Opinion
No. 01-1288-T-An.
August 9, 2004
ORDER
This interpleader action was filed by plaintiff Nancy Choate in the Chancery Court for Madison County, Tennessee, seeking a determination as to the appropriate disposition of certain funds held in escrow. The named defendants were Tracy Tubbs and Barbara Tubbs; the Internal Revenue Service ("IRS") was identified as an interested party. The United States, on behalf of the IRS, which claims an interest in the funds as a result of federal tax liens against Tracy Tubbs, removed the action to this Court and was granted leave to intervene. An amended complaint was filed on January 2, 2002, including the United States as a named defendant.
The escrowed funds that gave rise to this action, in the amount of $226,942.21, were paid into the registry of the Madison County Chancery Court upon the filing of the original interpleader complaint, and were transferred into the registry of this Court following removal. The funds represent the proceeds of an annuity owned by John Allen Tubbs, who died on June 18, 2000. Defendant Tracy Tubbs, the son of John Allen Tubbs, is the designated beneficiary of the annuity. Defendant Barbara Tubbs, widow of John Allen Tubbs and stepmother of Tracy Tubbs, is the contingent beneficiary. At the time of John Allen Tubbs' death, several tax liens were outstanding against Tracy Tubbs. The IRS claims an interest in the proceeds of the annuity pursuant to 26 U.S.C. § 6321. The Court subsequently entered an order granting the United States' motion for summary judgment, ruling that the escrowed annuity funds are subject to any valid outstanding tax liens. The Court then ordered the parties to submit briefs setting forth their arguments regarding the amount of the tax liability in question.
In the petition to intervene filed by the IRS in this case on October 11, 2001, it was asserted that the pertinent tax assessments against Tracy Tubbs included certain employment and unemployment taxes for 1996 through 1998, as well as income taxes for the years 1990 through 1996. The exhibits attached to the petition show total tax assessments in the amount of $110,773.44; however, there is no documention for an assessment of income taxes for the tax year 1997.
This figure does not include all accrued interest.
The answer filed by the IRS on January 25, 2002 asserted the same employment and unemployment tax assessments, and then referred to income tax assessments for the years 1992 through 1998, rather than 1990 through 1996. The answer further asserted that, as of February 4, 2002, the total balance due on those assessments, with accrued interest, would be $187,821.65. However, the exhibits attached to the answer do not document income tax assessments for tax years 1997 or 1998, or the accrued interest.
The assertion in the Petition to Intervene that the IRS is seeking to collect on tax assessments made for income tax years 1990 through 1996 appears to have been either inadvertent or erroneous. At all other places in the record, the IRS refers to assessments for income tax years 1992 through 1998.
The record also contains a copy of a letter dated April 16, 2002, from the IRS' attorney of record, Jason S. Zarin, to Tracy Tubbs' counsel. That letter states:
Enclosed as per your requests are the balances due (with breakdowns into penalties and interest) on the employment and income tax liabilities owed by Tracy Tubbs. The balances are calculated as of February 4, 2002. Please note that the Service is asserting that only $155,767.45 of these liabilities are secured by the federal tax liens.
(T. Tubbs Mem. Opp. to Summ. Judg., Ex. A.)
On January 28, 2003, the IRS filed a motion for summary judgment, reiterating the February 2, 2002 figure of $187,821.65, and stating that a current interest calculation would be provided as soon as possible. The motion for summary contained exhibits documenting all of the tax assessments, including the income tax assessments for 1997 and 1998. A Notice of Updated Balance was filed February 25, 2003, asserting that the balance due as of January 29, 2003 was $197,779.50. In the Supplemental Brief filed on May 2, 2003, it was asserted that as of February 3, 2003, the balance due was $198,004.81. Official Certified Transcripts are attached to the brief, documenting all of the claimed tax assessments.
Upon adding the figures contained in the IRS' documentation, the figure should be $187,821.56 rather than $187,821.65.
Tracy Tubbs and Barbara Tubbs contend that the IRS has engaged in a "shell game" of shifting numbers regarding the amount of Tracy Tubbs' tax liability, making it impossible to determine how much is owed. Tracy Tubbs also asserts that, in order for a federal tax lien to be valid, it must be secured, i.e., a Notice of Federal Tax Lien must have been filed. Therefore, he asserts that the IRS should be estopped from denying the assertion of its attorney, in the April 16, 2002 letter, that only $155,767.45 of the assessments were "secured by the federal tax liens."
The premise set forth by Tracy Tubbs, that the federal tax liens at issue in this case are not effective against him unless recorded by an actual Notice of Federal Tax Lien, is erroneous. Pursuant to 26 U.S.C. § 6321, once the IRS assesses a tax and the taxpayer refuses to pay after a demand is made, a lien arises "in favor of the United States upon all property and rights to property, whether real or personal, belonging to" the taxpayer. This lien is perfected against the taxpayer even without the recording of a Notice of Federal Tax Lien. See McGinley v. United States, 942 F. Supp. 1239, 1243 (D. Neb. 1996); United States v. Battley ( In re Berg), 188 B.R. 615, 618 (B.A.P. 9th Cir. 1995), aff'd 121 F.3d 535 (9th Cir. 1997);Suarez v. United States ( In re Suarez), 182 B.R. 916, 919 (Bankr. S.D. Fla. 1995). When there are no competing interests, the " general rule is that the tax collector prevails even if he has not recorded at all." United States v. McDermott, 507 U.S. 447, 455 (1993). "However, before a tax lien will be effective against certain third parties, a Notice of Federal Tax Lien must be recorded." Suarez, 182 B.R. at 919.
As neither Tracy Tubbs nor Barbara Tubbs has asserted that there are any competing interests in this case, the tax liens would not be invalided by the failure to record a Notice of Federal Tax Lien for each of the claimed assessments. Thus, as pointed out by the IRS, to the extent that it implied some of the tax liens might not be valid against Tracy Tubbs, Mr. Zarin's April 2002 letter was erroneous. Indeed, it appears to the Court that the IRS has erroneously stated that notices of federal tax lien have not been filed for all of the assessments in question. (IRS Supp. Br. at 3) ("The Internal Revenue Service has filed notices of federal tax liens for some, but not all, of the tax periods at issue.") Each of the Official Certified Transcripts attached to the IRS' supplemental brief appears to show a date that a Notice of Federal Tax Lien was recorded.
Even though Mr. Zarin's letter does not seem to have been a deliberate attempt to mislead Tracy Tubbs as to the amount of his tax liability, it was at least confusing. However, mere confusion is not enough to warrant the application of estoppel. This is even more true when a party seeks to estop the United States.
"[T]he traditional elements of estoppel are: (1) misrepresentation by the party against whom estoppel is asserted; (2) reasonable reliance on the misrepresentation by the party asserting estoppel; and (3) detriment to the party asserting estoppel." Michigan Express, Inc. v. United States, 374 F.3d 424, 427 (6th Cir. 2004) (quoting LaBonte v. United States, 233 F.3d 1049, 1053 (7th Cir. 2000)). However, the United States "may not be estopped on the same terms as any other litigant."Heckler v. Community Health Servs. of Crawford County, Inc., 467 U.S. 51, 60 (1984). The reason for this is that "[w]hen the Government is unable to enforce the law because the conduct of its agents has given rise to an estoppel, the interest of the citizenry as a whole in obedience to the rule of law is undermined." Id. Thus, a party attempting to estop the United States bears a "very heavy burden." Fisher v. Peters, 249 F.3d 433, 444 (6th Cir. 2001). At a minimum, the party must show some "affirmative misconduct" by the United States. Id. "`[A]ffirmative misconduct' is more than mere negligence. It is an act by the government that either intentionally or recklessly misleads the claimant." Michigan Express, Inc., 374 F.3d at 427.
Even if the traditional elements of estoppel could be met, the Court finds that Mr. Zarin's April 2002 letter to Tracy Tubbs' counsel, while erroneous, does not rise to a level that can be described as affirmative misconduct. At most, the letter was the result of negligence rather than an intentional or reckless attempt to mislead. Likewise, any uncertainty regarding the tax liability in the various documents filed by the IRS does not appear to have been a deliberate "shell game" as asserted by Tracy Tubbs and Barbara Tubbs, but rather the result of carelessness. Therefore, the Court concludes that the IRS is not estopped from disputing the figure given by Mr. Zarin in that letter.
Some of the variation in the figures is simply the result of interest that continues to accrue.
Tracy Tubbs also contends that the IRS should not be allowed to claim penalties and interest that have accrued since the filing of this action. While that would appear to be an equitable result, it is not the law. Even in an interpleader action where the funds are held by the Court, penalties and interest continue to accrue until the tax liability is paid. See Paul Revere Life Ins. Co. v. Brock, 28 F.3d 551, 553-54 (6th Cir. 1994). The right to receive penalties and interest is established by 26 U.S.C. § 6601, and cannot be disregarded by a court of equity. Id. at 554 (citation omitted). Tracy Tubbs could have ameliorated this seemingly harsh result at any time by paying, at the very least, the undisputed portions of his tax liability.
The Court concludes that the IRS is entitled to payment from the escrowed funds held in the registry of this Court in the amount of the total of the claimed tax assessments plus all accrued penalties and interest. The IRS is hereby allowed eleven days from the entry of this order in which to file an updated statement of the amount due. A final order and judgment will be entered following the Court's receipt of that statement.
IT IS SO ORDERED.