State ex rel. Dept. of Revenue v. Karras

• Decision Date: 27 April 1994
• Docket Number: Nos. 18306,18373,s. 18306
• Citation: 515 N.W.2d 248
• Parties: State of South Dakota, ex rel. DEPARTMENT OF REVENUE, Plaintiff and Appellant, v. Christos KARRAS, a/k/a Chris Karras and Chris D. Karras, Dion Karras, and Donald G. Karras, Defendants and Appellants, and Lincoln County, a Municipal subdivision of the State of South Dakota, Defendant.
• Court: South Dakota Supreme Court

Page 248

515 N.W.2d 248

State of South Dakota, ex rel. DEPARTMENT OF REVENUE, Plaintiff and Appellant, v. Christos KARRAS, a/k/a Chris Karras and Chris D. Karras, Dion Karras, and Donald G. Karras, Defendants and Appellants, and Lincoln County, a Municipal subdivision of the State of

South Dakota, Defendant.

Nos. 18306, 18373.

Supreme Court of South Dakota.

Argued Jan. 10, 1994.

Decided April 27, 1994.

Donald N. Srstka, Sp. Asst. Atty. Gen., Sioux Falls, for plaintiff and appellant.

Steven M. Johnson and Kevin L. Reiner of Johnson, Heidepriem, Miner & Marlow, Yankton, for defendants and appellants.

SABERS, Justice.

Trial court held that certain real estate was conveyed to wife of delinquent taxpayer free of sales tax lien. We reverse.

FACTS

In the late 1970s and early 1980s, Christos Karras (Karras) owned, and, with his wife and family, operated the Time-Out Steakhouse and Restaurant (Time-Out) in Sioux Falls, South Dakota. In February, 1983, the South Dakota Department of Revenue (Department) conducted an audit of the Time-Out. Karras was informed of the results of the audit June 24, 1986 when he received a jeopardy assessment from Department for sales taxes relating to 1980, 1981, and 1982 in the amount of $103,324. Department filed a tax lien on July 23, 1986.

Karras had entered into a contract for deed on August 31, 1979 with Harold and Frances Jacobson (Jacobson) to purchase approximately 76 acres of undeveloped farmland in Lincoln County. ¹ Jacobson agreed to convey a warranty deed to Karras upon payment of $160,000.00.

On December 27, 1979, Karras purchased on contract for deed an additional 17 acres of undeveloped farmland in Lincoln County from Jacobson. Jacobson agreed to convey a warranty deed to Karras upon payment of $37,500.00. On January 6, 1984, Karras paid Jacobson $16,170.00 and received a warranty deed to the 17 acre tract.

Karras deeded both the 71 acre tract and the 17 acre tract to his wife, Dion Karras (Dion), on July 5, 1985. The deed was recorded that day in Minnehaha County, but was not recorded in Lincoln County until July 28, 1986. Department filed a tax lien against the Lincoln County real estate in Lincoln County on July 23, 1986. Dion received a warranty deed to the 71 acres on November 14, 1986 and deeded both tracts to her son, Donald Karras (Donald) on April 10, 1987.

Department commenced an action on June 20, 1991, against Karras, Dion, and Donald to foreclose and to quiet title in the property. The trial court held that Department's fraudulent conveyance action with regard to the conveyance from Karras to Dion was barred by the four-year statute of limitations found in SDCL 54-8A-9 and that such statute of limitations was not tolled by the filing of the administrative appeal. The trial court further found that Dion had taken title to the 71 acre tract as a gift without notice of a tax lien and later paid good and valuable consideration for the transfer. The trial court also found, however, that Dion did not pay good and valuable consideration for the 17 acre tract. Department appeals. Karras cross-appeals as to the 17 acre tract.

1. Whether Dion qualifies as a purchaser for value without notice of Department's sales tax lien that had attached to the two tracts.

A sales tax lien attaches to the property of the taxpayer at the time the tax is due and delinquent and becomes perfected when Department records the lien with the register of deeds in the county where the taxpayer's property is located. SDCL 10-59-11. ² If the lien is not recorded, a subsequent mortgagee, purchaser or judgment creditor that has given value and does not have actual notice of the lien has priority over the sales tax lien. Id. (emphasis added). ³

The trial court concluded that while the July 5 deed to Dion was a gift, the transfer of the 71 acres was for value and without notice. The trial court further found that, although Karras and Dion had knowledge of the sales tax audit, knowledge of an audit does not constitute knowledge and notice of a tax lien and, since notice was not given by Department nor was a tax lien filed until after the transfer on July 5, 1985, neither Karras nor Dion had notice of Department's sales tax lien which had attached to the property prior to the transfer. ⁴ Therefore, the trial court held that because Department did not file until after Dion's purchase, Department's lien was not preserved against Dion as a subsequent purchaser for value and without notice.

Notice

SDCL 10-59-11 protects subsequent purchasers for value and without actual notice of the lien. However, as this court explained in Betts v. Letcher, 1 S.D. 182, 46 N.W. 193 (1890):

The protection which the registry law gives to those taking titles or security upon land upon the faith of the records should not be destroyed or lost except upon clear evidence showing a want of good faith in the party claiming this protection, and a clear equity in him who seeks to establish a right in hostility to such person. Slight circumstances, or mere conjectures, should not suffice to overthrow the title of one whose title is first on record. Our statute, however, says an unrecorded instrument is valid as between the parties thereto, and those who have notice thereof. ... Our Civil Code makes void a conveyance not recorded only as against a subsequent purchaser of the same property, or any part thereof, in good faith, and for a valuable consideration. Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, and who omits to make such inquiry with reasonable diligence, is deemed to have constructive notice of the fact itself. The validity of the instrument as between the plaintiff and defendant [ ], therefore, depends upon whether she had notice of its existence at the time of her alleged purchase, and whether she was a purchaser in good faith, and for a valuable consideration. Notice of a prior unrecorded conveyance, or of any title, legal or equitable, to the premises, or knowledge and notice of any facts which would put a prudent person upon inquiry, impeaches the good faith of the subsequent purchaser.

Id. at 196 (citations omitted).

According to testimony presented at trial, Dion only recorded two of every three guest checks on the cash register at the Time-Out. See State v. Karras, 438 N.W.2d 213, 215 (S.D.1989) (noting that agents of the Department observed that many meal transactions were not rung up on the cash register. Former employees indicated that their wages were paid partly by cash disbursements which were not reported for income tax purposes and tax and other items were not withheld). As a result, only approximately two-thirds of the Time-Out's actual receipts were recorded and Karras' sales tax went unremitted to that extent. Id. Unrecorded and unremitted sales tax becomes a lien upon the taxpayer's property at the time the tax was due and delinquent. SDCL 10-59-11.

At the time of Dion's alleged purchase from Karras, Dion, as the operator of the cash register, had knowledge and notice of the fact that only approximately two-thirds of the guest checks were being entered on the cash register reducing Karras' recording and remitting of sales tax. Knowledge and notice of these facts was sufficient to put a prudent person on notice or, at the very least, inquiry. Dion's good faith as a subsequent purchaser was impeached. Betts, 46 N.W. at 196. Accordingly, the benefits and protections of SDCL 10-59-11 are reserved for non-family members who are not intricately involved in that part of taxpayer's business accountable for the delinquencies.

Purchaser for Value

As noted above, the trial court concluded that while the July 5 deed to Dion was a gift, the transfer of the 71 acres was for value. ⁵ It is undisputed that Dion did not pay any consideration at the time of the conveyance. She allegedly verbally assumed and paid the outstanding debt of approximately $45,000.00 later. The final payment, however, of approximately $21,000.00 was not paid until September 1, 1986, almost two months after Department recorded its tax lien.

In United States v. Galvin, 199 F.Supp. 4 (E.D.N.Y.1961), taxpayer transferred property subject to three mortgages to her son who paid her either nothing or a merely nominal cash consideration. A year later, the son transferred the property to his wife for no consideration or nominal cash consideration. The IRS was auditing a prior return of the taxpayer prior to the first transfer, but did not serve the taxpayer with notice of a tax deficiency until after the transfer to the son.

The United States argued at trial that the transfers were subject to the IRS lien even though its lien was not filed until after the first transfer because the son was not a "purchaser." The son and his wife claimed that the transfers to them were based on valuable consideration in that they took the property subject to three existing real estate mortgages. The district court found the contention of the son and his wife without merit. According to the court:

Section 6323(a) [ ] defines the persons against whom a lien is not valid until filed as "any mortgagee, pledgee, purchaser, or judgment creditor." These defendants obviously were not mortgagees, pledgees, or judgment creditors. Nor were they "purchasers," as defined in the case of United States v. Scovil, 348 U.S. 218, at page 221, 75 S.Ct. 244, at page 247, 99 L.Ed. 271: "A purchaser within the meaning of Sec. 3672 [of the Internal Revenue Code of 1939 (now Section 6323 of the Internal Revenue Code of 1954) ] usually means one who acquires title for a valuable consideration in the manner of vendor and vendee." [ ] Concededly, Irving M. Galvin paid his mother either no or a merely nominal cash consideration, so that they were hardly in the position of vendor and vendee. That was equally true of his transfer of title to his wife on June 4, 1957, after the lien had been filed. ...