Opinion
No. CV-01-2450-PHX-SRB
September 30, 2003
ORDER
Pending before the court are Defendant's Motion for Summary Judgment (Doc. 17-1) and Plaintiff's Cross-Motion for Summary Judgment (Doc. 21-1). This case arises out of the attachment of a federal tax lien to real property held in joint tenancy with right of survivorship, and the subsequent collection of one-half of the proceeds from the sale of the liened property under 26 U.S.C. § 6321.
I. BACKGROUND
On April 16, 1996 Plaintiff and her son (hereinafter "Taxpayer") acquired title to a condominium as joint tenants with right of survivorship. Plaintiff and her daughter had previously held title to the property as joint tentants. Plaintiff and Taxpayer both assert that the transfer of title was done solely for estate planning purposes and that Taxpayer acquired nominal title to the property only. Plaintiff paid all expenses and received all income from the property during the period that she and Taxpayer co-owned the property as joint tenants.
The property, used as rental property, is located at 4901 Calle Los Cerros, #115, Tempe, Arizona 85282.
The Internal Revenue Service ("IRS") recorded notices of federal tax liens with the Maricopa County Recorder on August 7, 1996 for tax years 1993 and 1994, and on November 2, 1998 for tax years 1995, 1996, and 1997 against all property and rights to property belonging to Taxpayer. In June 2000, the IRS collected approximately one-half of the net sale proceeds in partial satisfaction of its liens against Taxpayer.
Plaintiff brought suit for a refund of the portion of the net sale proceeds of the property taken by the IRS in partial satisfaction of its federal tax liens on property of Taxpayer. Plaintiff's Complaint alleged that Taxpayer had only a nominal interest, and therefore retention of half of the proceeds of the property by the IRS was illegal. The United States defends on grounds that the IRS was entitled to collect one-half of the proceeds from the sale of the subject property because federal tax liens properly attached. Both parties now seek summary judgment.
II. LEGAL STANDARDS AND ANALYSIS
The standard for summary judgment is set forth in Rule 56(c) of the Federal Rules of Civil Procedure. Under this rule, summary judgment is properly granted when: (1) no genuine issues of material fact remain; and (2) after viewing the evidence most favorably to the non-moving party, the movant is clearly entitled to prevail as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53 (1986); Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir. 1987). As noted in Court's order entered on April 4, 2003, the material facts in this case are not in dispute. Therefore, any issues that remain can be determined as a matter of law.
The threshold question in this case, consistent with every case where the Federal Government attaches a tax lien to a taxpayer's property, is "whether and to what extent the taxpayer had `property' or `rights to property' to which the tax lien could attach." Aquilino v. United States, 363 U.S. 509, 512, 80 S.Ct. 1277, 1280(1960). This question stems from the Internal Revenue Code, which provides in part: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. § 6321 (emphasis added). This statutory language has been interpreted broadly by the Supreme Court, noting that the statute "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. Stonehill, 83 F.3d 1156, 1159 (9th Cir. 1996)( quoting United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985)).
To answer this question, the courts must look to state law, as it is well established that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute." Aquilino, 363 U.S. at 513, 80 S.Ct. at 1280 ( quoting Morgan v. Commissioner, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585 (1940). "Once the court determines the state-law right possessed by the taxpayer, then the federal tax consequences are solely a matter of federal law." Stonehill, 83 F.3d at 1159 ( quoting National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925; Little v. United States, 704 F.2d 1100, 1105 (9th Cir. 1983). Thus, in determining whether a property is subject to a federal tax lien, a court must conduct a two-part analysis: 1) the court must make a determination, based upon state law, as to the nature and legal interest the taxpayer has in the property the Government seeks to reach, and 2) once the court has determined those rights under state law, the court must look to federal law to determine whether the state-law right constitutes `property' or `rights to property' attachable by a federal tax lien. Drye v. United States, 528 U.S. 49, 58, 120 S.Ct. 474, 481, (1999); National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925; Aquilino, 363 U.S. at 513, 80 S.Ct. at 1280; Stonehill, 83 F.3d at 1159.
A. JOINT TENANTS UNDER ARIZONA LAW
Ownership of property through joint tenancy evolved from the common law. "Fundamentally, it is a way two or more persons take and hold property as if they were one person." Graham v. Allen, 463 P.2d 102, 103, 11 Ariz.App. 207, 208 (Ariz.Ct.App. 1970). To establish a joint tenancy relationship, there exist four basic requirements: 1) all tenants must acquire their interests from the same source, 2) all must have identical shares, 3) all must take at the same time, and 4) the possession of each is the possession of all. See In re Estelle's Estate, 593 P.2d 663, 665, 122 Ariz. 109, 111 (1979); Kleeman v. Sheridan, 256 P.2d 553, 555, 75 Ariz. 311, 314 (1953); Brown v. Navarre, 169 P.2d 85, 87, 64 Ariz. 262, 265 (1946); Graham, 463 P.2d at 103, 11 Ariz.App. at 208; 20 Am.Jur.2d Cotenancy and Joint Ownership §§ 1-2.
Joint tenancy "is not testamentary but is a present estate in which both joint tenants are seized in the case of real estate . . . per my et per tout, that is, such joint tenant is seized by the half as well as by the whole." Kleeman, 256 P.2d at 555, 75 Ariz. at 315. Joint tenants hold an equal and undivided interest in the subject property. See Graham, 463 P.2d at 103, 11 Ariz.App. at 208; State v. Superior Court, 936 P.2d 558, 559, 188 Ariz. 372, 373 (Ariz.Ct.App. 1997). "Although a joint tenant cannot convey an entire estate unless authorized by his co-tenants, he can transfer his interest." Cooley v. Veling, 505 P.2d 1381, 1382, 19 Ariz.App. 208, 209 (Ariz.Ct.App. 1973) (finding that the interest of one owner in the joint tenancy property was subject to both a mortgage without the consent of the other joint tenant, as well as to foreclosure) ( quoting 48 C.J.S. Joint Tenancy § 17 (1947). A joint tenant has a qualified right to rents, profits and accounting, as well as a right to contributions from other joint tenants for expenditures made for all. Graham, 463 P.2d at 104, 11 Ariz.App. at 209. Finally, a joint tenant's "individual interest . . . is subject to levy and sale upon execution." Id.
In the present case, neither party disputes the fact that Plaintiff and Taxpayer gained title to the property as joint tenants. Rather, Plaintiff argues that Taxpayer was named as a joint tenant solely for estate planning purposes and held nominal title only. Defendant argues that a claimant should not be permitted to claim that property is jointly owned for probate purposes while disavowing joint ownership for tax purposes. Defendant maintains that Plaintiff cannot overcome the presumption that she did not intend to enter into joint tenancy for the purpose of creating a gift.
Taxpayer does assert that he was not aware that he was a joint owner of the property until Plaintiff tried to sell the property and a tax lien showed up on the title report. But Plaintiff does not dispute that Taxpayer was in fact a joint tenant of the property. Taxpayer, with Plaintiff, signed the acceptance of the Quitclaim Deed To Joint Tenancy on April 2, 1996, which stated: "The foregoing QUITCLAIM DEED TO JOINT TENANCY is accepted and approved by the undersigned Releasee(s), It being their intention to acquire an interest in said property as Joint Tenants with the right of survivorship, and not as community property or as tenants in common." (emphasis added). The Deed was signed and certified in front of a Notary Public.
In Haugen v. United States, 33 A.F.T.R.2d 74-634, 74-1 U.S.T.C. ¶ 9253, 1973 WL 709 at 4 (D. Ariz. 1973), the Court was presented with facts and issues similar to those presented in this case. Haugen involved a tax levy and notice of seizure relating to an automobile held in joint tenancy with right of survivorship by a mother and her son. The mother filed a complaint in District Court, alleging that the automobile could not be seized because: (1) the alleged tax liability was attributable to the son only, and (2) the son had no property interest in the automobile. The mother introduced evidence that she had made all payments on the purchase of the automobile, paid for all repairs done, paid for all insurance premiums, and had sole use of the vehicle. Id. She contended that by placing both herself and her son as joint tenants on the title of the automobile, her intent was not to give the son any incidents of ownership or to make a gift, but was merely "for testamentary purposes to facilitate the transfer of title to him upon her death." Id. The Court held that where a joint tenancy is created between a mother and a son, the plaintiff must prove by clear and convincing evidence that a joint tenancy was not intended in order to overcome the presumption of a gift. In reaching this conclusion, the Court discussed characteristics of joint tenancy, including that joint tenancy is not testamentary in nature and that a joint tenant is "seized by the half as well as the whole." Id. at *3 ( quoting Kleeman v. Sheridan, 75 Ariz. 311(1953)). The Court emphasized that a joint tenant obtains rights such as the right to lease his proportionate interest and a right to contribution, and also becomes subject to levy and sale upon execution. The Court stated that the only consideration under Arizona law in determining ownership of the automobile was whether the individual held legal title, not who had paid the purchase price, paid insurance premiums, or even who used the car. Id. The court concluded that the son had an interest in the automobile and found the levy and seizure of the automobile proper.
The court in Haugen relied on Arizona Revised Statutes § 28-130, which states that "Owner' means a person who holds legal title of a vehicle. . . ." The court went on to say, "the Arizona statute is unequivocal. It makes no differentiations among persons who have paid the purchase price of the automobile, paid insurance premiums, or even among those who use the car. The only consideration under the statute in determining ownership is whether the individual holds legal title." Haugen, 33 A.F.T.R.2d 74-634, 74-1 U.S.T.C. ¶ 9253, 1973 WL 709 at 3.
A second case, whose facts are substantially similar to those in the present case and whose analysis was the primary focus by the Haugen court to establish the test in Arizona, is Frederick v. Shorman, 259 Iowa 1050, 1057, 147 N.W.2d 478, 483 (1966). In Shorman, a mother purchased a residence by paying the entire consideration but took title in joint names of herself and her son, both signing a deed which stated that the mother and son were joint tenants. Id. The mother's testimony was that she put the property in both names solely in case something happened to her. Id. The court held that the plaintiff failed to prove by clear and convincing evidence that she and her joint tenant did not hold equal interests in the property, and consequently the son's creditor could levy upon the son's property interest. Id.
The Court finds the reasoning of Haugen and Shorman persuasive. Just as in Haugen and Shorman, in the present case there are no indicators that Taxpayer paid any funds towards the property. All expenses were paid by Plaintiff and she retained all income. Plaintiff reported all expenses and income from the property on her tax returns. The only purpose in transferring the property into joint tenancy was for estate planning. Under Arizona law factors such as monies expended, income reported and the intention of the parties in taking title to the property do not affect the legal rights of a joint tenant. Rather, because a joint tenancy was created between Plaintiff and Taxpayer, and because Taxpayer therefore had an interest in the whole of the property regardless of whether he chose to exercise his rights, his interest in the property could consequently be levied upon. Plaintiffs intention to utilize a joint tenancy to avoid probate does not create only nominal title as a matter of law. As Defendant points out, Plaintiff took no steps to restrict Taxpayer's rights as a joint tenant.
Schmit v. United States, 896 F.2d 352 (9th Cir. 1990), relied on by Plaintiff, does not require a different result. Schmit, a case determined under Nevada law, was brought by a taxpayer's ex-wife to have a tax lien on her property declared wrongful and ordered released. The Nevada state court had earlier determined in a divorce action that the property was the wife's separate property. The tax lien, recorded after the state court ruling but while the property was still titled in joint tenancy, did not amount to an interest in property already determined under state law as the wife's separate property. The Court stated, "although the government can levy upon jointly owned property to collect taxes, the government's lien under I.R.C. § 6321 attaches only to the interest owned by the delinquent taxpayer." Schmit, 896 F.2d at 353.
B. ATTACHING LIENS UNDER FEDERAL LAW
Once the court has determined a joint tenant's rights under state law, the court must next look to federal law to determine whether the state-law right constitutes `property' or `rights to property' attachable by a federal tax lien. Drye, 528 U.S. at 58, 120 S.Ct. at 481; National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925; Aquilino, 363 U.S. at 513, 80 S.Ct. at 1280; Stonehill, 83 F.3d at 1159. Courts have consistently determined that property is subject to a federal tax lien, "if [property] has beneficial value for its holder, and it is sufficiently transferable." In re Kimura, 969 F.2d 806, 811, 70 A.F.T.R.2d 92-5414, 92-2 U.S.T.C. ¶ 50 (9th Cir. 1992); relying on Little v. United States 704 F.2d 1100, 1105-06 (9th Cir. 1983) (stating that whether an asset is property under Section 6321 involves determining whether it has pecuniary worth and is transferable); see e.g. Drye, 528 U.S. at 60, 120 S.Ct. at 482; United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057 (1958) (finding that life insurance policies are property to the extent of their case surrender value for tax lien purposes); 21 West Lancaster Corp. v. Main Line Restaurant, Inc., 790 F.2d 354, 351, 57 A.F.T.R.2d 86-1423, 86-2 U.S.T.C. ¶ 9516 (3rd Cir. 1986) (holding that a state liquor license constitutes property sufficient for a tax lien to attach); Randall v. H. Nakashima Co., Ltd., 542 F.2d 270, 278 (5th Cir. 1976) (declaring that the pertinent question to address is, "was the interest of the taxpayer . . . bargainable, was it transferable, did it have value?").
Applying Arizona law, it is clear that Taxpayer's interest in the property was both beneficial and transferrable. Under Arizona law, a joint tenant is able to transfer his interest in the property, has a qualified right to rents, profits and accounting, and has a right to contributions from other joint tenants for expenditures made for all. Cooley, 505 P.2d at 1382, 19 Ariz.App. at 209 (Ariz.Ct.App. 1973), Graham, 463 P.2d at 104, 11 Ariz.App. at 209. There is no evidence that Taxpayer lacked the ability to exercise his rights. Regardless of whether Taxpayer intended to exercise his rights in the property, he held an interest that was beneficial, transferable, and had value. As a consequence, Taxpayer's interest in the property was subject to the attachment of a lien under Federal law.
III. CONCLUSION
Taxpayer was a joint tenant with Plaintiff in the property. Taxpayer's legal rights as a joint tenant were not limited in any way. Whether he chose to exercise any of those rights is immaterial. Under federal law Taxpayer's interest in the property constituted `property' and/or `rights to property.' The property was properly subjected to a tax lien on Taxpayer's joint tenancy interest in the property.
IT IS THEREFORE ORDERED granting Defendant's Motion for Summary Judgment (Doc. 17);
IT IS FURTHER ORDERED denying Plaintiff's Cross-Motion for Summary Judgment (Doc. 21); IT IS FURTHER ORDERED that the clerk enter judgment in favor of Defendant, thereby terminating this case.