O'Hagan v. U.S.

• Decision Date: 12 June 1996
• Docket Number: No. 95-1185,95-1185
• Citation: 86 F.3d 776
• Parties: -2467, 96-1 USTC P 50,311 Ann H. O'HAGAN, Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 776

86 F.3d 776

77 A.F.T.R.2d 96-2467, 96-1 USTC P 50,311

Ann H. O'HAGAN, Appellee, v. UNITED STATES of America, Appellant.

No. 95-1185.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 13, 1995.

Decided June 12, 1996.

Thomas Linguanti, Washington, DC, argued (Gary R. Allen, William S. Estabrook and Paula K. Speck, on the brief), for appellant.

Richard Snyder, Minneapolis, MN, argued (Steven Z. Kaplan, on the brief), for appellee.

Before BEAM, HEANEY, and MORRIS SHEPPARD ARNOLD, Circuit Judges.

BEAM, Circuit Judge.

Ann O'Hagan (Mrs. O'Hagan) filed this action pursuant to section 7426 of the Internal Revenue Code (IRC) to enjoin the Internal Revenue Service (IRS or government) from selling her husband's (Mr. O'Hagan) interest in real property which she owned with him as a joint tenant. After the IRS administratively levied upon Mr. O'Hagan's property interest in an effort to collect his delinquent taxes, the district court enjoined the IRS from selling Mr. O'Hagan's interest. The IRS appeals, claiming that the district court lacks jurisdiction to issue the preliminary injunction. We affirm in part and reverse in part.

I. BACKGROUND

The facts in this case are not in dispute. The O'Hagans have been married since 1988. They own real property, which is their principal place of residence, in Sunfish Lake, Minnesota (the homestead property). The O'Hagans have owned the homestead property at all times during their marriage as joint tenants with a right of survivorship. In 1988, the O'Hagans obtained a home equity loan in the amount of $400,000. Mr. and Mrs. O'Hagan signed the note, obligating each of them to repay the $400,000. The bank received a mortgage encumbering by lien each O'Hagan's interest in the homestead property.

In the early 1990s, the government imposed an assessment against Mr. O'Hagan for unpaid federal income tax liabilities incurred in 1986, 1987, 1989, and 1991. Although Mr. O'Hagan owes the government $747,761.69 in unpaid taxes, Mrs. O'Hagan has not been assessed any income tax liability and is not obligated to pay any part of her husband's taxes.

On June 8, 1994, the government seized the homestead property after having levied upon Mr. O'Hagan's interest in that property pursuant to section 6331 of the IRC. The government then advertised the sale of Mr. O'Hagan's interest in the real estate, which sale was to occur on November 21, 1994. Mrs. O'Hagan filed a motion for a temporary restraining order and preliminary injunction to enjoin the sale of Mr. O'Hagan's interest in the homestead property. The government challenged the district court's jurisdiction based on the Anti-Injunction Act, 26 U.S.C. § 7421. The district court determined that it had jurisdiction, granted Mrs. O'Hagan's motion for a preliminary injunction, and enjoined the forced sale of Mr. O'Hagan's interest. The government now brings this interlocutory appeal pursuant to 28 U.S.C. § 1292(a).

II. DISCUSSION

The question before us is whether the district court has subject matter jurisdiction to enjoin the government from selling Mr. O'Hagan's interest in the homestead property. The government contends that the district court lacks subject matter jurisdiction because the Anti-Injunction Act precludes such an injunction and that none of the exceptions to that Act apply in the present case. After reviewing the litany of applicable state and federal laws, we conclude that the district court has jurisdiction to enjoin the sale of Mr. O'Hagan's right to use and occupy the homestead property, but cannot enjoin the government from conveying Mr. O'Hagan's survivorship interest.

The Anti-Injunction Act (the Act) prohibits federal courts from entertaining any action filed to restrain the assessment or collection of taxes. 26 U.S.C. § 7421(a). The primary purpose of the Act is to facilitate the expeditious collection of taxes by the government. See Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1, 7, 82 S.Ct. 1125, 1129, 8 L.Ed.2d 292 (1962). The Act, however, contains several exceptions. 26 U.S.C. § 7421(a). The district court recognized both a statutory exception, 26 U.S.C. § 7426(b)(1), and a judicially crafted exception, Enochs, 370 U.S. at 6-7, 82 S.Ct. at 1128-29, ¹ to the Anti-Injunction Act. Although the district court relied on the judicially created exception set out in Enochs to support its preliminary injunction, to the extent we affirm its decision we rely, instead, on the statutory exception set out in section 7426. ²

The statutory exception allows a person, other than the delinquent taxpayer, who claims an interest in or lien on the property levied upon by the government to bring a wrongful levy action. 26 U.S.C. § 7426(a). This action may be brought without regard to whether the property has been surrendered to or sold by the government. Id. This statutory exception, which expressly gives the district court jurisdiction to grant injunctive relief, provides:

If a levy or sale would irreparably injure rights in property which the court determines to be superior to rights of the United States in such property, the court may grant an injunction to prohibit the enforcement of such levy or to prohibit such sale.

26 U.S.C. § 7426(b)(1). To satisfy this statutory exception, therefore, Mrs. O'Hagan must demonstrate that: (1) she has a right in the levied property superior to that of the government; and (2) her right would be irreparably injured by the forced sale of the levied property.

A. Mr. O'Hagan's Rights in the Homestead Property

In order to analyze whether Mrs. O'Hagan has a right superior to that of the government in the levied property, we must first determine Mr. O'Hagan's interest in the homestead property. It is well established that in a levy proceeding, the IRS " 'steps into the taxpayer's shoes.' " United States v. Rodgers, 461 U.S. 677, 691 n. 16, 103 S.Ct. 2132, 2141 n. 16, 76 L.Ed.2d 236 (1983) (quoting 4 Boris I. Bittker, Federal Taxation of Income, Estates and Gifts p 111.5.4. at 111-102 (1981)). The administrative levy statute only authorizes the IRS to "levy upon all property and rights to property" belonging to the delinquent taxpayer, except certain exempt property which is not at issue in the present case. 26 U.S.C. § 6331. In levying upon Mr. O'Hagan's interest in the homestead property, however, the government could not acquire more property rights than those already held by Mr. O'Hagan.

We look to state law to define Mr. O'Hagan's interest in the homestead property. United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (stating that the IRC " 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law' ") (quoting United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958)). In the present case, it is undisputed that Mr. O'Hagan owns the homestead property in joint tenancy with Mrs. O'Hagan. Accordingly, we look to the applicable state law--in this case Minnesota, where the real property is located--to define the property rights upon which the government has levied.

Under Minnesota law, Mr. O'Hagan has an undivided interest, as a joint tenant with Mrs. O'Hagan, in the property. As such, Mr. O'Hagan has a right of survivorship to Mrs. O'Hagan's interest in the joint tenancy property, as well as a present right to use and occupy the real estate. See generally Hendrickson v. Minneapolis Fed. Sav & Loan Ass'n, 281 Minn. 462, 161 N.W.2d 688 (1968). Moreover, a joint tenant generally has the right to unilaterally sever the joint tenancy, so long as the joint tenant satisfies at least one of the statutory methods for doing so. ³ See Wendt v. Hane, 401 N.W.2d 457, 459 (Minn.Ct.App.1987). Once the joint tenancy has been severed it converts into a tenancy in common and extinguishes the other joint tenant's right of survivorship. ⁴ See Hendrickson, 161 N.W.2d at 690-91.

Mr. O'Hagan, however, may not convey his interest in the homestead property without Mrs. O'Hagan's consent. ⁵ Although joint tenants are generally free to convey their interest in the joint tenancy, Minn.Stat. § 500.19, subd. 4 (1996 Supp.), spouses who own homestead property--as joint tenants or as tenants in common--are prohibited from conveying their interest, except to the other spouse, without the other spouse's consent, id.; Minn.Stat. § 507.02. Furthermore, Mr. O'Hagan would normally have the right to unilaterally sever the joint tenancy and devise his remainder interest subject to a life estate in Mrs. O'Hagan, see Minn.Stat. § 525.145 (1996 Supp.); but as discussed below, Mr. O'Hagan does not have the right to unilaterally sever the joint tenancy in this particular case. Therefore, Mr. O'Hagan and Mrs. O'Hagan, in effect, each have a life estate with a vested remainder interest.

In addition to imposing limitations upon the transfer of homestead property, Minnesota law does not provide for an absolute right to unilaterally sever a joint tenancy. The Supreme Court of Minnesota has expressly recognized that a joint tenant may be prevented from unilaterally severing a joint tenancy when the other joint tenant has detrimentally relied on its existence. Hendrickson, 161 N.W.2d at 692. As explained in that case:

If the survivor had taken some irrevocable action in reliance upon the creation or existence of the joint tenancy, or if some consideration was given or received when the joint tenancy was created, it would seem reasonable to insist that unilateral action would not be effective to deprive the passive joint tenant of the rights so created.

Id. Although sparse, the record in the present case, along with common sense and Minnesota law, support our conclusion that Mrs. O'Hagan relied upon the existence of a joint tenancy when she obligated herself to repay the entire amount of the mortgage note. The record demonstrates that Mrs. O'Hagan, through her attorney,...