Craft v. U.S. through C.I.R., 96-1038.

• Decision Date: 01 April 1998
• Docket Number: No. 96-1039.,No. 96-1038.,96-1038.,96-1039.
• Citation: 140 F.3d 638
• Parties: Sandra L. CRAFT, Plaintiff-Appellant/Cross-Appellee, v. The UNITED STATES of America, acting Through the COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

140 F.3d 638

Sandra L. CRAFT, Plaintiff-Appellant/Cross-Appellee, v. The UNITED STATES of America, acting Through the COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee/Cross-Appellant.

No. 96-1038.

No. 96-1039.

United States Court of Appeals, Sixth Circuit.

Argued September 16, 1997.

Decided April 1, 1998.

Jeffrey Alan Moyer (argued and briefed), Donovan, Love & Twinney, Grand Rapids, MI, for Plaintiff-Appellant/Cross-Appellee.

Gary R. Allen, Acting Chief, David English Carmack (argued and briefed), Sara S. Holderness (briefed), Marion E.M. Erickson, U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, for Defendant-Appellee/Cross-Appellant.

Before: RYAN, SUHRHEINRICH, and COLE, Circuit Judges.

COLE, J., delivered the opinion of the court, in which SUHRHEINRICH, J., joined. RYAN, J. (pp. 645-649), delivered a separate concurring opinion.

OPINION

COLE, Circuit Judge.

Sandra Craft appeals the district court's order granting summary judgment in favor of the United States, in which the district court found that a federal tax lien filed against the property of Sandra's husband for his individual unpaid tax liabilities attached to property held by Sandra and her husband, first as tenants by the entirety and then jointly conveyed to Sandra. The United States, in turn, cross-appeals the district court's determinations of when the lien attached and the value of Sandra's husband's interest in the property. For the following reasons, we REVERSE the district court's grant of summary judgment in favor of the United States and REMAND for further proceedings in accordance with this opinion.

I.

Sandra Craft and her husband, Don, purchased real property located at 2656 Berwyck Road in Grand Rapids, Michigan (hereinafter the "Berwyck Property") as tenants by the entirety on May 26, 1972 for $48,000, encumbered by a $37,000 mortgage. Don failed to file income tax returns for the taxable years 1979 through 1986. The Internal Revenue Service accordingly prepared substitute income tax returns for these years as permitted by the provisions of 26 U.S.C. § 6020(b) and assessed $482,446.73 in unpaid tax liabilities against him. The IRS advised Don of these liabilities in 1988; Don nonetheless failed to pay these assessments. The IRS then filed a notice of federal tax lien on March 30, 1989 against all of Don's property or rights in property with the Register of Deeds in Kent County, Michigan.

Don and Sandra thereafter executed a quitclaim deed on the Berwyck Property, transferring the property to Sandra in exchange for one dollar on August 28, 1989. On January 30, 1992, Don filed a petition for relief under Chapter 7 of the Bankruptcy Code. The bankruptcy court entered a discharge order on June 1, 1992 and closed the case on June 11, 1992.

Sometime later, Sandra entered into a contract to sell the property, but a title search revealed the IRS's lien and prevented the sale. Upon Sandra's request, the IRS refused to release the lien. Don then filed a motion to reopen the bankruptcy case on August 14, 1992, and also filed an adversary complaint against the IRS that sought to determine the dischargeability of the federal tax lien. Although the bankruptcy court reopened the case, it determined on January 27, 1993 that it did not have jurisdiction to determine the validity of the government's lien on the Berwyck Property because the property never had become a part of Don's bankruptcy estate. The bankruptcy court thus closed the case for a second time.

The IRS subsequently agreed to release its lien on the property to enable Sandra to sell it. The IRS conditioned its release on the establishment of a non-interest-bearing escrow account containing fifty percent of the proceeds of the sale and subject to the same right, title, and interest that the federal tax lien had on the property. Sandra finally sold the property in June 1992 and received half the proceeds, amounting to $59,944.10.

On April 23, 1993, Sandra filed a complaint pursuant to 28 U.S.C. § 2410(a) in the United States District Court for the Western District of Michigan against the United States, seeking to quiet title to the proceeds in the escrow account. The government asserted in response that the federal tax lien attached to Don's interest in the property, even though Don and Sandra had held the property as tenants by the entirety, and that it was entitled to half the proceeds from the sale of the property. The government further asserted that Don's conveyance to his wife was fraudulent.

Sandra filed a motion for summary judgment on September 10, 1993, arguing that the completion of the bankruptcy proceedings estopped the government's ability to bring an action for fraudulent conveyance. On September 13, 1993, the government also filed a motion for summary judgment, contending that the federal tax lien had attached to Don's interest in the property.

Following a hearing on the parties' motions on July 21, 1994, the district court issued an opinion and order on September 12, 1994, denying Sandra's motion for summary judgment and granting the government's motion. The district court found that the federal tax lien attached to the property at the time Don and Sandra conveyed the property to Sandra, stating, in essence, that this conveyance effectively: (1) terminated the tenancy by the entirety; (2) after which, each spouse owned an equal one-half interest; and (3) was followed by the conveyance of the property to Sandra. The federal tax lien thus attached at the moment in time that Don possessed a separate one-half interest in the property.

On September 22, 1994, Sandra filed four motions: the first sought either to amend the judgment to include the conclusions of law supporting denial of her motion for judgment against the government's action for fraudulent conveyance, or, in the alternative, a new trial; the second sought to amend the judgment to include a determination of the value of Don's interest in the property on the date when Don and Sandra terminated the tenancy by the entirety; the third sought to refer the case to the bankruptcy court for it to make this determination; and, the fourth sought to stay execution of the judgment pending resolution of the other motions.

The district court entered another opinion and order on November 17, 1994, denying Sandra's first motion and stating that, having resolved the matter on other grounds, it did not need to decide whether a fraudulent conveyance had occurred. However, the court granted Sandra's second motion, concluding that further proceedings were necessary to determine the value of Don's interest at the time of the termination of his joint tenancy. Still, the court found that it, and not the bankruptcy court, was the proper forum to make this determination and thus denied Sandra's third motion. Finally, the court granted Sandra's fourth motion and stayed execution of the judgment.

Following a telephonic hearing on September 11, 1995, the district court issued an opinion on October 26, 1995, finding that the government held a valid lien on the interest Don held in the property on August 28, 1989 — the date of the termination of the entireties estate and the subsequent conveyance to Sandra. The parties stipulated that the property had a fair market value of $120,000 and an outstanding mortgage balance of $19,412.12 on August 28, 1989. The district court thus determined that Don's interest in the property at the time of the conveyance was $50,293.94 and entered a final judgment awarding the government this amount.

Sandra timely filed her appeal on December 22, 1995. The government timely filed its notice of cross-appeal on December 26, 1995.

II.

We review de novo a district court's grant of summary judgment. Harrow Prods., Inc. v. Liberty Mutual Ins. Co., 64 F.3d 1015 (6th Cir.1995); Copeland v. Machulis, 57 F.3d 476, 479 (6th Cir.1995). Summary judgment is appropriate if the record shows "that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). We assess the record in the light most favorable to the non-movant, drawing all reasonable inferences in its favor. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356-57, 89 L.Ed.2d 538 (1986).

III.

A.

The Internal Revenue Code provides for the creation of a federal tax lien on a taxpayer's property, stating that: "[i]f 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 rights to property, whether real or personal, belonging to such person." 26 U.S.C. § 6321. Under the succeeding section, the Code further provides that the lien generally arises when the assessment is made, and it continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. § 6322.

Federal tax law "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Thus, in order to determine whether property is subject to a federal tax lien, "`state law controls in determining the nature of the legal interest which the taxpayer had in the property.'" Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960) (quoting Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585 (1940)). "`[O]nce it has been determined that state law creates sufficient interest in the [taxpayer] to satisfy the requirements of [the statute], state law is inoperative,' and the tax consequences thenceforth are dictated by federal law." United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (quoting Bess, 357 U.S. at 56-57, 78 S.Ct. at 1057-58). Under federal tax law, the government's tax liens attach to every...