Hoggarth v. Somsen, 920178
| Decision Date | 23 February 1993 |
| Docket Number | No. 920178,920178 |
| Citation | 496 N.W.2d 35 |
| Parties | Thomas HOGGARTH, Gerald Hoggarth, Kenneth Hoggarth, Duane Hoggarth, a partnership d/b/a Hoggarth Bros. and Scott Hoggarth, for himself, Plaintiffs and Appellants, v. Steven SOMSEN and Sherry Somsen, Defendants and Appellees. Civ. |
| Court | North Dakota Supreme Court |
David E. Nething (argued), Jamestown, for plaintiffs and appellants.
James A. Reisnour (argued) of Mackenzie, Jungroth, Mackenzie & Reisnour, Jamestown, for defendants and appellees.
Thomas, Gerald, Kenneth, and Duane Hoggarth, a partnership doing business as Hoggarth Brothers, and Scott Hoggarth, individually, appeal from a declaratory judgment determining that their interests in the SE 1/4 of Section 32, Township 144, Range 62, in Stutsman County were subordinate to a federal tax lien, and that Steven and Sharon Somsen acquired title to that land free of the interests of Hoggarth Brothers and Scott. We affirm in part, reverse in part, and remand for further proceedings.
On March 24, 1987, the Internal Revenue Service filed notice of a federal tax lien against Walter Johnson in Stutsman County for Johnson's personal income taxes for 1981 and 1982. See NDCC 35-29-01, 35-29-02, and 35-29-04. On September 19, 1990, the IRS filed a certificate of release for that tax lien. See NDCC 35-29-04(2) and (3). Meanwhile, on August 26, 1988, Johnson, the record title owner of the SE 1/4, leased that farmland to Scott, and Johnson assigned his right to the rental payments to Hoggarth Brothers in exchange for an option to purchase a different parcel of land from them. The written lease ran from September 1, 1988, through November 30, 1993, and required Scott's $5,145 annual rental payments to be made directly to Hoggarth Brothers on March 15 of each year. The lease and the assignment of rents were not recorded.
On September 19, 1988, the IRS assessed employer's quarterly federal taxes against Johnson for the periods ending September 30, 1987; December 31, 1987; March 31, 1988; and June 30, 1988. Pursuant to the September 19, 1988 assessment, the IRS filed notices of that tax lien against Johnson in Stutsman County on July 20, 1989, and on September 5, 1989. The IRS seized the SE 1/4 pursuant to the September 19, 1988 assessment and thereafter furnished Johnson with a notice of sale for that land. At the sale on July 10, 1990, no one bid the predetermined minimum price for that land, and it was declared sold to the United States for the minimum price. The IRS then issued a certificate of sale to the United States. Johnson failed to redeem the property, and on March 8, 1991, the IRS issued a deed to the United States. On the same day, the United States issued a quitclaim deed to Somsens.
Although Scott knew that a quitclaim deed had been issued to Somsens, he made his annual rental payment to Hoggarth Brothers on March 15, 1991. Somsens then served Scott with a notice to quit, claiming the lease had been terminated by the United States' deed to them and by Scott's failure to make the rental payments to them. Hoggarth Brothers and Scott sued Somsens, seeking a declaration of their rights under the lease and the assignment of rents. They alleged that Somsens were not entitled to Scott's annual rental payments and possession of the land until the expiration of the lease on November 30, 1993.
The parties submitted the action to the trial court on stipulated facts. The court determined that because Hoggarth Brothers and Scott had not recorded the lease and the assignment of rents, they were not "purchasers" under IRC 6323(a), and the IRS therefore had priority over the lease and the assignment of rents. The court determined that the IRS's deed to the United States discharged the interests of Hoggarth Brothers and Scott in the land. The court concluded that because the United States had received good title to the land, Somsens also received good title regardless of their knowledge of the lease and the assignment of rents. Hoggarth Brothers and Scott appealed.
On appeal, Hoggarth Brothers and Scott do not dispute that Somsens are entitled to ownership of the land. Rather, they assert that Somsens' ownership is subject to the lease and the assignment of rents. Somsens respond that their interest in the land has priority over the lease and the assignment of rents, because of the tax lien filed on March 24, 1987, or, alternatively, because of the tax assessment on September 19, 1988, and the notices of tax lien filed on July 20, 1989, and September 5, 1989. Before considering the parties' specific arguments, we sketch the statutes and principles affecting priorities between federal tax liens and competing interests in a taxpayer's property.
Under IRC 6321, "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to" the taxpayer. A federal tax lien attaches to a taxpayer's property "at the time the assessment is made" and "continue[s] until the liability for the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time." IRC 6322.
Because a federal tax lien is effective on the date of assessment regardless of whether it has been filed, it has been aptly described as a "secret lien." United States v. Security Trust & Savings Bank, 340 U.S. 47, 53, 71 S.Ct. 111, 114, 95 L.Ed. 53, 58 (1950) (Jackson, J., concurring). The secret nature of the federal tax lien prompted Congress to enact legislation to protect certain third parties whose interests in the taxpayer's property arise before a tax lien is filed. 1 IRC 6323(a) now provides that a federal tax lien on a taxpayer's property and rights to property is not "valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice ... has been filed" in the appropriate office.
Under those provisions, it is well established that state law governs the threshold determination of whether a taxpayer has "property" or "rights to property," and federal law governs the priority between a federal tax lien and competing interests in the taxpayer's state-created "property" or "rights to property." E.g., Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). Priorities under federal law are determined by the basic principle that first in time is first in right. Id. Within that framework, we consider the parties' specific arguments in this case.
Relying on United States v. Bank of Celina, 721 F.2d 163 (6th Cir.1983) and Peterson v. United States, 511 F.Supp. 250 (D. Utah 1981), Somsens argue that the notice of tax lien filed on March 24, 1987, gives their interest priority over the August 26, 1988 lease and assignment of rents. Hoggarth Brothers and Scott respond that the 1987 tax lien was released on September 19, 1990, and that Celina and Peterson did not involve the release of an earlier tax lien and are not controlling. They also argue that the IRS seized and sold the land pursuant to the September 19, 1988 assessment and the notices filed in 1989, rather than the notice filed in 1987.
In Celina, a corporate taxpayer failed to pay employer's quarterly federal taxes, and the IRS filed three separate notices of tax liens against the taxpayer. Between the filing of the first and the second notice, a bank advanced money to the taxpayer for payroll and filed a financing statement which said that the advances were secured by a security interest in accounts receivable. After the last notice was filed, the bank, fearing an imminent levy, exercised a setoff of the taxpayer's overdue loans against the taxpayer's bank accounts. In holding that the IRS was entitled to priority over the taxpayer's bank accounts, the court said that where several notices of a tax lien have been filed as unpaid taxes accumulate, the priority of each subsequent notice relates back to the filing of the first notice.
In Peterson, a vendee admitted that his interest in a taxpayer's property was inferior to a federal tax lien filed before he acquired that interest, but argued that his interest had priority over federal tax liens filed after he acquired that interest. In rejecting that argument, the court said that the first filing gave the subsequent vendee notice of the continuously accumulating amount of the tax liability secured by the lien and that the later filings had no legal effect on priority because of the first filing. The court said that the later filings during the life of the lien acquired no independent priority of their own.
In both Celina and Peterson, the IRS did not file a certificate of release of the first notice of federal tax lien. In this case, on March 19, 1990, the IRS filed a certificate of release of the 1987 lien. Subject to exceptions not relevant to this case, a certificate of release is conclusive that the lien is extinguished. IRC 6325(f)(1)(A). Additionally, in both Celina and Peterson all the notices related to the taxpayer's failure to pay employer's taxes. Here, the 1987 notice of tax lien was for Johnson's personal income taxes, and the later assessment and notices of tax liens were for employer's quarterly federal taxes. The IRS's "Record of Seizure and Sale of Real Estate" indicates that the seizure and sale of this land was for the September 19, 1988 assessment for employer's quarterly federal taxes and that notices of liens for that assessment were filed on July 20, 1989, and September 5, 1989. In seizing this land, the IRS relied upon the September 19, 1988 assessment and did not rely on the 1987 notice. Although, as a general proposition, the actual amount secured by a tax lien is not static and continues to accumulate until the...
To continue reading
Request your trial
-
In re Nerland Oil, Inc.
...tax liens against purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. See Hoggarth v. Somsen, 496 N.W.2d 35, 39 (N.D.1993) (federal priority statutes give IRS priority unless competing state interests are accorded "purchaser" status prior to IRS filin......