IN RE:  JACK MCGHEE        CASE NO.  94-60460   ADV. NO.  98-6053  MEMORANDUM OPINION IRS TAX LIENT POST-PETITION RECOVERY

 

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN

IN RE:

 JACK MCGHEE                         CASE NO.  94-60460

 DEBTOR

 IN RE:

 MAXIE HIGGASON, trustee             PLAINTIFF

 V.                                  ADV. NO.  98-6053

 UNITED STATES OF AMERICA,

  INTERNAL REVENUE SERVICE          DEFENDANT

 MEMORANDUM OPINION

     This proceeding is before the court pursuant to an agreed order of submission dated November 29, 1999 (Document # 16).  The court has jurisdiction over the subject matter under 28 U.S.C. 1334(b).  Because this proceeding is one to determine the validity, extent, and priority of a lien, it is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A), (K), and (O).

     Simply stated the issue presented is whether an Internal Revenue Service ("IRS") tax lien attaches to a post-petition recovery.


FINDINGS OF FACT:

     The parties have filed two identical sets of stipulations of facts, both of which are titled "Amended Stipulation of Facts."  (Docs. # 8 & 10).  The stipulations are incorporated in these findings.

     On February 2, 1994 the debtor, Jack McGhee, and his non-debtor spouse, Lawyette McGhee, conveyed real property to their sons Tab Kendall McGhee and Jeffrey Todd McGhee.  Counsel have stipulated that the property was transferred "for love and affection with no actual consideration passing."  The deed was recorded on April 19, 1994 in the office of the Laurel County Clerk, Deed Book 430 at Page 517.  This property is referred to in Adversary Proceeding 95-6018, Maxie Higgason, trustee v. Jack McGhee, et al., ("AP 95-6018") as "the service station."

     Some 3 months later, on May 20, 1994, the debtor "without any consideration" did transfer real property to his son Jeffrey Todd McGhee and his son's wife, Vera J. McGhee.  The deed was recorded on May 20, 1994 in Deed Book 432 at Page 124.  This property is referred to in AP 95-6018 as "the five acre parking area."

     Approximately 3 months after the last of the conveyances, on August 31, 1994, the IRS filed Notice of Federal Tax Lien against Jack McGhee in the Laurel County Clerk's Office, Lis Pendens Book 37 at Page 684.[1]  The total amount of taxes owed is $22,792.45.  The Notice provides that pursuant to sections 6321, 6322, and 6323 of the Internal Revenue Code, a lien is filed in favor of the United States "on all property and rights to property belonging to this taxpayer" for the amount of the taxes, additional penalties, interest, and costs that might accrue.  The date of assessment given on the Notice is March 14, 1994, that is, about 6 weeks after the date of the deed to the first piece of property was executed ("the service station," 2/2/94) and approximately one month before the recording of that deed (4/19/94).

     On October 18, 1994 Jack McGhee filed in this court a petition for relief under chapter 7 of the U. S. Bankruptcy Code, along with schedules and statement.  (Doc. # 1, main case)  The trustee was duly appointed and qualified.  (Docs. # 14, 15 & 23, main case)

     On November 8, 1995, following a trial in Adversary Proceeding No. 95-6018, Higgason v. Jack McGhee, et al., the court entered Judgment vacating the transfers of real property noted here.  The conveyances were found to be "avoidable" pursuant to 11 U.S.C. 548 ("Fraudulent transfers and obligations") in that they were made to insiders within the 12 month period prior to filing of bankruptcy and at a time when the debtor was insolvent.  (Doc. # 71, AP 95-6018)  No appeal from the judgment was taken.  The adversary proceeding has been closed.

     On March 20, 1996 the court entered an order in the main case approving sale of the real property known as "the service station" to Jeffrey Todd McGhee and his wife, Vera J. McGhee, for $135,000, free and clear of liens.[2]

  (Doc. # 62, main case)  The order provides:

     The disputed liens of United States of America, Internal Revenue Service [and others] are transferred to the net remaining proceeds of sale after payment of the undisputed liens of London Bank & Trust Company and any taxes or from a gain or loss resulting from such sale.

 

The order refers to the 1/2 undivided interest of the debtor, Jack McGhee, and the other 1/2 undivided interest which at that time was owned by Marilyn Benge MeGhee.[3]

     On September 3, 1996 the trustee filed an objection to the status of the IRS lien on the basis that the debtor did not own the property when the lien was filed and that because of the automatic stay the lien could not attach when the property was recovered by the trustee.  (Doc. # 76, main case)  The IRS responded with a motion to dismiss the objection on the basis that it should have been filed as an adversary proceeding.  (Doc. # 77, main case)

     At a hearing on October 10, 1996, the court determined the issue regarding the IRS lien should be presented in an adversary proceeding.  (Doc. # 79, main case)  An order was entered continuing the trustee's objection until further orders and proceedings before the court.  (Doc. # 84, main case)  This adversary proceeding was filed on November 13, 1998.

CONCLUSIONS OF LAW:

     The trustee takes the position that 11 U.S.C. 362(a)(4) controls, in other words that the automatic stay prevented creation, perfection, or enforcement of an IRS lien on property when it became property of the bankruptcy estate, when the property was recovered by the trustee.  Reliance on Section 362 is misplaced.

     Internal Revenue Code Section 6321 ("Lien for taxes), 26 USC 6321, provides that if a taxpayer owes taxes then a lien arises in favor of the United States on all property of the taxpayer.  26 USC 6322 ("Period of lien") states the lien arises at the time of assessment and continues until the liability is satisfied or is unenforceable by reason of lapse of time.  Relying on these two sections of the Internal Revenue Code, the bankruptcy court in Rodriguex v. Citibank, F.S.B., et al., 202 B.R. 729, 738 (Bankr. N.D.Ill. 1996), held that the IRS had a valid lien on proceeds from the sale of a chapter 7 debtor's residence where assessment of outstanding taxes against the debtor occurred prior to the debtor's fraudulent transfer of the property.

     The third statute in the sequence, 26 USC 6323 ("Validity and priority against certain persons"), states in subsection (a) that the lien is not valid against a purchaser until a Notice of Lien is filed in accordance with IRC requirements.  Subsection (h)(6) offers the definition of "purchaser" as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice."

     As previously stated, the trustee and IRS have stipulated that the property referred to as "the service station" was "transferred for love and affection with no actual consideration passing" and that the property referred to as "the 5 acre parking area" was transferred "without any consideration" (Docs. # 8 & 10, s 2 & 3).  Therefore, in this case the lien in favor of the IRS arose at the time of assessment, March 14, 1994, and was unaffected by the transfers of the two pieces of property by the debtor to his family members.

     Support of this result can be found even without looking to the definition of "purchaser." In First of America Bank--West Michigan v. Alt, et al., 848 F.Supp. 1343, 1349 (W.D. Mich. 1993), the district court held the taxpayers' transfer of real property was ineffective to defeat a federal tax lien where the deed was not recorded until after assessment.  The facts before this court are that assessment preceded recording of the first deed (4/19/94) by approximately a month and preceded transfer and recording of the second deed (5/20/94) by approximately two months.  Kentucky law is clear-- until a deed is recorded, it is not valid as to a creditor.  KRS 382.110.

     Therefore, the IRS had a valid lien on property of the debtor, Jack McGhee, at the time of his fraudulent transfer of property to his family members, prior to his filing for relief under chapter 7 of the Bankruptcy Code, and prior to recovery of two pieces of property by the trustee.  Further, the IRS lien transferred to the debtor's interest in proceeds from sale of "the service station" pursuant to order of this court dated March 20, 1996 (Doc. # 62).

Dated:

                               By the court --

 

                               ______________________

                               JOSEPH M. SCOTT, JR.

                               U. S. BANKRUPTCY JUDGE

 

 

Copies to:

 

Maxie E. Higgason, Jr., Esq.

Charles H. Keen, Esq.

U. S. Trustee


UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN

IN RE:

 

JACK MCGHEE                         CASE NO.  94-60460

 

DEBTOR

 

 

IN RE:

 

MAXIE HIGGASON, trustee             PLAINTIFF

 

V.                                  ADV. NO.  98-6053

 

UNITED STATES OF AMERICA,

  INTERNAL REVENUE SERVICE          DEFENDANT

 

 

ORDER

 

     In accordance with the memorandum opinion this day entered, IT IS HEREBY ORDERED that the tax lien of the Internal Revenue Service be satisfied from the debtor's interest in net proceeds from the sale of property known as "the service station."

Dated:

                               By the court --

 

                               ______________________

                               JOSEPH M. SCOTT, JR.

                               U. S. BANKRUPTCY JUDGE

 

Copies to:

 

Maxie E. Higgason, Jr., Esq.

Charles H. Keen, Esq.

U. S. Trustee



[1]  A copy of the Notice was not filed in the record of this adversary proceeding.  However, the court takes judicial notice of a copy of a federal tax lien filed in the Laurel County Clerk's Office on 8/31/94 which is part of Exhibit 9 of the trustee's Pretrial Compliance in AP 98-6018 (Doc. # 38).

[2]  The trustee filed in the main case notices of intent to sell the property on 3 previous occasions: on 12/21/95 for $125,000 to Bill Abrams (Doc. # 55), on 1/2/96 for $130,000 to Jeffrey and Vera McGhee (Doc. # 56), and on 1/22/96 for $132,000 to Bill Abrams.  (Doc. # 58).

[3]   Marilyn Benge McGhee obtained a 1/2 undivided interest in the property by Master Commissioner deed dated 10/31/91.