Claremont Terrace Homeowners' Assn. v. U.S.

• Citation: 194 Cal.Rptr. 216,146 Cal.App.3d 398
• Court: California Court of Appeals Court of Appeals
• Decision Date: 24 August 1983
• Parties: CLAREMONT TERRACE HOMEOWNERS' ASSN., Plaintiff and Respondent, v. UNITED STATES of America, Defendant and Appellant. AO 14246.

Page 216

194 Cal.Rptr. 216

146 Cal.App.3d 398

CLAREMONT TERRACE HOMEOWNERS' ASSN., Plaintiff and Respondent, v. UNITED STATES of America, Defendant and Appellant.

AO 14246.

Court of Appeal, First District, Division 1, California.

Aug. 24, 1983.

Gross & Gross, Benton F. Gross, Oakland, for plaintiff and respondent.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Robert T. Duffy, John A. Dudeck, Jr., Attys., Tax Div., Dept. of Justice, Washington, D.C., for defendant and appellant; Joseph P. Russoniello, U.S. Atty., Jeffrey Scott Niesen, Michael D. Howard, Asst. U.S. Attys., San Francisco, of counsel.

NEWSOM, Acting Presiding Justice.

Appeal has been taken by the United States of America from a judgment quieting title to a condominium unit in favor of respondent. The relevant facts of the case are undisputed, and we summarize them only as necessary to resolution of the legal issues presented on appeal.

The Claremont Terrace Condominiums, a large complex of condominium units located in Oakland, California, were built in 1973 and 1974 by Broadway Investors, a limited partnership in which James Dickson and his wife Myra Dickson were general partners. Respondent Claremont Terrace Homeowners' Association (hereafter referred to as "Association" or "respondent"), an unincorporated association of dues paying members, was formed soon after the construction of Claremont Terrace Condominiums complex.

On or about March 29, 1974, James and Myra Dickson obtained a loan in the amount of $18,400 from Golden West Savings and Loan Association, secured by a deed of trust in favor of the lender on Unit No. 203 in the Claremont Terrace Condominiums complex. (Unit No. 203 is the property which is the subject of this dispute; it will hereinafter be referred to as Unit No. 203 or "the property.") The Dicksons never lived on the property, and in fact on July 29, 1974, the Association decided to purchase Unit No. 203 from the Dicksons for occupation by a resident manager. Thereafter, the Association, through its member Roy Peters, negotiated with James Dickson's uncle, Mort Dickson, to purchase the property.

On December 1, 1974, the Association and the Dicksons executed a "Resident Lease and Option to Purchase" (hereinafter the "option agreement"), whereby the Association leased Unit No. 203 for $188.23 per month and was given an exclusive option to purchase the property (for 48 months) at a price of $19,026.58. The Association paid $100 in consideration for the option agreement, which was apparently misplaced by Mort Dickson and not recorded until December 22, 1975.

After execution of the option agreement, respondent acted as the owner of the property. Instead of rent, the Association made monthly payments in the amount of the first deed of trust, $142, payable to Broadway Investors, and then later directly to the bank. By and after December 1974, a resident manager occupied Unit No. 203. From March of 1975, respondent made all tax payments on the property.

On May 5, 1975, the Internal Revenue Service assessed a 100 percent penalty against James Dickson in the amount of $109,046.54 for unpaid federal employment taxes. (26 U.S.C., § 6672.) Appellant filed a tax lien against Dickson with the Alameda County Recorder's office in the amount of the assessed penalty on July 11, 1975.

On December 15, 1975, the Association orally exercised its option to purchase the property, and paid James Dickson $750 for the privilege. ¹ When the option was exercised, the Association did not have actual knowledge of the tax lien filed against James Dickson by appellant, but it knew that Dickson was having financial problems. And the Association did not request a title report on the property before it exercised the option.

James Dickson testified that he could not recall signing or delivering to respondent a deed to the property, although his customary business practice was to do so after receiving payment. A deed conveying the property from the Dicksons to respondent was never recorded, nor has one been found. But after receiving payment in December of 1975, the Dicksons acted as if the Association owned the property.

On June 10, 1976, the Dicksons filed for bankruptcy in the federal district court in Oakland, listing liabilities in excess of $4,000,000 and virtually no assets.

The Association first became aware of appellant's tax lien in September of 1977, when a title search was made. The value of the property at the time of trial was approximately $47,500; thus the Association will lose the taxes and mortgage payments made to date, as well as any equity in the property, in the event appellant's tax lien is deemed a senior interest in the property.

Appellant claims that the trial court erred by giving respondent's interest in the property priority over the federal tax lien contending that the lien was assessed and recorded before respondent exercised its option to purchase the property on December 15, 1975, and that such priority is dispositive of the controversy.

Section 6321 of the Internal Revenue Code (26 U.S.C. § 6321) ² grants the United States a lien upon "all property and rights to property" of a taxpayer who neglects or refuses to pay taxes. (Crocker National Bank v. Trical Manufacturing Co. (1975) 523 F.2d 1037, 1038.) A tax lien is effective from the date of its assessment (26 U.S.C., § 6322; ³ United States v. Jenison (1980) 484 F.Supp. 747, 754), and the federal tax lien at issue here "came into existence at the time demand was made upon the taxpayer," on May 5, 1975. (United States v. Ed Lusk Construction Company, Inc. (1974) 504 F.2d 328, 331.)

Since the lien granted by section 6321 arises without notice, in order to protect third party claimants, section 6323 was enacted. (United States v. Truss Tite, Inc. (1968) 285 F.Supp. 88, 90.) That section requires the government to record the lien before it becomes valid against purchasers, holders of security interests, mechanics lienors, or judgment lien creditors. (Id., at pp. 90-91.) ⁴ Section 6323, subdivision (a), states: "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary."

The priority of a federal tax lien granted by section 6321 is governed by the common law rule of "first in time is the first in right." (United States v. Equitable Life (1966) 384 U.S. 323, 326, 86 S.Ct. 1561, 1563, 16 L.Ed.2d 593; United States v. Pioneer American Ins. Co. (1962) 374 U.S. 84, 87, 83 S.Ct. 1651, 1654, 10 L.Ed.2d 770.) But a tax lien only attaches to the property of the taxpayer. (Slodov v. United States (1978) 436 U.S. 238, 257, 98 S.Ct. 1778, 1790, 56 L.Ed.2d 251; Crocker National Bank v. Trical Manufacturing Co., supra, 523 F.2d 1037, 1038.) The Internal Revenue Service has no authority to levy on property in which the taxpayer has no interest. (Slodov, supra, at p. 257, 98 S.Ct. at p. 1790.)

Here, appellant duly recorded its tax lien on July 11, 1975, after the Association entered into its option contract with taxpayer Dickson but before the option was exercised on December 15, 1975. Since the Association's option to purchase was never recorded, appellant's lien must be given priority as first in time unless the grant of the option to purchase ipso facto divested Dickson of his interest in the property, so that, in effect, at the time the Internal Revenue Service lien arose, the taxpayer had no property interest to which it could attach. (Aguilino v. United States (1960) 363 U.S. 509, 512, 80 S.Ct. 1277, 1279, 4 L.Ed.2d 1365): "The threshold question in ... all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the lien could attach."

Concerning the property interest of the Association, we note section 6323, subdivision (a) which directs that a federal tax lien "shall not be valid as against any purchaser, ..." until notice of the lien has been filed. (Emphasis added.) As defined in subdivision (h)(6)(C) of section 6323, "purchaser" specifically includes one who "for adequate and full consideration" acquires an interest in "an option to purchase or lease property or any interest therein ...," a definition which seems clearly to embrace the Association. But while the term "purchaser" specifically includes one who acquires an "option to purchase," such as that granted to the Association, it is also the rule that a competing property interest cannot take priority over a federal tax lien as first in time unless it has become "choate"--i.e., has acquired sufficient substance to be perfected or valid. (United States v. State of Vermont (1964) 377 U.S. 351, 355, 84 S.Ct. 1267, 1269, 12 L.Ed.2d 370; Rice Inv. Co. v. United States (1980) 625 F.2d 565, 568; United States v. Colby Academy (1981) 524 F.Supp. 931, 934.) We must hence determine the precise time at which the Association's option to purchase became a recognizable property interest for purposes of establishing priorities under section 6323. (United States v. Pioneer America Ins. Co., supra, 374 U.S. 84, 87, 83 S.Ct. 1651, 1654, 10 L.Ed.2d 770; MDC Leasing v. New York Property Ins. Underwriting (1978) 450 F.Supp. 179, 181.)

It is settled that the nature and extent of a property interest competing with a federal tax lien for priority will be determined by reference to state law. (Aquilino v. United States, supra, 363 U.S. 509, 512-513, 80 S.Ct. 1277, 1279, 4 L.Ed.2d 1365; United States v. Hunt (1975) 513 F.2d 129, 133; Superior Business Assistance Corp. v. United States (1972) 461 F.2d 1036, 1038; United States v. Colby Academy, supra, 524 F.Supp. 931, 934.) The language of subdivision (h)(6) of section 6323 reinforces this rule by providing that a "purchaser" is one who holds a valid property interest "under local...