U.S. v. Librizzi, 95-2550

• Decision Date: 05 March 1997
• Docket Number: No. 95-2550,95-2550
• Citation: 108 F.3d 136
• Parties: -1322, 97-1 USTC P 50,263 UNITED STATES of America, Plaintiff-Appellant, v. Carole F. LIBRIZZI, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 136

108 F.3d 136

79 A.F.T.R.2d 97-1322, 97-1 USTC P 50,263

UNITED STATES of America, Plaintiff-Appellant, v. Carole F. LIBRIZZI, Defendant-Appellee.

No. 95-2550.

United States Court of Appeals Seventh Circuit.

Argued Sept. 13, 1996.

Decided March 5, 1997.

Thomas P. Schneider, Office of U.S. Atty., Milwaukee, WI, Gary R. Allen, William S. Estabrook (argued), Marion E. Erickson, Department of Justice, Tax Division, Appellate Section, John A. Marrella, Washington, DC, for plaintiff-appellant.

William A. Jennaro, Thomas J. Lonzo, Pamela A. Johnson (argued), Cook & Franke, Milwaukee, WI, for defendant-appellee.

Before RIPPLE, DIANE P. WOOD and EVANS, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

This case presents a narrow question about the scope of a valid federal tax lien on property the taxpayer held in joint tenancy, when the lien attaches (and is recorded) prior to the taxpayer's death, but the Internal Revenue Service forecloses on the lien some two years later. Mrs. Carole Librizzi, an innocent spouse, argues that the Government may recover no more than one-half the value of the property at the time of her husband's death, while the United States asserts that once the lien attached to the property, it may recover one-half the amount the property fetches at the foreclosure sale. Although the district court ruled for Mrs. Librizzi, we conclude that the United States has the better of the argument, and we therefore reverse.

The underlying facts are undisputed. In 1975, Salvadore Librizzi (the taxpayer) and his wife Carole acquired real property located at 307 East Carlisle Avenue, Whitefish Bay, Wisconsin, which they held under Wisconsin law as joint tenants with a right of survivorship. A decade later, in 1985 and 1986, the Secretary of the Treasury made a number of tax assessments totaling $1,468,312.72 against Mr. Librizzi relating to wagering activities and associated interest and penalties. When Mr. Librizzi did not pay the amounts due, a federal tax lien arose pursuant to 26 U.S.C. § 6321, and attached to all property belonging to him. On September 26, 1986, and on December 15, 1989, the IRS filed Notices of Federal Tax Lien for Mr. Librizzi's assessed liabilities with the Register of Deeds, Milwaukee County, Wisconsin. Mr. Librizzi died on June 19, 1990, without having paid his taxes.

Upon her husband's death, Mrs. Librizzi took full title to the Carlisle Avenue property. Two years later, on October 6, 1992, the United States filed a suit for foreclosure of its liens under 26 U.S.C. § 7403 in the U.S. District Court for the Eastern District of Wisconsin. In that suit, Mrs. Librizzi conceded that the federal tax lien attached to Mr. Librizzi's one-half interest in the property and that when he died she acquired the property subject to that lien. She argued, however, that the Government's interest was limited to one-half of the estimated fair market value of the property at the time of Mr. Librizzi's death (that is, one-half of $152,500, or $76,250). This was an attractive position for her to take, because the property had appreciated in value during the time between his death and the suit: as of the time of suit, it was estimated to be worth some $173,100. The Government took the position that it was entitled to one-half the fair market value at the time of foreclosure, which would have yielded about $86,550--still considerably less than the amount due for the delinquent taxes. As noted above, the district court, relying on provisions of Wisconsin law we discuss below, granted summary judgment for Mrs. Librizzi, and the United States has appealed.

When dealing with tax liens under 26 U.S.C. § 6321, it has been settled for years that "state law controls in determining the nature of the legal interest which the taxpayer had in the property." United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (citations and internal quotation marks omitted). See also United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983). The federal tax lien attaches to whatever rights or interests the taxpayer has under state law. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925; Rodgers, 461 U.S. at 683, 103 S.Ct. at 2137. As the Wisconsin Supreme Court put it:

... the I.R.C. does not create any property rights, but merely attaches federally defined consequences to rights which are created under state law. Once state law has been used to determine the nature and existence of a property interest, further state law is inoperative, and the tax consequences thenceforth are dictated by federal law.

Elfelt v. Cooper, 168 Wis.2d 1008, 485 N.W.2d 56, 61 (1992) (citations omitted). Furthermore, the U.S. Supreme Court noted in Rodgers that "once a lien has attached to an interest in property, the lien cannot be extinguished (assuming proper filing and the like) simply by a transfer or conveyance of the interest." 461 U.S. at 691 n. 16, 103 S.Ct. at 2141 n. 16.

A federal tax lien attaches at the time the tax assessment is made, and it continues until the liability has been satisfied or it becomes unenforceable due to the lapse of time. 26 U.S.C. § 6322. See also Jersey State Bank v. United States, 926 F.2d 621, 622-23 (7th Cir.1991); J.D. Court, Inc. v. United States, 712 F.2d 258, 261 & n. 7 (7th Cir.1983). In this case, it is undisputed that the tax lien attached to Mr. Librizzi's undivided one-half interest in the Carlisle Avenue property in 1985 and 1986, at the time the assessments were made. Mrs. Librizzi argues, however, that the character of the lien changed at the time of Mr. Librizzi's death, when under the Wisconsin law of joint tenancy, Mrs. Librizzi became the sole owner of the property. Wis. Stat. Ann. § 700.17(2)(a). At that point, she claims, the lien changed from an encumbrance on the interest in the property to an I.O.U. for the value of Mr. Librizzi's interest in the property on the date of his death. She relies principally on language in the Third Circuit's decision in United States v. Avila, 88 F.3d 229 (3d Cir.1996), but also on the Wisconsin Supreme Court's early decision in Musa v. Segelke & Kohlhaus Co., 224 Wis. 432, 272 N.W. 657 (1937), to support this position.

In Musa, the Wisconsin Supreme Court considered the effect of a judgment lien on property held in joint tenancy, after the joint tenant who was the judgment debtor died. The judgment lien there had been docketed, but not executed, on the date of the debtor's death. The supreme court decided that "the lien of the judgment in question could attach only to such interest or estate as Adam Musa [the debtor] actually and effectively had in the premises." Id., 272 N.W. at 658. Because his interest was only that of a joint tenant, it was limited by the right of survivorship. Upon his death, when the property passed to the other joint tenant, the judgment lien itself was extinguished: there was no more property of the debtor on which the lien could operate. Mrs. Librizzi does not take her argument as far as Musa might suggest, as she does not contend that the tax liens vanished when Mr. Librizzi died. She does say, however, that Musa means that the lien attached only to the interest Mr. Librizzi had while alive, and that this interest was finally determined as of the moment of his death.

Later legislation and court decisions in Wisconsin indicate that the Musa rule does not have the consequences Mrs. Librizzi claims for it. Section 700.24 of the Wisconsin Statutes addresses the effect of a joint tenant's death on certain liens (including, we note, state tax liens attached pursuant to Wisconsin law):

A real estate mortgage, a security interest under ch. 409, or a lien under s. 71.91(5)(b), s. 72.86(2), 1985 stats., ch. 49 or 779 on or against the interest of a joint tenant does not defeat the right of survivorship in the event of the death of such joint tenant, but the surviving joint tenant or tenants take the interest such deceased joint tenant could have transferred prior to death subject to such mortgage, security interest or statutory lien.

Mr. Librizzi could have transferred his undivided one-half interest to Mrs. Librizzi before his death, by taking steps to sever the joint tenancy and then to convey his interest to her. In that case, the federal tax lien would have continued to encumber his one-half interest in her hands. See, e.g., United States v. Bess, 357 U.S. 51, 57, 78 S.Ct. 1054, 1058, 2 L.Ed.2d 1135 (1958) ("The transfer of property subsequent to the attachment of the lien does not affect the lien[.]"). The effect of § 700.24 is to make it clear that the same result follows even if he did not go through those steps during his lifetime. When the undivided one-half interest passed to Mrs. Librizzi by operation of law, it came encumbered with the federal tax lien.

Taking another approach, Mrs. Librizzi points to Avila, in which the Third Circuit held that the Government could recover on a tax lien imposed on a husband's one-half interest in a joint tenancy, even though the property had later been transferred to his wife (first for a payment of $100, and later in a divorce settlement). There, as here, the district court had held that the Government could recover only the amount that the lien was worth at the time the debtor transferred his interest to his wife. Citing the Ninth Circuit's decision in Han v. United States, 944 F.2d 526 (9th Cir.1991), the court reversed, holding that "because the lien is unaffected by...