Eastern District Finds In Rem Tax Lien Survives Bankruptcy

The conveyance by taxpayers of their house (in which they continued to reside) to their children for no consideration, one year after the issuance of a Notice of Deficiency, three years prior to tax assessment, and eight years prior to a Chapter 13 bankruptcy, was a fraudulent conveyance which would not operate to deprive the government of its right to foreclose on the federal tax lien. U.S. v. Alfano et al., 99-1 USTC ¶50,303 (EDNY). [The defendants were the children, who owned the house. A $53,015 tax lien had earlier been asserted against the parents arising from tax returns which claimed an “exemption” from income tax on wages earned because of membership in the “Life Science Church.”]

Both sides moved for summary judgment:  The defendants argued that the doctrines of res judicata and collateral estoppel barred the government from foreclosing on the house. Judge Seybert disposed of defendants’ res judicata argument by finding that the defendants had established neither privity nor identity of causes of action. Privity was lacking because the conveyance occurred prior to the tax assessment. Defendants’ collateral estoppel argument was rejected on the grounds that the legitimacy of the conveyance, a relevant issue, had not been litigated in the bankruptcy proceeding.

Before analyzing the plaintiff’s motion for summary judgment, the court, sua sponte, analyzed the issues of standing and the statute of limitations. The court found the action timely since it had been commenced within the 10-year period provided by IRC §6502. Furthermore, the U.S. had standing to sue the children since IRC  §6331 permits a tax levy to be made on property belonging to the taxpayer or on property subject to a tax lien.

The U.S., also moving for summary adjuciation, argued that a tax lien could be asserted against the house in rem. The Court found that in Re Isom,  901 F.2d 744 (9th Cir. 1990), “representing the vast weight of opinion,” stood for the proposition that bankruptcy does not destroy a federal tax lien. The opinion then confidently cited to and analyzed a phalanx of cases which distinguished between actions against the debtor, in personam, which are extinguished by bankruptcy discharge, and actions in rem, which are not.

The momentum of the opinion, inexorably approaching the “no genuine issue of material fact” standard for granting summary judgment, nevertheless abated when the court was forced to acknowledge that “the tax lien was not recorded as a lien against the particular property but only against the parents [,and consequently] an action to enforce the lien in rem may be inapposite.” The court attempted to surmount this problem by observing that while “in a strict sense, a proceeding in rem is one taken directly against property . . . in a larger and more general sense, the terms are applied to actions between parties, where the direct object is to reach and dispose of property owned by them.” The court then dismissed the concern concluding that the “better approach is the lien survives the property of the debtor.” The tribunal then summarily rejected defendants’ argument that the U.S., by voluntarily agreeing to reduce its secured claim to $2,000, had thereby “waived” its right to collect the balance, finding that the property in issue was not “dealt with by the plan.”

The court next analyzed the bona fides of the underlying transfer in the context of summary judgment. Building a second, more pedestrian, line of defense against the possibility of appellate reversal, and citing frequently to New York Debtor & Creditor law, and also to trial testimony, the court found that the defendants had presented no “credible evidence” to meet their burden of proving that the property was conveyed for fair consideration, and thus found the conveyance to be fraudulent.

After granting summary judgment and holding the tax lien valid, the court then appeared to sit in equity when deciding an appropriate remedy. Although recognizing that IRC  §7403 permitted it to decree a sale of the property, the court instead expressed its “prefer[ence] that the parties reach agreement resolving the action” without a forced sale.

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