Court Opinion

ID: 2999860
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:58:31.44054+00
Date Added: 2024-06-11T12:50:07.263121
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 06-1298
UNITED STATES OF AMERICA,
                                                  Plaintiff-Appellant,
                                  v.

PETER SWAN, JANE HARRIS,
   JOEN TOWNE, and THOMAS TOWNE,
                                               Defendants-Appellees.
                          ____________
             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
                No. 04 C 3020—Amy J. St. Eve, Judge.
                          ____________
   ARGUED SEPTEMBER 6, 2006—DECIDED NOVEMBER 1, 2006
                          ____________

  Before FLAUM, Chief Judge, and BAUER and POSNER,
Circuit Judges.
  POSNER, Circuit Judge. The government wants to fore-
close a tax lien on a house in Libertyville, Illinois, a fancy
distant suburb of Chicago. The house is occupied by its
former owners, Thomas and Joen Towne, who owe the
government back taxes. But it is owned by Peter Swan and
his wife Jane Harris, and they alone have a financial stake in
avoiding foreclosure. After a one-day bench trial the district
court awarded judgment to the defendants, which means, as
a practical matter, to Swan and Harris.
2                                                  No. 06-1298

  A federal tax lien attaches to “all property and rights
to property, whether real or personal,” of a federal taxpayer.
26 U.S.C. § 6321. State law determines what property rights
the taxpayer has, Drye v. United States, 528 U.S. 49, 58 (1999);
United States v. Bess, 357 U.S. 51, 55 (1958); United States v.
Librizzi, 108 F.3d 136, 137 (7th Cir. 1997), because, as the
Supreme Court said in a related context, “the federal statute
creates no property rights but merely attaches consequences,
federally defined, to rights created under state law.” United
States v. National Bank of Commerce, 472 U.S. 713, 722 (1985).
Federal law determines whether those rights are the sort of
rights to which a lien attaches, United States v. Craft, 535 U.S.
274, 278-79 (2002), but there do not appear to be any rele-
vant differences between state and federal law in this case.
  The government argues that the Townes are the real
owners of the house in which they live, and if this is right
then the government can seize the house to satisfy its tax
claim against them. But if they are merely tenants, the
government can no more seize the house than it could
seize Trump Tower because one of its tenants owed back
taxes.
  The amount of the asserted lien, as of October 2004, was
about $329,000, and was based on taxes owed by the
Townes for the tax years 1988 through 1997 (except 1990 and
1992). No doubt the amount is significantly more
today because of accrual of interest, so foreclosure may wipe
out most of the Swans’ equity in the house, for which they
paid $296,000 in 2003, though this depends on how much
the property has appreciated since then.
  Mr. Towne has lived in the house since 1976 (we don’t
know the date of his marriage to Joen), and apparently
he owned it until 1987, when the mortgagee foreclosed and
obtained a judicial deed to the house. The mortgagee
No. 06-1298                                                 3

sold the house the following year to a friend of Towne’s
named Jack Shull, who leased the house back to the Townes.
The Townes eventually defaulted on the payments called for
by the lease, and in 1999 Shull filed a suit in state court to
evict them. They resisted eviction and the matter was settled
in 2001 by the intervention of the Mary V. Sams Revocable
Trust. Mary Sams is Mr. Towne’s mother-in-law and, it
appears, controls the trust. The trust bought the house from
Shull for $219,000 and promptly leased it back to the
Townes. The following year, however, the Townes having
again defaulted, the trust brought a suit to evict them. The
Townes were represented in the suit by Peter Swan, who is
a lawyer. The suit was settled. The essential terms of the
settlement were that the Townes could for four months
direct that the house be sold to anyone of their choice,
provided that they repaid the trust $296,000 from the
proceeds of the sale. Since they could direct that the house
be sold to themselves, they had in effect an option to buy
(back) the house for $296,000. If they did not sell the house
within the four-month period and remit the agreed sum, the
trust would be entitled to take possession of the house—that
is, to evict the Townes.
  In August 2003, shortly before the expiration of the four-
month period, Swan and his wife agreed to buy the
house from the trust for $296,000. The Swans, to whom the
Townes had directed the sale, agreed that the Townes could
continue to live in the house for 24 months, apparently at
below-market rent, and during that time they would have
the right to buy the house by paying the Swans what the
Swans had paid for it, $296,000, plus interest and costs. If
the Townes did not buy the house within that period, but
the Swans later sold it for more than $420,000, the Townes
would be entitled to the difference between the sale price
and $420,000.
4                                                  No. 06-1298

  The house was not sold during the 24-month period;
indeed, it has not been sold yet. The Townes are living there
still, determined not to leave until their last child graduates
from high school. The Swans would like to sell the
house—they would be entitled to the appreciation over their
purchase price up to $420,000—but they cannot sell it at a
decent price until the dispute over the government’s lien is
resolved.
  The government has two theories for why it can foreclose
the lien on the house even though the owners of the
house are not the taxpayers. The first is that the rights
that the Townes acquired in their former house by virtue
of the transactions that we’ve described are property
rights within the meaning of the federal tax lien statute.
But the rights that they acquired other than those of a
tenant, which as we said are not property rights within
the meaning of the lien statute, were a four-month and later
a 24-month option to buy the house for $296,000, a right to
direct the sale of the house to someone else if the first option
was not exercised, and a right to sale proceeds above
$420,000 should the second option not be exercised and the
house later be sold to someone else.
  The grant of an option is enforceable in Illinois, but as a
contract right, not a property right. Keogh v. Peck, 147 N.E.
266, 269 (Ill. 1925); Artful Dodger Pub, Inc. v. Koch, 596 N.E.2d
39, 42 (Ill. App. 1992); Fried v. Barad, 530 N.E.2d 93, 99 (Ill.
App. 1988). The government argues that this doesn’t matter,
that a contract right can be recharacterized as a property
right. Even if this is true (a proposition for which we can
find no support in Illinois law, though we have found
California cases which treat an option to purchase land as a
property right for eminent-domain purposes, e.g., San Jose
Parking, Inc. v. Superior Court, 110 Cal. App. 4th 1321, 1326-
No. 06-1298                                                   5

27 (2003); Claremont Terrace Homeowners’ Ass’n v. United
States, 146 Cal. App. 3d 398, 406 (1983)), all it would imply
is that the government could foreclose a lien on that right,
not that it could foreclose a lien on the property that would
have been acquired had the option been exercised and the
Townes acquired title to the house. The government does
not argue for that alternative relief, or attempt to value
either option or the right to direct the sale to someone else.
  The government’s other argument is that the Swans are
merely “nominees” or “alter egos” of the Townes. That is a
better theory, G.M. Leasing Corp. v. United States, 429 U.S.
338, 351 (1977); Scoville v. United States, 250 F.3d 1198, 1202-
03 (8th Cir. 2001); Oxford Capital Corp. v. United States, 211
F.3d 280, 282-86 (5th Cir. 2000) (per curiam), though it failed
for want of proof in the district court. Suppose a person who
wants to evade taxes parks his property with a friend or
family member. That would be a fraudulent conveyance,
and so the person to whom the property was conveyed
would be deemed the taxpayer’s “nominee” and forced to
cough it up. See Scoville v. United States, supra, 250 F.3d at
1202-03; Shades Ridge Holding Co. v. United States, 888 F.2d
725, 728-29 (11th Cir. 1989); Loving Saviour Church v. United
States, 728 F.2d 1085, 1086 (8th Cir. 1984) (per curiam).
Because Mary Sams was the mother of one of the taxpayers
and the mother-in-law of the other, and because Swan
describes himself as a “friend” of Mr. Towne as a result of
having represented him in an unrelated case shortly before
he became his attorney in the Townes’ dispute with Mary
Sams, the government smells a rat. But it presented little
evidence that would have enabled the court to find the
rat—little evidence that the Townes ever had a property
interest that Shull, or Sams, or the Swans tried to keep out
of the hands of the government.
6                                                No. 06-1298

  The Townes lost the house to their mortgagee the year
before they began underpaying their taxes. The mortgagee
sold the property to Shull, Shull to the Sams Trust, the Sams
Trust to the Swans. Shull and Swan were friends of Towne,
and there was a family relation in the case of the trust, but
transactions among friends or even relatives are not pre-
sumptively fishy—they minimize information and broker-
age costs. There is no evidence that Shull was a “nominee”
of Towne, and the only indication that the trust and the
Swans may have been nominees was that they must have
known that the Townes had little or no incentive to sell the
house, since any money they received from the sale would
in all likelihood be seized by the government. Why then did
the trust and the Swans grant the Townes options to buy the
house? Why did they think the Townes would if they didn’t
exercise the options make a serious effort to sell the house?
Yet there is no evidence that the trust or the Swans wanted
the Townes to remain as squatters until the last cygnet left
the nest for—and yet the Swans knew that the Townes had
stiffed all of their previous landlords and had success-
fully resisted eviction (and had stiffed the IRS as well);
how could they have intended anything other than what has
occurred? What’s more, the Swans apparently have not tried
to evict the Townes.
  Maybe the Townes directed the sale of the house to the
Swans at the bargain-basement price of $296,000 as a quid
pro quo for the Swans’ letting the Townes continue to live
in the house, and at a bargain rental rate. (For if the Townes
had directed a sale at a higher price, the government might
have seized the difference—the part of the proceeds to
which the Townes would be entitled—and the new owner
would either have kicked them out or charged them the
market rental rate.) Such a collusive scheme between the
Townes and the Swans would if proved have subjected both
No. 06-1298                                                 7

couples to legal sanctions, but is not argued by the govern-
ment, which insists that the Townes should be regarded as
the real owners of the house, which they have not been for
the last 20 years.
  Anyway the government had its trial; it was for the
district judge to untangle these knots; and the judge’s
finding that the Townes are not the real owners is not
clearly erroneous and therefore binds us.
                                                  AFFIRMED.

A true Copy:
       Teste:

                          _____________________________
                           Clerk of the United States Court of
                             Appeals for the Seventh Circuit

                   USCA-02-C-0072—11-1-06