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.