PRONTO ENTERPRISES, INC., and Norman Rouse, Appellees/Plaintiffs, v . UNITED STATES of America, et al., Appellants/Defendants., United States District Court, W.D. Missouri, Southwestern Division., 188 B.R. 590, No. 92-5053-C V-S W-8., August 29, 1995
PRONTO ENTERPRISES, INC., and Norman Rouse, Appellees/Plaintiffs, v . UNITED STATES of America, et al., Appellants/Defendants.
United States District Court, W.D. Missouri, Southwestern Division.
188 B.R. 590
No. 92-5053-C V-S W-8.
August 29, 1995.
Richard J. Collins, Collins, Webster & Rouse, P.C., Joplin, MO, for Pronto Enter╜prises, Inc. and Norman Rouse.
Robert D. Millstone, U.S. Dept. of Justice, Tax Division, Washington, DC, for U.S.
Brian E. Darling, Missouri Dept. of Reve╜nue, Jefferson City, MO, for State of Mis╜souri and Dept. of Revenue of the State of Missouri.
Raymond I. Plaster, Champion & Plaster, P.C., Springfield, MO, for Ozark.
STEVENS, District Judge.
This bankruptcy appeal is before the Court to determine whether the Internal Revenue Service or the Missouri Department of Reve╜nue has a superior right to proceeds result╜ing from the March, 1991 sale of a conve╜nience store formerly owned and operated by Pronto Convenience Stores, Inc. ("Pronto"), and sold pursuant to Pronto's bankruptcy. Norman Rouse, trustee of Pronto Enterpris╜es, has no further interest in this appeal. Jurisdiction is proper pursuant to 28 U.S.C. ╖ 158(a). The bankruptcy court (Arthur B. Federman, J.) determined that the United States is not entitled to the portion of pro╜ceeds earmarked to satisfy delinquent state taxes because under Missouri successor lia╜bility statutes, that portion of proceeds never becomes property of the bankruptcy estate. The bankruptcy court found that the United States is entitled to $58,751.09, plus interest, from the sale, and that the Missouri Depart╜ment of Revenue is entitled to $21,248.91, plus interest, from the sale. The bankruptcy court also determined that the United States is entitled to the entire $30,000 proceeds from the sale of two other convenience stores in June, 1991. The United States appeals and seeks the full amount of the proceeds from the March sale. For the reasons below, the bankruptcy court's order is remanded for further proceedings consistent with this or╜der.
Standard of Review
In considering this appeal, the Court must review the bankruptcy court's conclusions of law de novo. In re Apex Oil Co ., 884 F.2d 343, 348 (8th Cir.1989). The bankruptcy court's findings of fact will not be disturbed unless they are clearly erroneous. Bankruptcy Rule 8013; Apex Oil, 884 F.2d at 348.
On September 12, 1991, Norman Rouse, trustee, instituted this adversary action against the United States and the State of Missouri, ex rel. Missouri Department of Revenue. Among other matters, the trustee requested that the bankruptcy court deter╜mine whether the United States or Mis╜souri's Department of Revenue is entitled to the proceeds from the sale of certain stores owned by the debtor Pronto Convenience Stores, Inc.
In March, 1991, Pronto sold a store which it owned and operated in Franklin County, Missouri. In consideration for the sale, the buyer gave Pronto two checks totaling $80,╜000. One check was issued to Pronto and the Internal Revenue Service for $58,751.09; the other was issued to Pronto and the De╜partment of Revenue for $21,248.91. Pronto never cashed the checks. Upon order of the bankruptcy court, on or about July 19, 1991, the checks were endorsed to the trustee by the United States and the Department of Revenue. The checks are currently being held in the registry of the bankruptcy court pending the outcome of the present litigation.
In June, 1991, two additional stores owned and operated by Pronto were sold by the trustee. The trustee received $30,000, which was deposited into the registry of the bank╜ruptcy court.
This dispute revolves around sale proceeds represented by the check for $21,248.91, made payable to the Pronto and the Depart╜ment of Revenue. This sum equals the amount of unpaid taxes Pronto owed to the state.
The United States claims that it is entitled to priority over the Department of Revenue because it assessed taxes against Pronto be╜fore the debt Pronto owed to the Department of Revenue even accrued.
The Department of Revenue argues that it is entitled to priority over the United States because Missouri successor liability statutes, Mo.Rev.Stat. ╖╖ 143.241(5) and 144.150(3), operated to divest Pronto of its property interest in the proceeds from the sale of the store, so that at the time of bankruptcy, Pronto had no property interest to which the federal lien could attach. Alternatively, the Department of Revenue contends that be╜cause Pronto owed the state of Missouri em╜ployment taxes, the state is entitled to a trust equal to the amount of the employment taxes owed.
On June 3, 1992, the bankruptcy court entered a memorandum order and judgment. in favor of the Department of Revenue, hold╜ing that the amount withheld from the purchase price by a purchaser of a debtor's business pursuant to Mo.Rev.Stat. ╖╖ 143.241(5) and 144.150(3) does not consti╜tute property of the debtor to which the Internal Revenue Service's federal tax lien can attach.
This appeal followed.
This case involves a dispute over $21,╜248.91, plus interest, to which both the Unit╜ed States and the Department of Revenue claim entitlement. If that amount were property of the debtor at the time the stores were sold, then the United States is entitled to the amount under the Bankruptcy Code's well-established priority rules. If that amount were not property of the debtor, then :Missouri Department of Revenue has priori╜ty. Thus, the central question presented by this case is whether the debtor had property rights in that portion of the sale proceeds.
Under the Internal Revenue Code, a feder╜al tax lien is created in the amount of any unpaid tax on "all property and rights to property, whether real or personal," belong╜ing to the delinquent taxpayer. 26 U.S.C. 6321. The lien arises automatically when outstanding taxes are assessed. 26 U.S.C. ╖ 6322.
However, federal tax liens attach only to property and property rights. To determine whether such property rights ex╜ist, one must first look at state law. State law determines the nature of the legal inter╜est held by a taxpayer in property, which subsequently determines whether the inter╜est may be subjected to a tax lien. See Tony Thornton Auction Serv. v. United States, 791 F.2d 635, 637 (8th Cir.1986) (citing Aquilino v. United States, 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1279-80, 4 L.Ed.2d 1365 (1960)). The Internal Revenue Code itself "creates no property rights but merely attaches conse╜quences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958).
Although state law creates legal in╜terests, "the ultimate question of whether an interest thus created and defined falls within a category stated by a federal statute is a federal question." In re Halprin, 280 F.2d 407, 409 (3d Cir.1960); see also Rodriguez v. Escambron Dev. Corp., 740 F.2d 92, 97 (1st Cir.1984) (federal law governs whether state-created "rights are ▒rights to property' to which a tax lien may attach"). Once it is determined that a taxpayer has a property interest to which a federal tax lien could attach, the priority of the competing inter╜ests is determined by federal law. United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985).
In this case, the Department of Revenue contends that the portion of the sale proceeds it claimed was never property of the debtor, because of Missouri's successor liability statutes. Under Missouri law, a pur╜chaser of a business must withhold an amount from the purchase price sufficient to cover any delinquent state employee with╜holding taxes and sales and use taxes. Mo. Rev.Stat. ╖╖ 143.241(5) and 144.150(3). The Missouri successor liability statutes apply to every sale of a business unless the purchaser acquires the business as the result of an enforcement action by a lien creditor. Mo. Rev.Stat. ╖╖ 143.241(7) and 144.150(5). Basi╜cally, these statutes enable the state to col╜lect delinquent taxes when business property is transferred.
In the case before us, the buyer complied with the Missouri successor liability statutes by making the $21,248.91 check jointly pay╜able to Pronto and the Department of Reve╜nue. The bankruptcy court held that the $21,248.91 was properly paid to the state before transfer and never became property of the bankruptcy estate. Therefore, the State argues, the federal tax lien did not attach to that amount.
It is undisputed that Pronto had a property interest in the stores prior to the sale. It is undisputed that federal tax liens attached to all of Pronto's property and rights to property before the petition for bankruptcy was filed, and before the Depart╜ment of Revenue's claim arose. Whatever was property of a debtor before bankruptcy becomes property of the bankruptcy estate once bankruptcy action is commenced. Begier v. Internal Revenue Serv., 496 U.S. 53, 57, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990); In re Wendy's Food Systems, Inc., 133 B.R. 917, 920 (Bankr.S.D. Ohio 1991). Nonethe╜less, the Department of Revenue argues that because the stores were sold when the sales and employment taxes were delinquent, Pronto had no property interest in certain proceeds from the sale of the stores, and thus the federal tax lien did not attach to the proceeds.
The difficulty this Court has with the De╜partment of Revenue's position is illustrated by the following example. If the stores at issue had not been sold, the federal tar- lien would be superior to the Department of Rev╜enue's post-petition tax assessment. Thus, Missouri's successor liability laws, as applied in this situation, carve out a portion of what otherwise would be part of the bankruptcy estate, at the instant the property is trans╜ferred.
Despite Missouri's compelling in╜terest in collecting unpaid taxes, and the "legitimate and traditional interest [it] has in creating and defining the property interest of its citizens," Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1279, 4 L.Ed.2d 1365 (1960), it is not generally within the province of state law to infringe on the feder╜al government's equally compelling interest in collecting delinquent federal taxes. State law determines property rights, but federal law is used to prioritize claims of competing creditors. A state "cannot thwart the opera╜tion of the Tax Code by classifying the inter╜ests it has created as something other than property rights." In re Terwilliger's Cater╜ing Plus, Inc., 911 F.2d 1168, 1172 (6th Cir. 1990), cert. denied, Ohio, Dep't of Taxation v. Internal Revenue Serv., 501 U.S. 1212, 111 S.Ct. 2815, 115 L.Ed.2d 987 (1991).
Moreover, section 6334(a) of the Internal Revenue Code outlines certain exemptions from levy, for "necessity of life" items such as clothing, school and professional books, and minimal income. 26 U.S.C. ╖ 6334(a). Section 6334(c) provides that "no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)." 26 U.S.C. 6334(c). In the case before us, the Mis╜souri successor liability statutes, as applied, appear to create exemptions not outlined in ╖ 6334(a) and frustrate the federal tax scheme.
In the instant case, notwithstanding Missouri law, Pronto appears to have had a sufficient interest in the proceeds from the sale of the store for a federal tax lien to attach to the proceeds. Before the stores were sold, it is undisputed that the stores themselves were subject to federal tax liens. Thus, when Pronto sold the stores, the pro╜ceeds from the sale of the stores remained encumbered by the pre-existing federal tax liens. Under 26 U.S.C. ╖ 6322, liens contin╜ue from the time of assessment until liability is satisfied. See also B & H Opticks, Inc. v. Internal Revenue Serv., 633 F.Supp. 1356, 1358 (E.D.Mo.1986). Furthermore, since the Internal Revenue Service assessed the taxes against Pronto before the taxes owed to Mis╜souri even accrued, it seems that the federal tax liens would be entitled to priority. Ter╜williger's Catering Plus, Inc., 911 F.2d 1168, 1176 (6th Cir.1990) cert. denied Ohio, Dep't of Taxation v. Internal Revenue Serv., 501 U.S. 1212, 111 S.Ct. 2815, 115 L.Ed.2d 987 (1991).
The language of 26 U.S.C. ╖ 6321 is "broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. 713, 720-21, 105 S.Ct. 2919, 2924-25, 86 L.Ed.2d 565 (1985). In accordance with the broad grant of power to the Internal Revenue Ser╜vice, the Supreme Court has upheld the fed╜eral power to collect taxes notwithstanding conflicting provisions of state law. In United States v. Mitchell, 403 U.S. 190, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971), the Court held that a wife's renunciation under Louisiana law of her community property rights did not protect her from federal tax liability on com╜munity earnings, even though under state law the renunciation exonerated her of debts contracted during the marriage. Mitchell, 403 U.S. at 191, 91 S.Ct. at 1765. The Court stated that "an exempt status under state law does not bind the federal collector. Fed╜eral law governs what is exempt from federal levy." Id. at 204, 91 S.Ct. at 1771.
In United States v. Rodgers, 461 U.S. 677, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983), the Court was called upon to decide whether Texas homestead exemption law immunized a taxpayer's home from foreclosure and sale to satisfy a federal tax lien. The foreclosure and sale violated, it was argued, the home╜stead rights of taxpayer's spouse, who held an interest in the home and whose property was not subject to the tax lien. The Court, relying on the foreclosure statute, 26 U.S.C. ╖ 7403, held that the district court could order the sale of the home. Id. The Su╜preme Court recognizes situations in which federal law can preempt inconsistent state law provisions.
In reaching its conclusion, the bankruptcy court examined In re the Wine Boutique, 117 B.R. 506 (W.D.Mo.1990), a case involving the sale of a business. At the time of the sale, the sellers owed Missouri over $18,000 in taxes. 117 B.R. at 509. A creditor of the debtor argued that it was entitled to the entire proceeds, while the state contended that its tax liens had to be satisfied first. Id. at 507-08. In Wine Boutique, unlike the case before us, neither the buyers nor the sellers complied with Missouri's successor li╜ability statute, and the amount sellers owed in back taxes was paid into the bankruptcy estate. The court exercised its equitable powers and required that the debt be paid to the state of Missouri, acknowledging that this amount should have been paid from sale proceeds before they were turned over to the estate. 117 B.R. at 509.
Wine Boutique involved general creditors, not the United States of America. In the case before us, unlike in Wine Boutique, the application of the Missouri successor liability statute seems to operate in such a way to thwart the federal tax scheme, and defy the authority afforded federal law by the su╜premacy clause of the United States Consti╜tution. See, e.g., In re Terwilliger's Catering Plus, Inc., 911 F.2d 1168 (6th Cir.1990), cert. denied Ohio, Dep't of Taxation v. Internal Revenue Serv., 501 U.S. 1212, 111 S.Ct. 2815, 115 L.Ed.2d 987 (1991); In re Kick-Off, 82 B.R. 648 (Bankr.D.Mass.1987).
The pleadings on appeal address the issue of whether the proceeds are property more comprehensively than did the pleadings pre╜sented to the bankruptcy court. This Court feels that it would be beneficial for the bank╜ruptcy court to review the additional plead╜ings on the issue of property, and address the issue in subsequent findings.
Accordingly, the decision of the bankrupt╜cy court is REMANDED for further pro╜ceedings consistent with this order.
IT IS SO ORDERED.