Filed: Aug. 19, 1998
Latest Update: Mar. 03, 2020
Summary: 111 T.C. No. 6 UNITED STATES TAX COURT PETER J. BRESSON, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 22824-96. Filed August 19, 1998. In July 1990, J, a corporation, transferred to petitioner, its sole shareholder, real property situated in California (the Alhambra property) without receiving a reasonably equivalent value in exchange therefor. Immediately thereafter, petitioner sold the Alhambra property for $329,000 to an unrelated third party. Petitioner k
Summary: 111 T.C. No. 6 UNITED STATES TAX COURT PETER J. BRESSON, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 22824-96. Filed August 19, 1998. In July 1990, J, a corporation, transferred to petitioner, its sole shareholder, real property situated in California (the Alhambra property) without receiving a reasonably equivalent value in exchange therefor. Immediately thereafter, petitioner sold the Alhambra property for $329,000 to an unrelated third party. Petitioner ke..
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111 T.C. No. 6
UNITED STATES TAX COURT
PETER J. BRESSON, TRANSFEREE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22824-96. Filed August 19, 1998.
In July 1990, J, a corporation, transferred to
petitioner, its sole shareholder, real property situated
in California (the Alhambra property) without receiving
a reasonably equivalent value in exchange therefor.
Immediately thereafter, petitioner sold the Alhambra
property for $329,000 to an unrelated third party.
Petitioner kept the proceeds from the sale. On Mar. 5,
1993, J filed a tax return for its fiscal year ended Feb.
28, 1991, reporting a capital gain of $194,705 from the
sale of the Alhambra property and a tax due of $49,683,
which was not paid. On Aug. 1, 1993, petitioner executed
a promissory note to J for repayment of a purported
obligation owed by petitioner to J.
On Aug. 2, 1996, respondent issued a notice of
transferee liability to petitioner as a transferee under
sec. 6901, I.R.C. Respondent determined, on the basis of
California's Uniform Fraudulent Transfer Act
(California's UFTA), that petitioner was liable for J's
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taxes resulting from the transfer of the Alhambra
property.
Petitioner asserts that the period of limitations
for filing fraudulent conveyance actions under
California's UFTA expired before the issuance of the
notice of transferee liability. Respondent maintains that
the Federal Government is not bound by State statutes of
limitations under the rule in United States v. Summerlin,
310 U.S. 414 (1940). Petitioner counters that the period
of limitations in California's UFTA is not a statute of
limitations, but rather is an element of the cause of
action, which provides for the complete extinguishment of
the fraudulent conveyance claim if the time limit is not
satisfied, relying on United States v. Vellalos, 780 F.
Supp. 705 (D. Haw. 1992), appeal dismissed 990 F.2d 1265
(9th Cir. 1993).
1. Held: Respondent has established that the
Alhambra property was fraudulently conveyed under
California law.
2. Held, further, respondent is not bound by the
limitations period in California's UFTA. United States
v. Summerlin, supra, applied.
3. Held, further, respondent issued petitioner a
notice of transferee liability within the limitations
period for assessments prescribed by sec. 6901(c), I.R.C.
Willard D. Horwich, for petitioner.
Robert H. Schorman, Jr., for respondent.
JACOBS, Judge: By means of a notice of transferee liability
dated August 2, 1996, respondent determined that petitioner is
liable under section 6901 as a transferee of property from Jaussaud
Enterprises, Inc. (hereinafter referred to as Jaussaud Enterprises
or the corporation), for unpaid Federal corporate income taxes and
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additions to tax due from Jaussaud Enterprises, as follows:
Additions to Tax
Year Ended Income Tax Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2/28/91 $41,965 $9,803 $10,716 $2,487
Unless indicated otherwise, all section references are to the
Internal Revenue Code for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The disputed transferee liability arises as a result of the
conveyance of certain real property from Jaussaud Enterprises to
petitioner during 1990. We must herein decide whether petitioner
is liable as a transferee under section 6901 as a result of that
conveyance. In resolving this issue, we must decide whether by
virtue of section 3439.09 of the California Civil Code (West 1997)
the period of limitations for assessing transferee liability
against petitioner expired before respondent's issuance of the
notice of transferee liability. Subsumed in this latter issue is
the question of whether the Commissioner is bound by a State
limitations period when relying on State law to collect unpaid
taxes.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulations of facts and the attached exhibits are incorporated
herein by this reference.
At the time the petition was filed, petitioner resided in Los
Angeles, California. Petitioner is unmarried. He filed his tax
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returns on a calendar year basis.
Jaussaud Enterprises
Jaussaud Enterprises is a California corporation with a fiscal
year ending February 28. At all relevant times, petitioner was the
sole shareholder and sole officer of Jaussaud Enterprises.
Jaussaud Enterprises operated an equipment leasing business,
providing trash cans and containers for the rubbish pickup
industry. The corporation's principal customer was PJB, a
corporation all the stock of which was owned by petitioner and his
mother (who died in 1988, leaving petitioner as the sole
shareholder of PJB). By 1991, Jaussaud Enterprises' business
activity was minimal.
Transfer of Real Property
Jaussaud Enterprises was the owner of improved real property
located at 905 N. Hidalgo Avenue, Alhambra, California (the
Alhambra property). Located on the Alhambra property was a house
in which petitioner resided.
Petitioner decided to sell the Alhambra property. A potential
buyer of the Alhambra property was found, and on June 11, 1990,
petitioner, on behalf of Jaussaud Enterprises, executed escrow
instructions at Atla Escrow Corp. (Atla Escrow) pursuant to which
the Alhambra property was to be sold for $329,000 to Ming Eo
Jessica Sung, an unrelated third party. The escrow instructions
were amended on June 12 and 20, 1990, to account for various
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details and contingencies relating to the anticipated sale. On
July 5, 1990, the escrow instructions were again amended to change
the identification of the seller to "PETER J. BRESSON, an unmarried
man".
On July 5, 1990, Jaussaud Enterprises executed a grant deed
conveying the Alhambra property to petitioner.1 On the same date
petitioner executed a grant deed conveying the Alhambra property to
Ms. Sung.
On July 25, 1990, Atla Escrow sent petitioner a closing
statement with regard to the sale of the Alhambra property,
together with a check in the amount of $266,680.44, representing
the net proceeds due the seller. Petitioner kept the $266,680.44.
The closing statement indicated that $38,900 had been
transferred by wire to "Western Pacific Escrow #16848".2 The
balance of the consideration paid by Ms. Sung was disbursed for a
realtor's commission, taxes, escrow fees, and other expenses
related to the sale of the Alhambra property.
1
The deed reported no transfer tax due, and stated:
"This conveyance changes the manner in which title is held,
grantor(s) (Corporation) and Grantee(s) remain the same and
continue to hold the same proportionate interest, R & T 11911."
Pursuant to California law, no transfer tax is due
where the consideration exchanged is $100 or less. Cal. Rev. &
Tax. Code sec. 11911 (West 1994).
2
The record is void of any explanation for the wire
transfer or the purpose of the Western Pacific escrow account.
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Reporting Sale of Alhambra Property
On its U.S. Corporation Income Tax Return, Form 1120, for tax
year ended February 28, 1991, filed on March 5, 1993, Jaussaud
Enterprises reported a capital gain of $194,7053 from the sale of
the Alhambra property. Jaussaud Enterprises also reported gross
receipts of $1,210, which resulted in a reported Federal income tax
liability of $49,683 for the tax year ended February 28, 1991,
which was not paid. The return was signed by petitioner, as
corporate president.
Petitioner did not report any gain from the sale of the
Alhambra property on his U.S. Individual Income Tax Return, Form
1040, for any year.
Promissory Note
At an undisclosed time following the sale of the Alhambra
property, petitioner sought professional advice with respect to the
tax consequences of Jaussaud Enterprises' transfer of the Alhambra
property to him and the subsequent sale of that property. On July
15, 1993, petitioner, as president of Jaussaud Enterprises, called
a special meeting of the board of directors (which consisted solely
of himself) and determined that he owed the corporation $125,000.
(The record is void of any explanation as to how the amount of
petitioner's debt to Jaussaud Enterprises was determined to be
3
The gain on the sale of the Alhambra property was
calculated as follows: $329,000 (gross proceeds) + $28,130
(depreciation previously allowed) - $162,425 (basis) = $194,705.
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$125,000.) To repay this debt, petitioner agreed to execute a note
providing for monthly installments of $798.32 each for 30 years,
with interest at 6.6 percent per annum.4 On August 1, 1993,
petitioner executed such a note. Beginning August 4, 1993, and
continuing through September 11, 1996, petitioner made the required
monthly payments to Jaussaud Enterprises. After September 1996,
petitioner made no further payments on the note.
Internal Revenue Service Actions
The Internal Revenue Service (IRS) sent several billing
notices to Jaussaud Enterprises. These notices mistakenly listed
the tax period involved as the year ended February 29, 1992. On
July 25, 1994, the IRS recorded in Los Angeles County a Notice of
Federal Tax Lien for Jaussaud Enterprises. The Notice of Federal
Tax Lien listed $117.73 as being owed for employment taxes for the
tax year ended December 31, 1993, and $79,207.53 as being owed for
corporation income taxes for the tax year ended February 28, 1992.5
William Ryland, an IRS revenue officer, was assigned to
4
The corporation adopted a resolution at the July 15,
1993, meeting which stated:
RESOLVED, that the corporation shall accept a
promissory note from Peter J. Bresson, payable $798.32
a month, the first payment to be made on August 1,
1993, and said note to continue for 30 years at an
interest rate of 6.6%.
5
The corporation made a payment of $1,603.76 on Aug. 24,
1993, and received a credit against its assessment.
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collect the taxes owed by Jaussaud Enterprises. He attempted to
locate assets of Jaussaud Enterprises, but his efforts proved
unsuccessful. At an undisclosed time, a representative of Jaussaud
Enterprises, presumably Willard D. Horwich (petitioner's counsel),
offered to satisfy the corporation's tax liability by way of a
"long-term" installment plan. Revenue Officer Ryland rejected the
proposed arrangement because the period of limitations to collect
the delinquent taxes would have expired prior to full collection
under the proposed plan. Ultimately, in a Report of Investigation
of Transferee Liability dated September 21, 1994, Revenue Officer
Ryland recommended that the IRS seek to collect the delinquent
taxes from petitioner as a transferee.
No notice of deficiency was issued to Jaussaud Enterprises for
the tax year ended February 28, 1991, but an assessment was made
against Jaussaud Enterprises for that year on February 28, 1996.
Respondent sent a notice of transferee liability to petitioner
dated August 2, 1996, determining that he was liable as a
transferee of the Alhambra property for Jaussaud Enterprises' tax
year ended February 28, 1991.
In October 1996, the collection file was assigned to Revenue
Officer Donald Dinsmore. He searched for assets which the IRS
could levy against. He checked IRS internal sources for financial
and other information concerning Jaussaud Enterprises; he also
searched Department of Motor Vehicles and real property records.
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He found no assets which could be used to collect the tax
liabilities from Jaussaud Enterprises.
On November 13, 1996, the IRS issued a final demand letter
which was received and signed for (but not responded to) by
Jaussaud Enterprises.
OPINION
Evidentiary Matters
Preliminarily, we address various evidentiary matters.
At trial, petitioner contended that respondent assessed taxes
against Jaussaud Enterprises for the wrong year. Respondent's
witness, Vicki McIntire, credibly testified about the error, which
occurred as a result of the filing of corporate income tax returns
for fiscal years ended February 28, 1991, and February 29, 1992, at
approximately the same time in 1993, and the subsequent correction
of the error by respondent. In that vein, petitioner objected to,
as hearsay, the admission into evidence of Exhibit AA, Summary
Record of Assessments, and Exhibit BB, Certificate of Assessments
and Payments, to prove the existence of Jaussaud Enterprises' tax
liability.
Rule 803 of the Federal Rules of Evidence provides numerous
exceptions to the hearsay rule. As pertinent herein, rule 803(8)
provides an exception for:
(8) Public records and reports.--Records, reports,
statements, or data compilations, in any form, of public
offices or agencies, setting forth (A) the activities of
the office or agency, or (B) matters observed pursuant to
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duty imposed by law as to which matters there was a duty
to report * * * unless the sources of information or
other circumstances indicate lack of trustworthiness.
Exhibits AA and BB are both public records or reports prepared by
respondent pursuant to a duty imposed by law.
Exhibit AA does not indicate the taxpayer's name. Thus, we
conclude that this document lacks trustworthiness. Consequently,
we sustain petitioner's objection to Exhibit AA.
Exhibit BB reflects that an audit deficiency assessment of
$43,569 was made for the year ended February 28, 1991, and a
reported tax return assessment of $49,683 was made for the year
ended February 29, 1992--which was later abated because no tax was
owing for that year. The record contains no explanation as to why
an audit deficiency assessment was made (nor the basis for it) for
the year ended February 28, 1991, or as to why a tax return
assessment (of $49,683) was not made for that same year.
Petitioner contends on brief that without the admission of Exhibits
AA and BB, there is no evidence to demonstrate an existing
liability in the form of an assessment against Jaussaud
Enterprises--and thus respondent can not establish that the
transferor owes taxes for which petitioner may be liable as a
transferee. Petitioner also asserts that even if Exhibit BB is
admitted, the audit deficiency assessment for the year ended
February 28, 1991, was improper under section 6213 because no
notice of deficiency for that year was issued to the transferor.
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Exhibit BB, which was certified as true and to which
respondent's witness credibly testified, shows an assessment
against Jaussaud Enterprises for the year ended February 28, 1991.
We find the information in the document accurately reflects the
existence of a tax liability owed by Jaussaud Enterprises.
Accordingly, we overrule petitioner's objection to the admission of
Exhibit BB. Further, respondent's failure to issue a notice of
deficiency against Jaussaud Enterprises is immaterial. A notice of
deficiency need not be issued in order for the Commissioner to
assess a taxpayer for a reported tax liability on a tax return.
See sec. 6201(a)(1). Moreover, the Commissioner is not required to
issue a notice of deficiency or to make an assessment against the
transferor where efforts to collect delinquent taxes from a
transferor would be futile. Gumm v. Commissioner, 93 T.C. 475, 484
(1989), affd. without published opinion
933 F.2d 1014 (9th Cir.
1991), and cases cited therein; see also O'Neal v. Commissioner,
102 T.C. 666, 675-676 (1994). In this regard, respondent presented
two witnesses, both IRS revenue officers, who credibly testified as
to their searches for assets owned by the corporation and their
inability to find any such assets or any evidence of the
corporation's capacity to pay the taxes owed. Consequently,
whether an audit deficiency (or tax return) assessment was made
against Jaussaud Enterprises is not relevant. Jaussaud
Enterprises' income tax return for the year ended February 28,
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1991, clearly indicates taxes owed of $49,683 (which have not been
paid except for a $1,603.76 payment made on August 24, 1993).
Thus, respondent has established the existence of a liability owing
by Jaussaud Enterprises for which petitioner may be held liable as
a transferee. See sec. 6901(b) (providing that transferee
liability may relate either to the amount shown on a tax return or
to any deficiency).
Finally, petitioner objected to the admission of Exhibit HH,
a letter from Willard D. Horwich, petitioner's counsel, to James
Canny, petitioner's accountant. Petitioner claims that the letter
is inadmissible because it falls within the attorney-client
privilege. We need not decide whether the attorney-client
privilege is applicable (and we did not consider Exhibit HH)
because the admission, or exclusion, of Exhibit HH is moot inasmuch
as we hold petitioner is liable as a transferee under section 6901
for the reasons set forth infra.
Transferee Liability
The issue for decision is whether petitioner is liable for
taxes owed by Jaussaud Enterprises as a result of the corporation's
transfer to petitioner of the Alhambra property.
Respondent suggests two bases for claiming that Jaussaud
Enterprises owes taxes as the result of the transfer of the
Alhambra property to petitioner. One is that Jaussaud Enterprises
was the seller of the Alhambra property to the unrelated third
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party and petitioner served merely as the straw man. The second is
that Jaussaud Enterprises made a distribution of appreciated
property to petitioner with respect to Jaussaud Enterprises stock,
in which case the corporation must recognize gain on the transfer
as if the corporation sold the property to petitioner. Sec.
311(b). We need not decide which basis applies because in either
scenario Jaussaud Enterprises would realize the same amount of
income.
Section 6901(a)(1)(A) authorizes the assessment of transferee
liability in the same manner as the taxes in respect of which the
tax liability was incurred. It does not create a new liability,
but merely provides a remedy for enforcing the existing liability
of the transferor. Coca-Cola Bottling Co. v. Commissioner, 334 F.2d
875, 877 (9th Cir. 1964), affg.
37 T.C. 1006 (1962); Mysse v.
Commissioner,
57 T.C. 680, 700-701 (1972). The Commissioner has
the burden of proving all the elements necessary to establish the
taxpayer's liability as a transferee except for proving that the
transferor was liable for the tax. Sec. 6902(a); Rule 142(d). In
the case at hand, the existence and the amount of the transferor's
tax liability have been established.
We examine State law to determine the extent of a transferee's
liability for the debts of a transferor. Commissioner v. Stern,
357 U.S. 39, 45 (1958); Hagaman v. Commissioner,
100 T.C. 180, 183-
185 (1993); Gumm v. Commissioner, supra at 479-480. Because the
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conveyance of the Alhambra property occurred in California, we
examine California law. See Adams v. Commissioner, 70 T.C. 373,
389 (1978), affd. in part without published opinion and dismissed
in part
688 F.2d 815 (2d Cir. 1982).
In 1986, California adopted the Uniform Fraudulent Transfer
Act (UFTA), which applies to transfers made or obligations incurred
on or after January 1, 1987. Cal. Civ. Code sec. 3439.12 (West
1997). The transfer at issue in this case--the conveyance of the
Alhambra property from Jaussaud Enterprises to petitioner--occurred
in July 1990. Thus, the UFTA applies herein.
California's UFTA contains two provisions for determining
whether a fraudulent conveyance occurred. The provision we believe
applicable in this case is section 3439.046 of the California Civil
Code (1997), which provides:
A transfer made or obligation incurred by a debtor
is fraudulent as to a creditor, whether the creditor's
claim arose before or after the transfer was made or the
obligation incurred, if the debtor made the transfer or
incurred the obligation as follows:
(a) With actual intent to hinder, delay, or defraud
any creditor of the debtor.
6
The other potentially applicable provision is Cal. Civ.
Code sec. 3439.05 (West 1997), which relates to constructive
fraud that occurs after a creditor's claim arises. Arguably,
that is not the case here because the transfer from Jaussaud
Enterprises to petitioner created respondent's claim for tax, and
that transfer occurred before respondent's claim arose. However,
we need not decide this issue because either Cal. Civ. Code sec.
3439.04(b)(1) or (2) (West 1997) provides other bases for finding
constructive fraud.
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(b) Without receiving a reasonably equivalent value
in exchange for the transfer or obligation, and the
debtor:
(1) Was engaged or was about to engage in a
business or a transaction for which the remaining assets
of the debtor were unreasonably small in relation to the
business or transaction; or
(2) Intended to incur, or believed or reasonably
should have believed that he or she would incur, debts
beyond his or her ability to pay as they became due.
The record is void of any evidence to support a finding that
petitioner (who entirely controlled Jaussaud Enterprises) had the
requisite intent to satisfy section 3439.04(a) of the California
Civil Code. Petitioner lacked any knowledge of taxes or the
preparation of tax returns. He relied entirely on his accountant,
James Canny, for preparing his tax returns.
In addition, it is clear that petitioner did not understand
the tax consequences of the transfer of the Alhambra property from
Jaussaud Enterprises to himself followed by the sale to the third
party. Petitioner credibly testified that he caused the transfer
of the property to himself because he was told by the title company
that the title had to be in an individual's name for the sale to be
completed. When petitioner's accountant learned of the transaction
nearly a year later, the accountant told petitioner that he might
be indebted to Jaussaud Enterprises. The accountant told
petitioner to seek further tax advice. Nearly 3 years after the
transaction, petitioner executed a promissory note in favor of
Jaussaud Enterprises, apparently to prevent the appearance of a
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corporate distribution or some other event that would impose tax
liability on either the corporation or petitioner.
The record, however, supports a finding that the conveyance
from Jaussaud Enterprises to petitioner satisfies the requirements
for constructive fraud under section 3439.04(b)(1) and/or (2) of
the California Civil Code. Jaussaud Enterprises did not receive
reasonably equivalent value in exchange for the transfer of the
Alhambra property to petitioner; in fact, Jaussaud Enterprises
received nothing for the property (which was sold for $329,000 in
an arm's-length transaction on the same day). Moreover, we do not
believe the note which petitioner executed in favor of Jaussaud
Enterprises represented a quid pro quo for the transfer of the
Alhambra property: (1) The promissory note was executed 3 years
after the conveyance to petitioner on the advice of a tax
professional (and the face amount of the note ($125,000) was
approximately $200,000 less than the amount realized ($329,000)
from the sale of the Alhambra property); (2) petitioner did not
understand that his receipt of the Alhambra property (or the sale
proceeds) constituted a loan from the corporation; and (3) we do
not believe the corporation ever intended to enforce the note's
terms (for example, the corporation took no legal action after
petitioner stopped making monthly payments).
On Schedule L, Balance Sheets, of the income tax return
belatedly filed by Jaussaud Enterprises for the tax year ended
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February 28, 1991, there were only two items listed as assets
existing as of the end of the tax year: $264 in cash and $192,3087
as "other current assets" which was identified as "note receivable-
-P. Bresson". When asked about this receivable, petitioner
testified: "I really don't know what that is." In petitioner's
initial brief, petitioner treats the purported receivable as
"consideration from Bresson back to the corporation for whatever
Bresson received, whether it be the property or whether it be the
proceeds of sale."
Schedule L also reflects that Jaussaud Enterprises had current
liabilities as of February 28, 1991, in the amount of $67,450
($49,683 as Federal tax payable and $17,767 as State tax payable)
and retained earnings of $125,122.
We believe the purported $192,308 receivable was merely
bookkeeping legerdemain. The purported receivable was created by
Mr. Canny, petitioner's accountant, long after the transfer of the
Alhambra property and without petitioner's knowledge of its
existence or import. Accordingly, we find the purported $192,308
receivable was not an asset of the corporation. Thus, the only
asset remaining after the transfer of the Alhambra property ($264
in cash) was insufficient for the corporation to pay its debts.
Consequently, we hold that respondent has established that the
7
Apparently, the $125,000 note executed on Aug. 1, 1993,
was intended to replace this $192,308 purported receivable.
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transfer to petitioner was in constructive fraud of creditors under
section 3439.04(b)(1) and/or (2) of the California Civil Code.
Although this holding would appear to resolve this case,
petitioner raises an issue that at first glance "seems overly
ambitious". See Bankers Life & Cas. Co. v. United States, 142 F.3d
973, 974 (7th Cir. 1998). We shall now address this issue.
Period of Limitations
Petitioner argues that even if a fraudulent conveyance is
deemed to have occurred under the UFTA, the period of limitations
for filing actions under the UFTA expired before respondent's
issuance of a notice of transferee liability. This, according to
petitioner, would preclude respondent from using section 6901 as a
remedy to collect the delinquent taxes of Jaussaud Enterprises. On
the other hand, respondent maintains that State limitations periods
may not cut short the time the Federal Government has to assess and
collect the tax liability of petitioner as a transferee under
section 6901. For the reasons set forth below, we agree with
respondent.
Section 6901(c) provides that the Commissioner may assess a
transferee for taxes owed by a transferor within 1 year after the
expiration of the period of limitations for assessment against the
transferor. In the case at bar, Jaussaud Enterprises filed its
Federal corporation income tax return for the tax year ended
February 28, 1991, on March 5, 1993. (Generally, under section
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6501, the period of limitations for assessments against a taxpayer
is 3 years from the filing of the tax return.) Therefore, the
period of limitations for making an assessment against Jaussaud
Enterprises expired on March 5, 1996, and the Commissioner could
assess petitioner's transferee liability at any time up to March 5,
1997. The notice of transferee liability to petitioner from
respondent was dated August 2, 1996. Thus, pursuant to section
6901(c), respondent's notice of transferee liability to petitioner
was timely.
Section 3439.09 of the California Civil Code provides:
A cause of action with respect to a fraudulent
transfer or obligation under this chapter is extinguished
* * *:
(a) Under subdivision (a) of Section 3439.04,
within four years after the transfer was made or the
obligation was incurred or, if later, within one year
after the transfer or obligation was or could reasonably
have been discovered by the claimant.
(b) Under subdivision (b) of Section 3439.04 or
Section 3439.05, within four years after the transfer was
made or the obligation was incurred.
Petitioner asserts that the UFTA limitations period applies,
rather than the limitations period under section 6901(c), and
therefore the period of limitations for assessment against
petitioner expired prior to respondent's issuance of the notice of
transferee liability to petitioner. Petitioner further claims that
even if respondent did not originally know of the transfer,
respondent obtained such knowledge by September 1994, the date of
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Revenue Officer Ryland's transferee liability report discussing the
conveyance. (This assumes, of course, that section 3439.04(a) of
the California Civil Code is applicable, which we have found supra
it was not.) Thus, 1 year from the date of respondent's knowledge
of the transfer would have been no later than September 1995, still
nearly 1 year short of the date of the notice of transferee
liability against petitioner. Accordingly, we are required to
determine which period of limitations, Federal or State, controls
the time for assessing transferee liability.
The Supreme Court has stated that the United States is not
bound by State statutes of limitations in enforcing its rights,
whether the action is brought in Federal or State court. United
States v. Summerlin, 310 U.S. 414, 416 (1940), and cases cited
thereat. Petitioner contends, however, that section 3439.09 of the
California Civil Code is not a statute of limitations, but rather
is an element of the cause of action which provides for the
complete extinguishment of the fraudulent conveyance claim (and
thus the transferee liability) where the time limit is not
satisfied.
Petitioner relies on United States v. Vellalos, 780 F. Supp.
705 (D. Haw. 1992), appeal dismissed
990 F.2d 1265 (9th Cir. 1993),
in arguing that California's UFTA limitations period requires an
outcome different than that in United States v.
Summerlin, supra.
In Vellalos, the United States District Court for Hawaii examined
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Hawaii's UFTA statute, which is identical to the relevant
California statute now before us. Therein, nearly 1 year after the
limitations period expired under the Hawaii UFTA, the Federal
Government sought to foreclose on property conveyed to the
defendant. (The United States proceeded directly under the UFTA to
obtain its remedy because the limitations period under section
6901(c) for transferee liability had expired.) The United States
argued that it was not bound by the Hawaii UFTA limitations period
because of the rule in United States v. Summerlin, supra.
The court interpreted the UFTA's limitations period not as a
statute of limitations with respect to Federal transferee
liability, but rather as an element of the cause of action for
fraudulent conveyance which would be entirely extinguished if not
timely filed. In applying the UFTA's limitations period, the court
rejected the Government's argument, stating that "There is an
important distinction between cases involving the government's
common law right to collect on a debt and cases involving a
carefully delimited state statutory right." United States v.
Vellalos, supra at 707. The court distinguished the Florida
statute in Summerlin from Hawaii's UFTA on the basis that the
latter contained an extinguishment provision for a State-created
cause of action whereas the former imposed a limitations period on
an action arising out of a Federal statute (the Act of June 27,
1934, 48 Stat. 1246). The court noted the explicit intent of the
- 22 -
drafters of the UFTA in their commentary to avoid the rule of
Summerlin through the creation of the claim extinguishment
provision:
"This section is new. Its purpose is to make clear that
lapse of the statutory periods prescribed by the section
bars the right and not merely the remedy.... The section
rejects the rule applied in the United States v.
Gleneagles Inv. Co., 565 F. Supp. 556, 583 (M.D. Pa.
1983) (state statute of limitations held not to apply to
action by United States based on Uniform Fraudulent
Conveyance Act)."
United States v. Vellalos, supra at 707 (quoting Uniform Fraudulent
Transfer Act sec. 9 (Commentary), 7A U.L.A. 665-666 (1984)). (The
same language appears in the Legislative Committee Comment of the
California Assembly in its 1986 adoption of the UFTA. Cal. Civ.
Code sec. 3439.09 (Legislative Committee Comment--Assembly).) The
court went on to find that the State had the authority to
extinguish the cause of action, referring to the 10th Amendment to
the United States Constitution. The court stated that the Federal
Government was seeking to extend Summerlin beyond its holding to
cover all State laws which could be affected by the common law
right of the Government to collect its debts. The court suggested
the Government create its own Federal fraudulent conveyance statute
with an unlimited limitations period to remedy the problem.8
8
We are mindful that as part of the Crime Control Act of
1990, Pub. L. 101-647, sec. 3611, 104 Stat. 4959, Congress
created provisions for voiding fraudulent transfers as to debts
to the United States, and established applicable limitations
periods. The effective date of the fraudulent transfer
(continued...)
- 23 -
The decision in United States v. Vellalos, supra, has been the
subject of much discussion and has been generally rejected by other
District Courts in tax collection cases where the Government has
sought to foreclose on property transferred to third parties. See,
e.g., United States v. Cody,
961 F. Supp. 220 (S.D. Ind. 1997);
United States v. Kattar, 97-1 USTC par. 50,132 (D.N.H. 1996);
United States v. Smith,
950 F. Supp. 1394 (N.D. Ind. 1996); United
States v. Zuhone, 78 AFTR 2d 96-5106, 96-2 USTC par. 50,366 (C.D.
Ill. 1996); United States v. Hatfield, 77 AFTR 2d 96-1969, 96-2
USTC par. 50,342 (N.D. Ill. 1996); Flake v. United States, 76 AFTR
2d 95-6957, 95-2 USTC par. 50,588 (D. Ariz. 1995); Stoecklin v.
United States,
858 F. Supp. 167 (M.D. Fla. 1994). The District
Court for the Eastern District of California, however, approved the
reasoning of Vellalos in examining California's UFTA provisions,
but held for the Government on other grounds. United States v.
Wright, 76 AFTR 2d 95-7526, 96-1 USTC par. 50,005 (E.D. Cal. 1995),
affd. without published opinion
87 F.3d 1325 (9th Cir. 1996).
The Court of Appeals for the Ninth Circuit, the court to which
an appeal in this case lies, recognized the issue raised in
Vellalos, but found it did not have the occasion to address it
(although the court did conclude that the UFTA contained a claim
extinguishment provision). United States v. Bacon, 82 F.3d 822
8
(...continued)
provisions therein is subsequent to the date of the transfer
involved in the instant case.
- 24 -
(9th Cir. 1996) (considering the UFTA as adopted by the State of
Washington). Other Courts of Appeals, however, have addressed this
issue (albeit without great elaboration) and have applied the rule
in Summerlin to actions under the UFTA or other statutory
provisions, as well as actions under common law. See United States
v. Wurdemann, 663 F.2d 50 (8th Cir. 1981); United States v. Fernon,
640 F.2d 609 (5th Cir. 1981); see also United States v. Moore,
968
F.2d 1099 (11th Cir. 1992). (The District Court in United States
v.
Vellalos, supra at 708 n.3, criticized the decisions in Fernon
and Wurdemann as "an overly mechanical application of the dicta in
Summerlin without serious consideration of the significant
implications such a rule has for state sovereignty".)
The situation in Vellalos is factually distinguishable from
the situation herein. In Vellalos, the Government was unable to
invoke section 6901 because it missed the limitations period
prescribed by subsection (c). Therefore, it relied on State
foreclosure proceedings as a means for collection.9 (It is
unclear whether the District Court in Vellalos would have reached
its same conclusion had the Government proceeded timely under
section 6901.) Here, however, respondent has proceeded timely
9
In United States v. California, 507 U.S. 746, 758
(1993), the Supreme Court recognized that it is "a difficult
question" whether a State law action brought by the United States
is subject to Federal or State limitations periods. See Santiago
v. United States,
884 F. Supp. 45 (D.P.R. 1995); United States v.
Perrina,
877 F. Supp. 215, 218 n.5 (D.N.J. 1994).
- 25 -
under section 6901 and is using that section rather than State law
to assert a claim against petitioner as transferee. (In this
regard, we disagree with the dissent's assertion that respondent's
claim against petitioner is not created under Federal law, but
rather under California's UFTA. See Dissenting op. p. 33.)
Therefore, petitioner's reliance on Vellalos is misplaced.10
Further, the Court of Appeals for the Ninth Circuit has not
affirmatively approved of the District Court's exception in
Vellalos to the general rule of United States v. Summerlin, 310
U.S. 414 (1940), with respect to limitations periods in transferee
liability cases.11 United States v.
Bacon, supra. Accordingly, we
are not bound to follow any such exception. See Golsen v.
Commissioner,
54 T.C. 742 (1970), affd.
445 F.2d 985 (10th Cir.
10
The dissent's reliance on Custer v. McCutcheon, 283
U.S. 514 (1931), is similarly misplaced. Dissenting op. p. 34.
Like the situation in United States v. Vellalos,
780 F. Supp. 705
(D. Haw. 1992), in Custer the United States pursued its remedies
under State law rather than under Federal law. Therefore, the
situation in Custer is distinguishable from the situation herein.
Moreover, it should be noted that Custer was decided several
years before United States v. Summerlin,
310 U.S. 414 (1940).
11
The Court of Appeals for the Ninth Circuit has created
an exception to the general rule of United States v. Summerlin,
supra, "[such] that a state statute which provides a time
limitation as an element of a cause of action or as a condition
precedent to liability applies to suits by the United States even
if there is an otherwise applicable federal statute of
limitations." United States v. California,
655 F.2d 914, 918
(9th Cir. 1980) (citing United States v. Hartford Accident &
Indem. Co.,
460 F.2d 17, 19 (9th Cir. 1972)). The Court of
Appeals for the Ninth Circuit, however, has never applied this
exception in transferee liability cases.
- 26 -
1971). Consequently, the situation before us is one of first
impression, and we are free to adopt our own interpretation of the
rule in United States v. Summerlin, supra.
In United States v. Summerlin, supra, the Supreme Court
addressed a claim of the United States against an estate in
Florida. (A county judge in Florida denied the Government's
petition to allow the claim, which arose under a Federal statute,
determining that the claim was "void" because it was not filed
within 8 months from the time of the first publication of the
notice to creditors as required by Florida law.) The Supreme
Court, in holding that the United States was not bound by State
statutes of limitations (or subject to the defense of laches) in
enforcing its rights, stated that "When the United States becomes
entitled to a claim, acting in its governmental capacity and
asserts its claim in that right, it cannot be deemed to have
abdicated its governmental authority so as to become subject to a
state statute putting a time limit upon enforcement."
Id. at 417.
The Court then recognized that the Florida statute was not even
considered a statute of limitations, but was referred to as a
statute of "non-claim".12 Regardless, the Court rejected the notion
12
The Court concluded that this interpretation was drawn
from language in the statute which provided that a claim not
filed within the specified period "'shall be void even though the
personal representative has recognized such claim or demand by
paying a portion thereof or interest thereon or otherwise.'"
United States v. Summerlin, supra at 417.
- 27 -
that claims of the United States could be invalidated because they
were not filed within the prescribed period of time. The Court
reasoned:
If this were a statute merely determining the limits
of the jurisdiction of a probate court and thus providing
that the County Judge should have no jurisdiction to
receive or pass upon claims not filed within the eight
months, while leaving an opportunity to the United States
otherwise to enforce its claim, the authority of the
State to impose such a limitation upon its probate court
might be conceded. But if the statute, as sustained by
the state court, undertakes to invalidate the claim of
the United States, so that it cannot be enforced at all,
because not filed within eight months, we think the
statute in that sense transgressed the limits of state
power.
Id.
We do not read Summerlin as requiring a distinction between a
statute of limitations and a limitations period that is an element
of a cause of action, and we hold that no such distinction is
relevant in this case. The Supreme Court in Summerlin did not
recognize the Florida limitations period as a statute of
limitations, and there is no language in that case limiting its
holding to such statutes. See FSLIC v. Landry,
701 F. Supp. 570,
573 (E.D. La. 1988). The persuasive case law supports our holding.
See United States v.
Cody, 961 F. Supp. at 221.
Moreover, the public policy for exempting the Federal
Government from the application of State statutes of limitations is
not furthered by carving out exceptions where the State integrates
the limitations period as an element of the cause of action which
- 28 -
could then be barred if untimely. See Guaranty Trust Co. v. United
States, 304 U.S. 126, 136 (1938). The preservation and protection
of public rights, revenues, and property from the negligence of
public officers deteriorates when exceptions are made for time
limitations that have the same purpose as statutes of limitations
but in a different form. And the extinguishment provision of the
UFTA was created precisely to circumvent the rule in United States
v.
Summerlin, supra, a provision that the Court of Appeals for the
Ninth Circuit described as a "dressed-up statute of limitations".
United States v.
Bacon, 82 F.3d at 824 n.2; see Dillman v.
Commissioner,
64 T.C. 797, 806 (1975) ("If the State statute
attempts to abrogate or void the existing claim of the United
States by use of a different timetable it will be attempting to
reach beyond its powers. By whatever name such a statute might be
called it would be in effect a statute of limitations not binding
on the United States."). While a State may limit the jurisdiction
of its own courts for private claimants, time limitations imposed
on the United States' efforts to collect its taxes would
"transgress the limits of state power." United States v.
Summerlin, supra at 417.
Federal revenue law requires national application that is not
displaced by variations in State law. Tax assessment and
collection against a transferee in transferee liability cases is a
difficult task; to complete such a task within arbitrary time
- 29 -
constraints of State law would be an even greater burden,
particularly where, as in the case herein, the transferor is
delinquent in filing its tax return.
Additionally, the Supreme Court has consistently held that,
although State law is controlling as to the nature and extent of
the property rights in applying a Federal revenue act, Federal law
determines the consequences of those rights. United States v.
National Bank of Commerce, 472 U.S. 713, 722-723 (1985); Aquilino
v. United States,
363 U.S. 509, 513 (1960). "'[O]nce it has been
determined that state law creates sufficient interests in the * *
* [taxpayer] to satisfy the requirements of * * * [the statute],
state law is inoperative,' and the tax consequences thenceforth are
dictated by federal law." United States v. National Bank of
Commerce, supra at 722 (quoting United States v. Bess,
357 U.S. 51,
56-57 (1958)).
In the situation before us we are concerned only with whether
the Alhambra property was fraudulently conveyed to petitioner under
California's UFTA; we are not concerned with whether the UFTA would
permit the Federal Government to assess petitioner for transferee
liability as a result of the fraudulent conveyance. The latter
issue, including the time within which to assess, is resolved by
Federal revenue law, not State property law. See sec. 6901.
Thus, we hold that respondent is not bound by the limitations
period in California's UFTA in seeking to assert or assess
- 30 -
transferee liability against petitioner under section 6901.
Conclusion
In conclusion, we hold that section 6901(c) is the applicable
limitations period to which respondent is bound in asserting
transferee liability against petitioner for the unpaid taxes of
Jaussaud Enterprises. For purposes of petitioner's transferee
liability under section 6901, California's limitations period does
not control. As a result, we hold that respondent timely issued
the notice of transferee liability and has established petitioner's
liability as a transferee.
To reflect the foregoing,
Decision will be entered
for respondent.
Reviewed by the Court.
COHEN, CHABOT, SWIFT, GERBER, PARR, WELLS, RUWE, COLVIN,
CHIECHI, LARO, GALE, and MARVEL, JJ., agree with this majority
opinion.
- 31 -
HALPERN, J., dissenting:
I. Introduction
The majority’s conclusion that respondent has a right under
the California Uniform Fraudulent Transfer Act to enforce a
liability against petitioner fails to recognize and apply the
distinction between statutes of limitations, which set maximum time
periods during which certain actions can be brought or rights
enforced, and temporal rights created by State statutes.
Therefore, I dissent.
II. Section 6901
To use the courts to enforce a liability, the Government, like
any other creditor, must establish a basis in law for that
liability. Section 6901 does not provide any such basis.1 See
Commissioner v. Stern, 357 U.S. 39, 42 (1958) (interpreting section
311, I.R.C. 1939, the predecessor of section 6901). Section
6901(a) merely establishes the deficiency procedure as a mechanism
for collecting certain existing, enumerated liabilities. One of
the enumerated liabilities is the liability of a transferee of
property of a taxpayer in the case of the income tax. Sec.
6901(a)(1)(A)(i). Section 6901(c) imposes a period of limitations
for the assessment of the enumerated liabilities. Granting that
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
- 32 -
petitioner is the transferee of property of a taxpayer, the first
question we must address is whether there is any basis in law for
respondent’s claim that petitioner has some liability to respondent
on account thereof.
III. California Uniform Fraudulent Transfer Act
A. Introduction
As the majority acknowledges, with the exception of proving
that the taxpayer (Jaussaud) was liable for the tax, respondent has
the burden of proving all of the elements necessary to establish
petitioner’s liability as the transferee of property of the
taxpayer. Sec. 6902(a); Rule 142(d). The majority is also correct
in stating that we must examine the law of California to determine
petitioner’s liability, if any. Majority op. p. 13. Respondent
argues, and petitioner and the majority agree, that the applicable
law of California is the California Uniform Fraudulent Transfer
Act, Cal. Civ. Code sec. 3439 through 3439.12 (West 1997)
(hereafter, CUFTA and section 3439.xx, respectively). The CUFTA
provides remedies to creditors with respect to fraudulent transfers
made by debtors. Section 3439.04 defines a fraudulent transfer,
and section 3439.07 provides remedies to creditors. Those remedies
delimit both the right of the creditor to demand something from a
transferee and the offsetting duty (liability) of the transferee to
comply (that duty hereafter being referred to as transferee
liability). Section 3439.09 sets forth certain time limits within
- 33 -
which an action must be brought and provides for the extinguishment
of the cause of action created by the CUFTA if those time limits
are exceeded. In the case of a fraudulent transfer within the
meaning of section 3439.04(b), the cause of action is extinguished
unless an action is brought or a levy is made pursuant to section
3439.07 within 4 years after the fraudulent transfer is made.
B. Section 3439.09
Section 3439.09 is part of the CUFTA and, like the section
3439.07 remedies, it delimits the right (and offsetting transferee
liability) created by the CUFTA. It delimits that right, however,
not in terms of specifying the available remedies, as does section
3439.07 but, rather, in terms of specifying the temporal dimension
of the right. Section 3439.09 is not a statute of limitations. It
does not operate by making the judicial mechanism unavailable to
enforce the right. Rather, it delimits the existence of the State-
created right; thus, the question of enforcement is moot. The
distinction between a statute of limitations and a temporally
delimited right is widely recognized. See, e.g., Crandall v.
Irwin, 39 N.E.2d 608, 610 (Ohio 1942), in which the Supreme Court
of Ohio held:
A wide distinction exists between pure statutes of
limitation and special statutory limitations qualifying
a given right. In the latter instance time is made an
essence of the right created, and the limitation is an
inherent part of the statute or agreement out of which
the right in question arises, so that there is no right
of action whatever independent of the limitation. A
lapse of the statutory period operates, therefore, to
- 34 -
extinguish the right altogether.
C. Respondent’s Failure To Carry the Burden of Proof
The Government did not demonstrate that the transfer occurred
within 4 years of the date of the notice of transferee liability
against petitioner. Majority op. p. 18. Therefore, I conclude
that the Government has not sustained its burden of proving that
petitioner was liable as a transferee under California law.
IV. The Summerlin Issue
A. Quod Nullum Tempus Occurrit Regi
The majority rests its holding on the ancient rule of quod
nullum tempus occurrit regi--"that the sovereign is exempt from the
consequences of its laches, and from the operation of statutes of
limitations". See Guaranty Trust Co. v. United States, 304 U.S.
126, 132 (1938). The majority explains that the Supreme Court has
already addressed the distinction between statutes of limitations
and "non-claim" statutes in United States v. Summerlin,
310 U.S.
414 (1940). The majority applies Summerlin here to dispose of the
case on the theory that section 3439.09 amounts to a nonclaim
statute, and that is the equivalent of a statute of limitations.
The Supreme Court in Summerlin held that "if the statute * * *
undertakes to invalidate the claim of the United States, so that it
cannot be enforced at all, because not filed within * * * [the
statutory period], we think the statute in that sense transgressed
the limits of state power."
Id. at 417.
- 35 -
The distinction between "pure" statutes of limitations and
"non-claim" statutes relates to how the statute achieves the
limitation.2 The Supreme Court held that such a distinction is
irrelevant if the result is that the sovereign's claim is
invalidated. Id. That is not, however, a relevant distinction
here.
The issue here is not how the statute limits a right (i.e., by
denying the means of enforcing the right or by extinguishing the
right), but rather upon what right the limitation acts. The United
States’ claim in Summerlin arose when the Federal Housing
Administrator became the assignee of a claim against a decedent’s
estate. The Government had an existing right that would have been
invalidated by the provisions of a State statute had the State
statute been held applicable. To the contrary, respondent's CUFTA
claim against petitioner, as a transferee, is not created by
Federal or common law. Respondent makes no claim except under the
CUFTA, and, therefore, the issue is whether respondent has any
rights as a creditor under the CUFTA. The issue here does not
involve an extension or modification of the Summerlin doctrine,
2
A "pure" statute of limitations merely limits or
restricts the time within which a right, otherwise unlimited, may
be enforced. Vaughn v. United States, 43 F. Supp. 306, 308 (E.D.
Ark. 1942). A "non-claim" statute operates by extinguishing the
underlying substantive right. See United States v. Summerlin,
310 U.S. 414 (1940). Both "pure" statutes of limitations and
"non-claim" statutes are, however, statutes of limitations in
that they are statutes that limit causes of action. Beach v.
Mizner,
3 N.E.2d 417, 419 (Ohio 1936).
- 36 -
where the Supreme Court refused to apply a State statute of
limitations to cut off the Government’s existing cause of action.
Rather, the Summerlin doctrine is inapposite to these
circumstances.
B. The Supreme Court
The Supreme Court has held that temporal limitations contained
in State statutory rights are not statutes of limitations that are
subject to the rule of quod nullum tempus occurrit regi. See
Custer v. McCutcheon, 283 U.S. 514 (1931). In Custer, the Supreme
Court reversed the decision of the Court of Appeals for the Ninth
Circuit (Ninth Circuit) affirming a judgment of the District Court
for Idaho in favor of a U.S. marshal. The marshal had levied an
execution against Custer upon a judgment entered in favor of the
United States 9 years earlier. The Idaho statute governing the
execution process, which applied to proceedings in the District
Court as if Congress had enacted the statute, provided that "[t]he
party in whose favor judgment is given, may, at any time within
five years after the entry thereof, have a writ of execution issued
for its enforcement."
Id. at 515. The Supreme Court, recognizing
that absent specific provisions to the contrary, statutes of
limitations do not bind the sovereign, held that the statute was
not a statute of limitations. Rather, the Court held that it was
a statute granting a right of execution, and the time element is an
- 37 -
integral part of the statutory right conferred. Id. at 516-517.
Although the marshal argued that, on grounds of public policy, the
sovereign ought not be subject to restrictions binding on private
suitors, the Supreme Court saw no valid reason for making such an
exception:
The time limit for issuing executions is, strictly
speaking, not a statute of limitations. On the contrary,
the privilege of issuing an execution is merely to be
exercised within a specified time, as are other
procedural steps in the course of a litigation after it
is instituted. * * *
Id. at 519.
The Supreme Court has also recognized that the right of the
Government to be free from statutes of limitations does not mean
the Government can pursue a cause of action where none exists
under State law or otherwise. See United States v. California,
507 U.S. 746 (1993); Guaranty Trust Co. v. United
States, supra.
C. The Court of Appeals for the Ninth Circuit
The Ninth Circuit has similarly recognized that the Summerlin
doctrine is inapplicable to State statutes that provide a time
limitation as an element of a cause of action. See United States
v. California, 655 F.2d 914 (9th Cir. 1980). In California, the
Ninth Circuit held that the claim filing requirements of
California Government Code section 911.2, which required that all
claims for money or damages for which the State is liable be
presented within 1 year of the date that the claim arose, was
applicable to the Federal Government. The Government was pursuing
- 38 -
a claim against the State of California pursuant to California
Health and Safety Code section 13009 for the Government’s expense
of fighting a fire negligently set to a national forest. The
majority conveniently dismisses such relevant precedent,
relegating its mention to a footnote, and noting that the Ninth
Circuit has never applied this exception in transferee liability
cases. The majority does not, however,
provide any reasoning as to why there is a relevant distinction
between substantive claims provided for by California State law
that regard transferee liability versus liability in connection
with the expenses incurred for fighting negligently set fires.
Another relevant Ninth Circuit case is United States v.
Hartford Accident & Indem. Co., 460 F.2d 17, 18 (9th Cir. 1972).
There, the Ninth Circuit held that the United States "was barred
from recovery because of its failure to comply with the California
Insurance Code" requiring suit to be brought within 1 year.
Id.
The Ninth Circuit recognized that United States v. Summerlin,
310
U.S. 414 (1940), provided "clear authority for the proposition
that an action vested in the United States cannot be defeated by
a state statute of limitations". United States v. Hartford
Accident & Idem. Co., supra at 19. However, the Ninth Circuit
determined that neither Summerlin nor its progeny "hold that
considerations of federal supremacy can create a cause of action
where none exists under state law or otherwise."
Id. (citing
- 39 -
United States v.
Summerlin, supra at 417). Therefore, the Ninth
Circuit distinguished pure statutes of limitations from State-
created temporal rights.
D. Distinguishing a Temporal Right From a Temporal
Limitation
The cases cited from the Courts of Appeals by the majority in
order to further its approach do not address the issue of whether
a State can provide a limited temporal right, as opposed to
temporally limiting the sovereign from exercising a right that is
not otherwise so limited. See United States v. Moore, 968 F.2d
1099 (11th Cir. 1992) (holding without citation to the Georgia
statute in issue that the statute is a State statute of
limitations); United States v. Wurdemann,
663 F.2d 50 (8th Cir.
1981) (holding without any analysis that State "statutes of
limitation" do not apply to the sovereign); United States v.
Fernon,
640 F.2d 609 (5th Cir. 1981) (interpreting Florida statute
section 95.11(6) to be a statute of limitations, and not an
element of a State-created right). I agree with the criticisms
made in United States v. Vellalos,
780 F. Supp. 705, 708 n.3 (D.
Haw. 1992), appeal dismissed
990 F.2d 1265 (9th Cir. 1993), that
these cases are "an overly mechanical application of the dicta in
Summerlin without serious consideration of the significant
implications such a rule has for state sovereignty."3
3
There are numerous cases that deal with the question of
(continued...)
- 40 -
It is true that we are not bound to follow United States v.
Vellalos, supra. The majority, however, attempts to distinguish
it by noting that, in Vellalos, the Government was "unable to
invoke section 6901 because it missed the limitations period
prescribed by subsection (c). Therefore, it relied on State
foreclosure proceedings as a means for collection." Majority op.
p. 24. The majority explains that it is not clear whether the
District Court in Vellalos would have reached its same conclusion
had the Government proceeded timely under section 6901, which is
the case here. I disagree. The District Court in Vellalos was
explicit in holding that
The Tenth Amendment to the United States
Constitution provides:
3
(...continued)
whether, in substance, a temporal limitation should be treated as
a temporally limited right. See, e.g., Fairbanks-Morse & Co. v.
Alaska Palladium Co., 32 F.2d 233, 234 (9th Cir. 1929) (quoting
Partee v. St. Louis & S.F.R. Co.,
204 F. 970, 972 (8th Cir.
1913)):
A statute which in itself creates a new liability,
gives an action to enforce it unknown to the common
law, and fixes the time within which that action may be
commenced, is not a statute of limitations. It is a
statute of creation, and the commencement of the action
within the time it fixes is an indispensable condition
of the liability and of the action which it permits.
Such a statute is an offer of an action on condition
that it be commenced within the specified time. If the
offer is not accepted in the only way in which it can
be accepted, by the commencement of the action within
the specified time, the action and the right of action
no longer exist, and the defendant is exempt from
liability.
- 41 -
The powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are
reserved to the States respectively, or to the people.
U.S. Const. amend. X. The law of real property has
traditionally been within the province of the states.
The government has cited no federal statute that would
restrict the states' rights to legislate in the area of
fraudulent real estate transfers.
Here, the government is seeking to take advantage of
a right that is entirely within the domain of the state.
This right was created by a state statute and
specifically limited by the text of that statute. This
is not a straightforward question of debt collection
under the common law as was addressed by the Supreme
Court in Summerlin. * * *
United States v. Vellalos, supra at 707-708.
Further, the majority's review of United States v. Bacon, 82
F.3d 822 (9th Cir. 1996), ignores a significant holding. The
issue in Bacon was whether Washington State's Uniform Fraudulent
Transfer Act (WSUFTA) may be applied retroactively. The Ninth
Circuit concluded that it is precisely because the WSUFTA contains
an extinguishment provision, rather than a remedial or procedural
limitation, that it does not apply retroactively absent an express
provision to the contrary.
V. Conclusion
For the foregoing reasons, I believe that the time period
contained in CUFTA section 3439.09 is not a statute of
limitations, but rather is an inherent element of the right
created. Although the effect of the provision is one of "non-
claim" (i.e., it extinguishes the underlying substantive right),
rather than a mere bar to enforcement, this difference is not
- 42 -
controlling. What is dispositive is that the right that the
Government claims to possess against petitioner as a transferee is
nonexistent but for the provisions of California State law, and
California has decided to provide only a temporal right against
transferees in these instances. Respondent and the majority may
regret that California did not provide a different rule than it
did, but it is not our province to legislate on behalf of the
States. In limited circumstances, as illustrated by the Summerlin
doctrine, we may ignore State statutes of limitations, but that is
the extent of our authority. To hold otherwise is an encroachment
on State sovereignty and raises problematic constitutional issues.
WHALEN, BEGHE, and THORNTON, JJ., agree with this dissenting
opinion.
