Prologue — Minnesota Department of Revenue v. United States

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1 \ FILED

“99 597 ocr -5199

OFFICE OF THE CLERK

In The

Supreme Court of the United States

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STATE OF MINNESOTA, DEPARTMENT OF REVENUE,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

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On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Eighth Circuit

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PETITION FOR A WRIT OF CERTIORARI

¢

Mike HatcuH

Attorney General,

State of Minnesota

Barry R. GRELLER

Assistant Attorney General

(Counsel of Record)

STEPHEN F. SIMON

Assistant Attorney General

(Of Counsel)

600 North Robert Street,

Suite 4000

St. Paul, MN 55146-0600

Telephone: (651) 296-0982

Attorneys for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

pt seins

On PAT a

QUESTION PRESENTED

This Court’s test for determining whether tax liens

are “choate” for lien priority purposes examines the point

at which the liens become summarily enforceable by the

taxing authority. Minnesota’s tax liens became summarily

enforceable under Minnesota law as of the date on which

a taxpayer filed its returns. Were Minnesota’s tax liens

“choate” as of the date on which the taxpayer filed its tax

returns, so that its liens were superior to the IRS liens?

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TABLE OF CONTENTS

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CONSTITUTIONAL AND STATUTORY

PROVING CVE. osc csnsceasunavacessaes 1

SIATEMENT OF TRGB CAGR. «<6 ccciducesestccintss 2

REASONS FOR GRANTING THE PETITION ....... 4

I. The Eighth Circuit Decision Runs Afoul Of This

Court’s Lien Priority Jurisprudence ............ 4

ll. The Eighth Circuit Decision Attributes Statutory

Absurdities To The Minnesota Legislature...... 9

A. The Court Of Appeals’ Reading Of Minn.

Stat. § 289A.35 Ignores Core Choateness

Principles, Renders Other Minnesota Tax

Statutes Superfluous, And Fails To Address

The Facts Ob File Gi dein cnccasesusevee 10

B. The Court Of Appeals Mischaracterizes The

Language Of Minnesota’s Late Payment Pen-

alty Statute, And Ignores The Other Penalty

Statutes At Issue In This Case............. 14

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TABLE OF AUTHORITIES

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FEDERAL CASES

‘Aquilano v. United States, 363 U.S. 509 (1960) ......... 4

Comm’r of Internal Revenue v. Brown, 380 U.S. 563

oes SOL ee ETE Ee eee Ter ere ore 10

Dep't of Revenue of Oregon v. ACF Industries, 510

EE Sen chan sae bad didnces aden babaceers 10

Escoe v. Zerbst, 295 U.S. 490 (1935).................. 11

Middlesex Savings Bank v. Johnson, 777 F. Supp.

I I osc kw nnu chewed sakedewn., 8

Minnesota, Dep't of Revenue v. United States, 184

oe BE 1

In re Priest, 712 F.2d 1326 (9th Cir. 1983), modified,

Wee wae Gre CPU Cie, TOO)... ce cece en cceacs 7

Tully v. Griffin, 429 U.S. 68 (1976)................05. 10

United States v. New Britain, 347 U.S. 81 (1954) ..5, 6, 7

United States v. Vermont, 377 U.S. 351 (1964)........ ef

United States v. Zacks, 375 US. 59 SE ere 10

STATE CASES

Carl Bolander & Sons Co. v. Minneapolis, 488

N.W.2d 804 (Minn. Ct. App. 1992), aff'd, 502

Pa.ewete 200 CIM. 1993) own. ck ccc ccc cccccccs 11

Heller v. Wolner, 269 N.W.2d 31 (Minn. 1978)........ 11

State v. Lucas, 589 N.W.2d 91 (Minn. 1999) .......... 10

State v. McKown, 475 N.W.2d 63 (Minn.), cert.

eR ss) 10

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TABLE OF AUTHORITIES - Continued

Page

FEDERAL CONSTITUTION, STATUTES AND REGULATIONS

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STATE CONSTITUTION, STATUTES AND RULEs

Minn. Stat. § 270.65 (1992).................. Ss. Oe

Minn. Stat. § 270.69, subd. 1 pa a 1, 6, 12

Minn. Stat. § 270.69, subd. 4 1 ee ee . f

Minn. Stat. § 270.69, subd. 6 SEPM Sk ckece cae ; &

Minn. Stat. § 289A.35 (1992) ...................... ‘; 22

Minn. Stat. § 289A.37, subd. eo . rnes 1, 13

Minn. Stat. § 289A.55, subd. ee) es 5, 45

Minn. Stat. § 289A.60, subd. 1 GPO iad sana asiane 1, 14

Minn. Stat. § 289A.60, subd. 2 (1991 Supp.) ....... 1, 15

Minn. Stat. § 289A.63 (1992) .........................8

Minn. Stat. § 645.17, subd. 1 Lo Beyer re henna 1, 11

PETITION FOR A WRIT OF CERTIORARI

Petitioner respectfully petitions for a writ of cer-

tiorari to review the judgment of the United States Court

of Appeals for the Eighth Circuit in this case.

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OPINIONS BELOW

The opinion of the court of appeals (App. 1-15, infra)

is reported at 184 F.3d 725. The opinion of the district

court (App. 16-21, infra) is not reported.

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JURISDICTION

The court of appeals entered its judgment on July 7,

1999 (App. 23, infra). The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254(1) (1998).

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CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Minn. Stat. § 270.65 (1992); Minn. Stat. § 270.69, subd.

1 (1992); Minn. Stat. § 270.69, subd. 4 (1992); Minn. Stat.

§ 270.69, subd. 6 (1992); Minn. Stat. § 289A.35 (1992);

Minn. Stat. § 289A.37, subd. 1(a) (1992); Minn. Stat.

§ 289A.55, subd. 9(a) (1992); Minn. Stat. § 289A.60, subd.

1 (1992); Minn. Stat. § 289A.60, subd. 2 (1992); Minn. Stat.

§ 645.17, subd. 1 (1998).

STATEMENT OF THE CASE

Petitioner State of Minnesota (“the State”), Depart-

ment of Revenue (“the Department”), brought this action

for wrongful levy against Respondent United States in

the United States District Court for the District of Minne-

sota. The jurisdiction of the district court was invoked

under 28 U.S.C. § 1346(e), 28 U.S.C. § 6532(c), and 28

U.S.C. § 7426.

The issue in the district court was whether the State’s

tax liens were prior and superior to the liens of the

Internal Revenue Service (“IRS”). The relevant facts were

stipulated. The facts giving rise to the dispute began on

June 2, 1992, when a Minnesota-based taxpayer, Prime

Factors Communications, Inc. (“Prime Factors”) filed late

state and federal withholding tax returns for several

quarterly tax periods. Among those periods were March

1991 through March 1992, the contested periods at issue

in this case. Prime Factors did not remit payment with

those returns to either the State or the IRS. On August 20,

1992, the Department processed the tax returns by mak-

ing an initial entry into its computer system. On March 3,

1993, the Department filed a state tax lien in the home

county of Prime Factors reflecting a total outstanding

State tax liability of $35,623.73. The IRS made its assess-

ments for the contested periods on August 3, 1992 and

August 10, 1992. It then filed a federal tax lien in the

home county of Prime Factors on January 14, 1993,

reflecting the total outstanding federal tax amount of

$248,658.33.

On or about June 21, 1996, Charles and Lorilee

Leininger purchased certain property belonging to Prime

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Factors. Prior to the sale, on June 10, 1996, the IRS served

a Notice of Levy on the closing agent to the sale to assure

that the federal liens would be satisfied out of the sale

proceeds. At the time of the purchase the property in

question was subject to the unsatisfied state and federal

tax liens. After deducting settlement charges and delin-

quent property taxes, $34,688.96 remained from the sale

to pay state and federal taxing authorities. Of that

amount, the Minnesota Department of Economic Security

received $16,386.40, the IRS received $14,579.22, and the

Department received $3,723.34 in satisfaction of a portion

of its lien for uncontested tax periods not at issue in this

case.

The State filed a wrongful levy action against the

United States, pursuant to 26 U.S.C. § 7426, on March 3,

1997. The State alleged that the IRS wrongfully levied

upon $14,378 of the sales proceeds from the Prime Factors

property. More specifically, the State contended that its

tax liens for the contested periods were prior to and

superior to the IRS tax liens. Both parties stipulated to all

material facts, and filed cross-motions for summary judg-

ment.

Following argument on the motions, the district court

granted summary judgment to the State. The court held

that the State’s liens were choate and summarily enforce-

able under applicable state law as of the date on which

Prime Factors filed its tax returns, June 2, 1992, and that

the IRS liens were not choate and enforceable until the

IRS made a formal assessment against Prime Factors

some two months later.

The United States Court of Appeals for the Eighth

Circuit reversed. In its opinion, the court held that the

receipt of a tax return by the State is insufficient to meet

the federal standard for choateness. Specifically, the court

held that the determination of a taxpayer’s liability under

Minnesota law mandates some sort of action by the State

subsequent to the filing of a tax return. Accordingly, the

court ruled that the federal tax liens at issue were prior to

and superior to the State’s tax liens.

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REASONS FOR GRANTING THE PETITION

The Eighth Circuit decision in this case contravenes

this Court’s precedents in two distinct ways. First, the

decision disregards paramount principles regarding pri-

ority among competing liens. Second, the decision disre-

gards this Court’s time-honored statutory construction

principles by attributing absurd intentions to the Minne-

sota Legislature. Ultimately, the Court should accept

review of this case in order to correct a serious error of

law.

I. The Eighth Circuit Decision Runs Afoul Of This

Court’s Lien Priority Jurisprudence.

This Court’s rules regarding lien priority are long-

standing and straightforward. The determination of what

property rights exist is a question of state law. Aquilano v.

United States, 363 U.S. 509, 512-13 (1960). However, fed-

eral law determines the question of priority among com-

peting liens. Id. at 513-14. The enduring principle under

federal law, with regard to lien priority disputes, is that

“a prior lien gives a prior claim, which is entitled to prior

satisfaction out of the subject it binds. ...” United States

v. New Britain, 347 U.S. 81, 85 (1954) (quoting Rankin &

Schatzell v. Scott, (12 Wheat.) 25 U.S. 177, 179 (1827)). In

its more familiar form, the cardinal rule is that “the first

in time is the first in right.” Id. at 85.

A determination of which lien is first in time depends

upon the doctrine of “choateness.” A lien is choate for

priority purposes when it is “perfected” in the sense that

“the identity of the lienor, the property subject to the lien,

and the amount of the lien are established.” New Britain,

347 U.S. at 84. The same standard for choateness applies

to both state and federal tax liens. United States v. Ver-

mont, 377 U.S. 351, 358 (1964).

The primary rationale behind the choateness require-

ment is to ensure that a lien is not subject to “contingen-

cies” which might render it unenforceable. Id. at 355

(citing United States v. Security Trust & Savings Bank, 340

U.S. 47, 50 (1950)); New Britain, 347 U.S. at 86-87. Such

“contingencies” may arise when, for example, a particu-

lar lien gives a creditor no right to actually proceed

against the attached property before obtaining a judg-

ment. Id. (citing United States v. Security Trust & Savings

Bank, 340 U.S. 47, 50 (1950)). The “contingencies” ratio-

nale is particularly well-founded in light of the facts in

the Vermont case. In Vermont, the applicable state statute

created a lien at the time of assessment. Vermont, 377 U.S.

at 352. The assessment date was the date on which the

State made a formal demand for the amount owed. Id.

This Court held that the state statute was sufficient to

create a choate lien in favor of the state because the lien

was summarily enforceable. Id. at 351. Specifically, the

Court noted that “it is as true of Vermont’s lien here as it

was of the federal lien in New Britain that ‘The assessment

is given the force of a judgment, and if the amount

assessed is not paid when due, administrative officials

may seize the debtor’s property to satisfy the debt.’ ” Id.

(citing Bull v. United States, 295 U.S. 247, 260 (1935)). In

other words, there were no contingencies which might

hinder the state’s right or power to enforce its lien. Sig-

nificantly, the Vermont statute provided for such enforce-

ment only by foreclosure. Id. at 359 n.11.

Minnesota law provides for a self-assessing tax lien

mechanism. It is undisputed that under Minnesota law a

tax lien arises from the date of “assessment.”! The appli-

cable “assessment date” is the date a return is filed or

should have been filed. The lien, being enforceable from

the time it arises, is therefore enforceable as of the date

on which a taxpayer files a return.* Moreover, under

Minnesota law tax liens are enforceable at the time tax

returns are filed not only by judgment lien foreclosure,

but also by levy.*

In the instant case, the court of appeals held that the

State liens were not choate before the IRS liens. The court

concluded that the filing of a tax return is too “imprecise”

to serve as an assessment date, and that the State’s liens

could only become choate when the State determined the

amount of the liens with absolute certainty, through some

' Minn. Stat. § 270.69, subd. 1 (1992) (App. 24).

2 Minn. Stat. § 270.65 (1992) (App. 24).

3 Minn. Stat. § 270.69, subd. 4 (1992) (App. 24-25).

4 Minn. Stat. § 270.69, subd. 6 (1992) (App. 25).

yer

sort of additional administrative action, at some later

time. As support for its reasoning, the court relied in

large part upon In re Priest, 712 F.2d 1326 (9th Cir. 1983),

modified, 725 F.2d 477 (1984), in which the Ninth Circuit

Court of Appeals held that a California state tax return

was insufficient to satisfy the “amount” prong of the New

Britain test for choateness, and that some sort of addi-

tional administrative action by the state was necessary in

order to fix the taxpayer’s liability. App. 11-12.

The court of appeals erred fundamentally by over-

looking the primacy of this Court’s rationale for the

choateness doctrine. As this Court’s Vermont decision

explains, choateness depends upon summary enforce-

ability: an absence of “contingencies” which might render

a particular lien unenforceable by a particular creditor.

Minnesota tax liens meet the summary enforceability test.

The applicable Minnesota statutes provide for a self-

assessing mechanism. Put another way, the State’s liens in

both cases were “not contingent on future events”

because they were “summarily enforceable” as of the

moment the tax returns were filed. Moreover, because

Minnesota tax liens are enforceable both by levy and by

judgment lien foreclosure, the State has two tools with

which to enforce its lien, instead of only one. In other

words, the Minnesota tax liens in the instant case are

even more readily “summarily enforceable” than the tax

lien that this Court validated in Vermont, which means

that any concerns about potential “contingencies” are

even less warranted.

There are two additional flaws with the conclusion

by the court of appeals that the filing by a taxpayer of a

self-assessing tax return cannot serve as the measuring

point for choateness. First, it ignores the practical reality

that the precise amount of a tax lien constantly changes.

The accrual of statutory interest charges is the most

obvious example. The “meter,” so to speak, is always

running. Ironically, the United States itself has acknowl-

edged that truism by arguing previously (and suc-

cessfully) that the amount of a federal tax lien should

include interest that is accrued subsequent to assessment.

See Middlesex Savings Bank v. Johnson, 777 F. Supp. 1024,

1026 n.3 (D. Mass. 1991). In other words, the United

States itself has recognized the absurdity of a requirement

that a tax lien is only enforceable if and when its precise

value is knowable.

The second additional flaw with the argument is that

it negates the principle that a tax return, at both the state

and federal level, is a declaration and disclosure of lia-

bility. See, e.g., Minn. Stat. § 289A.63, subd. 2(a); 26 U.S.C.

§ 2706(1) (subjecting the untruthful taxpayer to potential

criminal penalties for making false statements on a tax

return). As discussed above, the Supreme Court's choate-

ness doctrine imposes no requirement of absolute preci-

sion at the time of assessment. It mandates only that no

contingencies might arise which would hinder enforce-

ment of the lien. Therefore, even assuming that the court

of appeals found some element of the United States’

argument compelling, it should have held that the State’s

lien as to the tax portion established by the taxpayer’s

returns was choate. When Prime Factors filed its with-

holding tax returns on June 2, 1992, it made a disclosure

and declaration as to the tax it owed, and thereby

assessed itself under Minnesota law. The state made no

changes to that tax amount. At the very least, therefore,

the State’s liens in the instant matter were unquestiona-

bly certain as to the tax amount, the identity of the lienor,

and the identity of the property subject to the lien upon

filing, and were summarily enforceable at that time. In

holding that a tax lien is inchoate per se as of the filing of

a tax return, the court of appeals in this case went far

beyond the established boundaries of this Court’s lien

priority jurisprudence. Accordingly, the decision of the

Eighth Circuit merits review.

Il. The Eighth Circuit Decision Attributes Statutory

Absurdities To The Minnesota Legislature.

The Eighth Circuit decision in this case construes

Minnesota law in a manner that neither the Minnesota

Legislature nor any reasonable legislature could have

intended. In it, the court of appeals concluded that even

if a tax lien is not inchoate per se as of the date of filing it

is inchoate under Minnesota law because Minnesota tax

statutes purportedly require certain administrative steps

which make a taxpayer's true liability as of the filing date

unknowable. Specifically, the court determined that the

language of two statutory provisions mandates that the

State must in each case make some sort of change to a

taxpayer's return. App. 9-11. That conclusion is a funda-

mental misreading of Minnesota law as to the first stat-

ute, and is wholly inapplicable to the second statute.

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A. The Court Of Appeals’ Reading Of Minn. Stat.

§ 289A.35 Ignores Core Choateness Principles,

Renders Other Minnesota Tax Statutes Super-

fluous, And Fails To Address The Facts Of This

Case.

As this Court has acknowledged, taxation is a state

function “central to state sovereignty.” Department of Rev-

enue of Oregon v. ACF Industries, 510 U.S. 332, 345 (1994);

see also Tully v. Griffin, 429 U.S. 68, 73 (1976) (according

special deference to states’ taxing prerogatives). Con-

struction of state taxation statutes by any federai court

should account for that fact. Accordingly, the State in this

case ought to enjoy a presumption against any interpreta-

tion of federal choateness doctrine which nullifies a pro-

vision of its tax statutes.

As a general matter, statutes are to be interpreted in

part materia with one another. In other words, as this

Court has repeatedly emphasized, “When there are two

acts upon the same subject, the rule is to give effect to

both if possible.” United States v. Zacks, 375 U.S. 59, 67-68

(1963) (quoting United States v. Borden Co., 308 U.S. 188,

198 (1939)). Minnesota courts have adopted the same

cannon of construction. See, e.g., State v. Lucas, 589

N.W.2d 91, 94 (Minn. 1999); State v. McKown, 475 N.W.2d

63, 66-67 (Minn.), cert. denied, 502 U.S. 1036 (1991).

An additional principle of statutory construction is

that federal courts have “some ‘scope for adopting a

restricted rather than a literal or usual meaning of [a

statute’s] words where acceptance of that meaning would

lead to absurd results... .’” Commissioner of Internal

Revenue v. Brown, 380 U.S. 563, 571 (1965) (citing Helvering

11

v. Hammel, 311 U.S. 504, 510 (1941)). As an example, the

word “shall” is generally, but not always, mandatory. Escoe

v. Zerbst, 295 U.S. 490, 493 (1935). As to the interpretation

of state laws, Minnesota courts have held likewise. See

Heller v. Wolner, 269 N.W.2d 31, 33 (Minn. 1978) (noting,

inter alia, that “shall” is directory where statutes “are

obviously designed merely to secure order, uniformity,

system, and dispatch in public business”); Carl Bolander &

Sons Co. v. Minneapolis, 488 N.W.2d 804, 809-10 (Minn. Ct.

App. 1992), aff'd, 502 N.W.2d 203 (Minn. 1993) (holding

that the word “shall” is directory “[w]here a statute or

rule does not explicitly declare the consequence of a

failure to comply”). In fact, Minn. Stat. § 645.17, subd. 1

(1998) commands that in interpreting state statutes, the

courts should be guided by the principle that “[t]he legis-

lature does not intend a result that is absurd, impossible

of execution, or unreasonable.”

The court of appeals’ interpretation of Minnesota law

would indeed lead to absurd results. The first statute

upon which the court relied in its decision is Minn. Stat.

§ 289A.35, which provides that:

The commissioner shall make determina-

tions, corrections, and assessments with respect

to state taxes, including interest, additions to

taxes, and assessable penalties. . . . If a return

has been filed, the commissioner shall examine

the return and make any audit or investigation

that is considered necessary.

App. 25 (emphasis added). A common sense reading of

this language reveals that the provision merely sets forth

the powers of the Minnesota Commissioner of Revenue in

the first clause, and merely provides for the discretionary

12

power to change a tax return in the subsequent clause.

The court of appeals concludes that the statute requires

action for each and every taxpayer that either changes the

amount on the taxpayer’s self-assessed tax return or at

the very least rises to the level of an administrative step

sufficient to create a new “assessment” date. Such a read-

ing would ignore the statutory language limiting such

changes to those which are “considered necessary.” It

would thereby mandate the examination and correction

of literally millions of tax returns of varying tax types.

This simply is not done by either the Minnesota Depart-

ment of Revenue or the Internal Revenue Service. The

Eighth Circuit’s decision further concludes that the

quoted language makes self-assessment as of the date of

filing impossible. But that cannot be true in light of the

undisputed principles of the choateness doctrine. As pre-

viously mentioned, the enduring test for choateness is

whether a lien is “summarily enforceable” in that no

contingencies might hinder the state’s right or power to

enforce its lien. The State’s liens meet that test because

Minnesota law makes them summarily enforceable on the

date of filing.° Once a self-assessed tax return is filed, the

resulting lien may immediately be enforced both by levy

and by judgment lien foreclosure.®

The court of appeals’ interpretation of that statute is

also a general mischaracterization of Minnesota tax law.

The only occasion when the filing of a tax return is not

the applicable “assessment” date is either “in the case of

> See Minn. Stat. § 270.65, § 270.69, subd. 1 and § 270.69,

subd. 4 (1992) (App. 24-25).

© See Minn. Stat. § 270.69, subd. 6 (1992) (App. 25).

ewe...

13

taxes determined by the commissioner” (in which case

the assessment date is “the date of the order assessing

taxes”) or “in the case of an amended return” (in which

case the assessment date is “the date the [amended]

return was filed with the commissioner”).” Otherwise, as

in this case, the “assessment” date is always the date of

filing a return.® If, as the court of appeals contends, the

State must make an independent determination of the

accuracy of the tax amount on each and every tax return,

then the portion of § 270.65 defining the “assessment” as

the date of filing would be utterly superfluous — because

all returns would supposedly be subject to some addi-

tional administrative step. By the terms of the statute, no

return date could ever be an “assessment.” The Minne-

sota legislature could not have intended such a result.

And such a construction by the court of appeals fails to

read Minnesota tax statutes in pari materia. In other

words, the court of appeals has used one Minnesota tax

statute to render part of another Minnesota tax statute

meaningless, rather than to clarify its meaning.

Additionally, the Eighth Circuit’s holding is not

responsive to the facts of this case. If the State had made

changes to the tax amount on Prime Factors’ returns, or

7 See Minn. Stat. § 270.65 (1992) (App. 24); see also Minn.

Stat. § 289A.37, subd. 1(a) (1992) (App. 25), which commands

that:

When a return has been filed and the commissioner

determines that the tax disclosed by the return is

different than the tax determined by the examination,

the commissioner shall send an order of assessment to

the taxpayer. .

8 Id.

14

had issued a discretionary penalty of some sort, it would

have sent out an order assessing the new amount of tax

liability. Under Minnesota law, the date of that order

would then have been the new assessment date.? But the

State never made any adjustments to the self-assessed tax

amount on the Prime Factors’ returns. The only changes

were the automatic additions of penalties for late filing

and late payment. See II.B, infra. Accordingly, the assess-

ment date was the date on which the taxpayer filed its

return.

B. The Court Of Appeals Mischaracterizes The

Language Of Minnesota’s Late Payment Pen-

alty Statute, And Ignores The Other Penalty

Statutes At Issue In This Case.

The second statute that the court of appeals cites is

Minnesota’s penalty provision for the late payment of a

withholding tax. That statute, along with the separate

statutory provision governing the late filing of a with-

holding tax return, are the two primary penalty provi-

sions at issue in this case. The late payment statute

provides that “If a withholding or sales or use tax is not

paid within the time specified for payment, a penalty

must be added to the amount required to be shown as tax.”

Minn. Stat. § 289A.60, subd. 1 (1992) (Emphasis added).

This provision directly contradicts the Eighth Circuit’s

conclusion that some further administrative action is

required before a lien is choate as to the penalties at issue

in this case. The quoted language reveals that the penalty

* i.

15

for late filing of a tax “must be added.” The law vests no

discretion in the Department of Revenue. The penalty is

simply automatic. No administrative step is therefore

required to apply the penalty amount to the self-assessed

tax amount which a taxpayer discloses on a tax return.

Tellingly, the court of appeals does not quote any

language whatsoever from the second of the two penalty

provisions at issue in this case, which is Minnesota’s late

filing penalty. The language in effect during 1992 is even

more direct than the language in the aforementioned late

payment penalty provision. The statute provides that “If a

taxpayer fails to make and file a return other than an

income tax return of an individual, within the time pre-

scribed or an extension, a penalty is added to the tax.”

Minn. Stat. § 289A.60, subd. 2 (1991 Supp.). A penalty

that “is added” to a tax can not require any sort of

administrative step. Like the late payment penalty, the

late filing penalty is simply automatic. It is difficult to

conceive of language that would be more direct.

Other provisions of Minnesota tax law recognize that

automatic penalties, such as the late filing and late pay-

ment penalties at issue in the instant case, arise automat-

ically upon the filing of a tax return. The language of

Minn. Stat. § 289A.55, subd. 9(a) (1990), for example,

provides that a penalty for either late filing or late pay-

ment “bears interest from the date the return or payment

was required to be filed or paid, including any extensions, to

the date of payment of the penalty.” (Emphasis added).

The court of appeals’ decision holds that automatic penal-

ties, with automatic interest charges dating from the date

of a tax return, frustrate the choateness of a tax lien

16

because they somehow require additional administrative

steps. That holding is untenable.

Ultimately, no Minnesota statute interferes with the

summary enforceability of the State’s tax liens in this

case. Prime Factors filed its returns on June 2, 1992.

Certain penalties accrued automatically, as did the statu-

tory interest charges. The unchanged self-assessed tax

amount together with the automatic penalties were there-

fore enforceable as of the filing date. Accordingly, the

court of appeals should have held that the State tax liens

were choate as of June 2, 1992, and were prior and

superior to the IRS liens.

CONCLUSION

For all the foregoing reasons, the State respectfully

requests that the Court grant this petition.

Dated: October 5, 1999

Respectfully submitted,

Barry R. GRELLER

Assistant Attorney General

(Counsel of Record)

STEPHEN F. SIMON

Assistant Attorney General

(Of Counsel)

600 North Robert Street,

Suite 4000

St. Paul, MN 55146-0600

Telephone: (651) 296-0982

Attorneys for Petitioner

App. 1

APPENDIX

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No. 98-1927

State of Minnesota,

Department of Revenue,

* *

*

ppm, * Appeal from the United

V. * States District Court for the

United States of America, ‘ District of Minnesota

Appellant. *

Submitted: February 8, 1999

Filed: July 7, 1999

Before McMILLIAN, LAY and MURPHY, Circuit Judges.

McMILLIAN, Circuit Judge.

The United States appeals from a final order entered

in the District Court for the District of Minnesota grant-

ing summary judgment in favor of the State of Minnesota

and denying summary judgment to the United States,

holding that the state tax liens were choate, as of the time

of filing of the state tax returns and not when processed.

For reversal, the United States argues that the state tax

liens were not established at the time the state tax returns

were filed because, under state law, the state must take

App. 2

administrative action to acknowledge taxpayer liability

before its liens can be perfected, and thus “choate,” under

federal law for purposes of determining relative priority.

For the reasons discussed below, we reverse the judgment

of the district court and remand the case to the district

court with directions to enter summary judgment in favor

of the United States.

JURISDICTION

The district court had subject matter jurisdiction over

this wrongful levy suit brought pursuant to 26 U.S.C.

§ 7426 under 28 U.S.C. § 1346(e). The United States filed a

timely notice of appeal. See 28 U.S.C. § 2107(b) (notice of

appeal in a civil case must be filed within 60 days of

judgment when the United States is a party); Fed. R. App.

P. 4(a)(1)(B). This court has jurisdiction over this appeal

under 28 U.S.C. § 1291.!

1 The district court’s judgment provides that the state’s

motion for summary judgment is granted. In an action for

money, specification of the amount of monetary award

generally is an essential element of the judgment. See United

States v. F. & M. Schaefer Brewing Co., 356 U.S. 227, 233-35 (1958).

It is sufficient, however, if the judgment specifies the means of

determining the amount due. See id. at 234. Here, the summary

judgment is, in effect, a judgment that the state is entitled to

recover the amount ($14,378) that it sought in its complaint. Cf.

Goodwin v. United States, 67 F.3d 149, 151 (8th Cir. 1995) (“a

judgment may be final if only ministerial tasks in determining

damages remain”) (citation and internal quotations omitted).

App. 3

BACKGROUND

The relevant facts were stipulated. On June 2, 1992,

the taxpayer, Prime Factors Communications, Inc., filed

federal and state employment tax returns for several

quarters, including all four quarters of 1991 and the first

quarter of 1992, the periods at issue in this appeal. The

taxpayer did not pay the taxes that it reported as due on

its federal and state returns. The IRS assessed the unpaid

federal taxes for the quarters at issue on August 3 and

August 10, 1992. By law, federal tax liens upon the tax-

payer’s property for those liabilities arose on that date.

See 26 U.S.C. §§ 6321, 6322. The IRS filed a notice of

federal tax lien on January 14, 1993, reflecting a total

federal tax liability due from the taxpayer of $248,658.33.

The state processed the taxpayer’s state employment

tax returns for the period at issue by entering the tax-

payer’s liability into its computer records, on August 20,

1992, after the date the IRS assessed the taxpayer’s fed-

eral tax liabilities at issue. The taxpayer’s state tax lia-

bility for the period at issue totaled $14,378.32.

On June 21, 1996, Charles and Lorilee Leininger pur-

chased certain property belonging to the taxpayer. Prior

to the sale, the IRS served on the closing agent for the

sale a notice of levy with respect to the taxpayer’s unpaid

federal employment taxes, including the taxes due for the

quarters at issue. Pursuant to the levy, the IRS received

$14,579.22 of the sale proceeds.

2 The IRS was paid after deductions were made for

settlement charges, delinquent property taxes, and payments to

other creditors. The Minnesota Department of Economic

App. 4

The state filed its complaint in this action on March 3,

1997, and an amended complaint on September 23, 1997.

The state alleged that the IRS had wrongfully levied upon

$14,378.32 of the sales proceeds, because the state’s tax

liens were entitled to priority over the federal tax liens.

The United States and the state filed cross-motions for

summary judgment. The state contended that, under

Minn. Stat. § 270.69(1), a lien for state taxes arises on the

date of the assessment of the tax, and that under Minn.

Stat. § 270.65, the date of the assessment is the later of the

date the return is filed or the date on which the return is

due. The state thus argued that its tax liens became

choate, on June 2, 1992, the date the returns were filed,

and were therefore entitled to priority over the federal

tax liens which arose on August 3 and 10, 1992, the dates

the federal taxes were assessed. In support of its argu-

ment, the state relied on Cannon Valley Woodwork, Inc. v.

Malton Construction Co., 866 F.Supp. 1248 (D. Minn. 1994)

(Cannon Valley), a case in which the district court held

that Minnesota tax liens had priority over those of the

United States.

The United States argued that the state’s tax liens did

not become choate, until the returns were actually pro-

cessed by the state on August 20, 1992, a date after the

federal tax liability had been assessed, and that the fed-

eral tax liens were thus entitled to priority over the state

tax liens. The United States relied on In re Priest, 712 F.2d

1326, 1329 (9th Cir. 1983), modified, 725 F.2d 477 (1984), in

Security received $16,386.40 and the Minnesota Department of

Revenue received $3,723.34 for other tax liabilities. These other

payments from the proceeds are not in dispute.

App. 5

which the Ninth Circuit, interpreting a California statute

similar to Minn. Stat. §§ 270.65, .69(1), held that the “mere

receipt” of a state tax return was insufficient “to establish

a lien that is capable of taking priority over a federal

lien.”

Following arguments on the motions, the district

court ruled from the bench and granted summary judg-

ment in favor of the state and denied the motion of the

United States. The district court found that the state’s tax

liens became choate upon the filing of the taxpayer’s

returns, adopting the rationale of Cannon Valley and

rejecting the Ninth Circuit’s reasoning in In re Priest. The

district court ruled that the state’s tax liens were “estab-

lished” and “summarily enforceable” as of the date the

taxpayer filed its returns and “not contingent on future

events.” Accordingly, the district court ruled that the

state’s tax liens were prior to those of the United States

and that the state was entitled to recover. This appeal

followed.

DISCUSSION

The district court’s grant of summary judgment is

reviewed de novo. See Bremen Bank & Trust Co. v. United

States, 131 F.3d 1259, 1264 (8th Cir. 1997) (Bremen Bank);

see also McDermott v. Zions First Nat'l Bank, 945 F.2d 1475,

1478 (10th Cir. 1991) (district court’s finding that a federal

tax lien has priority over a state tax lien is reviewed de

novo), rev'd on other grounds sub nom. United States v.

McDermott, 507 U.S. 447 (1993) (McDermott). Summary

judgment is appropriate if “the pleadings, depositions,

answers to interrogatories, and admissions on file,

App. 6

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law.” Fed. R.

Civ. P. 56(c). This case was tried on the basis of stipulated

facts and the sole issue is a question of law, that is,

whether the state tax liens were sufficiently choate as a

matter of federal law so as to be entitled to priority over

the federal tax liens.

The lien provisions of the Internal Revenue Code are

intended to insure prompt and certain enforcement of the

tax laws. See United States v. National Bank of Commerce,

472 U.S. 713, 721 (1985); United States v. Rodgers, 461 U.S.

677, 683 (1983). When a person liable to pay a federal tax

fails to do so after a demand for payment is made, the

amount of the tax, together with interest, additions, pen-

alties, and costs, becomes a lien in favor of the United

States upon all real and personal property and all rights

to property belonging to the delinquent taxpayer. See 26

U.S.C. § 6321; Bremen Bank, 131 F.3d at 1262-63. The lien

arises automatically when the assessment is made and

continues until the taxpayer’s liability is either satisfied

or becomes unenforceable due to the lapse of time. See 26

U.S.C. § 6322. An assessment is “a bookkeeping notation

. . made when the Secretary [of the Treasury] or his [or

her] delegate establishes an account against the taxpayer

on the tax rolls.” Laing v. United States, 423 U.S. 161, 170

n.13 (1976); see 26 U.S.C. § 6203.

State law determines the nature and the extent of a

taxpayer's interest in “property.” See Aquilino v. United

States, 363 U.S. 509, 513 (1960); United States v. Bess, 357

U.S. 51, 55 (1958); Little v. United States, 704 F.2d 1100,

1105 (9th Cir. 1983). Federal law, however, governs the

App. 7

relative priority accorded to the competing liens asserted

against the property of the delinquent taxpayer. See Aqui-

lino v. United States, 363 U.S. at 513-14. “Federal tax liens

do not automatically have priority over all other liens.

Absent provision to the contrary, priority for purposes of

federal law is governed by the common-law principle

that ‘the first in time is the first in right.’ ” McDermott,

507 U.S. at 449 (citations omitted); see United States v.

Equitable Life Assurance Soc’y, 384 U.S. 323, 327-30 (1966);

United States v. City of New Britain, 347 U.S. 81, 87 (1954)

(New Britain); cf. Bremen Bank, 131 F.3d at 1263 (discussing

modification of common law rules by Federal Tax Lien

Act of 1966). “Under federal law, the priority of a lien

depends on the time the lien attached to the property in

question and became choate.” Cannon Valley, 866 F. Supp.

at 1250, citing New Britain, 347 U.S. at 84. A state-created

lien is “choate” for “first in time” purposes only when it

has been “perfected” in the sense that there is nothing

more to be done, i.e., when “the identity of the lienor, the

property subject to the lien, and the amount of the lien

are established.” New Britain, 347 U.S. at 84; accord United

States v. Vermont, 377 U.S. 351, 354-55 (1965); see also

McDermott, 507 U.S. at 449. The test for choateness or

perfection also requires that the creditor have the right to

summarily enforce its lien. See United States v. Vermont,

377 U.S. at 359 (holding state’s assessment choate where

the “assessment is given the force of a judgment, and if

the amount assessed is not paid when due, administrative

officials may seize the debtor’s property to satisfy the

debt”) (quoting Bull v. United States, 295 U.S. 247, 260

(1935)); Monica Fuel, Inc. v. IRS, 56 F.3d 508, 513 (3d Cir.

1995); In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168,

App. 8

1176 (6th Cir. 1990) (holding a “state lien holder must

show that he [or she] had the right to enforce the lien at

some time prior to the attachment of the federal lien”),

cert. denied, 501 U.S. 1212 (1991).

The issue to be decided in this case is whether, under

federal law, the state tax liens were sufficiently choate

upon the taxpayer’s filing of its tax returns to prime the

federal tax liens. The United States argues that, regardless

of state law, the mere receipt by the state of a tax return is

insufficient to meet the federal standard for choateness,

because such receipt does not establish the amount of the

taxpayer's liability or of the liens themselves. Under Min-

nesota law, the United States contends, additional steps

are required to establish the amount of the state tax liens

and to permit the state to enforce the liens, and federal

law regarding choateness requires a state to take some

action to acknowledge a liability before a lien can be

perfected. As a result, the United States argues that the

state tax liens were not perfected and were not entitled to

priority over the federal liens.

The state tax liens at issue arose by virtue of Minne-

sota law, which provides, in relevant part:

The tax imposed by any chapter administered

by the commissioner of revenue, and interest

and penalties imposed with respect thereto,

including any recording fees, sheriff fees, or

court costs that may accrue, shall become a lien

upon all the property within this state, both real

and personal, of the person liable for the pay-

ment or collection of the tax .. . from and after

the date of assessment of the tax.

App. 9

Minn. Stat. § 270.69(1). “For purposes of taxes adminis-

tered by the commissioner [i.e., taxes due as shown on a

return], the term ‘date of assessment’ means the date a

return was filed or the date a return should have been

filed, whichever is later... .” Id. § 270.65. Thus, under

state law, the state tax liens at issue arose when the

taxpayer filed its returns on June 2, 1992, two months

before the federal taxes at issue were assessed.

State law, however, and a state’s own characteriza-

tion of its liens for purposes of determining priority do

not control this issue. See William T. Plumb, Jr., Federal

Tax Liens 180 (3d ed. 1972) (“Local statutory provisions

that fix a tax lien date prior [to the time the lien becomes

choate] must be ignored for the purpose of resolving the

federal-state priority question.”). “Otherwise, a State

could affect the standing of federal liens, contrary to the

established doctrine, simply by causing an inchoate lien

to attach at some arbitrary time even before the amount

of the tax, assessment, etc., is determined.” New Britain,

347 U.S. at 86 (footnote omitted). Accordingly, state tax

liens are not necessarily perfected on the date a taxpayer

files a return simply because state law provides that the

“date of assessment” with regard to taxes shown due ona

return is the date the return is filed. Rather, we must still

determine if the state tax liens are sufficiently perfected

as of that date under federal law.

In our view, the state tax liens at issue were not

choate as of the date the taxpayer filed its returns and the

state tax liens therefore are not entitled to priority.

Despite the fact that state law provides that tax liens arise

on the date on which the taxpayer filed its returns, state

law also provides that “[t]he commissioner shall make

App. 10

determinations, corrections, and assessments with respect

to state taxes, including interest, additions to taxes, and

assessable penalties.” Minn. Stat. § 289A.35 (emphasis

added). In addition, when a taxpayer has filed a return,

“the commissioner shall examine the return and make

any audit or investigation that is considered necessary.”

Id. Therefore, even after a return is filed, the commis-

sioner is required to examine the return and to make a

determination of the taxpayer’s liability. Beyond doubt, it

is this determination that formally establishes the amount

of the taxpayer’s liability.

Further, Minnesota law also provides that “[i]f a

withholding or sales or use tax is not paid within the time

specified for payment, a penalty must be added to

amount required to be shown as tax.” Minn. Stat.

§ 289A.60(1). Therefore, in a case such as this where

withholding taxes were not timely paid, state law

required the commissioner to add a penalty to the tax

liability. This penalty is not computed until a tax return is

processed. Cannon Valley, 866 F. Supp. at 1252. Also upon

processing, interest due on the liability is computed.

As a result of these state law provisions, we hold that

the amounts of the state tax liens at issue here were not

established on the date the returns were filed and that

state tax liens were therefore not perfected and choate on

that date. The returns filed by the taxpayer had not been

examined, the taxes owed had not been determined by

the commissioner, and the delinquency penalties and

interest had not been computed and added to the amount

of the tax, all of which is required under state law. Thus,

pursuant to state law, the state has done that which is

App. 11

expressly prohibited, that is, it has “affect[ed] the stand-

ing of federal liens . . . simply by causing an inchoate lien

to attach at some arbitrary time even before the amount

of the tax is determined.” New Britain, 347 U.S. at 86.

Moreover, we also note that because of these addi-

tional statutory provisions, the state tax liens were not

summarily enforceable. While a lien is considered sum-

marily enforceable even though ministerial acts which do

not affect the viability of the lien remain to be done, the

acts described above as required by state law cannot be

characterized as ministerial. After the taxpayer filed its

returns, it remained the statutory duty of the commis-

sioner to examine the returns and determine its liabilities,

and to calculate and add to the unpaid tax the required

penalty for non-payment and the interest that was due.

Only then could notice and demand for payment of the

amount due be sent. See Minn. Stat. § 270.70(2)(a). Notice

and demand for payment must be sent before a levy can

be made. See id. Thus, substantial contingencies remain

before the state tax liens could be enforced.

We note that, in addition to the requirements of state

law, federal law regarding choateness also requires that a

state take some administrative action to acknowledge

formally a liability before the amount of the lien can be

deemed “established” and the lien perfected. See New

Britain, 347 U.S. at 86. For example in In re Priest, a

California statute provided that a perfected and enforce-

able state tax lien for an unpaid tax liability shown as due

on a return arose at the time the tax return was filed.

California characterized the effect of the filing of the

delinquent state return as “self assessment” and argued

that this admission of liability by the taxpayer satisfied

App. 12

the New Britain test for choateness. The Ninth Circuit

disagreed and held that the statute cannot be deemed to

create liens that are sufficiently choate under New Britain.

See 712 F.2d at 1329. The court held that “a lien cannot

arise prior to the taking of any administrative steps to

establish the lien” because “[t]he mere receipt of a delin-

quent State tax return [under California law] is too vague

and indefinite.” Id., 725 F.2d at 478. The court observed

that

[slignificant delays might well occur before

there was even any acknowledgment of the

director’s receipt of the delinquent return, or

any administrative act by which the State

acknowledged in its own accounts that the tax-

payer is liable for unpaid taxes, or the precise

amount of that delinquency, and the amount of

penalty, interest and fees.

Id., 712 F.2d at 1329.

In re Priest has been followed by other courts. In

Baybank Middlesex v. Electronic Fabricators, Inc., 751 F.

Supp. 304, 310 (D. Mass. 1990) (citations omitted), the

district court held that “in order for the amount of the

state lien to be established, there must be ‘some activity

by the State to fix the taxpayer’s liability.’” The state

liens at issue had priority over the federal liens because

the state had acknowledged in its own accounts that the

taxpayer was liable for unpaid taxes. See id. The district

court also noted approvingly that the state had calculated

the interest due on the liability and included that amount

in the notice of lien. See id. Because these steps had been

taken before the federal lien arose, the state lien was

choate since there was nothing more to be done. See id.

App. 13

As noted above, the district court relied upon Cannon

Valley, 866 F. Supp. 1248, and declined to follow In re

Priest. Cannon Valley involved the same statutes at issue

in this case, i.e., Minn. Stat. §§ 270.65, .69. The district

court concluded that a lien arising under the statutes was

choate under federal law at the time of assessment, the

date a tax return was filed. See 866 F. Supp. at 1252. The

district court rejected the argument of the United States

that a state assessment was only choate if it was similar to

the federal assessment, see id. at 1250-51, as well as its

contention that, as in In re Priest, preciseness in the

amount of tax owed is necessary for the lien to be choate.

See id. at 1251. Instead, the district court interpreted the

doctrine of choateness to require that “a lien be enforce-

able and not contingent on future events before it could

defeat a federal tax lien.” Id. at 1251. The district court

found that under state law Minnesota tax liens were not

contingent on future events and were summarily enforce-

able and therefore choate. See id.

We believe the analysis in Cannon Valley improperly

discounted the importance of preciseness in the amount

of tax owed in the New Britain test for choateness. In our

view, the plain language of New Britain requires the

amount of the lien to be established, that is, determined,

before a state-created lien can be considered choate. See

347 U.S. at 84. Certainly, more had to be done in the

present case, and if the Supreme Court had intended to

require only that the lien, i.e., the taxpayer’s liability in

general, had to be established, it could have said so.

Instead, it stated that the amount of the lien had to [sic]

established. Moreover, in both New Britain and Vermont,

the Court refers to the requirement that the amount of the

App. 14

lien be “certain.” See id. at 86; see also Vermont, 377 U.S. at

357. The Ninth Circuit was therefore correct in emphasiz-

ing this requirement in In re Priest and the district court

in Cannon Valley was wrong to discount it.

In addition, we disagree with the finding in Cannon

Valley that the Minnesota tax liens were free from contin-

gencies upon the taxpayer’s filing of its return and sum-

marily enforceable. See supra at 7-8. In our view, state law

requires additional administrative action to establish the

liens. The taxpayer’s liabilities could not be collected

until notice of the liabilities and demand for payment had

been sent out, and notice and demand could not be sent

until the returns had been processed and the tax, penal-

ties, and interest determined by the commissioner. Thus,

the state tax liens are not summarily enforceable on the

date of assessment, the date the return is filed or should

have been filed.

Finally, we note that there is a critical factual distinc-

tion between Cannon Valley and the present case. In Can-

non Valley, unlike the present case, the state had in fact

“processed” the taxpayer’s return before the IRS assessed

the federal taxes. See 866 F. Supp. at 1249 n.1, 1252. The

district court in Cannon Valley held, in the alternative,

that at the very least, the state tax liens were choate at the

time the returns were processed, noting that “[b]y pro-

cessing the forms, Minnesota took administrative action

that established that the taxpayer was liable to the State

of Minnesota for unpaid taxes, including the amount of

the unpaid taxes and the amount of any penalty and

interest.” Id. at 1252. Thus, for purposes of the New

Britain test for choateness, “the lienor was known... , all

of the property of the taxpayer was attached, and the

EEE |

App. 15

amount including principal, penalties and interest was

known.” Id. (noting only variable that continued to

change was applicable interest, which changed daily).

Accordingly, while the primary rationale for the Cannon

Valley analysis is at odds with that in In re Priest, the

result (and the alternative holding) in Cannon Valley is in

harmony with In re Priest. In the present case, on the

other hand, the state did not process the taxpayer’s

returns until August 20, 1992, a date after the IRS

assessed the federal taxes on August 3 and August 10,

1992.

Accordingly, the judgment of the district court is

reversed and the case is remanded with instructions to

the district court to enter summary judgment in favor of

the United States.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH

CIRCUIT.

App. 16

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

FOURTH DIVISION

—~aw e ~emwe

Department of Revenue,

Civil 97-482

State of Minnesota, TRANSCRIPT OF

Plaintiff, PROCEEDINGS

VS.

United States of America,

Defendant.

The above-entitled matter came duly on for hearing

before the Honorable James M. Rosenbaum on the 23rd

day of January, 1998, at the US. Courthouse, 300 South

Fourth Street, City of Minneapolis, State of Minnesota.

APPEARANCES:

For the Plaintiff:

STEPHEN F. SIMON, AAG

Tax Litigation Division

10 River Park Plaza

Mail Station 0600

St. Paul, Minnesota 55146-0600

For the Defendant:

NANCI S. BRAMSON, ESQ.

U.S. Department of Justice

555 Fourth Street, Northwest

Room 8921

Washington, DC 20001

App. 17

Court Reporter:

Michelle K. Skoog, Pro Tem

Shaddix & Associates

9100 W. Bloomington Frwy., #122

Bloomington, Minnesota 55431

Proceedings recorded by mechanical stenography;

transcript produced by computer-aided transcription.

[p. 2] (The following proceedings were duly had:)

THE COURT: This matter lies before the court

on cross-motions for summary judgment pursuant to

Rule 56 of the Federal Rules of Civil Procedure. The

plaintiff’s motion is granted. The defendant’s motion is

necessarily denied. The plaintiff, the State of Minnesota,

Department of Revenue has brought a wrongful levy

action against the defendant, the United States of Amer-

ica, and specifically, its agency the Internal Revenue Ser-

vice. The court seldom has the pleasure of a direct

conflict between sovereigns. Now, the parties here have,

and have commendably and kindly to the court I might

point out, stipulated to the material facts in the case. And

they are not in dispute. The state contends that its lien is

sufficiently choate on the filing of a tax return, and the

IRS responds that the lien becomes choate on the date at

which the return is actually processed by the state. The

issue before the court is whether the state’s lien became

sufficiently choate on June 2, 1992, at the time of the

filing. Thus, making it superior to the federal tax lien

which was undoubtedly and an [p. 3] agreement was in

place prior to this date on August 20, 1992, to the state

filing in 1992. The fed put its in on the third — the third or

App. 18

tenth of 1992. Each party has moved for summary judg-

ment and the question is clearly a matter of law.

Summary judgment is appropriate when there’s no

genuine issue as to material fact and the moving party is

otherwise entitled to judgment as a matter of law. Citing

Rule 56C and Celotex versus Catrett and Anderson

versus Liberty Lobby. Both recorded in 477 U.S. The first

is 317, and the second is 242 with the companion cases

decided in 1986. There being no issues of fact and the

question being a matter of law, the matter is ripened for

summary judgment.

It is clear and weil established that federal law deter-

mines the question of priority among liens. Citing Aqui-

lano versus United States at 363 U.S. 509, 513 to 14 (1960).

Under federal law, quoting, a prior lien gives a prior

claim, which is entitled to prior satisfaction out of the

subject it binds close quote. Citing the United States

versus New Britain at 347 U.S. 81 and at 85 (1954). Ren-

dering the entirely unsurprising - or [p. 4] quoting that

first in time is first in right close quote. That’s at 85. A

lien has priority over another if it is perfected. Or in other

words, quote the identity of the lienor, the property sub-

ject to the lien, and the amount of the lien are established.

Reference New Britain at 84. Where state tax liens are

involved, however, the enforceability requirement is met

if quote the states’ assessment is given the force of a

judgment, i.e. if the amount assessed is not paid when

due, administrative officials may seize the property to

satisfy the debt close quote. The United States versus

Vermont at 377, 351, at 359 (1950). It is thus implied that

to determine enforceability the court must look to the

ee ne ee

App. 19

. state’s law, and the parties here disagree only as to the

| time which the state’s lien was established.

The facts in this case are similar to those which

occurred in my brother Judge Doty’s court when he was

confronted with the case of Cannon Valley Woodwork

versus Malton Construction at 866 Fed Supp 1248, Dis-

trict of Minnesota in 1994. Although a binding of a co-

district court is not binding within the district, this court

elects to adopt its analysis and its holding. In [p. 5] that

case, the court found that the amount of the lien was

established and its amount assessed when the state tax

return was filed rather than when it was processed. I cite

the case at 1250. The Internal Revenue Service’s under-

lined that Cannon Valley was wrongfully decided

because the amount of the lien could be assessed only

upon actual processing of the return. They argued that

only after that return was processed that the total amount

of the tax liability established rather than when it was

filed, and certainly there was a failure to determine the

interest. However, that upholds under any circumstances.

This court, however, cannot agree. The rationale behind

the choatness doctrine, which requires that the amount of

the lien be established, is to ensure the lien is not subject

to contingencies which might render it otherwise unen-

forceable. I cite the United States versus Vermont at 355.

Also, in Cannon Valley, Judge Doty recognized that the

state’s liens are not contingent on future events when

filed because they are summarily enforceably under Min-

nesota Statute at filing. Furthermore, under Minnesota

law when a return is filed, it contains the taxpayers’

disclosure of its tax liabilities. [p. 6] I reference page 1251.

And as a result, the state lien dating - this state lien

App. 20

dating from the time of filing is assessed, perfected, and

thus senior to the federal tax lien. This is in accord with

the policy of a self-assessed tax.

While the court has considered what would happen

with either a minor determination or a minor deviation

and a large tax assessment or a stripped blank tax return

being filed, that is not the factual nexus which represents

itself. So it’s a varied filed return, and Minnesota has

elected a statutory framework which declares that its lien

is established on the filing.

Counsel for the government has appropriately noted

that the United States has a number of prerogatives and

that Congress has selected its own. But having made that

selection and the state - another co-sovereign having

elected its, there is no principled basis why the State of

Minnesota cannot enforce its statute, and the statute

appears to be reasonable.

This court, like Cannon Valley, then declines to adopt

the Ninth Circuit reasoning set forth in In re Priest at 712

Fed 2nd at 1326, at 1328. Subsequently modified at 725

Fed 2nd 477. [p. 7] That was in — that holding — that quote

a mere receipt of a delinquent tax return is too vague and

indefinite a standard by which to establish a lien that is

capable of taking priority over a federal tax lien close

quote. The Ninth Circuit’s determination was based on

the language of New Britain, that a lien is not choate

unless the amount is established. This court finds that

since Minnesota’s tax liens were not contingent on future

events according to Minnesota law and by operation of

the state statute which were summarily enforceable, they

were established, they were choate, and thus satisfying

———— <<

App. 21

New Britain’s test. And therefore, the government's — the

federal government’s motion for summary judgment was

denied. They denied that case and remanded it.

I will be frank to tell you that I have enjoyed the

argument of both counsel. Each appeared to be well

familiar with their law and quite flexible with their rea-

soning. That does not mean that they were not staunch in

their defense, but it told me they considered the alterna-

tive. It’s an interesting question, and there is — on these

facts and then considering [p. 8] the Minnesota Statute

and the statutory structures set forth by the Minnesota

State Legislature, the determination is made and to indi-

cated and that will be the order of the court. I thank you,

counsel.

(The proceedings were concluded.)

App. 22

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

97-CV-482

State of Minnesota,

Department of Revenue ORDER

V.

— ~~

United States of America

This matter is before the Court on the parties’ cross-

motions for summary judgment, pursuant to Rule 56 of

the Federal Rules of Civil Procedure. The Court heard

oral argument on January 23, 1998. Based on the files,

records, and proceedings herein, IT IS ORDERED that:

1. Plaintiff’s motion for summary judgment is

granted.

2. Defendant’s motion for summary judgment is

denied.

Dated: January 28th, 1998

/s/ James M. Rosenbaum

JAMES M. ROSENBAUM

United States District Judge

App. 23

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

State of Minnesota,

Department of Revenue Case No. Civil 97-482JMR/FLN

v. JUDGMENT IN A

United States of America CIVIL CASE

( ) Jury Verdict. This action came before the Court for

a trial by jury. The issues have been tried and the

jury has rendered its verdict.

(X) Decision by Court. This action came to trial or

hearing before the Court. The issues have been

tried or heard and a decision has been rendered.

IT IS ORDERED AND ADJUDGED that plaintiff's

motion for summary judgment is granted and defen-

dant’s motion for summary judgment is denied.

DATE: January 29, 1998

FRANCIS E. DOSAL, CLERK

/s/ Denise LaFond, Deputy Clerk

App. 24

Minn. Stat. § 270.65 (1992):

For purposes of taxes administered by the

commissioner, the term “date of assessment”

means the date a return was filed or the date a

return should have been filed, whichever is

later; or, in the case of taxes determined by the

commissioner, “date of assessment” means the

date of the order assessing taxes; or in the case

of an amended return filed by the taxpayer, the

assessment date is the date the return was filed

with the commissioner.

Minn. Stat. § 270.69, subd. 1 (1992):

The tax imposed by any chapter adminis-

tered by the commissioner of revenue, and inter-

est and penalties imposed with respect thereto,

including any recording fees, sheriff fees, or

court costs that may accrue, shall become a lien

upon all the property within this state, both real

and personal, of the person liable for the pay-

ment or collection of the tax, except property

exempt under subdivision 3, from and after the

date of assessment of the tax.

Minn. Stat. § 270.69, subd. 4 (1992):

The lien imposed by this section shall, not-

withstanding any other provision of law to the

contrary, be enforceable from the time the lien

arises and for ten years from the date of filing

the notice of lien, which must be filed by the

App. 25

commissioner within five years after the date of

the assessment of the tax... .

Minn. Stat. § 270.69, subd. 6 (1992):

The lien imposed by this section shall be

enforceable by levy as authorized in section

270.70, or by judgment lien foreclosure as autho-

rized in chapter 550.

Minn. Stat. § 289A.35 (1992):

The commissioner shall make determina-

tions, corrections, and assessments with respect

to state taxes, including interest, additions to

taxes, and assessable penalties. . . . If a return

has been filed, the commissioner shall examine

the return and make any audit or investigation

that is considered necessary.

Minn. Stat. § 289A.37, subd. 1(a) (1992):

When a return has been filed and the com-

missioner determines that the tax disclosed by

the return is different than the tax determined

by the examination, the commissioner shall send

an order of assessment to the taxpayer. . .

App. 26

Minn. Stat. § 289A.55, subd. 9(a) (1992):

[Blears interest from the date the return or

payment was required to be filed or paid,

including any extensions, to the date of payment

of the penalty.

ne

Minn. Stat. 289A.60, subd. 1 (1992):

If a withholding or sales or use tax is not

paid within the time specified for payment, a

penalty must be added to the amount required

to be shown as tax.

a

Minn. Stat. § 289A.60, subd. 2 (1992):

If a taxpayer fails to make and file a return

other than an income tax return of an individ-

ual, within the time prescribed or an extension,

a penalty is added to the tax.

Minn. Stat. § 645.17, subd. 1 (1998):

[t]he legislature does not intend a result that

is absurd, impossible of execution, or unreason-

able.