State of Minnesota v. U.S.

• Decision Date: 08 February 1999
• Docket Number: No. 98-1927,98-1927
• Citation: 184 F.3d 725
• Parties: (8th Cir. 1999) STATE OF MINNESOTA, DEPARTMENT OF REVENUE, APPELLEE, v. UNITED STATES OF AMERICA, APPELLANT. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 725

184 F.3d 725 (8th Cir. 1999)

STATE OF MINNESOTA, DEPARTMENT OF REVENUE, APPELLEE, v. UNITED STATES OF AMERICA, APPELLANT.

No. 98-1927

U.S. Court of Appeals, Eighth Circuit

Submitted: February 8, 1999

July 07, 1999

Appeal from the United States District Court for the District of Minnesota

Randolph L. Hutter, Dept. of Justice, Washington, D.C., argued (Bruce R. Ellison, Washington, D.C., on the brief), for Appellant.

Stephen F. Simon, Assistant Attorney General, St. Paul, MN, argued, for Appellee.

Before McMILLIAN, Lay and Murphy, Circuit Judges.

McMILLIAN, Circuit Judge.

The United States appeals from a final order entered in the District Court for the District of Minnesota granting summary judgment in favor of the State of Minnesota and denying summary judgment to the United States, holding that the state tax liens were choate, as of the time of filing of the state tax returns and not when processed. For reversal, the United States argues that the state tax liens were not established at the time the state tax returns were filed because, under state law, the state must take administrative action to acknowledge taxpayer liability before its liens can be perfected, and thus "choate," under federal law for purposes of determining relative priority. For the reasons discussed below, we reverse the judgment of the district court and remand the case to the district court with directions to enter summary judgment in favor of the United States.

JURISDICTION

The district court had subject matter jurisdiction over this wrongful levy suit brought pursuant to 26 U.S.C. § 7426 under 28 U.S.C. § 1346(e). The United States filed a timely notice of appeal. See 28 U.S.C. § 2107(b) (notice of appeal in a civil case must be filed within 60 days of judgment when the United States is a party); Fed. R. App. P. 4(a)(1)(B). This court has jurisdiction over this appeal under 28 U.S.C. § 1291.¹

BACKGROUND

The relevant facts were stipulated. On June 2, 1992, the taxpayer, Prime Factors Communications, Inc., filed federal and state employment tax returns for several quarters, including all four quarters of 1991 and the first quarter of 1992, the periods at issue in this appeal. The taxpayer did not pay the taxes that it reported as due on its federal and state returns. The IRS assessed the unpaid federal taxes for the quarters at issue on August 3 and August 10, 1992. By law, federal tax liens upon the taxpayer's property for those liabilities arose on that date. See 26 U.S.C. §§ 6321, 6322. The IRS filed a notice of federal tax lien on January 14, 1993, reflecting a total federal tax liability due from the taxpayer of $248,658.33.

The state processed the taxpayer's state employment tax returns for the period at issue by entering the taxpayer's liability into its computer records, on August 20, 1992, after the date the IRS assessed the taxpayer's federal tax liabilities at issue. The taxpayer's state tax liability for the period at issue totaled $14,378.32.

On June 21, 1996, Charles and Lorilee Leininger purchased certain property belonging to the taxpayer. Prior to the sale, the IRS served on the closing agent for the sale a notice of levy with respect to the taxpayer's unpaid federal employment taxes, including the taxes due for the quarters at issue. Pursuant to the levy, the IRS received $14,579.22 of the sale proceeds.²

The state filed its complaint in this action on March 3, 1997, and an amended complaint on September 23, 1997. The state alleged that the IRS had wrongfully levied upon $14,378.32 of the sales proceeds, because the state's tax liens were entitled to priority over the federal tax liens. The United States and the state filed cross-motions for summary judgment. The state contended that, under Minn. Stat. § 270.69(1), a lien for state taxes arises on the date of the assessment of the tax, and that under Minn. Stat. § 270.65, the date of the assessment is the later of the date the return is filed or the date on which the return is due. The state thus argued that its tax liens became choate, on June 2, 1992, the date the returns were filed, and were therefore entitled to priority over the federal lax liens which arose on August 3 and 10, 1992, the dates the federal taxes were assessed. In support of its argument, the state relied on Cannon Valley Woodwork, Inc. v. Malton Construction Co., 866 F. Supp. 1248 (D. Minn. 1994) (Cannon Valley), a case in which the district court held that Minnesota tax liens had priority over those of the United States.

The United States argued that the state's tax liens did not become choate, until the returns were actually processed by the state on August 20, 1992, a date after the federal tax liability had been assessed, and that the federal tax liens were thus entitled to priority over the state tax liens. The United States relied on In re Priest, 712 F.2d 1326, 1329 (9th Cir. 1983), modified, 725 F.2d 477 (1984), in which the Ninth Circuit, interpreting a California statute similar to Minn. Stat. §§ 270.65,.69(1), held that the "mere receipt" of a state tax return was insufficient "to establish a lien that is capable of taking priority over a federal lien."

Following arguments on the motions, the district court ruled from the bench and granted summary judgment in favor of the state and denied the motion of the United States. The district court found that the state's tax liens became choate upon the filing of the taxpayer's returns, adopting the rationale of Cannon Valley and rejecting the Ninth Circuit's reasoning in In re Priest. The district court ruled that the state's tax liens were "established" and "summarily enforceable" as of the date the taxpayer filed its returns and "not contingent on future events." Accordingly, the district court ruled that the state's tax liens were prior to those of the United States and that the state was entitled to recover. This appeal followed.

DISCUSSION

The district court's grant of summary judgment is reviewed de novo. See Bremen Bank & Trust Co. v. United States, 131 F.3d 1259, 1264 (8 th Cir. 1997) (Bremen Bank); see also McDermott v. Zions First Nat'l Bank, 945 F.2d 1475 1478 (10th Cir. 1991) (district court's finding that a federal tax lien has priority over a state tax lien is reviewed de novo), rev'd on other grounds sub nom. United States v. McDermott, 507 U.S. 447 (1993) (McDermott)). Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). This case was tried on the basis of stipulated facts and the sole issue is a question of law, that is, whether the state tax liens were sufficiently choate as a matter of federal law so as to be entitled to priority over the federal tax liens.

The lien provisions of the Internal Revenue Code are intended to insure prompt and certain enforcement of the tax laws. See United States v. National Bank of Commerce, 472 U.S. 713, 721 (1985); United States v. Rodgers, 461 U.S. 677, 683 (1983). When a person liable to pay a federal tax fails to do so after a demand for payment is made, the amount of the tax, together with interest, additions, penalties, and costs, becomes a lien in favor of the United States upon all real and personal property and all rights to property belonging to the delinquent taxpayer. See 26 U.S.C. § 6321; Bremen Bank, 131 F.3d at 1262-63. The lien arises automatically when the assessment is made and continues until the taxpayer's liability is either satisfied or becomes unenforceable due to the lapse of time. See 26 U.S.C. § 6322. An assessment is "a bookkeeping notation... made when the Secretary [of the Treasury] or his [or her] delegate establishes an account against the taxpayer on the tax rolls." Laing v. United States, 423 U.S. 161, 170 n. 13 (1976); see 26 U.S.C. § 6203.

State law determines the nature and the extent of a taxpayer's interest in "property." See Aquilino v. United States, 363 U.S. 509, 513 (1960); United States v. Bess, 357 U.S. 51, 55 (1958); Little v. United States, 704 F.2d 1100, 1105 (9th Cir. 1983). Federal law, however, governs the relative priority accorded to the competing liens asserted against the property of the delinquent taxpayer. See Aquilino v. United States, 363 U.S. at 513-14. "Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right. '" McDermott, 507 U.S. at 449 (citations omitted); see United States v. Equitable Life Assurance Soc'y, 384 U.S. 323, 327-30 (1966); United States v. City of New Britain, 347 U.S. 81, 87 (1954) (New Britain); cf. Bremen Bank, 131 F.3d at 1263 (discussing modification of common law rules by Federal Tax Lien Act of 1966). "Under federal law, the priority of a lien depends on the time the lien attached to the property in question and became choate." Cannon Valley, 866 F. Supp. at 1250, citing New Britain, 347 U.S. at 84. A state-created lien is "choate" for "first in time" purposes only when it has been "perfected" in the sense that there is nothing more to be done, i. e., when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." New Britain, 347 U.S. at 84; accord United States v. Vermont, 377 U.S. 351, 354-55 (1965); see also McDermott, 507 U.S. at 449. The test for choateness or perfection also requires that the creditor have the right to summarily enforce its lien. See United States v. Vermont, 377 U.S. at 359 (holding state's assessment choate where the "assessment is given the force of a judgment and if the amount assessed is not paid when due, administrative officials may seize the debtor's property to satisfy the...