Court Opinion

ID: 9670344
Source: CourtListenerOpinion
Date Created: 2023-08-24 03:19:11.92815+00
Date Added: 2024-06-11T09:42:32.006945
License: Public Domain

SABERS, Justice
(dissenting).
I dissent on Issue III because the United States is not entitled to priority of escrow funds by virtue of 26 U.S.C. § 6321. The core of the IRS’ argument is that the prepaid rents held in escrow were at all times the property of Ceasar’s, Inc., and thus subject to the IRS lien. As pointed out in Kurylas’ brief, the IRS failed to cite three paragraphs from the escrow agreement which make clear that the payments into the escrow account were prepaid lease payments. Ceasar’s had no right to those payments; they were paid to the escrow account for Kurylas and belonged to Kurylas under the expressed terms of the escrow agreement, and contrary to the IRS’ assertions, no contingency needed to occur for those payments to become Kurylas’ property. In fact, the only contingency was that Ceasar’s would be entitled to the use of the premises six months later if they avoided default.
The majority opinion states at page 659-60:
Section 6321 of the Internal Revenue Code of 1954 imposes a federal tax lien upon “all property and rights to property, whether real or personal,” belonging to a delinquent taxpayer. 26 U.S.C. § 6321 (1964). Such tax liens arise automatically at the time of assessment and continue until the underlying tax liability is satisfied or the statute of limitations expires. This lien attaches to all property or property rights the taxpayer then holds or subsequently acquires. Glass City Bank v. United States, 326 U.S. 265, 66 S.Ct. 108, 90 L.Ed. 56 (1945); J.D. Court, Inc. v. United States, 712 F.2d 258 (7th Cir.1983); Bank of America Nat. Trust & Sav. Ass’n. v. Mamakos, 509 F.2d 1217 (9th Cir.1975). The scope of Section 6321 is “broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565, 573 (1985).
The dispute is in the application of the law, not in the law itself. The point the majority opinion obviously overlooks is that the federal tax lien only reaches the interest in property that a taxpayer has, and not the interest in property of the taxpayer’s creditor. These prepaid lease payments belonged to Kurylas under the escrow agreement and neither Ceasar’s nor its successor, the IRS, had any interest therein except for the accrued interest. This position is indirectly conceded by the majority opinion on page 662 where it states:
The second two payments were made subsequent to the date of assessment, on September 9 and October 7,1985. These funds placed in the escrow account were encumbered at the time of deposit; therefore, Kurylas’ claim must yield to the IRS statutory authority. The interest accruing on these encumbered funds *664would [also be encumbered]. Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975).
The majority opinion is correct as to interest and payments after the date of assessment, but not correct as to payments before the date of assessment. The federal tax lien assessment occurred on August 19, 1985 and the federal tax lien did not attach to any funds paid into the escrow account prior to that date. Therefore, the first two prepaid lease payments of $22,500 each which were made on July 1, 1985 and July 21,1985, were the property of Kurylas and not the property of Ceasar’s and therefore not attachable by the IRS. The IRS’ federal tax lien could only attach to property of Ceasar’s, which at that point was nothing more than the right to use the property for periods of one month each in December 1985 and January 1986 and accrued interest.
This escrow account operates under South Dakota law the same as a pledge and does not need to be filed to be effective as long as the two prepaid lease payments were paid prior to the IRS’ assessment date of August 19, 1985. As indicated above, the IRS lien only attaches to the rights of the debtor (taxpayer) and not the rights or money of the debtor’s creditor.
As indicated in the majority opinion at page 660, the priority of federal tax liens over other liens is essentially based upon
“[FJirst in time is the first in right.” United States v. City of New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520, 526 (1954). This general lien of the government prevails against all unperfected or inchoate liens covering a taxpayer’s property or rights to property with the exceptions outlined in 26 U.S.C. § 6323 (1964). That section provides that federal tax liens are invalid with respect to the claims of any “purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until proper notice has been filed.” J.D. Court, Inc., supra.
This federal tax lien was invalid with respect to the claims to Kurylas’ property which was properly placed in an escrow account prior to and outside the reach of Ceasar’s or its creditor, the IRS.