GARDNER v. U.S., 34 F.3d 985 (10th Cir. 1994)

TERRYL A. GARDNER, PLAINTIFF-APPELLEE, v. UNITED STATES OF AMERICA, DEFENDANT-APPELLANT.

No. 93-3243.United States Court of Appeals, Tenth Circuit.
September 8, 1994.

Regina S. Moriarty, Tax Div., Dept. of Justice, Washington, DC (Michael L. Paup, Acting Asst. Atty. Gen., William S. Estabrook, Tax Div., Dept. of Justice, Washington, DC, with her on the brief) (Randall K. Rathbun, U.S. Atty., of counsel), for defendant-appellant.

Christopher A. McElgunn, of Klenda, Mitchell, Austerman
Zuercher, Wichita, KS (J. Michael Morris, with him on the brief), for plaintiff-appellee.

Appeal from the United States District Court for the District of Kansas.

Before SEYMOUR, Chief Judge, HENRY, Circuit Judge, and DAUGHERTY, Sr. District Judge.[*]

HENRY, Circuit Judge.

[1] The Internal Revenue Service (IRS) appeals the district court order granting summary judgment in a quiet title action in favor of the plaintiff-appellee, Ms. Terryl A. Gardner. The United States District Court for the District of Kansas held that the marital property awarded to Ms. Gardner in a divorce proceeding is not subject to a tax lien held by the government for taxes assessed against the plaintiff’s former husband, Billie L. Gardner. The IRS argues that Mr. Gardner had “property” or “rights to property,” within the meaning of 26 U.S.C. § 6321, and therefore that he had a sufficient ownership interest when the taxes were assessed against him for a federal tax lien to attach to the property in question. For the reasons stated below, we disagree, and accordingly affirm the district court’s order.

[2] I. BACKGROUND
[3] The facts of this case are not in dispute. On January 22, 1985, Ms. Gardner commenced a divorce action in the Kansas District

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Court. On August 1, 1986, prior to entry of a divorce decree, the IRS assessed previously unpaid income taxes against Mr. Gardner and filed a Notice of Federal Tax Lien three days later.[1]
Subsequently, Mr. Gardner filed a Chapter 7 bankruptcy petition. The bankruptcy court allowed the divorce action to continue by lifting the automatic stay,[2] and on January 12, 1987, the Kansas District Court entered the divorce decree, awarding a substantial amount of the property to Ms. Gardner.[3]

[4] Ms. Gardner later filed suit in bankruptcy court against the bankruptcy trustee and the United States, seeking to obtain the property that had been awarded to her in the divorce action. The bankruptcy court awarded the property to Ms. Gardner, holding that under Kansas law, any interest in the property that the government might have held was divested by entry of the divorce decree. The district court affirmed the bankruptcy court’s decision, but we reversed, holding that the bankruptcy court lacked jurisdiction over a conflict between two creditors when the property was no longer part of the bankruptcy estate. In re Gardner, 913 F.2d 1515 (10th Cir. 1990) (per curiam). However, we specifically declined to reach the issue of whether the property was subject to a federal tax lien, remanding the case for dismissal because the bankruptcy court lacked jurisdiction. [5] On December 7, 1990, Ms. Gardner filed the present complaint in the district court to quiet title to the marital property under 28 U.S.C. § 2410. In response, the IRS argued that a federal tax lien had attached to Mr. Gardner’s property interests on the date of assessment and that this lien took priority over Mr. Gardner’s interest in the property, which the government characterized as merely inchoate. The case was submitted to the district court for a decision on the basis of the parties’ stipulations, and both parties filed motions for summary judgment. The district court held that Ms. Gardner was entitled to summary judgment because she came into ownership of the property when the divorce petition was filed. Mr. Gardner, therefore, had no interest in the property to which the tax lien could attach.[4]

[6] II. DISCUSSION
[7] We review a grant of summary judgment de novo, applying the same legal standard used by the district court. Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241
(10th Cir. 1990). “Summary judgment is appropriate when there is no genuine dispute over a material fact and the moving party is entitled to judgment as a matter of law.” Russillo v. Scarborough, 935 F.2d 1167, 1170 (10th Cir. 1991); see
Fed.R.Civ.P. 56(c). The facts are not in dispute in this case and the matter at issue is purely a question of Kansas state law. Interpretation of state law by district courts is subject to do novo review. Salve Regina

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College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1990).

[8] A. Federal Tax Liens
[9] Section 6321 of the Internal Revenue Code provides:

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.

[10] 26 U.S.C. § 6321. Under 26 U.S.C. § 6322, this lien arises at the time of assessment. [11] A lien arising under Section 6321 cannot, however, extend beyond the property interests held by the taxpayer. United States v. Rodgers, 461 U.S. 677, 690-91, 103 S.Ct. 2132, 2140-41, 76 L.Ed.2d 236 (1982). Consequently, a federal tax lien attaches only to the property interests of the delinquent taxpayer at the time of assessment. United States v. Wingfield,
822 F.2d 1466, 1472 (10th Cir. 1987). [12] Additionally, although federal law delineates the standard for determining when a federal tax lien attaches,

The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had “property” or “rights to property” to which the tax lien could attach. In answering that question, both federal and state courts must look 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.”

[13] Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1279-80, 4 L.Ed.2d 1365 (1960) (quoting Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585 (1940)) (alteration in original); see also United States v. Colorado, 872 F.2d 338, 339-40 (10th Cir. 1989). Therefore, in order to determine the rights of Ms. Gardner and the United States in this case, we must first examine whether Mr. Gardner had “property” or “rights to property” under Kansas state law on the date the taxes were assessed against him. It is only after a taxpayer’s legal interest in the property is so determined that federal law dictates the tax consequences. United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985).

[14] B. Kansas Property Law
[15] In Cady v. Cady, 224 Kan. 339, 581 P.2d 358 (1978), the Kansas Supreme Court considered the effect that filing a petition for divorce has on the property interests of the parties. Prior to filing a divorce petition “a spouse possesses only an inchoate interest in real estate held by the other spouse.” Id. at 362 (citing McGill v. Kuhn, 186 Kan. 99, 348 P.2d 811 (1960)). “The filing for divorce, however, has a substantial effect upon the property rights of the spouses. At that moment each spouse becomes the owner of a vested, but undetermined, interest in all the property individually or jointly held.” Id. at 362-63 (emphasis added). The Cady court therefore held “that the filing of a petition for divorce . . . creates a species of common or co-ownership in one spouse in the jointly acquired property held by the other.” Id. at 363. The extent of that interest is to be subsequently determined by the state trial court when dividing the property under the divorce decree pursuant to Kan.Stat.Ann. § 60-1610(b) (Supp. 1993). Id.[5]

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[16] Ultimately, the Cady court held that such a property interest is sufficient to defeat a claim by the IRS that division of property pursuant to a divorce decree constitutes a taxable transfer of property. Id. at 360, 363. Instead, the court characterized it as a division of property between two co-owners, which is not a taxable transfer because the parties had an interest in the property prior to the division between them. [17] Nearly ten years later, the Kansas Supreme Court revisited the issue. In Smith v. AIFAM Enters., 241 Kan. 249, 737 P.2d 469
(1987), the court held that the filing of a petition of divorce creates a vested property interest in both spouses such that the property is not subject to a judgment creditor’s lien or execution obtained against one of the spouses while the divorce action is pending. Id., 737 P.2d at 474. The court reasoned that allowing the judgment creditor to prevail on the basis of a lien arising after the divorce petition was filed would “interfere with the ability of the trial court to divide the property on a fair and equitable basis” as mandated by Section 60-1610(b). Id.

[18] C. Application to the Instant Case
[19] Through its decision in Cady, the Kansas Supreme Court has recognized a policy interest in granting the trial court adequate leeway to divide the marital property on a “just and reasonable” basis under Section 60-1610(b). The Kansas courts address this interest by treating the property interests created by the divorce decree as having vested on the date the divorce petition was filed. Thus, the spouse is deemed to have an interest in the property on the date of filing, even though the extent of that interest is undetermined prior to entry of the divorce decree.

[20] In this case, both Mr. and Ms. Gardner had a vested interest in the marital property when the IRS assessed the taxes against Mr. Gardner. However, the extent of those interests had yet to be determined by the Kansas District Court. We now know, due to the divorce decree entered by the Kansas court, that Ms. Gardner’s interest extended to almost all of the property on the assessment date, and Mr. Gardner’s interest extended to practically none of the property. [21] It has been aptly noted that “the Government’s rights can rise no higher than those of the taxpayer to whom the property belongs. . . . Moreover, the tax collector not only steps into the taxpayer’s shoes but must go barefoot if the shoes wear out.” 4 B. Bittker, Federal Taxation of Income, Estates, and Gifts ¶ 111.5.4, at 111-12 (1981); see also Rodgers, 461 U.S. at 690-91, 103 S.Ct. at 2140-41 (A federal tax lien under Section 6321 “cannot extend beyond the property interest held by the delinquent taxpayer.”). Because of the divorce decree, Mr. Gardner had no rights to the property in question when the IRS made its assessment against him, no tax lien could attach, and Ms.

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Gardner owns that property free of any such lien.

[22] The government attempts to avoid this conclusion by advancing a number of arguments, none of which we find persuasive. First, the government contends that the fact that the divorce decree was written in terms of a “judgment” against Mr. Gardner,[6]
suggests that he maintained an ownership interest in the property up to the time the decree was entered, and therefore that a tax lien did attach to the property. We disagree. Although the divorce decree is framed in terms of a “judgment,” we cannot ignore the fact that the Kansas court merely divided marital property pursuant to its duty to do so in a “just and reasonable” manner under Kan. Stat.Ann. § 60-1610(b). Under Cady, this division of property serves to determine the extent of the parties’ interests in the marital property, which had previously vested when the divorce petition was filed. Because the property interests vested at the time the petition was filed, this subsequent determination of the extent of those interests does not indicate that Mr. Gardner held any lingering interests in the property at issue. [23] The government also argues that the doctrine of relation back may not serve to extinguish a federal tax lien. In making this argument, the government relies on United States Supreme Court precedent holding that a judgment lien may not relate back to the date of attachment, thereby gaining priority over an intervening lien. See United States v. Security Trust Savings Bank, 340 U.S. 47, 50, 71 S.Ct. 111, 113, 95 L.Ed. 53 (1950). However, the government’s reliance on this precedent is misplaced. As we have already noted, Ms. Gardner’s interest in the property in this case is not that of a judgment creditor who holds a lien. Instead, Ms. Gardner had a vested ownership interest in the property prior to any attempt by the IRS to create a tax lien. Because the government simply has no rights to property beyond the interests held by the delinquent taxpayer, no tax lien ever attached to the property that was awarded to Ms. Gardner. [24] For the same reasons, the government’s argument that this case raises an issue of priority between the parties must also fail. Because the property interests were already vested in Ms. Gardner when the tax lien was filed, the government simply has no rights to Ms. Gardner’s property. [25] Finally, during oral argument the government urged that the outcome we reach today might encourage spouses to conspire to engage in tax evasion. In the unlikely event that spouses may seek to avoid a tax lien through a divorce action, it could, of course, be set aside for fraud — just as any other fraudulent conveyance may be redressed. See, e.g., Unif. Fraudulent Conveyance Act § 7, 7A U.L.A. 509 (1918) (“Every conveyance made and every obligation incurred with actual intent . . . to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.”).[7] [26] Affirmed.

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