Petition for Writ of Certiorari — Orr v. Internal Revenue Service, 120 S. Ct. 1835 (2000) (No. 99-1585)

~ Supreme Coort, 0.8,

DD PILED

991585 mar 30 2000

No. 99- OFFICE Gr int ws

IN THE

Supreme Court of the United States

JOHN DAVIS ORR,

Petitioner,

v.

INTERNAL REVENUE SERVICE, ‘

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

RONALD A. SIMANK

Counsel of Record

LaurA M. BAKER

SCHAUER & SIMANK, P.C.

Attorneys for Petitioner

615 North Upper Broadway

Suite 2000

Corpus Christi, Texas 78477

(361) 884-2800

158616 @ Counsel Press LLC

(800) 274-3321 * (800) 359-6859

T7020

1

QUESTION PRESENTED

Did federal tax liens filed by the Internal Revenue

Service attach, prior to the time of filing of a taxpayer’s

Chapter 7 voluntary bankruptcy petition, to any “property”

or “rights to property” with respect to a spendthrift trust

beneficiary’s right to receive unaccrued, undistributed future

income payments from a spendthrift trust, or does a lien

attach only to each net income payment when it accrues and

is actually paid over to the beneficiary.

il

TABLE OF CONTENTS

Page

Question Presented .....ssices eee eeeeeeenn as i

Table of ComhemR .i.<sc00 5 eee ll

Table of Coted Amati ©. .iuceu suai e sens lil

Table of Appendiees «.aési:csedawkseeeteersss ss Vv

Opimons Below . .....i«ss50e5e eee |

Statement of Jurisdiction ..................... ]

Statutory Provisions Involved ................. 1

Statement of the Cage. <4 cscs ss cune eae ees 3

Reasons for Granting the Writ ................. 6

The Petition Should Be Granted Because The

Court Below Has Decided An Important

Question Of Federal Law That Has Not Been,

But Should Be, Settled By This Court And

Because The Analysis Employed By The

Court Below Conflicts With Prior Relevant

Decisions Of This Court. ............... 6

Comebusae® oo... cccccane cee 12

lil

TABLE OF CITED AUTHORITIES

Page

Cases:

Aquilano v. United States, 363 U.S. 509, 80 S. Ct.

1277, 4 L. Ed. 2d 1365 (1960) ............... 6

Bank One Ohio Trust Co. v. United States, 80 F.3d

ilies oat” a |.) Ea ae aces 8

Becknal v. Atwood, 518 S.W.2d 593 (Tex. Civ. App.

— Amarillo 1975, no writ) .................. 10

Drye v. United States, 120 S. Ct. 474, 145 L. Ed. 2d

ss oat a ae 754, 15, 2

Glass City Bank v. United States, 326 U.S. 265, 66

S. Ct. 108, 90 L. Ed. 56 (1945) .............. 6

Long v. Long, 252 S.W.2d 235 (Tex. Civ. App. —

Texarkana 1952, writ ref’d WD Wn see caa se we 10

United States v. Bess, 357 US. 51, 78 S. Ct. 1054,

Os. Be 20 0135 (1958) .................... 7,9

United States v. National Bank of Commerce, 472

U.S. 713, 105 S. Ct. 2919, 86 L. Ed. 2d 565

Ne ee etc te 6, 7,9

United States v. Rodgers, 461 U.S. 677, 103 S. Ct.

2132, 76 L. Ed. 2d 236 io: , Spires Seen 6

iv

Cited Authorities

Page

Statutes:

BP UE EE Saeed seat ae eae 2

Ee Were IRD ohn bon bees wee wees 5

fale fot ys : eae Meer ner ee ra:

Se as EE os oS es ees eee 1,6

Ae PON nF hk ae ho ORR ER l

TEX. PROP. CODE ANN. §§ 113.102(a)(5),

SED COA Ve BME 6 5 kd oaks oo eda Shas 10

Other Authorities:

5-HERBERT S. KENDRICK & JOHN J.

KENDRICK, JR., TEXAS TRANSACTION

GUIDE: ESTATE PLANNING § 50B.30 (1992

8 EE re ee re Ae ee er re ee Ree PL LD 10

III SCOTT, THE LAW OF TRUSTS, § 233 (3d ed.

OES ce ee eee ee ee ee 10

TABLE OF APPENDICES

Appendix A — Opinion Of The United States Court

Of Appeals For The Fifth Circuit Dated And Filed

ely 14, 19 6G ieee eee

Appendix B — Order Of The United States District

Court For The Southern District Of Texas, Corpus

Christi Division, On Appeal From Order Granting

Summary Judgment And Delimiting The

Attachment Of Appellant’s Lien To Appellee’s —

Spendthrift Trust Dated January 14,1998 .....

Appendix C — Order Of The United States

Bankruptcy Court For The Southern District Of

Texas, Corpus Christi Division, Granting

Summary Judgment Dated April 4, 1997 And

eee Age 7 T9Rt oc ea

Appendix D — Joint Stipulation Of Issues And Fact

Dated And Filed December 2, 1996 ..........

Appendix E — Order Of The United States Court

Of Appeals For The Fifth Circuit Denying Petition

For Rehearing Dated And Filed January 10,

POPPE ere er i, Se

Page

la

19a

37a

39a

ee ee ee le ae eT he, Pe eS nee Oe ee ee ee ee ee

l

Petitioner, John Davis Orr, (“Orr”), respectfully requests

that a writ of certiorari be issued to review the judgment of

the United States Court of Appeals for the Fifth Circuit in

this case

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the Fifth Circuit is reported at Jn the Matter of: John Davis

Orr, Debtor; Internal Revenue Service v. John Davis Orr,

180 F.3d 656 (5" Cir. 1999) (App. A). The opinion of the

district court is reported at Jnternal Revenue Service v. John

Davis Orr, 239 B.R. 130 (S.D. Tex. 1998) (App. B). The

Order Granting Summary Judgment of the bankruptcy court

in Jn re: John Davis Orr; John Davis Orr v. Internal Revenue

Service, Case No. 95-22895-C-7, Adversary No. 96-2021-

C, is not published (App. C).

STATEMENT OF JURISDICTION

The judgment of the United States Court of Appeals for

the Fifth Circuit (“Court of Appeals”) was entered on July

12, 1999. The Court of Appeals denied a timely Petition for

Rehearing En Banc on January 10, 2000 (App E).

The jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

STATUTORY PROVISIONS INVOLVED

26 U.S.C. § 6321 provides:

If any person liable to pay any tax neglects or

refuses to pay the same after demand, the amount

2

(including any interest, additional amount,

addition to tax, or assessable penalty, together

with any costs that may accrue in addition thereto)

shall be a lien in favor of the United States

upon all property and rights to property, whether

real or personal, belonging to such person.

26 U.S.C.A. § 6321 (West 1989).

11 U.S.C. § 541 provides in relevant part:

(a) The commencement-of_a-case under section

301, 302, or 303 of this title creates an estate. Such

estate is comprised of all the following property,

wherever located and by whomever held: . . . (5)

Any interest in property that would have been

property of the estate if such interest had been an

interest of the debtor on the date of the filing of

the petition, and that the debtor acquires or

becomes entitled to acquire within 180 days after

such date — (A) by bequest, devise, or inheritance

... 11 U.S.C.A. § 541(a) (West 1993).

11 U.S.C. § 727 provides in relevant part:

(a) The court shall grant the debtor a discharge

... (b) Except as provided in section 523 of this

title, a discharge under subsection (a) of this

section discharges the debtor from all debts that

arose before the date of the order for relief under

this chapter... 11 U.S.C.A. § 727 (West 1993).

a Pee A eee

3

STATEMENT OF THE CASE

The question in this case is whether federal tax liens

filed by the Internal Revenue Service attached, prior to the

time of filing of Mr. Orr’s Chapter 7 voluntary bankruptcy

petition, to any “property” or “rights to property” with respect

to Mr. Orr’s right to receive unaccrued, undistributed future

income payments from a spendthrift trust, of which Mr. Orr

is the beneficiary, or whether the liens attach only to each

net income payment when it accrues and is actually paid

over to Mr. Orr. The question arose in the context of an

adversary proceeding initiated by Mr. Orr in the course of

his bankruptcy proceeding. A recitation of the material

factual and procedural background follows.

On April 24, 1965, Unis Chapman Eichelberger, Mr.

Orr’s grandmother, executed a document entitled “Unis

Chapman Eichelberger Chapman Ranch Trusts.” Mr. Orr is

the named principal beneficiary of the Unis Chapman

Eichelberger Chapman Ranch Trust I (“Trust”), which is the

Trust at issue. Mr. Orr is co-trustee of the Trust, together

with Mercantile Bank, N.A. Pertinent to the dispute between

Mr. Orr and the IRS are the net income distribution’ and

spendthrift? provisions of the Trust document, which appear

1. Paragraph 5(e) of the trust document reads in part:

At all times when the principal beneficiary of a trust is

living, over the age of thirty (30) years and competent,

all of the net income of the trust shall be distributed to

the principal beneficiary annually or at more frequent

intervals.

2. The spendthrift provision appears at Paragraph 26 of the

(Cont'd)

Trust document and reads as follows:

4

in the Joint Stipulation of Issues and Fact submitted by the

parties to the bankruptcy court (App. D).

Mr. Orr did not file federal income tax returns for the

years 1984 through 1991. After examination, Mr. Orr and

the IRS reached an agreement whereby the IRS, on October

26, 1992, assessed taxes, penalties and interest for 1984

through 1991. Notices of Federal Tax Liens were filed on

January 11, 1993 in the personal and real property records

of Nueces County, Texas for those tax years.

On November 1, 1995, Mr. Orr filed for relief under

Chapter 7 of the Bankruptcy Code. There is no dispute that

on the petition date, Mr. Orr was of the required age under

the terms of the Trust to receive net income distributions, if

any were available to be made. The bankruptcy court granted

Mr. Orr his discharge pursuant to 11 U.S.C. § 727 on May

21, 1996.

Mr. Orr initiated an adversary proceeding on February

8, 1996, seeking to determine whether he had been personally

discharged from federal income tax liability for the years

1984 through 1992, and to avoid the liens, if any, of the IRS

(Cont'd)

No trust assets or income shall be liable for the debts of

any beneficiary, nor subject to seizure under any judicial

writ or proceeding. No beneficiary shall have the power

to give, grant, sell, assign, transfer, mortgage, pledge,

encumber, or in any manner to anticipate or dispose of

the interest in the trust estate or its income or to dispose

of any trust property until it has been actually delivered

to him in accordance with the terms hereof, except that

the foregoing shall in no manner restrict the authority

otherwise granted to any trustee who is a beneficiary to

distribute the trust property as provided herein.

5

on post-petition net income distributions received by him as

beneficiary of the Trust. In the bankruptcy court, the parties

stipulated to all relevant facts, including Mr. Orr’s personal

discharge for tax liability for the years 1984 through 1991.

The matter proceeded on cross-motions for summary

judgment. Following oral argument, the bankruptcy court

granted Mr. Orr’s motion and denied the motion of the IRS,

ruling that the IRS liens attached only to net income

distributions made to Mr. Orr through April 30, 1996, but

not to subsequent net income distributions.’

On appeal by the IRS, the district court reversed the

decision of the bankruptcy court. The district court held that

the IRS liens attached prepetition to Mr. Orr’s right to receive

net income distributions in the future, thereby permitting the

IRS to satisfy the tax liability from these future net income

distributions until paid in full.

Mr. Orr appealed the district court’s decision, Following

oral argument, the Court of Appeals issued its opinion on

July 12, 1999, affirming the decision of the district court.

Mr. Orr’s Petition for Rehearing En Banc was denied on

January 10, 2000.

3. In imposing this time limitation, the bankruptcy court relied

on 11 U.S.C. § 541(a)(5)(A), which operates to bring into the

bankruptcy estate property acquired by bequest, devise or inheritance

during the 180-day period following the filing of the bankruptcy

petition.

6

REASONS FOR GRANTING THE WRIT

THE PETITION SHOULD BE GRANTED

BECAUSE THE COURT BELOW HAS DECIDED AN

IMPORTANT QUESTION OF FEDERAL LAW THAT

HAS NOT BEEN, BUT SHOULD BE, SETTLED BY

THIS COURT AND BECAUSE THE ANALYSIS

EMPLOYED BY THE COURT BELOW CONFLICTS

WITH PRIOR RELEVANT DECISIONS OF THIS

COURT. :

Section 6321 of the Internal Revenue Code provides for

the imposition of a lien, for the purpose of collecting

delinquent taxes, on the “property” or “rights to property”

belonging to a taxpayer. 26 U.S.C. § 6321 (West 1989). This

Court has previously noted that the language of § 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, 719-

20, 105 S. Ct. 2919, 86 L. Ed. 2d 565 (1985); see also Glass

City Bank v. United States, 326 U.S. 265, 267, 66 S. Ct.

108, 90 L. Ed. 56 (1945) (observing that “stronger language

could hardly have been selected to reveal a purpose to assure

the collection of taxes’’).

It is well-settled in the decisions of this Court that in

determining whether a federal tax lien attaches to a particular

interest held by a taxpayer, the identification of that interest

is left to state law, while the consequences that attach to that

interest is a matter governed by federal law. United States v.

Rodgers, 461 U.S. 677, 683, 103 S. Ct. 2132, 76 L. Ed. 2d

236 (1983); Aquilano v. United States, 363 U.S. 509, 512-

13, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). In a recent

decision, this Court has clarified this principle, stating that

7

its proper application involves an initial examination of state

law to determine what rights the taxpayer has in the property

the Government seeks to reach. Drye v. United States, 120

S. Ct. 474, 481, 145 L. Ed. 2d 466 (1999). Federal law is

then consulted to determine whether the taxpayer’s state-

delineated rights qualify as “property” or “rights to property”

pursuant to the Internal Revenue Code Provision imposing

the tax lien. /d.

In its previous application of this principle to various

taxpayer interests, this Court held that a taxpayer’s right

under state law to withdraw all of the proceeds deposited in

a joint bank account amounted to “property” or “rights

to property subject to a lien for federal taxes, although

state law would not allow ordinary creditors of the taxpayer

to reach those funds. United States v. National Bank

of Commerce, 472 U.S. 713, 723-27, 105 S. Ct. 2919, 86

L. Ed. 2d 565 (1985). Similarly, a taxpayer’s right to compel

an insurer to pay over to her the cash surrender value of a

life insurance policy was found to qualify that cash surrender

value as “property” or “rights to property” subject to a federal]

tax lien. United States y. Bess, 357 US. 51, 56-57, 78S. Ct.

1054, 2 L. Ed. 2d 1135 (1958). This was so although state

law prohibited the attachment of creditor liens to the cash

Surrender value of a policy. /d. In Bess, however, this Court

also concluded that the insurance policy proceeds themselves

were not “property” to which a lien could attach because the

insured could not enjoy the proceeds in her lifetime. 357

U.S. at 55-56.

Having noted these previous decisions, the Court in Drye

found that the United States Court of Appeals for the Eighth

Circuit had correctly applied the law to determine whether a

taxpayer’s interest as the heir to his mother’s estate was

8

subject to a federal tax lien, although the taxpayer had

exercised his right under Arkansas state law to disclaim his

inheritance. Drve, 120 S. Ct. at 482. Specifically, the Eighth

Circuit had first examined what rights state law accorded to

the taxpayer in his mother’s estate, finding that under

Arkansas law, the taxpayer had, at his mother’s death, a

valuable, transferable, legally protected right to an interest

in her estate. Jd. Furthermore, as a prospective heir, the

taxpayer would be permitted to assign his expectancy in the

estate, which assignment would be enforceable when the

expectancy ripened into a present estate. /d.

In noting with approval the analysis applied by the

Eighth Circuit, this Court, at note 7 of the Drye decision,

made the following observation: -

In recognizing that state-law rights that

have pecuniary value and are transferable fall

within § 6321, we do not mean to suggest that

transferability is essential to the existence of

“property” or “rights to property” under that

section. For example, although we do not here

decide the matter, we note that an interest in a

spendthrift trust has been held to constitute

“property” for purposes of § 6321, even though

the beneficiary may not transfer that interest to

third parties. See Bank One [Ohio Trust Co. v.

United States], 80 F.3d at 176 [6" Cir. 1996]. Nor

do we mean to suggest that an expectancy that

has pecuniary value and is transferable under state

law would fall within § 6321 prior to the time it

ripens into a present estate.

Drye, 120 S. Ct. at 482-83 n.7.

9

The taxpayer proceeded to argue before this Court that

his right under Arkansas law to disclaim the inheritance was

personal to him and not marketable. This Court rejected that

argument, reasoning that the primary right accorded by

Arkansas law to the taxpayer — the right to claim the

inheritance or to channel it to a close family member—was a

right of considerable value in that the taxpayer exercised

dominion over the property by determining who would

receive it. Drye, 120 S. Ct. at 483. This ability to exercise

dominion over estate assets lead this Court to conclude that

the taxpayer held “property” or “rights to property” that were

subject to the Government’s tax liens. Jd

Thus, the Drye decision has established that in examining

the rights that state law accords to a taxpayer with respect to

a particular interest, the federal courts should identify the

primary right accorded and should then determine whether

that primary right has value because of the dominion the

taxpayer is able to exercise. The Court continues to find that

the characteristics of pecuniary value and transferability are

relevant to a determination of “property” or “rights to

property,” but should be examined in conjunction with the

element of control.

In its opinion below, the United States Court of Appeals

for the Fifth Circuit concluded that Mr. Orr’s equitable

Ownership interest in the Trust corpus and right to receive

distributions from the trust were sufficient in themselves to

constitute “property” or “rights to property,” and that the

Government’s need to collect taxes rises above the wishes

of the creator of a spendthrift trust. The Fifth Circuit,

however, failed to examine the rights actually accorded under

Texas state law to Mr. Orr as the beneficiary of a spendthrift

trust, although this Court’s decisions in National Bank of

Commerce, Bess, and now Drye mandate such an analysis.

10

Mr. Orr’s primary right as the beneficiary of the Trust is .

to receive the net income, if any, that is generated by the

Trust corpus. It has been Mr. Orr’s position throughout these

proceedings that this right lacks transferability and calculable

pecuniary value, and the net income is beyond his dominion

and control until it is actually paid over to him.

With respect to the transferability of his interest, Mr.

Orr cannot alienate, assign or pledge his expectancy in

receiving the net income. See Becknal v. Atwood, 518 S.W.2d

593, 598 (Tex. Civ. App. — Amarillo 1975, no writ)

(spendthrift trust beneficiary may not anticipate or assign

his interest in, or income from, trust estate); Long v. Long,

252 S.W.2d 235, 246 (Tex. Civ. App. — Texarkana 1952,

writ ref'd n.r.e.) (spendthrift trusts are exception to general

rule that alienability of estate is incident of ownership).

With respect to the pecuniary value of his interest, there

iS as a practical matter no determinable present value to the

stream of net income payments that Mr. Orr might receive

in the future. “Income” is defined in Texas as the return

derived from the use of principal and includes receipts from

business and farming operations, such as that comprising

the Trust corpus in the present case, calculated in accordance

with generally accepted accounting principles. TEX. PROP.

CODE ANN. §§ 113.102(a)(5), 113.106 (Vernon 1995). The

calculation is not subject to interpretation by trustees or trust

beneficiaries, but is an objective calculation determined by

subtracting expenditures properly chargeable to income from

receipts properly allocable to income. See 5-HERBERT

S. KENDRICK & JOHN J. KENDRICK, JR., TEXAS

TRANSACTION GUIDE: ESTATE PLANNING § 50B.30

(1992 ed.) (citing WI SCOTT, THE LAW OF TRUSTS, § 233

(3d ed. 1967) (discussing calculation of net income).

aalidteanalathin withneliadatieeh tet ad

RR ES Rea AT ar er ee

1]

Thus, net income is not determinable and has no

recognizable value until the properly chargeable expenses

for a fiscal period are deducted from the receipts from

farming operations for that fiscal period. It is at this point

that net income becomes payable to Mr. Orr, who can then

exercise dominion and control over the use to which it is

put. Because the farming operations that comprise the Trust

corpus are entirely dependent on the vagaries of the South

Texas climate, there is no assurance that the corpus will yield

any net income in a given fiscal period, let alone be

susceptible to long-term projections for purposes of

valuation.

The present case thus possesses a unique combination

of the factual circumstances specifically referenced by the

Drye Court at footnote 7 of its opinion, and which have not

yet been brought squarely before this Court. On the one hand,

the interest at issue is the nontransferable interest of a

spendthrift trust beneficiary. On the other hand, the net

income payments in the present case do not ripen into a

present estate until they are calculated for each fiscal period

and paid over to Mr. Orr. Mr. Orr’s petition should be granted

so that the Court can settle the important question of whether

a spendthrift trust beneficiary’s right to receive unaccrued,

undistributed future net income payments constitutes

“property” or “rights to property” such that a federal tax lien

may attach, or whether the tax lien attaches only when each

net income payment accrues and is actually paid over to the

beneficiary.

12

CONCLUSION

The important question presented by this case is whether

a spendthrift trust beneficiary’s right to receive unaccrued,

undistributed future net income payments from a spendthrift

trust constitutes “property” or “rights to property” such that

a federal tax lien may attach, or whether the tax lien attaches

only when each net income payment accrues and is actually

paid over to the beneficiary. The opinion below creates

significant yet flawed judicial precedent concerning the

attachment of federal tax liens. By granting Mr. Orr’s

petition, this Court can correct. the Fifth Circuit’s decision,

which employed an erroneous analysis of the rights accorded

to Mr. Orr under Texas state law as the beneficiary of a

spendthrift trust. The appropriate analysis has been

established in this Court’s previous decisions, and most

expressly in the decision in Drye v. United States, 120 S. Ct.

474, 145 L. Ed. 2d 466 (1999). In addition, this case presents

an opportunity for the Court to address an issue of apparent

interest to it, which has yet to be squarely presented for

consideration.

For the foregoing reasons, John Davis Orr respectfully

requests that his petition for writ of certiorari be granted.

Respectfully submitted,

RONALD A. SIMANK

Counsel of Record

LaurA M. BAKER

SCHAUER & SIMANK, P.C.

Attorneys for Petitioner

615 North Upper Broadway

Suite 2000

Corpus Christi, Texas 78477

(361) 884-2800

APPENDIX

la

APPENDIX A — OPINION OF THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

DATED AND FILED JULY 12, 1999

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 98-40170

In The Matter Of: JOHN DAVIS ORR,

Debtor.

INTERNAL REVENUE SERVICE,

Appellee,

VERSUS

JOHN DAVIS ORR,

Appellant.

Appeal from the United States District Court

for the Southern District of Texas

Before SMITH, DeMOSS, and STEWART, Circuit Judges.

DeMOSS, Circuit Judge:

A spendthrift trust beneficiary who extinguished

personal federal tax liabilities through bankruptcy now

appeals the determination by the district court that

distributions from the trust are subject to a prebankruptcy

2a

Appendix A

federal tax lien until the tax liability is satisfied. The district

court’s order conclusively settles a discrete issue within the

bankruptcy case, and is appealable pursuant to 28 U.S.C.

§ 158(d). We conclude that the federal tax lien on Orr’s

income distributions from this Texas spendthrift trust

attached to future distributions at the time of the creation of

the lien, and not as of the time each distribution was made.

The lien thus predates and survives the bankruptcy. The

judgment below is, therefore, affirmed.

I.

On April 24, 1965, Unis Chapman Eichelberger executed

a document entitled “Unis Chapman Eichelberger Chapman

Ranch Trusts” (“Trust Document”). Eichelberger’s grandson,

John Davis Orr, is the named principal beneficiary of the

Unis Chapman Eichelberger Chapman Ranch Trust I

(“Trust”), described in the Trust Document. The Trust

provides that Orr, after reaching the age of thirty, shall

receive “all of the net income of the trust . . . distributed . . .

annually or at more frequent intervals.” The Trust lasts for

Orr’s life and then terminates. Orr has limited testamentary

power over the distribution of the Trust’s property after his

death, but if Orr does not exercise this power the property is

distributed to Orr’s then-living descendants, and if no such

persons exist, to charity. The spendthrift provision reads as

follows:

No trust assets or income shall be liable for the

debts of any beneficiary, nor subject to seizure

under any judicial writ or proceeding. No

beneficiary shall have the power to give, grant,

3a

Appendix A

sell, assign, transfer, mortgage, pledge, encumber,

or in any manner to anticipate or dispose of the

interest in the trust estate or its income or to

dispose of the interest in the trust estate or its

income [sic] or to dispose of any trust property

until it has been actually delivered to him in

accordance with the terms hereof. except that the

foregoing shall in no manner restrict the authority

otherwise granted to any trustee who is a

beneficiary to distribute the trust property as

provided herein.

Despite the generous provisions made for him by his

grandmother, Orr has encountered financial difficulties. He

filed for bankruptcy relief under Chapter 7 on November 1,

1995, and received his discharge on May 21, 1996. He has

received no distributions from the Trust since filing for

bankruptcy relief. And, most pertinent to the present

controversy, he had previously run afoul of the Internal

Revenue Service by failing to pay income taxes.

Orr failed to file his federal income tax returns for 1984

through 1991. After examination, the IRS and Orr agreed to

the amount of tax and signed a Form 4549-CG, Income Tax

Examination Changes, consenting to assessment and

collection on October 1, 1992. On October 26, 1992, the

IRS assessed the taxes, penalties, and interest reflecting the

consent. Despite notice and demand, Orr’s federal income

tax liabilities for the taxes assessed on October 26, 1992 (to

the date of the bankruptcy petition) were as follows:

4a

Appendix A

Year Amount

1984 $160,062.08

1985 63,126.91

1986 88,018.08

1987 79,723.98

1988 141,729.83

1989 29,435.00

1990 45,436.27

1991 23,842.35

Notices of federal tax liens were filed in the personal

and real property records of Nueces County, Texas for the

1984 through 1991 income tax liabilities on January 11, 1993.

Orr also owed federal income taxes on the date of petition

for 1992 in the amount of $2.69. Notices of federal tax liens

were filed in the personal and real property records of Nueces

County for the 1992 income tax liability on December 28,

1993. At the times the notices of federal tax liens were filed,

Orr was a resident of Nueces County.

Orr filed this adversary action to determine the answer

to one stipulated issue: “Whether the Internal Revenue

Service’s Notices of Federal Tax Lien attached to any interest

of Debtor in the Unis Chapman Eichelberger Chapman Ranch

Trust I to secure the payment of Debior’s federal income tax

liabilities for 1984 through 1992?” The parties agree that

Orr can be granted a personal discharge from his federal tax

liability for 1984 through 1991 pursuant to 11 U.S.C. § 727,

but not for his liability for 1992. Furthermore, the parties

stipulated that the federal tax liens attached to Orr’s property

or interests in property in existence at the time of his

Sa

Appendix A

‘bankruptcy filing are not dischargeable as to the property to

which they attached. There is no stipulation as to whether

the federal tax liens attached or attaches to any of Orr’s

interest in the Trust or its assets, or that Orr has or had an

interest in the Trust or its assets.

Orr prevailed in the bankruptcy court. The IRS appealed

to the district court, which reversed the bankruptcy court.

Orr now appeals the judgment of the district court.

II.

Counsel were instructed to brief the question of

“[{w]hether the order from which appeal is taken in the

bankruptcy case is a final order for purposes of appeal.” The

parties agree that this Court may properly exercise its

appellate jurisdiction, invoking the grant of jurisdiction in

28 U.S.C. § 158(d). That statute provides that “[t]he courts

of appeals shall have jurisdiction of appeals from all final

decisions, judgments, orders, and decrees entered under

subsections (a) and (b) of this section.” 28 U.S.C. § 158(d).

Subsection (a) provides for the appellate jurisdiction of

district courts over inter alia, “final judgments, orders, and

decrees ... of bankruptcy judges.” (Subsection (b), which

is inapplicable in this case, pertains to the jurisdiction of

bankruptcy appellate panels.)

Orr prevailed on his motion for summary judgment in

the bankruptcy court, based on his contention that the tax

liens do not attach to his post-discharge income distributions

from the Trust. In the context of a bankruptcy proceeding,

this grant of summary judgment qualified as a “final order”

reviewable by the district court. This Court has explained:

6a

Appendix A

A [bankruptcy] case need not be appealed as a

“single judicial unit” at the end of the entire

bankruptcy proceeding, but the order must

constitute a “ ‘final determination of the rights of

the parties to secure the relief they seek in this

~ gsuit,’”” or the order must dispose of a discrete

dispute within the larger bankruptcy case for the

order to be considered final.

Texas Extrusion Corp. v. Lockheed Corp. (In re Texas

Extrusion Corp.), 844 F.2d 1142, 1155 (Sth Cir. 1988)

(internal citations omitted). There is, therefore, a lower

threshold for meeting the “final judgments, orders, and

decrees” appealability standard under 28 U.S.C. § 158(a)

than there is for the textually similar “final decisions”

appealability standard under 28 U.S.C. § 1291. In this case,

the decision of the bankruptcy court resolved all dispositive

issues pertaining to the discrete dispute concerning the post-

discharge viability of pre-discharge federal tax liens on Orr’s

interest in the Trust, and therefore was ripe for appeal to the

district court.

Likewise, the district court’s reversal of the bankruptcy

court is reviewable by the court of appeals pursuant to

28 U.S.C. § 158(d). Review of “final decisions, judgments, |

orders, and decrees” under § 158(d) is more akin to review

of “final decisions” under § 1291 in nonbankruptcy appeals,

whereby “[a] decision is final when it ‘ends the litigation on

the merits and leaves nothing for the court to do but execute

the judgment.’ ” Briargrove Shopping Ctr. Joint Venture

v. Pilgrim Enters., Inc., 170 F.3d 536, 539 (Sth Cir. 1999)

(quoting Askanase v. Livingwell, Inc., 981 F.2d 807, 810

[ees me

7a

Appendix A

(Sth Cir. 1993) (quoting Coopers & Lybrand v. Livesay, 437

U.S. 463, 467, 98 S. Ct. 2454 (1978))). But even under

§ 158(d), “this court’s determination of whether an order is

final (and therefore appealable) is more liberal in the.

bankruptcy context” than under § 1291. See Lentino y. Cage

(In re Lentino), No. 98-20626, 1999 WL 77140, at *2 (Sth

Cir. Mar. 5, 1999) (summary calendar).

If this adversary proceeding stood alone as an

independent case, it would be appealable even under the

higher standard of § 1291. Now that the district court has

overruled the bankruptcy court and ordered “that IRS’ lien

shall attach to all income distributions made to Orr frora the

spendthrift trust at issue,” there is nothing left for the

bankruptcy court to do. Hence, the matter is sufficiently

“final” for appellate review.

Orr is the beneficiary of a spendthrift trust. Texas law

has historically respected the validity of spendthrift trusts.

See, e.g., Caples v. Buell, 243 S.W. 1066 (Tex. Comm’n

App. 1922); see generally 72 Tex. Jur. 3d Trusts §§ 37-42

(1990). The state specifically acknowledges the validity of

spendthrift trusts by statute. See Tex. Prop. Code Ann.

§ 112.035 (Vernon 1995).

The creation of a trust involves the separation of legal

and equitable ownership of property. The trustee is the legal

owner of the corpus of a spendthrift trust; the beneficiary is

the equitable owner. See, e.g., Burns v. Miller, Hiersche,

Martens & Hayward, P.C.,948 S.W.2d 31 7,322 (Tex. App.

— Dallas 1997, writ denied).

8a

Appendix A

The tax liens at issue in this case were created pursuant

to 26 U.S.C. § 6321, which provides:

If any person liable to pay any tax neglects

or refuses to pay the same after demand, the

amount (including any interest, additional

amount, addition to tax, or assessable penalty,

together with any costs that may accrue in addition

thereto) shall be a lien in favor of the United States

upon all property and rights to property, whether

real or personal, belonging to such person.

26 U.S.C. § 6321. “Stronger language could hardly have been

selected to reveal a purpose to assure the collection of taxes.”

Glass City Bank v. United States, 326 U.S. 265, 267, 66

S. Ct. 108, 110 (1945). “Congress meant to reach every

interest in property that a taxpayer might have.” United

States v. National Bank of Commerce, 472 U.S. 713, 719,

105 S. Ct. 2919, 2924 (1985). The Supreme Court has

construed the language of § 6321 to mean that a tax lien

attaches not only to property owned by the debtor at the time

the lien attaches, but also to after-acquired property until

the tax liability is satisfied. See Glass City Bank, 326 U.S.

at 267-69, 66 S. Ct. at 110-11.

The interaction between federal and state law in this area

is an important facet of our analysis. It is well-settled that in

federal taxation cases, the definition of underlying property

interests is left to state law, but the consequences that attach

to those interests are determined by reference to federal law.

See United States v. Rodgers, 461 U.S. 677, 683, 103 S. Ct.

2132, 2137 (1983); Aquilino v. United States, 363 U.S. 509,

9a

Appendix A

513, 80S. Ct. 1277, 1280 (1960). Thus, we look to state law

to determine the character of any property right Orr may

have in future distributions from the Trust, but federal law

determines whether or not, and at what point in time, a tax

lien may attach to that property interest. See, e.g., United

States v. Bess, 357 U.S. 51, 55-57, 78 S. Ct. 1054, 1057-58

(1958).

A.

The principle of the Glass City Bank case (that a tax

lien attaches to the debtor’s after-acquired property until the

tax liability is satisfied) was long ago extended to include

the attachment of a tax lien to after-acquired distributions

from a spendthrift trust. See United States y. Dallas Nat’!

Bank, 152 F.2d 582 (Sth Cir. 1945) (hereinafter, Dallas I),

appeal after remand, 164 F.2d 489 (5th Cir. 1947), appeal

after second remand, 167 F.2d 468 (Sth Cir. 1948)

(hereinafter, Dallas III). The precise holding of the Dallas

opinions is the main bone of contention in the appeal of Orr’s

case, which involves the added feature of an intervening

bankruptcy. Orr’s filing for bankruptcy relief under Chapter

7 did not affect the validity of any tax lien the IRS may have

had prior to the filing. Ordinarily, liens and other secured

interests survive bankruptcy. See Farrey v. Sanderfoot, 500

U.S. 291, 297, 111 S. Ct. 1825, 1829 (1991); see also

11 U.S.C. § 522(c)(2)(B) (“Unless the case is dismissed,

property exempted under this section is not liable during or

after the case for any debt of the debtor that arose... before

the commencement of the case, except... a tax lien, notice

of which is properly filed[.]”); Isom v. United States (In re

Isom), 901 F.2d 744, 745 (9th Cir. 1990) (“The liability for

10a

Appendix A

‘ the amount assessed remains legally enforceable even where

the underlying tax debt is discharged in the bankruptcy

proceeding. A discharge in bankruptcy prevents the I.R.S.

from taking any action to collect the debt as a personal

liability of the debtor. ... [T]heir property remains liable

for a debt secured by a valid lien, including a tax lien.”).

There is no discussion in 11 U.S.C. § 541(c)(2) of liens, tax

or otherwise, that attach before bankruptcy discharge.

Repeatedly, courts have been willing to attach liens to

post-discharge benefits despite the “fresh start” policy of

the bankruptcy scheme. See, e.g., Connor v. United States

(In re Connor), 27 F.3d 365 (9th Cir. 1994); In re Wesche,

193 B.R. 76 (Bankr. M.D. Fla. 1996). The IRS therefore has

a valid tax lien against Orr’s interest in the Trust if that lien

attached before Orr’s personal liabilities were extinguished

in bankruptcy. The dispositive issue is, therefore, the question

of whether a federal tax lien in this situation attaches to a

spendthrift trust beneficiary’s equitable interest in the trust

itself or to each individual distribution as it is paid to the

beneficiary. Both parties to this appeal claim support for their

respective positions in Dallas.

Dallas invoived a federal tax liability owed by Carolyn

Maxwell, arising from several stock transactions. Mrs.

Maxwell was a resident of England, so the government

sought to enforce the tax liability by imposing a lien on her

interest in a spendthrift trust, of which the Dallas National

Bank was trustee. As in the customary trust arrangement,

the trustee possessed legal title to the trust funds. Mrs.

Maxwell received monthly income payments from the trust.

This Court concluded that the government had a valid lien,

and explained the result as follows:

lla

Appendix A

Mrs. Maxwell has no title to the corpus of

any property other than the profits after they have

accrued and have been passed to her account and

made available to her by the Trustee. In other

words, after “the net revenues,” amounting to

approximately $54 per month, accrue, or are set

apart and become payable to her, such net

revenues then belong to her and are then subject

to the lien of the Government for taxes, and are

available as an appropriate res in a proceeding in

: rem by the Government to have a lien for

delinquent taxes declared and enforced against

such revenues.

The Government is entitled to a lien upon

these monthly payments of net revenue in the

i hands of the Trustee, by virtue of the law as stated

in 26 U.S.C.A.Int.Rev.Code, §§ 3670 and 3671.

Under the holding of [Glass City Bank), that

the lien of the United States attaches to after-

| acquired property, we think that such lien will

continue to be fastened on the monthly income

from the trust as it becomes payable to the

; taxpayer.

Dallas I, 152 F.2d at 585 (footnote omitted). In a following

appeal (Dallas ITT), Circuit J udge Edwin R. Holmes of Yazoo

City, Mississippi, noted in a specially concurring opinion

that:

12a

Appendix A

The taxpayer is the equitable owner for life

of an undivided interest in Texas realty, which

under local law is not subject to seizure or sale

for ordinary debts incurred by the taxpayer; but

this does not mean that testamentary restraints

against alienation should prevail against the

fastening of a lien for federal income taxes on

the taxpayer’s equitable interest in the trust estate.

We are, in fact, holding the contrary in this case.

Dallas III, 167 F.2d at 469 (Holmes, J., specially

concurring). Orr emphasizes the language in Dallas I that

“such lien will continue to be fastened on the monthly income

from the trust as it becomes payable to the taxpayer,” 152

F.2d at 585 (emphasis supplied), in support of his contention

that no valid lien would exist until he actually received a

distribution from the trust, and because through bankruptcy

he has discharged his personal liability for the tax, the lien

can no longer continue to attach to future distributions. See,

e.g., Connor, 27F.3dat__. The IRS emphasizes the language

in Dallas III indicating that the lien attaches to Orr’s

“equitable interest in the trust estate,” 167 F.2d at 469

(emphasis supplied), and therefore precedes and survives

Orr’s bankruptcy.

The Dallas panels did not need to confront the question

presented by Orr’s case. The trust distributions paid to Mrs.

Maxwell fell into the category of after-acquired property at

the time she received them. There was no bankruptcy, as

there is in this case, to discharge the debtor’s personal

liability for the taxes owed. As Mrs. Maxwell received each

new distribution from the trust, a new § 6321 lien would

13a

Appendix A

fasten onto the distribution so long as she owed the taxes.

The law was settled in Glass City Bank that such after-

acquired property became subject to a statutory federal tax

lien on the debtor’s “property,” and thus there was no need

to decide whether the lien could have attached earlier. The

Dallas I opinion specifically invokes Glass City Bank to

justify its result. Thus, the opinion of Judge Holmes (which

Was not joined by any other judge) that the tax lien validly

attached to Mrs. Maxwell’s equitable interest in the trust

was not necessary to the decision in that case.

B.

The issue addressed by Judge Holmes, specially

concurring in the Dallas III appeal, is squarely presented

by Orr’s case, because the only way the IRS can collect from

Orr’s trust distributions is if the tax lien on future

distributions attached before Orr’s personal liability was

discharged through bankruptcy. With the issue now squarely

presented, fifty-one years later, we conclude that the dictum

announced by Judge Holmes was correct. Texas law

recognizes the validity of the Trust’s spendthrift clause.

Texas law acknowledges that a spendthrift trust beneficiary

possesses an equitable ownership interest in the trust corpus.

And Texas law respects the Trust’s bestowal upon Orr of a

fully vested right to receive distributions from the trust on

at least an annual basis. These interests constitute “property”

or “rights to property” under § 6321, even though the

beneficiary does not possess total, exclusive, fee-simple

ownership.

14a

Appendix A

The broad scope of 26 U.S.C. § 6321, encompasses

“property” in this sense, as befits that statute’s purpose of

tax collection, see United States v. National Bank of

Commerce, 472 U.S. 713, 719-20, 105 S. Ct. 2919, 2923-24

(1985). Courts have routinely concluded that § 6321 tax liens

attach to other types of equitable interests. See, e.g., Southern

Bank v. IRS, 770 F.2d 1001, 1003, 1009-10 (11th Cir. 1985)

(equitable right of redemption); Runkel v. United States,

527 F.2d 914, 916 (9th Cir. 1975) (equitable interest in real

property); United States v. Johansson, 447 F.2d 702, 705

(Sth Cir. 1971) (equitable lien); United States v. Klimek,

952 F. Supp. 1100, 1112 (E.D. Pa. 1997) (equitable

ownership of real property); Bank of Lyons v. Cavanaugh

(In re Cavanaugh), 153 B.R. 224, 228 (Bankr. N.D. Ill.

1993) (equitable interest in a land trust).*

* Texas Commerce Bank Nat’l Ass’n v. United States, 908

F. Supp. 453 (S.D. Tex. 1995), relied upon by Orr, is not to the

contrary. Texas Commerce Bank involved an attempt by the IRS to

levy upon the interest of Ellanor Ann Fondren in a trust in which

payments to her were left to the sole discretion of the trustee until

the year 2002. The court ruled that distributions made to Fondren in

trustee’s discretion did not violate the levy because Fondren had no

interest to which the levy could attach. Unlike the spendthrift trust

in this case, the discretionary nature of the trustee’s power in Texas

Commerce Bank meant that the beneficiary had no property or rights

to property to which the levy could attach. And although the trust

provided that Fondren would be entitled to future income

distributions that right was “clearly a contingent, non-vested, and

non-determinable right” at the time the IRS imposed its levy.

We also note that it is not clear from the Texas Commerce

Bank opinion why the Glass City Bank and Dallas principles of

(Cont'd)

1Sa

Appendix A

Moreover, the attachment of the lien in this case is not

at odds with the Texas policy of respecting the wishes of the

creator of a spendthrift trust by enforcing the trust’s anti-

alienation provisions. The wishes of the creator of the

spendthrift trust are to ensure a stream of income for the

beneficiary by preventing the beneficiary from leveraging

present purchasing power out of future payments. The state

may (and Texas does) think it advisable to respect the wishes

of the creator of the trust by enforcing the spendthrift term.

Creditors in Texas are on notice of the unenforceability of

any loan agreement with a trust beneficiary that purports to

grant an interest in future distributions from a spendthrift

trust. The risk of default is thereby placed on the shoulders

of creditors who rely on the spendthrift trustee’s income

stream.

The government does not stand in the shoes of an

ordinary creditor seeking to attach distributions from a

spendthrift trust. Consistent with the imperative nature of

tax collection, § 6321 gives the government an advantage

over ordinary creditors in collection matters. Moreover, the

rationale for shifting the risk of default to creditors, who

ought to examine the terms of a trust before agreeing to accept

the right to future distributions as collateral, does not apply

to the government, which imposes the income tax unilaterally

(Cont’d)

tax liens’ attachment to after-acquired property, including

distributions from a spendthrift trust, would not have applied to the

trustee’s distributions to Fondren. In any case, Texas Commerce

Bank does not support Orr’s contention that a vested right to future

payments from a spendthrift trust cannot be property or rights to

property susceptible to attachment by a tax lien.

16a

Appendix A

and without reference to spendthrift protections. The wishes

of the creator of a spendthrift trust cannot overcome the

government’s need to collect tax and a spendthrift trust

beneficiary’s duty to pay tax. It does not make sense to permit

the spendthrift trust to be a vehicle for tax immunity.

Though not dispositive of the meaning of “property and

rights to property” under § 6321, we further note that Texas

law supports the classification of Orr’s interest in the Trust

as “property.” In determining the ordinary meaning of the

term “property” for the purposes of statutory construction,

the Supreme Court of Texas has characterized it as extending

to “every species of valuable right and interest.” State v.

Public Util. Comm’n, 883 S.W.2d 190, 200 (Tex. 1994)

(citing Womack v. Womack, 141 Tex. 299, 172 S.W.2d 307,

308 (1943)); cf Tex. Prop. Code Ann. § 111.004(12) (Vernon

1995) (for purposes of the Trust Code: “ ‘Property’ means

any type of property, whether real, tangible or intangible,

legal, or equitable. The term also includes choses in action,

claims, and contract rights, including a contractual right to

receive death benefits as designated beneficiary under a

policy of insurance, contract, employees’ trust, retirement

account, or other arrangement.”).

Weare aware of authority suggesting that “[1]n enforcing

§ 6321, appellate courts have interpreted ‘property’ or ‘rights

to property’ to mean state-law rights or interests that have

pecuniary value and are transferable.” Drye Family 1995

Trust v. United States, 152 F.3d 892, 895 (8th Cir. 1998)

(citing United States v. Stonehill, 83 F.3d 1156, 1159-60

(9th Cir. 1996); In re Kimura, 969 F.2d 806, 811 (9th Cir.

1992); In re Terwilliger’s Catering Plus, Inc., 911 F.2d

“st . Voge eee ee 2 ae a a eee OP ae te

Ci i a tl RR ES 5 So Rr et Lae heh Sie ge Gd aR gta it Sth Do

A TE OF TELE EE Sh Reine Pre GY bean te

17a

Appendix A

1168, 1171-72 (6th Cir. 1990); 27 West Lancaster Corp. v.

Main Line Restaurant, Inc., 790 F.2d 354, 357-58 (3d Cir.

1986); Southern Bank v. IRS, 770 F.2d 1001, 1005 (11th

Cir. 1985)), cert. granted on other grounds, 119S. Ct. 1453

(1999). We think this test takes an unnecessarily narrow view

of the scope of § 6321. In particular, we know of no

controlling authority which conipels the conclusion that

transferability is a necessary incident of “property and rights

to property” under the statute. Indeed, a persuasive scholarly

treatment of the question comes to the opposite conclusion.

See Note, Property Subject to the Federal Tax Lien, 77 Harv.

L. Rev. 1485, 1485-87 (1964).

The terms “property and rights to property” have no

statutory definition. This Court has noted in the past that in

crafting the tax lien statute, “Congress did not attempt to

define the commercial cosmos. Rather, it was perfectly

willing to let contemporary transactions be analyzed to

determine whether or nor the delinquent taxpayer had any

part of a bundle of rights of commercial value, to which the

tax lien would then attach.” Randall v. H. Nakashima &

Co., Ltd., 542 F.2d 270, 278 (Sth Cir. 1976). And it bears

repeating that the Supreme Court has held that “Congress

meant to reach every interest in property that a taxpayer mi ght

have.” National Bank of Commerce, 472 US. at 719, 105

S. Ct. at 2924. Each case requires individual consideration,

and we conclude that despite the nontransferability of a

spendthrift trust beneficiary’s interest in the trust, Orr’s

interest still possesses sufficient characteristics of “property”

or “rights to property” to fall within the scope of § 6321.

—

18a

Appendix A

With reference to Texas iaw, we conclude that at the

time the liens were filed, Orr possessed equitable and legal

rights to future income distributions from the Trust. With

reference to federal law, we conclude that those rights

constituted “property” or “rights to property” subject to

attachment pursuant to § 6321. Because the federal tax lien

attached to Orr’s rights to future payments at the time of the

filing of the lien, Orr’s subsequent bankruptcy does not affect

the validity of the lien against Orr’s equitable ownership of

the Trust and legal right to receive income distributions from

the Trust. The tax lien is therefore valid against future income

distributions.

IV.

In sum, we conclude that we may exercise appellate

jurisdiction in this case. The subject matter of the appeal is

a discrete issue within a larger bankruptcy case, which was

presented in the context of an adversary action between the

parties. The order of the district court settled the sole issue

in contention. Jurisdiction is proper under 28 U.S.C. § 158(d).

Furthermore, the IRS has a valid lien against future

income distributions to Orr from the Trust. Under state law,

Orr possesses an equitable interest in the trust corpus and

legal entitlement to future income distributions from that

trust. These interests constitute “property” or “rights to

property” to which a 26 U.S.C. § 6321 tax lien may attach.

AFFIRMED.

19a

APPENDIX B — ORDER OF THE UNITED STATES

DISTRICT COURT FOR THE SOUTHERN DISTRICT

OF TEXAS, CORPUS CHRISTI DIVISION, ON

APPEAL FROM ORDER GRANTING SUMMARY

JUDGMENT AND DELIMITING THE ATTACHMENT

OF APPELLANT’S LIEN TO APPELLEE’S

SPENDTHRIFT TRUST DATED JANUARY 14, 1998

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

CORPUS CHRISTI DIVISION

C.A. No. C-97-357

INTERNAL REVENUE SERVICE,

Appellant,

¥.

JOHN DAVIS ORR,

Appellee.

ORDER ON APPEAL FROM ORDER GRANTING

SUMMARY JUDGMENT AND DELIMITING THE .

ATTACHMENT OF APPELLANT’S LIEN TO

APPELLEE’S SPENDTHRIFT TRUST

On this date came on to be considered Appellant Internal

Revenue Service’s (“IRS”) Appeal from the Order Granting

Summary Judgment issued by the United States Bankruptcy

Court for the Southern District of Texas, Corpus Christi

Division. That Order granted Appellee John Davis Orr’s

20a

Appendix B

(“Orr”) motion for summary judgment, finding that the IRS’s

federal income tax liens attach only to the distributions which

Orr received from his spendthrift trust prior to April 30, 1996.

In effect, the Bankruptcy Court found that Orr’s prepetition

equitable interest in his future spendthrift trust income did

not constitute “property” within the meaning of 26 U.S.C.

§ 6321. This Court reverses.

I, JURISDICTION

The Court has jurisdiction pursuant to 28 U.S.C.

§ 158(a).

IT. PROCEDURAL & FACTUAL HISTORY

In 1965, Orr’s grandmother created a spendthrift trust

which yields the income that is at issue in the present dispute.

This trust provides that “all net income of the trust shall be

distributed” to Orr, provided only that Orr is competent and

over the age of thirty. (Trust para. 5.) In accordance with the

trust, Orr has regularly received payments of the annual

income and has also been made a co-trustee. The trust income

is granted to Orr unconditionally and permanently, and the

trust requires the trustee to disburse all of the income to Orr

at least annually.'

1. The settlor originally created two trusts for Orr. Trust “A”

distributed the principal to Orr in three separate payments when he

reached the ages of 30, 35 and 40. Trust “B” is the trust at issue and

automatically pays its full net income to Orr from the time he turned

30 years old. Trust “B” includes a spendthrift clause. Thus, in

creating Trust B, the settlor explicitly created the exclusive power

in Orr to collect the trust’s income during his lifetime.

2la

Appendix B

Between 1984 and 1991, Orr failed to file his federal

income tax returns, incurring over $630,000 in tax liabilities.

Consequently, in 1993, the IRS properly filed Notices of

Federal Tax Liens pursuant to 26 U.S.C. § 6671, thereby

securing payment of these tax liabilities. On November 1,

1995, Orr petitioned for bankruptcy relief under Chapter 7,

and he received a discharge of personal liability on May 21,

1996. Of course, in accordance with 11 U.S.C. § 524(a)(1),

this discharge did not remove the federal tax liens from Orr’s

prepetition property.

Months prior to receiving his discharge, in February

1996, Orr filed an adversary requesting the Bankruptcy Court

to determine precisely to what property interests the federal

tax liens had attached. In particular, with respect to the

spendthrift trust, Orr wanted to know whether the liens

attached only to prepetition income payments, or if the liens

attached to his interest in the trust income such that the IRS

could also collect its debt from the post-petition

disbursements. That is, Orr asked the court to choose between

two plausible construals of what constituted Orr’s property

upon filing for relief: (1) Orr owned only the income already

disbursed to him from the spendthrift trust, or (2) Orr owned

an interest in the spendthrift trust which was in itself an

attachable property interest. Orr preferred the former

construal since it would mean that the IRS’ liens are

dischargeable as to his trust income which is disbursed

post-petition. In contrast, the IRS maintained that the federal

tax liens had attached to Orr’s prepetition interest in the

spendthrift trust itself, and therefore the IRS could collect

its debts from all of Orr’s trust income — whether disbursed

prepetition or post-petition.

22a

Appendix B

On April 7, 1997, the Bankruptcy Court ruled in favor

of Orr — i.e., that the IRS could satisfy its tax liability only

out of trust income distributions made prior to Orr’s petition

(i.e., through April 30, 1996). In effect, the Bankruptcy

Court held that, in these circumstances, Orr’s interest in his

spendthrift trust income was not attachable property until

Orr had the right to alienate the disbursed income, even if

he did have exclusive rights to all future income accrued

during his life. In making this decision, that court relied on

a case from 1945, United States v. Dallas Nat’l Bank, 152

F.2d 582 (Sth Cir. 1945), modified, 164 F.2d 489 (1947),

modified, 167 F.2d 468 (1948), which was subsequently

modified twice by the Fifth Circuit and, regardless, does not

address the issue before this Court.

III. STANDARD OF REVIEW

This Court has capacity to hear appeals from decisions

of a bankruptcy court, See 28 U.S.C. § 158, and it reviews

findings of fact by the bankruptcy court under the clearly

erroneously standard and decides issues of law de novo.

2. While Orr petitioned for relief on November 1, 1995, Section

541(a)(S)(A) of the Bankruptcy Code creates a 180-day window

during which petitioner’s new income will be included in the estate

subjected to prepetition liabilities. Therefore, Orr’s “prepetition”

estate effectively included, at the least, all disbursements made

through April 30, 1996, rather than through his actual petition date

of November 1, 1995. See 11 U.S.C. 524(a)(5)(A). The Bankruptcy

Court properly identified this cut-off date (of course, the

identification of this date could be made independently of how the

court construed the extent of Orr’s property upon filing for

bankruptcy).

23a

Appendix B

Matter of Haber Oil Co., Inc., 12 F.3d 426, 434 (Sth Cir.

1994); Matter of Killebrew, 888 F.2d 1516, 1519 (Sth Cir.

1989).

IV. DISCUSSION

a. The Nature of Federal Tax Liens Issued Pursuant

to 26 U.S.C. § 6321

When a person fails to pay federal taxes, all property

rights that the person has or acquires thereafter are subject

to a federal tax lien immediately and automatically. See

26 U.S.C. § 6321. Such a lien will attach to all property

acquired during the life of the lien, including property

acquired after its assessment. Glass City Bank of Jeanette,

Pa. v. United States, 326 U.S. 265, 66 S.Ct. 108 (1945).

While the reach of a § 6321 lien is very broad, it does not

apply to property acquired after bankruptcy. Jn re Conner,

27 F.3d 365, 366 (9th Cir. 1994); seee.g., Inre Braund, 289

F. Supp. 604 (C.D.Cal.1968), aff’d sub nom, United States

v. McGugin, 423 F.2d 718 (9th Cir.), cert. denied, 400 U.S.

823, 91 S.Ct. 44 (1970).

A § 6321 lien is not easily limited. First, such federal

tax liens are not subject to any state laws that govern ordinary

liens or to any state perfection requirements. See United

States v. Security Trust & Sav. Bank, 340 U.S. 47, 51, 71

S.Ct. 111, 113-14 (1950); Legget v. United States, 120 F.3d

592, 594 (Sth Cir. 1997). With respect to the operation of

such liens, “there is no doubt that the paramount right to

collect taxes of the federal government overrides a state

statute providing for exemptions.” Lueschner v. First

24a

Appendix B

Western Bank and Trust Company, 261 F.2d 705, 708

(9 Cir. 1958). This means, for example, that barriers against

creditors — which are the hallmark of a spendthrift trusts

created under state law — cannot prevent a federal tax lien

from attaching to the beneficiary’s interests in that trust.

United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132,

2137 (1985);. United States v. Bess, 357 51, 56-57, 78 S.Ct.

1054, 1057-58 (1958) (once it has been determined that state

law has created property interests sufficient for federal tax

lien to attach, state law “is inoperative to prevent the

attachment” of such liens); see also, Dallas 1, 152 F.2d at

585 (“If [IRS statutes] are in conflict with State law,

constitutional or statutory, the latter must yield”). Second, a

§ 6321 lien is not limited by a discharge in bankruptcy: such

a discharge only extinguishes the debtor’s personal liability,

11 U.S.C. § 524(a)(1), and does not prevent the enforcement

of valid tax liens against the debtor’s bankruptcy estate. 11

U.S.C. § 522(c)(2)(B).

Further, § 6321 is intended to be broad in scope and to

apply to every interest the taxpayer has in property. See

United States v. National Bank of Commerce, 472 U.S. 713,

719-20, 105 S.Ct. 2919, 2923-24 (1985); Legget, 120 F.3d

at 594. The statutory language used in § 6321 “reveals on its

face that Congress meant to reach every interest in property

that a taxpayer might have.... ‘Stronger language could

hardly have been selected to reveal a purpose to assure the

collection of taxes’ ” National Bank of Commerce, 105 S.Ct.

at 2924, citing, Glass City Bank, 326 U.S. at 267, 66 S.Ct. at

110.

25a

Appendix B

In sum, when a federal tax lien is created pursuant to

§ 6321, it attaches (and remains attached) to all of the debtor’s

prepetition property interests, notwithstanding state law

spendthrift trust restrictions on alienation. Three questions

remain for this Court. First, what kind of prepetition property

interest did Orr have? Second, does a § 6321 lien attach to

such property interests? And, third, what effect, if any, did

Orr’s filing for bankruptcy have on the lien’s prepetition

attachment?

b. The Nature of Orr’s Property Interest

Property is generally characterized as an aggregate of

rights; “the right to dispose of a thing in every legal way, to

possesses it, to use it, and to exclude everyone else from

interfering with it.” Black’s Law Dictionary 1095 (5th ed.

1979). This so-called “bundle of rights and powers” can be

divided among a number of persons, each of whom then

possesses an interest that is less than absolute ownership.

In re Terwiliger’s Catering Plus, Inc., 911 F.2d 1168, 1178

(6th Cir. 1990), cert denied, 111 S.Ct. 2815 (1991); In re

Kimura, 969 F.2d 806, 810 (9th Cir. 1992). Thus, there are

various types of property interests.

While the Supreme Court mandates a broad scope of

attachment to property under § 6321, the section does not

define what kind of property interests constitutes an

attachable property interest for § 6321 purposes. Instead, in

this context, it is left to state law to determine whether a

taxpayer has a property interest to which a federal lien may

attach. See National Bank of Commerce, 105 S.Ct. at

2925-26; Bess, 357 U.S. at 55, 78 S.Ct. at 1057; Legget, 120

26a

Appendix B

F.3d at 594. Therefore, the Court must look to Texas law for

a characterization of Orr’s property interest in the spendthrift

trust.

Texas courts have long upheld and enforced spendthrift

trust provisions. Burns v. Miller, Hiersche, Martens, 948

S.W.2d 317, 320 (Tex.App. — Dallas 1997 writ denied);

Dierschke v. Central Nat’l Branch of First Nat'l Bank at

Lubbock, 876 S.W.2d 377, 380 (Tex.App. — Austin 1994,

no writ). Under Texas law, a spendthrift provision generally

prohibits a beneficiary from anticipating or assigning his

interests in the trust. Jd. Spendthrift trusts protect the

beneficiary’s interest in the trust corpus and income from

claims of a beneficiary’s creditors simply while the corpus

and income remain in the trust and are held by the trustee.

Id. The trust code essentially codified Texas common law.

TEX.TRUST CODE ANN. § 112.035 (Vernon 1995); see

Burns, 948 S.W.2d at 321-2.°

While Texas law prohibits creditors from reaching the

beneficiary’s income from a spendthrift trust, it does not deny

that the beneficiary holds an “ownership interest” in the trust.

Burns, 948 S.W.2d at 322. In Burns, the Court reasoned that,

unless trust beneficiaries had an ownership interest in trust

assets, spendthrift provisions preventing the alienation of

such assets would be superfluous. Burns, 948 S.W.2d at 322.

Thus, while the trustee holds bare legal title and the right to

possession of spendthrift trust assets, it is “the beneficiary

[who] is considered the real owner of the property, holding

3. Of course, as explained above, such state law barriers to

creditors do not apply to the IRS.

27a

Appendix B

equitable or beneficial title.” Jd.; Hallmark v. Port/Cooper-T.

Smith Stevedoring Co., 907 S.W.2d 586, 589 (Tex.App. —

Corpus Christi 1995, no writ); Dierschke, 876 S.W.2d at 38].

In the present case, it is undisputed that paragraphs 5

and 26 of the trust in question create a spendthrift trust and

that Orr is the sole beneficiary. Consequently, under Texas

law, Orr had a vested equitable interest in the trust income

when the lien attached and when he filed for bankruptcy.

c. Federal Tax Liens Regularly Attach to Equitable

Interests

The Court must now determine precisely in what manner

a federal tax lien attaches to a beneficiary’s equitable interest .

in a spendthrift trust. As noted above, Congress intended

for liens to attach broadly under § 6321, see United States v.

National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct.

2919, 2923-24 (1985); Legget, 120 F.3d at 594, and,

accordingly, courts have regularly held that such liens attach

to imperfect property interests in general and to equitable

property interests in particular. For example, federal tax liens

attach to rights under a contract which are dependant upon

future performances. Seaboard Surety Co. v. United States,

306 F.2d 855 (9th Cir. 1962), to royalties which are

contingent on a third party’s performance, United States v.

Phillips, 715 F.Supp. 81 (S.D.N.Y. 1989), to equitable

interests in the form of realty contracts, Runkel v. United

States, 527 F.2d 914 (9th Cir. 1975), and to a beneficiary’s

equitable interest in a land trust. Jn re Cavanaugh, 153 B.R.

224, 228 (Bankr.N.D.III. 1993). As the Cavanaugh court

explained: “. . . the beneficial interest in a land trust is Clearly

DRa

Appendix B

property of the beneficiary of the land trust, not the property

of the land trustee. Thus, a federal tax lien against a

beneficiary of a land trust does not attach to the underlying

res in the land trust. However, a federal tax lien can attach

to the beneficiary’s beneficial interest in the land trust”

(citations omitted). Jd. at 228.

In the case relied on by the bankruptcy court (Dallas J,

supra), the Fifth Circuit addressed the issue of how a federal

tax lien attaches to an equitable interest in a spendthrift trust,

but that case is not determinative of the instant issue because

this case involves a debtor/beneficiary who has filed for

bankruptcy whereas Dallas ] merely involved a debtor/

beneficiary who continued to receive spendthrift trust

payments after the lien had attached. /d. In Dallas National

Bank, the debtor owed federal taxes and so a lien was

declared on her property, including her interest in the income

from a spendthrift trust. Dallas ], at 584. Her interest gave

her the right to receive non-discretionary payments of the

income generated by real property, and the government

wanted to satisfy its debt from those payments as they were

disbursed. /d. The Fifth Circuit held that, in accordance with

26 U.S.C. §§ 3670 and 3671, federal liens attach to property

acquired after creation of the lien. /d. at 585. Accordingly,

Dallas | stands for the limited and well-established

proposition that, when a federal tax lien attaches to a

spendthrift trust, the IRS may collect its debt from all future

disbursements of the trust income. /d. at 585.

Orr cites a phrase from Dallas ] which, when taken out

of context, appears to support his position that the lien cannot

attach to post-petition disbursements until the moment they

29a

Appendix B

are paid. The passage gives this impression because, for its

immediate purposes, the Fifth Circuit could treat the question

of property rights as a simple “either/or” proposition — either

the debtor has full property interests or no property interests

at all:

[the debtor] has no title to the corpus of any

property other than the profits after they have

accrued and have been passed to her account and

made available to her by the Trustee. In other

words, after the “net revenues” . . . accrue, or are

Set apart and become payable to her, such net

revenues then belong to her and are then subject

to the lien . . . and are available as an appropriate

res in a proceeding in rem by the Government to

have a lien for delinquent taxes declared and

enforced against such revenues. /d. at 585.

Although the Fifth Circuit did not need to decide the issue,

this passage appears to say that federal tax liens attach to a

beneficiary’s interest in spendthrift trust income only as those

income payments are made — in other words, these liens

could only attach on a payment-by-payment basis, as if the

beneficiary had no property interest in the income until the

moment in which she exercised full proprietary powers over

the income.

However, such an interpretation of Dallas ] conflicts

with fundamental principles of property law which allow for

a “bundle of rights” in any particular piece of property,

Terwiliger’s, 911 F.2d at 1178, and, further, the Fifth

Circuit’s subsequent rehearings of this case indicate that

30a

Appendix B

Dallas ] must be read in accordance with these fundamental

principles. In Dallas 2 and Dallas 3, the court confirms its

holding which is now an established tenet of tax law: that

future disbursements from a spendthrift trust are subject to

federal tax liens. Dallas 2, at 489; Dallas 3 at 469. In Dallas

2, the debtor asserted that Dallas ] gave the government

only the right to a single income disbursement, and not all

subsequent ones. Dallas 2 at 489. In explaining the nature

of the government’s right of recovery, the Court stated it

previously had held that:

the [debtor] had an interest in the trust property,

but not an interest that could be sold; but that her

share in the income after it accrued and was ready

to be paid over to her was fully her property and

could be subjected to the tax lien of the United

States, and that the lien could be fastened on the

future monthly income as it became payable to

the taxpayer. Jd. (emphasis added).

Thus, the phrasing of the modified opinion clarifies that the

debtor had a property interest prior to the disbursements.

Similarly, in Dallas 3, Judge Holmes states in his

concurrence that the debtor “is the equitable owner for life

of an undivided interest in Texas realty.” Dallas 3, at 469.

The rehearings confirm that the beneficiary of a

spendthrift trust has an equitable interest, and therefore it is

inaccurate to read Dallas ] as saying that such a beneficiary

has no interest until paid trust income. Also, these cases

confirm that the government can collect from all future

payments. What the Dallas cases are really discussing in

3la

Appendix B

the phrase cited by Orr is the ability of a lien to extend to

future payments and the mechanics of collection of those

payments, instead of discussing the way a lien attaches to

that equitable interest prior to bankruptcy proceedings.

Indeed, Judge Holmes states that Dallas 2 holds that the

debtor “had an interest in the trust property but not an interest

that could be sold.” Jd. (concurring, Holmes, J.), and that

the previous decision thereby was limiting the manner in

which the government could collect its debt: it could collect

the payments as they were made, but could not sell the

debtor’s equitable interest or the corpus itself.* Meanwhile,

the case does not reach the question of the effect of

bankruptcy proceedings on the government’s right to collect

those payments.

In sum, what can be gleaned from case law is that

(1) underlying policy considerations call for broad

attachment of federal tax liens to all sorts of property

interests, including equitable interests, (2) that federal tax

liens attach to an equitable interest in a spendthrift trust,

and (3) that such attachment presumes that IRS will be able

to collect all future disbursements. What cannot be answered

from reading Dallas and the forgoing cases is whether, when

a debtor files bankruptcy, the rule that liens attach only to

4. Indeed, the quoted passage from Dallas 2 could be read as

holding that the debtor had an interest prior to disbursement and

that the lien could not attach to such an interest. However, it is

unreasonable to read the case in that way because the court simply

was not deciding that issue: rather, it was deciding at what moment

the IRS could collect the money from her — i.e., at what moment

her property was “subjected” to the lien, and not at what moment

the lien attached to her property interest.

32a

Appendix B

prepetition property will somehow restrict the lien’s

attachment to only those disbursements made prepetition.

d. The Effect of Filing Bankruptcy on Federal Tax

Liens

To determine whether Orr’s filing for bankruptcy limits

the attachment of the liens to only prepetition payments from

the spendthrift trust, the Court must look to analogous

situations since there is not a case directly on point. In Orr’s

case, he had an equitable interest and the federal liens

attached to that interest. The question remains as to what (if

anything) happened to that lien’s attachment when Orr filed

bankruptcy. As explained below, the effect of filing

bankruptcy in such circumstances depends primarily on the

nature of the beneficiary’s prepetition property interest: was

the right to post-petition payments contingent, or was the

right unconditional?

In Jn re Conner, 27 F.3d 365 (9th Cir. 1994), the IRS

noticed a federal lien on the property of a retired supreme

court justice of the Alaska Supreme Court (“Conner”)

pursuant to § 6321. Jd. at 365. Two years later, Conner filed

for bankruptcy and was discharged of personal liability for

the tax debt. /d. at 366. The question in Conner was whether

the lien attached to his prepetition beneficial interest in his

retirement benefits such that the IRS could satisfy its debt

from his post-petition disbursements.

Like Orr, Conner sought a determination that his future

payments were “after-acquired property” and thus clear of

the lien. Jd. The Ninth Circuit noted that this question “turns

33a

Appendix B

upon the nature of the rights created by Alaska’s judicial

retirement system.” Jd. Finding that the right was not

contingent on any future occurrence or service, the Court

found that “this unqualified right to receive future payments

constituted “property” within the meaning of § 6321.” Jd.

The Court noted that it did not make any difference that

Conner himself had not made any contributions to the

benefits program. /d.. That is, the court recognized that the

relevant issue was simply that Conner’s right to the payments

was unqualified.

Several bankruptcy courts have also found this inquiry

to be the relevant one when determining precisely how

federal tax liens attach to prepetition property interests which

guarantee the beneficiary post-petition disbursements. For

example, in Jn re Wesche, 193 B.R. 76 (Bankr.M.D.Fla.

1996), the court was faced with the issue of whether federal

tax liens attach to the debtor’s post-petition civil service

retirement payments. That court found it “firmly established

in case law that a federal tax lien attaches to a then existing

right to receive property in the future.” See also, Tillery v.

United States, 204 B.R. 575 (Bankr.E.D.Okla. 1996); Wessel

v. United States, 161 B.R. 155 (Bankr.D.S.C.1993).

As with the retirement and civil service payments, Orr’s

right to the future payments was unqualified and guaranteed

at the time the lien was created. Further, as in Conner, it

does not matter that Orr made no contribution to the

spendthrift trust to earn these future disbursements. Nor does

it matter that Orr, like Conner, could not alienate his

beneficial interest. What matters here is that Orr had an

34a

Appendix B

unconditional right to the income payments for the rest of

his life.°

In sum, both the applicable statutes and the relevant case

law indicate that the § 6321 lien must enable the IRS to

collect the tax debt from all of Orr’s trust income which is

disbursed after April 30, 1996. First, under Texas law, the

present right to future spendthrift trust income constitutes

an equitable property interest. Second, in accordance with

Congress’ intent, § 6321 liens normally attach to a oad

scope of property interests, including equitable interests.

Third, when § 6321 liens attach to equitable property interests

which unconditionally guarantee future income, they remain

attached to that interest (and thus subject the future income

to collection), even when the owner of the interest receives

a personal discharge through bankruptcy proceedings. These

three principles necessarily support the conclusion that the

§ 6321 lien attached to Orr’s prepetition equitable interest

in Trust B and remained attached to the interest after he

received his personal discharge.

Finally, there are no extrinsic policy interests which

could make the Court deviate from the logical conclusion of

these principles. Orr suggests that policies implicit in both

state law and the IRS code should temper the lien’s

attachment to his property. First, with respect to his state

law arguments, since § 6321 liens are never subject to state

law barriers to collection, there is no reason to expect that

the state’s purposes in allowing for spendthrift trusts should

5. Notably, Orr also has testamentary power over the trust

corpus.

35a

Appendix B

somehow alter the way a § 6321 lien attaches to an equitable

interest. That is, it is irrelevant that state law aims to afford

settlors control over the corpus or to ensure the that a

beneficiary will not lose the guaranteed income.

Second, Orr’s contentions based on the Bankruptcy code

are equally unpersuasive. He essentially asserts that, since

the Bankruptcy code creates the 180-day window following

a debtor’s filing of bankruptcy during which new income is

included in the bankruptcy estate, the code intends to

guarantee that all of debtor’s income disbursed after that 180

days must be free of attachment — 1.€., all subsequent income

must be part of the debtor’s “fresh start.” Yet it is a matter

of settled precedent that, pursuant to § 6321 liens, the IRS

collects debts from income disbursed after that 180-day

window. Conner, 27 F.3d 365 ; Wesche, 193 B.R. 76; T. illery,

204 B.R. 575; Wessel, 161 B.R. 155. Orr’s contentions are

simply attempts to circumvent the critical issues which must

decided by looking to federal law on the nature of federal

tax liens and to state law on the nature of Orr’s property

interest.

V. CONCLUSION

For the forgoing reasons, the Court ORDERS that IRS’

lien shall attach to all income distributions made to Orr from

the spendthrift trust at issue (Trust B of the Unis Chapman

Eichelberger Chapman Ranch Trust I), including those

distributions made after April 30, 1996. Accordingly, the

Court hereby ORDERS that the bankruptcy court’s Order

Granting Summary Judgment to Orr is OVERRULED.

36a

Appendix B

SIGNED and ENTERED on this the 14 day of January

1998.

s/ Janis Graham Jack

JANIS GRAHAM JACK

UNITED STATES DISTRICT

JUDGE

37a

APPENDIX C — ORDER OF THE UNITED STATES

BANKRUPTCY COURT FOR THE SOUTHERN

DISTRICT OF TEXAS, CORPUS CHRISTI DIVISION,

GRANTING SUMMARY JUDGMENT DATED APRIL 4,

1997 AND ENTERED APRIL 7, 1997

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

CORPUS CHRISTI DIVISION

Case No. 95-22895-C-7

IN RE:

JOHN DAVIS ORR

DEBTOR

Adversary No. 96-2021-C

JOHN DAVIS ORR

PLAINTIFF

vs

INTERNAL REVENUE SERVICE

DEFENDANT

ORDER GRANTING SUMMARY JUDGMENT

On this day came on for consideration the Motion for

Summary Judgment and Incorporated Brief in support

38a

Appendix C

Thereof filed by John Davis Orr (“Orr’’), and the response

thereto, and Cross Motion for Summary Judgment of the

Internal Revenue Service. The Court, after reviewing the

pleadings and hearing the arguments of counsel, finds that

the facts were stipulated and Orr’s Motion is well taken and

should be granted. The case of United States v. Dallas Nat'l

Bank, 152 F.2d 582 (Sth Cir. 1985), applies here and supports

the contentions made by Orr.

It is therefore ORDERED that the Motion for Summary

Judgment of John Davis Orr be and it hereby is GRANTED.

It is further ORDERED that the liens of the Internal

Revenue Service shall attach to distributions made to Mr.

Orr from the Unis Chapman Eichelberger Chapman Ranch

Trust I during the period from November 1, 1995 to April

30, 1996, but that any and all subsequent distributions shall

not be subject to these liens.

It is further ORDERED that the Cross Motion of the

Internal Revenue Service is hereby DENIED.

Dated this 4 day of Apr., 1997.

s/ Richard S. Schmidt

RICHARD S. SCHMIDT

United States Bankruptcy Judge

39a

APPENDIX D — JOINT STIPULATION OF ISSUES

AND FACT DATED AND FILED DECEMBER 2, 1996

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

CORPUS CHRISTI DIVISION

CASE NO. 95-22895-C-7

(CHAPTER 7)

IN RE:

JOHN DAVIS ORR,

DEBTOR

ADV. NO. 96-2021-C

JOHN DAVIS ORR

VS.

INTERNAL REVENUE SERVICE

JOINT STIPULATION OF ISSUES AND FACT

The parties present the following stipulations to the

Court to resolve this case: .

STIPULATION OF ISSUES

1. Whether the Internal Revenue Service’s Notices of

Federal Tax Lien attached to any interest of Debtor in

the Unis Chapman Eichelberger Chapman Ranch Trust I

40a

Appendix D

to secure the payment of Debtor’s federal income tax

liabilities for 1984 through 1992?

STIPULATIONS OF FACT

John Orr filed for relief under Chapter 7 on November

1, 1995, and received his discharge on May 21, 1996.

Mr. Orr failed to file his federal income tax returns for

1984 through 1991. After examination, the IRS and Mr.

Orr agreed to the amount of tax and signed a Form

4549-CG, Income Tax Examination Changes, consenting

to assessment and collection on October 1, 1992. On

October 26, 1992, the Internal Revenue Service assessed

the taxes, penalties and interest reflecting the consent.

Despite notice and demand, Debtor’s federal income tax

liabilities for the taxes assessed on October 26, 1992 (to

the date of the petition) are as follows:

Year Amount

1984 $160,062.08

1985 63,126.91

1986 88,018.08

1987 79,723.98

1988 141,729.83

1989 29,435.00

1990 45,436.27

1991 23,842.35

4la

Appendix D

Notices of Federal Tax Liens were filed in the personal

and real property records of Nueces County, Texas for

the 1984 through 1991 income tax liabilities on January

11, 1993.

Mr. Orr also owed, federal income taxes on the date of

petition for 1992 in the amount of $2.69. Notices of

Federal Tax Liens were filed in the personal and real

property records of Nueces County, Texas for the 1992

income tax liability on December 28, 1993.

At the time the Notices of Federal Tax Liens were filed,

Mr. Orr was a resident of Nueces County, Texas.

Mr. Orr was born on May 20, 1951. At the time of the

filing of the petition on November 1, 1995, he was

44 years old.

On April 24, 1965, Unis Chapman Eichelberger,

Debtor’s grandmother, executed a document entitled

“Unis Chapman Eichelberger Chapman Ranch Trusts”.

The documents will also be referred to as the “Trust

Document”. A true and correct copy of the Trust

Document is attached.

Debtor, John Davis Orr, is the named principal

beneficiary of the Unis Chapman Eichelberger Chapman

Ranch Trust I described in the Trust Document. Unis

Chapman Eichelberger Chapman Ranch Trust I will

hereinafter be referred to as the “Trust”, unless otherwise

indicated.

10.

11.

12.

13.

14.

15.

42a

Appendix D

The terms of the Trust Document have not been changed

since inception.

All property used to establish the Trust or donated to

the Trust was conveyed before 1980.

Both Unis Chapman Eichelberger and H. L. Eichelberger

are deceased.

Mercantile Bank, N.A. and John Davis Orr are co-

trustees of the Chapman Ranch Trust I.

The following recitations of provisions of the Trust

document is for the convenience of the Court. The parties

believe that the following paragraphs will assist the

Court but do no intend to bind either party to only

referring to the paragraphs reprinted below in either

parties argument.

Paragraph | reads in part:

I hereby establish three separate trusts, referred

to here as the Unis Eichelberger Chapman Ranch

Trusts Numbers I, II and III, respectively. For

convenience, John Davis Orr is referred to here

as the principle beneficiary of Trust I ... even

though at times and under certain conditions, such

persons are not entitled to the principal benefits

from such trusts ... An undivided one-third

(1/3) interest in the property conveyed and

assigned by me to my trustee is conveyed to him

in his capacity as trustee of each of such trusts,

respectively.

43a

Appendix D

16. Paragraph 2 reads in part:

Upon additional property hereafter being acquired

by any of the trusts created in paragraph one, each

trust shall be divided into two shares, referred to

here as Share A and Share B. The division shall

be made in the following manner:

(a) Such property shall be allocated to Share A

and Share B as the will, deed or gift or other

instruments making the transfer shall provide.

If the instrument making such transfer does

not provide for the allocation of such property

between Share A and Share B, such property

shall be added to the principle of Share A and

Share B on the following basis.

(1) Ifany of the trusts hereafter acquired any

land out of the Chapman Ranch, Nueces

County, Texas, such property shall be a

portion of Share A...

(2) If any of the trusts hereafter acquire any

additional property other than that

defined as a portion of Share A above,

such property shall be a portion of Share

B.

(b) All of the net income of each trust shall,

except to the extent it is distributed in

accordance with the further provisions hereof,

be considered a portion of Share B. The net

44a

Appendix D

income of Share A, shall to the extent not

distributed as hereafter provided, be added to

and considered a portion of Share B.

17. Paragraph 5 reads in part:

Beginning one year after the deaths of Unis

Chapman Eichelberger and H. L. Eichelberger

have occurred, the following distributions shall

be made:

(c) When a principal beneficiary of a trust

reaches the age of forty (40) years, the trustee

shall distribute to him all then remaining

assets of Share B of the trust of which he is

the principal beneficiary, free of trust.

18. Paragraph 5(e) reads in part:

(e) At all times when the principal beneficiary

of a trust is living, over the age of thirty (30)

years and competent, all of the net income of

the trust shall be distributed to the principal

beneficiary annually or at more frequent

intervals.

19. Paragraph 6 reads in part:

The Term of each of the trusts established herein

shall last until ... for the life of the principal

beneficiary of the trust ... At the termination of

each trust, all of the then remaining assets of such

45a

Appendix D

trust shall be distributed as the ... principal

beneficiary shall have appointed . . . Such power

of appointment may in no event be exercised

directly or indirectly in favor of the person having

such power hereunder, nor directly or indirectly

in favor of the estate of any such person, any

creditor of any such person or any creditor of his

estate, or for the purpose of meeting any legal

obligation of any such person.

20. Paragraph 7 reads in part:

If the person having a power of appointment under

the preceding paragraph should fail to fully

exercise it, or should release or relinquish such

power of appointment without having fully

exercised it, then such property with respect to

which the power of appointment has been

exercised shall be distributed to the then living

decedents of the principal beneficiary ... If no

such persons are then living I direct my trustee to

distribute such property among such corporations

. organized and operated for the purpose of

furthering education . . . of needy children.

21. Paragraph 11 reads:

Notwithstanding any other provision of this

instrument, no trustee shall have the power to

appoint or apply trust funds in favor of himself

individually; nor to appoint or apply funds in favor

of his estate, his creditors, or the creditors of his

46a

Appendix D

estate; nor to pay, satisfy, or discharge any legal

obligation of the Grantor or of a trustee

individually, nor for the pecuniary benefit of any

such person. If a beneficiary should hereafter

serve as trustee or as a co-trustee, the foregoing

provisions of this paragraph shall not effect his

rights as a beneficiary; however, nor shall they

limit his duties as a trustee to make the

distributions provided for herein.

22. Paragraph 21 reads in part:

The trustee shall distinguish between income and

principal of each trust ... in accordance with

reasonable trust administration.

23. Paragraph 26 reads:

No trust assets or income shall be liable for the

debts of any beneficiary, not subject to seizure

under any judicial writ of proceeding. No

beneficiary shall have the power to give, grant,

sell, assign, transfer, mortgage, pledge, encumber,

or in any manner to anticipate or dispose of the

interest in the trust estate or its income or to

dispose of any trust property until it has been

actually delivered to him in accordance with the

terms hereof, except that the foregoing shall in

no manner restrict the authority otherwise granted

to any trustee who is a beneficiary to distribute

the trust property as provided herein.

24.

25.

26.

af.

47a

Appendix D

The parties agree that Mr. Orr can be granted a personal

discharge from his federal tax liability for 1984 through

1991 pursuant to 11 U.S.C. § 727. The parties agree that

Mr. Orr cannot be granted a personal discharge of his

federal income tax liability for 1992.

The parties agree that the Federal Tax Liens attached to

the property or interest in property of Mr. Orr in

existence at the time of the filing of this bankruptcy and

the Federal Tax Liens are not dischargeable as to the

property to which they attached. This agreement

acknowledges that Mr. Orr has assets totalling $3,797.00

listed on his bankruptcy schedules to which the Federal

Tax Liens attached. This agreement does not include the

stipulation of whether or not the Federal Tax Lines

attached or attaches to any interest of Mr. Orr in the

Unis Chapman Eichelberger Chapman Ranch Trust I or

its assets. Nor does this agreement include any

stipulation that Mr. Orr has or had an interest in the Unis

Chapman Eichelberger Chapman Ranch Trust I or its

assets.

Mr. Orr has received no distributions from the Trust since

November 1, 1995.

When the Debtor filed bankruptcy, he owned the

following property:

2.22 acres of land, more or less, out of and a part of

Section D, Laureles Farm Tracts

1983 Chevrolet Blazer

Clothes

48a

Appendix D

TV

VCR

Radio

Bedroom Set

Dressers (3)

Desks (2)

Couches (2)

Typewriter

Dining Room Table & Chairs

Bunk Beds

Nightstands

Computer Table

Book Shelf

Chair & Ottoman

Breakfast Table

Chairs (2) & Table

End Tables (2)

Lamps

Cordless Phone System

Caller ID Phone

Answering Machine

Jewelry — Watch

49a

Appendix D

AGREED AS TO FORM AND CONTENT:

PIPITONE, SCHAUER, SIMANK &

LEDBETTER, P.C.

MT 159

615 N. Upper Broadway, Suite 2000

Corpus Christi, Texas 78477

(512) 884-4200

(512) 884-7444 (FAX)

By: s/ Ronald A. Simank

Ronald A. Simank

State Bar No. 18359400

Federal Admissions No. 0359

ATTORNEYS FOR DEBTOR,

JOHN DAVIS ORR

s/ Joseph A. Pitzinger, III

JOSEPH A. PITZINGER, III

Attorney, Tax Division

State Bar No. 16055800

Department of Justice

Maxus Energy Tower

717 N. Harwood, Suite 400

Dallas, Texas 75201

(214) 880-9728

(214) 880-9741 (FAX)

ATTORNEYS FOR INTERNAL REVENUE SERVICE

50a

APPENDIX E — ORDER OF THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

DENYING PETITION FOR REHEARING DATED

AND FILED JANUARY 10, 2000

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 98-40170

In The Matter Of: JOHN DAVIS ORR

Debtor

INTERNAL REVENUE SERVICE

Appellee

Vv.

JOHN DAVIS ORR

Appellant

Appeal from the United States District Court for the

Southern District of Texas, Corpus Christi

ON PETITION FOR REHEARING I .. BANC

(Opinion 07/12/99, 5 Cir. ,_ «11 F.3d __)

Before SMITH, DeMOSS, and STEWART, Circuit Judges.

Sla

Appendix E

PER CURIAM:

(“) Treating the Petition for Rehearing En Banc as a Petition

for Panel Rehearing, the Petition for Panel Rehearing

is DENIED. No member of the panel nor judge in regular

active service of the court having requested that the court

be polled on Rehearing En Banc (Fep. R. App. P. and

STH Cir. R. 35), the Petition for Rehearing En Banc is

DENIED.

ENTERED FOR THE COURT:

s/ Harold R. DeMoss, Jr.

United States Circuit Judge