Viva Ltd. v. United States

• Decision Date: 06 June 1980
• Docket Number: Civ. A. No. 79-C-1701.
• Citation: 490 F. Supp. 1002
• Parties: VIVA LTD., a Caymanian corporation, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Colorado

490 F. Supp. 1002

VIVA LTD., a Caymanian corporation, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 79-C-1701.

United States District Court, D. Colorado.

June 6, 1980.

Stanton Rosenbaum, Isaacson, Rosenbaum, Spiegleman & Friedman, Denver, Colo., Leslie J. Barnett, Barnett & Bolt, Tampa, Fla., for plaintiff.

Jeffrey A. King, Dept. of Justice, Trial Attorney, Tax Div., Washington, D.C., for defendant.

MEMORANDUM OPINION AND ORDER

CARRIGAN, District Judge.

The defendant United States has moved to dismiss the complaint on the grounds that this Court does not have subject matter jurisdiction and that the plaintiff, Viva Ltd., does not have the capacity to bring this action. For the reasons stated in this Memorandum Opinion and Order, the motion is denied.

On September 20, 1979, the Internal Revenue Service imposed certain tax assessments against one Tony Darwin, an individual taxpayer.¹ On September 24, 1979, the IRS filed a Notice of Federal Tax Lien against Darwin in Eagle County, and with respect to the same assessments against Darwin, the IRS also filed a Notice of Federal Tax Lien which named as the taxpayer "Viva Limited as nominee, transferee of sic agent of Tony Darwin."²

On December 13, 1979, Viva Ltd. filed this action seeking to quiet title to the Eagle County property against which the foregoing lien had been imposed, and seeking to have the lien declared invalid. As grounds for the relief sought, the complaint alleges that the plaintiff, not Tony Darwin, is the owner of the real property described in the notice of lien, and then continues:

"8. Said lien was arbitrarily and capriciously imposed by reason of the following facts:

a) No assessment upon which said lien was based was ever made against Plaintiff;

b) No notice or demand for payment had been served upon Plaintiff at the time of the commencement of this action;

c) No notice of assessment had ever been furnished to Plaintiff as required by law."

The complaint alleges that jurisdiction is founded on 28 U.S.C. sections 1340 and 2410. The United States contends that this Court does not have jurisdiction under those or any other provisions, and therefore that the action should be dismissed. Alternatively, the government argues that the plaintiff has not qualified to do business under Colorado law, and therefore has no capacity to bring this action because of the provisions of section 7-9-103, C.R.S.1973.

I. "Jurisdictional" Arguments.

The United States correctly points out that 28 U.S.C. section 2410 waives sovereign immunity for the classes of cases within its scope, but does not grant jurisdiction. E.g., Hudson County Board of Chosen Freeholders v. Morales, 581 F.2d 379, 382-83 (3rd Cir.1978); Falik v. United States, 343 F.2d 38, 40 (2d Cir.1965). On the other hand, 28 U.S.C. section 1340 grants jurisdiction to the district courts in certain cases, but does not waive sovereign immunity. Id., 343 F.2d at 40. Thus, for this action to proceed, it must appear that it falls within both sections. Id.

A. Jurisdiction: 28 U.S.C. section 1340.

Section 1340 provides that the district courts "shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue . . .." The United States concedes that section 1340 "has been found to be a basis for subject matter jurisdiction where the issue concerns the validity or priority of the federal tax liens, E.g. Benson v. United States, 442 F.2d 1221, 1223 (C.A.D.C. 1971)." (Memorandum in Support of Motion to Dismiss, at 4; emphasis added). See also Aqua Bar & Lounge, Inc. v. United States, 539 F.2d 935, 937 (3rd Cir.1976) ("Clearly, a suit which contests the validity of a federal tax lien and sale falls within section 1340's terms"); United States v. Coson, 286 F.2d 453, 455-56 (9th Cir.1961).

The United States argues, however, that "the issue in this case involves the ownership of certain property, and therefore this action does not arise under any internal revenue law since state law determines the nature and extent of plaintiff's and Mr. Darwin's interests in property to which the lien can attach." (Memorandum in Support of Motion to Dismiss, at 3.) In other words, the essence of the government's position is that resolution of state law questions alone will dispose of the case, and therefore the action should have been filed in state court.³

The government's position is only partially correct. The amount of a delinquent taxpayer's liability gives rise to "a lien in favor of the United States upon all property, whether real or personal, belonging to such person." 26 U.S.C. section 6321. (Emphasis added.) Thus, state law defines the taxpayer's property interests to which a tax lien can attach:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had `property' or `rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that `in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.'" Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365, 1368 (1960).

See also United States v. Durham Lumber Company, 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960); United States v. Overman, 424 F.2d 1142, 1144 (9th Cir.1970).

This approach to the question has obvious logic, for the threshold state law determination may dispose of the case. "A federal tax lien can only attach to a property interest of the taxpayer which exists under state law, and if the taxpayer does not own the property or have rights to the property under state law, then the federal tax lien could not attach to such property. . ." Atlas, Inc. v. United States, 459 F.Supp. 1000, 1004 (D.N.D., S.W.D.1978).

That does not mean, however, that the existence of a property interest is determinative, in and of itself, of the question whether the tax lien has validly attached. "Once it has been determined under state law that the taxpayer owns property or rights to property, federal law is controlling for the purpose of determining whether a lien will attach to such property or rights to property." Broday v. United States, 455 F.2d 1097, 1099 (5th Cir.1972). See also United States v. Bess, 357 U.S. 51, 56-57, 78 S.Ct. 1054, 1058, 2 L.Ed.2d 1135, 1141 (1958). Therefore, even where it has been determined that a taxpayer owns property to which a lien can attach, it remains to be determined, when the issues are raised, whether the government has complied with the necessary notice and other procedural requirements. See, e.g., Bauer v. Foley, 408 F.2d 1331, 1333 (2d Cir.1969) ("The consequence of such a defect in the notice required by 26 U.S.C. section 6303, in the absence of proof by the Government of actual notice and demand prior to filing a lien, was that it invalidated the lien subsequently filed.")

In this case, the first question regarding the relative property interests of the plaintiff and Tony Darwin will be resolved according to state law principles. Indeed, if that inquiry determines that the plaintiff is not Darwin's alter ego, then the matter would need to proceed no further. If Darwin, the taxpayer, has no interest in the property described in the notice of lien, then no lien for his taxes could validly attach to that property.

If, on the other hand, the court were to find that Darwin does have an interest in the subject property, the questions raised in the complaint regarding the government's compliance with federal notice and demand requirements would need to be answered. It is because of this latter contingency that this is an action "arising under" the internal revenue laws.⁴ In other words, although state law will determine whether there is "property" to which a federal tax lien could attach, federal law must determine whether, given that property interest, a valid lien was perfected against it.

Although not exactly on point factually, United States v. Coson, 286 F.2d 453 (9th Cir.1961), supports this conclusion. That case raised a question whether notices and demands on two general partners were sufficient to constitute notice and demand on the plaintiff, who contended that he was not a general partner and therefore his personal property was not subject to the government's lien for the partnership's taxes. Although it was necessary to decide an underlying question dependent upon the state law governing partnerships, the court recognized that there were also federal questions which supported jurisdiction under section 1340:

"We inquire next whether this is an action `arising under' any Act `providing for internal revenue' within the meaning of § 1340. Insofar as the plaintiff's lien is based upon an assertion that the Government's lien is void and ineffective because of a failure to make demand upon the plaintiff, . . . it must be said that the suit `really and substantially involves a dispute or controversy respecting the validity, construction or effect of such a law, upon the determination of which the result depends.'

"Plainly enough as concerns his contention that the lien claimed by the United States is void because of want of prior demand, plaintiff undertook to bring a suit the result of which depends upon the meaning of Title 26 U.S.C. § 6321 which provides for a lien in favor of the United States against the property of a person liable for a tax who `neglects or refuses to pay the same after demand.' (Emphasis added.) He cites authority to support his claim that the effect of the law was that a lien upon his property was dependent upon a prior demand to him personally. The result so far as that portion of the case is concerned would turn upon the determination of that question which is one

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