A. Greene, Receiver for the Great Global Assurance Company, in
Liquidation, Plaintiff v.
Court of Federal Claims; 96-169-T,
October 7, 2004
Secs. 815 and 6323]
Life insurance companies: Insolvent insurers: Policyholders' surplus
accounts: Amount taxable: Priority of claims: State insurance guaranty
fund: Federal tax claims. --
amount of an insolvent insurer's policyholders' surplus account (PSA)
became taxable when the insurer failed to qualify as a life insurance
company for two consecutive years. The full amount of the PSA was
subject to federal tax, without any reduction for amounts that would be
used to pay policyholders's claims. However, the receiver for the
insurer was entitled to a refund of taxes paid on the PSA because under
applicable state (
) law, the claims of the state guaranty fund had priority over the
unsecured claims of the federal government. Monat Capital Corp.
(DC Kan.), 94-2
USTC ¶50,626, distinguished.
Schmidt, Kathryn B. Bussing, Blackwell Sanders Peper Martin LLP, for
plaintiff. Eillen J. O'Connor, Assistant Attorney General, Mildred L.
Seidman, Chief, Mary M. Abate, Department of Justice, for defendant.
HORN, Judge: This case arises out of a dispute concerning a tax refund
allegedly owed by the
to the Great Global Assurance Company (Great Global). The plaintiff,
John A. Greene, 1
Receiver for the Great Global Assurance Company, a life insurance
company, alleges that the defendant, the United States, acting through
the Department of the Treasury, Internal Revenue Service (IRS),
erroneously withheld a tax refund due to Great Global. The plaintiff
seeks relief in the amount of $699,849.00 plus interest, costs,
attorney's fees, and such other costs as the court deems proper.
In an earlier decision, this court dismissed plaintiff's complaint,
holding that Great Global failed to file its refund claim with the
Internal Revenue Service within the required statutory period. See
Greene v. United States [ 98-2
USTC ¶50,777], 42 Fed.Cl. 18 (1998). The Federal Circuit reversed
and remanded the case, holding that the plaintiff filed its claim within
the three-year statute of limitations provided by 26 U.S.C. §6511.
See Greene v. United States [ 99-2
USTC ¶50,778], 191 F.3d 1341 (Fed. Cir. 1999). The decision below
addresses the parties' cross-motions for summary judgment, filed by the
parties pursuant to Rule 56 of the Rules of the United States Court of
Federal Claims (RCFC).
Before 1959, life insurance companies were taxed only on that portion of
their investment income which was in excess of the funds reserved to
satisfy their obligations to policyholders. In 1959, Congress enacted
tax legislation applicable to life insurance companies which attempted
to measure the total income of a life insurance company, rather than
just its investment income. Due to the difficulties in calculating the
true annual income of a life insurance company, the Life Insurance
Company Income Tax Act of 1959 (the 1959 Tax Act), Pub. L. No. 86-169,
73 Stat. 112 (codified as amended at 26 U.S.C. §801-20), introduced a
three-phase procedure for taxing life insurance companies. 2
The 1959 Tax Act allowed insurance companies to shelter a portion of
their income to enable insurers to build sufficient reserves. This tax
sheltered money was to be placed in a "policyholders surplus
account" designed to contain enough money to satisfy the insurance
company's obligations to policyholders. The income taxed under Phase I
of the three-phase tax procedure includes "the portion of the net
income from interest, dividends, rents, royalties and other investment
sources which is in excess of the amount required as interest additions
to reserves or as interest paid." H.R. Rep. No. 34, 86th Cong., 1st
Sess. 15 (1959), 1959-2 C.B. 736, 741.
The Phase II portion of the tax base is calculated at 50 percent of the
excess of total net income from all sources over the taxable investment
income. This is referred to as an underwriting gain and represents
"mortality and loading savings, or savings resulting from longer
life expectancies than assumed in establishing premiums and reserves,
and also savings from reductions in expenses of servicing policies and
expenses incurred in 'putting policies on the books.'"
The 50 percent untaxed portion of the underwriting gain is placed in a
policyholders surplus account. The Phase III portion of the tax base was
designed to assure that amounts previously deferred under Phase II were
added to the tax base and, therefore, subject to taxation when they were
no longer used to comply with the insurance company's obligations to
policyholders. The Phase III tax "is designed to give assurance
that underwriting gains made available to shareholders will be subject
to the full payment of tax. Thus, this phase is concerned with the half
of underwriting income which under Phase II is not added to the tax
The Phase III tax liability for that amount of money, which life
insurance companies previously excluded from the tax base, is triggered
by one of several events, including the failure of an insurance company
to qualify for two successive years as a "life insurance
company" pursuant to the statutory definition included in 26 U.S.C.
(1982). See 26 U.S.C. §815(d)(2)(A)(ii)
OF FACT 4
The plaintiff, Great Global Assurance Company, has its principal place
of business in
. Great Global requested an extension of time until
September 17, 1984
to file its 1983 tax return. Great Global filed a federal Life Insurance
Company Income Tax Return, Form 1120L, for tax year 1983, on
September 17, 1984
. On that tax return, Great Global reflected zero tax liability for tax
year 1983. 5
During the following two tax years, 1984 and 1985, Great Global failed
to qualify as an insurance company. 6
Therefore, Great Global became liable to the IRS for taxes on the money
in the policyholders surplus account (PSA), and was required to add the
amount remaining in the PSA to its taxable income for the last preceding
tax year in which it had qualified as an insurance company. In this
case, Great Global had qualified as an insurance company in tax year
1983, but had not qualified in 1984 or 1985. 7
As a result, Great Global filed an amended 1983 return on
July 9, 1990
, which included in the tax base funds held in the PSA.
The Maricopa County Superior Court of
February 7, 1986
that Great Global was insolvent, placed the company in receivership and
appointed the Director of the Arizona Department of insurance as the
Receiver. Subsequently, the Receiver's efforts to rehabilitate Great
Global failed. Thereafter, on
June 8, 1988
, the Maricopa County, Arizona Superior Court directed the Receiver to
liquidate any remaining assets of Great Global.
The Receiver filed an amended return on behalf of Great Global on
July 9, 1990
, and paid $699,849.00 to the IRS. The amount paid consisted of
$357,392.00 in revised tax liability and interest thereon of
$342,457.00. This increased tax liability resulted from the addition of
$820,961.00 to Great Global's 1983 income base from funds previously
held in the PSA. Approximately three months later, on
September 24, 1990
, the IRS assessed the additional tax and interest on Great Global
pursuant to 26 U.S.C. §6501(c)(6)
On July 8, 1993, Great Global filed a second amended tax return for the
tax year 1983 and requested a refund of the $699,849.00, including taxes
and interest pursuant to 26 U.S.C. §6402(a)
In its claim for a refund, Great Global stated that:
1. Under Arizona law for the relevant period, which is binding on Great
Global and the IRS because of the McCarran-Ferguson Act, 15 U.S.C. §1012(b),
the Taxpayer's Receivership has insufficient funds to satisfy claims of
policyholders, whose priority to payment in the Receivership is senior
to the claim of the IRS.
2. No Phase III tax is applicable in a receivership where shareholders
receive nothing, since such tax "is designed to give assurance that
underwriting gains made available to shareholders will be subject to the
full payment of tax." H.R. Rep. No. 34, 86th Cong., 1st Sess. 15
(1959), 1959-2 C.B. 736, 741, 742.
The IRS District Director, Mark Cox, responded by letter dated
March 1, 1995
, and denied the claim for the refund on two counts. The IRS concluded
that Great Global had not timely filed the refund claim and that, even
if the claim had been timely, it would have been denied because a
partial or complete liquidation of an insurance company is one of the
events that trigger Phase III tax liability pursuant to 26 U.S.C. §815(d)(2)(A).
Thereafter, the taxpayer filed a supplemental claim dated
March 7, 1995
, and a protest, dated
March 23, 1995
, which requested that the appeals office consider the claim.
The IRS appeals officer, George Lawrence, notified Great Global that it
should resubmit its claim and explain its position on the timeliness
issue. Great Global responded to the IRS with its resubmitted claim and
its taxpayer's position contending that the claim was timely. The
appeals office rejected Great Global's argument and disallowed the claim
on the ground that it was not timely.
Thereafter, Great Global filed the above-captioned complaint. The
government moved to dismiss on grounds that this court lacked subject
matter jurisdiction pursuant to RCFC 12(b)(1) and on grounds that Great
Global failed to state a claim upon which relief can be granted pursuant
to RCFC 12(b)(4). The government predicated its position regarding the
court's subject matter jurisdiction on the applicable three-year statute
of limitations in tax refund cases provided by 26 U.S.C. §6511(a)
(1982). The government contended that Great Global filed its tax return
for tax year 1983 on September 17, 1984, thus commencing the time from
which to calculate the three-year statute of limitation.
According to the government, the three-year statute of limitations ended
September 17, 1987
. Moreover, according to the government, Great Global filed the amended
return with the tax payment on July 9, 1990, thus commencing the running
of the applicable two-year statute of limitations, pursuant to 26 U.S.C.
which ended on July 9, 1992. Therefore, the defendant argued that the
two-year statute of limitations expired nearly a year before plaintiff
filed its refund claim on
July 8, 1993
. In addition, defendant contended that plaintiff's actions should be
dismissed pursuant to RCFC 12(b)(4) because any allowable refund
necessarily would be limited to zero under 26 U.S.C. §6511(b)(2)(B)
Plaintiff contended that the 1984 filing for the 1983 tax year could not
have triggered the starting date for computation of the statute of
limitations because the facts necessary to ascertain the Phase III tax
liability had not been determined at that time and subsequent events
necessary to compute the tax had not yet occurred. According to the
plaintiff, Great Global did not become liable for the Phase III tax
January 1, 1986
, after it failed to qualify as a life insurance company for two
consecutive years (1984-85). Great Global argued that the July 9, 1990
amended return was the operative return with respect to calculating the
statute of limitation on the Phase III tax in dispute and, therefore,
that the statute of limitations did not expire for three years, or until
July 9, 1993, one day after plaintiff filed its claim with the IRS for
the tax refund at issue.
After briefing by the parties, this court held in favor of the
government on the ground that the court lacked subject matter
jurisdiction. See Greene v. United States [ 98-2
USTC ¶50,777], 42 Fed.Cl. at 30. The court found that the
three-year statute of limitations provided by 26 U.S.C. §6511(a)
(1982) began to run on September 17, 1984, the date that Great Global
filed its tax return for the 1983 tax year. See id. at 28-29.
Thus, the court found that the applicable statute of limitations expired
September 17, 1987
. See id. The court further found that the two-year statute of
limitations from the date of payment began to run on
July 9, 1990
, the date that Great Global filed its second amended return for the
1983 tax year with the accompanying tax payment. See id. The
court found that the three-year statute of limitations from the date of
filing and the two-year statute of limitations from the date of payment
expired, respectively, almost six years and approximately one year
before Great Global filed its refund claim with the IRS. See id.
Great Global appealed.
The United States Court of Appeals for the Federal Circuit reversed and
remanded. The Federal Circuit reasoned:
In this case,
where the events giving rise to the tax necessarily took place after the
taxable year, the return that starts the running of the statute is the
return in which the taxpayer is required to or does report the income.
Here, both parties concede that the Phase III income was not required to
be reported on GGAC's 1983 tax return; in fact, it could not be so
reported because GGAC's liability had not been established at the time
of the filing of that return. Therefore, contrary to the conclusion of
the Court of Federal Claims, the 1983 return cannot be the return that
starts the running of the three-year limitations period. Because there
apparently was no date on which the return showing the Phase III income
was required to be filed, and hence no other such return was filed, the
1990 amended return is the only return that could have started the
running of the limitations period. It reported the "overpayment of
[the] tax in respect of which tax [the] taxpayer [was] required to file
Greene v. United States [ 99-2
USTC ¶50,778], 191 F.3d at 1343 (quoting 26 U.S.C. §6511(a)
(1994) (alterations in original)). The appellate court found that the
plaintiff's refund action was not time barred and that jurisdiction
regarding plaintiff's complaint was properly lodged and remanded the
case to the trial court.
Following the remand, in its motion for summary judgment, the plaintiff
argues that under the McCarran-Ferguson Act, 15 U.S.C. §1012(b) (1982),
Arizona law, in particular, Arizona Revised Statutes §20-629 (1997),
which it applies retroactively as applicable to the relevant time
period, takes priority over the federal priority statute. The
statute cited by plaintiff requires that policyholders' claims and
claims by guarantee funds are senior to claims of the Internal Revenue
Service. From this, plaintiff concludes that the government must refund
the disputed tax payment because the money appropriately should be used
to satisfy Great Global's outstanding policyholders' claims.
In its cross-motion for summary judgment, the government argues that
Phase III tax liability for the 1983 tax year was triggered when Great
Global failed to qualify as a life insurance company for two consecutive
years. The government states that the Receiver's payment of the tax and
interest does not qualify as an overpayment. Therefore, according to the
defendant, the plaintiff properly satisfied its tax liability with the
1990 payment and is owed no refund. The government also contends that it
is immaterial under 26 U.S.C. §815(d)(2)(A)(ii)
whether Great Global would use the refund to satisfy claims of
policyholders as opposed to shareholders' claims.
The parties have filed cross-motions for summary judgment on the
plaintiff's complaint pursuant to RCFC 56. RCFC 56 is patterned on Rule
56 of the Federal Rules of Civil Procedure (Fed. R. Civ. P.) and is
similar both in language and effect. Both rules provide that summary
judgment "shall be rendered forthwith 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 a
judgment as a matter of law." RCFC 56(c); Fed. R. Civ. P. 56(c); see
also Anderson v. Liberty Lobby, Inc., 477
242, 247-48 (1986); Adickes v. S. H. Kress & Co., 398
144, 157 (1970); Telemac Cellular Corp. v. Topp Telecom, Inc.,
247 F.3d 1316, 1323 (Fed. Cir.), reh'g denied and reh'g en banc
denied (2001); Monon Corp. v. Stoughton Trailers, Inc., 239
F.3d 1253, 1257 (Fed. Cir. 2001); Avenal v.
, 100 F.3d 933, 936 (Fed. Cir. 1996), reh'g denied (1997); Creppel
, 41 F.3d 627, 630-31 (Fed. Cir. 1994). A fact is material if it
will make a difference in the result of a case under the governing law.
Irrelevant or unnecessary factual disputes do not preclude the entry of
summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. at
247-48; see also Monon Corp. v. Stoughton Trailers, Inc., 239
F.3d at 1257; Curtis v. United States, 144 Ct.Cl. 194, 199, 168
F.Supp. 213, 216 (1958), cert. denied, 361 U.S. 843 (1959), reh'g
denied, 361 U.S. 941 (1960).
When reaching a summary judgment determination, the judge's function is
not to weigh the evidence and determine the truth of the case presented,
but to determine whether there is a genuine issue for trial. Anderson
v. Liberty Lobby, Inc., 477
at 249; see, e.g., Ford Motor Co. v. United States, 157
F.3d 849, 854 (Fed. Cir. 1998) (the nature of a summary judgment
proceeding is such that the trial judge does not make findings of fact);
Johnson v. United States, 49 Fed.Cl. 648, 651 (2001), aff'd,
No. 01-5143, 2002 WL 31724971 (Fed. Cir.
Dec. 3, 2002
); Becho, Inc. v.
, 47 Fed.Cl. 595, 599 (2000). The judge must determine whether the
evidence presents a disagreement sufficient to require submission to
fact finding, or whether the issues presented are so one-sided that one
party must prevail as a matter of law. Anderson v. Liberty Lobby,
at 250-52; Jay v. Sec'y of Dep't of Health and Human Servs., 998
F.2d 979, 982 (Fed. Cir.), reh'g denied and en banc suggestion
declined (1993). When the record could not lead a rational trier of
fact to find for the nonmoving party, there is no genuine issue for
trial, and the motion must be granted. See, e.g., Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Hall
v. Aqua Queen Mfg., Inc., 93 F.3d 1548, 1553 n.3 (Fed. Cir. 1996).
In such a case, there is no need for the parties to undertake the time
and expense of a trial, and the moving party should prevail without
further proceedings. Summary judgment:
expense and time of a full trial when it is unnecessary. When the
material facts are adequately developed in the motion papers, a full
trial is useless. "Useless" in this context means that more
evidence than is already available in connection with the motion for
summary judgment could not reasonably be expected to change the result.
Dehne v. United States, 23 Cl.Ct. 606, 614-15 (1991) (citing Pure
Gold, Inc. v. Syntex, Inc., 739 F.2d 624, 626 (Fed. Cir. 1984)), vacated
on other grounds, 970 F.2d 890 (Fed. Cir. 1992); United States
Steel Corp. v. Vasco Metals Corp., 394 F.2d 1009, 1011 (C.C.P.A.
Summary judgment, however, will not be granted if "the dispute
about a material fact is 'genuine,' that is, if the evidence is such
that a reasonable [trier of fact] could return a verdict for the
nonmoving party." Anderson v. Liberty Lobby, Inc., 477
at 248; Eli Lilly &
v. Barr Labs., Inc., 251 F.3d 955, 971 (Fed. Cir. 2001), cert.
1109 (2002); Gen. Elec. Co. v. Nintendo Co., 179 F.3d 1350, 1353
(Fed. Cir. 1999). In other words, if the nonmoving party produces
sufficient evidence to raise a question as to the outcome of the case,
then the motion for summary judgment should be denied. Any doubt over
factual issues must be resolved in favor of the party opposing summary
judgment, to whom the benefit of all presumptions and inferences runs. Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. at 587-88; Monon
Corp. v. Stoughton Trailers, Inc., 239 F.3d at 1257; Wanlass v.
Fedders Corp., 145 F.3d 1461, 1463 (Fed. Cir.), reh'g denied and
en banc suggestion declined (1998).
The initial burden on the party moving for summary judgment to produce
evidence showing the absence of a genuine issue of material fact may be
discharged if the moving party can demonstrate that there is an absence
of evidence to support the nonmoving party's case. Celotex Corp. v.
317, 325 (1986); see also Trilogy Communications, Inc. v. Times Fiber
Communications, Inc., 109 F.3d 739, 741 (Fed. Cir.) (quoting Conroy
v. Reebok Int'l, Ltd., 14 F.3d 1570, 1575 (Fed. Cir. 1994), reh'g
denied and en banc suggestion declined (1995)), reh'g denied and
en banc suggestion declined (1997); Lockwood v. Am. Airlines,
Inc., 107 F.3d 1565, 1569 (Fed. Cir. 1997). If the moving party
makes such a showing, the burden shifts to the nonmoving party to
demonstrate that a genuine dispute regarding a material fact exists by
presenting evidence which establishes the existence of an element
essential to its case upon which it bears the burden of proof. See
Celotex Corp. v. Catrett, 477
at 322; Am. Airlines v.
USTC ¶50,236], 204 F.3d 1103, 1108 (Fed. Cir. 2000); see also
Schoell v. Regal Marine Indus., Inc., 247 F.3d 1202, 1207 (Fed. Cir.
Pursuant to RCFC 56, a motion for summary judgment may succeed whether
or not accompanied by affidavits and/or other documentary evidence in
addition to the pleadings already on file. Celotex Corp. v. Catrett,
at 324. Generally, however, in order to prevail by demonstrating that a
genuine issue for trial exists, the nonmoving party must go beyond the
pleadings by use of evidence such as affidavits, depositions, answers to
interrogatories and admissions.
Even if both parties argue in favor of summary judgment and allege an
absence of genuine issues of material fact, however, the court is not
relieved of its responsibility to determine the appropriateness of
summary disposition in a particular case. Prineville Sawmill Co. v.
, 859 F.2d 905, 911 (Fed. Cir. 1988) ( citing Mingus
Constructors, Inc. v.
, 812 F.2d 1387, 1391 (Fed. Cir. 1987)); Chevron USA, Inc. v.
Cayetano, 224 F.3d 1030, 1037 n.5 (9th Cir. 2000), cert. denied,
532 U.S. 942 (2001). "[S]imply because both parties moved for
summary judgment, it does not follow that summary judgment should be
granted one or the other." LewRon Television, Inc. v. D.H.
Overmyer Leasing Co., 401 F.2d 689, 692 (4th Cir. 1968), cert.
denied, 393 U.S. 1083 (1969); see also B.F. Goodrich Co. v. U.S.
Filter Corp., 245 F.3d 587, 593 (6th Cir. 2001); Massey v. Del
Labs., Inc., 118 F.3d 1568, 1573 (Fed. Cir. 1997). Cross-motions are
no more than a claim by each party that it alone is entitled to summary
judgment. The making of such inherently contradictory claims, however,
does not establish that if one is rejected the other necessarily is
justified. B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d at
593; Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d
1138, 1148 (10th Cir. 2000); Allstate Ins. Co. v. Occidental Int'l.,
Inc., 140 F.3d 1, 2 (1st Cir. 1998); Reading & Bates Corp. v.
United States [ 98-1
USTC ¶50,290], 40 Fed.Cl. 737, 748 (1998). The court must evaluate
each party's motion on its own merits, taking care to draw all
reasonable inferences against the party whose motion is under
consideration. DeMarini Sports, Inc. v. Worth, Inc., 239 F.3d
1314, 1322 (Fed. Cir. 2001); Gart v. Logitech, Inc., 254 F.3d
1334, 1338-39 (Fed. Cir. 2001), cert. denied, 534
In the instant case, the parties claim that there are no material issues
of fact in dispute. Moreover, the court has found no disputed material
issue of fact. Therefore, the court's analysis begins with the plain
language of the statute. See Duncan v. Walker, 533
167, 172 (2001) ("Our task is to construe what Congress has
enacted. We begin, as always, with the language of the statute."); Carter
v. United States, 530
255, 257 (2000) ("[T]he Court's inquiry begins with the textual
product of Congress' efforts, not with speculation as to the internal
thought processes of its Members."). In interpreting the plain
meaning of the statute, it is the court's duty, if possible, to give
meaning to every clause and word of the statute. See Duncan v. Walker,
at 173; Williams v. Taylor, 529
362, 404 (2000) (describing as a "cardinal principle of statutory
construction" the rule that every clause and word of a statute must
be given effect if possible). Similarly, the court must avoid an
interpretation of a clause or word which renders other provisions of the
statute inconsistent, meaningless, or superfluous. See Duncan v.
at 167 (noting that courts should not treat statutory terms as
"surplusage"). "'[W]hen two statutes are capable of
co-existence ... it is the duty of the courts, absent a clearly
expressed congressional intention to the contrary, to regard each as
effective.'" Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer,
528, 533 (1995) ( quoting Morton v. Mancari, 417
535, 551 (1974)); see also Hanlin v.
, 214 F.3d 1319, 1321 (Fed. Cir.), reh'g denied (2000).
A court must not stray from the statutory definition of a term. See
Stenberg v. Carhart, 530
914, 942 (2000); Meese v. Keene, 481
465, 484-485 (1987); Colautti v. Franklin, 439
379, 392 n.10 (1979). "It is axiomatic that the statutory
definition of the term excludes unstated meanings of that term." Meese
at 484-85. As the United States Court of Appeals for the Federal Circuit
stated in AK Steel Corporation:
makes such a clear statement as to how categories are to be defined and
distinguished, neither the agency nor the courts are permitted to
substitute their own definition for that of Congress, regardless of how
close the substitute definition may come to achieving the same result as
the statutory definition, or perhaps a result that is arguably better.
AK Steel Corp. v.
, 226 F.3d 1361, 1372 (Fed. Cir. 2000). When a word is undefined,
courts regularly give that term its ordinary meaning. Asgrow Seed Co.
v. Winterboer, 513
179, 187 (1995); AK Steel Corp. v.
, 226 F.3d at 1371.
A singular term may not be read in isolation, however. See Pollard v.
E.I. du Pont de Nemours & Co., 532
843, 852 (2001) ( citing Gade v. Nat'l Solid Wastes Mgmt. Assn.,
88, 99 (1992)). The "meaning of a provision is 'clarified by the
remainder of the statutory scheme ....'" United States v.
Cleveland Indians Baseball Co. [ 2001-1
USTC ¶50,341], 532 U.S. 200, 217 (2001) ( quoting United Sav.
Assn. of Tex. v. Timbers of Inwood Forest Assocs, Ltd., 484
365, 371 (1988) and describing statutory construction as a
"holistic endeavor"). "Words are not pebbles in alien
juxtaposition; they have only a communal existence; and not only does
the meaning of each interpenetrate the other, but all in their aggregate
take their purport from the setting in which they are used." King
v. Saint Vincent's Hosp., 502
215, 221 (1991) ( quoting NLRB v. Federbush Co., 121 F.2d 954,
957 (2d Cir. 1941) (L. Hand, J.)).
When the statute provides a clear answer, the court's analysis is at an
end. Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc.,
238, 254 (2000) ( quoting Hughes Aircraft Co. v. Jacobson, 525
432, 438 (1999)). Thus, when the "'statute's language is plain,
"the sole function of the courts is to enforce it according to its
terms."'" Johnson v. United States, 529
694, 723 (2000) ( quoting United States v. Ron Pair Enterps., Inc.
USTC ¶9179], 489 U.S. 235, 241 (1989) ( quoting Caminetti v.
470, 485 (1917))). In such an instance, the court will not consider
"conflicting agency pronouncements" or "extrinsic
evidence of a contrary intent." Weddel v. Sec'y of Dep't of
Health and Human Servs., 23 F.3d 388, 391 (Fed. Cir. 1994) ( citing
Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 476 (1992)
(noting that courts must not defer to agency interpretation contrary to
the intent of Congress evidenced by unambiguous language) and Darby
v. Cisneros, 509 U.S. 137, 147 (1993)). "[O]nly language that
meets the constitutional requirements of bicameralism and presentment
has true legal authority." Weddel v. Sec'y of Dep't of Health
and Human Servs., 23 F.3d at 391 ( citing INS v. Chadha, 462
U.S. 919 (1983)). "'[C]ourts have no authority to enforce [a]
principl[e] gleaned solely from legislative history that has no
statutory reference point.'" Shannon v. United States, 512
573, 583- 84 (1994) ( quoting Int'l Bhd. of Elec. Workers, Local
Union No. 474 v. NLRB, 814 F.2d 697, 712 (D.C. Cir. 1987)).
Consequently, if a statute is plain and unequivocal on its face, there
is usually no need to resort to the legislative history underlying the
statute. See Circuit City Stores, Inc. v. Adams, 532
105, 119 (2001) ( citing Ratzlaf v.
USTC ¶50,015], 510 U.S. 135, 147-148 (1994) ("[W]e do not
resort to legislative history to cloud a statutory text that is
clear.")). There are select instances when resort to legislative
history is proper. For example, a court may consider legislative history
meaning produces a result that is not just "harsh," Griffin
v. Oceanic Contractors, Inc., 458 U.S. 564, 576, 102 S.Ct. 3245,
3252, 73 L.Ed.2d 973 (1982), "curious," Tennessee Valley
Auth. v. Hill, 437 U.S. 153, 172, 98 S.Ct. 2279, 2291, 57 L.Ed.2d
117 (1978), or even "stark and troubling," Estate of Cowart,
505 U.S. at , 112 S.Ct. at 259, but "so bizarre that
Congress 'could not have intended' it," Demarest v. Manspeaker,
498 U.S. 184, 186, 190-91, 111 S.Ct. 599, 601-02, 603-04, 112 L.Ed.2d
Weddel v. Sec'y of Dep't of Health and Human Servs., 23 F.3d at
391. Moreover, legislative history may be introduced into the analysis
to resolve an ambiguous statute. Ratzlaf v. United States [ 94-1
USTC ¶50,015], 510
at 148 n.18 (citing Barnhill v. Johnson, 503
393, 401 (1992)); Patterson v. Shumate, 504
753, 761 (1992).
"If legislative history is to be considered, it is preferable to
consult the documents prepared by Congress when deliberating." Gustafson
v. Alloyd Co., 513
561, 580 (1995). "[T]he authoritative source for finding the
Legislature's intent lies in the Committee Reports on the bill, which
'represen[t] the considered and collective understanding of those
Congressmen involved in drafting and studying proposed
legislation.'" Garcia v. United States, 469
70, 76 (1984) ( quoting Zuber v. Allen, 396
168, 186 (1969)). "'[T]he fears and doubts of the opposition are no
authoritative guide to the construction of legislation'" because of
the likelihood that those in opposition tend to overstate the reach of
the bill in question. Bryan v. United States, 524
184, 196 (1998) ( quoting Schwegmann Bros. v. Calvert Distillers
384, 394 (1951)). Moreover, statements by individual legislators should
not be given controlling weight, although such statements may evidence
congressional intent when consistent with statutory language and other
pieces of legislative history. Brock v. Pierce County, 476
253, 263 (1986) ( citing
555, 567 (1984)).
"'[S]ubsequent history is less illuminating than the
contemporaneous evidence.'" Solid Waste Agency of N. Cook County
v. United States Army Corps of Eng'rs, 531 U.S. 1359, 170 (2001) ( quoting
Hagen v. Utah, 510 U.S. 399, 420, reh'g denied (1994)); see
also United States v. X-Citement Video, Inc., 513 U.S. 64, 77 n.6
(1994) ("[T]he views of one Congress as to the meaning of an Act
passed by an earlier Congress are not ordinarily of great weight ... and
the views of the committee of one House of another Congress are of even
less weight."). But cf. Loving v. United States, 517
748, 770 (1996) ("'"Subsequent legislation declaring the
intent of an earlier statute is entitled to great weight in statutory
construction."'") ( quoting Consumer Prod. Safety Comm'n v.
GTE Sylvania, Inc., 447
102, 118 n.13 (1980) ( quoting Red Lion Broad. Co. v. FCC, 395
367, 380-81 (1969))).
Although the Court in Loving cited the Consumer Product Safety
Commission decision for the proposition that subsequent legislation may
be used to interpret an earlier statute, the Court in Consumer Product
Safety Commission adhered to the principle that "the views of a
subsequent Congress form a hazardous basis for inferring the intent of
an earlier one." Consumer Prod. Safety Comm'n v. GTE Sylvania,
at 118. It cited the proposition regarding reliance on subsequent
legislation only for the purpose of declining to adopt it, stating that
"even when it would otherwise be useful, subsequent legislative
history will rarely override a reasonable interpretation of a statute
that can be gleaned from its language and legislative history prior to
at 118 n.13.
In this regard, a court should give little weight to attempts to infer
congressional intent to adopt judicial interpretations of a statutory
provision when Congress revises the statutory scheme but fails to amend
the provision in question. See Alexander v. Sandoval, 531
1049, 1523 (2001). Similarly, "'failed legislative proposals are
"a particularly dangerous ground on which to rest an interpretation
of a prior statute."'" Solid Waste Agency of N. Cook County
v. United States Army Corps of Eng'rs, 531
at 170 ( quoting Cent. Bank of
, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 187
(1994) ( quoting Pension Benefit Guar. Corp. v. LTV Corp., 496
U.S. 633, 650, (1990))).
A. Phase III Tax Liability as Applied to PSA Accounts
The plain language of the statutory sections which impose Phase III tax
liability are contained in 26 U.S.C. §§802
802(b)(3) states: "For purposes of this part, the term 'life
insurance company taxable income' means the sum of ... the amount
subtracted from the policyholders surplus account for the taxable year,
as determined under section
815." 26 U.S.C. §802(b)(3).
provided in section
381(c)(22) (relating to carryovers in certain corporate
readjustments), if- ... (ii) for any two successive taxable years the
taxpayer is not a life insurance company, then the amount taken into
account under section 802(b)(3) for the last preceding taxable year for
which it was a life insurance company shall be increased (after the
application of subparagraph (B)) by the amount remaining in its policy
holders surplus account 12
at the close of such last preceding taxable year.
26 U.S.C. §815(d)(2)(A).
815(d) describes several events that trigger Phase III tax
liability, thereby ending the tax deferred status of money previously
held in the PSA. The relevant triggering event in this case is the
failure of an entity previously qualified as a life insurance company to
qualify as a life insurance company for two consecutive years, as
described in section
815(d)(2)(A)(ii). Other events, described in section
815(d)(2)(B), however, may trigger Phase III tax liability, as
In sum, section
815(d)(2)(A)(ii) requires a former life insurance company to
"subtract" the full balance of its PSA and include the amount
subtracted as taxable income in the last year in which the company
qualified as a life insurance company. This subtraction reduces the PSA
to zero and triggers the taxation of the full balance under section
802(b)(3), which defines "life insurance company taxable
income" as the amount subtracted from the PSA for the taxable year.
The PSA's balance must then be calculated, however, "after the
application of subparagraph (B) [of 26 U.S.C. §815(d)(2)],"
which addresses, separately, distributions made to shareholders. 26
815(d)(2)(B) provides that "[i]f for any taxable year the
taxpayer is an insurance company but not a life insurance company, then
any distribution to shareholders during such taxable year shall be
treated as made on the last day of the last preceding taxable year for
which the taxpayer was a life insurance company." When applied, the
plain meaning of sections
815(d)(2)(A)(ii) and 815(d)(2)(B)
require that an insurance company first treat any distributions made to
shareholders as if they were made on the last day the company qualified
as a life insurance company. Then, after any distributions to
shareholders are taken into account, the company's taxable income is
increased by whatever amount remains in its PSA. Thus, by its plain
meaning, even if an insurance company makes no distributions to
shareholders, as identified under section
815(d)(2)(B), the company must increase its taxable income by the
amount remaining in its PSA when it fails to qualify as a life insurance
company for two successive years.
The government argues that the plain language of sections
802(b)(3) and 815(d)(2)(A)(ii)
require that, with the one (not applicable) enumerated exception for
carryovers, an entity that fails to qualify as a life insurance company
for two consecutive years must "subtract" from the PSA the
full balance of the PSA, rendering it taxable. The defendant argues that
this subtraction, and consequential taxation, exists independent of, and
in addition to any distributions made to shareholders or policyholders.
Moreover, the government contends that there is no ambiguity in the
language of either of these provisions.
Plaintiff argues that an exception to Phase III taxation exists for
amounts in PSAs intended to be paid to policyholders, thus preventing
those amounts from being taxed. However, section
815 does not contain an exception for insolvent life insurance
companies that would use PSA funds to pay policyholders' claims. Section
815 contains only a single exception, "as provided in [26
(relating to carryovers in certain corporate readjustments)." 26
That Congress included an exception related to carryovers in certain
corporate readjustments allows the court to infer that Congress intended
to exclude other exceptions. See United States v. Johnson, 529
53, 58 (2000) ("When Congress provides exceptions in a statute, it
does not follow that courts have authority to create others. The proper
inference, and the one we adopt here, is that Congress considered the
issue of exceptions and, in the end, limited the statute to the ones set
forth."). Contrary to plaintiff's contentions, the court finds no
ambiguity in the language of section
815(d)(2)(A)(ii). Instead, the court agrees with the government that
the statute's plain language requires that an insurance company's
failure to qualify as a life insurance company for two years renders its
entire PSA balance taxable as income for the last year in which the
company qualified as a life insurance company.
Plaintiff, in its brief supporting its motion for summary judgment, does
not identify what portion of the statute it considers to be the source
of the ambiguity. The extent of plaintiff's identification in that brief
of the alleged ambiguity is a subheading which summarily concludes that
"[t]he 1959 Act's Language is Ambiguous and Requires Reference to
the Legislative History." Furthermore, in its brief in opposition
to defendant's motion for summary judgment, plaintiff summarily cites
the title of section
815, "distributions to shareholders," as the source of the
ambiguity, giving no further explanation as to how the title renders the
language of the statutory section ambiguous. The only support that
plaintiff offers for its conclusion regarding ambiguity, and seemingly
the only case law addressing plaintiff's argument, is a citation to a
non-precedential United States District Court case, Monat Capital
Corporation v. United States [ 94-2
USTC ¶50,626], 869 F.Supp. 1513 (D. Kan. 1994) and reference to
another non-precedential United States District Court case, GE Life
& Annuity Company v. United States [ 2001-1
USTC ¶50,192], 127 F.Supp.2d 794 (E.D. Va. 2000), judgment
modified, 89 A.F.T.R.2d 2002-1815 (E.D. Va. Mar. 25, 2002).
In GE Life, the court was asked to determine whether a corporate
stock election under 26 U.S.C. §338
triggered Phase III tax liability under 26 U.S.C. §815(d).
See GE Life & Annuity Co. v. United States [ 2001-1
USTC ¶50,192], 127 F.Supp.2d at 800. Whether or not a company that
fails to qualify as an insurance company for two years should be taxed
on the balance of its PSA was not at issue in the GE Life case.
However, plaintiff quotes the proposition in GE Life that states,
"if monies held in such PSAs were ultimately needed to provide for
payments of benefits to the company's policyholders, such monies would
never be subject to tax as profits of the company."
at 795. Plaintiff does not continue the quotation in its brief, but the
District Court does, stating that: "However, the Code outlines
three 'triggering events' relevant to this case. Upon the happening of
any such event all or part of a life insurance company's PSA balance
became taxable income."
Thus, contrary to plaintiff's claim that the GE Life decision
stands for the proposition that amounts intended to pay policyholders
claims could not be taxed, or that the statute is ambiguous, the GE
Life court identified that upon the triggering of one of the three
scenarios, including termination of either insurance or life insurance
company status, the amounts in the company's PSA could be taxed. See
id. at 798.
Although plaintiff cites GE Life, plaintiff relies heavily on the
Monat court's decision to support its argument. In Monat,
the court examined the PSA and Phase III tax provisions under the 1984
Act and found them to be ambiguous. A revised version of section
815 titled "Distributions to Shareholder from pre-1984
Policyholder Surplus Account," became effective on
December 31, 1983
, pursuant to the 1984 Act. The court in Monat explored the 1984
Act, which replaced the 1959 Act at issue in the instant case. The Monat
court was charged with interpreting certain provisions of the 1984 Act,
some of which referred to the 1959 Act's provisions regarding Phase III
liability and PSA accounts. In its opinion, the Monat court first
explored the literal language of both the 1984 and 1959 Acts, finding
that, "[u]nder a literal reading of the 1959 Act, if, for any two
successive years an insurance company failed to qualify as a life
insurance company for federal tax purposes, all amounts in its PSA were
to be included in Phase III taxable income under section
802(b)(3) for the last year in which the company qualified as a life
at 1518. Thus, the Monat court recognized that, read literally,
the 1959 Act regarded the entire PSA balance as taxable under these
circumstances without regard to whether the PSA balance would otherwise
be used to satisfy policyholders' claims. See id.
The Monat court rejected the literal language of both Acts
because it found in the 1984 Act an ambiguity that caused it to examine
the legislative history of the 1984 Act. As stated by the Monat
court: "[t]he 1984 Act carried forward the triggering events
provision of the old statute ( I.R.C.
§815(d)), but did not carry forward the mechanism for imposing a
Phase III tax ( I.R.C.
§802(b)(3)). Because of this ambiguity it is necessary to look
outside the language of the 1984 Act."
The court stated: "Therefore ... the termination of life insurance
company status triggered a subtraction of the PSA balance and imposition
of Phase III tax, even when the company had been declared insolvent and
all available funds had been earmarked to pay policyholder claims."
The court turned to the language of the 1959 Act for additional
guidance, finding that:
The 1959 Act
defined certain "triggering events," in former Section
815(d), which would end the tax deferred status of money held in a
PSA. These events all resulted in money being "subtracted"
from the PSA. Upon the occurrence of one of these events, the money
subtracted from the PSA would treated [sic] as income and subject to the
Phase III tax, under former Section
802(b)(3). The 1984 Act carried forward the triggering event
provision of the old statute ( I.R.C.
§815(d)), but did not carry forward the mechanism for imposing a
Phase III tax ( I.R.C.
at 1517-18. In examining the 1959 Act, the Monat court also
observed that the title of the section, "Distributions to
Shareholders," and references to distributions to shareholders,
caused it to view the section as ambiguous.
at 1518. Explaining its conclusions regarding the ambiguities in the
1959 Act, the Monat court stated:
815, the section that defined the triggering events in which money
is "subtracted" from a PSA and thus subject to the Phase III
tax, is entitled "Distributions to Shareholders." In addition,
815(c) provided that the amount "subtracted" from a PSA is
equal to the amount "distributed" out of the PSA. This use of
the terms "distributed" and "distribution" was
continued by the 1984 Act which defines the current version of the Phase
III tax amounts as "direct and indirect distributions ... to
shareholders from such account." I.R.C.
references to distributions to shareholders lead the court to conclude
that the 1959 Act's language is ambiguous on the question of whether
termination of life insurance company status automatically results in
the PSA balance becoming taxable, even if earmarked solely for
policyholder claims. Therefore, the court is required to look beyond the
plain language of the statute to determine congressional intent.
In examining the legislative history of the 1959 Act, the court found no
clear indication of Congress's intent regarding Phase III tax liability
in the event that the money used to pay the PSA taxation would otherwise
end up in the hands of policyholders rather than shareholders. The court
It is clear
from the legislative history that Congress intended to tax any
distribution from the tax-deferred PSA balance that benefitted
shareholders in any way. The legislative history does not, however,
provide any meaningful explanation for the provision that upon
termination of a life insurance company's status as such, the PSA
balance would be taxed.
The court, therefore, adopted an interpretation of the Phase III PSA
taxation provision that it found to be more consistent with its
perception of the general purpose of the Phase III life insurance
company taxation scheme. The Monat court summarized its
perception of the congressional intent as preventing "shareholders
from taking advantage of the tax deferral system by closing the
company's doors but continuing to avoid tax liability on PSA amounts not
needed for policyholder claims."
at 1520. From that, the Monat court concluded that Congress must
not have intended to tax PSA dollars earmarked for receipt by
policyholders because PSAs provide a "'desirable 'cushion' for
special contingencies which may arise in the case of the policies
at 1519 (citing S. Rep. No. 291, 86th Cong., 1st Sess. (1959), reprinted
in 1959 U.S.C.C.A.N. 1575, 1601). According to the Monat court,
"[i]t would be contrary to Congressional intent to allow the
Government to tax the cushion merely because it existed at the time the
company became insolvent if doing so pulls the cushion out from under
the policyholders it was established to protect."
at 1519. The court, therefore, held that: "For these reasons, the
court concluded that termination of life insurance company status does
not trigger taxation of the PSA balance under the 1959 Act when none of
[the PSA] balance will be distributed directly or indirectly to
This court finds three problems with the rationale used by the Monat
court. First, the court in Monat found ambiguity in the statute
and resorted to the legislative history, despite finding a literal
meaning supported by the plain language of the statute. See id.
at 1517. The Monat court itself wrote: "The problem with
applying the literal statutory language to the question in this case...
By disregarding the literal language of the statute, the Monat
court ignored the basic principles of statutory interpretation that
counsel against this approach. If a statute is plain and unequivocal on
its face, there is usually no need to resort to the legislative history
underlying the statute. See Circuit City Stores, Inc. v. Adams,
at 119 ("[W]e do not resort to legislative history to cloud a
statutory text that is clear.") (quoting Ratzlaf v. United
States [ 94-1
USTC ¶50,015], 510
Second, the Monat court used the absence of specific language in
the statute and the absence of "meaningful explanation" in the
legislative history to bolster an interpretation that is supported by
neither. Monat Capital Corp. v. United States [ 94-2
USTC ¶50,626], 869 F.Supp. at 1519. Regarding the absence of any
provision in the plain language of the statute regarding distributions
to policyholders, "'courts have no authority to enforce [a]
principl[e] gleaned solely from legislative history that has no
statutory reference point.'" Shannon v. United States, 512
at 583-84 (quoting Int'l Bhd. of Elec. Workers, Local Union No. 474
v. NLRB, 814 F.2d at 712). The Supreme Court has also counseled
against using "ingenuity to create ambiguity" that does not
otherwise exist in the statute. Rothschild & Bro. v.
463, 465 (1900).
Finally, although the 1984 Act removed the specific language in section
815(d)(2)(A)(ii) referring to a life insurance company's failure to
qualify as a life insurance company for two years, section
815(f) of the 1984 revision carried forward and made applicable to
PSAs any provisions of the 1959 Act that were not inconsistent with the
1984 Act. Section
815(f) of the 1984 Act states:
rules applicable to policyholders surplus account continued.
Except to the
extent inconsistent with the provisions of this part, the provisions of
subsections (d), (e), (f), and (g) of section
815 (and of sections
as in effect before the enactment of the Tax Reform Act of 1984 are
hereby made applicable in respect of any policyholders surplus account
for which there was a balance as of December 31, 1983.
26 U.S.C. §815(f)
(1984). Thus, section
815(f) of the 1984 revision recognizes that, while the 1984 Act
ended PSAs, the PSA accounts that existed must still be managed and
Furthermore, legislative history lacking in "meaningful
explanation" on the PSA taxation issue should not be used to
displace the literal meaning of the statute. The Senate Report on the
1959 Act specifically stated that when certain "triggering
events" occur "it becomes clear that the company itself has
made the determination that additional amounts constitute income which
was not required to be retained to fulfill the policyholder's
contracts." GE Life and Annuity Co. v. United States [ 2001-1
USTC ¶50,192], 127 F.Supp.2d at 799 (quoting Sen. Rep. No. 291,
86th Cong., 1st Sess. 20-21, reprinted in 1959-2 C.B. 778). A far
more tenable conclusion dictates that the legislative history itself is
ambiguous. Moreover, this court finds no clearer explanation in the
general discussion of the legislative intent behind the 1959 Act.
The Monat court found that, in general, Congress designed the
1959 Act to "prevent shareholders from taking advantage of the tax
deferral system by closing the company's doors but continuing to avoid
tax liability on PSA amounts not needed for policyholder claims." Monat
Capital Corp. v. United States [ 94-2
USTC ¶50,626], 869 F.Supp. at 1520. This court finds no clear
indication from any of the legislative history cited by plaintiff, or
identified in the Monat court's decision, that Congress intended
there to be an exception to the Phase III taxation of PSA funds that
would otherwise pay policyholders' claims.
Moreover, the Monat court used the legislative history language
of the 1984 Act to find the 1959 Act ambiguous. In so doing, the court
ignored another maxim of statutory interpretation which states that
"the views of one Congress as to the meaning of an Act passed by an
earlier Congress are not ordinarily of great weight... ." United
States v. X-Citement Video, Inc., 513
at 77 n.6; see also Consumer Prod. Safety Comm'n v. GTE Sylvania,
Inc., 447 U.S. at 118 n.13 ("Thus, even when it would otherwise
be useful, subsequent legislative history will rarely override a
reasonable interpretation of a statute that can be gleaned from its
language and legislative history prior to its enactment."). In
passing the 1984 Act, Congress altered the 1959 Act's scheme, and
thereby created a tax provision that does not tax PSA funds earmarked
for policyholders. From the literal language of the 1959 statute,
Congress appears to have intended that the 1959 Act rendered taxable all
PSA funds of twice non-qualifying life insurance companies, even if
those PSA funds were earmarked to pay policyholders' claims. Congress'
alteration of the previous Act's taxation scheme in 1984 says nothing
about what Congress intended in 1959.
This court disagrees with the court in Monat because this court
finds no ambiguity in the language of the 1959 Act, and the result
dictated by the literal meaning of the statutes is not "so bizarre
that Congress 'could not have intended' it...." Weddel v. Sec'y
of Dep't of Health and Human Servs., 23 F.3d at 391 (citing Demarest
v. Manspeaker, 498
As defendant correctly identified in a final hearing in this case, section
7806 of the 1959 and 1984 Acts requires that: "No inference,
implication, or presumption of legislative construction shall be drawn
or made by reason of the location or grouping of any particular section
or provision or portion of this title, nor shall any table of contents,
table of cross references, or similar outline, analysis, or descriptive
matter relating to the contents of this title be given any legal
effect." 26 U.S.C. §7806(b).
Thus, the Monat court's reliance and reference to the title of section
815, "Distribution to Shareholders," is unpersuasive,
because the statute requires the courts not to infer any intentions or
meaning from the title of particular sections, which, in this case,
would include any reference to distributions or shareholders.
With regard to the absence of any "meaningful explanation" in
the legislative history, by adopting a meaning gleaned from only a
general understanding of the legislative history of the 1959 Act, the Monat
court and the plaintiff ignored the basic canons of statutory
construction. "The starting point for interpretation of a statute
'is the language of the statute itself. Absent a clearly express
legislative intention to the contrary, that language must ordinarily be
regarded as conclusive.'" Kaiser Aluminum & Chemical Corp.
v. Bonjorno, 494
827, 835 (1990) (quoting Consumer Prod. Safety Comm'n v. GTE
Sylvania, Inc., 447
102, 108 (1980)). Moreover, the Supreme Court has declined to contradict
the literal language of a statute with the legislative history when
"[t]he legislative history cited by petitioners is at best
ambiguous" because such references lack a clear legislative
intention or expression. Buckhannon Bd. and Care Home, Inc. v. West
Va. Dep't of Health and Human Res., 532 U.S. 598, 599 (2001).
The government, in its arguments regarding the proper interpretation,
makes an alternate argument, contending that "there were indirect
or constructive distributions to Great Global's shareholders during the
period 1983 through 1986; therefore, under section
815(d)(2)(A), the deferred tax on the 1983 PSA balance was required
to be paid." Greene responds that "there have been no
'distributions,' directly or indirectly, to or for the benefit of Great
Global's Shareholders." Whether or not Great Global made indirect
or constructive distributions to its shareholders is an issue of fact
and not subject to summary judgment. However, there is no need to
address the issue at this time. A determination of whether constructive
distributions were made is not material to the core issue of whether 26
provide the exception relied on by the plaintiff. Moreover, because the
court construes the statutes in the government's favor, there is no need
to reach the government's alternate, factual argument. The PSA account
taxation of twice nonqualifying life insurance companies does not offer
an exception for funds earmarked for policyholder claims.
B. Supremacy of Federal Law and the
1. Plaintiff's Priority Argument
Plaintiff contends that
law places claims of policyholders and the Arizona Guaranty Fund ahead
of unsecured claims of the
. Plaintiff argues that the McCarran-Ferguson Act, 15 U.S.C. §1012
which reserves to states the authority to govern the insurance industry,
supplants 31 U.S.C. §3713(a)(1)(A)(iii), the federal statute granting
first priority to claims of the United States against insolvent
entities. According to plaintiff, the Arizona priority statute, Arizona
Revised Statutes §20-629, 14
regulates the business of insurance and, therefore, under the
McCarran-Ferguson Act, displaces the general federal priority statute.
To support its argument, plaintiff cites United States Department of
Treasury v. Fabe, 508 U.S. 491 (1993). In Fabe, the Supreme
Court examined an
priority statute similar to the
priority statute at issue in the instant case. The
priority statute entitled claims of the federal government to fifth
priority, behind (1)
istrative expenses, (2) specified wage claims, (3) policyholders' claims
and (4) claims of general creditors. See id. at 495. The Court
partially upheld the order of priority dictated by the
statute, holding that state priority statutes can designate
istrative expenses and policyholders' claims to receive priority over
claims of the
. See id. at 508-509. The
, however, held that specified wage claims and claims of general
creditors may not receive priority over claims of the
. See id.
The Supreme Court reasoned that the McCarran-Ferguson Act reserved to
the states the power to regulate the "business of insurance."
at 493. The Court further interpreted the "business of
insurance" to include state laws enacted to protect policyholders
through enforcing performance of insurance contracts.
at 505. The
recognized that the state priority statute at issue was "designed
to carry out the enforcement of insurance contracts by ensuring the
payment of policyholders' claims despite the insurance company's
at 504. Applying this rationale to the
statute, the Court wrote:
priority statute, to the extent that it regulates policyholders, is a
law enacted for the purpose of regulating the business of insurance. To
the extent that it is designed to further the interests of other
creditors, however, it is not a law enacted for the purpose of
regulating the business of insurance. ... We also hold that the
preference accorded by
to the expenses of
istering the insolvency proceeding is reasonably necessary to further
the goal of protecting policyholders. ... The preferences conferred upon
employees and other general creditors, however, do not escape
pre-emption because their connection to the ultimate aim of insurance is
Dep't of Treasury v. Fabe, 508
at 508-09. The Supreme Court remanded the case to the trial court
because of a clash in priorities between the respective provisions of
the federal statute and Ohio Code.
The Supreme Court had previously set forth a three-part standard for
defining what constitutes "the business of insurance": first,
whether the practice has the effect of transferring or spreading the
risk of insurer insolvency; second, whether the practice is an integral
part of the policy relationship between the insurer and the insured
because it is designed to maintain the reliability of the insurance
contract; and third, whether the practice is limited to entities within
the insurance industry. See id. at 497-98 (quoting Union Labor
Life Ins. Co. v. Pireno, 458
119, 129 (1982)). The Supreme Court has recognized, however, that these
three requirements represent only "checking points or
guideposts" and are not firm requirements for finding that a state
statute regulates the business of insurance. Kentucky Ass'n of Health
Plans, Inc. v. United States, 538 U.S. 329, 333, (2003) (quoting Union
Labor Life Ins. Co. v. Pireno, 458 U.S. at 129); UNUM Life Ins.
Co. of America v. Ward, 526 U.S. 358, 373 (1999) ("We have
indicated that the McCarran-Ferguson factors are 'considerations [to be]
weighed' in determining whether a state law regulates insurance.").
Ultimately, the Supreme Court, in reviewing the McCarran-Ferguson Act
under the Employee Retirement Income Security Program, stated that,
"[t]oday we make a clean break from the McCarran-Ferguson factors
and hold that for a state law to be deemed a 'law ... which regulates
insurance' under §1144(b)(2)(A),
it must satisfy two requirements. First, the state law must be
specifically directed toward entities engaged in insurance. Second, as
explained above, the state law must substantially affect the risk
pooling arrangement between the insurer and the insured."
Ass'n of Health Plans, Inc. v.
at 341-42. Thus, the Supreme Court did not intend that the three factors
identified in Fabe be required or satisfied for a court to
determine that a state law regulates the business of insurance.
In earlier cases in which the Supreme Court reviewed the
McCarran-Ferguson Act, the Court had emphasized the necessity under the
Act to protect policyholders. For example, in Pireno, the court
found that the use of a peer review committee to advise an insurer as to
whether chiropractic charges were reasonable was not part of the
business of insurance. Rather, the court found the peer review process
as an aid to decision making to be "a matter of indifference to the
policyholder, whose only concern is whether his claim is paid,
not why it is paid." Union Labor Life Ins. Co. v. Pireno,
at 120 (emphasis in original). Similarly, in Group Life and Health
Insurance Company v. Royal Drug Company, the court found agreements
between insurance companies and their participating pharmacies too
tenuous to be considered "business of insurance." See Group
Life & Health Ins. Co. v. Royal Drug Co., 440
205, 213-14 (1979), reh'g denied, 441 U.S. 917 (1979).
While Pireno and Royal Drug interpreted the second clause
of 15 U.S.C. §1012(2)(b) of the McCarran-Ferguson Act, which addresses
antitrust laws, the Supreme Court nevertheless noted that the purpose of
the McCarran-Ferguson Act was to protect policyholders. See
Dep't of Treasury v. Fabe, 508
at 504. In particular, when construing the phrase "for the purpose
of regulating the business of insurance," the Supreme Court
emphasized the importance of ensuring payment to policyholders under
insurance contracts. To this end, the
relationship between insurer and insured, the type of policy which could
be issued, its reliability, interpretation, and enforcement --these were
the core of the 'business of insurance.' Undoubtedly, other activities
of insurance companies relate so closely to their status as reliable
insurers that they too must be placed in the same class. But whatever
the exact scope of the statutory term, it is clear where the focus was
--it was on the relationship between the insurance company and the
United States Dep't of Treasury v. Fabe, 508
at 501 (quoting SEC v. Nat'l Secs. Inc., 393
453, 460 (1969)). Therefore, in Fabe, the Supreme Court found
that "[u]nder the McCarran-Ferguson Act, 15 U.S.C. §1012(b),
federal law must yield to the extent the
statute furthers the interests of policyholders."
In the case currently before the court, the plaintiff urges the court to
apply Fabe, arguing that the
priority statute, Arizona Revised Statutes §60-629, places
policyholders' claims ahead of claims by the
. Plaintiff also asks this court to determine whether the Arizona
Guaranty Fund is part of the "business of insurance," to the
extent that guaranty fund claims are entitled to the same priority as
policyholder claims under the
priory statute and the McCarran-Ferguson Act. Plaintiff contends that,
under the McCarran-Ferguson Act, the federal super-priority provided by
31 U.S.C. §3713(a)(1)(A)(iii) does not apply because the Arizona
Guaranty Fund and the Arizona priority statute protect policyholders and
regulate the "business of insurance."This issue appears not to
have been previously addressed in this Circuit.
The dispute in this case arises from the inherent conflicts between the
relevant state and federal statutes. See Boozell v United States,
979 F.Supp. 670, 676 (N.D.
1997). Therefore, this court must review the purpose of the
insurance statute, as well as the relevant case law on guaranty fund
priority claims. In general, federal case law addressing whether
guaranty funds have priority over claims by the federal government is
sparse. However, of the few cases that have addressed the issue, each
one has held that guaranty funds are entitled to protection under the
McCarran-Ferguson Act. See Ruthardt v. United States, 303 F.3d
375 (1st Cir. 2002), cert. denied sub nom. Bowler v. United States,
538 U.S. 1031 (2003), and cert. denied sub nom. Alabama Ins. Guar.
Ass'n v. United States, 538 U.S. 1031 (2003); Boozell v. United
States, 979 F.Supp. at 670. None of these cases, however, are
precedential in this court.
In Ruthardt, the First Circuit reviewed a
priority statute under the McCarran-Ferguson Act to determine whether
guaranty fund claims had priority over claims by the
. See Ruthardt v.
, 303 F.3d at 379. Like the plaintiff in the case currently before
the court, the Massachusetts Commissioner of Insurance argued that the
McCarran-Ferguson Act protected the state priority statute, which
preferred claims by guaranty funds arising out of their payments to
policyholders ahead of claims by the
at 380. The Ruthardt court upheld the
statute, stating that "[t]he priority that
affords to guaranty funds is part and parcel of an integrated regime
aimed at the protection of policyholders."
In granting guaranty funds higher priority than federal claims, the Ruthardt
court examined Fabe and rejected the argument that the Supreme
Court intended to limit priority only to actual policyholders.
at 381-82. Instead, the First Circuit held that since guaranty funds are
intended to protect policyholders, they accordingly deserve a higher
priority than claims by the federal government, in part because the
"obligations of the guaranty funds to pay covered policy claims
exists whether or not the guaranty funds are then reimbursed."Ruthardt
, 303 F.3d at 381. The court stated that "priorities that
indirectly assure that policyholders get what they were promised can
also trigger McCarran-Ferguson protection; the question is one of
degree, not of kind. "
at 382. Thus, the First Circuit found that "the guaranty funds are
little more than a mechanism for advancing the money to pay
policyholders promptly... ."
In reaching its decision, the First Circuit focused on the importance of
reimbursements made to the
guaranty funds. The court stated that "[r]eimbursements to the
funds are a significant source of revenue for making covered payments to
at 382. In essence, the First Circuit equated making reimbursement
payments to guaranty funds with making payments directly to
policyholders because "[w]ithout the priority for such
reimbursements, payments to policyholders could in practice be less
secure and would at the very least be delayed in some instances. Prompt
payment is one of the main benefits of guaranty funds."
The Ruthardt court also wrote: "Yet the guaranty funds are
little more than a mechanism for advancing the money to pay
policyholders promptly and then recovering those advances out of the
estate assets, ahead of the
, just as the policyholders could have done directly."
at 382. Accordingly, the Ruthardt court held that because the
purpose of the guaranty fund was to protect policyholders and ensure
payments on insurance contracts, guaranty funds are appropriately
accorded higher priority than federal claims.
Similarly, in Boozell v. United States, the United States
District Court for the Northern District of Illinois reviewed an
priority statute to determine whether guaranty funds should be accorded
higher priority than federal claims. See Boozell v.
, 979 F.Supp. 670 (N.D.
1997). Like Ruthardt, the Boozell court also equated
making payments to guaranty funds with making payments to policyholders.
In Boozell, however, the court applied a state statute that
assigned to the guaranty fund any amounts paid to policyholders. See
id. at 678 ("Policyholders who receive payments on other
benefits from a guaranty association are deemed to have assigned their
rights under the covered policies to the association to the extent of
the benefits provided. Thereafter, the guaranty association is entitled
to the same priority as the policyholders would have had with respect to
the assigned claims in distributions from the insolvent insurer's
estate") (citing 215 ILL. COMP. STA. 5/545(a), (b), 5/531.08(12)).
The Boozell court found that the
priority statute was enacted for the purpose of regulating the business
of insurance and, therefore, under McCarran-Ferguson, was not preeempted
[ sic] by the federal priority statute.
To reach its decision, the Boozell court also expanded the narrow
protection afforded to policyholders in Fabe by relying upon the
United States Court of Appeals for the Second Circuit's decision in Stephens
v. American International Insurance Company, 66 F.3d 41 (2nd Cir.
1995). The Boozell court found that the Fabe holding
attempted to give meaning to the plain wording of the McCarran-Ferguson
Act by exempting any state law which directly or indirectly protects
policyholders from federal preemption. See Boozell v.
, 979 F.Supp. at 678. In Stephens, the Second Circuit found
that an anti-arbitration provision of the Kentucky Liquidation Act was
enacted "for the purpose of regulating the insurance business"
and, therefore, was not preempted by the federal priority statute. Stephens
v. Am. Int'l Ins. Co., 66 F.3d at 46. The Stephens court reasoned
that "[i]t is crucial to the 'relationship between [an] insurance
company and [a] policyholder' that both parties know that in the case of
insolvency, the insurance company will be liquidated in an organized
On the other hand, the Stephens court, like the court in Boozell
rejected the First Circuit's reasoning in Garcia v. Island Program
Designer, Inc., 4 F.3d 57 (1st Cir. 1993). In Garcia, the
court held that the federal superpriority statute preempted a
filing deadline-related priority provision. See id. at 62. The
Commonwealth provision provided that creditors making claims could file
claims past the deadline for filing claims specified by the Insurance
Commissioner, but that no claims filed after the deadline would be
allowed until all timely filed claims had been fully paid. See id.
at 60-61 (citing P.R. Laws Ann., tit. 26, §4019(2)).
In Garcia, the court rejected the Insurance Commissioner's
argument that the McCarran-Ferguson Act upheld the filing-deadline
statute on two grounds. First, the court found that the filing
provision, with its priority deadlines, did not "regulate
policyholders" because it was neither "directed at, nor
necessary for, the protection of policy holders as [the Fabe]
Court required." Garcia v. Island Program Designer, Inc., 4
F.3d at 62. Second, the Garcia court found that the
Commonwealth's filing deadline provision was not "necessary for the
protection of policyholders."
In short, the Garcia court found the deadline priority provision
too tenuous for the McCarran-Ferguson Act to apply in that it did not
have sufficient nexus to the goal of protecting policyholders.
As the Ruthardt court stated in its opinion, the Supreme Court
has read the McCarran-Ferguson Act "more narrowly than
literally," making this an extremely close case. Ruthardt v.
, 303 F.3d at 382. In the case currently before the court, after
reviewing the relevant statutes and case law, this court agrees with the
holdings in Ruthardt and Boozell, and holds that the
Arizona Insurance Statute "regulates the business of
insurance," and properly grants the Arizona Guaranty Fund priority
over claims by the
Although the Supreme Court did not address plaintiff's guaranty fund
issue directly, the Fabe court, and the subsequent cases
interpreting Fabe, focused on protecting the policyholder.
at 511. Certainly, a policyholder is best protected if his or her claim
can be paid, even when an insurance company is insolvent. The cases that
have rejected application of the McCarran-Ferguson Act to state
statutes, such as Garcia and Pireno, have done so because
those courts found that the state statutes under review were not enacted
to protect policyholders. See Garcia v. Island Program Designer, Inc.,
4 F.3d at 59.
The purpose of the Arizona Guaranty Fund is to ensure insurance contract
completion and to protect the interests and rights of the policyholders.
If a creditor were to collect on a claim directly from the assets of an
insurance company, the government in this case concedes that the
policyholder is entitled to priority ahead of the
. If, however, the same policyholder were to recover from the
guaranty fund, the
attempts to lay claim to the remaining assets of the insurance company
not used directly for the policyholder's claim, rather than providing
for repayment to the guaranty fund for use to pay other policyholders'
claims. This action results in actually increasing the
' priority to assets which would have been used to pay claims but for
the guaranty fund. As the Ruthardt court described, this would be
a "perverse result." Ruthardt v.
, 303 F.3d at 382. This court, therefore, holds that the Guaranty
Funds are entitled to priority ahead of claims by the
Likening this case to Pireno, the defendant argues that,
"the source of the [guaranty] fund's reimbursement is of no
interest to an individual policyholder." See Union Labor Life
Ins. Co. v. Pireno, 458
at 132 (finding the peer review process to be "a matter of
indifference to the policyholder, whose only concern is whether
his claim is paid, not why it is paid."). This argument is
not dispositive in the instant case. Unlike in Pireno, in which
the peer review committee was ascertaining how much a policyholder
should be paid, and the nexus to the interests of the policyholder is
more attenuated, a state guaranty fund actually pays the policyholder
when an insurance company is insolvent. The
guaranty fund is designed protect the policyholder, and, logically,
merits McCarran-Ferguson protection. See SEC v. Nat'l Secs., Inc.,
at 460 ("Statutes aimed at protecting or regulating this
relationship [between the insurance company and the policyholder]
directly or indirectly are laws regulating the 'business of
In 1977, the Arizona Legislature adopted the 1975 Life and Health
Guaranty Association Model Act of the National Association of Insurance
Commissioners. In addressing the purpose of the 1975 Model Act, and
finding the purpose applicable to
's Life and Disability Insurance Guaranty Fund Act, the Arizona Supreme
of this Act is to protect policy owners, insureds, beneficiaries,
annuitants, payees, and assignees of life insurance policies, health
insurance policies, annuity contracts, and supplemental contracts,
subject to certain limitations, against failure in the performance of
contractual obligations due to the impairment or insolvency of the
insurer issuing such policies or contracts.
Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc.,
945 P.2d 805, 808 (
1997); see also Bills v.
Prop. & Cas. Ins. Guar. Fund, 984 P.2d 574, 577 (Ariz. Ct. App.
1999), review dismissed, 195 Ariz. 574 (1999) (stating that the
purpose of the guaranty fund is "to provide for the payment of
claims under certain insurance policies to avoid excess delay in payment
and financial loss to claimants or policyholders because of the
insolvency of an insurer.") (quoting Wells Fargo Credit Corp. v.
Prop. & Cas. Ins. Guaranty Fund, 799 P.2d 908, 909 (Ariz. Ct.
App. 1990) (citing A.R.S. §20-661 et seq.).
The government also contends that the
priority statute is invalid because the United States Supreme Court did
not address directly the validity of granting priority to claims of
state guarantee funds and that extending the Fabe decision to
include creditors such as guaranty funds is exactly what the Supreme
Court hoped to avoid. 15
From this, defendant contends that the Fabe decision must have
foreclosed the possibility that claims of state guarantee funds receive
priority over claims of the
. In Fabe however, the Supreme Court was not asked to address guaranty
funds, and the arguments and logic set forth in Fabe do not support
defendant's argument. The
held that the focus of applying the McCarran-Ferguson Act is to protect
the policyholder. See Fabe v.
at 511. 16
In the instant case, plaintiff correctly argues that the Arizona
Guaranty Fund should have priority over government claims because it is
part of a state statute that protects and regulates the relationship
between the policyholder and the insurer. The
statute is designed to carry out the completion of insurance contracts
by ensuring payment of policyholder's claims despite an insurance
company's intervening bankruptcy, as required under Fabe. See
2. Plaintiff's Retroactivity Argument
Although this court holds that the Arizona Guaranty Fund is entitled to
priority ahead of claims by the federal government, the issue of how
Arizona prioritizes creditors in its distribution statute was raised by
the plaintiff in this case. In the present case, the plaintiff seeks a
refund for a tax return filed and paid in 1990. However, the plaintiff
asks this court to apply the 1997 version of
's priority statute, Arizona Revised Statutes §60-629 (1997). In the
1997 version, the
legislature ranked creditor priorities in an insurance bankruptcy
situation in the following order: 1)
istrative expenses, 2) claims of the guaranty funds, 3) claims of
policyholders, and 4) claims of the
. See id.
Plaintiff basis its retroactivity argument on a Historical and Statutory
Note following section 60-629 (1997). That note reads:
applies to all delinquency proceedings begun after the effective date of
this act and to all delinquency proceedings pending on the effective
date of this act in which a final distribution in payment of claims has
not been made, other than a distribution to claimants under §20-629,
subsection A, paragraph 1, Arizona Revised Statutes, or an early access
distribution to insurance guaranty funds.
ARIZ. REV. STAT. §60-629 (1997) (citing 1997
272, §§2 and 3).
Plaintiff argues that the 1997 statute applies because "[i]t is
undisputed that the Great Global delinquency proceedings were pending as
of the effective date of this statute and that no final distribution has
yet been made in the matter." Plaintiff also points out that the
clear language of the 1997 statute states that it applies to all
proceedings in which a final distribution in payment of claims has not
been made. See ARIZ. REV. STAT. §60-629 (1997). The defendant
challenges plaintiff's argument and contends that the 1977 statutory
version should apply. Defendant argues that, when the tax was paid in
1990, the statutory version was the same as the 1977 version, and that
there was no conflict with the Federal Insolvency Priority Statute.
Since its inception in 1939, the
priority statute has been amended five times: in 1977, 1991, 1993, 1997
and 2001. The significant dates for this case are: December 31, 1985,
when Great Global failed to qualify as a life insurance company pursuant
to 26 U.S.C. §815(d)(2)(A)(ii);
February 7, 1986, when the Arizona Supreme Court declared Great Global
insolvent; June 8, 1988, when the court ordered an liquidation order;
and July 9, 1990 when Great Global's Receiver filed an amended 1983 tax
return and paid $699,849.00.
Plaintiff's argument that the 1997 statute should apply fails, however,
legislature also changed the statute in 2001, and plaintiff asks this
court to arbitrarily pick a statute that falls in between the year the
payment occurred, 1990, and a recodification of the
statute, 2001. Outside of the retroactivity language, the plaintiff
presents no reason why the 1997 statute applies and not the 2001 or 1977
legislature changed section 20-629 in 1993, they restructured the
statute significantly to give clear rankings to the priority of
creditors during an insolvency. See ARIZ. REV. STAT. §20-629
(1993). The 1993 statute, established after Fabe, more clearly
placed guaranty funds and policyholder claims above claims by the
federal government. 17
See id. Before 1993, the priority statute's language was not as clear
and did not mention specifically guaranty funds directly in the statute.
The 1977 statute stated only that "[u]npaid claims ... which arise
out of and are within the coverage of insurance policies issued by the
insolvent insurer shall have preference over and shall be paid prior to
payments of claims of general creditors." ARIZ. REV. STAT. §20-629(E)
Whether the revised statute mentioned guaranty funds directly or not,
statute has continuously required that "[a]ny person recovering
pursuant to this article shall be deemed to have assigned his or her
rights under the policy to the fund to the extent of his or her recovery
from the fund." ARIZ. REV. STAT. §20-672(A) (1977 and 2001). Thus,
in 1993, when
began mentioning guaranty funds in section 20-629, the
legislature recognized what it had been practicing since the statute's
inception, that guaranty funds protect and pay policyholder claims.
Furthermore, the guaranty fund could bring a claim against a
policyholder only if the policyholder first collects from the guaranty
fund and in some manner assigns or surrogates his or her claim to the
fund. Section 20-672 bypasses any independent assignment by the
policyholder, and deems any amount received by policyholders statutorily
assigned to the guaranty fund.
While the placement of claims of the guaranty fund ahead of those of
policyholder claims in the 1997 version seems at odds with the Model Act
and the federal cases discussed above, either way, this ranking has no
affect on the government's lower priority to both policyholders and the
guaranty fund as discussed and found by this court above. It appears
that resolution of priority rankings under the state statute is a
question for the
courts to resolve. Moreover, whether the statute itself places guaranty
funds ahead of federal claims, or guaranty funds are assigned by
statute, the result is the same - guaranty funds serve to directly
protect the policyholder and, therefore, enjoy a higher priority than
the claims pursued by the IRS.
On December 31, 1985, when Great Global failed to qualify as a life
insurance company for two years, it triggered Phase III tax liability
under 26 U.S.C. §815(d)(2)(A)(ii).
Accordingly, all amounts remaining in its Policyholder Savings Account
became taxable. On
February 7, 1986
, the Superior Court of Arizona declared Great Global insolvent, making
the Arizona Guaranty Fund responsible for paying its policyholders
claims. Great Global's receiver filed an amended 1983 tax return in
1990, paying $699,849.00 based on the amounts remaining in the
Policyholders Savings Account on
December 31, 1985
. After reviewing the arguments presented and the relevant case law,
this court holds that the Arizona Guaranty Fund was entitled to priority
claims ahead of the federal government's tax claim and that, therefore,
Great Global is entitled to a complete refund of $699,849.00, plus
interest. This court, therefore, DENIES defendant's motion for
summary judgment and GRANTS plaintiff's motion for summary
judgment. The Clerk of the Court shall enter JUDGMENT in
accordance with this opinion. Each party shall bear it's own costs.
Originally, the Receiver for Great Global was Chris Herstam. The
position of Receiver is allocated to the Director of the Arizona
Department of Insurance. Accordingly, because the person in this
position has changed, so has the party acting as Receiver for Great
Global. As of this date, the case is captioned in the name of Receiver,
John A. Greene.
The Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494,
further changed the way life insurance companies were taxed. Division A
of the Deficit Reduction Act is known as the Tax Reform Act of 1984,
which, at section 211, 98 Stat. 720, addressed the taxation of life
insurance companies (codified at 26 U.S.C. §801 et seq.).
However, 26 U.S.C. §815(f)
(1982 & Supp. III 1985) directs that the previous version of the
code be applied to policyholders surplus accounts for which there was a
balance as of December 31, 1983.
For further descriptions of Phases I, II, and III, see S. Rep.
No. 291, 86 th Cong., 1st Sess., reprinted in 1959
The court incorporates the findings of fact included in its earlier
opinion, which are summarized in this opinion and expanded upon based on
more recent filings by the parties following the remand.
Great Global reported income from operations of $2,770,918.00 and
deductions attributable to operations of $2,828,834.00. This net loss
caused the calculation of a zero tax liability.
Although neither party has indicated the reasons for the failure to
qualify, both parties agree that Great Global did not qualify as an
insurance company during the tax years 1984 and 1985. The requirements
for qualifying as an insurance company for tax purposes are set forth at
26 U.S.C. §801(a)
The terms of 26 U.S.C. §815(d)(2)(A)
(2) Termination as life insurance company
(A) Effect of termination
Except as provided in section
381(c)(22)(relating to carryovers in certain corporate
readjustments), if --
(i) for any taxable year the taxpayer is not an insurance company, or
(ii) for any two successive taxable years the taxpayer is not a life
insurance company, then the amount taken into account under section
802(b)(3) for the last preceding taxable year for which it was a
life insurance company shall be increased (after the application of
subparagraph (B)) by the amount remaining in its policyholders surplus
accountant the close of such last preceding taxable year.
26 U.S.C. §6501(c)(6)
was in effect prior to 1984 and is made applicable to the time period at
issue by 26 U.S.C. §815(f).
Section (c)(6) stated:
(6) Tax resulting from certain distributions or from termination as a
life insurance company. In the case of any tax imposed under section
802(b)(3) on account of termination of the taxpayer as an insurance
company or as a life insurance company to which section
815(d)(2)(A) applies, or on account of a distribution by the
taxpayer to which section
815(d)(2)(B) applies, such tax may be assessed within three years
after the return was filed (whether or not such return was filed on or
after the date prescribed) for the taxable year for which the taxpayer
ceases to be an insurance company, the second taxable year for which the
taxpayer is not a life insurance company, or the taxable year in which
the distribution is actually made as the case may be.
26 U.S.C. §6402(a)
(a) General Rule --In the case of any overpayment, the Secretary, within
the applicable period of limitations, may credit the amount of such
overpayment, including any interest allowed thereon, against any
liability in respect of an internal revenue tax on the part of the
person who made the overpayment and shall, subject to subsections (c)
and (d), refund any balance to such person.
The provisions of 26 U.S.C. §6511(b)(2)(B)
state: "[i]f the claim was not filed within such 3-year period, the
amount of the credit or refund shall not exceed the portion of the tax
paid during the 2 years immediately preceding the filing of the
Section 815(d)(2)(A) of the Act is also referred to in the case law
discussion as the 1959 Act.
A policyholders surplus account is defined in the immediately preceding
subsection, 26 U.S.C. §815(c).
In relevant part, section
815(c) provides that life insurance companies shall "establish
and maintain" a PSA, and defines what additions and subtractions
should be made from a PSA.
15 U.S.C. §1012(b) reads in relevant part: "No Act of Congress
shall be construed to invalidate, impair, or supersede any law enacted
by any State for the purpose of regulating the business of insurance...
As discussed below, there is an issue raised by the parties as to the
version of this Arizona statute to be applied.
Responding to the dissent's criticism that the majority's decision was
so broad that "any law which redounds to the benefit of
policyholders is, ipso facto, a law enacted to regulate the
business of insurance...," the Fabe Court stated how that
was "precisely the argument we reject in the text, as evidenced by
the narrowness of our actual holding." Fabe v. United States,
508 U.S. at 509 n.8.
The Fabe court also upheld a priority for
istrative expenses, stating that: "We also hold that the preference
to the expenses of
istering the insolvency proceeding is reasonably necessary to further
the goal of protecting policyholders." Fabe v.
at 509. Included in the Ohio Code's
istrative expenses were costs payable to the Guaranty Fund. While this
court does not directly rely on this aspect of the Fabe decision,
a strong argument and analogy can be made that reimbursements to the
Arizona guaranty fund are within the parameters of the kind of
istrative expenses anticipated by the Fabe court.
The 1993 version was later changed in 1997. Among the significant
changes in 1997 was the removal of employee claims from a priority above
that of the federal government as directed by Fabe. See Fabe
v. United States, 508 U.S. at 508 ( "We hold that the Ohio
priority statute, to the extent that it regulates policyholders, is a
law enacted for the purpose of regulating the business of insurance. To
the extent that it is designed to further the interests of other
creditors, however, it is not a law enacted for the purpose of
regulating the business of insurance."). However, the guaranty
fund's priority did not change relative to the federal government and
remained ahead of "Claims of the federal government, except ...
claims that are treated as secured claims." ARIZ REV STAT. §20-629(A)(4)
the Matter of the Estate of James Lee Williamson.
Iowa District Court,
; ES 49250,
April 24, 2003
Validity and priority against third parties: Conflicts of law. --
claim against an estate was valid despite a state (
) statute of limitations that would have rendered the claim untimely.
State statutes of limitations do not bind the
KLOTZ, Associate Probate Judge: This matter came on for hearing on
April 10, 2003
on the Claim in Probate of Department of the Treasury/Internal Revenue
Service. The estate appeared by its attorney, Christine M. Shriver. The
claimant appeared by Michael S. Raum, Trial Attorney, Tax Division, U.
S. Department of Justice.
James Lee Williamson died intestate on
March 25, 2002
. Julie Demeter, daughter of the decedent, was appointed as
April 24, 2002
. The second publication of Notice of Appointment and Notice to
Creditors was on
May 16, 2002
. The Court file does not reflect actual notice to creditors. The
claimant, however, acknowledged receiving actual notice dated
May 9, 2002
. The claim was filed on
December 20, 2002
January 3, 2003
the estate mailed Notice of Disallowance of Claim to the claimant.
Request for Hearing was filed on
January 21, 2003
February 4, 2003
the Estate filed an answer to the claim and as affirmative defense that
the claim was barred by the statute of limitations set forth in Iowa
Code 633.410. On
February 28, 2003
the claimant filed Motion for Summary Judgment and Memorandum of Law in
Support of its Motion for Summary Judgment.
The sole question before this Court is as to whether the claim of
Internal Revenue Service may be disallowed by the estate on the basis
that the claim was filed beyond the time periods set forth in Iowa Code
Section 633.410. In its original Answer no issue was raised by the
estate as to the merits of the claim. In its Resistance to Motion for
Summary Judgment, it does state it disputes the facts on which the claim
is based but stated no specific facts in dispute.
Section 633.410, Iowa Code, provides:
claims against a decedent's estate, other than charges, whether due or
to become due, absolute or contingent, liquidated or unliquidated,
founded on contract or otherwise, are forever barred against the estate,
the personal representative, and the distributes of the estate, unless
filed with the clerk within the later to occur of four months after the
date of the second publication of the notice to creditors or, as to each
claimant whose identity is reasonably ascertainable, one month after
service of notice by ordinary mail to the claimant's last known address.
* * * *
Notice is not required to be given by mail to any creditor whose claim
will be paid or otherwise satisfied during
istration and the personal representative may waive the limitation on
filing provided under this section. This section does not bar claims for
which there is insurance coverage, to the extent of the coverage, or
claimants entitled to equitable relief due to peculiar
It is the position of the estate that the claim of Internal Revenue
Service filed on
December 20, 2002
is forever barred for the reason it was not filed within the later to
occur of four months from publication of notice to creditors or one
month from actual notice. The estate further states that no peculiar
circumstances have been shown by the claimant to entitle it to equitable
It is clear from all of the facts established that the claimant did not
make a timely filing of its claim within the statutory provisions set
forth above and has not alleged peculiar circumstances for such late
filing. The question before this Court is as to whether non-compliance
with Iowa Section 633.410 bars the claim of this claimant --the
United States of America
, through the Internal Revenue Service. The claimant takes the position
is does not bar their claim and that case law clearly establishes that
state statutes of limitation do not bind the
In support of its position the claimant cites United States v.
Summerlin [ 40-2
USTC ¶9633], 310 U.S. 414,416 (1940). This was a case in which the
had filed suit against the
istrator of an estate who denied a claim based on a state statute of
limitations. In that case the Court stated: "It is well settled
is not bound by state statutes of limitation or subject to the defense
of laches in enforcing its rights. The same rule applied whether the
brings its suit in its own courts or in a state court." This basic
finding in Summerlin has been applied in numerous cases since
that ruling, included an Eighth Circuit case in ruling on an
v. Brown, 835 F.2d 176, 180 (1987). The Supreme Court has
explained that the United States maintains its sovereign status even
when it acts as a creditor as follows: "When the United States
becomes entitled to a claim, acting in its governmental capacity and
asserts its claim in that right, it cannot be deemed to have abdicated
its governmental authority so as to become subject to a state statute
putting a time limit upon enforcement."
Since Summerlin state courts confronted with the same question
before this Court have held in favor of the
. See Estate of McBride, 249 N.E.2d 266, 267-68 (
App. 1969); In re Estate of Feinberg, 250 N.Y.S.2d 609 (Surrogate
Court, New York 1964); Baker v. Charles, 202 N.E.2d 646 (Oh.
It is concluded that the claim of the
, through Internal Revenue Service, is not barred by the provisions of
Section 633.410. This conclusion is based on the existing case law that
as sovereign is not bound by state statutes of limitation.
IT IS, THEREFORE, ORDERED that the Claimant's Motion for Summary
Judgment is granted and the Claim of United States of America, through
the Internal Revenue Service, is allowed.
USTC ¶50,703] Leland Gail Ridenbaugh, Plaintiff v. Bryan Long, et al.,
District Court, So. Dist.
, East. Div., 02-CV-98, 9/3/2002
Notice of federal tax lien: State law: Certification of lien.--In
the absence of a genuine issue of material fact, the IRS was entitled to
summary judgment with respect to its determination to proceed with
collection of an individual's tax liabilities. Regardless of whether the
IRS met state (
) certification requirements, the form and content of the Notice of
Federal Tax Lien sent to the taxpayer was controlled by federal law and
was valid pursuant to Code
Sec. 6323 .
OPINION AND ORDER
comes before the Court for consideration of the Motion to Dismiss of
Defendants John Gallagher, United States of America, and Department of
the Treasury ("Federal Defendants"), (Doc. # 6), and the
Motion for Summary Judgment of the Licking County Recorder, Bryan Long
(Doc. # 9). The Court exercises jurisdiction pursuant to 28 U.S.C. §1331.
For the reasons set forth below, the Federal Defendants' Motion is GRANTED
and Defendant Long's Motion is GRANTED.
Plaintiff, Leland Gail Ridenbaugh, filed this case in state court
seeking a declaratory judgment that a federal tax lien filed against him
is invalid and seeking an injunction preventing enforcement of the lien.
Amended Complaint, p. 2. The lien was filed on
November 14, 2000
, for unpaid federal taxes.
The essence of
Plaintiff's complaint appears to be that the lien was not entitled to be
filed because it violated the Uniform Federal Lien Registration Act and
the Internal Revenue Code.
Ex. B. Plaintiff claims that the lien violated federal law because it
was not "certified."
Ex. B §3.
removed the case to this Court pursuant to 28 U.S.C. §§1441(a), (b),
1442 and 1444. The Federal Defendants then moved to dismiss this action
and Defendant Long moved for summary judgment. Memorandum in Support
Defendants' Motion to Dismiss ("Federal Defendant's
Memorandum in Support"); Memorandum in Support of Defendant
Long's Motion for Summary Judgment ("Defendant Long's
Memorandum in Support").
failed to properly file his either of his Memorandums in Opposition with
the Court, faxing them to this Court's chambers. The Federal Defendants,
however, replied to Plaintiff's Memorandum Contra.
' Reply to Plaintiff's Response to Motion to Dismiss. Thus, there
is clearly no prejudice to the Federal Defendants if the Court deems
this document filed. Defendant Long, although not replying to
Plaintiff's response to his motion for summary judgement [sic],
is nonetheless not prejudiced by Plaintiff's improper filing based on
the Court's granting of Long's motion. Thus, the Court will deem
Plaintiff's Memorandum Contra Defendant Long's Motion for Summary
Judgment as filed.
Defendants move to dismiss pursuant to Rule 12(b)(1) and 12(b)(6) of the
Federal Rules of Civil Procedure. Defendant Long moves for summary
judgment pursuant to Rule 56(c) of the Federal Rules of Civil
The Federal Defendants' Motion to Dismiss
A motion to
dismiss based on Rule 12(b)(1) for lack of subject matter jurisdiction
must be considered before a motion brought under Rule 12(b)(6) for
failure to state a claim upon which relief can be granted. Moir v.
Regional Transit Authority, 895 F.2d 266, 269 (6th Cir. 1990). A
Rule 12(b)(6) motion may be decided only after establishing subject
matter jurisdiction since the Rule 12(b)(6) challenge becomes moot if
this Court lacks subject matter jurisdiction. Id. (citing Bell
v. Hood, 327 U.S. 678, 682 (1946) which asserts that a motion to
dismiss for failure to state a cause of action may be decided only after
establishing subject matter jurisdiction, since determination of the
validity of the claim is, in itself, an exercise of jurisdiction).
Circuit has distinguished between facial and factual attacks among
motions to dismiss for lack of subject matter jurisdiction pursuant to
Rule 12(b)(1). A facial challenge is an attack on the court's subject
matter jurisdiction that takes the material allegations of the complaint
as true and construes them in a light most favorable to the nonmoving
party. Singleton v.
, 277 F.3d 864, 870 n.4 (6th Cir. 2002) (citing Ohio Nat'l Life
Ins. Co. v. United States [91-1
USTC ¶50,009 ], 922 F.2d 320, 325 (6th Cir. 1990)). In contrast, a
factual attack is "not a challenge to the sufficiency of the
pleading's allegations, but a challenge to the factual existence of
subject matter jurisdiction." United States v. Ritchie [94-1
USTC ¶50,076 ], 15 F.3d 592, 598 (6th Cir. 1994). Because
Defendants do not dispute the sufficiency of the allegations in the
pleadings, they present a factual challenge, as opposed to a facial
challenge, to federal subject matter jurisdiction. See generally RMI
Titanium Co. v. Westinghouse Elec. Corp., 78 F.3d 1125, 1134-35 (6th
Defendant Long's Motion for Summary Judgment
for considering whether summary judgment is appropriate is set forth in
Federal Rule of Civil Procedure 56(c), which provides:
sought shall be rendered forthwith 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.
evidence must be viewed in the light most favorable to the nonmoving
party. Adickes v. Kress & Co., 398
144, 158-59 (1970). Summary judgment will not lie if the dispute about a
material fact is genuine; "that is, if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party." Anderson
v. Liberty Lobby, Inc., 477
242, 248 (1986). Summary judgment is appropriate however, if the
opposing party fails to make a showing sufficient to establish the
existence of an element essential to that part's case and on which that
party will bear the burden of proof at trial. Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986); see also Matsushita Electronic
Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986).
Circuit Court of Appeals has recognized that
Lobby, Celotex, and Matsushita have effected "a
decided change in summary judgment practice," ushering in a
"new era" in summary judgments. Street v. J.C. Bradford
& Co. 886 F.2d 1472, 1476 (6th Cir. 1989). The court in Street
identifies a number of important principles in new era summary judgment
practice. For example, complex cases and cases involving state of mind
issues are not necessarily inappropriate for summary judgment.
in responding to a summary judgment motion, the nonmoving party
"cannot rely on the hope that the trier of fact will disbelieve the
movant's denial of a disputed fact, but must 'present affirmative
evidence in order to defeat a properly supported motion for summary
(quoting Liberty Lobby, 477
at 257). The nonmoving party must adduce more than a mere scintilla of
evidence in order to overcome the summary judgment motion.
It is not sufficient for the nonmoving party to merely " 'show that
there is some metaphysical doubt as to the material facts.' "
(quoting Matsushita, 475
at 586). Moreover, "[t]he trial court no longer has the duty to
search the entire record to establish that it is bereft of a genuine
issue of material fact."
That is, the nonmoving party has an affirmative duty to direct the
court's attention to those specific portions of the record upon which it
seeks to rely to create a genuine issue of material fact.
Court notes that Plaintiff is proceeding pro se. The pleadings of
a pro se litigant are held to "less stringent standards than
formal pleadings drafted by lawyers." Haines v. Kerner, 404
519, 520 (1972); Williams v. Browman, 981 F.2d 901, 903 (6th Cir.
1992). The Court has, therefore, viewed Plaintiff's claims pursuant to
this less stringent standard.
The Court will
address each of the defendants' motions in turn.
The Federal Defendants' Motion to Dismiss
Defendants move to dismiss this action on the basis of sovereign
immunity. Plaintiff does not challenge the dismissal of the Federal
Defendants from this case. Instead, Plaintiff wishes to dismiss the
Federal Defendants. Plaintiff states that:
seeks no relief against the
as he is not a U.S. Citizen, and for this cause no claim for relief need
be stated as the
lacks jurisdiction to grant the relief requested from the state of
.. . .
Memorandum Contra the Federal Defendants' Motion to Dismiss,
at 2. Plaintiff claims that when the Federal Defendants are voluntarily
dismissed, the Court should remand the case to state court. In addition,
Plaintiff expressed in the Rule 26(f) Report of the Parties that he
"desires to dismiss the
with prejudice and remand the action back to state court." (Doc.
Plaintiff's request, the Federal Defendants are hereby dismissed from
this case. 1
The Court, however, denies Plaintiff's request that this case be
would have the discretion to remand this case if the federal claim that
formed the basis of this Court's federal question jurisdiction were to
be dismissed. More specifically, the Court has discretion to determine
whether or not to retain, remand, 2
or dismiss without prejudice the supplemental state law claims. Long
v. Bando Mfg. of Am., Inc., 201 F.3d 754, 761 (6th Cir. 2000)
(citing Carnegie-Melon Univ. v. Cohill, 484
343, 357 (1988) and 28 U.S.C. §1367(c)). But in this case, the federal
claim that forms the basis of the Court's jurisdiction has not been
dismissed. Plaintiff alleges violations of the Uniform Federal Lien
Registration Act of 1978 and the Internal Revenue Code, 26 U.S.C. §6065.
Complaint, Exs. C and D. The Internal Revenue Code is a federal
statute. Consequently, this Court retains federal question jurisdiction
in this case under 42 U.S.C. §1331. 3
Further, the effect of a tax lien in relation to provisions of federal
law for collection of debts owing to the
is always a federal question. United States v. Pioneer American Ins.
USTC ¶9532 ], 374 U.S. 84, 88 n.7 (1963).
Defendant Long's Motion for Summary Judgment
moves for summary judgment arguing that the Uniform Federal Lien
Registration Act ("UFLRA") does not apply to this action and
that the controlling statute does not require certification of a notice
of federal tax lien. Plaintiff argues that the tax lien filed against
his property is a fraud and unenforceable because it is uncertified, as
required by Section 3 of the UFLRA. Complaint, Ex. B.
Court notes that Defendant is correct in his assertion that the UFLRA
does not apply to this action. The UFLRA is a proposed uniform act and
is not binding upon the states. The National Conference of Commissioners
on Uniform State Laws prepared this 1978 proposed uniform act, which the
various states are free to reject or adopt by action of the state
legislature. The UFLRA itself shows that only thirty-eight states have
not being one of them. 7A Uniform Laws Annotated, at 449.
controlling federal law, rather than being the UFLRA, is 26 U.S.C. §6323
which in pertinent part provides:
(f) Place for
filing notice; form.
(1) Place for
filing. The notice referred to in subsection (a) shall be filed--
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
(3) Form. The
form and content of the notice referred to in subsection (a) shall be
prescribed by the Secretary. Such notice shall be valid
notwithstanding any other provision of law regarding the form or content
of a notice of lien.
U.S.C. §6323 (emphasis added).
by this statute, the tax lien filed against Plaintiff is valid, even if
had adopted the UFLRA, and its requirement of certification, because 26
U.S.C. §6323 supercedes state law. See Larrew v.
Dist. LEXIS 8905, *4, 2001-2
U.S. Tax Cas. (CCH) P50,514 (N.D. Tex. 2001) (finding the tax lien
properly filed 26 U.S.C. §6323 even though it did not contain the
requisite certification required by state law); Bertelt v. United
States, 206 B.R. 579, 583 (Bankr. M.D. Fla. 1996) (same). As the Larrew
and Bartlet courts acknowledged, Revenue Ruling 71-466,
interpreting 26 U.S.C. §6323, accurately states the federal law:
are of statutory origin and are not essential to the validity of an
instrument in the absence of specific statutory provisions.
Acknowledgment of notices of tax liens, certificate of discharge, and
other instruments mentioned above, would, therefore, not appear to be
essential, inasmuch as there are no Federal statutory provisions
specifically requiring acknowledgment of such instruments.
6323(a) of the Code, which provides that a notice of lien shall not be
valid unless filed in the office in which its filing is authorized by
State law, does not purport to give a State authority to do more than
designate a place for filing the notice. Section 6323(f)(3) of the Code,
relating to the form and content of the notice, provides that the notice
shall be valid notwithstanding any other provision of law regarding the
form or content of a notice of lien. Accordingly, general provisions of
State laws requiring the recording of documents, or otherwise requiring
the acknowledgment of instruments relating to title to real property are
not applicable. Section 6323(f) of the Code should be construed as
setting up a specific filing procedure which is complete in and of
itself and which is not affected by general provisions of State laws
relating to recording, filing, or title to property.
Ruling 71-466, 2 C.B. 409, 1971
I.R.B. Lexis 309 *1-2, Rev. Rul. 71-466 (1971).
Plaintiff presents no genuine issue as to any material fact and
Defendant Long is entitled to judgment as a matter of law.
Based on the
foregoing, the Federal Defendants' Motion to Dismiss is hereby GRANTED,
(Doc. # 6), and Defendant Long's Motion for Summary Judgment is hereby GRANTED,
(Doc. # 9). The Clerk is DIRECTED to enter judgment against
Plaintiff and in favor of Defendants.
IT IS SO
The Court further notes that the Federal Defendants would likely be
dismissed from this case whether or not Plaintiff voluntarily did so. It
is well settled that under its sovereign immunity, the
is ordinarily immune from suit, and that it may define the conditions
under which it will permit actions against it. United States v.
584, 586 (1941); Clay v. United States [2000-1
USTC ¶50,115 ], 199 F.3d. 876, 879 (6th Cir. 1999). It is the
burden of the party who institutes a claim against the
, here Plaintiff, to allege an act of Congress that authorizes the Court
to entertain that specific claim. Malone v. Bowdoin, 369
643, 645 (1962). Plaintiff has not attempted to show the Court what act
of Congress authorizes this suit against the
Although it is preferable to remand rather than dismiss state claims
after the federal claim is eliminated, the Court may evaluate the use of
manipulative tactics, such as voluntarily dismissing all federal claims,
to control the forum. Carnegie-Mellon Univ. v. Cohill, 484
343, 357 (1988) ("If the plaintiff has attempted to manipulate the
forum, the court should take this behavior into account in determining
whether the balance of factors to be considered under the pendent
jurisdiction doctrine support a remand in the case.")
"The district courts shall have original jurisdiction of all civil
actions arising under the Constitution, laws, or treaties of the
." 42 U.S.C. §1331.
United States of America
, Plaintiff-Appellant v. Dishman Independent Oil, Inc., Penny Oil
Corporation, Ronnie Messer, Kings Construction Company, Corbin Chemical
U.S. Court of Appeals, 6th Circuit, 93-6246, 1/31/95, 46 F3d 523,
Reversing an unreported District Court decision
IRS liens: Validity and priority against third parties: Priority over
attachment lien: Relation back.--A corporation's prejudgment
attachment lien against a bankrupt oil company for amounts due on the
sale of petroleum products did not have priority over an IRS lien filed
against the same company even though the corporation's lien was filed
first. Regardless of when the corporation's lien was considered
perfected for purposes of state (Kentucky) law, it was considered
inchoate under federal law until the corporation obtained a judgment
that identified both the property subject to the attachment lien and its
amount. Thus, although the taxpayer was in actual possession of the
company's property before the IRS lien arose, M.P. Acri (SCt), 55-1
USTC ¶9138 , mandated that the tax lien was entitled to priority.
The relation back doctrine did not prevent a federal tax lien from
preempting an inchoate lien that attaches prior to judgment.
Middleton, Assistant United States Attorney, Lexington, Ky., Stuart M.
Fischbein, William S. Estabrook,
ert L. Baker, Gary R. Allen, Department of Justice, Washington, D.C.
20530, for plaintiff-appellant. L. Lee Tobbe, Monticello, Ky., for
Dishman Independent Oil, Inc., Julius Rathner, Lexington, Ky., for Penny
Oil Corp., Ronnie Messer, Kings Construction Co., Corbin Chemical Co.
and BATCHELDER, Circuit Judges, and EDGAR, District Judge *
United States of America
, appeals the ruling by the bankruptcy court, as affirmed by the United
States District Court for the Eastern District of Kentucky, granting
Defendant-Appellee, Dishman Independent Oil, Inc., its motion for
summary judgment. The bankruptcy court order held that appellee
Dishman's prejudgment attachment lien was entitled to priority over the
federal tax lien filed by the Internal Revenue Service (IRS). For the
reasons stated below, we reverse the decision of the bankruptcy court,
as affirmed by the district court.
The facts in
this case are not in dispute. Defendant-Appellee Dishman Independent
Oil, Inc. (Dishman) initiated suit in
state court by suing Penny Oil Corporation, Ron Messer, Edna Messer,
Corbin Chemical Company, and Kings Construction Company (hereafter the
"debtors") in the sum of $365,522.25 for amounts allegedly due
on the sale of petroleum products from Dishman to the debtors. In
pursuit of its suit against the debtors, Dishman secured a prejudgment
attachment against the property of Penny Oil Corporation and Ron and
Edna Messer on
January 11, 1991
January 14, 1991
, the prejudgment attachments were served and personal property of the
debtors was seized by Dishman. Since
January 14, 1991
, Dishman has been in possession of the debtors' property which consists
of diesel fuel, gasoline, cash, checks, semi-tractors and trailers, bulk
petroleum storage tanks, and fuel blending pumps.
As a result of
its own indebtedness to its creditors, Dishman subsequently filed a
petition for relief under Chapter 11 of the Bankruptcy Code. Dishman's
suit against the debtors was therefore moved to the bankruptcy court as
an adversary hearing. A trial was held on
February 27, 1992
, which resulted in an
April 27, 1992
judgment in favor of Dishman for $365,522.25 with service charges.
time period between Dishman's attachment and seizure of the debtors'
property (January 14, 1991) and the judgment in favor of Dishman (April
27, 1992), a series of events took place which gave rise to the issue in
this appeal. The first significant event during that period was the
postponement of the trial in Dishman's case against the debtors, which
was originally scheduled to go to trial on
November 22, 1991
However, immediately prior to that date, the defendants Ron and Edna
Messer assigned all of their right, title, and interest in the attached
property to the IRS. As a result, the IRS was granted a continuance,
over the objection of Dishman, specifically to prepare for trial in its
new role as defendant and owner of the attached property.
significant event occurred on
January 1, 1992
, nearly one year after Dishman's attachment of the debtors' property,
at which time the IRS assessed the debtors for unpaid excise taxes,
interest, and penalties. The IRS consequently filed a tax lien against
the debtors on
January 29, 1992
, approximately three months before Dishman was granted judgment by the
bankruptcy court on
April 27, 1992
. The IRS tax lien seeks to collect $2,851,910.09 which is owed to the
by the debtors for unpaid taxes from the third quarter of 1987 through
the third quarter of 1988.
May 29, 1992
, the IRS was permitted to intervene in the proceeding to seek a
determination by the court that its federal tax lien was valid and prior
to any interest held by Dishman in the debtors' property. The IRS
eventually filed a motion for summary judgment which the bankruptcy
filed its own motion for summary judgment against the IRS. The
bankruptcy court granted Dishman's motion for summary judgment, after
finding that Dishman's attachment lien was perfected by the judgment
entered in its favor on April 27, 1992, and was therefore prior to the
federal tax lien against the debtors. In re Dishman Indep. Oil Corp.,
Nos. 91-00057, Adv. No. 91-0078, 1993 WL 110032 (Bankr. E.D.
Jan. 8, 1993
). The district court affirmed the bankruptcy court's order granting
Dishman's motion for summary judgment.
Internal Revenue Code ("Code"), the IRS obtains a lien on the
property of a taxpayer 2
when that taxpayer fails or refuses to pay his taxes after assessment,
notice, and demand. I.R.C. §§6321 & 6322. The lien attaches to all
property and rights to a taxpayer's property, including property
subsequently acquired by the taxpayer. See Glass City Bank v. United
States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945); United
States v. Safeco Ins. Co. [89-1 USTC ¶9227], 870 F.2d 338, 340 (6th
Cir. 1989). The broad language of the Code "reveals on its face
that Congress meant to reach every interest in property that a taxpayer
might have." United States v. National Bank of Commerce
[85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). In turn, §6323(a) of the
Code gives priority to these federal tax liens over most other creditors
of the taxpayer-debtor. The priority allotted to IRS tax liens by §6323(a)
only allows such federal tax liens to be defeated by a narrow category
Purchasers, holders of security interests, mechanic's lienors, and
judgment lien creditors.--The lien imposed by section 6321 shall not be
valid as against any purchaser, holder of a security interest,
mechanic's lienor, or judgment lien creditor until notice thereof which
meets the requirements of subsection (f) has been filed by the
asserts that its tax lien against the debtors has priority over
Dishman's attachment lien on debtors' property because Dishman does not
fall within the category of creditors protected by §6323(a). According
to the IRS, its tax lien was filed before Dishman obtained a final
judgment, therefore, Dishman was not a judgment lien creditor until
after the tax lien was filed. The IRS further argues that Dishman did
not hold a perfected security interest in the attached property because
a prejudgment attachment lien is merely an unperfected, inchoate
interest in the property.
before this court is whether a state attachment lien has priority over a
federal tax lien if the property subject to the liens was attached prior
to the time the federal tax lien was filed, although final judgment on
the attachment lien was not handed down until after the federal tax lien
was filed. It is undisputed that when a federal lien is involved, the
relative priority between competing liens is a question of federal law
determined by the principle "the first in time is the first in
right." United States v. City of New Britain [54-1 USTC ¶9191],
347 U.S. 81, 85 (1954); State Bank of Fraser v. United States
[88-2 USTC ¶9592], 861 F.2d 954, 963 (6th Cir. 1988). Nonetheless, the
task of determining what constitutes a perfected lien is usually
governed by state law. United States v. Bess [58-2 USTC ¶9595],
357 U.S. 51, 55-56 (1958); see also
v. Brosnan [60-2 USTC ¶9516], 363 U.S. 237, 240 (1960); United
States v. Waddil, Holland & Flinn, Inc. [45-1 USTC ¶9126], 323
U.S. 353, 356 (1945). This usual rule is altered, however, when one of
the competing liens is a federal tax lien. National Bank of Commerce
[85-2 USTC ¶9482], 472
at 727; see also In re Construction Alternatives, Inc. [93-2 USTC
¶50,569], 2 F.3d 670, 674 (6th Cir. 1993); In re Terwilliger's
Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th
Cir. 1990), cert. denied sub nom.,
, Dep't of Taxation v. IRS, 501
1212 (1991). According to the Supreme Court, "it is a matter of
federal law when such a [state] lien has acquired sufficient substance
and has become so perfected as to defeat a later-arising or later-filed
federal tax lien." United States v. Pioneer Am. Ins. Co.
[63-2 USTC ¶9532], 374 U.S. 84, 88 (1963) (footnote omitted).
"Consequently, state-law limitations upon the ability of general
creditors to reach a taxpayer's property do not affect the attachment of
federal tax liens because the state-law consequences flowing from a
property interest properly defined under state law 'are of no concern to
the operation of the federal tax law.' " Safeco Ins. Co.
[89-1 USTC ¶9227], 870 F.2d at 340-41 (quoting National Bank of
Commerce [85-2 USTC ¶9482], 472
the Supreme Court has determined a state lien to be
"perfected" only when "'the identity of the lienor, the
property subject to the lien, and the amount of the lien are
established.' " United States v. McDermott [93-1 USTC ¶50,164],
113 S. Ct. 1526, 1528 (1993) (quoting City of New Britain [54-1
USTC ¶9191], 347
at 84); see also Treas. Reg. §301.6323(h)-1(g) (1976). The IRS
contends, therefore, that Dishman's lien was not perfected until
April 27, 1992
, when the bankruptcy court judgment determined the amount of the lien
and the property subject to the lien--nearly three months after the
federal tax lien was filed. Consequently, the IRS argues that regardless
of whether Dishman's attachment lien is considered to be perfected under
Kentucky law, 3
Dishman's lien was inchoate for purposes of federal law and the federal
tax lien therefore retains its priority.
this issue is controlled by the holding of United States v. Acri
[55-1 USTC ¶9138], 348 U.S. 211 (1955), which supports the IRS's
position. In Acri, the Supreme Court unequivocally held that a federal
tax lien filed after an attachment lien was executed had priority over
the attachment lien because judgment on the attachment lien did not
occur until after the filing of the tax lien.
at 214. In Acri, the Court was not persuaded by the recognition of the
attachment lien as perfected under
at 213. Rather, for "federal tax purposes" the lien was
"inchoate . . . because, at the time the attachment issued, the
fact and the amount of the lien were contingent upon the outcome of the
suit for damages."
In this case,
Dishman had not yet been granted judgment at the time the federal tax
lien was filed. According to federal law, therefore, at the time the
federal tax lien was filed, both the property subject to Dishman's
attachment lien and its amount remained uncertain. Thus, despite the
fact that Dishman was in actual possession of the debtors' property
before the tax lien was filed, the tax lien has a higher priority based
on the holding in Acri.
Based in part
on In re Coston, 65 B.R. 224 (Bankr. D. N.M. 1986), the
bankruptcy court found that Dishman's attachment lien had priority over
the federal tax lien. It appears, however, that the bankruptcy court's
reliance on In re Coston was misplaced. In that case, the bankruptcy
court held that a judgment obtained by a creditor after a bankruptcy
filing avoided the preference period of §547 because it related back to
the date of prejudgment attachment. However, neither of the competing
liens in In re Coston was a federal tax lien, and that decision is,
therefore, inapposite to the case at hand.
In light of United
States v. Acri, the concept of relation back, "which by process
of judicial reasoning merges the attachment lien in the judgment and
relates the judgment lien back to the date of attachment . . . ," United
States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340
U.S. 47, 50 (1950), would not change the outcome of this case. Pursuant
to the holding in Acri, a state lien that is dependent upon the outcome
of a suit for damages, is inchoate until final judgment. Consequently,
the doctrine of relation back cannot save such an inchoate lien from
being preempted by a federal tax lien which attaches before judgment is
an additional argument, on equitable grounds, that allowing a federal
tax lien to obtain priority over the claim of a Chapter 11 debtor
defeats the goal of Congress to help "struggling businesses to
reorganize." In support of this contention, Dishman cites United
States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198
(1983), establishing that Congress intended to protect the property of a
bankrupt debtor from being levied upon by the IRS.
In its order,
the bankruptcy court declined to address this or Dishman's additional
equitable arguments because the court had concluded that Dishman's
attachment lien had priority. On remand the court should, therefore,
address Dishman's equitable arguments including the assertion that
delaying the prosecution of Dishman's case allowed the IRS to intervene
and thereby insured that the filing of the federal tax lien predated
judgment in favor of Dishman. Cf. In re Mansfield Tire & Rubber
Co. [91-2 USTC ¶50,419], 942 F.2d 1055, 1062 (6th Cir. 1991)
("We continue to recognize that equitable subordination in
bankruptcy may be appropriate if the claimholder is guilty of
inequitable conduct or if the claim itself is of a status susceptible to
subordination."), cert. denied sub nom., Krugliak v. United
States, 112 S. Ct. 1165 (1992).
We note in
that regard that the IRS apparently became the owner of the property in
question before the IRS filed its tax lien against the property. On
November 1, 1991
, the Secretary of State of Kentucky dissolved Penny Oil Corporation,
rendering Ron Messer the owner and title holder of the defunct
corporation's assets. On
November 22, 1991
, all of the Messer rights, title, and interest in the attached property
were then transferred to the IRS. In this manner, the IRS became the new
owner of the property, established standing, and won the continuance on
November 22, 1991
, the date on which trial was originally scheduled to begin. Finally, on
January 29, 1992
, the IRS filed its tax lien. On remand, the court must, therefore, also
consider whether the actions of the IRS, purporting to file a tax lien
on its own property in January, 1992, constituted additional inequitable
foregoing reasons, we REVERSE the order of the district court granting
appellee Dishman's motion for summary judgment. This case is REMANDED
for proceedings not inconsistent with this opinion.
The Honorable R. Allan Edgar, United States District Court for the
Eastern District of Tennessee, sitting by designation.
Plaintiff Dishman was prepared for trial on
November 22, 1991
, and had five witnesses present to testify that day.
As §6321 states: 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. I.R.C. §6321.
The Kentucky Revised Statute reads:
A lien shall
be created on the property of the defendant by the levy of the
attachment; or by service of the summons, with the object of the action
indorsed thereon, on the person holding or controlling his property. Ky.
Rev. Stat. Ann. §426.383 (
1991). The Kentucky courts have further determined that a lien on a
specific piece of property acquired by attachment does not become
effective merely by issuance of the writ of attachment or by placing the
writ in the hands of an officer, . . . nor does a lien become effective
merely upon delivery of a copy of the attachment to the debtor. . . .
There must be an actual levy on the property itself. Thacker v.
Commonwealth, 284 S.W.2d 325, 326 (Ky. Ct. App. 1955) (citations
omitted). Upon examining the record in the case at hand, the bankruptcy
court found that Dishman had executed an actual levy on the debtors'
property and that Dishman had reported the proceeds of the attachment to
the Wayne Circuit Court. In re Dishman Indep. Oil Corp., 1993 WL
110032, at * 2. The IRS did not dispute that the property actually had
been levied upon. Consequently, the bankruptcy court found, pursuant to
state law, that Dishman secured a perfected lien on the property
as of the date of attachment and that Dishman was therefore a
judgment lien creditor as defined by 11 U.S.C. §101(36) (defining a
judicial lien as one "obtained by judgment, levy, sequestration, or
other legal or equitable process or proceeding").
¶50,715] State of
, Department of Revenue, Appellee v.
United States of America
Court of Appeals, 8th Circuit, 98-1927,
, 184 F3d 725, 184 F3d 725. Reversing and remanding an unreported
District Court decision
Secs. 6323 and 7426 ]
Liens: Priority: Federal v. state: Perfection of liens: State
(Minnesota) law: Filing of return: Date of assessment: Administrative
actions: Additions of penalties and interest: Nonministerial actions.--State
tax liens on the property of a corporation that failed to pay its
federal and state employment tax liabilities were not perfected on the
date the corporation filed state tax returns and, consequently, the
state liens were not entitled to priority over federal tax liens. Under
law, the state had to take
istrative action to acknowledge the taxpayer's liability before its
liens could be perfected, and thus choate, under federal law.
Specifically, after the taxpayer filed its state tax returns, the state
tax commissioner was required to examine the returns, make a
determination of the taxpayer's liability, and impose penalties and
interest for the corporation's failure to pay over the withheld taxes.
The state liens were not summarily enforceable because the actions left
to be done could not be described as merely ministerial.
MCMILLIAN, LAY and MURPHY, Circuit Judges.
States appeals from a final order entered in the District Court for the
District of Minnesota granting summary judgment in favor of the State of
Minnesota and denying summary judgment to the United States, holding
that the state tax liens were choate, as of the time of filing of the
state tax returns and not when processed. For reversal, the
argues that the state tax liens were not established at the time the
state tax returns were filed because, under state law, the state must
istrative action to acknowledge taxpayer liability before its liens can
be perfected, and thus "choate," under federal law for
purposes of determining relative priority. For the reasons discussed
below, we reverse the judgment of the district court and remand the case
to the district court with directions to enter summary judgment in favor
court had subject matter jurisdiction over this wrongful levy suit
brought pursuant to 26 U.S.C. §7426 under 28 U.S.C. §1346(e). The
filed a timely notice of appeal. See 28 U.S.C. §2107(b) (notice
of appeal in a civil case must be filed within 60 days of judgment when
is a party); Fed. R. App. P. 4(a)(1)(B). This court has jurisdiction
over this appeal under 28 U.S.C. §1291. 1
facts were stipulated. On
June 2, 1992
, the taxpayer, Prime Factors Communications, Inc., filed federal and
state employment tax returns for several quarters, including all four
quarters of 1991 and the first quarter of 1992, the periods at issue in
this appeal. The taxpayer did not pay the taxes that it reported as due
on its federal and state returns. The IRS assessed the unpaid federal
taxes for the quarters at issue on August 3 and
August 10, 1992
. By law, federal tax liens upon the taxpayer's property for those
liabilities arose on that date. See 26 U.S.C. §§6321, 6322. The
IRS filed a notice of federal tax lien on
January 14, 1993
, reflecting a total federal tax liability due from the taxpayer of
processed the taxpayer's state employment tax returns for the period at
issue by entering the taxpayer's liability into its computer records, on
August 20, 1992, after the date the IRS assessed the taxpayer's federal
tax liabilities at issue. The taxpayer's state tax liability for the
period at issue totaled $14,378.32.
June 21, 1996
, Charles and Lorilee Leininger purchased certain property belonging to
the taxpayer. Prior to the sale, the IRS served on the closing agent for
the sale a notice of levy with respect to the taxpayer's unpaid federal
employment taxes, including the taxes due for the quarters at issue.
Pursuant to the levy, the IRS received $14,579.22 of the sale proceeds. 2
filed its complaint in this action on
March 3, 1997
, and an amended complaint on
September 23, 1997
. The state alleged that the IRS had wrongfully levied upon $14,378.32
of the sales proceeds, because the state's tax liens were entitled to
priority over the federal tax liens. The
and the state filed cross-motions for summary judgment. The state
contended that, under Minn. Stat. §270.69(1), a lien for state taxes
arises on the date of the assessment of the tax, and that under Minn.
Stat. §270.65, the date of the assessment is the later of the date the
return is filed or the date on which the return is due. The state thus
argued that its tax liens became choate, on
June 2, 1992
, the date the returns were filed, and were therefore entitled to
priority over the federal lax liens which arose on August 3 and 10,
1992, the dates the federal taxes were assessed. In support of its
argument, the state relied on Cannon Valley Woodwork, Inc. v. Malton
Construction Co., 866 F. Supp. 1248 (D. Minn. 1994) (Cannon
Valley), a case in which the district court held that Minnesota tax
liens had priority over those of the United States.
argued that the state's tax liens did not become choate, until the
returns were actually processed by the state on
August 20, 1992
, a date after the federal tax liability had been assessed, and that the
federal tax liens were thus entitled to priority over the state tax
liens. The United States relied on In re Priest, 712 F.2d 1326,
1329 (9th Cir. 1983), modified, 725 F.2d 477 (1984), in which the
Ninth Circuit, interpreting a California statute similar to Minn. Stat.
§§270.65,.69(1), held that the "mere receipt" of a state tax
return was insufficient "to establish a lien that is capable of
taking priority over a federal lien."
arguments on the motions, the district court ruled from the bench and
granted summary judgment in favor of the state and denied the motion of
. The district court found that the state's tax liens became choate upon
the filing of the taxpayer's returns, adopting the rationale of Cannon
Valley and rejecting the Ninth Circuit's reasoning in In re
Priest. The district court ruled that the state's tax liens were
"established" and "summarily enforceable" as of the
date the taxpayer filed its returns and "not contingent on future
events." Accordingly, the district court ruled that the state's tax
liens were prior to those of the
and that the state was entitled to recover. This appeal followed.
court's grant of summary judgment is reviewed de novo. See Bremen
Bank & Trust Co. v. United States [98-1 USTC ¶50,116], 131 F.3d
1259, 1264 (8th Cir. 1997) (Bremen Bank); see also McDermott
v. Zions First Nat'l Bank [91-2 USTC ¶50,491], 945 F.2d 1475, 1478
(10th Cir. 1991) (district court's finding that a federal tax lien has
priority over a state tax lien is reviewed de novo, rev'd on other
grounds sub nom. United States v. McDermott [93-1 USTC ¶50,164],
507 U.S. 447 (1993) (McDermott)). Summary judgment is appropriate
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 a judgment as a matter of law." Fed. R. Civ.
P. 56(c). This case was tried on the basis of stipulated facts and the
sole issue is a question of law, that is, whether the state tax liens
were sufficiently choate as a matter of federal law so as to be entitled
to priority over the federal tax liens.
provisions of the Internal Revenue Code are intended to insure prompt
and certain enforcement of the tax laws. See United States v.
National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721
(1985); United States v. Rodgers [83-1 USTC ¶9374], 461 U.S.
677, 683 (1983). When a person liable to pay a federal tax fails to do
so after a demand for payment is made, the amount of the tax, together
with interest, additions, penalties, and costs, becomes a lien in favor
upon all real and personal property and all rights to property belonging
to the delinquent taxpayer. See 26 U.S.C. §6321; Bremen Bank
[98-1 USTC ¶50,116], 131 F.3d at 1262-63. The lien arises automatically
when the assessment is made and continues until the taxpayer's liability
is either satisfied or becomes unenforceable due to the lapse of time. See
26 U.S.C. §6322. An assessment is "a bookkeeping notation . . .
made when the Secretary [of the Treasury] or his [or her] delegate
establishes an account against the taxpayer on the tax rolls." Laing
v. United States [76-1 USTC ¶9164], 423 U.S. 161, 170 n.13 (1976); see
26 U.S.C. §6203.
determines the nature and the extent of a taxpayer's interest in
"property." See Aquilino v. United States [60-2 USTC ¶9538],
363 U.S. 509, 513 (1960); United States v. Bess [58-2 USTC ¶9595],
357 U.S. 51, 55 (1958); Little v. United States [83-1 USTC ¶9343],
704 F.2d 1100, 1105 (9th Cir. 1983). Federal law, however, governs the
relative priority accorded to the competing liens asserted against the
property of the delinquent taxpayer. See Aquilino v. United States
[60-2 USTC ¶9538], 363
at 513-14. "Federal tax liens do not automatically have priority
over all other liens. Absent provision to the contrary, priority for
purposes of federal law is governed by the common-law principle that
'the first in time is the first in right.' " McDermott [93-1
USTC ¶50,164], 507 U.S. at 449 (citations omitted); see United
States v. Equitable Life Assurance Soc'y [66-1 USTC ¶9444], 384
U.S. 323, 327-30 (1966); United States v. City of New Britain
[54-1 USTC ¶9191], 347 U.S. 81, 87 (1954) (New Britain); cf.
Bremen Bank [98-1 USTC ¶50,116], 131 F.3d at 1263 (discussing
modification of common law rules by Federal Tax Lien Act of 1966).
"Under federal law, the priority of a lien depends on the time the
lien attached to the property in question and became choate." Cannon
Valley, 866 F. Supp. at 1250, citing
[54-1 USTC ¶9191], 347
at 84. A state-created lien is "choate" for "first in
time" purposes only when it has been "perfected" in the
sense that there is nothing more to be done, i.e., when "the
identity of the lienor, the property subject to the lien, and the amount
of the lien are established."
[54-1 USTC ¶9191], 347
at 84; accord
[64-2 USTC ¶9520], 377 U.S. 351, 354-55 (1965); see also
McDermott [93-1 USTC ¶50,164], 507
at 449. The test for choateness or perfection also requires that the
creditor have the right to summarily enforce its lien. See United
States v. Vermont [64-2 USTC ¶9520], 377 U.S. at 359 (holding
state's assessment choate where the "assessment is given the force
of a judgment, and if the amount assessed is not paid when due,
istrative officials may seize the debtor's property to satisfy the
debt") (quoting Bull v. United States [35-1 USTC ¶9346],
295 U.S. 247, 260 (1935)); Monica Fuel, Inc. v. IRS [95-2 USTC ¶50,477],
56 F.3d 508, 513 (3d Cir. 1995); In re Terwilliger's Catering Plus,
Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990)
(holding a "state lien holder must show that he [or she] had the
right to enforce the lien at some time prior to the attachment of the
federal lien"), cert. denied, 501 U.S. 1212 (1991).
The issue to
be decided in this case is whether, under federal law, the state tax
liens were sufficiently choate upon the taxpayer's filing of its tax
returns to prime the federal tax liens. The
argues that, regardless of state law, the mere receipt by the state of a
tax return is insufficient to meet the federal standard for choateness,
because such receipt does not establish the amount of the taxpayer's
liability or of the liens themselves. Under
contends, additional steps are required to establish the amount of the
state tax liens and to permit the state to enforce the liens, and
federal law regarding choateness requires a state to take some action to
acknowledge a liability before a lien can be perfected. As a result, the
argues that the state tax liens were not perfected and were not entitled
to priority over the federal liens.
The state tax
liens at issue arose by virtue of
law, which provides, in relevant part:
imposed by any chapter
istered by the commissioner of revenue, and interest and penalties
imposed with respect thereto, including any recording fees, sheriff
fees, or court costs that may accrue, shall become a lien upon all the
property within this state, both real and personal, of the person liable
for the payment or collection of the tax . . . from and after the date
of assessment of the tax.
Stat. §270.69(1). "For purposes of
istered by the commissioner [i.e., taxes due as shown on a
return], the term 'date of assessment' means the date a return was filed
or the date a return should have been filed, whichever is later. . .
§270.65. Thus, under state law, the state tax liens at issue arose when
the taxpayer filed its returns on
June 2, 1992
, two months before the federal taxes at issue were assessed.
however, and a state's own characterization of its liens for purposes of
determining priority do not control this issue. See William T.
Plumb, Jr., Federal Tax Liens 180 (3d ed. 1972) ("Local statutory
provisions that fix a tax lien date prior [to the time the lien becomes
choate] must be ignored for the purpose of resolving the federal-state
priority question."). "Otherwise, a State could affect the
standing of federal liens, contrary to the established doctrine, simply
by causing an inchoate lien to attach at some arbitrary time even before
the amount of the tax, assessment, etc., is determined."
[54-1 USTC ¶9191], 347
at 86 (footnote omitted). Accordingly, state tax liens are not
necessarily perfected on the date a taxpayer files a return simply
because state law provides that the "date of assessment" with
regard to taxes shown due on a return is the date the return is filed.
Rather, we must still determine if the state tax liens are sufficiently
perfected as of that date under federal law.
In our view,
the state tax liens at issue were not choate as of the date the taxpayer
filed its returns and the state tax liens therefore are not entitled to
priority. Despite the fact that state law provides that tax liens arise
on the date on which the taxpayer filed its returns, state law also
provides that "[t]he commissioner shall make determinations,
corrections, and assessments with respect to state taxes, including
interest, additions to taxes, and assessable penalties." Minn.
Stat. §289A.35 (emphasis added). In addition, when a taxpayer has filed
a return, "the commissioner shall examine the return and make any
audit or investigation that is considered necessary."
Therefore, even after a return is filed, the commissioner is required to
examine the return and to make a determination of the taxpayer's
liability. Beyond doubt, it is this determination that formally
establishes the amount of the taxpayer's liability.
law also provides that "[i]f a withholding or sales or use tax is
not paid within the time specified for payment, a penalty must be added
to amount required to be shown as tax."
Stat. §289A.60(1). Therefore, in a case such as this where withholding
taxes were not timely paid, state law required the commissioner to add a
penalty to the tax liability. This penalty is not computed until a tax
return is processed.
, 866 F. Supp. at 1252. Also upon processing, interest due on the
liability is computed.
As a result of
these state law provisions, we hold that the amounts of the state tax
liens at issue here were not established on the date the returns were
filed and that state tax liens were therefore not perfected and choate
on that date. The returns filed by the taxpayer had not been examined,
the taxes owed had not been determined by the commissioner, and the
delinquency penalties and interest had not been computed and added to
the amount of the tax, all of which is required under state law. Thus,
pursuant to state law, the state has done that which is expressly
prohibited, that is, it has "affect[ed] the standing of federal
liens . . . simply by causing an inchoate lien to attach at some
arbitrary time even before the amount of the tax is determined."
[54-1 USTC ¶9191], 347
also note that because of these additional statutory provisions, the
state tax liens were not summarily enforceable. While a lien is
considered summarily enforceable even though ministerial acts which do
not affect the viability of the lien remain to be done, the acts
described above as required by state law cannot be characterized as
ministerial. After the taxpayer filed its returns, it remained the
statutory duty of the commissioner to examine the returns and determine
its liabilities, and to calculate and add to the unpaid tax the required
penalty for non-payment and the interest that was due. Only then could
notice and demand for payment of the amount due be sent. See
Stat. §270.70(2)(a). Notice and demand for payment must be sent before
a levy can be made. See id. Thus, substantial contingencies
remain before the state tax liens could be enforced.
We note that,
in addition to the requirements of state law, federal law regarding
choateness also requires that a state take some
istrative action to acknowledge formally a liability before the amount
of the lien can be deemed "established" and the lien
perfected. See New Britain [54-1 USTC ¶9191], 347
at 86. For example in In re Priest, a
statute provided that a perfected and enforceable state tax lien for an
unpaid tax liability shown as due on a return arose at the time the tax
return was filed.
characterized the effect of the filing of the delinquent state return as
"self assessment" and argued that this admission of liability
by the taxpayer satisfied the
test for choateness. The Ninth Circuit disagreed and held that the
statute cannot be deemed to create liens that are sufficiently choate
. See, 712 F.2d at 1329. The court held that "a lien cannot
arise prior to the taking of any
istrative steps to establish the lien" because "[t]he mere
receipt of a delinquent State tax return [under
law] is too vague and indefinite."
, 725 F.2d at 478. The court observed that
delays might well occur before there was even any acknowledgment of the
director's receipt of the delinquent return, or any
istrative act by which the State acknowledged in its own accounts that
the taxpayer is liable for unpaid taxes, or the precise amount of that
delinquency, and the amount of penalty, interest and fees.
, 712 F.2d at 1329.
Priest has been followed by other courts. In Baybank Middlesex v.
Electronic Fabricators, Inc., 751 F. Supp. 304, 310 (D. Mass. 1990)
(citations omitted), the district court held that "in order for the
amount of the state lien to be established, there must be 'some activity
by the State to fix the taxpayer's liability.' " The state liens at
issue had priority over the federal liens because the state had
acknowledged in its own accounts that the taxpayer was liable for unpaid
taxes. See id. The district court also noted approvingly that the
state had calculated the interest due on the liability and included that
amount in the notice of lien. See id. Because these steps had
been taken before the federal lien arose, the state lien was choate
since there was nothing more to be done. See id.
above, the district court relied upon
, 866 F. Supp. 1248, and declined to follow In re Priest.
involved the same statutes at issue in this case, i.e.,
Minn. Stat. §§270.65, .69. The district court concluded that a lien
arising under the statutes was choate under federal law at the time of
assessment, the date a tax return was filed. See 866 F. Supp. at
1252. The district court rejected the argument of the
that a state assessment was only choate if it was similar to the federal
assessment, see id. at 1250-51, as well as its contention that,
as in In re Priest, preciseness in the amount of tax owed is
necessary for the lien to be choate. See id. at 1251. Instead,
the district court interpreted the doctrine of choateness to require
that "a lien be enforceable and not contingent on future events
before it could defeat a federal tax lien."
at 1251. The district court found that under state law
tax liens were not contingent on future events and were summarily
enforceable and therefore choate. See id.
We believe the
improperly discounted the importance of preciseness in the amount
of tax owed in the
test for choateness. In our view, the plain language of
requires the amount of the lien to be established, that is, determined,
before a state-created lien can be considered choate. See [54-1
USTC ¶9191], 347
at 84. Certainly, more had to be done in the present case, and if the
Supreme Court had intended to require only that the lien, i.e.,
the taxpayer's liability in general, had to be established, it could
have said so. Instead, it stated that the amount of the lien had to
established. Moreover, in both
, the Court refers to the requirement that the amount of the lien be
"certain." See id. at 86; see also
[64-2 USTC ¶9520], 377
at 357. The Ninth Circuit was therefore correct in emphasizing this
requirement in In re Priest and the district court in
was wrong to discount it.
we disagree with the finding in Cannon Valley that the
tax liens were free from contingencies upon the taxpayer's filing of its
return and summarily enforceable. See supra at 7-8. In our view,
state law requires additional
istrative action to establish the liens. The taxpayer's liabilities
could not be collected until notice of the liabilities and demand for
payment had been sent out, and notice and demand could not be sent until
the returns had been processed and the tax, penalties, and interest
determined by the commissioner. Thus, the state tax liens are not
summarily enforceable on the date of assessment, the date the return is
filed or should have been filed.
note that there is a critical factual distinction between
and the present case. In
, unlike the present case, the state had in fact "processed"
the taxpayer's return before the IRS assessed the federal taxes. See
866 F. Supp. at 1249 n.1, 1252. The district court in Cannon Valley
held, in the alternative, that at the very least, the state tax liens
were choate at the time the returns were processed, noting that
"[b]y processing the forms, Minnesota took
istrative action that established that the taxpayer was liable to the
State of Minnesota for unpaid taxes, including the amount of the unpaid
taxes and the amount of any penalty and interest."
at 1252. Thus, for purposes of the
test for choateness, "the lienor was known . . ., all of the
property of the taxpayer was attached, and the amount including
principal, penalties and interest was known."
(noting only variable that continued to change was applicable interest,
which changed daily). Accordingly, while the primary rationale for the Cannon
Valley analysis is at odds with that in In re Priest, the
result (and the alternative holding) in
is in harmony with In re Priest. In the present case, on the
other hand, the state did not process the taxpayer's returns until
August 20, 1992
, a date after the IRS assessed the federal taxes on August 3 and
August 10, 1992
the judgment of the district court is reversed and the case is remanded
with instructions to the district court to enter summary judgment in
favor of the
The district court's judgment provides that the state's motion for
summary judgment is granted. In an action for money, specification of
the amount of monetary award generally is an essential element of the
judgment. See United States v. F. & M. Schaefer Brewing
Co. [58-1 USTC ¶9410], 356 U.S. 227, 233-35 (1958). It is
sufficient, however, if the judgment specifies the means of determining
the amount due. See id. at 234. Here, the summary judgment
is, in effect, a judgment that the state is entitled to recover the
amount ($14,378) that it sought in its complaint. Cf. Goodwin v.
United States, 67 F.3d 149, 151 (8th Cir. 1995) ("a judgment
may be final if only ministerial tasks in determining damages
remain") (citation and internal quotations omitted).
The IRS was paid after deductions were made for settlement charges,
delinquent property taxes, and payments to other creditors. The
Minnesota Department of Economic Security received $16,386.40 and the
Minnesota Department of Revenue received $3,723.34 for other tax
liabilities. These other payments from the proceeds are not in dispute.
¶50,169] First of America Bank--West Michigan, Plaintiff v. William J.
Alt, M.D., Lind Alt, Harbor Laboratory, Inc., United States of America,
and Cote La Mer, Inc., Defendant
District Court, West. Dist.
, So. Div., 1:91-CV-1020,
Secs. 6323 , 6501
and 6502 ]
Tax liens: Assessments: Statute of limitations: Standing to
challenge.--A bank lacked standing to challenge the validity of an
IRS tax lien against a condominium owned by delinquent taxpayer
individuals who had obtained a mortgage on the property from the bank on
the grounds that the two underlying assessments were not filed within
three years of the date on which their return was filed. The three-year
limitations period for assessing tax protects taxpayers only, not third
parties. Furthermore, since the assessments were assumed valid due to
the bank's lack of standing, the IRS's lien attached for ten years under
the applicable limitations period for collecting tax.
Sec. 6321 ]
Lien for taxes: Validity of lien: Transfer to related entity.--The
transfer of a condominium by delinquent taxpayers to a related
corporation did not defeat an IRS tax lien that was filed against the
individuals only. Although the deed was executed before the IRS filed
its lien, it was not recorded until afterward.
Sec. 6323 ]
Lien for taxes: Validity of lien: Conflicts of law.--An IRS tax
lien had priority over a bank's unrecorded mortgage even though under
) law it would not have had priority if the IRS was on notice of the
bank's lien. Notice of a prior unrecorded interest is irrelevant to
determining lien priority under the Code. The priority of IRS liens is
determined under federal law, not state law.
Sec. 6323 ]
Lien for taxes: Validity of lien: Estoppel against IRS: Equitable
principles.--The IRS was not estopped from claiming an interest in
mortgaged real estate even though it waited almost 10 years to begin
legal proceedings or to enforce its lien. Despite the fact that the
lender would not have made the loan had it known of the IRS's
assessment, the IRS had committed no affirmative action that misled the
bank or induced it to make the loan. Furthermore, the IRS was not
required under equitable principles to apply seized assets to the
earliest tax liability.
Court Rule 37 ]
Suits by nontaxpayers: Default judgment: Attorney fees:
Interrogatories, failure to reply.--A lender was not entitled to a
default judgment against the IRS in a case involving the priority of
liens since the IRS complied with discovery orders. The lender may have
been entitled to attorney fees since the IRS had not answered all
interrogatories fully and correctly. This issue was referred to a
magistrate judge for further consideration.
Treado, Culver, Lague & McNally, 600 Terrace Plaza,
, for plaintiff. Michael H. Dettmer, United States Attorney, Michael L.
Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand
Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist,
Department of Justice, Washington, D.C. 20530, for defendant (IRS).
Floyd H. Farmer,
102 S. Buchanan St.
49456, for defendant (Cote La Mer, Inc.). Cote La Mer, Inc., 4739
Poinsettia, Grand Rapids, Mich. 49508, pro se. Michael H.
Dettmer, United States Attorney, Michael L. Shiparski, Assistant United
States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra
E. Nicholaides, John A. Linquist, Department of Justice, Washington,
D.C. 20530, for defendant (USA).
This is a
civil action brought by plaintiff First of America Bank--
("FOA" or "Bank") to foreclose its mortgage on
certain real property previously owned by William and Rosalinda
("Lind") Alt, and to determine the priority of its lien. The
subject property is a condominium located in Cote La Mer, a subdivision
. The property was recently sold by judicial sale, yielding net proceeds
of $79,710.45. Those proceeds have been placed in escrow with the Court.
States contends that its tax lien against Lind Alt has priority over
plaintiff's claimed mortgage interest in the property pursuant to the
Internal Revenue Code, 26 U.S.C. §6323
. Both parties are now before the Court on contesting motions for
purchased the disputed Cote La Mer property on
December 30, 1971
April 16, 1982
, Lind and William Alt filed their 1981 tax return with the Internal
Revenue Service ("IRS"). A few months later, on
October 11, 1982
, the IRS made an assessment against the Alts for their unpaid taxes
from 1981. On
June 27, 1984
, the Alts borrowed $501,000 from FOA in the form of a commercial loan,
securing the loan with a mortgage on the condominium and two other
pieces of property located in
. The Bank recorded the mortgages by filing in
, but not in
where the Cote La Mer condo is located.
On or before
April 15, 1985
, the government contends that it issued a statutory notice of
deficiency for the Alts' unpaid 1981 taxes. 1
Later in April of that year, the Alts commenced a Tax Court proceeding
relating to their 1981 return. On
May 27, 1986
, the Tax Court entered a judgment against the Alts for taxes due in the
sum of $83,655.40, plus negligence penalties. A few days later, on
June 2, 1986
, Lind Alt transferred the condominium to a corporation called Harbor
Laboratory, Inc. ("Harbor Lab"), by quitclaim deed. Although
the facts are unclear, Harbor Lab is apparently owned by Lind Alt. The
deed was recorded on
August 1, 1986
. The IRS later found Harbor Lab to be a nominee or alter ego of the
June 13, 1986
, the IRS made another assessment against the Alts, this time pursuant
to the Tax Court's ruling in May.
November 3, 1986
, the IRS filed a tax lien against Lind and William Alt, but
. The tax lien was for $178,280.87, for the tax period ending
December 31, 1981
. This lien initially referenced the assessment of
October 11, 1982
April 28, 1987
, however, the IRS filed an amended tax lien, changing the assessment
June 13, 1986
, the date of the assessment which followed the Tax Court's ruling.
In August of
1987, the IRS sold other property of the Alts, realizing net proceeds of
$94,770.80. These proceeds were applied against the Alts' 1981 tax
December 31, 1987
, FOA requested proof of fire insurance for the Cote La Mer property
from the Alts. Lind Alt responded that the loan had been paid in full.
Subsequent negotiations between the Alts and the Bank ensued, whereby
FOA agreed to refinance the Alts' loan on
March 8, 1988
, secured by the same property, including the condominium. This time,
however, the mortgage was recorded in
April 28, 1988
June 12, 1991
, the IRS filed a notice of Federal Tax Lien against Harbor Lab in
early 1991, FOA requested that the Alts obtain fire insurance on the
Cote La Mer property. Effective
June 26, 1991
, the Bank independently obtained its own insurance coverage for the
condo. A few months later, on
November 1, 1991
, FOA filed the present foreclosure action in Ottawa County Circuit
November 12, 1991
, the IRS filed further liens against the Alts' property for tax years
subsequent to 1981.
contends that Lind Alt owes the
$188,794.83 as of
August 1, 1993
, on the 1981 tax liability. At the judicial sale of the Cote La Mer
condo, the property grossed approximately $91,500. After payment of back
taxes on the property, U.S. Marshal fees, dues owed to the condominium
association, and utility costs incurred by the association in
maintaining the property, $79,710.45 remained. This sum was escrowed
with the Court, pending disposition of this matter.
In October of
1992, FOA served its first set of interrogatories and document
production requests in this case on the IRS. The IRS objected to most of
these requests and inquiries. On
January 25, 1993
, Magistrate Judge Scoville granted the Bank's motion to compel
discovery, and the IRS was ordered to furnish FOA with supplemental
answers. In its subsequent answers, the IRS indicated that it was
appropriate for it to file a notice of deficiency for the tax year 1981
in the spring of 1986, as the Alts misrepresented their 1981 income by
over 25%, giving the IRS a six-year statute of limitations. These
subsequent answers proved inadequate to FOA, however, and on
March 31, 1993
, Judge Scoville issued another order compelling the IRS to comply with
discovery requests. In this set of answers, the IRS no longer claimed
that the Alts had misrepresented their income by over 25%. Rather, the
IRS claimed that notice of deficiency had issued on or before
April 15, 1985
, pulling it within the three-year statute of limitations applicable in
most situations. The IRS also revealed for the first time that the Alts
had filed a Tax Court petition in 1985.
Both FOA and
are now before this Court on cross-motions for summary judgment. The
briefs in this case present a myriad of issues for resolution. First and
foremost, is the question, "Who has priority in the property?"
Although it appears the IRS does, FOA challenges the priority of the
federal tax lien on several grounds. The second issue is whether the
equitable doctrines of laches or estoppel apply in this case. The third
issue concerns whether the doctrine of marshalling may be applied to the
IRS. The fourth question presented by the briefs asks whether FOA is
entitled to discovery sanctions due to IRS actions (or nonactions) in
the course of this litigation. The final issue presented for resolution
is whether FOA is entitled to reimbursement for the insurance it
obtained on the Cote La Mer property. Applying the standards for summary
judgment, the Court will examine each of these issues in turn.
judgment is appropriate when the record reveals that there are no issues
as to any material fact in dispute and the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(c); Sims v. Memphis
Processors, Inc., 926 F.2d 524, 526 (6th Cir. 1991) (citing Celotex
Corp. v. Catrett, 477
317, 322-23 (1986), and Anderson v. Liberty Lobby, Inc., 477
242, 248 (1986)). The standard for determining whether summary judgment
is appropriate 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." Booker
v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir.
at 251-52). "By its very terms, this standard provides that the
mere existence of some alleged factual dispute between the
parties will not defeat an otherwise properly supported motion for
summary judgment; the requirement is that there be no genuine
issue of material fact." Anderson, 477
at 247-48 (emphasis in original).
party bears the burden of clearly and convincingly demonstrating the
absence of any genuine issues of material facts. Sims, 926 F.2d
at 526. The court must consider all pleadings, depositions, affidavits,
and admissions on file and draw all justifiable inferences in favor of
the party opposing the motion. See Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475
574 (1986). If the moving party carries this burden, the nonmoving party
must present significant probative evidence showing that genuine,
material factual disputes remain to defeat summary judgment. Sims,
926 F.2d at 526. The court's function is not to weigh the evidence and
determine the truth of the matter, but to determine whether there is a
genuine issue for trial.
The court must make purely legal judgments that go to the nature and
sufficiency of the complaint as well as the evidence put forward to
support it. Val-Land Farms, Inc. v. Third Nat'l Bank, 937 F.2d
1110, 1113 (6th Cir. 1991). Applying these principles to the present
case, this memorandum concludes that FOA's motion for summary judgment
shall be denied. The government's motion shall be granted.
Priority of Lien
question presented for resolution in this matter is whose interest in
the Cote La Mer property has priority. FOA contends that its mortgage on
the condominium has priority, while the
claims that the federal tax lien prevails. This is a question of both
federal and state law.
, interests in real property are recorded with the register of deeds in
the county where the property is located. All recorded liens, rights,
and interests in property take priority over subsequent owners and
encumbrances. M.C.L.A. §565.25. Where an individual fails to record a
lien or interest in property, that interest is void as against any
subsequent interest holder who purchased the interest in good faith for
valuable consideration. M.C.L.A. §565.29. A person takes in "good
faith" if he or she takes without notice of the prior unrecorded
Nat'l Bank & Trust Co. v. Morran, 194
App. 407, 410 (1992). Thus,
has adopted what is frequently known as a "race-notice"
statute: the first interest holder to record takes priority, unless that
individual has notice of a prior unrecorded interest.
Revenue Code alters the scheme of priorities under
law. Under 26 U.S.C. §6321
, a lien on an individual's property arises when the individual is
liable to pay a tax, but neglects or refuses to pay the tax after notice
of the liability is given. However, "[t]he lien imposed by section
6321 shall not be valid against any . . . holder of a security
interest . . . until notice thereof which meets the requirements of [26
U.S.C. §6323(f) ]
has been filed." 26 U.S.C. §6323(a)
6323(f) requires that notice of a lien on real property be filed
according to the laws of the state where the property is located.
Accordingly, the tax lien has priority if it was recorded first
with the register of deeds in the county where the property is situated.
November 3, 1986
, the IRS filed a tax lien against Lind and William Alt in
, the location of the Cote La Mer property. The Bank had recorded its
mortgage on the property in
in 1984, but did not file in
until April of 1988. A cursory review of the facts thus suggests that
the IRS has priority in the condominium. FOA disputes this conclusion,
however, on four separate grounds. First, FOA challenges the validity of
the IRS assessment against the Alts, which gave rise to the lien.
Second, FOA contends that the statute of limitations on the collection
of taxes has expired. Third, the Bank argues that the lien did not
attach to the Cote La Mer condominium, as that property had been
transferred to Harbor Lab on
June 2, 1986
. Finally, FOA maintains that a genuine issue of material fact remains
as to whether the IRS had notice of the Bank's prior unrecorded interest
in the property. Such notice is relevant, the Bank contends, to
determining the priority of the tax lien.
Validity of the IRS Assessment
the validity of the government's tax lien, claiming that the assessments
pursuant to which the liens were filed were untimely and not preceded by
notices of deficiency. Under 26 U.S.C. §6501(a)
, taxes must be assessed within three years of the date on which the
return was filed. In this case, two assessments were made for the Alts'
1981 taxes: one on
October 11, 1982
, and the other on
June 13, 1986
assessment clearly falls within the statutory three-year period. The
second assessment, however, falls well outside this time frame.
Supplemental assessments are permitted by the Internal Revenue Code, but
they too must fall within the three-year period of limitations. See
26 U.S.C. §6204(a) ;
Brockhurst, Inc. v. United States [91-1
USTC ¶50,217 ], 931 F.2d 554, 557 (9th Cir. 1991). FOA also
contends that the government failed to provide the Alts with notice of
deficiency for the June 1986 assessment. Initially, the IRS contended
that notice was served sometime in the spring of 1986; later the
government alleged that notice was issued before
April 15, 1985
, pulling it within the three-year statute of limitations. The
government has no evidence to support these assertions, however. 2
The IRS does
not appear to argue that the
June 13, 1986
, assessment fell inside the statutory time frame, or that it can prove
that notice was sent prior to
April 15, 1985
. Rather, the government contends that the Bank lacks standing to
challenge the assessment. Under 28 U.S.C. §2410(a), sovereign immunity
of the government is waived, permitting a party to sue the
to foreclose a mortgage on property upon which the government has a
lien. This is essentially a suit to "quiet title." However,
the courts have construed §2410 to permit only challenges to the
procedural regularity of the lien, not the underlying tax liability or
merits of the assessment. Pollack v. United States [87-2
USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987). FOA contends that
it asserts merely procedural defects in the assessment, and not the
underlying tax. The IRS counters that a challenge to the notice is a
challenge to the very merits of the assessment.
The case law
provides little guidance on the resolution of this issue. In Guthrie
v. Sawyer [92-2
USTC ¶50,391 ], 970 F.2d 733, 737 (10th Cir. 1992), the Tenth
Circuit held that a taxpayer could not raise a procedural defect in the
issuance of a deficiency notice in a quiet title action because the
purpose of the notice requirement was to allow the taxpayer to challenge
the amount of the assessment in Tax Court. The challenge thus went to
the underlying tax liability itself. However, the taxpayer was found to
be entitled to relief under another statute, and the Court held that the
failure of the IRS to send a notice of assessment could be
challenged under §2410. Other cases suggest that all taxpayer
challenges to notice, be it notice of deficiency or assessment, do
qualify as claims of procedural irregularities. In an unpublished
decision, the Sixth Circuit permitted a taxpayer to challenge notice
under §2410, although it ultimately ruled against him on the merits. See
Williams v. United States, No. 89-5740, 1990 W.L. 47555 (6th Cir.
1990); see also Gentry v.
USTC ¶50,374 ], No. CIV-1-89-337, 1991 W.L. 191246 (E.D. Tenn.
1991) (citing Williams). Thus, it would appear that in this
Circuit, a taxpayer may challenge the validity of the assessment and the
resulting lien by asserting that no deficiency notice was issued. A
taxpayer challenge to the assessment on the grounds that it fell outside
the statutory period similarly appears to constitute a procedural