Filed: Feb. 28, 2014
Latest Update: Mar. 02, 2020
Summary: power to take the property free of those liens.1, Although the IRS issued the Discharge Certificate at issue, in this case, the federal government, not the IRS, intervened in, Hannon's land damages suit because the IRS holds tax liens in, favor of the United States.property. See id.total tax lien.
United States Court of Appeals
For the First Circuit
No. 13-1022
PATRICK J. HANNON,
Plaintiff,
v.
CITY OF NEWTON,
Defendant.
UNITED STATES OF AMERICA,
Interested Party, Appellant,
v.
COMMONWEALTH OF MASSACHUSETTS;
RITA S. MANNING,
Interested Parties, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Lynch, Chief Judge,
Thompson and Kayatta, Circuit Judges.
Anthony T. Sheehan, Attorney, Tax Division, Department of
Justice, with whom Teresa E. McLaughlin, Attorney, Tax Division,
Department of Justice, Kathryn Keneally, Assistant Attorney
General, and Carmen M. Ortiz, United States Attorney, were on
brief, for appellant.
Thomas J. Flannagan, with whom MacLean Holloway Doherty
Ardiff & Morse, P.C. was on brief, for appellee.
February 28, 2014
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LYNCH, Chief Judge. This case presents an issue of first
impression concerning the authority under federal law of the
Internal Revenue Service to discharge a portion of its tax liens on
a piece of real property taken by eminent domain in exchange for
payment from that taking while asserting the remaining value of its
liens on any proceeds that the taxpayer obtains in a state post-
taking suit for undercompensation damages. The Internal Revenue
Code, 26 U.S.C. § 6325(b)(2)(A), gives the IRS discretion to
discharge property from a tax lien if the IRS is paid an amount,
"which shall not be less than the value" of its interest in that
property. We conclude that the IRS discharge under this provision
did not surrender the government's tax lien on the proceeds of the
taxpayer's post-taking suit. We reverse the district court's
determination to the contrary. Hannon v. City of Newton, 820 F.
Supp. 2d 254, 258, 261 (D. Mass. 2011).
We quickly summarize both the issue and our conclusions.
In the spring of 2007, Patrick J. Hannon owed the United States
over $4 million for unpaid taxes, and the IRS held tax liens for
that sum against his property, including a parcel of land he owned
at 20 Rogers Street in Newton, Massachusetts. In March 2007, the
City of Newton, seeking to take the 20 Rogers Street property by
eminent domain, asked the IRS to assist it by discharging that
parcel from tax liens, thus avoiding any question as to Newton's
power to take the property free of those liens. On May 4, 2007,
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the IRS discharged that specific parcel of land (20 Rogers Street)
from its tax lien under 26 U.S.C. § 6325(b)(2)(A) in a Certificate
of Discharge. That Certificate expressly stated that it "sav[ed]
and reserv[ed] . . . the force and effect of said tax lien against
and upon all other property or rights to property to which said
lien is attached, wheresoever situated."
Three days later, on May 7, 2007, Newton paid $2.3
million to take Hannon's property at 20 Rogers Street by eminent
domain. The IRS had authorized the tax lien discharge on 20 Rogers
Street upon its receipt of $57,214.55, which was its estimate of
what would remain of the $2.3 million paid by Newton after the
mortgagee, a senior creditor, was paid in full.
Following the taking, on November 10, 2008, Hannon
exercised his statutory right under Massachusetts eminent domain
law to sue Newton in state court, claiming that Newton had not
sufficiently compensated him for taking his property. See Mass.
Gen. Laws ch. 79, § 8A. He was awarded $420,000 as damages for
undercompensation on July 6, 2010. Both the government1 and Rita
S. Manning, a lower-priority creditor who had obtained a judgment
against Hannon, intervened in this land damages suit and asserted
priority to receive the damages award. The government removed the
1
Although the IRS issued the Discharge Certificate at issue
in this case, the federal government, not the IRS, intervened in
Hannon's land damages suit because the IRS holds tax liens "in
favor of the United States." 26 U.S.C. § 6321.
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case to federal court, and both the government and Manning moved
for summary judgment on the question of whose lien had priority.
The district court entered summary judgment in favor of Manning,
holding that the IRS's decision to discharge 20 Rogers Street from
federal tax liens in exchange for payment from the taking also
meant the government had relinquished any tax lien on the later
damages award.
There is no dispute that before the taking and the filing
of the IRS Certificate, Manning's judgment lien was junior to the
government's tax lien. The question of law before us is whether
the IRS Certificate issued under § 6325(b)(2)(A), read in light of
§ 6325(b)(3), released or abandoned any claims the IRS had on the
post-taking proceeds awarded to the taxpayer under Mass. Gen. Laws
ch. 79, § 8A. We hold the IRS lien on those post-taking proceeds
is valid and so senior. As a result, we reverse and direct the
district court to enter summary judgment in the government's favor.
I.
A. The Discharge of the Real Property at 20 Rogers Street
from Federal Tax Liens
On August 23, 2002, Hannon purchased a 1.5 acre
beachfront residence located at 20 Rogers Street in Newton,
Massachusetts for $3,000,000. That same day, Merrill Lynch Credit
Corp. recorded its purchase money mortgage in the amount of
$1,950,000 against the property.
-5-
Meanwhile, Hannon never paid his federal income tax and
other federal taxes assessed against him for the years 1999, 2000,
and 2001, even after the IRS had issued a notice and demand for
payment of those taxes. Due to this outstanding tax liability, the
IRS recorded notices in February 2003 of federal tax liens against
Hannon's real property in the Middlesex County Registry of Deeds
for taxes owed from years 1999 to 2001, totaling $5,447,154. See
Mass. Gen. Laws ch. 36, § 24 ("Notice of a federal tax
lien . . . on any real property or fixtures shall be filed with the
register of deeds of the county in which such real property or
fixtures are situated."). Hannon's Newton, Massachusetts property
is located in Middlesex County.
The IRS also recorded notices, in late January and early
February 2003, of federal tax liens against Hannon's personal
property for the same amount in the District Court for the District
of Massachusetts.2
About two years later, on March 17, 2005, Manning
obtained a judgment against Hannon in the amount of $103,333.33.
On June 9, 2005, she obtained an execution for that amount against
Hannon's "goods, chattels or land," which she recorded at the
2
The Internal Revenue Code directs the IRS to file notices
of federal tax liens against personal property in the District
Court for the judicial district in which the personal property is
located whenever state law has not designated a different filing
forum, as is the case in Massachusetts. See 26 U.S.C.
§ 6323(f)(1)(B).
-6-
Middlesex Registry of Deeds on June 28, 2005. The IRS liens were
obviously recorded first.
In 2007, Newton sought to take Hannon's beachfront
property on 20 Rogers Street by eminent domain. Newton intended to
fix an unstable retaining wall on the property that abutted
Newton's public beach area and that posed a public safety risk to
swimmers. As a result, on March 26, 2007, Newton submitted an
application to the IRS to discharge 20 Rogers Street from the
federal tax liens. Newton informed the IRS that it was waiting for
the IRS to approve the discharge before Newton's Board of Aldermen
convened for a final vote on the draft order of taking.
Newton's application for a discharge certificate complied
with the IRS requirements that it: a) describe the property from
which it sought to remove the federal tax lien; b) provide the
address of the real property; c) identify the basis for the
discharge under 26 U.S.C. § 6325; and d) submit a professional
appraisal of the property completed by a disinterested third
party.3 See IRS Form 14135 (June 2010). The appraisal that Newton
submitted valued the property at $2.3 million.
The IRS knew that Hannon believed that his property was
worth more than Newton's $2.3 million estimate and that Newton had
a budget limit of $2.3 million to acquire that property. Under
3
The application form solicits different information from
the applicant depending on the subsection of § 6325 that forms the
basis of the application.
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Massachusetts law, a city is authorized to take privately owned
"real estate or any interest therein" by eminent domain. Mass.
Gen. Laws ch. 79, §§ 1, 2; Lichoulas v. City of Lowell, 937 N.E.2d
65, 69-70 (Mass. App. Ct. 2010). Upon recording an order of
taking, the city acquires title to the property designated in that
order, and a right to damages vests in the former owner of the
property taken. See Mass. Gen. Laws ch. 79, § 3. As a result, the
city is required to pay a "reasonable amount" for the condemned
property. See
id. § 8A. This amount can be accepted by the owner
as either a settlement for all damages owed for the taking or
merely as a "payment pro tanto," which preserves the right "to
claim a larger sum by proceeding before an appropriate tribunal"
for an assessment of damages within three years of the taking.
Id.
§§ 8A, 16. Hannon took the $2.3 million sum as a payment pro
tanto.
To facilitate the taking as Newton requested, the IRS
approved the discharge of 20 Rogers Street from federal tax liens
on May 4, 2007, well aware that the property might be worth more
than the $2.3 million that Newton was able to pay for it, and that
there could be a post-taking claim by Hannon for a larger sum.
According to the IRS's notes from April 2007, the IRS issued the
Discharge Certificate because it believed its tax liens would
follow any proceeds that Hannon would obtain if he successfully
sued Newton for additional damages.
-8-
The Certificate of Discharge, contained in relevant part
in the Appendix, discharged 20 Rogers Street, "[a] certain parcel
of land more fully described at the Registry of Deeds," from
federal tax liens while "saving and reserving, however, the force
and effect of said tax lien[s] against and upon all other property
or rights to property to which said lien[s] [are] attached,
wheresoever situated." The discharge was issued pursuant to 26
U.S.C. § 6325(b)(2)(A), which permits the Secretary of Treasury to
issue a certificate of discharge with respect to a certain property
if:
there is paid over to the Secretary in partial
satisfaction of the liability secured by the
lien an amount determined by the Secretary,
which shall not be less than the value, as
determined by the Secretary, of the interest
of the United States in the [property] to be
so discharged[.]
26 U.S.C. § 6325(b)(2)(A). The sum the IRS obtained from the
eminent domain proceeding was only in partial satisfaction of the
total tax lien.
The IRS calculated that it would get only $57,214.55 from
the initial $2.3 million pro tanto payment after Merrill Lynch, a
senior secured creditor, was paid in full, and so the Certificate
discharged 20 Rogers Street in exchange for a payment of that sum.
As it turned out, on May 11, 2007, Newton paid the IRS $60,692.83
-- more than the $57,214.55 listed in the Discharge Certificate --
because Merrill Lynch's outstanding mortgage balance was less than
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expected. This allocation accorded with the IRS's belief that it
was entitled to all "remaining funds by virtue of its [federal tax
liens]" after payment of the senior mortgage, regardless of the
specific amount listed in the Discharge Certificate.
Newton issued its order of taking on May 7, 2007, by
which it acquired 20 Rogers Street by eminent domain in exchange
for a $2.3 million damages award. The IRS later recorded the
Discharge Certificate in the Middlesex County Registry of Deeds on
July 17, 2007. The Certificate was explicit that it applied only
to real property located at 20 Rogers Street, so the IRS did not
record the Certificate of Discharge in the District of
Massachusetts District Court, where it must file tax lien notices
for personal property.
B. Procedural History
On November 10, 2008, a little over a year after the
taking, Hannon sued Newton in Middlesex County Superior Court,
asserting that the damages award was inadequate compensation for
the taking of 20 Rogers Street. See Mass. Gen. Laws. ch. 79,
§§ 8A, 16. Manning intervened in this land damages suit on May 14,
2010, and the IRS served a notice of levy to attach to any judgment
against Newton on May 19, 2010.
On July 6, 2010, the Superior Court entered judgment in
favor of Hannon, awarding him $420,000 in damages for
undercompensation and $31,245.72 in interest. On October 4, 2010,
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Newton paid $451,649.82 into the registry of the court, and
$151,761.73 of the interpleaded funds were paid to Hannon's counsel
with the consent of all parties, leaving $299,888.09 to be
distributed.
The government moved to intervene in this post-taking
undercompensation suit on December 3, 2010. The Superior Court
granted the government's motion on December 7, 2010, based on the
federal tax liens, and the government later removed the case to
federal court. As of November 1, 2010, Hannon's outstanding tax
liability totaled $7,307,687. Only the government and Manning
timely asserted an interest in these undercompensation damages, and
the government moved for summary judgment, asserting that its tax
liens had priority over Manning's judgment lien and that the
Discharge Certificate only applied to real property located at 20
Rogers Street and not to any additional damages recovered by
Hannon. Manning opposed the motion and cross-moved for summary
judgment.
In an October 24, 2011 memorandum and order, the district
court granted summary judgment in favor of Manning. The district
court, in a theory it advanced sua sponte, held that by proceeding
under 26 U.S.C. § 6325(b)(2)(A), the IRS had discharged the
government's lien on any proceeds from the taking other than
$57,214.55, the amount listed in the Discharge Certificate as the
value of its interest in 20 Rogers Street. Hannon, 820 F. Supp. 2d
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at 258, 261. It reasoned the government had to elect between
§ 6325(b)(2)(A) and § 6325(b)(3), and by opting for the former had
relinquished its right to any undercompensation damages. The
government's failure to comply with the § 6325(b)(3) procedure, the
district court reasoned, surrendered the priority of its tax liens
to the additional damages paid to the taxpayer in his post-taking
suit. Id. at 257-58.
The district court also noted that Massachusetts's
eminent domain law treats the right to sue for damages, and any
award resulting from that suit, as a substitute for and
representation of the land that was taken. Manning had priority
because the IRS had discharged its lien on the land, whereas
Manning had not. Id. at 259-61. As a result, the district court
issued a judgment awarding Manning $103,333.33, the amount of her
judgment lien, out of the undercompensation damages with the
remainder distributed to the government "as an unsecured creditor."
Id. at 261.
On November 21, 2011, the government moved for
reconsideration, arguing: (1) that its federal tax liens attached
to Hannon's undercompensation damages regardless of its discharge
of 20 Rogers Street under 26 U.S.C. § 6325(b)(2)(A); and (2) that
the district court had misinterpreted 26 U.S.C. § 6325(b)(3). The
district court denied this motion on September 24, 2012. It agreed
with the government that the feasibility of a discharge pursuant to
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§ 6325(b)(3) was doubtful in this case. Hannon v. City of Newton,
No. 11-10021-DPW, 2012 WL 4390527, at *6 (D. Mass. Sept. 24, 2012).
However, the court explained that this did not alter its conclusion
that § 6325(b)(3) means that use of § 6325(b)(2)(A) implicitly
discharges any lien on post-taking proceeds.
Id. at *5-*6. It
also reasoned the IRS could have chosen to do nothing at all in the
eminent domain proceedings to preserve its rights.
Id. at *6.
The government timely appealed.
II.
This court reviews a grant of summary judgment de novo.
Colon v. Tracey, 717 F.3d 43, 49 (1st Cir. 2013). Neither party
points to any disputed facts. Further, the issues here involve
statutory interpretation questions, subject to de novo review. See
United States v. Strong,
724 F.3d 51, 55 (1st Cir. 2013).
A. Scope of the Discharge of Property from Federal Tax Liens
Under § 6325(b)(2)(A)
Under federal law, if a person, such as Hannon, fails to
pay federal taxes despite a demand for payment, tax liens "in favor
of the United States" automatically attach to all of that person's
"property and rights to property, whether real or personal." 26
U.S.C. § 6321. We emphasize the lien is not only attached to
property, but also to "rights to property, whether real or
personal." Id. "Stronger language could hardly have been selected
to reveal a purpose to assure the collection of taxes." Glass City
Bank of Jeanette, Pa. v. United States,
326 U.S. 265, 267 (1945).
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As a result, federal tax liens attach to property acquired by the
delinquent taxpayer at "any time during the life of the lien." Id.
at 268; see also 26 U.S.C. § 6322 ("[T]he lien imposed by [§] 6321
shall arise at the time the assessment [for taxes] is made and
shall continue until the liability for the amount so assessed
. . . is satisfied or becomes unenforceable by reason of lapse of
time.").
Amidst this backdrop, § 6325(b) grants the IRS discretion
to discharge specific property from federal tax liens under certain
circumstances. See 26 U.S.C. § 6325(b); 26 C.F.R. § 301.6325-1(b).
Most discharges occur to facilitate the transfer of encumbered
property. The IRS's application process for discharges reflects
this reality.
For example, the application form allows either the
delinquent taxpayer or the purchaser/transferee of the taxpayer's
property to apply for a discharge certificate. Applicants must
describe "how and when the taxpayer will be divested of his/her
interest in the property" and attach the sales contract and
proposed closing statement, if possible. IRS Form 14135 (June
2010). As a result, and consistent with the broad language of
§ 6321, the purpose of almost every discharge is to carve out of
the tax lien only the specific property or part of property which
a delinquent taxpayer will no longer own in exchange for payment of
that interest which is discharged.
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To that end, § 6325(b)(2) provides in relevant part:
Subject to such regulations as the Secretary
[of Treasury] may prescribe, the Secretary may
issue a certificate of discharge of any part
of the property subject to the lien if--
(A) there is paid over to the
Secretary in p a r t i a l
satisfaction of the liability
secured by the lien an amount
determined by the Secretary,
which shall not be less than the
value, as determined by the
Secretary, of the interest of
the United States in the part to
be so discharged . . . .
In determining the value of the
interest of the United States in
the part to be so discharged,
the Secretary shall give
consideration to the value of
such part and to such liens
thereon as have priority over
the lien of the United States.
26 U.S.C. § 6325(b)(2)(A) (emphases added).
A fundamental purpose of § 6325(b)(2)(A) is to give clear
title to the purchaser. Nothing in § 6325(b)(2)(A) purports to
discharge any property other than the specific property or portion
of a property that is discharged from tax liens in a discharge
certificate. A properly recorded certificate of discharge issued
pursuant to any subsection of § 6325(b) is "conclusive that the
property covered by such certificate is discharged from the [tax]
lien." Id. § 6325(f)(1)(B). This makes clear that the particular
subsection of § 6325(b) that authorizes the discharge does not
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operate to define that discharge. Rather, the language of the
certificate controls.
Here, the Discharge Certificate was precise and
discharged only 20 Rogers Street, Newton, Massachusetts, defined as
"[a] certain parcel of land more fully described at the Registry of
Deeds, Southern Middlesex, State of Massachusetts in Book 36209,
Page 167." Of the "bundle of sticks" or collection of rights that
comprised Hannon's ownership of 20 Rogers Street, see United States
v. Craft, 535 U.S. 274, 278-79 (2002), the Certificate discharged
only a specific piece of real property that Hannon was parting with
and Newton was taking. It did not discharge the other sticks that
made up Hannon's ownership interest in 20 Rogers Street, such as
his contingent rights to property if that parcel of land was taken
by eminent domain; these included the right to receive an initial
damages award, which accrued after the parcel of land was taken by
eminent domain, and the right to sue for more damages if Hannon
deemed the initial award inadequate. Were there any doubt as to
the limited scope of the discharge, the Certificate saved and
reserved the "force and effect of [said] tax lien[s] against and
upon all other property or rights to property to which said lien is
attached, wheresoever situated." (emphasis added).
Nor was the scope of the discharge limited here by
§ 6325(b)(2)(A)'s instruction that the IRS receive a payment worth
"not . . . less than the value . . . of [its] interest" in the
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property discharged. That instruction constitutes a precondition
to the IRS's exercise of discretion to issue a discharge
certificate. It directs the IRS not to discharge property for less
than what it calculates as the value of its interest in that
property. It does not modify the scope of the discharge beyond
what is expressly included in the Certificate.4 Nor does it
prevent the government's liens from attaching to any surplus in the
initial pro tanto payment, and the government enforced its liens on
that payment when it received $60,692.83, an amount that exceeded
the specified § 6325(b)(2)(A) payment of $57,214.55. In short,
§ 6325(b)(2)(A) is entirely consistent with the government's
actions here and fully authorized them.
Manning's argument is that a different subsection,
§ 6325(b)(3), must be read with § 6325(b)(2)(A) and that it imposes
limits on what may be discharged under § 6325(b)(2)(A). Section
6325(b)(3) states:
Subject to such regulations as the Secretary
may prescribe, the Secretary may issue a
certificate of discharge of any part of the
property subject to the lien if such part of
the property is sold and, pursuant to an
agreement with the Secretary, the proceeds of
such sale are to be held, as a fund subject to
the liens and claims of the United States, in
the same manner and with the same priority as
such liens and claims had with respect to the
discharged property.
4
Section 6325(b)(2)(A) does not address what happens in
cases where the IRS has accepted less than its interest in the
property at the time of discharge due to fraud.
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26 U.S.C. § 6325(b)(3). Manning argues that because § 6325(b)(3)
expressly articulates a way to discharge property while maintaining
an interest in the proceeds from the sale of that property, whereas
§ 6325(b)(2)(A) requires the government to receive a specified
payment in exchange for the discharge, § 6325(b)(2)(A) implicitly
extinguishes the government's lien on any proceeds that exceed that
payment. This argument misconstrues the relationship between
subsections (b)(3) and (b)(2)(A). Both the plain language of the
statute and the legislative history of these sections make clear
the argument is wrong. In fact, § 6325(b)(3) addresses a different
problem, not present here, and does not affect the operation of
§ 6325(b)(2)(A) on these facts. Rather, subsection (b)(3) applies
to allow the resolution of disputes where the priority of the IRS
liens is disputed before transfer of the property from the
taxpayer. That is not this situation.
To begin, interpreting § 6325(b)(2)(A) in light of
§ 6325(b)(3) is a dubious undertaking because Congress enacted
§ 6325(b)(3) in 1966, long after § 6325(b)(2)(A) was adopted,5 in
order to address a specific situation. At that time, Congress
noted that a predecessor version of § 6325(b)(2)(A) existed under
which the IRS could discharge property if it is paid the value of
the government's interest in that property. Federal Tax Lien Act
5
The similarly worded predecessor to § 6325(b)(2)(A) was
enacted as Section 509 of the Revenue Act of 1934, ch. 277, 48
Stat. 680, 757-58.
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of 1966, H.R. Rep. No. 89-1884 (1966). However, no procedure then
existed to facilitate the transfer of encumbered property where
lienors of that property disputed the priority of their liens. So,
Congress enacted subsection (b)(3) as a "new procedure [to] aid in
the disposition of property where a dispute exists among competing
lienors, including the United States, concerning their rights to
specific property." Id. In this way, § 6325(b)(3) enables a sale
of encumbered property without the immediate distribution of the
proceeds from that sale to lienholders. It also ensures that
federal tax liens remain attached to sale proceeds while a priority
dispute ensues even if the taxpayer loses his interest in those
proceeds. Section 7426(a)(3), in turn, coordinates with
§ 6325(b)(3) by allowing competing lienors to sue the United States
to resolve priority disputes concerning "property [that] has been
sold pursuant to an agreement described in [§] 6325(b)(3)." 26
U.S.C. § 7426(a)(3).
On appeal, Manning adopts the district court's
interpretation of § 6325(b)(2)(A) in light of § 6325(b)(3). The
district court reasoned that because § 6325(b)(3) sets forth a
specific mechanism for maintaining liens on proceeds from the sale
of discharged property, the government's failure to use that
mechanism surrendered its liens on proceeds resulting from the
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post-taking suit for undercompensation in this case.6 Hannon, 820
F. Supp. 2d. at 257-58. In other words, the district court read
subsection (b)(3) as implicitly limiting the government's power
under subsection (b)(2). This misapprehends the congressional
purpose behind § 6325(b)(3).
It was an error of law to interpret subsection (b)(3) as
providing the exclusive means for maintaining liens on the proceeds
of post-taking compensation proceedings. Section 6325(b)(3) (in
concert with § 7426(a)(3)) does no more than create a useful
procedure to facilitate the sale of encumbered property when there
is a dispute as to the priority of federal tax liens. Rather than
delay the sale (and risk losing it) during the time it takes to
resolve priority disputes, §§ 6325(b)(3) and 7426(a)(3) give
lienors the option to move their dispute to the proceeds of the
sale and resolve it through litigation if need be. Where, as in
this case, there was no priority dispute when the IRS discharged 20
6
The district court relied on three out-of-circuit district
court decisions it found persuasive in interpreting
§ 6325(b)(2)(a). See Hannon, 2012 WL 4390527, at *6-*7; Hannon,
820 F. Supp. 2d. at 257-58. None of these cases involved the
taking of property by eminent domain. See Estate of Frazier v.
Dist. Dir., IRS, No. 1:91-CV-1877-JTC,
1992 WL 472026 (N.D. Ga.
Oct. 14, 1992); In re Miller,
98 B.R. 110 (Bankr. N.D. Ga. 1989);
United States v. Holtzclaw, Civil No. S-84-403 MLS, 1988 U.S. Dist.
LEXIS 16355 (E.D. Cal. Dec. 12, 1988). To the extent they support
the district court's interpretation of § 6325(b)(2)(A), we disagree
with their reasoning on this issue of law for the same reasons we
reject the district court's statutory interpretation.
-20-
Rogers Street, use of § 6325(b)(3) was not compulsory to accomplish
the discharge. Nor was it practicable.7
Manning does not and cannot dispute that before the IRS
had discharged 20 Rogers Street from a portion of the federal tax
liens, the IRS's federal tax liens of over $4 million had priority
over Manning's judgment lien. In this case, the IRS had properly
filed its notices of federal tax liens against Hannon's real and
personal property, in compliance with both federal and
Massachusetts law, by February 2003.8 Manning did not file her
judgment lien in the Middlesex County Registry of Deeds until June
28, 2005, clearly making her interest junior to the federal tax
liens.
7
The IRS can unilaterally implement a § 6325(b)(2)
discharge. By contrast, § 6325(b)(3) requires the IRS and
competing lienors to agree in writing to hold the proceeds from a
sale of encumbered property in escrow. See 26 U.S.C. § 6325(b)(3);
26 C.F.R. § 301.6325-1(b)(3); Discharge Instructions, IRS Pub. 783
(June 2010). Absent a priority dispute, Merrill Lynch, which was
paid in full out of the initial payment pro tanto, had no incentive
to agree to tie up the proceeds from the eminent domain taking in
escrow. Nor did the IRS.
8
Federal law determines the priority that federal tax liens
have against competing liens on a taxpayer's property. See
Aquilino v. United States, 363 U.S. 509, 513-14 (1960). A federal
tax lien is not valid against other lienholders, including judgment
lien creditors such as Manning, until a notice of federal tax lien
has been filed in the appropriate forum. 26 U.S.C. § 6323(a), (f).
State law designates the appropriate forum. See
id.
§ 6323(f)(1)(A). If state law is silent as to the appropriate
forum, federal law designates a default forum where the IRS can
file notice to assert the priority of its tax lien. See
id.
§ 6323(f)(B).
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Supreme Court case law establishes that in this case,
where the government's federal tax liens were imposed and recorded
before Manning had recorded her judgment lien against Hannon, the
government's liens retain their preexisting priority to any
property that Hannon later acquires, including the $420,000 in
undercompensation damages he received in July 2010. See United
States v. McDermott, 507 U.S. 447, 455 (1993); Glass City Bank of
Jeanette,
Pa., 326 U.S. at 268.
The unambiguous language of the Certificate and the
statute resolve this case. The IRS could not have waived,
relinquished, or surrendered its remaining tax liens on May 4,
2007, when the IRS issued the Discharge Certificate in this case.
Newton did not take 20 Rogers Street by eminent domain until three
days later on May 7, when it issued an order of taking for that
parcel of land, and the taxpayer's cause of action for additional
compensation arose after May 7. See Mass. Gen. Laws ch. 79, § 8A;
Truck Terminal Realty Co. v. Bos. Redev. Auth., 339 N.E.2d 891, 891
(Mass. 1976).
B. Massachusetts Law of Equitable Conversion Does Not
Remove the Government's Tax Liens from Any Property that
Was Not Expressly Discharged in a Discharge Certificate
Manning argues that the IRS discharge encompassed
discharge of the proceeds of a post-taking undercompensation suit
under the state law doctrine of equitable conversion. She starts
with the proposition that Massachusetts law treats any damages
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awarded for a taking by eminent domain as a substitute for the land
taken. See Cornell-Andrews Smelting Co. v. Bos. & P.R. Corp., 95
N.E. 887, 890 (Mass. 1911) ("[C]ompensation paid for land taken by
the exercise of the power of eminent domain in equity represents
the land and is subject to all the rights of persons who had rights
in the land . . . ."). She contends this equitable conversion
doctrine means the government's discharge of 20 Rogers Street from
tax liens also gave up its interest in the later award of post-
taking damages. In contrast, she argues her liens attached to all
of Hannon's eminent domain damages precisely because she never
discharged her lien on 20 Rogers Street, while the IRS did. This
argument is wrong on several grounds.
First, federal law, not Massachusetts law, controls both
the scope the IRS discharge in this case and the attachment of
federal tax liens to Hannon's property and rights to property.
Under controlling federal statutory law, a lien in favor of the
government attaches to "all property and rights to property" held
by a delinquent taxpayer. 26 U.S.C. § 6321 (emphasis added); see
United States v. Rodgers, 461 U.S. 677, 701 (1983). Moreover, once
a federal tax lien is imposed (and recorded), it automatically
attaches to any property that the taxpayer later acquires, such as
Hannon's post-taking undercompensation damages, with the same
priority it had over preexisting junior creditors like Manning.
See
McDermott, 507 U.S. at 455.
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Second, a state law doctrine of equitable conversion,
which might define the rights of state law creditors, does not
extend the IRS's discharge of real property located at 20 Rogers
Street to Hannon's post-taking right to sue for undercompensation
damages. Section 6321 governs whether Hannon's right to sue for
undercompensation damages is a "property or right to property"
subject to the government's federal tax liens. For example, in
Drye v. United States, 528 U.S. 49 (1999), the IRS had made
assessments against a taxpayer and so had valid tax liens against
all of his property and property rights under § 6321.
Id. at 53.
Six months later, the taxpayer's mother died intestate, and he
exercised his right under Arkansas law to disclaim his inheritance.
This disclaimer treated the taxpayer as if he had predeceased his
mother, directing his share of the estate to his daughter, the next
person in line. As such, under Arkansas law, the taxpayer's
creditors could not reach the disclaimed property.
Id. The
Supreme Court held that "the disclaimer did not defeat the federal
tax liens" because Arkansas law had given the taxpayer a valuable
protected right to either inherit his mother's estate or channel
the inheritance to a close relative.
Id. at 52, 60. As a matter
of federal law, this substantive state-delineated right was
sufficient to count as a "right to property" under § 6321 to which
federal tax liens attached. Cf. United States v. Bess,
357 U.S.
51, 56-60 (1958) (holding that delinquent taxpayer's right to
-24-
compel his insurer to pay him cash surrender value of policy
constituted "right to property" under § 6321 subject to federal tax
liens although state law insulated that cash surrender value from
other creditors' liens).
We look to Massachusetts law only for the purpose of
determining the nature of the substantive rights it grants Hannon
as to 20 Rogers Street. See Craft, 535 U.S. at 278-79.
Massachusetts statutory law gives Hannon the right to an initial
payment of a "reasonable amount" if his land is taken by eminent
domain, as well as a right to sue for undercompensation and receive
additional damages for the taking. Mass. Gen. Laws ch. 79, § 8A.
That ends the state law inquiry under § 6321.
As a matter of federal law, once Newton took 20 Rogers
Street by eminent domain, Hannon's right to sue for and receive
undercompensation damages for that taking qualifies as "property"
or a "right to property" to which federal tax liens attach, and
Manning does not argue otherwise. Rather, she claims that
Massachusetts's equitable conversion doctrine transferred
creditors' liens on 20 Rogers Street to Hannon's post-taking
undercompensation damages, such that only creditors that had
existing liens on 20 Rogers Street at the time of the taking could
later claim an interest in those damages.9 However, § 6321 does
9
Manning also argues that the government's discharge of 20
Rogers Street was unnecessary because under Massachusetts law, "an
eminent domain taking in fee simple extinguishes all other
-25-
not put the government on par with other creditors but instead
relates to the taxpayer's interests, allowing federal tax liens to
follow all of the taxpayer's state-defined property rights
regardless of state law restrictions on others seeking to reach the
same interests. See United States v. Nat'l Bank of Commerce, 472
U.S. 713, 727 (1985).
Finally, Manning's argument misstates the relevant state
law. She claims that due to equitable conversion, Massachusetts
law recognizes only "one continuing interest" in real property and
the statutory right to sue and receive damages when that property
is taken by eminent domain. However, it is Massachusetts statutory
law that divided Hannon's property interests in 20 Rogers Street,
recognizing his right, which arose after the taking of the land, to
receive and sue for eminent domain damages as distinct from his
right to possess the land. See Mass. Gen. Laws ch. 79, §§ 8A, 16.10
interests in the property." New Eng. Cont'l Media, Inc. v. Town of
Milton, 588 N.E.2d 1382, 1384 (Mass. App. Ct. 1992). The cases on
which Manning relies, however, involve only private parties and so
do not implicate federal tax law.
The government says this argument is both irrelevant and rests
on a questionable premise that Newton could have removed the
federal tax liens without agreement from the government. It is
unsettled whether Newton might have had to bring a condemnation
suit against the United States under 28 U.S.C. § 2410(a)(4) to
clear title without the actions the IRS took. This squares with
Newton's conduct in this case: Newton requested the discharge
certificate from the IRS and postponed its vote on the final draft
order of the taking until the IRS had approved the discharge of 20
Rogers Street. We need not decide the question.
10
In a footnote, Manning asserts that this court should
disregard ten pages of the government's brief because it did not
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III.
Accordingly, we reverse with instructions that the
district court enter summary judgment in the government's favor.
raise those arguments with the district court. Her failure to
brief this issue waives it. See United States v. Zannino, 895 F.2d
1, 17 (1st Cir. 1990).
-27-
Appendix
Certificate of Discharge:
Department of the Treasury-Internal Revenue Service
CERTIFICATE OF DISCHARGE OF PROPERTY FROM FEDERAL TAX LIEN
(Under Section 6325(b)(2)(A) of the Internal Revenue Code)
WHEREAS, Patrick J & Elizabeth Hannon . . . is/are indebted to
the United States for unpaid internal revenue tax, as evidenced
by:
Notice of Recording Date Taxpayer Amount
Federal Tax Information Recorded Identification Shown on
Lien Serial Number Lien
Number
(A) (B) (C) (D) (E)
40318073 Book: 37941 02-08-2003 $2,739,256.88
Page: 130
40318586 Book: 38015 02-15-2003 $2,707,897.12
Page: 259
156245104 Book: 42081 02-23-2004 $17,408.00
Page: 591
WHEREAS, to secure the collection of said tax, notice of the lien
of the United States, attaching to all the property and rights to
property of the said taxpayer on account of said tax
indebtedness, was filed with the Registry of Deeds, Southern
Middlesex, State of Massachusetts in accordance with the
applicable provisions of law.
WHEREAS, the lien of the United States, listed above, for
said tax has attached to certain property described as:
20 Rogers Street, Newton, MA
A certain parcel of land more fully described at the Registry
of Deeds, Southern Middlesex, State of Massachusetts in
Book 36209, Page 167.
WHEREAS, the Area Director of Internal Revenue has
determined that the value of the interest of the United
States in the foregoing property, under and by virtue of its
aforesaid tax lien, amounts to the sum of $57,214.55. In
addition, under the provisions of section 6325(d)(2), the
United States subordinates its tax lien to all reasonable and
necessary expenses incurred in connection with the sale of
the property or administration of the sale proceeds and any
interest I have determined will increase the amount realized
and facilitate collection of the tax liability. I have, therefore
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authorized the issuance, under the provisions of section
6325(b)(2)(A) of the Internal Revenue Code, of a certificate
discharging the above-described property from the tax lien of
the United States upon the payment of the sum of
$57,214.55 to be applied in part satisfaction of the liability in
respect of the tax hereinbefore stated which sum has been
paid to be so applied, and the receipt of which sum by me is
hereby acknowledged;
NOW, THEREFORE, THIS INSTRUMENT WITNESSETH, that I, [Collection
Area Director, North Atlantic Area of the Internal Revenue
Service,] charged by law with the duty of collecting and
enforcing the collection of internal revenue taxes due to the
United States, and charged with the assessment hereinbefore
stated, do, pursuant to the provisions of section 6325(b)(2)(A)
of the Internal Revenue Code, discharge the
property heretofore described from the aforesaid tax lien,
saving and reserving, however, the force and effect of said
tax lien against and upon all other property or rights to
property to which said lien is attached, wheresoever situated.
WITNESS my hand at Boston, Massachusetts, on May 4, 2007.
[Signature Omitted]
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