United States v. Kocher

• Decision Date: 30 October 1972
• Docket Number: No. 24,Docket 72-1163.,24
• Citation: 468 F.2d 503
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Walter KOCHER, a/k/a Walter A. Kocher, Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

468 F.2d 503 (1972)

UNITED STATES of America, Plaintiff-Appellee, v. Walter KOCHER, a/k/a Walter A. Kocher, Defendants-Appellants.

No. 24, Docket 72-1163.

United States Court of Appeals, Second Circuit.

Argued October 2, 1972.

Decided October 30, 1972.

E. Gayle McGuigan, New York City (McGuigan & Kilcullen, New York City), for defendants-appellants.

Gerald A. Rosenberg, Asst. U. S. Atty., New York City (Whitney North Seymour, Jr., U. S. Atty., Yale L. Rosenberg and Michael I. Saltzman, Asst. U. S. Attys., New York City, of counsel), for appellee.

Before MOORE, FEINBERG and MULLIGAN, Circuit Judges.

MULLIGAN, Circuit Judge:

This is an appeal from a partial summary judgment rendered by Hon. Charles M. Metzner, United States District Judge, Southern District of New York, May 10, 1971. Judge Metzner's opinion is reported in 329 F.Supp. 1079 (S.D.N.Y.1971). Judgment affirmed.

This action was brought by the United States on June 24, 1965 to secure an adjudication of indebtedness for federal income taxes and to foreclose tax liens on real property located in the Village of Tarrytown, Westchester County, New York. The Government's first motion for partial summary judgment sought a decree that the taxpayer (Mr. Kocher) was indebted to the United States for unpaid, assessed income taxes, plus assessed interest for the years 1943-47 in the total amount of $275,863.31, plus interest thereon according to law. The motion was unopposed and entry of the judgment dated November 23, 1970 was consented to by counsel for the taxpayer. The total amount of adjudicated indebtedness including interest to January 2, 1971 was $500,590.07 with interest accruing thereafter at the rate of $44.14 per diem. The Government then moved for summary judgment of foreclosure. The property on which foreclosure was sought consists of ten parcels of land. Five parcels, denominated the Homestead Parcels since Mr. and Mrs. Kocher live there, were acquired by the Kochers in 1944 and 1945 by deeds running to Mr. and Mrs. Kocher, as tenants by the entirety. The other five parcels (the "Disputed Parcels") were acquired in 1946 by deed running to Mr. Kocher alone. In October, 1961, at the request of the Government, the Kochers executed deeds of all ten parcels to themselves as tenants in common in order to defeat in the event of Kocher's demise, succession to the property by his widow, by operation of law, free of any tax lien.

In opposition to the motion for summary judgment, the Kochers maintained that there was newly discovered evidence with respect to the Disputed Parcels which would indicate that Mrs. Kocher's interest in them arose before the tax lien by virtue of a partnership agreement entered into between the husband and wife in 1946. Since the Government did not have time to investigate these allegations, the motion for full summary judgment was withdrawn and a motion for partial summary judgment to foreclose only with respect to the Homestead Parcels was made. The District Court granted this judgment which (a) permitted the United States to sell the Homestead Parcels in their entirety as opposed to a sale of only the taxpayer's interest therein¹ (b) permits the United States to bid at the foreclosure sale and (c) certified pursuant to Fed.R.Civ.P. 54(b) that there is no just reason for delay and directed that final judgment be entered forthwith. The appellants urge that each of these determinations was erroneous as a matter of law.

(a) May the Government enforce its lien by selling the Homestead Parcels or is it limited to a sale only of Mr. Kocher's undivided half interest in the property?

This is a question of first impression in this Circuit and involves an interpretation of Section 7403 of the Internal Revenue Code, 26 U.S.C. § 7403 (1970).² There is no question but that the statute literally provides for the sale of any property in which the delinquent taxpayer has any interest, with the proceeds to be distributed according to the interests of the parties.³ Appellants admit that if the statute is to be literally applied, there is no escape from the position taken by the Government and adopted in Judge Metzner's opinion below. There is no doubt either that Mr. Kocher's interest in the property as a tenant in common is to be determined by state law, but that the manner of enforcement of the lien is to be governed by federal law. Aquilino v. United States, 363 U.S. 509, 512-814, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958). While the New York law provides for a sale by a tenant in common only if it appears that a partition in kind cannot be made without great prejudice to the owners (N.Y. Real Prop. Actions and Proceedings Law § 901(1) (McKinney 1963)), the section refers only to actions brought by tenants in common inter sese and does not purport to affect a sale by virtue of a tax lien in favor of the United States, the enforcement of which is properly determined by federal law.

Appellants' principal reliance for escape from the literal language of Section 7403 is upon Folsom v. United States, 306 F.2d 361 (5th Cir. 1962) which held that the Government, as a lien holder, did not have the right under Section 7403 to force a sale of property in which a tax delinquent had an undivided one-sixth interest. This, in the view of that court, denied the right of the other five joint owners to seek a partition in kind under Alabama law. That court would require the Government to acquire only the undivided interest of the delinquent and then to exercise whatever property rights such joint owner might exercise under state law.

We cannot agree with the Folsom decision because in our opinion it overlooks the principles of Aquilino and Bess, which teach that although we look to state law to determine what interest, if any, the taxpayer has in the property, the manner of enforcement of the lien is then to be determined by federal law. The holding in Folsom was specifically rejected by the Seventh Circuit in United States v. Trilling, 328 F.2d 699 (7th Cir. 1964), which permitted the sale of property owned jointly by husband and wife and rejected the proposition that the sale should be limited to the tax delinquent husband's joint interest. The Trilling decision has been followed in United States v. Washington, 402 F.2d 3 (4th Cir. 1968), cert. denied, 402 U.S. 978, 91 S.Ct. 1641, 29 L.Ed.2d 145 (1971), and United States v. Overman, 424 F.2d 1142 (9th Cir. 1970).

The sale of the property pursuant to the statute not only eliminates the necessity of the United States bringing two lawsuits (acquiring the tenancy and then selling it) but obviously will result in a greater financial return to the Government, the taxpayer and his wife. It is apparent that a bidder would pay considerably less for an undivided interest in the Homestead Parcels in which he presumably could have no realistic expectation to possess in common with the remaining tenant, Mrs. Kocher. He would in effect be purchasing a partition action and another sale. In any event, we cannot do more than to construe the language of Congress and we cannot assume that the statute authorizing the sale of the property in which the taxpayer has an interest was mistakenly or arbitrarily selected. Commissioner of Internal Revenue v. Brown, 380 U.S. 563, 571, 85 S.Ct. 1162, 14 L.Ed.2d 75 (1965).

(b) May the United States be permitted to bid at the foreclosure sale?

In his judgment below, Judge Metzner detailed the terms and conditions of the sale fixing the amounts due and the priorities to be observed. The property is to be sold subject to the senior mortgage liens of the Commercial Bank of Soleure and Eric Kocher. The order specifically provides that the Internal Revenue Service might purchase the property. Appellant contends that Section 7403(c) (supra note 2) prohibits the United States from bidding except when it holds a first lien and then it may only bid in a sum not exceeding the amount of such senior lien plus the expenses of sale. Since the Government is concededly a junior lienor here, the argument runs, the judgment permitting it to purchase is erroneous and reversible.

We cannot accept this construction of the statute. The last sentence of Section 7403(c), which is at issue here, was added in 1966 (Act of Nov. 2, 1966, Pub.L.No.89-719, Tit. I, § 107(b), 80 Stat. 1140), and no case construing it has been cited to us or discovered in our research. The purpose of the amendment is made clear, however, by the report of the Senate Committee.

Where property is sold at a tax lien foreclosure sale, the Internal Revenue Code contains no specific authority authorizing the Federal Government to bid at these sales where it believes that less than full consideration is being offered for the property. Such authority is contained elsewhere, however, in the public statutes (see sec. 195 of title 31 of the United States Code).

It is desirable for the Federal Government to bid in property to prevent its sale at distress prices in order to assure that the Government receives the full value of the property sold or the amount of the Government\'s tax claim, as well as to protect the interests of the delinquent taxpayer whose property is being sold.

For the reason indicated above, the bill codifies the rule that where the Government brings an action to enforce a tax lien, the Government can bid on the property where the Government holds a first lien. The amount which it may bid under the bill is limited to the amount of its lien, plus selling expenses. Whether or not the Government exercises this authority to bid within the limit set forth in the bill is a matter within the discretion of the Treasury Department. (S. Rep.No.1708, 89th Cong., 2d Sess., in 1966 U.S.Cong. & Ad.News 3722, 3747).

It is thus evident that the intent of Congress was to prevent the sale of property at distress prices in order to assure that the Government...