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[2000-1 USTC ¶50,342] Whiting-Turner/A.L. Johnson, a Joint Venture, Plaintiff v. P.D.H. Development, Inc., United States of America, and Athens First Bank & Trust Company, Defendants

U.S. District Court, Mid. Dist. Ga., Athens Div., 3:98-CV-107(DF), 3/21/2000

[Code Sec. 6321 ]

Tax liens: Security interest: Priority: Accounts receivable: Existence of property.--A bank's security interest in a delinquent subcontractor's accounts receivable from a construction contract had priority over a subsequently filed federal tax lien. The taxpayer had performed part of its contract duties before the tax lien was filed and, thus, had rights to at least a portion of the receivables to which the bank's security interest could attach. Accordingly, the receivables were "in existence" when the tax lien was filed, regardless of whether state (Georgia) law gave the taxpayer an interest in the accounts as soon as the contract arose, or federal law gave the taxpayer an interest in the accounts only after it performed its contract duties.

[Code Sec. 6323 ]

Tax liens: Security interest: Accounts receivable: Existence of property: 45-day safe harbor provision.--A bank's security interest in a delinquent subcontractor's accounts receivable was superior to a subsequently-filed federal tax lien. Moreover, because the security interest arose from a commercial transaction financing agreement, the bank was also entitled to the payments that the subcontractor was owed within 45 days after the tax lien filing. However, a question of fact as to the amount of the receivables that were subject to the tax lien precluded summary judgment.

[Code Sec. 6323 ]

Tax liens: Notice of: Wrong name: Substantial compliance.--A federal tax lien sufficiently identified the delinquent taxpayer. Although the name listed on the lien differed from the taxpayer's incorporated name, under the substantial compliance standard of Code Sec. 6323 , it was sufficiently similar so that a reasonable inspection of the county lien index would have revealed the lien's existence.

[Code Sec. 7402 ]

Tax liens: Security interest: Priority: Evidence: IRS employees: Unsworn declarations: Hearsay: Best evidence.--In an action to determine the priority of competing security interests, unsworn declarations from IRS employees were admitted into evidence because they were made under penalty of perjury and verified as true and correct. However, their statements regarding the taxpayer's employer identification number were stricken as hearsay, and statements regarding the taxpayer's total tax liabilities were accepted only as proving that the taxpayer had a federal tax deficiency.

ORDER

FITZPATRICK, District Judge:

Whiting-Turner/A.L. Johnson ("Whiting-Turner")initiated this lawsuit in the Superior Court of Clarke County by filing a complaint in interpleader, as amended, in which it seeks to determine entitlement to $26,330.14 that it is obligated to pay P.D.H. Development, Inc. ("PDH") as compensation for work performed on the University of Georgia Animal Science Complex . Whiting Turner named three defendants to the action: (1) PDH; (2) Athens First Bank & Trust Company ("Athens First"); and (3) the United States of America . The complaint for interpleader was filed pursuant to 28 U.S.C. §2410, in which the United States waived its sovereign immunity for interpleader actions involving tax liens. The United States subsequently removed the case to federal court pursuant to 28 U.S.C. §1444, which allows the United States to remove any action brought in state court against the United States under §2410 to the district court. This matter is now before the Court on cross-motions for summary judgment filed by the United States and Athens First.

I. STATEMENT OF FACTS

On August 9, 1996 , Whiting-Turner entered into a subcontract (the "Subcontract") with PDH to perform all of the grading and site utilities work on a project known as the University of Georgia Animal Science Complex (the "Project"). In subsection (b) of Article 5 of the Subcontract, PDH agreed to submit to Whiting-Turner applications for payment by the fifteenth of each month, or as otherwise provided in the contract documents, so as to enable Whiting-Turner to apply for payment from the Project owner. Subsection (a) of Article 5 of the Subcontract provides for payment of the contract amount as follows: Whiting-Turner was obligated to pay PDH an amount equal to ninety percent (90%) of the value of the work performed as determined by the architect and approved by the construction manager during any calendar month within fifteen (15) days after payment therefore was received by the construction manager from the owner of the project or within such time as specified by law. Additionally, the contract provides that

Retainage and any other balance of the Contract Amount shall be payable within fifteen (15) days . . . after the work under this Agreement has been completed and accepted by Owner, Architect, and [Whiting-Turner] and following approval by the Architect of the final application for payment and settlement of all claims, if any under this Agreement, provided that Trade Contractor has fully performed all of its obligations hereunder.

Article 5(a) of the Subcontract.

On July 18, 1997 , Whiting-Turner declared PDH to be in default under the Subcontract. Whiting-Turner terminated the Subcontract and PDH ceased all work on the Project as of July 18, 1997 . The amount due and owning PDH for the services it performed on the Project is $26,330.14.

Two independent parties, Athens First and the United States , claim an interest in the money owed to PDH under the Subcontract. PDH has not claimed an independent entitlement to any portion of the fund involved in this case or indicated its support for either of the two claims of entitlement.

Athens First's claim is premised on its security interest in all of PDH's accounts receivable. Over a period of several years, Athens First advanced loans and funds to PDH. PDH executed numerous promissory notes, security agreements, and UCC-1 financing statements granting a security interest in all of PDH's accounts receivable to Athens First (Aff. of A. Middleton Ramsey (tab #22), paras. 3 & 4; Exhibits D, E, F, I, J, K, O, and Q). On February 10, 1994, Athens First filed a UCC-1 financing statement to perfect its interest in "All Furniture, Fixtures, Equipment, Accounts Receivable and General Intangibles now or hereafter existing or created" (Aff. of A. Middleton Ramsey (tab #22), Exhibit O). Athens First filed a second UCC-1 financing statement, covering "All Furniture, Fixtures, Equipment, Inventory, Accounts Receivable and proceeds thereof, all General Intangible instruments, chattel paper and cash of P.D.H. Development, Inc. now owned or hereinafter acquired or created," on June 8, 1995 (Aff. of A. Middleton Ramsey (tab #22), Exhibit Q). Athens First has not advanced any loans or funds to P.D.H. since August 4, 1995 (Aff. of A. Middleton Ramsey (tab #22), para. 5). As of January 31, 1997 , the balance owed by PDH to Athens First was $345,678.90 principal and $41,338.45 interest (Aff. Of A. Middleton Ramsey (tab #22), para. 6).

The United States' interest is premised on assessments made by the Internal Revenue Service ("IRS") against P.D. Hill Development, Inc. ¹ On July 15, 1996, the IRS made assessments against P.D. Hill Development, Inc. for $12,873.12 in unpaid Form 941 liabilities for the fourth quarter of 1995 (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). On January 31, 1997 , the IRS fried a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). Samuel Elliot, a revenue officer with the IRS in Athens, Georgia, asserts that the "balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999, is $23,592.51" (Decl. Of Samuel W. Elliot, para. 5, attached as Exhibit 3 to the United States ' Statement Of Material Facts Not In Dispute (tab #27)).

II. MOTIONS TO STRIKE

Athens First has objected to, and moved to strike, the affidavits of Paul Dennis Hill and Samuel W. Elliot, which the United States presented in support of its motion for summary judgment (Mot. to Strike Unsworn Decl. of Paul Dennis Hill (tab #31); Mot. to Strike Unsworn Decl. of Samuel W. Elliot (tab #33); Mot. to Strike Supplemental Decl. of Paul Dennis Hill and Renewed Mot. to Strike Decl. of Paul Dennis Hill (tab #42); Mot. to Strike Supplemental Decl. of Samuel W. Elliot and Renewed Mot. to Strike Decl. of Samuel W. Elliot (tab #44)). In an effort to cure the objectionable portions of the declarations, the United States filed a Supplemental Declaration of Paul Dennis Hill (tab #41) and a Supplemental Declaration of Samuel W. Elliot (tab #37) following Athens First's initial motions to strike. Given that the United States was able to address many of Athens First's concerns through the supplemental declarations, the Court considers the first motions to strike to be moot and will now address the issues raised in Athens First's motions to strike the supplemental declarations.

In order for the supplemental declarations to be used as summary judgment proof, they must be sworn and meet the requirements of Federal Rule of Civil Procedure 56(e). The unsworn declarations submitted by the United States are of the same force and effect as sworn affidavits because both were made under penalty of perjury and verified as true and correct. 28 U.S.C. §1746. Rule 56(e) also requires that

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith.

Fed.R.Civ.P. 56(e).

With respect to the Supplemental Declaration of Paul Dennis Hill, Athens First objects to paragraph 5, in which Mr. Hill states that "[i]t is well known in the community of Clarke County that 'P.D. Hill Development, Inc.' and 'P.D.H. Development, Inc.' are the same corporation. It is known by all banks, suppliers and construction contractors in the community." In his declaration, Mr. Hill states that, as the president of "P.D. Hill Development, Inc. a/k/a P.D.H. Development, Inc." (para. 2), he has operated his construction business in Clarke County under these names since 1989 (para. 3). Mr. Hill also states that, as an agent for his construction business, he has dealt with every major bank, supplier of materials, and contractor in Clarke County (para. 4). Based on Mr. Hills extensive business dealings in Clarke County , perhaps the Court, or a jury at trial, could reasonably infer that the banks, suppliers and construction contractors in the community do know that "P.D. Hill Development, Inc." and "P.D.H. Development, Inc." are the same corporation. However, a reasonable inference based on specific admissible facts is different from Mr. Hills affirmative statement as to what he believes is known in the community. As Mr. Hills statements as to what is known in the community would not be admissible in evidence, the Court hereby strikes paragraph 5 of the Supplemental Declaration of Paul Dennis Hill pursuant to Rule 56(e).

Athens First also objects to parts of the Supplemental Declaration of Samuel W. Elliot. First, Athens First objects to Mr. Elliot's statements regarding the application for employer identification number filed in the name of "P.D. Hill Development, Inc." (para. 3). Athens First argues that these statements are hearsay and thus would not be admissible at trial. Specifically, Athens First objects to the second Sentence of paragraph 3, which provides that "[t]he name 'P.D. Hill Development, Inc.,' used by the Internal Revenue Service, is derived from the application for employer identification number filed by the taxpayer." The application for employer identification number, rather than Mr. Elliot's testimony about the contents of the application, would be the best evidence of the application's contents at trial. See Fed.R.Evid. 1002. As Mr. Elliot's testimony about the contents of the application would not be admissible at trial and a sworn or certified copy of the application is not attached to Mr. Elliot's declaration, the Court will strike the second sentence of paragraph 3 concerning the application for employer identification number.

Athens First also objects to the second sentence of paragraph 6, which states that "[t]he balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999 , is $23,592.51." As he is the revenue officer assigned to collect PDH's tax liabilities, Mr. Elliot is certainly competent to testify about the tax liabilities of PDH as a matter within his personal knowledge. The Court agrees, however, that a proper foundation would have to be laid for this testimony to be admissible at trial. However, the Court does not deem it necessary to strike this portion of Mr. Elliot's declaration any more than it deems it necessary to strike the portion of A. Middleton Ramsey's affidavit stating that the amount PDH was indebted to Athens First on January 31, 1997 is $345,678.90 principal and $41,338.45 interest. Thus, for purposes of the United States ' motion for summary judgment, the Court will accept that PDH owes the United States a sum of money for its Form 941 liabilities for the fourth quarter of 1995. If necessary, the precise amount of money owed for PDH's Form 941 liabilities can be determined after the Court determines which of the parties is entitled to the $26,330.14 that Whiting-Turner is obligated to pay PDH.

III. CROSS-MOTIONS FOR SUMMARY JUDGMENT

A. Summary Judgment Standard

Summary judgment is appropriate when "there is no genuine issue as to any material fact . . . and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Proc. 56(c); Edwards v. Shalala, 64 F.3d 601, 603 (11th Cir. 1995). If the moving party demonstrates that there is "an absence of evidence to support the non-moving party's case," the burden shifts to the non-moving party to go beyond the pleadings and present specific evidence giving rise to a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

In reviewing a motion for summary judgment, the court must construe the evidence and all inferences drawn from the evidence in the light most favorable to the non-moving party. See Maynard v. Williams, 72 F.3d 848, 851 (11th Cir. 1996). Even if there exists some alleged factual dispute between the parties, summary judgment is not necessarily improper; there must be a genuine issue of material fact to render summary judgment improper. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

B. Priority of Athens First's Security Interest to the Federal Tax Lien

Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. §6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer, 26 U.S.C. §6321. The lien also attaches to property acquired by the delinquent taxpayer after the initial imposition of the lien. See, e.g., Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945). A tax lien is not valid as against any holder of a security interest under the Federal Tax Lien Act "until notice thereof which meets the requirements of subsection (f) has been filed." 26 U.S.C. §6323(a); see also United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88, 83 S.Ct. 1651, 1655 (1963). The United States ' lien commenced no sooner than January 31, 1997 , the date on which the IRS filed a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office. See United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128(1993).

Athens First argues that its security interest is senior to the federal tax lien under §6323(a) because it possessed a perfected security interest in PDH's accounts receivable prior to the Internal Revenue Service's filing of notice of the tax lien. In order to come within the protections of §6323(a) as a holder of a security interest, both parties agree that Athens First must establish the four conditions set out by the Court of Appeals in Atlantic States Constr., Inc. v. Hand, Arendall, Bedsole, Greaves & Johnston [90-1 USTC ¶50,065], 892 F.2d 1530 (11th Cir. 1990). The four conditions are:

(1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth.

Id. at 1535 (citing 26 U.S.C.A. §6323(h)(1)).

Athens First maintains that the four conditions are met in this case. First, Athens First's security interest was acquired through the security agreements executed by PDH for the purpose of securing payment for the substantial funds it advanced to PDH. Second, Athens First contends that the property to which the security interest was to attach, the accounts receivable, were in existence at the time the tax lien was filed. Third, Athens First's security interest was protected under Georgia law by virtue of O.C.G.A. §11-9-310(a) against a judgment lien arising out of an unsecured obligation. Finally, Athens First satisfies the fourth condition because, by advancing substantial funds to PDH, Athens First "parted with money or money's worth."

In response, the United States recognizes that Athens First "has met conditions (1), (3), and (4), of the requirements of a security interest." (Mem. of Law of United States of America (tab #26), p. 6). The United States argues, however, that Athens First has not met the second condition. In support of this argument, the United States argues that federal law, rather than the state law relied on by Athens First, determines when an account receivable comes into existence. Although state law determines the nature of the legal or property interest of the entity With the competing lien, the United States asserts that, in the case of a federal tax lien, the priority of competing liens is a province of federal law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). The difficulty faced by the Court when applying this principle to the facts of this case, however, is that the characterization of when an account receivable is in existence differs significantly under Georgia law and the Treasury Regulations. Moreover, the Treasury Regulations appear to require that the federal definition control over an inconsistent state definition when the case involves a federal tax lien.

Under the Uniform Commercial Code, as adopted by the Georgia legislature, an "account" in the sense if collateral is defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." O.C.G.A. §11-9-106. A security interest does not attach unless: (1) the debtor has signed a security agreement which contains a description of the collateral; (2) value has been given; and (3) the debtor has rights in the collateral. O.C.G.A. §11-9-203(1). A security in accounts may be perfected by filing a financing statement. O.C.G.A. §11-9-302(1). If steps are taken to perfect the security interest before the security interest attaches, the security interest is perfected at the time when it attaches. O.C.G.A. §11-9-303(1).

Applying these principles to this case, the debtor, PDH, signed several security agreements which granted the secured party, Athens First, a security interest in the collateral described, in part, as "All Accounts Receivable, . . . now owned or hereinafter existing" (Aff. of A. Middleton Ramsey (tab #22), Exhibits D, E, F, I, J, & K). In addition, Athens First gave value for the security interest when it advanced loans and funds to PDH. Even though Athens First took steps to perfect its security interest by filing financing statements, Athens First's security interest did not attach until PDH had rights in the collateral.

Athens First argues that, under Georgia law, the account at issue arose upon the signing of the Subcontract on August 9, 1996 , when PDH acquired a right to payment under the Subcontract, even though that right to payment had not yet been earned by performance. Following this analysis, Athens First security interest attached to PDH's right to payment for services rendered on August 9, 1996 , and, because it previously took steps to perfect its security interest by filing financing statements on February 10, 1994 and June 8, 1995 , Athens First's security interest was perfected as of August 9, 1996 . Because the account receivable to which the security interest was to attach was in existence at the time the tax lien was filed, the second condition of Atlantic States is satisfied. As a result, if the Court applies the law as suggested by Athens First, Athens First's security interest has priority over the federal tax lien.

The United States argues that, although state law characterizes the property at issue, federal law applies to determine when that property interest, i.e., the account receivable, came into existence. Under the applicable Treasury Regulations, an account receivable, defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper" (Treas. Reg. §301.6323(c)-1(c)(2)(ii)), "is in existence when, and to the extent, a right to payment is earned by performance." Treas. Reg. §301.6323(h)-1(a)(1). Furthermore, the regulations require that

A security interest must be in existence within the meaning of this paragraph, at the time as of which its priority against a tax lien is determined. For example, to be afforded priority under the provisions of paragraph (a) of §301.6323(a)-1 a security interest must be in existence within the meaning of this paragraph before a notice of lien is filed. Treas. Reg. §301.6323(h)-1(a)(1). The language of this Treasury Regulation supports the Government's contention that, despite any provision of Georgia law to the contrary, Athens First's security interest must have been in existence in the federal sense for Athens First to benefit from the protections of §6323(a). Thus, PDH's accounts receivable did not come into existence until PDH earned the right to payment under the Subcontract by performance.

Without conceding that federal law determines when PDH's accounts receivable came into existence under the Subcontract, Athens First argues that the account receivable existed for purposes of federal law prior to the filing of the federal tax lien because PDH earned the right to payment of substantial funds by performance prior to January 31, 1997 . Apparently, Athens First bases this argument, in part, on the portions of the Subcontract which provide for the withholding of retainage.

As part of its summary judgment proof, Athens First submits the Supplemental Declaration of Scott Saarlas, who was employed as the project engineer or project manager by Whiting-Turner at the times relevant to this cause of action (Supplemental Aff. of Scott Saarlas (tab #30), para. 2). The United States objects to this affidavit on the grounds that (1) the affidavit contains blanks in paragraph 5 which makes the remaining statements in the affidavit nonsensical; (2) there is no evidentiary foundation for the documents attached as exhibits; and (3) the exhibits do not appear to be what the affidavit asserts them to be (Reply of the United States to Athens First's Opp'n to Mot. for Summ. J. (tab #40), p. 4). Although the Court agrees that paragraph 5, which is incomplete, lacks evidentiary value, the Court disagrees that the deficiencies of this paragraph make the remaining statements in the affidavit nonsensical. Similarly, the Court disagrees with the United States ' contentions that there is no evidentiary foundation for the attached exhibits and that the documents do not appear to be what the affidavit asserts them to be. In paragraph 4 of the affidavit, Mr. Saarlas states that the exhibits attached to his affidavit are "true and correct copies" of the pay requests that Whiting-Turner received from PDH for work performed on the Project. The Court has examined the documents and, although documents other than the pay requests are included, the exhibits certainly appear to be what Mr. Saarlas asserts them to be. Thus, although the Court may decline to consider certain portions of the supplemental affidavit, the Court will disregard the assertion by the United States that the entire supplemental affidavit should not be considered for purposes of determining the motions for summary judgment.

Based on the exhibits attached to the Supplemental Affidavit of Scott Saarlas, Athens First argues that, at the time of the filing of the federal tax lien on January 31, 1997 , Whiting-Turner owed PDH money for its performance under the Subcontract. PDH began performing its duties under the Subcontract on August 14, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), para. 3). Undoubtedly, as the Subcontract specifically provided that Whiting-Turner would withhold retainage from its payments to PDH, some amount of money for work performed prior to January 31, 1997 , was due and owing PDH at the time of the federal tax lien filing. The evidence that Athens First provided the Court with respect to the amount of payment earned by performance, but retained by Whiting-Turner, during the period from August 14, 1996 and January 31, 1997 shows that Whiting-Turner owed PDH $11,115.00 as of October 20, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit C). Thus, an account existed as of October 20, 1996 because PDH had earned by performance a right to payment of $11,115.00 for services rendered as of this date.

Athens First also asserts an interest in the $19,801.73 in retainage owed to PDH as of March 12, 1997 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit D; Brief of Athens First filed June 29, 1999 (tab #36), p. 3). Given that Athens First refers to payments made within forty-five days of the filing of the tax lien, the Court assumes that Athens First is attempting to utilize the provisions of §6323(c). 26 U.S.C. §6323(c) provides as follows:

(c) Protection for certain commercial transactions financing agreements, etc.--

(1) In general.--To the extent provided in this subsection, even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--

(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--

(i) a commercial transactions financing agreement, . . . and

(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

(2) Commercial transactions financing agreement.--For purposes of this subsection--

(A) Definition.--The term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business)--

(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, . . . but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

(B) Limitation on qualified property.--The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

(C) Commercial financing security defined.--The term "commercial financing security means . . . (ii) accounts receivable, . . . .

Pursuant to §6323(c), Athens First's security interest prevails as to any account for construction services rendered which became due and owing within 45 days after the tax lien filing. Prior to the tax lien filing, Athens First and PDH entered into several commercial transaction financing agreements. In these agreements, Athens First, in the ordinary course of its business as a bank, agreed to make loans to PDH to be secured by commercial financing security, which includes the accounts receivable acquired by PDH in the ordinary course of its business. Given that no loans or funds have been advanced to PDH since August 4, 1995 , Athens First made its loans before the 46th day after the date of tax lien filing. In addition, because PDH acquired the accounts receivable before the 46th day after the date of tax lien filing, the accounts receivable come under the statute's definition of qualified property. The retainage of $19,801.73 represents the amount of accounts receivable generated by the services performed by PDH within the forty-five days following the filing of the tax lien on January 31, 1997 . Thus, Athens First's security interest in the accounts receivable takes priority over the federal tax lien on those accounts at least to the extent of $19,801.73.

With respect to the $19,801.73 owed to PDH as retainage, the parties do not address the effect, if any, of the conditional nature of this right to payment under the Subcontract. PDH was entitled to receive payment of the retainage amount only after completion and acceptance of the agreed upon work and following approval by the architect of the final application for payment provided that PDH fully performed all of its obligations under the Subcontract. The Court previously concluded that Athens First's security interest in the accounts receivable existed for purposes of the Federal Tax Lien Act when PDH performed the services giving rise to the accounts receivable. The Court now concludes that, even though the property subject to Athens First's security interest--the amount owing to PDH as of March 12, 1997 --was subject to final calculation or computation, the property was still in existence within the meaning of the FTLA at that time. Thus, although the amount of money subject to Athens First's security interest could have been reduced or eliminated in the future, the fact that the amount payable had not been finally ascertained does not affect the existence of the right to payment.

This conclusion is in accord with the case law concerning the doctrine of choateness. Generally, in order for a competing lien to take priority over a federal tax lien, the competing lien must be established, or "choate," prior to the attachment of the federal lien. A lien is "choate" under the federal rule when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). Athens First's security interest in PDH's accounts receivable satisfies these three requirements. First, the identity of the holder of the security interest (Athens First) was sufficiently established at the time of the tax lien filing. Second, the property subject to the security interest (PDH's right to the account receivable, or retainage, under the Subcontract) was established, even though the exact amount of the property itself--the precise value of the account receivable--had yet to be determined with complete accuracy. See, e.g., Corigliano v. Catla Constr. Co. [64-2 USTC ¶9657], 231 F.Supp. 245, 248-49 (S.D.N.Y. 1964) (concluding that "[a] state-created lien is not inchoate merely because the amount or value of the liened property has not been finally determined") (citing Brief for the Government at 6, Crest Fin. Co. v. United States [62-1 USTC ¶9105], 368 U.S. 347, 82 S.Ct. 384, 7 LEd.2d 342 (1961) (No. 325), rev'g United States v. Crest Finance Co. [61-1 USTC ¶9460], 291 F.2d 1 (7th Cir. 1961). Third, the amount of Athens First's interest (the amount of its loans to PDH) was fixed and specific. Thus, Athens First satisfied the three-part test for choateness with respect to its security interest at the time the IRS filed its notice of tax lien and within forty-five days thereafter.

However, a genuine issue of material fact, precluding summary judgment, remains as to the precise amount of the accounts receivable generated by the services performed before and within the forty-five days following the filing of the first tax lien. The United States offers the declaration of Paul Dennis Hill, the president of PDH, in which he states that "[a]ll of the work performed by [PDH] for Whiting-Turner . . . for which outstanding balances are due was performed after March 17, 1997, and before July 17, 1997" (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 6). However, the exhibits attached to the affidavit of Scott Saarlas clearly show that, as of March 12, 1997 , Whiting-Turner owed PDH $19,801.73 in retainage. The Court is unable to determine from the evidence before the Court what amount, if any, of this $19,801.73 remains following the backcharges assessed by Whiting-Turner due to PDH's failure to complete and perform properly its obligations under the Subcontract. Accordingly, the cross-motions for summary judgment are hereby DENIED.

At this time, the Court does not consider a trial on this issue to be necessary. The total amount of funds deposited with the Court's registry is $26,330.14. The Court has determined in this order that Athens First may entitled to some amount of these funds less than or equal to $19,801.73. The United States is entitled to the remaining $6,528.41 of these funds in addition to any amounts that Athens First is not entitled to receive. If Athens First and the United States are able to reach an agreement as to the correct amount that each party should receive consistent with this decision, the Court will direct the disbursement of the funds in the agreed upon manner. If the parties are unable to agree within fifteen (15) days of the date of this order, the Court will consider motions for summary judgment on this issue. Athens First is directed to submit its motion and supporting evidence within fifteen (15) days of the termination of first fifteen (15) day period. The United States will then have fifteen (15) days from the date appearing on the certificate of service attached to Athens First's motion in which to respond.

C. Validity of the Federal Tax Lien

Section 6323(f) governs the place of filing for tax lien notices and gives the Secretary of the Treasury the authority to prescribe the form and content of the notice, 26 U.S.C. §6323(f)(3). Although the parties do not dispute that the notice was filed in the correct place and on the correct form, Athens First disputes whether the notice sufficiently identifies the taxpaying entity. The Treasury Regulation promulgated by the Secretary requires only that the notice of lien "must identify the taxpayer." Treas. Reg. §301.6323(f)-1(c)(2). The notice of federal tax lien filed on January 31, 1997 identifies the taxpayer as "PD Hill Development Inc., a corporation DBA Phoenix Pipe. & Dirt." Relying on the undisputed evidence that PDH is incorporated under the name of "P.D.H. Development, Inc." ( Athens First's Mot. for Summ. J. (tab #19), Exhibit AA), Athens First maintains that the tax lien is not valid because it was not filed against the proper corporate entity. The United States argues in response that the notice filed adequately identified the taxpayer.

In support of its argument, the United States relies on Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464, 1471 (S.D. Ind. 1992), in which the district court stated that "lien notices . . . need to comply only substantially, rather than perfectly, to convey adequate notice of a lien." Several courts have applied, with different results, this substantial compliance standard when considering whether a lien notice adequately identifies the taxpayer. Many courts have enforced liens after finding that there is an error in the taxpayer's name. See, e.g., Kivel v. United States [89-2 USTC ¶9415], 878 F.2d 301 (9th Cir. 1989) ("Bobbie Morgan" rather than "Bobbie Morgan Lane"); United States v. Polk [87-2 USTC ¶9432], 822 F.2d 871 (9th Cir. 1987) ("Roy Bruce Polk" rather than "Bruce Polk"); Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753 (5th Cir. 1956) ("Freidlander" rather than "Friedlander"); Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464 (S.D. Ind. 1992) ("William S. Van Horn" rather than "William B. Van Horn"); and United States v. Sirico [66-1 USTC ¶9209], 247 F.Supp. 421 (S.D.N.Y. 1965) ("Sirico, George" and "Sirico, A." rather than "Assunta Sirico"). Conversely, other courts have invalidated a federal tax lien where the IRS misspells or otherwise materially alters a taxpayer's name. See, e.g., Fritschler, Pellino, Schrank & Rosen, S.C. v. United States [89-1 USTC ¶9111], 716 F.Supp. 1157 (E.D. Wis. 1988) ("Allen G. Casey" rather than "Allen J. Casey"); Haye v. United States [79-1 USTC ¶9192], 461 F.Supp. 1168 (C.D. Cal. 1978) ("Castello" rather than "Castillo"); United States v. Ruby Luggage Corp. [54-2 USTC ¶9512], 142 F.Supp. 701 (S.D.N.Y. 1954) ("Ruby Luggage Corp." rather than "S. Ruby Luggage Corp."); and Continental Invs. [53-2 USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953) ("W.R. Clark, Sr." rather than "W.B. Clark, Sr.").

Many of the above listed cases rely on the language of §6323(f)(4) which requires that, in the case of real property, the notice must be filed in such a manner that a reasonable inspection of the index will reveal the existence of the lien. In this case, a reasonable inspection of the Clarke County lien index would have revealed the existence of the federal tax lien. A certified copy of page 773 from the Clarke County Lien Index is attached to the Supplemental Declaration of Samuel W. Elliot as Exhibit C. The federal tax lien in the name of "PD HILL DEVELOPMENT INC." appears directly above a GED lien for "PDH DEVELOPMENT INC." on the same page. As these are the only two entries on the Lien Index under the name of "PD Hill" or "PDH," someone searching diligently under "PD Hill Development Inc." would be likely to notice an entry under "PDH Development Inc." In addition, even if there were multiple entries, the two names are sufficiently similar such that they would appear in close proximity on the Lien Index, which is arranged alphabetically. Because these two names are substantially identical, a reasonable searcher, noticing this similarity, would have looked at the lien notice and taken steps to discover the identity of the taxpayer. Thus, under the substantial compliance standard, the lien notice adequately identifies the taxpayer.

CONCLUSION

Athens First's motions to strike the supplemental declarations are hereby GRANTED in part and DENIED in part. Athens First's motion for summary judgment is hereby DENIED. The United States motion for summary judgment is hereby DENIED.

¹ P.D.H. Development, Inc. and P.D. Hill Development, Inc. are the same entity (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 2).

 

 

[99-1 USTC ¶50,407] Kerry Villard, Plaintiff-Appellant v. United States of America, on behalf of United States Internal Revenue Service, Defendant-Appellee

(CA-5), U.S. Court of Appeals, 5th Circuit, 98-30421, 3/8/99, 176 F3d 479, Affirming an unreported District Court decision

[Code Sec. 6323 ]

Liens: Filing of: Misspelled name: Judgment liens: Priority of.--Summary judgment was granted to the IRS against a third-party creditor of the taxpayer because the mis-hyphenation of the taxpayer's name in the IRS's tax lien and the subsequent indexing discrepancy was not so extreme as to evade a reasonable inspection.

Before: HIGGINBOTHAM, JONES and WIENER, Circuit Judges.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

Per Curiam"

EC: ^* In this contest for lien priority between (1) Plaintiff-Appellant Kerry Villard, as a judgment creditor against Whitehall-Windermere Company, Inc., the alter ego of Ms. Villard's ex-husband, Joseph Villard, Jr., and (2) the Internal Revenue Service (IRS), as federal tax lien holder against "White-Hall Windermere, Company, Inc." [sic], for federal taxes owed by Mr. Villard, Ms. Villard asserts that the government's mis-hyphenation of the corporation's name produced an error in the index to the applicable public records of Rapides Parish , Louisiana , identifying the tax lien debtor as "White-Hall Windermere, Company, Inc., Nominee of Joseph Villard, Jr." rather than Whitehall-Windermere Company, Inc. This, she urges, caused the failure of the IRS to meet its own test for determining whether a prior recorded federal tax lien primes a subsequently recorded judgment lien. Specifically, Ms. Villard insists that the name differences and the resulting mis-indexing of the tax lien does not satisfy 26 U.S.C. §6323(f)(4), which requires the IRS to file a Form 668 ¹ in the office designated under state law for the filing of liens "in such a manner that a reasonable inspection of the index would reveal the existence of the lien." ² The IRS, of course, insists that the misplaced hyphen produced an indexing discrepancy that was not so extreme as to evade a reasonable inspection.

We have carefully reviewed the opinion of the district court (which agrees with the position of the IRS), have familiarized ourselves with the operable facts of this case (which are essentially undisputed) and have studied the arguments and applicable law as advanced by able counsel for the parties in their respective appellate briefs and in their oral arguments to this court. As a result, we conclude that the district court's grant of summary judgment in favor of the IRS and adverse to Ms. Villard is correct, essentially for the reasons set forth in the court's opinion. Therefore, the judgment of the district court is, in all respects,

AFFIRMED. ¹

^* Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

¹ See 28 C.F.R. §301.6323(f)-1(d)(2).

² 226 U.S.C. §6323(f)(4); 26 C.F.R. §301.6323(f).

¹ We do not address Villard's alternative argument grounded in retroactivity of the judgment against the tax debtor's alter ego corporation as we find it to be unmeritorious under the established jurisprudence of the Supreme Court and this court.

 

 

[99-1 USTC ¶50,334] Joseph Daniel Brady, Plaintiff v. Internal Revenue Service, Defendant

U.S. District Court, East. Dist. Calif., CIV.S-97-2315 DAD PS, 2/23/99

[Code Secs. 6321 and 6323 ]

Liens: Notice of filing: Defective notice: Real property.--Summary judgment was granted to the IRS and denied to a joint owner of property in his third-party suit for refund of taxes that were owed by the other joint owner and collected by the IRS out of proceeds from the sale of the property. The IRS's notice of federal tax lien against the delinquent taxpayer was sufficient to protect its interest in the property, even though the lien was not in the proper form or properly indexed with respect to the property due to a misspelling of the taxpayer's name. Since the third-party owner did not purchase his interest from the delinquent taxpayer, he was not a subsequent bona fide purchaser protected under Code Sec. 6323 .

[Code Sec. 6323 ]

Liens: Notice of filing: Defective notice: Real property: Security interest.--Summary judgment was granted to the IRS and denied to a joint owner of property in his third-party suit for refund of taxes that were owed by the other joint owner and collected by the IRS out of proceeds from the sale of the property. The third-party owner's contention that he was protected under Code Sec. 6323(a) as a "holder of a security interest" was rejected because he provided no evidence that an agreement with the taxpayer creating a security interest in the property was ever formed. Moreover, there was no valid authority to support the argument that the lien was extinguished when the IRS recorded the defective notice of the lien. BACK REFERENCES: ¶38,160.0199

Joseph Daniel Brady, 1919 Grand Canal Blvd., Stockton, Calif. 95269-2133, pro se. Yoshinori H.T. Himel, United States Attorney, Sacramento, Calif. 95814, Diana P. Nowezki, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

DROZD, Magistrate Judge:

This action came before the undersigned on August 28, 1998 , for hearing on cross-motions for summary judgment. ¹ Plaintiff Joseph Daniel Brady (aka Dan Brady) appeared pro se. Michael J. Desmond, Trial Attorney, Tax Division, United States Department of Justice, appeared on behalf of defendant United States of America (sued as the Internal Revenue Service (IRS)). ² Having considered all written materials submitted with respect to the cross-motions and after hearing oral argument, the court took the motion under submission. For reasons explained below, plaintiff's motion for summary judgment will be denied and defendant's motion for summary judgment will be granted.

BACKGROUND

Plaintiff commenced this action by filing a civil complaint in small claims court in San Joaquin County on November 15, 1997 . The complaint alleges that defendant owes plaintiff $5,000.00, not including court costs, because the IRS misspelled a tax lien for Yolanda Braskat as "Y. Brasket." The complaint alleges that a title company search failed to discover the lien, resulting in the IRS taking $6,437.00 from plaintiff. ³ Defendant removed the complaint to federal court on December 11, 1997 , and filed an answer on January 28, 1998 . Jurisdiction exists pursuant to 28 U.S.C. §1441(a) and 28 U.S.C. §1346(a)(1).

On June 19, 1998 , the court held a Status (Pretrial Scheduling) Conference. At that time, the court refrained from setting pretrial and trial dates, pending resolution of the present motions.

PENDING MOTIONS

A. Undisputed Facts.

The parties submitted a joint statement of undisputed facts with respect to the cross-motions for summary judgment, stipulating that the facts are as follows.

On October 1, 1990 R. Weaver and Y. Braskat filed a joint tax return, reporting a liability owing of $7,976.00 for the 1988 year. On this return, Ms. Braskat's last name was misspelled as "Brasket." (Joint Stip. Facts paras. 1-3.) On October 18, 1990 , Weaver and Braskat filed a joint tax return, reporting a liability of $6,263.00 for 1989. Id. The tax liabilities from both returns were assessed by the IRS on November 26, 1990 . Id. On the same date, the IRS sent notice and demand for payment to Weaver and Braskat with respect to the unpaid taxes for 1988. Id. Also on November 26, 1990 , the IRS sent notice and demand for payment to R. Weaver and Y. Braskat with respect to their unpaid 1989 tax liability. Id. para. 4.

On August 12, 1991 , the IRS caused a Notice of Federal Tax Lien (Notice) to be filed in the San Joaquin County Recorder's Office, setting forth unpaid tax liabilities against Weaver and Braskat for the years 1987, 1988, and 1989. (Joint Stip. Facts para. 5.) The Notice misspelled Ms. Braskat's last name as "Brasket," and did not provide her Social Security number. Id. para. 5 & Ex. A.

On May 17, 1996, title to real property at 9433 Black Swain Place in Stockton, California (Black Swain property) was conveyed by grant deed from Mr. & Mrs. Briggs to plaintiff, Dan Brady. (Joint Stip. Facts para. 7 & Ex. B.) The grant deed was recorded on May 24, 1996 . Id. On May 22, 1996 , title to the Black Swain property was conveyed by grant deed from "Dan Brady" to "Joseph Daniel Brady and Yolanda Braskat, as tenants in common, in undivided 1/2 interests." Id. para. 8 & Ex. C. In May of 1996, prior to conveying an interest in the Black Swain property to Ms. Braskat, plaintiff requested North American Title to conduct a search to see if there were any liens recorded against Ms. Braskat. That title search, in addition to a subsequent title search conducted in August of 1996, failed to disclose the existence of the federal tax lien recorded against "Y. Brasket."

Plaintiff and Yolanda Braskat acquired their interest in the Black Swain property using $150,000.00 in unsecured funds borrowed from the Bank of Stockton in May of 1996 (hereafter, unsecured loan). (Joint Stip. Facts paras. 10-11.) The purchase price of the property was $150,000.00. Id. In August of 1996, plaintiff and Ms. Braskat obtained a second loan from the Bank of Stockton in the amount of $132,000.00 (hereafter secured loan), secured by a deed of trust recorded against the Black Swain property. The proceeds from this loan were used to pay down the original loan, leaving a balance owing of $18,000.00 on the unsecured loan. Id. para. 11.

In December of 1996, plaintiff and Ms. Braskat entered a contract to sell their interests in the Black Swain property to a third party, for $151,000.00. (Joint Stip. Facts paras. 12-13.) In the course of this sale, Central Valley Title Company conducted a search of the San Joaquin County title records and discovered a Notice of Federal Tax Lien filed August 12, 1991, against "Y. Brasket." Id. The title company confirmed with the IRS that the individual referenced in the lien was the same as Yolanda Braskat, whose undivided one half interest in the Black Swain property was being sold. Id. On January 10, 1997, escrow closed on the sale of the Black Swain property. Id. para. 14. Of the $151,000.00 in proceeds from the sale, $132,800.00 was paid to the Bank of Stockton to pay off the secured loan, $6,437.00 was paid to the IRS to pay off tax liens arising from Ms. Braskat's unpaid 1988 and 1989 tax liabilities, and $11,763.00 was paid to the Bank of Stockton to reduce the $18,000.00 balance on the unsecured loan. Id.

On January 21, 1997, plaintiff filed an admin istrative claim for refund with the IRS, seeking to recover the $6,437.00 the IRS received out of escrow to pay Ms. Braskat's tax liabilities. (Joint Stip. Facts paras. 15-16.) The IRS denied plaintiff's claim by letter dated October 31, 1997. Id.

B. Analysis.

Federal law governs the relative priority of federal tax liens. See Feiler v. United States [95-2 USTC ¶50,448], 62 F.3d 315 (9th Cir. 1995). The Internal Revenue Code provides that "if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and right to property . . . belonging to such person." Id. at 317 (quoting 26 U.S.C. §6321 (1988)). Section 6323 addresses the priority of the lien created under §6321, providing that such lien "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 . . ." 26 U.S.C. §6323(a).

In moving for summary judgment, plaintiff contends that notice meeting the requirements of subsection (f)(3) and (f)(4) has not been filed, because the Notice was not in the proper form and was not properly indexed with respect to real property. Defendant concedes the point for the purposes of these cross-motions. (Opp'n Summ. J. at 2:5-7.)

Plaintiff argues that he was a "purchaser" under §6323(a), because he purchased the Black Swain property as indicated by the May 17, 1996 grant deed, and the spelling error in recording the Notice prevented him from receiving constructive notice of the IRS' lien. See Orr v. Byers, 198 Cal. App. 3d 666, 668 (1988). However, the term "purchaser" in the §6232(a) (inserted under amendment of the tax lien statutes in 1913) was intended to protect subsequent bona-fide purchasers for value without notice of the lien. TKB Int'l Inc. v. United States [93-1 USTC ¶50,346], 995 F.2d 1460, 1463 (9th Cir. 1993) (emphasis added). In other words, the statute protects those who purchase from the taxpayer. Here, although plaintiff indeed purchased the Black Swain property, he did not purchase it from the taxpayer and is therefore not protected as a "purchaser" under §6323(a).

Plaintiff also contends that he is protected under §6323(a) because he is a "holder of a security interest." ⁴ A security interest under the statute means an "interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability." 26 U.S.C. §6323(h)(1). A security interest exists at any time that "the property is in existence and the interest has become protected under local law against a subsequent judgement lien arising out an unsecured obligation," but only "to the extent that . . . the holder has parted with money or money's worth." Id.

Thus, in order to establish that he was a holder of a security interest under the statute at the time the IRS seized the funds, plaintiff would first have to come forth with evidence of an agreement with Ms. Braskat creating the security interest. However, plaintiff provides no evidence on summary judgment that such contract was ever formed. ⁵

Moreover, plaintiff provides nothing establishing that his security interest was properly perfected under state law. See Manalis Fin. Co. v. United States [80-1 USTC ¶9158], 611 F.2d 1270, 1272 (9th Cir. 1980); First Am. Title Ins. Co. v. United States [88-2 USTC ¶9408], 848 F.2d 969, 973 (9th Cir. 1988) (Tax Lien Act would give priority to bank's lien over IRS lien because bank perfected its lien before Government recorded its tax lien). Under California law, a security interest is perfected when it has attached and "when all of the applicable steps required for perfection have been taken." Cal. Com. Code §9302. "Such steps are specified in Sections 9302, 9304, 9305 and 9306." Id. Section 9302 provides that "a financing statement must be filed to perfect all security interests," with seven listed exceptions. Plaintiff does not argue that he is within one of the listed exceptions, and he clearly has not recorded a financing statement. Therefore, his security interest (if any) loses out to the government's lien.

Finally, the court will address plaintiff's argument that the "secret" lien created under §6323(a) was extinguished by the IRS's actions in recording defective notice of that lien. Plaintiff provides no authority for this notion. To the contrary, such liens appear to be valid for ten years after the assessment is made. See 26 U.S.C. §6502(a) (setting ten year limitation period for collection after assessment).

CONCLUSION

For the reasons explained above, plaintiff's third-party suit for refund of wrongfully collected taxes fails as a matter of law. Accordingly, the court HEREBY ORDERS that defendant's motion for summary judgment is granted and plaintiff's motion for summary judgment is denied.

¹ The parties consented to magistrate judge jurisdiction and the case was referred to the undersigned for all purposes by way of order filed August 14, 1998 . See 28 U.S.C. §636(c).

² This action is a third-party suit for refund of wrongfully collected taxes in absence of an alternative remedy, pursuant to 28 U.S.C. §1346(a)(1) and 26 U.S.C. §7422. Thus, the proper defendant is the United States , rather than the Internal Revenue Service. See Purk v. United States , 747 F. Supp. 1243, 1247 (S.D. Oh. 1989).

³ Plaintiff appears to have claimed damages of $5,000.00 rather than $6,437.00 in order to stay withing the jurisdictional amount for small claims court. The parties have informed the court that in the event the action survives summary judgment, a stipulated amendment will be filed increasing the amount of plaintiff's claimed damages.

⁴ More specifically, plaintiff argues that he is a "mortgagee" under the statute. The statute was amended in 1966 to substitute the words "holder of a security interest, mechanic's lienor, and judgment lien creditor" for former terms "mortgagee, pledgee, and judgment creditor." See 26 U.S.C. §6323(a) (historical and statutory notes). Thus, under present terminology, plaintiff claims to be a "holder of a security interest."

⁵ In his briefing on summary judgment and at oral argument, plaintiff stated that an oral contract existed between himself and Ms. Braskat whereby he extended credit to her, with the debt to be secured by her one-half interest in the Black Swain Property. Written or oral argument by a party does not constitute evidence on consideration of a motion for summary judgment. See Fed. R. Civ. P. 56(c) (opposition to summary judgment must include affidavits regarding relevant facts). Even assuming that such contract did exist, it was insufficient to render plaintiff a holder of a security interest because it was unrecorded, as explained below.

 

 

[99-1 USTC ¶50,277] In re Ronald D. Focht and Lois E. Focht, Debtors. James R. Walsh, Trustee of the Bankruptcy Estate of Ronald D. Focht and Lois E. Focht, Appellee v. United States of America , Internal Revenue Service, Appellant

U.S. District Court, West. Dist. Pa., Civ. 97-202J, 1/4/99, 243 BR 263, Affirming an unreported Bankruptcy Court decision

[Code Sec. 6323 ]

Bankruptcy: Notice of tax lien: Constructive notice: Priority.--The omission of an individual taxpayer's name from the notice of a federal tax lien that listed only the business name and the taxpayer's spouse as the general partner did not provide constructive notice of the lien. The notice requirement that the taxpayer be identified is a mandatory requirement. Since a reasonable search would not reveal the tax lien against the taxpayer, the lien was not perfected. Therefore, the IRS's claim was not entitled to priority status in the taxpayer's bankruptcy estate.

MEMORANDUM ORDER

SMITH, District Judge:

This bankruptcy appeal requires this Court to determine whether the Internal Revenue Service perfected its federal tax lien against debtor Ronald D. Focht, thereby entitling the IRS claim to priority. Debtors Ronald D. Focht and Lois E. Focht, husband and wife, reside at R.R. 1, Box 258 , Martinsburg, Blair County , Pennsylvania . R.--dkt. no. 11, exh. 5. Together with their son, Richard T. Focht, they formed a partnership which operated the Country Focht's Restaurant & Bakery at R.R. 1, Box 103 , Martinsburg, Blair County , Pennsylvania . R.--dkt. nos. 1, 4 ¶8 (complaint and answer).

Beginning in September 1993 and continuing through December 1995, the partnership failed to remit the federal employment taxes due for its employees. On April 22, 1996 , the IRS issued an assessment in the amount of $26,925.36 for the unpaid taxes, penalties and interest to:

Country Fochts Restaurant & Bakery

Focht, Lois E. Gen Ptr.

R.--dkt. no. 1, exh. 5. On April 30, 1996 , the IRS filed Form 668, Notice of Federal Tax Lien, in the Blair County Prothonotary's Office which referenced the federal lien for $26,925.36 against:

Country Fochts Restaurant & Bakery

Focht, Lois E. Gen Ptr[.]

R.--dkt. no. 1, exh. 6. The Notice indicated that the taxpayer's residence was R.R. 1, Box 103 , Martinsburg , Pennsylvania , 16662-9629 . Id.

Subsequently, on June 3, 1996 , Ronald D. Focht and Lois E. Focht filed a voluntary petition seeking protection under Chapter 7 of the Bankruptcy Code. James R. Walsh, Esquire, was appointed Trustee. R.--dkt. no. 11, exh. 5. On July 16, 1996 , the IRS filed a Proof of Claim for unpaid taxes which set forth a secured claim in the amount of $34,633.34, an unsecured priority claim for $5,368.50, and an unsecured general claim for $929.95. R.--dkt. no. 1, exh. 5. On October 24, 1996 , the Trustee filed an adversary proceeding against the IRS. Count I of the Trustee's complaint asserted that the federal tax lien against the partnership failed to establish a secured lien against three parcels of real estate owned by debtors Ronald D. Focht and Lois E. Focht as tenants by the entireties because the Form 668 Notice did not identify Ronald D. Focht as a taxpayer. Counts II and III sought to avoid the tax lien pursuant to §§544(a)(3) ¹ and 547 ² of the Bankruptcy Code. R.--dkt. no. 1 (citing 11 U.S.C. §§544(a)(3), 547).

The IRS moved for summary judgment, contending that it had a valid lien against Ronald D. Focht. In response, the Trustee argued that the lien had not been perfected because it failed to satisfy the notice requirements of 26 U.S.C. §6323 and Treasury regulation 26 C.F.R. §301.6323(f)-1. In support of his position, the Trustee filed an affidavit which confirmed that the records of the Prothonotary's Office of Blair County are computerized and that a lien search he personally conducted of the names Ronald D. Focht, Ronald Focht and R. Focht did not "disclose the existence of a federal tax lien against Ronald D. Focht." R.--dkt. no. 11, ¶5. The only entry indexed under these names was a judgment obtained by Altoona First Savings Bank. Id. The Trustee affirmed that the computerized entry for the federal tax lien at issue designated only Country Fochts Restaurant & Bakery and Lois E. Focht, general partner, as the delinquent taxpayers. Id. The address set forth on the Form 668 Notice was R.R.1, Box 103 , Martinsburg , Pennsylvania , an address which is separate and distinct from the Ronald D. and Lois E. Focht residence at R.R. 1, Box 258 , Martinsburg. Id. , exh. 3. The Trustee's affidavit attached a printout of the computerized entry of the Form 668 Notice and the actual Form 668 Notice of record. A comparison of the two documents reveals that they identify the same two entities, i.e., the restaurant and Lois E. Focht, as the delinquent taxpayers, and the same address. Scrutiny of the photocopy of the Form 668 Notice appended to the Trustee's affidavit confirms that it fails to reference Ronald D. Focht in any manner. Id. , exh. 4.

The bankruptcy court determined that the IRS' tax lien was not valid against Ronald D. Focht and granted summary judgment for the Trustee. ³ R.--dkt. no. 14. Because the Form 668 Notice failed to identify Ronald D. Focht as a taxpayer, the court concluded that the notice did not comply with the statutory requirements set forth in 26 U.S.C. §6323 and 26 C.F.R. §301.6323(f)-1. Accordingly, it held that the lien could not stand.

The bankruptcy court rejected the IRS' argument that the federal tax lien provided constructive notice of the lien against Ronald D. Focht. See R.--dkt. no. 14. The bankruptcy judge noted that the Trustee's affidavit indicated that while a search of Country Fochts Restaurant & Bakery revealed numerous tax liens assessed by the Commonwealth of Pennsylvania and against the partnership, Richard Focht and his mother, Lois E. Focht, as partners, nothing in the Trustee's search of the indices revealed that Ronald D. Focht had any interest in a business by that name. R.--dkt. no. 14, at 7-8. The judge wrote that a "[r]easonable inspection of the indices maintained by the prothonotary . . . would not . . . give constructive notice of the federal tax lien against debtor Ronald D. Focht's interest in the above real property located in Blair County." Id. at 7.

Finally, the bankruptcy court refused to apply the Eighth Circuit's decision in Tony Thornton Auction Service. Inc. v. United States [86-1 USTC ¶9434], 791 F.2d 635 (8th Cir. 1986). There, as in the case sub judice, the federal tax lien identified a partnership and only one of the general partners, who were husband and wife. Despite the failure to identify the wife on the Form 668, the Eighth Circuit affirmed the district court's order distributing an interpleaded fund to the government for unpaid federal employment taxes, concluding that "[a] reasonable and diligent search would have revealed the existence of the notices of the federal tax liens filed. . . ." Id. at 639. The bankruptcy court declined to accord great weight to this decision because it failed to provide any explanation regarding how the Form 668 provided notice of the lien against the wife. R.--dkt. no. 14 at 9.

The IRS' appeal contends that the bankruptcy court erred because the federal tax lien adequately identified the taxpayer. It relies upon Tony Thornton and asserts that a "reasonable and diligent search by a competing creditor would certainly reveal the existence of the federal tax lien filed against the debtors." Dkt. no. 2, at 9. The IRS concedes that the avoidance of the tax lien turns on whether its claim against Ronald D. Focht is perfected. Id. at 11-12.

The bankruptcy court appropriately began its analysis with the statutory provisions creating the lien. As the Third Circuit observed in United States v. Beaver Run Coal Co. [38-2 USTC ¶9540], 99 F.2d 610 (3d Cir. 1938), a case which considered whether a federal tax lien had priority over a mortgage, it is well established that the character, operation and extent of the lien must be ascertained from the terms of the statute which creates and defines it, and the lien will extend only to persons or conditions provided for by statute, and then only where there has been at least a substantial compliance with all the statutory requirements. Positive legislative enactments prescribing conditions essential to the existence and preservation of a statutory lien cannot be disregarded.

Id. at 612-13 (quotation marks and citations omitted). Substantial compliance with these statutory requirements serves to give constructive notice of the government's claim. In re Hudgins [92-2 USTC ¶50,341], 967 F.2d 973, 976 (4th Cir. 1992) (quoting United States v. Sirico [66-1 USTC ¶9209], 247 F.Supp. 421, 422 (S.D.N.Y. 1965)).

A lien in favor of the United States for unpaid taxes arises at the time the assessment is made. 26 U.S.C. §6322. "The lien imposed . . . shall not be valid as against any purchaser . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. §6323(a). Subsection (f) sets forth the procedure for filing the notice and specifies that the "form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary." 26 U.S.C. §6323(f). Treasury regulation §301.6323(f)-1 provides that the notice "shall be filed on Form 668, 'Notice of Federal Tax Lien Under Internal Revenue Laws.' " 26 C.F.R. §301.6323(f)-1(d)(1). "A Form 668 must identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose regardless of the method used to file the notice of Federal tax lien." Id. §301.6323(f)-1(d)(2).

The requirement that the Form 668 identify the taxpayer is mandatory. Id. The identification of Country Fochts Restaurant & Bakery and Lois E. Focht, general partner, on the Form 668 does not identify, as the bankruptcy court noted, Ronald D. Focht as a taxpayer. This defect is fatal because it results in a failure to provide even constructive notice that Ronald D. Focht had an interest in the Country Fochts Restaurant & Bakery partnership. Beaver Run [38-2 USTC ¶9540], 99 F.2d at 612 (recognizing that federal tax lien will extend to persons "only where there has been at least a substantial compliance with all statutory requirements").

Like the bankruptcy court, I also decline to follow Tony Thornton [86-1 USTC ¶9434], 791 F.2d at 638-39. That case fails to explain how the defective Form 668 Notice substantially complied with the statutory requirement that the taxpayer be identified, simply leaping to the conclusion that constructive notice was provided. Beaver Run, however, instructs that the first step in the analysis is determining the extent of the compliance with statutory requirements. [38-2 USTC ¶9540], 99 F.2d at 612-13.

Consistent with that instruction, I conclude that the Form 668 Notice filed in the Blair County Prothonotary's office against "Country Fochts Restaurant & Bakery [and] Lois E. Focht, Gen. Ptr.[,]" which did not identify Ronald D. Focht as a delinquent taxpayer, did not perfect the IRS's lien against Ronald D. Focht. Id. In the absence of a perfected lien against Ronald D. Focht, summary judgment was appropriately granted in favor of the Trustee.

Accordingly, this 4th day of January, 1999, it is hereby

ORDERED AND DIRECTED that the May 19, 1997 order of the bankruptcy court granting summary judgment in favor of the Trustee and against the IRS is AFFIRMED. The Clerk shall mark this case closed.

¹ Under §544(a)(3), the Trustee has the right to "avoid any lien avoidable by a hypothetical bona fide purchaser of real property of the debtor as of the date of the commencement of the case." 5 Collier on Bankruptcy ¶544.02 at 544-4 (15th ed. 1996). The purpose of §544 "is to cut off unperfected security interests . . . as of the commencement of the case." Id. ¶544.03 at 544-6.

² Section 547 permits a Trustee to avoid certain prebankruptcy obligations as preferences. 11 U.S.C. §547.

³ The bankruptcy court did not address the merits with regard to counts II and III of the complaint in the adversary proceeding, noting that the IRS did not dispute that the Trustee was entitled to summary judgment if the lien was unperfected. See R.--dkt. no. 14, at 9-10

 

 

[97-1 USTC ¶50,479] Selma Taylor v. Internal Revenue Service

U.S. District Court, East. Dist. Pa., Civ. 94-CV-5457, 5/8/97

[Code Sec. 6323 ]

Liens: Validity of: Purchaser.--An IRS tax lien on a residence was valid and defeated a claim by an individual who did not meet her burden of proving that she fit the statutory definition of "purchaser." Although the individual paid at least $60,000 toward the purchase of the home, she failed to prove that the amount of consideration paid for the property was full and adequate as a matter of law.

ORDER

RENDELL, Judge:

1. Plaintiff filed this complaint in order to prevent the Internal Revenue Service from proceeding with a sealed bid sale, to remove any claim made against the property by the IRS as a result of taxes owed by Louis Taylor. The subject property is at 1054 Dell Drive , Cherry Hill , New Jersey 08003 ("the Property"). Hereafter, plaintiff Selma Taylor will be referred to as "plaintiff" and Louis Taylor will be referred to as " Taylor ."

Findings of Fact

2. Plaintiff and Taylor lived in the Property together for nearly 30 years, but, despite having the same last name, were never married. Taylor had a drapery business, but plaintiff was not involved in the business, nor was plaintiff involved in Taylor 's business or other financial dealings.

3. On September 21, 1992, the Internal Revenue Service filed a notice of tax lien, indicating the name of taxpayer as "Louis Taylor, a corporation," indicating the "residence" as Dell Drive, Cherry Hill, New Jersey 08003, and listing numerous 941 and 948 taxes due aggregating $61,865.79 ("the Notice").

4. The Notice was filed at page 606389 of the Camden County records, immediately following a separate notice against "Louis Taylor" listing the same residence, and taxes due in the amount of $8,509.60.

5. On September 21, 1992 , Taylor was the record owner of the Property.

6. On December 28, 1993 , Taylor transferred title to the Property to plaintiff via a deed. At that time, plaintiff paid Taylor an amount in excess of $30,000.

7. Previously, plaintiff had made the mortgage payments and paid various expenses on the Property, and plaintiff's mother had given Taylor $10,000 toward purchase of the Property when they first moved in.

8. Dennis Nolan, the attorney for Taylor who prepared the deed, searched the indexing system at Camden County Courthouse under "Louis Taylor" and discovered the Notice. He alerted the IRS that it was improperly filed listing Taylor as a corporation, whereas Taylor was an individual. ¹

9. Although plaintiff and her daughter searched the records, they did not find either of the liens against Taylor . Moreover, there was little evidence as to exactly where and when they had searched. ²

10. Plaintiff had paid a total of not less than $60,000 to Taylor toward the Property at or prior to the conveyance, consisting of $10,000 paid by her mother, monies paid by herself to pay the $20,000 mortgage, and the $30,000 paid at the time of the conveyance.

Conclusions of Law

11. Despite the inclusion of "a corporation" after Louis Taylor's name, the Notice is valid as against him and a subsequent purchaser, because a reasonable inspection of the public records would have revealed the existence of the Notice. See Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753, 755 (5th Cir. 1956) (finding notice of tax lien adequate where taxpayer's name was incorrectly listed as "Freidlander" instead of "Friedlander," and noting that the record affords constructive notice of its contents as well as those other facts which prudent "inquiries, duly prosecuted, would have disclosed"); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421, 422 (S.D.N.Y. 1965) ("The essential purpose of the filing of the lien is to give constructive notice of its existence.").

12. Accordingly, the Notice is sufficient and therefore valid.

13. In light of the validity of the Notice, and, therefore, the lien, in order for plaintiff to prevail, she must show that she was a purchaser who took free and clear of the lien. See 26 U.S.C. §6323(a) (noting that a lien [under §6321] is invalid against "purchasers" of property until a notice of lien is filed pursuant to §6323(f)). See also Alexander Hamilton Life Ins. Co. of America v. Government of the Virgin Islands, 757 F.2d 534, 541 (3d Cir. 1985) (finding that "the burden of proof in a quiet title action rests with the complainant as to all issues which arise upon the essential allegations of his complaint").

14. In order to do so, she must show that pursuant to §6323(h)(6) of the Internal Revenue Code, she was "a person who, for adequate and full consideration in money or money's worth, acquire[d] an interest in [the] property." 26 U.S.C. §6323(h)(6).

15. Plaintiff bears the burden of proving that she fits the statutory definition of "purchaser." S.T.V. Engineers, Inc. v. Ash [86-1 USTC ¶9352], 57 A.F.T.R.2d 86-1137 (E.D. Pa.), aff'd, 806 F.2d 251 (3d Cir. 1986); Coventry Care Inc. v. United States [74-1 USTC ¶9163], 366 F. Supp. 497, 500-01 (W.D. Pa. 1973).

16. Adequate and full consideration must be an amount "having a reasonable relationship to the true value of the interest in property acquired." 26 C.F.R. §301.6323(h)-1(f)(3); see Alexander v. United States [94-2 USTC ¶50,415], 74 A.F.T.R. 2d 94-5590 (D. Minn. 1994).

17. Plaintiff has failed to prove that the amount of consideration paid for the Property by her was full and adequate as a matter of law.

18. Accordingly, the lien is valid as against plaintiff, and the sealed bid sale may proceed.

¹ In April 1994, the IRS filed an identical lien as to the Notice, except listing "Louis Taylor" without the words "a corporation." I find this fact not relevant to my decision here.

² I find that plaintiff's testimony as to the search was vague, and her ability to see was questionable, so that her testimony in this regard as to not finding the Notice is subject to question.

 

 

[96-1 USTC ¶50,266] Roy VanDolen, et al. v. Department of the Treasury, Internal Revenue Service, et al

U.S. District Court, Mid. Dist. Tenn., Nashville Div., 3-95-0614, 4/15/96, 929 FSupp 1083, 929 FSupp 1083

[Code Sec. 6323 ]

Validity of lien: Sufficiency of filing: Name change.--A genuine issue of material fact existed as to whether the name of a previous owner appeared in the chain of title for a married couple's property upon which the IRS issued a notice of seizure relating to the previous owner's tax liabilities. The chain of title reflected the previous owner's name prior to her divorce and subsequent remarriage while the IRS liens reflected her surname following her remarriage. There was no binding authority holding that filing under a delinquent taxpayer's correct legal name at the time precluded investigation into the sufficiency of the notice, and the statute did not state that such a filing was dispositive as to the sufficiency of the notice. The language of Code Sec. 6323(f)(4) plainly required a filing that would give notice of the lien's existence upon a reasonable inspection. However, since a deed of trust from the previous owner and her current husband to a trustee was not provided to the court, the record was insufficient, and the IRS's, the current owners' and the previous owner's motions for summary judgment were denied.

[Code Sec. 7421 ]

Suits to restrain assessment: Tax liens.--The current owners of property upon which the IRS issued a notice of seizure relating to the previous owner's tax liabilities were precluded from obtaining injunctive relief to prevent the IRS from seizing the property because they did not fall within the statutory or judicial exceptions to the Anti-Injunction Act. The current owners failed to address the IRS's motion for summary judgment on the issue and, thus, were presumed to have no objections.

Daniel Loren Wischhof, 110 Glancy St. , Goodlettsville , Tenn. 37072 , for plaintiff. Carol P. Lenhart, Department of Justice, Washington , D.C. 20530 , John M. Rankin, Jr., Anderson & Rankin, 100 Winners Circle , Brentwood , Tenn. 37027 , for defendant.

MEMORANDUM

HIGGINS, District Judge:

The Court has before it the motions for summary judgment of defendants Internal Revenue Service ¹ (filed November 21, 1995; Docket Entry No. 13) and Genevieve Graff (filed December 6, 1995; Docket Entry No. 24); and the plaintiffs' responses (filed December 5 and 12, 1995; Docket Entry Nos. 17 and 26). ² In addition, the Court also has before it the plaintiffs' motion (filed December 5, 1995 ; Docket Entry No. 17) for summary judgment; and the responses of defendants Internal Revenue Service (filed December 19, 1995 ; Docket Entry No. 27) and Genevieve Graff (filed December 22, 1995 ; Docket Entry No. 28).

Despite the plaintiffs' error in alleging jurisdiction, the Court has proper subject matter jurisdiction over the plaintiffs' claims under 26 U.S.C. §7426 and 28 U.S.C. §§1331.

For the reasons discussed below, the plaintiffs' and defendant Graff's motion for summary judgment shall be denied and defendant IRS' motion for summary judgment shall be denied in part and granted in part.

I.

The plaintiffs, Roy and Thelma Jean VanDolen originally filed this action on June 22, 1995 , to quiet title to property they own at 907 Lemont Drive , Nashville , Tennessee . They are seeking to enjoin the defendant IRS from selling the property and to have the liens encumbering the property declared invalid, or in the alternative, to be granted a judgment against the Graffs for the amount of the liens. Specifically, the plaintiffs assert that the liens are not valid as to their interest in the property because the IRS did not give sufficient notice, as required by the Internal Revenue Code.

This action arises out of the purchase of property by the plaintiffs in August, 1994, and tax liens levied upon a prior owner of the property, defendant Genevieve Graff.

Genevieve Adkisson and her then-husband, Danny W. Adkisson, purchased the property at 907 Lemont Drive in Nashville , Tennessee , in 1971. Subsequently, Genevieve and Danny Adkisson were divorced and, pursuant to the divorce decree, the title was vested in Genevieve Adkisson. Genevieve Adkisson remarried and acquired the surname of her new husband, David Graff.

In 1989, 1990 and 1991, the IRS filed tax liens against Genevieve Graff. ³ The IRS asserts that it received notice of foreclosure on the property on March 29, 1991 , in the name of Genevieve Graff. The foreclosing party, First Fidelity Federal Savings and Loan, was the first mortgage holder on the property. That foreclosure sale was ultimately cancelled.

Genevieve Graff filed Chapter 13 Bankruptcy on September 27, 1991 . First Fidelity Federal Savings and Loan filed a proof of claim in the bankruptcy proceedings on October 30, 1991 . On May 13, 1994, the first mortgage holder ⁴ foreclosed on the property and it was subsequently sold to Monica Miller for $9,100.00.

On August 18, 1994 , the plaintiffs, Roy and Thelma Jean VanDolen, purchased the Lemont Drive property from Monica Miller for $72,000. The IRS issued a notice of seizure of the property to Mr. and Mrs. VanDolen on June 22, 1995 . The VanDolens subsequently filed this action, asserting that the property is unencumbered as to their interest.

II.

As provided by Federal Rule of Civil Procedure 56(c), summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202, 211 (1986). In its consideration of the evidence, the Court must view all facts and inferences to be drawn therefrom in the light most favorable to the non-moving party. Davidson & Jones Dev. Co. v. Elmore Dev. Co., 921 F.2d 1343, 1349 (6th Cir. 1991).

In order to prevail on a summary judgment motion, the moving party bears the burden of proving the absence of a genuine issue of material fact concerning an essential element of the opposing party's action. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265, 274 (1986); Davidson & Jones Dev. Co., 921 F.2d at 1349; Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989). A dispute about the material fact must be genuine, that is, "the evidence is such that a reasonable jury could return a verdict for the non-moving party." ⁵ Liberty Lobby, 477 U.S. at 248, 106 S.Ct. at 2510, 91 L.Ed.2d at 211-12. Since the preponderance of the evidence standard is used in this determination, more than a mere scintilla of evidence in support of the plaintiff's position is required. Id. at 252, 106 S.Ct. at 2512, 91 L.Ed.2d at 214.

Once a motion for summary judgment has been made, "the non-moving party bears the responsibility to demonstrate that summary judgment is inappropriate under Rule 56(e)." Davidson & Jones Dev. Co., 921 F.2d at 1349. The non-moving party may not merely rest on conclusory allegations contained in the complaint, but must respond with affirmative evidence supporting its claims and establishing the existence of a genuine issue of material fact. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553, 91 L.Ed.2d at 274; Cloverdale Equip. Co. v. Simon Aerials, Inc., 869 F.2d 934, 937 (6th Cir. 1989). While the disputed issue does not have to be resolved conclusively in favor of the non-moving party to defeat summary judgment, "sufficient evidence supporting the claimed factual dispute" must be shown, thereby requiring resolution of the parties' differing versions of the truth by a jury or judge. Liberty Lobby, 477 U.S. at 249, 106 S.Ct. at 2510, 91 L.Ed.2d at 212; First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569, 592 (1968).

III.

A. Notice of the lien

Determination of the sufficiency of filing of a federal tax lien is governed by federal law. See United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 873 (9th Cir. 1987) (citing United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240 (1960)). Furthermore, section 6323 provides that the Secretary of the Treasury shall prescribe the "form and content of the notice" of filing. 26 U.S.C. §6323(f)(3) (1978). With regard to notice, subsection (f)(4) provides that the lien shall be filed and indexed in the local registry of deeds when state law requires, such that "a reasonable inspection of the index will reveal the existence of the deed." 26 U.S.C. §6323(f)(4) (1978).

The IRS argues that the Court should refuse to analyze whether the filing and indexing of the liens were sufficient to provide notice upon a reasonable inspection based on the fact that they were filed in defendant Genevieve Graff's correct legal name at the time. Defendant IRS' response (Docket Entry No. 14) at 11. Several courts have held that where the government files a notice of lien under the taxpayer's legal name, the filing constitutes proper constructive notice to subsequent purchasers. See Kivel v. United States [89-2 USTC ¶9415 ], 878 F.2d 301 (9th Cir. 1989); Polk [87-2 USTC ¶9432 ], 822 F.2d at 873; Pioneer Nat'l Title Ins. Co. v. United States, 81-2 USTC (CCH) ¶9482 (D.N.J. May 18, 1981); United States v. Valco Enterprises, Inc., 92-1 USTC (CCH) ¶50,297 (D.Mass. May 19, 1992 ). These courts based their holdings on the absence of language in section 6323 placing the burden on the government to maintain liens in the continually changing names of individuals. Pioneer, 81-2 USTC (CCH) 1 9482 at 87, 515. " 'If Congress had intended to impose upon the Internal Revenue Service the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so.' " Kivel [89-2 USTC ¶9415 ], 878 F.2d at 303 (quoting Polk [87-2 USTC ¶9432 ], 822 F.2d at 874).

It is notable, however, that the substantive provision governing liens filed by the IRS did not remain the same for each of the aforementioned cases. In 1978, section 6323(f)(4) was amended to include an additional requirement for notice filing by the IRS. Prior to the 1978 amendment, section 6323 "required simply that the fact of a lien's filing be recorded 'in a public index at the district office of the Internal Revenue Service for the district in which the property subject to the lien is situated.' " Pioneer, 81-2 USTC (CCH) ¶9482 at 87,514. The statute now requires a filing which would give notice of the lien's existence upon a "reasonable inspection." Id. However, at least one court has indicated that the 1978 amendment does not substantially alter the IRS' duty as to filing notices of tax liens.

In Polk, Valco, and Pioneer, the IRS filed its liens before the 1978 amendment of section 6323(f)(4) . Polk [87-2 USTC ¶9432 ], 822 F.2d at 872; Pioneer, 81-2 USTC (CCH) ¶9482 at 87,514. In Kivel, the IRS filed its liens after 1978. In that case, the Court referred to the decision of the United States Court of Appeals for the Ninth Circuit in Polk, noting that proper filing in a correct legal name might preclude further analysis of proper notice. Kivel [89-2 USTC ¶9415 ], 878 F.2d at 303. The Court in Kivel did not address the change in the statutory language, presumably finding that using the taxpayer's correct legal name at the time the notice of the lien was filed precluded further analysis of even the additional "reasonable inspection" element of post-1978 section 6323 .

However, the Court can find no binding authority, under the current version of section 6323(f)(4) , stating that filing in the proper location under a taxpayer's correct legal name precludes investigation into the sufficiency of the notice. Indeed, the law in the Sixth Circuit provides little guidance with regard to the notice provision. As such, the court must be guided by the statutory language.

Section 6323(f)(4) provides in pertinent part:

[U]nder the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed. ...

26 U.S.C. §6323(f)(4) (1978).

The statutory language plainly requires that the filing of the deed be such that a "reasonable inspection" will establish that the property is encumbered. The provision does not state, or even imply, that filing under the taxpayer's correct legal name is dispositive of the sufficiency of the notice. The statute establishes the benchmark by which the sufficiency of notice is determined: "filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed." Id.

To determine whether the filing of the notice was such that a "reasonable inspection" would have unearthed the lien from the voluminous records of the Register's office, it is necessary to view evidence of the "reasonable inspection" that either occurred or should have occurred. At this time, it appears from the affidavits in the record from Felix Z. Wilson, II, Register of Deeds, and Bill Matthews, a professional title researcher, that the name of Genevieve Graff does not appear in the chain of title of the property in question and lien indexes do not reflect any federal tax liens against Genevieve Adkisson or Genevieve Ott Adkisson. Further, there is nothing of record or indexed to show that Genevieve Graff is one and the same person as Genevieve Adkisson or Genevieve Ott Adkisson.

This would, in all probability, end the matter as to what would be uncovered by a reasonable inspection. However, there is a reference in the letter from Mr. Rosenberg to the IRS (see Defendant's response (filed December 22, 1995; Docket Entry No. 28), exhibit 1 at 3)) that makes reference to a deed of trust from Genevieve Adkisson Graff and husband, David A. Graff, to John B. Hardcastle, Trustee of record in Book 7348, page 517, Register's Office of Davidson County, Tennessee. This deed has not been provided to the Court. ⁶ Because of this insufficiency in the record before the Court, the motions for summary judgment shall be denied.

B. Injunction

The defendant IRS asserts in its memorandum in support (Docket Entry No. 14) that the plaintiff is precluded from obtaining injunctive relief in order to keep the IRS from seizing the property in question. The IRS states that the Anti-Injunction Act, 26 U.S.C. §7421 (1989), proscribes any "suit for the purpose of restraining the assessment or collection of any tax." While the Act provides some statutory exceptions and the Supreme Court has recognized a judicial exception, ⁷ the IRS asserts that the plaintiffs' situation falls outside the parameters of those exceptions. Defendant IRS' memorandum in support (Docket Entry No. 14) at 4-5.

The plaintiffs do not respond to the IRS' motion for summary judgment on this issue. See plaintiffs' response (Docket Entry No. 17). Indeed, the plaintiffs fail to address the issue at all. Thus, the Court presumes that the plaintiffs have no objection to the assertions of the defendant IRS. Accordingly, the IRS' motion for summary judgment as to the injunction issue shall be granted.

IV.

In conclusion, the Court finds on the record as it stands at this time, a genuine issue of fact exists as to whether the name Genevieve Graff appears in the chain of title to the property in question, and the motions for summary judgment will be denied. The motion of the IRS shall be granted with regard to the injunction issue as the plaintiffs did not respond to the IRS' motion on that issue. Thus, the plaintiffs are perceived not to object.

Accordingly, the motions of both the plaintiffs and defendant Genevieve Graff will be denied. The motion of the defendant IRS will be denied in part and granted in part.

An appropriate order shall be entered.

APPENDIX I

Chain of title to the real property at 907 Lemont Drive , Nashville , Davidson County , Tennessee , as it appears from the papers submitted to the Court:

1. Warranty deed from Carlos E. Herren and wife, Mary E. Herren to Danny W. Adkisson and wife, Genevieve Adkission, dated August 17, 1971, of record in Book 4530, page 675, Register's Office of Davidson County, Tennessee.

2. Deed of trust from Danny W. Adkisson and wife, Genevieve Adkisson to Vaden Lackey, Jr., Trustee, dated August 19, 1971, of record in Book 4530, page 677, Register's Office of Davidson County, Tennessee.

3. Final decree of divorce in Genevieve Ott Adkisson v. Danny Whitfield Adkisson, Case No. 66239, Fourth Circuit Court of Davidson County , Tennessee , of record in Book 5220, page 430, Register's Office of Davidson County, Tennessee.

(Vesting title in Genevieve Ott Adkisson.) (Decree entered September 12, 1973, Minute Book 83A, page 365, Fourth Circuit Court of Davidson County, Tennessee.)

4. Instrument (not included in papers submitted to Court, but referred to in other papers) appointing Arnold M. Weiss, Substitute Trustee, of record in Book 9294, page 479, Register's Office of Davidson County, Tennessee.

5. Substitute Trustee's Deed from Arnold M. Weiss, Substitute Trustee, to Monica Miller, dated May 10, 1994, of record in Book 9344, page 334, Register's Office of Davidson County, Tennessee.

6. Warranty deed from Monica Miller and husband, Barry Wayne Miller, to Roy L. VanDolen and wife, Thelma Jean VanDolen, dated August 18, 1994, of record in Book 9443, page 281, Register's Office of Davidson County, Tennessee.

APPENDIX II

Notice of Federal Tax Lien Under Internal Revenue Laws as they appear from the papers submitted to the Court:

1. Notice dated October 2, 1989

Taxpayer: Genevieve Graff

DBA Masons Restaurant

Residence: 901 Dickerson Road

Goodlettsville , TN

Amount: $3,205.71

Recorded in Book 7956, page 978, Register's

Office of Davidson County , Tennessee

2. Notice dated May 18, 1990

Taxpayer: Genevieve Graff

DBA Masons Restaurant

Residence: 901 Dickerson Road

Goodlettsville , TN

Amount: $35,557.13

Recorded in Book 8115, page 648, Register's

Office of Davidson County , Tennessee

3. Notice dated August 15, 1991

Taxpayer: Genevieve Graff

DBA Masons Restaurant

Residence: 901 Dickerson Road

Goodlettsville , TN

Amount: $6,384.13

Recorded in Book 8427, page 545, Register's

Office of Davidson County , Tennessee

¹ All documents representing the position of the IRS have been filed on behalf of both the IRS and the Department of Treasury. For the purposes of this memorandum, the defendant IRS represents the interests of both parties.

² The Court is also in receipt of replies of defendants Internal Revenue Service (filed December 19, 1995 ; Docket Entry No. 27) and Genevieve Graff (filed December 22, 1995 ; Docket Entry No. 28). The attention of the defendants is directed to the order entered August 16, 1995 (Docket Entry No. 5) at footnote five on page two stating "No reply shall be filed to any response unless invited by the Court."

³ See Appendix II for the particulars of the tax lien notices.

⁴ Union Planters National Bank became the first mortgage holder of the property when it acquired First Fidelity Federal Savings and Loan Association.

⁵ The Supreme Court further explained that a court must determine "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." Liberty Lobby, 477 U.S. at 251-52, 106 S.Ct. at 2512, 91 L.Ed.2d at 214.

⁶ See Appendix I for the instruments of record in the chain of title that have been provided to the Court.

⁷ See Enochs v. Williams Packing & Navigation Co. [62-2 USTC ¶9545 ], 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962).

 

 

[95-1 USTC ¶50,135] National Union Fire Insurance Company of Pittsburgh , Pa. , Plaintiff v. Karl J. Rost and Ameritrust Texas National Association, as Co-Executor of the Estate of Rob ert R. Rost, Defendants

U.S. District Court, So. Dist. Tex., Houston Div., Civ. H-93-2784, 1/26/95

[Code Sec. 6323 ]

Validity of liens: Notice: Wrong name.--IRS liens against property owned by a decedent and his wife were valid against a third-party creditor although the recorded notices did not reflect the fact that one of the taxpayers was deceased or refer to the decedent's estate or the co-executors of the estate. The recorded notices were sufficient to give constructive notice of the IRS's claim because they included the correct names of the decedent and his wife, who was one of the co-executors of the estate.

Carla Powers Herron, Marchris G. Rob inson, Chamberlain, Hrdlicka, White, Williams & Martin, 1200 Smith St., Houston, Tex. 77002, for plaintiff. Mary C. Vance, Ralph F. Shilling, Jr., Department of Justice, Dallas , Tex. 75201-0599 , for defendant (I.R.S.). Jeffrey G. Tinkham, Williams & Tinkham, 2401 Fountainview, Houston, Tex. 77057, for defendant ( Natl. Union Fire Ins., Co.). Mike Driscoll, 1001 Preston, Houston , Tex. 77002 , for defendant (Cheek, G.). Carla Powers Herron, Chamberlain, Hrdlicka, White, Williams & Martin, 1200 Smith St. , Houston , Tex. 77002 , for cross-claimant. Jeffrey G. Tinkham, Williams & Tinkham, 2401 Fountainview, Houston , Tex. 77057 , for counter-defendant. Jeffrey G. Tinkham, Williams & Tinkham, 2401 Fountainview, Houston , Tex. 77057 , for cross-defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

WERLEIN, JR., District Judge:

After all parties have rested and closed the evidence, and having heard the arguments and authorities of counsel, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Rule 52, Fed. R. Civ. P.

FINDINGS OF FACT

The Court adopts from the Stipulation of Facts of the United States and National Union Fire Insurance Company of Pittsburgh, Pa. the following facts, which are admitted, require no proof, and become the first 17 Findings of Fact, as follows:

1. Rob ert R. Rost and his spouse, Kari J. Rost were assessed liabilities for federal income taxes (form 1040), penalty, and interest by the Internal Revenue Service for taxable periods ending 12-31-81, 12-31-82, 12-31-84, 12-31-85 and 12-31-86. After the death of Rob ert R. Rost, the United States further assessed liabilities for estate income taxes (form 1041) payable for the periods of 1987, 1988, and 1989.

2. Rob ert R. Rost died testate on May 17, 1986 .

3. On June 11, 1986 , Kari J. Rost and MBank Houston National Association were appointed independent Co-Executors of the Estate of Rob ert R. Rost. For taxable period ending April 30, 1987 , a Form 1041 Federal Fiduciary Tax Return was filed with the IRS for the Rob ert R. Rost Estate, identification number 76-6030003. The fiduciaries listed on the return are Kari J. Rost and MBank Houston National Association. The return was signed by fiduciary representative Raymond R. Brown, for MBank Houston National Association on November 16, 1987 . Forms 1041 Federal Fiduciary Tax Return were filed with the IRS for the Rob ert R. Rost Estate, identification number 76-6030003 for the periods ending 4-30-88 and 4-30-89 but these returns have been destroyed and the parties are unable to determine whom they were signed by.

Forms 1041 Federal Fiduciary Tax Return were also filed with the IRS for the Rob ert R. Rost Estate, identification number 76-6030003 as follows:

Ameritrust Texas National Association filed with the IRS a Form 1041 for the period ended April 30, 1990 ; this return was signed by fiduciary representative Raymond R. Brown, for Ameritrust Texas National Association on August 14, 1990 . Ameritrust Texas National Association filed with the IRS a Form 1041 for the period ended April 30, 1991 ; this return was signed by fiduciary representative Raymond R. Brown, for Ameritrust Texas National Association on August 14, 1991 . Ameritrust Texas National Association filed with the IRS a Form 1041 for the period ended April 30, 1992 ; this return was signed by fiduciary representative Raymond R. Brown, for Ameritrust Texas National Association on June 30, 1992 . Ameritrust Texas National Association filed with the IRS a Form 1041 for the period ended April 30, 1993 ; this return was signed by fiduciary representative Bruce Fox, for Ameritrust Texas National Association on July 8, 1993 . Texas Commerce Bank National Association filed with the IRS a Form 1041 for the period ended April 30, 1994 ; this return was signed by fiduciary representative Barry Leaton, for Texas Commerce Bank National Association on July 8, 1994 .

4. The Internal Revenue Service knew by July 14, 1986 that Rob ert R. Rost had died. This date is the date the Internal Revenue Service accepted a Form 872-A, Special Consent to Extend the Time to Assess Tax. This form was signed by Kari J. Rost on June 12, 1986 , for herself, and for Rob ert R. Rost, in her capacity as independent co-executor of the estate of Rob ert R. Rost. The form was accepted by the Internal Revenue Service on July 14, 1986 by John Kramer III, acting for the District Director, Arturo Jacobs. Attached to the Form 872-A were letters testamentary reflecting that Kari J. Rost and MBank Houston National Association were duly appointed as independent co-executors of the Estate of Rob ert R. Rost on June 11, 1986 .

5. On September 15, 1989 , the Internal Revenue Service filed a "Proof of Claim for Internal Revenue Taxes" in Probate Court Number 4 of Harris County, Texas in docket number 207,404 with respect to Rob ert J. Rost (social security #450-32-0836). The claim of the United States covered income tax (form 1040) payable for the years 1980, 1981, 1982, 1984, 1986, and estate income tax (form 1041) payable for the periods 1987, 1988, and 1989. The United States ' claim totaled $439,220.68.

6. Without setting forth all of the above-listed unpaid taxable periods, the United States made timely assessments for income taxes (form 1040), penalty and interest against taxpayers, Rob ert R. Rost, and his spouse, Kari J. Rost for the taxable years 1981 and 1982, as follows (the United States exhibits numbers 1 and 2, Forms 4340, Certificates of Assessments and Payments, accurately, and more fully, reflect all account history for the Rosts for 1981 and 1982):

Tax       Assessment    Assessed     Assessed     Assessed

Period   Dates (Tax)       Tax       Interest      Penalty

12-31-81
   
12-06-82
    $ 99,117.53  $110,149.39  $ 39,216.41

           
11-07-83

           
04-13-87

           
10-08-91

         Account Balance as of 
9-17-94
  =  $65,565.98

12-31-82
   
10-10-83
    $130,544.61  $282,367.58  $133,096.21

           
04-13-87

           
08-15-88

           
10-08-91

         Account Balance as of 
9-17-94
  =  $454,690.34

 

7. Subsequent to the appointment of MBank as Independent Co-Executor and prior to June 10, 1991, Ameritrust Texas National Association assumed the role of Co-Executor of the Estate of Rob ert R. Rost, Deceased, from MBank Houston National Association. Ameritrust and/or MBank, as co-executors of the Estate of Rob ert R. Rost, have paid funds on behalf of the Estate of Rob ert R. Rost to the United States after the date of the death of Rob ert R. Rost.

8. The United States filed and recorded notices of federal tax liens as follows with regard to the liability of Rob ert R. Rost, and Kari J. Rost for the years 1981 and 1982. These liens do not reflect that Rob ert R. Rost is deceased or reference the decedent's estate or the then Co-Executors of the decedent's estate, Kari J. Rost and Ameritrust Texas National Association ("Ameritrust"). Rob ert R. Rost's social security number was 450-32-0836.

     Date Lien                        Name of       Social Security #

     Recorded    Where Recorded      Taxpayers     of Taxpayer on Lien

a.   
03-13-92
    

Fort
 
Bend

 Cty      "
Rob
ert R. &     #450-32-0836

                 

Richmond
, 
TX

         Kari Rost"

                 Personal Prop.

                 

County
 
Clerk

b.   
03-13-92
    Harris Cty         "
Rob
ert R. &     #450-32-0836

                 

Houston
, 
TX

          Kari Rost"

                 Personal Prop.

                 

County
 
Clerk

c.   
03-13-92
    

Fort
 
Bend

 Cty      "
Rob
ert R. &     #450-32-0836

                 

Richmond
, 
TX

         Kari Rost"

                 Real Prop.

                 

County
 
Clerk

d.   
03-13-92
    Harris Cty         "
Rob
ert R. &     #450-32-0836

                 

Houston
, 
TX

          Kari Rost"

                 Real Prop.

                 

County
 
Clerk

 

9. On June 17, 1992 , National Union obtained judgment against Kari J. Rost and Ameritrust Texas National Association, as co-executors of the Estate of Rob ert R. Rost in action number 20049/61 in the Supreme Court of the State of New York , County of New York ("the foreign judgment").

10. On January 12, 1993 , the foreign judgment was registered by National Union against Kari J. Rost and Ameritrust Texas National Association, as Co-Executors of the Estate of Rob ert R. Rost, in Cause No. 93-01060 in the 190th Judicial District Court of Harris County , Texas ("the registration action"). A Writ of Execution was issued in this matter on June 1, 1993 , and thereafter, National Union Directed Constable Cheek's deputy constable to levy on the property of the Estate of Rob ert R. Rost held by Ameritrust. Ameritrust held the estate funds that are the subject of this action.

11. On or about July 14, 1993 , National Union's attorney and a deputy constable arrived at Ameritrust's place of business to levy execution. The representative of Ameritrust stated to National Union and the deputy constable that the IRS had an outstanding claim to the proceeds, which likely superseded National Union's Writ of Execution.

12. On July 15 and 16, 1993, Ameritrust delivered the sum of $25,551.60 to Constable Cheek pursuant to the Writ of Execution.

13. On August 10, 1993 , the IRS delivered a Notice of Levy and a copy of an IRS federal tax lien to the Constable. The Notice of Levy stated that it attaches to "any property, rights to property, or proceeds from the estate of Rob ert R. Rost (Deceased) or Kari J. Rost," and specifically referenced the registration action.

14. Given the conflicting claims of the Internal Revenue Service and National Union to the funds held by Constable Cheek, a "Petition in Interpleader" was filed by Constable Cheek by intervening in the registration action (case number 93-01060, in the 190th District Court in Harris County, Texas).

15. After timely removal of this action to the federal district court in September of 1993, the constable transferred the seized funds from the Constable's escrow account to the federal court's registry pursuant to an Order of this Court entered March 22, 1994. The funds were placed in the federal court's registry by Constable Cheek on May 11, 1994 .

16. The writ of execution served on Ameritrust as Co-Executor of the Estate of Rob ert R. Rost, Deceased, was a valid and properly issued writ of execution and was properly served upon the co-executor. When funds were paid by the co-executor to the constable pursuant to the writ, a fully choate lien arose in favor of National Union as to the funds received by the constable. The underlying judgment supporting the issuance of the writ of execution was not at the time of issuance of the writ or at the time of service of the writ, satisfied in whole or in part.

17. National Union had a choate lien arising when its judgment was executed upon the constable. However, National Union's actions to register the foreign judgment and execute upon the registered foreign judgment all occurred after the filing and recording dates of the notices of federal tax liens by the United States .

The Court makes the following additional finding of fact from a preponderance of the evidence:

18. In October, 1991, the IRS sent notice and demand for payment addressed to " Rob ert Rost, Deceased, and Kari Rost," at their last known residence address, stating the assessment for income taxes against Rob ert R. Rost and Kari Rost for the taxable years 1981 and 1982.

CONCLUSIONS OF LAW

The Court adopts from the Joint Pretrial Order the agreed applicable provisions of law which consists of the first conclusion of law as follows:

1. If the Notices of Federal Tax Lien concerning Rob ert R. Rost and Kari J. Rost filed by the United States comply with 26 U.S.C. §6323(f) and reach and attach to the property held by Ameritrust as Co-Executor of the Estate of Rob ert R. Rost, then the United States is entitled to keep the interplead fund since its liens were filed prior to the execution of National Union's foreign judgment. Likewise, if the Notices of Federal Tax Lien concerning Rob ert R. Rost and Kari J. Rost filed by the United States do not comply with 26 U.S.C. §6323(f) and/or do not reach and attach to the property held by Ameritrust as Co-Executor of the Estate of Rob ert R. Rost, then National Union is entitled to keep the interplead fund.

The Court makes the following additional Conclusions of Law:

2. Title 26, §6303(a) , which requires that the IRS give notice and a demand for payment to each person liable for unpaid taxes, is designed to protect the taxpayer and thus "any cause of action for failure to comply with statutory notice requirements belongs to the taxpayer alone." Harris v. U.S. [84-2 USTC ¶9715 ], 588 F. Supp. 835, 837 (N.D. Tex. 1984), aff'd on other grounds, [85-2 USTC ¶9511 ], 764 F.2d 1126 (5th Cir. 1985); Macatee, Inc. v. U.S. [54-2 USTC ¶9550 ], 214 F.2d 717, 720 (5th Cir. 1954) (same conclusion regarding statutory predecessor to §6303 ).

3. National Union Fire Insurance Co. of Pittsburgh, Pa. ("National Union") is a party to this case as a claimant to the interpleaded funds and not as the "taxpayer" or the "person liable for the taxes," and therefore lacks standing to challenge any failure by the IRS to comply with the taxpayer notice requirements of the Internal Revenue Code.

4. In the alternative, assuming that National Union has standing to challenge the sufficiency of notice given under §6303(a) , the notice was sufficient, as a matter of law, for the following reasons:

a. As National Union has presented no contravening evidence, the presumption of official regularity establishes that the IRS discharged its official duties under §6303(a) by mailing notice and demand for payment to Rob ert Rost, deceased, and Kari Rost. See Williams v. Brandt, 672 F. Supp. 507, 506-07 (S.D. Fla. 1987), citing U.S. v. Chemical Foundation, Inc., 272 U.S. 1, 47 S. Ct. 1 (1926).

b. Section 6303(a) notice sent to Kari Rost, and also addressed to Rob ert Rost, Deceased, constitutes notice to Kari Rost individually and in her capacity as Co-Executor of the Estate of Rob ert R. Rost because as Co-Executor, Kari Rost was obligated to possess and hold the estate in trust to be disposed of in accordance with law, including the payment of debts owed by the deceased, Rob ert Rost. Tex. Prob. Code Ann. §37 ( Vernon Supp. 1995).

c. Notice to one co-executor of an estate constitutes notice to all other co-executors. See Tex. Prob. Code Ann. §240 (Vernon 1980) ("Should there be more than one executor or admin istrator of the same estate at the same time, the acts of one of them . . . shall be as valid as if all had acted jointly . . . ."); Irwin v. Larson [38-1 USTC ¶9065 ], 94 F.2d 187, 189 (5th Cir. 1938) (Notice to one co-executor of assessment of income tax deficiency is notice to all, especially if all are "regarded as one in dealings with the public.").

d. The IRS complied with §6303(a) by sending notice and a demand for payment to Kari Rost and, derivatively, to Ameritrust, both as Co-Executors of the Estate of Rob ert R. Rost.

5. Title 26, §6323(a) of the Internal Revenue Code provides that a federal tax lien "shall not be valid as against any . . . judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary."

6. Title 26, §6323(f)(3) provides that "[t]he form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary . . . ."

7. Treasury Regulation 301.6323(f)-1 details the requisite form and content of a Notice of Federal Tax Lien, and states that the notice of tax lien "must identify the taxpayer . . . ." 26 C.F.R. §301.6323(f)-1(c)(2) .

8. State law is consulted to determine the extent to which a person has an interest in property. Medaris v. U.S. [89-2 USTC ¶9565 ], 884 F.2d 832 (5th Cir. 1989).

9. Under Texas law, an executor, as personal representative of a decedent's estate, steps into the decedent's shoes with regard to federal tax liabilities, Tex. Prob. Code Ann. §§3 , 37, 320(a) (Vernon Supp. 1995), Estate of Johnson [88-1 USTC ¶9165 ], 836 F.2d 940, 946-47 (5th Cir. 1988), and a suit against the decedent seeking to subject the property of the estate for payment of the claim should ordinarily be instituted against such a personal representative. Price v. Estate of Anderson , 522 S.W.2d 690, 691 ( Tex. 1975).

10. As the parties responsible under Texas law for paying the tax liabilities of the decedent's estate, Kari Rost and Ameritrust, as Co-Executors of the Estate of Rob ert R. Rost, are the "taxpayers" within the meaning of the Treasury Regulations. See U.S. v. Glen Upton, Inc. [74-2 USTC ¶9814 ], 378 F. Supp. 1028 (W.D. Mo. 1974); U.S. v. LMS Holding Co. [94-1 USTC ¶50,045 ], 161 B.R. 1020 (N.D. Okla. 1993).

11. Once the extent of a person's legal interest in property is determined by reference to state law, tax consequences are determined by federal law. Medaris [89-2 USTC ¶9565 ], 884 F.2d at 833.

12. Sufficiency of notice under §6323(f) is a question of federal law. Tony Thornton Auction Service, Inc. v. U.S. [86-1 USTC ¶9434 ], 791 F.2d 635, 638 (8th Cir. 1986).

13. In determining the adequacy of notice under §6323(f) "[t]he test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim." Id. at 639; Du-Mar Marine Service, Inc. v. State Bank & Trust Co. of Golden Meadow, La., 697 F. Supp. 929, 935 ( E.D. La. 1988); both quoting U.S. v. Sirico [66-1 USTC ¶9209 ], 247 F. Supp. 421, 422 (S.D.N.Y. 1965).

14. The Notices of Federal Tax Lien mistakenly filed by the IRS under " Rob ert R. and Kari Rost," rather than "Kari Rost, individually and as Co-Executor of the Estate of Rob ert R. Rost, Deceased, and Ameritrust Texas National Association, Co-Executor of the Estate of Rob ert R. Rost, Deceased," nonetheless substantially complied with 26 U.S.C. §6323(f) in that the notices included the correct name of the decedent ( Rob ert R. Rost) and the correct name of one of the two co-executors (Kari Rost), and therefore, were such that a reasonably diligent examiner of the public records would have discovered the lien. See Tony Thornton Auction Service [86-1 USTC ¶9434 ], 791 F.2d at 639 (reasonably diligent searcher of record would have discovered lien filed under name of partnership and one of two partners, even though the other partner was not listed). See also Richter's Loan Co. v. U.S. [56-2 USTC ¶9706 ], 235 F.2d 753, 755 (5th Cir. 1956) ("[T]he slight difference in spelling the name 'Freidlander' instead of 'Friedlander' could not mislead searchers of the record, who were contemplating doing business with Friedlander . . . .").

15. The fact that the Notices of Federal Tax Lien did not reflect that Rob ert R. Rost was deceased, and only identified Kari Rost in her individual capacity and not in her capacity as Co-Executor of the Estate of Rob ert R. Rost, were not errors that would have prevented a reasonably diligent examiner of the property records from discovering the lien. See U.S. v. Jane B. Corporation [58-2 USTC ¶9924 ], 167 F. Supp. 352 (D. Mass. 1958) (prudent searcher of record would have discovered notice erroneously naming taxpayer as "Boat Barbara C. Angell" rather than "Boat Barbara C. Angell, Inc.").

16. The cases cited by National Union are distinguishable in that the names of the taxpayers in those cases were so different from the names under which the notices were filed that even resourceful examiners of the record would have had great difficulty in discovering the liens. U.S. v. LMS Holding Co. [94-1 USTC ¶50,045 ], 161 B.R. 1020 (N.D. Okla. 1993) (taxpayer named "Retail Marketing Company," but notice filed under "MAKO, Inc."); Davis v. United States [90-1 USTC ¶50,061 ], 728 F. Supp. 513 (C.D. Ill. 1989) (taxpayer named "Gillian Renslow," but notice filed under "Gillian Rongey"); U.S. v. Glen Upton Inc. [74-2 USTC ¶9814 ], 378 F. Supp. 1028 (W.D. Mo. 1974) (taxpayer named "Lee B. Hill," but notice filed under "Lane Body & Frame Co., Inc."). ¹

17. In a post-trial telephone conference between the Court Law all parties the parties have agreed that Constable Glen Cheek is entitled to recover his constable's fee of $165.51, for which he pled in his Original Petition in Interpleader.

18. Based on the above Findings of Fact and Conclusions of Law, the Notices of Federal Tax Lien concerning Rob ert R. Rost and Kari Rost filed by the United States comply with 26 U.S.C. §6323(f) and reach and attach to the property held by Ameritrust as Co-Executor of the Estate of Rob ert R. Rost. Accordingly, the united States is entitled to have and recover a judgment for the interpleaded funds, subject only to Constable Glen Cheek's recovery of his Constable's fee in the amount of $165.51, and declaring that National Union take nothing on its claim of entitlement to the funds.

19. If any of the foregoing Conclusions of Law constitute Findings of Fact, then they are adopted as such; and if any of the foregoing Findings of Fact constitute conclusions of Law, then they are adopted as such.

¹ To the extent that Glen Upton can be read to hold that "only notice giving the taxpayer's correct name is sufficient to perfect a federal tax lien," In re Hudgins [92-2 USTC ¶50,341 ], 967 F.2d 973, 976 (4th Cir. 1992), the court is of the opinion that the Fifth Circuit has not adopted such an exacting rule, and that the standard is rather one of "substantial compliance" with the statutory directives. See Richter's Loan Co. v. U.S. [56-2 USTC ¶9706 ], 235 F.2d 753, 755 (5th Cir. 1956), and Conclusion of Law 13, infra.

 

 

[93-2 USTC ¶50,527] Ok Sun Renner, Plaintiff v. Tong Hall, Defendant and Suk Hyun Shin, Garnishee v. United States of America, Intervenor

U.S. District Court, West. Dist. Okla., CIV-93-128-W, 8/26/93

[Code Sec. 6323 ]

Lien for taxes: Validity: Judgment creditor: Priority.--A notice of federal tax lien filed by the IRS against a cleaning establishment in the name of that establishment did not serve to give the tax lien priority over a lien of a judgment creditor of the taxpayer-owner. The notice, filed under the cleaning establishment's name, was not sufficient to provide constructive notice to the judgment creditor as to the existence of the tax lien. Under state ( Oklahoma ) law, a federal tax lien is indexed alphabetically by the name of the taxpayer; thus, a reasonable and diligent search for liens against property in the taxpayer's name would not have revealed the existence of the tax lien filed under the company's name. The IRS had actual knowledge that the cleaning business was run as a sole proprietorship and had a duty to refile the notice under the name of the taxpayer.

Richard K. Grigsby, 1111 W. Gore Blvd., Lawton, Okla. 73501, Department of Justice, Washington, D.C. 20530, for plaintiff. Dick W. Tannery, 602 SW D. Ave. , Lawton , Okla. 73501 , for defendant (Hall, T.) M. Kent Anderson, 210 W. Park Ave., Oklahoma City, Okla. 73102, Phyllis J. Gervasio, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

WEST, District Judge:

This matter comes before the Court upon Plaintiff Ok Sun Renner's Motion for Summary Judgment and Application for Order for Garnishee to Pay Money into Court and Intervenor United States of America 's Motion for Summary Judgment. Upon due consideration of the parties' submissions, the Court makes its determination.

During 1987 and 1988, Defendant Tong Hall ("Hall") operated Ken's Cleaners and filed federal employment and unemployment tax returns in the name of Ken's Cleaners, Inc. Beginning in 1989, Hall reported her federal employment and unemployment tax liabilities as a sole proprietorship under the name of Tong Hall. However, Hall's business was still conducted as Ken's Cleaners.

On November 13, 1990, the Internal Revenue Service ("IRS") filed a notice of federal tax lien against Ken's Cleaners, Inc. in the Comanche County Clerk's office for the employment and unemployment taxes for 1987 and 1988 totalling $28,728.41. The IRS released the lien on October 22, 1991 when it received a check from Hall for full payment of the tax liabilities included in the lien notice. On October 29, 1991, the IRS revoked the release because the check issued by Hall was returned for insufficient funds.

A new notice of federal tax lien including the tax liabilities in the previous notice of federal tax lien was filed with the Comanche County Clerk's office on January 3, 1992. A notice of federal tax lien for the same tax liabilities was also filed in the Oklahoma County Clerk's office on January 6, 1992. The taxpayer listed in both notices was Ken's Cleaners, Inc.

Hall sold the cleaning business to Garnishee Suk Hyun Shin ("Shin") on July 12, 1991. To finance part of the purchase, Shin executed a 60-month promissory note for $50,000.00. On July 24, 1992, the IRS issued a notice of levy to Shin for the money due to Hall on the 60-month promissory note. Pursuant to the levy, Shin has paid the IRS approximately $11,220.45. Thereafter, on October 16, 1992, Plaintiff Ok Sun Renner ("Renner") obtained a judgment against Hall totalling approximately $58,001.00. Renner then commenced garnishment proceedings against Hall and Shin in the Comanche County District Court on October 27, 1992 by issuing a garnishment affidavit and summons on information that Shin was indebted to Hall pursuant to the promissory note. On December 8, 1992, Shin filed an answer to the garnishment affidavit admitting that she was indebted to Hall on the promissory note for approximately $40,000.00. However, Shin asserted as a defense that the IRS had a tax lien on the proceeds of the promissory note.

On December 28, 1992, Renner filed an application requesting an order for Shin to pay the money due Hall into the court. The United States of America (" United States ") moved to intervene in the garnishment action, which was granted by the state court. Subsequently, the United States removed the garnishment action to this Court. Renner thereafter filed an amended garnishment affidavit adding a claim for wrongful levy against the United States .

In his motion, Renner contends that he is entitled to Shin's payments under the promissory note by reason of his judgment and garnishment affidavit and summons. Even though Renner acknowledges that the IRS filed a notice of federal tax lien prior to his judgment lien, Renner argues that the IRS tax lien has no priority over his judgment lien. Renner contends that the IRS tax lien is invalid because the notice fails to properly identify Hall as the taxpayer. According to Renner, a federal tax lien does not take priority over a judgment lien creditor until notice of such lien is properly filed. Because the IRS identified Ken's Cleaners, Inc. instead of Hall as the delinquent taxpayer, Renner contends that his judgment lien against Hall is prior to any claim of the IRS.

The United States , in response and for its motion, contends that the IRS tax lien notice as filed was sufficient to give Renner constructive notice of Hall's indebtedness to the IRS. The United States contends that a reasonable person would have discovered the tax lien. Moreover, the United States contends that the IRS filed the lien notice under the name used in the tax returns and requiring the IRS to verify that Hall was operating her cleaning business as a sole proprietorship instead of a corporation would put an intolerable admin istrative burden on the IRS.

Under 26 U.S.C.A. §6321 , the United States has a lien "upon all property and rights to property, whether real or personal," belonging to a person who fails to pay any federal tax for which he is liable. However, according to 26 U.S.C.A. §6323(a) , a tax lien "shall not be valid as against any . . . judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." Section 6323(f) provides that the form and content of the notice of federal tax lien referred to in subsection (a) shall be prescribed by the Secretary. The applicable IRS regulation, 26 C.F.R. §301.6323(f)-1(c)(1) , states that the notice of a federal tax lien is required to be filed on a "Form 668." That form is defined at §301.6323(f)-1(G)(2) as a form which "must identify the taxpayer."

In this case, there is no dispute between the parties that the IRS used the correct form for its notice and filed the notice in the proper place. The primary issue is whether the notice filed against "Ken's Cleaners, Inc." sufficiently identified the taxpayer Hall so as to give notice of the tax lien to a judgment creditor. The Court concludes that it did not. In the Court's view, the filing of the notice under Ken's Cleaners, Inc. was not sufficient to give constructive notice to a judgment creditor of Hall as to the existence of the tax lien. United States v. Sirico [66-1 USTC ¶9209 ], 247 F.Supp. 421, 422 (S.D.N.Y. 1965) ("The essential purpose of filing of the lien is to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim.") In Oklahoma , a federal tax lien notice is indexed alphabetically by the name of the taxpayer. Okla. Stat. Ann. tit. 68, §3405 (1991) Hence, a notice against Ken's Cleaners, Inc. would be indexed under "K" and a notice against Tong Hall would be indexed under "H". Consequently, a reasonable and diligent search by a judgment creditor for tax liens against Hall would not have revealed the existence of federal tax lien filed under Ken's Cleaners, Inc.

The parties have cited various cases addressing the validity of a federal tax lien notice which contains misspellings or other errors. The Court, however, concludes that the factual circumstances of In re Rob by's Pancake House of Florida, Inc., 24 B.R. 989 (Bankr. E.D. Tenn. 1982), more closely resemble the factual circumstances in this case. In that case, the IRS filed a notice of federal tax lien which named as taxpayer, a partnership and two partners. The notice, however, was only indexed under the name of the partnership. The judgment creditors argued that the IRS notice did not perfect a lien against the property of the individual partner in question because the notice was not indexed under the partner's name. The bankruptcy court agreed. The court found that a notice against a partnership is not sufficient to perfect a lien against the property of an individual partner, unless the partnership name is so similar to the name of an individual partner that a reasonable search would disclose the notice. Because the individual partner's name was not similar to the partnership name, the court concluded that the notice against the partnership did not perfect the lien against the property of the individual partner.

In the instant case, the notice of federal tax lien was indexed under Ken's Cleaners, Inc. Even if Ken's Cleaners, Inc. were a viable entity, its name is clearly distinguishable from the name Tong Hall. Hence, a reasonable search of the records for tax liens against the property of Hall would not have uncovered a tax lien indexed under the name of Ken's Cleaners, Inc. The Court thus concludes the notice of tax lien filed under the name of Ken's Cleaners, Inc. was not sufficient to provide constructive notice to a judgment creditor of a lien against Tong Hall, who traded as Ken's Cleaners.

The Court notes that the United States argues in its brief that the notice is valid because it was filed under the name used on the tax returns. Relying upon U.S. v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871 (9th Cir. 1987), the United States argues that the IRS, even though it knew that Tong Hall was operating Ken's Cleaners as a sole proprietorship instead of a corporation, does not have a duty to refile a notice of tax lien under Tong Hall. The Court, however, concludes that Polk is factually distinguishable.

In Polk, the IRS filed notice of tax lien under "Roy Bruce Polk" the legal name of the taxpayer. Thereafter, the taxpayer executed a mortgage to a mortgagee under his middle name "Bruce Polk". The mortgagee, in making his title search, looked only for the name of "Bruce Polk" and thus did not discover the IRS lien under "Roy Bruce Polk". The court rejected the creditor's argument that the IRS had a duty to investigate what property was owned by the taxpayer, record the name under which it was acquired and then file a separate notice of tax lien for each name. The court found that the IRS filing under the legal name of the taxpayer was sufficient to validate the lien against all property of the taxpayer, even though property was known by the IRS to have been acquired under another name.

Unlike Polk, the notice in this case was not filed under the correct legal name of the taxpayer. It was filed under the name of an entity that does not exist. Moreover, the IRS had actual knowledge that Hall's cleaning business was run as a sole proprietorship and filed subsequent tax lien notices under the name of Tong Hall. Under the circumstances of this case, the Court concludes that in the IRS had a duty to refile the notice under the name of Tong Hall. The Court therefore concludes that the claim of the IRS is subject to Renner's judgment lien.

Therefore, based upon the foregoing, the Court hereby GRANTS Plaintiff's Motion for Summary Judgment filed on May 10, 1993 and hereby DENIES United States of America 's Motion for Summary Judgment filed on April 27, 1993 . The Court hereby DENIES Plaintiff's Application for Order for Garnishee to Pay Money into Court filed in state court on December 28, 1992 . Instead, Garnishee is ORDERED to pay any money due and owing to Defendant Tong Hall to Plaintiff Ok Sun Renner.

 

 

[94-1 USTC ¶50,089] In the Matter of Hugues J. de la Vergne II, Debtor. Wayne C. Ducote, Trustee, Plaintiff v. United States of America, Department of the Treasury, Internal Revenue Service, Defendant

U.S. Bankruptcy Court, East. Dist. La. , 88-03347, 3/16/93 , 156 BR 773

[Code Sec. 6323 ]

Validity of lien: Bankruptcy: Wrong name.--

A federal tax lien filed against a debtor in bankruptcy was invalid and therefore avoidable by the trustee. A reasonable search of the public index for recording federal tax liens did not reveal the existence of the lien because misspelling in the name under which the lien was recorded rendered it inadequate to call attention to the government's claim. In addition to the misspelling, the term "Payroll Account" was added after the debtor's name. Since this error was due to erroneous preparation by the IRS, the lien was not perfected or enforceable at the time of the commencement of the case and, consequently, was avoidable.

Douglas S. Draper, Friend, Wilson, Draper, Hubbard & Bowling, 909 Poydras St., New Orleans , La. 70112 , Margaret Shook, 1335 First Nbc Bldg., New Orleans , La. 70112 , for debtor. Emile L. Turner, Jr., 424 Gravier St. , New Orleans , La. 70130 , for trustee.

MEMORANDUM OPINION

BROWN, Bankruptcy Judge:

This matter comes before the Court upon the complaint to avoid lien, for determination of secured status, and for declaratory judgment filed by the trustee, Wayne C. Ducote ("Trustee"). The Trustee alleges a federal tax lien filed against the debtor on May 13, 1988 should be: (a) avoided due to lack of due and proper notice to the taxpayer; (b) avoided as a preferential transfer; (c) deemed inferior to the judicial mortgage of Louis V. de la Vergne; and (d) deemed a priority, unsecured claim for the amount of the federal tax lien plus interest as of the date of the bankruptcy filing only. The United States denies the allegations of the complaint, and contends it is entitled to secured status for the entire federal tax plus interest owed. A trial on the merits was held on November 6, 1992 . Considering the evidence at trial, the arguments and briefs of counsel, the pleadings, and the applicable law, judgment will be entered in favor of the plaintiff and against the defendants. ¹

FINDINGS OF FACT

The debtor, Hugues J. de la Vergne, II ("de la Vergne") failed to pay federal employment withholding taxes (Form 941) for all four quarters of 1986. As of November 6, 1992, the debtor's unpaid balance for the Form 941 taxes owed for 1986, is $93,682.29, including taxes, penalties, and interest.

The United States through the Internal Revenue Service filed a Notice of Federal Tax Lien evidencing its lien for these four quarters on May 13, 1988 , with the Custodian of Notarial Records for the Parish of Orleans (the "Federal Tax Lien" or the "Federal Tax Lien of May 13, 1988 "). (Tr. Ex. 1). The Federal Tax Lien was recorded by the Recorder of Mortgages for the Parish of Orleans on May 16, 1988, and incorrectly identified the debtor as: "Hughes J. de la Verone II Payroll Account", rather than "Hugues J. de la Vergne". The amount of the lien was $49,528.44. (Tr. Ex. 1). ²

On August 12, 1988 , the debtor filed his petition for relief under Chapter 11. From that point until Wayne Ducote was appointed as trustee by the Court on December 12, 1990 , de la Vergne operated as a debtor-in-possession.

The United States filed two Notices of Federal Tax Lien on October 3, 1988 , for the Form 941 tax liabilities owed for 1987 and the first quarter of 1988, as well as the Form 940 liability owed for 1987. (D. Ex. 43-A, 43-B). Because these notices were filed while the automatic stay was in effect, the United States subsequently filed a Notice of Erroneously Filed Notices of Federal Tax Liens acknowledging this error and the ineffectiveness of the filing while the stay was in place. (D. Ex. 43-C).

On October 25, 1988 , the United States filed a proof of claim, dated October 18, 1988 , that reflects its secured claim for the Form 941 taxes for 1986, as well as its unsecured claim for tax liabilities for 1987 and 1988. (D.Ex. 50). The United States filed an amended and superseding proof of claim dated April 26, 1989 , on May 2, 1989 , which made certain deletions to the unsecured tax liabilities for 1988. (D.Ex. 50).

By Order and Memorandum Opinion entered on February 20, 1992 , this Court approved a Compromise and Settlement Agreement in this case. (D. Ex. 26). The agreement involved numerous compromises and exchanges principally by and among the Trustee, Louis de la Vergne, and the Hibernia National Bank. By virtue of the agreement, the secured claim of Louis de la Vergne was compromised. (D. Ex. 18). Under the terms of the compromise, several sales of movable and immovable property of the estate have been consummated. The United States has objected to the sale of properties located at 3 Garden Lane and the Georgian Apartments. Pursuant to Court Orders, the Trustee has escrowed a portion of the proceeds of the sales pending determination of the validity, rank, priority, and extent of all encumbrances, including the Federal Tax Lien of May 13, 1988 . The tax claims reflected on the proof of claim filed by the United States are for taxes excepted from discharge by virtue of 11 U.S.C. §§523(a)(1)(A) and 507(a)(7)(C).

The Trustee seeks to avoid the Federal Tax Lien, and contends that the United States should be recognized as a priority, unsecured claim, and any penalties subordinated to a general unsecured claim. The Trustee argues the Federal Tax Lien is avoidable under Sections 544 , 548, and 551 of the Bankruptcy Code. The United States asserts it is a secured creditor for the debtor's liability for Form 941 taxes for 1986.

CONCLUSIONS OF LAW

A. VOIDABILITY UNDER SECTIONS 544 and 545

Section 544 provides a bankruptcy trustee with "strong arm" powers to avoid any transfer of property of the debtor, or obligation incurred by the debtor, that would be voidable by a bona fide purchaser of the property. See In re Sandy Ridge Oil Co., Inc., 807 F.2d 1332, 1334 (7th Cir. 1986).

Section 545 provides a trustee with powers to avoid certain statutory liens. A statutory lien is defined by 11 U.S.C. §101(53) as "[a] lien arising solely by force of a statute on specified circumstances or conditions, . . .". Federal tax liens are statutory liens within the meaning of Section 545 . 11 U.S.C. §101(53) ; In re Carolina Resort Motels, Inc., 51 B.R. 447 (Bankr. D. S.C. 1985); In re Barry [83-2 USTC ¶9514 ], 31 B.R. 683 (Bankr. S.D. Ohio . 1983); 4 Collier's on Bankruptcy at 545-21--545-24 (15th ed. 1992). Consequently, the provisions of Section 545 , rather than the provisions of Section 544 , are directly applicable to this case.

Section 545(2) provides:

The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien--

(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists.