State of Wis. v. Bar Coat Blacktop, Inc.

• Decision Date: 09 April 1986
• Docket Number: No. 84-C-884-C.,84-C-884-C.
• Citation: 640 F. Supp. 407
• Parties: STATE OF WISCONSIN, (DEPARTMENT OF REVENUE) Plaintiff, v. BAR COAT BLACKTOP, INC., Defendant, and CITY OF SCHOFIELD, Garnishee, v. UNITED STATES of America and Real Estate Management, Inc., Intervenors.
• Court: U.S. District Court — Western District of Wisconsin

640 F. Supp. 407

STATE OF WISCONSIN, (DEPARTMENT OF REVENUE) Plaintiff, v. BAR COAT BLACKTOP, INC., Defendant, and CITY OF SCHOFIELD, Garnishee, v. UNITED STATES of America and Real Estate Management, Inc., Intervenors.

No. 84-C-884-C.

United States District Court, W.D. Wisconsin.

April 9, 1986.

COPYRIGHT MATERIAL OMITTED

James D. Harnett, Madison, Wis., for plaintiff.

Arthur L. Eberlein, Wausau, Wis., for Real Estate Mgt. Inc.

Beth A. Sabbath, Tax Division, U.S. Dept. of Justice, Washington, D.C., for U.S.

Raymond Thums, Schofield, Wis., for City of Schofield.

John Kelley, Wausau, Wis., for Bar Coat Blacktop.

ORDER

CRABB, Chief Judge.

In cross motions for summary judgment, the State of Wisconsin and the United States Internal Revenue Service ask the court to determine which of the parties has priority of interest in certain funds seized by the Wisconsin Department of Revenue in a state court garnishment proceeding.

A brief procedural history of the dispute is as follows: On September 13, 1983, the Wisconsin Department of Revenue filed a garnishment action in the Circuit Court for Marathon County, Wisconsin to collect on final state tax warrants entered against Bar Coat Blacktop, Inc., naming the City of Schofield, Wisconsin as garnishee. In July, 1984, after the State of Wisconsin had obtained judgment in the garnishment proceeding in the Marathon County court, Real Estate Management, Inc. and the United States Internal Revenue Service filed motions to intervene in the action as competing creditors. The Marathon County court granted the motions on October 11, 1984. The United States removed the action to this court on November 7, 1984.

Since the removal of the action, all of the parties with the exception of the United States and the State of Wisconsin have been dismissed pursuant to stipulation.

On April 23, 1985, the parties stipulated that the garnished funds held in the custody of the Marathon County court be transferred to the custody of the clerk of this court pending the resolution of this dispute. As of the date of this order, the funds have not been transferred to this court.

From the parties' stipulated proposed findings of fact, and for the sole purpose of deciding these motions, I find that there is no genuine dispute about the following material facts.

FACTS

Between October 1, 1981 and August 3, 1983, the Wisconsin Department of Revenue made six state tax assessments against Bar Coat Blacktop, Inc. After making each assessment, the department filed a delinquent tax warrant-judgment with the clerk of the Marathon County court with respect to that assessment.¹

Between June 14, 1981 and February 20, 1984, the Internal Revenue Service made five assessments against Bar Coat Blacktop, Inc. for federal taxes. Subsequent to each of the assessments, the Internal Revenue Service filed notices of a federal tax lien with the Wisconsin Secretary of State and with the Register of Deeds of Marathon County.²

On June 29, 1983, Bar Coat Blacktop, Inc. submitted a bid for a paving contract to the City of Schofield, Wisconsin. The City of Schofield accepted the bid on August 10, 1983.

On September 13, 1983, the State of Wisconsin filed a garnishment summons and complaint in the Circuit Court for Marathon County, naming Bar Coat as defendant and the City of Schofield as garnishee. In an order dated November 1, 1983 and entered November 4, 1983, the Marathon County court directed the City of Schofield to remit a sum of $24,490.94 to the Wisconsin Department of Revenue and discharged the City of Schofield from Bar Coat's demands for that sum.³

On June 7, 1984, the Internal Revenue Service served a notice of levy on the City of Schofield relating to the federal tax liabilities of Bar Coat.⁴

OPINION

In their cross motions for summary judgment, the parties assert differing views of the issues in this case and the factors controlling the priority of interest to the funds in question.

The State of Wisconsin contends that its filing of the state court garnishment action and the final judgment in that action established the state's right to the garnished funds and placed those funds beyond the reach of the subsequently served federal levy. The state argues that the general federal tax liens based on assessments made prior to the commencement of its garnishment action against Bar Coat either did not attach to the specific property subject to that action or are subordinate to the interests of the State of Wisconsin. Also, the state contends that the November 4, 1983 order of the Marathon County court divested Bar Coat of the funds garnished by the state, leaving no property for the federal government to reach in its June 7, 1984 notice of levy. The state further argues that funds held in custody of the state court following final judgment in a garnishment proceeding may not be reached by federal tax levy.

The state has two additional arguments that are equitable in nature: first, it maintains that but for the diligence of the Wisconsin Department of Revenue in initiating a garnishment proceeding to collect on delinquent state taxes, the City of Schofield would have paid its debt to Bar Coat and there would have been no action in which the federal government could have intervened; and second, it argues that the federal government's wrongful levy of the funds already garnished by the Wisconsin Department of Revenue violates public policy.

For its part, the federal government views the case as a matter of competing state and federal tax liens, and asserts that neither the commencement of the state garnishment proceedings nor the entry of final judgment therein is sufficient to establish priority to the funds at issue. The United States bases its claim to the funds at issue in this case not upon the notice of levy, which it maintains is merely an administrative device to seize property, but upon the perfected liens which created a right to that property, contending that the state could assert priority over the federal government only if the state had become a judgment lien creditor before the filing of the federal tax liens. It claims priority to the disputed funds on two interrelated grounds:

(1) the federal tax lien upon Bar Coat's property became choate on August 10, 1983, when the City of Schofield's acceptance of Bar Coat's bid brought into existence the property subject to the federal tax lien. The United States argues that the state and federal liens attached simultaneously upon the city's acceptance of the construction bid, and that in such a situation, the federal interest prevails;

(2) the Internal Revenue Service filed three notices of lien with the Wisconsin Secretary of State and the Marathon County Register of Deeds before the state had commenced its garnishment action and before that action had ripened into judgment.

Arguing that final judgment has yet to be rendered in this garnishment action, the United States also asserts priority to Bar Coat's unpaid employment taxes for the third quarter of 1983. The United States argues that the filing of notices of federal tax lien provided notice of the Internal Revenue Service's interest in all of Bar Coat's property. The United States denies that its notice of levy was wrongful and maintains that intervention in the state court garnishment proceeding was necessary to avoid a conflicting order concerning the disputed funds.

The nature of Bar Coat's interest in the garnished funds

The threshold question in this case is whether taxpayer Bar Coat had a property interest in the money owed to it by the City of Schofield at the time the federal liens arose upon the assessment of federal taxes. Only after it is ascertained that the taxpayer had an interest in the disputed property can the court proceed to consider which party has priority of interest in the property. United States v. Trigg, 465 F.2d 1264 (8th Cir.1972).

The extent to which a federal tax lien can reach a taxpayer's property depends on the nature of the taxpayer's legal interest in that property. That interest is determined by state law. Aquilino v. United States, 363 U.S. 509, 512-513, 80 S.Ct. 1277, 1279-1280, 4 L.Ed.2d 1365 (1960). The general federal tax lien created by 26 U.S.C. § 6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." Avco Delta Corporation of Canada Ltd. v. United States, 459 F.2d 436, 440 (7th Cir.1972) (quoting United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958)). "In other words, the rights of the government rise no higher than those of the taxpayer whose property is sought to be levied upon." Avco Delta, 459 U.S. at 441 (citation omitted). Accord Wagner v. United States, 573 F.2d 447, 451 (7th Cir.1978). Once it is determined that the federal lien has attached to interests created by state law, the relative priority of the federal lien and competing liens is governed by federal law. Aquilino, 363 U.S. at 513-14, 80 S.Ct. at 1280-81.

The lien stage

The State of Wisconsin argues that the general federal tax liens did not attach to the specific property subject to the garnishment action because under Wisconsin law the state's commencement of the garnishment action left no property for the liens to reach. In support of this argument, the state cites Wis.Stat. §§ 812.18(1)(a) and 812.19(7), which provide that a garnishee may be held liable for debts that have not yet become due to the defendant and that a court may render judgment on a debt that has not yet matured.

However, I can find no support in these sections for the proposition that a taxpayer loses his property interest in contract rights as soon as those rights become the subject of a garnishment action. The filing of the garnishment action gives the state an equitable lien upon the taxpayer's property, Elliot v. Regan, 274 Wis. 298, 79 N.W.2d 657 (1956), that is, a lien that may be satisfied out of...