Opinion ID: 527542
Heading Depth: 2
Heading Rank: 1

Heading: IRS Priority Under Secs. 6321 and 6322

Text: 54 The IRS contends that as to the tax liabilities it has assessed against Levine and Wilkis, it is entitled as a matter of law under 26 U.S.C. Secs. 6321 and 6322 to payment in full from the assets they, respectively, disgorged. We conclude that under these sections the IRS was entitled to payment from Levine's disgorged assets of its lien filed against his property prior to June 19, 1986, but not with respect to its later assessments against Levine and not with respect to its assessments against Wilkis. 55 Section 6321 of the Internal Revenue Code provides as follows: 56 If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. 57 26 U.S.C. Sec. 6321. Section 6322, in pertinent part, provides that the Sec. 6321 lien shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. Sec. 6322. The district court rejected the contention that Sec. 6321 gave the IRS priority, stating that the assets turned over to the receiver were analogous to funds which have been embezzled or misappropriated, as they were obtained by wrongful means and cannot properly be considered property of the defendants.... Thus, neither defendant ever had such property interests in the funds to which tax liens could have attached. 689 F.Supp. at 321-22. We have two difficulties with the court's ruling. 58 First, the view that the assets were obtained by wrongful means suggests that the allegations of the SEC complaints had somehow been established. In fact, the court in the present case had made no such adjudication; the consents specified that the defendants neither admitted nor denied any of the allegations of the civil complaints; and the judgments specified that they were consented to without admission or adjudication. It is true that between the signing of the consents and the SEC's presentation of the distribution plans, both Levine and Wilkis had pleaded guilty to the criminal informations filed against them. But the charges in those informations were by no means coextensive with the allegations of the SEC's civil complaints. The Levine information mentioned only one specified issuer, i.e., Jewel; the civil complaint against him alleged unlawful transactions not only in the securities of Jewel but in securities of 53 other identified issuers as well. The Wilkis information likewise mentioned only one issuer, i.e., Textron; the civil complaint against Wilkis alleged that he had also committed unlawful acts with respect to the securities of more than 50 other issuers. The pleas of guilty thus did not establish wrongdoing in the vast majority of the transactions at issue in the civil suits. For more than 98% of the securities adverted to in the SEC civil suits, there was neither an adjudication nor a concession to ground the district court's premise that the disgorged assets were obtained as a result of the unlawful conduct alleged in the SEC complaints. 59 Second, even assuming that all of the allegations in the SEC complaints had been established, the district court's conclusion that Levine and Wilkis did not have property rights in the assets they disgorged was not warranted by the applicable legal principles. In determining whether the disgorged assets constituted property ... belonging to the assessed taxpayer within the meaning of Sec. 6321, we look principally 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, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). Nonetheless, though the federal tax lien statute  'creates no property rights but merely attaches consequences, federally defined, to rights created under state law,'  id., other provisions of federal law may prevent the formation of such rights. Thus, if a taxpayer has purportedly acquired an interest by means of a transaction that violated a federal statute, the court should consider whether the federal statute has made the supposed transfer of property void: 60 When a federal statute condemns an act as unlawful, the extent and nature of the legal consequences of the condemnation, though left by the statute to judicial determination, are nevertheless federal questions, the answers to which are to be derived from the statute and the federal policy which it has adopted. To the federal statute and policy, conflicting state law and policy must yield. 61 Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 176, 63 S.Ct. 172, 174, 87 L.Ed. 165 (1942). If federal law made violative transactions void, the court would properly conclude that the transferee had thereby acquired no property right. 62 In the present case, the district court refused to recognize statutory priority for the IRS assessments against Levine and Wilkis on the ground that they had engaged in fraudulent transactions in violation of the 1934 Act, that those transactions were void, and that Levine and Wilkis therefore had acquired no property interest in the securities thereby obtained. The long-established interpretation of the 1934 Act, however, does not support the district court's construction. Section 29 of the 1934 Act provides, in pertinent part, that: 63 [e]very contract made in violation of any provision of this chapter or of any rule or regulation thereunder ... shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule, or regulation .... 64 15 U.S.C. Sec. 78cc(b) (1982). Notwithstanding this section's use of the word void, judicial interpretation has established that this provision render[s] the contract merely voidable at the option of the innocent party. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 387, 90 S.Ct. 616, 623, 24 L.Ed.2d 593 (1970); see id. at 386-88, 90 S.Ct. at 622-23. Thus the contract remains in force until the innocent party exercises his right to have it judicially set aside. Since federal law does not make the unlawful securities transaction void, but merely voidable, we must look to state law to see what property rights are conferred by a voidable transaction. See Aquilino v. United States, 363 U.S. at 513, 80 S.Ct. at 1280. 65 Under New York law, the culpable party to a voidable transaction acquires title, albeit voidable title, to the property he has received. Stanton Motor Corp. v. Rosetti, 11 A.D.2d 296, 203 N.Y.S.2d 273 (3d Dep't 1960). He may convey good title to a good-faith purchaser, see, e.g., Hartford Accident & Indemnity Co. v. Walston & Co., 21 N.Y.2d 219, 287 N.Y.S.2d 58, 234 N.E.2d 230 (1967); Stanton Motor Corp. v. Rosetti, 11 A.D.2d 296, 203 N.Y.S.2d 273, and an innocent party's lien may attach to the property in the culprit's possession, unencumbered by the equities between the parties on either side of the fraud, see Mendelsohn v. R. Simpson & Co., 267 A.D. 564, 47 N.Y.S.2d 489 (1st Dep't 1944). Since federal law makes contracts violating the 1934 Act voidable at the option of the victim, and state law grants title until the contract is voided, we conclude that property acquired by Levine or Wilkis in violation of the 1934 Act constituted property to which the federal tax lien could attach. 66 We note in passing that in general under state law a party who acquires property from a defrauding party and who has actual knowledge of the fraud may himself acquire only voidable title, see Anderson v. Blood, 152 N.Y. 285, 46 N.E. 493 (1897), and that the IRS, as part of the government, could be deemed to have knowledge of the wrongdoing attributed to Levine and Wilkis by other parts of the government. This state-law principle, however, cannot prevent attachment of a valid IRS lien because state law controls only with respect to the question of whether the taxpayer had a property interest. Once the latter question is answered in the affirmative, the validity of the government's tax lien is governed by federal law. See United States v. National Bank of Commerce, 472 U.S. 713, 722-23, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985). State law define[s] the nature of the taxpayer's interest in the property, but the state-law consequences of that definition are of no concern to the operation of the federal tax law. Id. at 723, 105 S.Ct. at 2926; see also United States v. Bess, 357 U.S. 51, 55-57, 78 S.Ct. 1054, 1057-58, 2 L.Ed.2d 1135 (1958) (fact that property in question was of a type that under state law was not attachable by creditors' liens did not impede attachment of federal tax lien). 67 In sum, under federal law, Levine and Wilkis entered into contracts that were not void but merely voidable; state law gave them a property interest in the securities thereby acquired; and under federal law, that property interest was subject to a tax lien in favor of the government under Sec. 6321. 68 The acquisition of these property interests does not, however, mean that the IRS is necessarily entitled to prevail on all of its claims here, for Levine and Wilkis lost their property rights in the disgorged assets at the time of disgorgement. They transferred all right, title and interest in those assets to the receiver, and both consent judgments provided that [n]o part of the receivership estate shall in any event be returned to the Defendants, ... their successors, heirs or assigns. Even if the assets in the receivership estate exceeded the value of the claims and the expenses of the receiver, the excess was not to be returned; rather, the balance was to be paid to the United States Treasury as a civil penalty. In transferring the assets, Levine and Wilkis reserved only the right to be heard as to the disposition of the assets. The right to be heard is not the power to control disposition, and the reservations that were agreed to were not sufficient to preserve ownership in the disgorged assets. 69 The facts that Levine and Wilkis acquired title to the assets in question prior to 1986 and yielded ownership on disgorgement in 1986 have varying implications for the claims at hand.
70 Preliminarily, we note that the Commission suggests that Levine had lost his property rights in the disgorged assets prior to the IRS's first assessment against him on May 23, 1986, by virtue of the freeze order that was entered by the court on May 12. We reject this contention. The May 12 order was a temporary restraining order prohibiting Levine and his codefendants from withdrawing, transferring, pledging, encumbering, assigning, dissipating, concealing or otherwise dealing with or disposing of any securities, funds or other assets of any of the defendants whatsoever and wherever situated or permitting any of the foregoing. Though the order required the defendants to deposit securities, funds, and other assets with the court immediately, in order to preclude dissipation, that relief was of a temporary character, as the order contemplated that after the deposits were made, the defendants would show cause why each of the defendants should not hold and retain [these assets] within his or its control. The freeze order plainly did not purport to adjudicate Levine's right eventually to regain possession or full use of the property. Cf. United States v. Safeco Insurance Co. of America, Inc., 870 F.2d 338, 341 (6th Cir.1989). Although the restrictions were sufficiently significant to implicate due process concerns, see United States v. Moya-Gomez, 860 F.2d 706, 725-26 (7th Cir.1988), they did not deprive Levine of ownership. 71 As noted above, Sec. 6322 provides that an IRS lien attaches to the taxpayer's property at the time the assessment is made. Levine transferred ownership of nearly all of his disgorged assets on June 19, 1986. The IRS made its first assessment against him, giving rise to a lien of some $8.5 million, on May 23, 1986. The assessment created a lien on all of the property owned by Levine at that time. That property included the assets that were later transferred to the receiver. Accordingly, the IRS has a lien in that amount on the disgorged assets. 72 In contrast, the IRS's subsequent assessment on Levine occurred after disgorgement. Though this assessment too created a government lien on all the property then owned by Levine, Levine did not then own the disgorged assets. Hence, the IRS does not have a lien on the disgorged assets resulting from the later assessment. 73 Under Sec. 6321, therefore, the IRS is entitled to priority payment from Levine's disgorged assets in the amount of approximately $8.5 million, and no more. On remand, the district court will determine the precise amount of the lien.
74 Wilkis disgorged most of his assets to the receiver on July 3, 1986, and the remainder by October 1986. All of the IRS's assessments on Wilkis occurred in 1987, subsequent to his disgorgements. Though these assessments created government liens on all the property then owned by Wilkis, Wilkis did not then own the disgorged assets. Hence, Sec. 6321 did not give the IRS a lien on any of the assets disgorged by Wilkis. 75