Opinion
CASE NO. 04cv2455 DMS (LSP), Doc. No. 22.
October 20, 2005
ORDER GRANTING RESPONDENT UNITED STATES' MOTION FOR SUMMARY JUDGMENT AND DIRECTING INTERPLEADER FUNDS TO BE DISBURSED
This suit arises from an interpleader action in which CTC Real Estate Services ("CTC") seeks to determine the proper claimants to the surplus funds from the sale of George and Betty Woolman's (the "Woolmans") home, located at 2225 Victoria Park Terrace, Alpine, California 91901 ("Subject Property"). The United States of America ("United States"), on behalf of the Internal Revenue Service ("IRS"), now moves for summary judgment, and requests that the Court direct payment from the surplus proceeds to the United States, for unpaid federal taxes the IRS assessed against the Woolmans in 1996. The Woolmans filed an Opposition to the motion for summary judgment on October 3, 2005. Thereafter, the United States filed a Reply. The Court finds this matter suitable for submission without oral argument pursuant to Local Civil Rule 7.1(d)(1). For the reasons discussed below, the Court grants the United States' motion for summary judgment.
I. FACTUAL AND PROCEDURAL BACKGROUND
On June 19, 2001, James L. Juby ("Juby") conveyed his interest in the Subject Property by quitclaim deed to his mother, Betty Woolman. Thereafter, on April 4, 2002, Betty Woolman recorded the deed to the Subject Property in her name as sole owner of the property.
After Betty Woolman recorded the deed, a dispute arose between Juby and Betty Woolman as to whether the transfer of interest in the Subject Property was valid. Notwithstanding the dispute, on July 2, 2004, Betty Woolman conveyed her interest in the Subject Property by quitclaim deed to her husband, George Woolman. On that same day, George Woolman filed for Chapter 7 bankruptcy protection and the Subject Property was subsequently sold at a non-judicial trustee's sale.
On November 8, 2004, CTC initiated an interpleader action in the Superior Court of the State of California in San Diego, to determine the proper claimants to the surplus funds from the sale of the Subject Property. CTC deposited a total of $101,504.97 in the registry of the Superior Court. On December 9, 2004, the United States removed this action to the District Court pursuant to 28 U.S.C. §§ 1444 and 2410. After removal, four parties answered the Complaint and claimed a right to the surplus proceeds from the sale: the Woolmans, the United States, the California Franchise Tax Board ("FTB"), and Northwest Funding Group ("Northwest").
After the case was removed from Superior Court to the United States District Court, pursuant to this Court's February 14, 2005 Order, the Superior Court transferred the excess proceeds to the District Court.
While Juby previously filed a claim to the excess funds with the Superior Court in this interpleader action, he has since failed to file any answer to the Complaint or otherwise indicate a claim to the funds after the case was removed to the District Court. In addition, the record indicates that Juby was notified by this Court of the United States' motion for summary judgment. ( See September 6, 2005 Order at 1.) Nonetheless, he failed to file an Opposition. Accordingly, the Court declines to consider Juby's potential claim to the fund for purposes of this motion for summary judgment.
On May 18, 2005, a portion of the excess proceeds in the amount of $34,600.00 was released to Northwest pursuant to a stipulation signed by the parties and subsequently approved by this Court. Thereafter, Northwest was dismissed from the case. In addition, after the FTB received the Woolmans' state tax returns for the periods of 1999 to 2001, it notified the United States Magistrate Judge in this matter that the only liabilities owed by the Woolmans for the relevant tax years are not covered by the FTB's liens. Accordingly, the FTB acknowledged that it no longer has a valid claim to the excess proceeds. ( See Attachment A to the Woolmans' Affidavit in Support of the Opposition to Motion for Summary Judgment.)
On August 31, 2005, the United States, on behalf of the IRS, filed a motion for summary judgment, contending that it is entitled to $52,830.55 of the excess proceeds from the sale of the Woolmans' home, due to unpaid federal taxes that the IRS assessed against them in 1996. The IRS' assessments of the Woolmans' federal tax liabilities covered the periods of 1991, 1992, 1994 and 1995. ( See Exhibits A, B, C, and D to United States' Motion for Summary Judgment). All of the IRS' notices of tax deficiencies were served at the Woolmans' last known address. (See Opposition to Motion for Summary Judgment at 5.) In addition, a declaration provided by the United States indicates that on February 2, 1997, a delegate of the Secretary of the Treasury filed a Notice of Federal Tax Lien against the Woolmans with the San Diego County Recorder's Office. ( See Exhibit E to United States' Motion for Summary Judgment). According to the United States, despite being properly notified of their tax deficiencies, the Woolmans have failed to pay the taxes assessed. ( See United States' Motion for Summary Judgment at 6.)
The United States' claim for the amount of $52,830.55 includes all statutory additions, penalties and interest calculated through September 2, 2005. ( See United States' Motion for Summary Judgment at 3.)
On October 3, 2005, the Woolmans filed an Opposition to the United States' motion for summary judgment, contending that genuine issues of material fact exist as to the validity of the federal tax lien. Specifically, the Woolmans raise three contentions in support of their opposition. First, they contend there are genuine issues of material fact as to whether the IRS properly notified them of their tax liabilities, because the notices of deficiencies were mailed to their last known address after they were evicted from that residence. ( Id.) Second, they contend the IRS' assessments of their tax liabilities is incorrect as to the amount owed. ( Id. at 5-6.) Finally, the Woolmans also argue that the principles of equity, justice, and economy weigh in favor of this Court's denial of the motion for summary judgment. ( Id.)
II. STANDARD OF REVIEW
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure on "all or any part" of a claim where there is an absence of a genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(a) (c); Celotex Corp. V. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute about a material fact is genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248.A party seeking summary judgment bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence to negate an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to make a showing sufficient to establish an element to that party's case on which that party will bear the burden of proof at trial. Id. at 322-23. If the moving party fails to discharge this initial burden, summary judgment must be denied and the court need not consider the nonmoving party's evidence. Adickes v. S.H. Kress Co., 398 U.S. 144, 159-60 (1970).
If the moving party meets this initial burden, the nonmoving party cannot defeat summary judgment by merely demonstrating "that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see also Triton Energy Corp. v. Square D. Co., 68 F.3d 1216, 1221 (9th Cir. 1995) ("The mere existence of a scintilla of evidence in support of the nonmoving party's position is not sufficient.") (citing Anderson, 477 U.S. at 252). Rather, the nonmoving party must "go beyond the pleadings and by [his or] her own affidavits, or by `the depositions, answers to interrogatories, and admissions on file,' designate `specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 344 (quoting Fed.R.Civ.P. 56(e)). "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv. Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987). Moreover, "the district court may limit its review to the documents submitted for purposes of summary judgment and those parts of the record specifically referenced therein." Carmen v. San Francisco Unified Sch. Dist., 237 F.3d 1026, 1030 (9th Cir. 2001). The Court is not obligated "to scour the records in search of a genuine issue of triable fact." Keenan v. Allen, 91 F.3d 1275, 1279 (9th Cir. 1996) (citing Richards v. Combined Ins. Co., 55 F.3d 247, 251 (7th Cir. 1995)).
When making its determination, the Court must view all inferences drawn from the underlying facts in the light most favorable to the party opposing the motion. See Matsushita, 475 U.S. at 587. "Credibility determinations, the weighing of evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, [when] he is ruling on a motion for summary judgment. Anderson, 477 U.S. at 255.
III. DISCUSSION
As noted above, the United States moves for summary judgment on grounds that the federal tax lien is valid, and that the lien takes priority over all other claims to the surplus funds. The Woolmans oppose the motion on grounds that genuine issues of material fact exist as to the validity of the federal tax lien. Based on the undisputed evidence presented by the parties, the Court finds that the federal tax lien is valid, and further, the tax lien has priority over all other claims to the interpled funds.
A. Validity of the Federal Tax Lien
In an interpleader action, each party claiming entitlement to the interpled funds has the burden of proof, by a preponderance of the evidence, to show that it is entitled to the funds. See In re The Kelly Group, Inc., 159 B.R. 472, 476 (Bkrtcy.W.D.Va. 1993); Midland Ins. Co. v. Friedgood, 577 F.Supp. 1407, 1411 (S.D.N.Y. 1984). If that burden is not met, the claimant is generally not entitled to share in the interpled funds. Midland Inc. Co., 577 F.Supp. at 1412. In addition, while interpleader actions are governed by equitable principles, a determination on the proper distribution of interpled funds must be based on law. Prudential Ins. Co. of America v. Neal, 768 F.Supp. 195, 200 (W.D.Tex. 1991).
The Government may impose tax liens against the real or personal property of any person who neglects or refuses to pay federal income taxes. 26 U.S.C. § 6321. A tax lien arises at the time the tax is assessed and continues until the tax liability is satisfied or is unenforceable due to lapse of time. 26 U.S.C. § 6322. Once a federal tax lien has attached to a taxpayer's property or rights to property, federal law determines the priority of the competing liens asserted against the taxpayer's property. Aquilino v. United States, 363 U.S. 509, 513-14 (1960). Finally, priority between competing debts or liens is established by the "first in time" rule: a tax lien has priority over other debts if it is first in time. U.S. By and Through I.R.S. v. McDermott, 507 U.S. 447, 449 (1993). Moreover, this is generally the rule even if the tax lien has not been recorded. Id. at 455.
Here, the United States' interest in the interpled funds arose from the assessments the IRS made against the Woolmans in 1996. Thus, pursuant to 26 U.S.C. § 6321, a federal tax lien attached to the Woolmans' property when the IRS made its tax assessments against them. 26 U.S.C. §§ 6321, 6322; see In re Berg, 188 B.R. 615 (B.A.P. 9th Cir. 1995). In addition, in their motion for summary judgment, the United States provides evidence to show that the IRS filed a notice of tax lien against the property belonging to the Woolmans with the County Recorder of San Diego County on February 12, 1997. ( See Exhibit E attached to Maragani Declaration.) Pursuant to 26 U.S.C. § 6322, the federal tax lien remains attached the Woolmans' property because they have failed to pay the taxes assessed. 26 U.S.C. § 6322; see also United States v. Hodes, 355 F.2d 746, 748 (2nd Cir. 1966) ("There is no specific time limitation on the life of an assessment lien; under I.R.C. § 6322, the lien, once valid, survives so long as the underlying liability for the tax is enforceable.") Accordingly, the tax lien attached to the interpled funds when the Subject Property was sold at the trustee's sale on July 2, 2004. See Glass City Bank of Jeanette, Pa., v. United States, 326 U.S. 265, 268 (1945) ("Our conclusion is that the lien applies to property owned by the delinquent at any time during the life of the lien."); see also Seaboard Sur. Co. v. United States, 306 F.2d 855 (9th Cir. 1962) (emphasis added).
The Woolmans, however, contend there are genuine issues of material fact as to the validity of the federal tax lien. They offer three arguments in support of their opposition. First, the Woolmans argue there are genuine issues of material fact as to whether the IRS provided adequate notice of their tax deficiencies. Specifically, the Woolmans allege that the notices of deficiency were mailed to the their last known address after they were evicted from that residence. ( See Opposition to Motion for Summary Judgment at 5.) Therefore, they were not aware of any attempts to personally serve them at that residence. ( Id.)
Second, the Woolmans contend the IRS' assessment of their tax liabilities is incorrect as to the amount they owe. In support, they attach the affidavit of their tax advisor, Richard Rogers ("Rogers"), as "evidence" that their tax liability may be as low as $180.00, when their tax returns are reassessed with consideration given to all relevant deductions. (See Affidavit of Richard Rogers at 2.) Based on Rogers' calculations, the Woolmans argue the "IRS' substitute for return assessments will cause them to pay more" than their actual tax liability for the tax periods at issue. (See Opposition to Motion for Summary Judgment at 6.)
Finally, the Woolmans contend that principles of equity — given the equitable nature of interpleader actions — weigh in favor of denying the United States' motion for summary judgment. The Woolmans claim they "were severely harmed by the incompetence of their prior tax advisors, who failed to take [sic] thousands of dollars in deductions on their behalf, and miscalculated the amount of tax they were to pay . . ." and that "[t]he incompetence of their fiduciaries caused the deficiencies in the Woolmans' tax payments and caused this action to be filed." ( See Opposition to Motion for Summary Judgment at 3.) In addition, the Woolmans allege they "were advised by their fiduciaries during the years in questions that the amounts they were paying for taxes were the correct amounts." ( Id.) In light of the alleged incompetence of their prior fiduciaries, as well as the projected reassessments of the tax statements for the relevant periods from their current tax advisor, the Woolmans argue summary judgment should be denied so they can present evidence to the IRS of the amount actually owed, and engage in settlement discussions prior to any judgment in this action. ( Id. at 7)
With respect to the first contention, the Woolmans admit the IRS mailed the notices of deficiency to their last known address. They claim, however, that the IRS failed to comply with proper notice requirements because they "were not aware of any attempts to personally serve them at this residence." ( See Opposition to Motion for Summary Judgment at 5.) This claim lacks merit. Under 26 U.S.C. § 6303(a), the IRS is required only to send notices of deficiency to the taxpayer's last known address. 26 U.S.C. § 6303(a); see Williams v. C.I.R., 935 F.2d 1066, 1067 (9th Cir. 1991). Moreover, as the Ninth Circuit has held, such notice is valid even if the taxpayer does not receive it. See Hansen v. United States, 7 F.3d 137 (9th Cir. 1993); United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984), cert. denied, 469 U.S. 830 (1984). The Court therefore finds that the United States complied with applicable notice requirements by sending the notices of deficiencies to the Woolmans' last known address.
Next, the Woolmans contend the IRS' assessment of their tax liabilities is incorrect. Here, the Woolmans claim that their current tax advisor's recalculated assessments of their tax liabilities "provide evidence that the IRS substitute for return assessments will cause the Woolmans to pay more than they actually owe to the federal government for their taxes in the years of 1991, 1992, 1994, and 1995." ( See Opposition to Motion for Summary Judgment at 6.) In essence, the Woolmans challenge the validity of federal tax lien as to the amount of the IRS' assessments. However, in cases where the United States is a named defendant pursuant to 28 U.S.C. § 2410, as is the case here, the Ninth Circuit has held that a taxpayer may not use a § 2410 action to collaterally attack the merits of a tax assessment. Hughes v. United States, 953 F.2d 531, 538 (9th Cir. 1992). The Woolmans' evidence regarding their prior fiduciaries' alleged incompetence, as well as the projected reassessments of their tax liabilities, challenges the merits of the IRS' assessments. Because the United States was joined in this action pursuant to 28 U.S.C. § 2410, the Woolmans may not in this proceeding challenge the validity of the IRS' assessments.
28 U.S.C. § 2410(a) states: "Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter . . . of interpleader or in the nature of interpleader with respect to . . . real or personal property on which the United States has or claims a mortgage or other lien."
Finally, the Woolmans' contend that the principles of equity preclude granting the United States' motion for summary judgment. While the Woolmans correctly note that an interpleader action is equitable in nature, a determination regarding the proper distribution of interpled funds is one based on law, not equity. See Prudential Ins. Co. of America, 768 F.Supp. at 195 ("District court is not free, even when sitting in equity, to disregard applicable federal statutes and case law.") A federal tax lien is a statutory lien. 11 U.S.C. § 101(53). Moreover, as noted above, a tax lien in favor of the United States arises by operation of law if a person is unable to pay a tax liability after demand for payment is made. 26 U.S.C. § 6321. Therefore, as applied to the case at bar, this Court is not free to disregard the United States' claim to the excess funds, which arises from a properly recorded and served tax lien. Accordingly, this argument provides no relief for the Woolmans.
In sum, the Court finds that the United States has established that the subject federal tax lien is valid. The Woolmans fail to raise genuine issues of material fact which controvert the validity of the federal lien. Fed.R.Civ.P. 56(e) ("When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial."); see Homestead Title of Pinellas, Inc. V. United States, 2005 WL 1221865 (M.D.Fla. 2005). Therefore, the Court concludes that no material questions of fact exists regarding the validity of the federal tax lien and its attachment to surplus proceeds upon the sale of the house in question.
B. Priority of the Lien
As noted, once a federal tax lien has attached to a taxpayer's property or rights to property, federal law determines the priority of the competing liens asserted against the taxpayer's property. Aquilino, 363 U.S. at 513-14. As such, the general rule of "first in time" applies; a tax lien has priority over other debts if it is first in time. McDermott, 507 U.S. at 449 (1993). Here, the Woolmans do not raise any arguments, or otherwise offer any evidence, to establish that their claim to surplus funds takes priority over that of the United States. In addition, all other claimants to the surplus proceeds have been dismissed, or have acknowledged they no longer have a valid claim to the surplus proceeds. It is evident, therefore, that the federal tax lien takes priority over all other claims, and the Court so holds.
IV. CONCLUSION AND ORDER
For the reasons discussed above, the Court GRANTS the United States' motion for summary judgment. The Clerk of the Court is directed to enter judgment in favor of the United States and to disburse $52,830.55, plus any interest, penalties, and other statutory additions that have accrued since the dates of assessment, from the interpled funds to the "United States Treasury." Pursuant to Local Civ.R. 67.1, the Clerk is authorized to deduct a fee for the handling of all funds deposited with the Court and held in interest-bearing accounts or instruments.
IT IS SO ORDERED.