No. 99-597
In the Supreme Court of the United States
STATE OF MINNESOTA, DEPARTMENT OF REVENUE,
PETITIONER
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
SETH P. WAXMAN
Solicitor General
Counsel of Record
LORETTA C. ARGRETT
Assistant Attorney General
BRUCE R. ELLISEN
RANDOLPH L. HUTTER
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTION PRESENTED
Whether a state tax lien took priority over a federal tax lien that arose
before the state taxes were administratively determined and assessed.
In the Supreme Court of the United States
No. 99-597
STATE OF MINNESOTA, DEPARTMENT OF REVENUE,
PETITIONER
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 1-15) is reported at 184
F.3d 725. The opinion of the district court (Pet. App. 16-21) is unreported.
JURISDICTION
The judgment of the court of appeals was entered on July 7, 1999. The petition
for a writ of certiorari was filed on October 5, 1999. The jurisdiction
of this Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. On June 2, 1992, a taxpayer named Prime Factors Communications, Inc.,
filed federal and state employment tax returns for all four quarters of
1991 and the first quarter of 1992. The taxpayer did not, however, pay the
taxes reported on these federal and state returns. The Internal Revenue
Service assessed the unpaid federal taxes for those quarters on August 3
and August 10, 1992. On the dates of these assessments, federal tax liens
to secure the payment of those taxes arose upon "all property and rights
to property" belonging to the taxpayer. 26 U.S.C. 6321. See 26 U.S.C.
6322. On January 14, 1993, the Internal Revenue Service filed a notice of
these federal tax liens which reflected that a total federal tax liability
of $248,658.33 was then due from the taxpayer. Pet. App. 3.
The Minnesota Department of Revenue (petitioner) processed the taxpayer's
state employment tax returns for these same quarters and entered the taxpayer's
liabilities into its computer records on August 20, 1992. That was ten days
after the Internal Revenue Service assessed the federal tax liabilities
and the federal tax lien attached to all of the taxpayer's property by operation
of federal law. Petitioner determined that the taxpayer's state tax liability
for the periods at issue totaled $14,378.32. Pet. App. 3.
On June 21, 1996, certain property that belonged to the taxpayer was sold
to a third party. Prior to the closing of this sale, the Internal Revenue
Service served a notice of levy directing the closing agent to disburse
any funds received on behalf of the taxpayer to the federal government.
Pursuant to that levy, the Internal Revenue Service received $14,579.22
of the sale proceeds, which it applied against the taxpayer's obligations.
Pet. App. 3.
2. The Minnesota Department of Revenue then brought this wrongful levy action
against the United States under 26 U.S.C. 7426, alleging that the state
tax lien for the periods at issue was entitled to priority over the federal
liens. Petitioner contended that a lien for state taxes arises on the date
of the assessment of the tax (under Minn. Stat. § 270.69(1) (West 1992))
and that state taxes are deemed automatically assessed under state law on
the later of the date the return is filed or the date the return is due
(under Minn. Stat. § 270.65 (West 1992)). Petitioner claimed that its
liens therefore arose on June 2, 1992, the date the returns were filed,
and were entitled to priority over the federal liens which arose on August
3 and August 10, 1992. Petitioner relied on Cannon Valley Woodwork, Inc.
v. Malton Construction Co., 866 F. Supp. 1248 (D. Minn. 1994), in which
the district court held on similar facts that Minnesota tax liens held priority
over the tax liens of the United States (Pet. App. 4).
The United States argued that petitioner's lien could not have been perfected
against the federal liens until petitioner administratively processed the
taxpayer's returns on August 20, 1992. Because the federal liens arose before
that date, the United States contended that the federal liens held priority
as first in time. The United States noted that in In re Priest, 712 F.2d
1326 (1983), modified, 725 F.2d 477 (1984), the Ninth Circuit held that
the "mere receipt" of a tax return under a California statutory
scheme similar to Minn. Stat. §§ 270.65 and 270.69(1) (West 1992)
was insufficient "to establish a lien that is capable of taking priority
over a federal lien." 712 F.2d at 1329.
The district court granted summary judgment to petitioner (Pet. App. 16-21).
The court concluded that the state tax lien was perfected upon the mere
filing of the taxpayer's returns and was therefore entitled to priority
as first in time (id. at 19-20).
3. The court of appeals reversed (Pet. App. 1-15). The court held that the
state tax liens were not perfected on the date the tax returns were filed
because the Minnesota Commissioner of Revenue is required by state law to
take administrative steps to establish the amount of the taxpayer's liability
after the return is filed (id. at 10-11). The court concluded that petitioner's
lien was not perfected against the federal liens because petitioner is required
to "take some administrative action to acknowledge formally a liability
before the amount of the lien can be deemed 'established' and the lien perfected"
(id. at 11).
ARGUMENT
The decision of the court of appeals is correct and does not conflict with
any decision of this Court or any other court of appeals. Further review
is therefore not warranted.
1. Federal law governs the relative priority of the federal tax lien against
claims asserted under state law by other creditors of a delinquent taxpayer.
Aquilino v. United States, 363 U.S. 509, 513-514 (1960). Absent any federal
statute to the contrary, the priority of the federal tax lien in competition
with a state-created lien is governed by the common-law rule that "the
first in time is the first in right." United States v. McDermott, 507
U.S. 447, 449 (1993). A federal standard governs the determination whether
a competing state lien is "first in time" for this purpose: a
state-created lien is perfected against the federal lien only when there
is "nothing more to be done to have a choate lien-when the identity
of the lienor, the property subject to the lien, and the amount of the lien
are established." United States v. City of New Britain, 347 U.S. 81,
84 (1954). The state lien must be "certain as to amount, identity of
the lienor, [and] the property subject thereto" to be perfected against
the federal lien. Id. at 86. A state tax lien satisfies this federal standard
of perfection only when the "assessment is given the force of a judgment,
and if the amount assessed is not paid when due, administrative officials
may seize the debtor's property to satisfy the debt." United States
v. Vermont, 377 U.S. 351, 359 (1964) (quoting Bull v. United States, 295
U.S. 247, 260 (1935)).
The lien claimed by petitioner in this case did not satisfy these federal
standards and was not perfected against the federal liens on the date the
federal liens arose. The court of appeals therefore correctly concluded
(Pet. App. 15) that the federal liens were entitled to priority as "first
in time" in this case.
a. Under Minnesota law, taxes shown as due on a return, together with interest
and penalties, become a lien upon all of the taxpayer's property within
the State "from and after the date of assessment of the tax."
Minn. Stat. § 270.69(1) (West 1992). Under state law, "the term
'date of assessment' means the date a return was filed or the date a return
should have been filed, whichever is later." § 270.65. For purposes
of state law, petitioner's tax lien thus arose on the date that the taxpayer
filed its returns (June 2, 1992)-a date that was two months before the federal
taxes were assessed and the federal tax liens arose under 26 U.S.C. 6321.
It is well established, however, that state law does not control the priority
of the federal lien and that the "characterization of a lien by the
State is not, of course, conclusive against the Federal Government."
City of New Britain, 347 U.S. at 84. See also United States v. Security
Trust & Savings Bank of San Diego, 340 U.S. 47, 49-50 (1950); Michigan
v. United States, 317 U.S. 338, 339-340 (1943). "Local statutory provisions
that fix a lien date prior to [the time the lien becomes perfected under
the federal standard] must be ignored for the purpose of resolving the federal-state
priority question." William T. Plumb, Jr., Federal Tax Liens 180 (3d
ed. 1972)). "Otherwise, a State could affect the standing of federal
liens, contrary to the established doctrine, simply by causing an inchoate
lien to attach at some arbitrary time even before the amount of the tax,
assessment, etc., is determined." City of New Britain, 347 U.S. at
86. A Minnesota tax lien is thus not perfected against the federal lien
on the date a taxpayer files a return simply because Minnesota regards that
as the "date of assessment" for purposes of state law. The court
must still determine whether the state lien satisfies the federal standards
of perfection on that date. Pet. App. 9.
The court of appeals correctly held that petitioner's lien did not satisfy
the established federal standards. The state lien was not perfected under
the federal standards on the date that the return was filed because, on
that date, (i) the amount of the lien had not been determined (City of New
Britain, 347 U.S. at 86) and (ii) the lien was not summarily enforceable
in the absence of an administrative determination of that amount (Vermont,
377 U.S. at 359).
Minnesota law requires the state tax commissioner to "make determinations,
corrections, and assessments with respect to state taxes, including interest,
ad- ditions to taxes, and assessable penalties." Minn. Stat. §
289A.35 (West 1992). After a return is filed, the state commissioner is
required by state law to examine the return and make a determination of
the taxpayer's liability. Ibid. As the court of appeals correctly held,
it is "[b]eyond doubt" that "it is this determination that
formally establishes the amount of the taxpayer's liability" under
state law (Pet. App. 10).
Minnesota law also specifies that, when such a tax "is not paid within
the time specified for payment, a penalty must be added to the amount required
to be shown as tax." Minn. Stat. § 289A.60 (West 1992). When,
as in this case, withholding taxes are not timely paid, state law thus requires
the state commissioner to add a penalty to the liability. This penalty,
along with any interest due on the unpaid liability, is not computed until
the tax return is administratively processed. Cannon Valley Woodwork, Inc.
v. Malton Constr. Co., 866 F. Supp. 1248, 1252 (D. Minn. 1994). As a result,
it cannot be said, at the time the taxpayer filed its returns, that there
was "nothing more to be done" (City of New Britain, 347 U.S. at
84) to determine the amount of the lien and to perfect petitioner's lien
under the established federal standard. On the date that the federal liens
arose (August 3 and August 10, 1992), the state returns still had to be
examined, the state tax liability still had to be determined by the state
commissioner, and the delinquency penalty and interest had to be computed
and added to the amount of the state tax. The federal liens had priority
because, on the dates that they arose, the amount of the state lien was
neither "certain" nor "established" by an administrative
determination of liability. City of New Britain, 347 U.S. at 84, 86.
Contrary to petitioner's claim (Pet. 6-9), the state lien was not summarily
enforceable on the dates the federal liens arose. Under Minnesota law, "notice
and demand for payment of the amount due" must be sent to a taxpayer
before the State may summarily levy upon a taxpayer's property. Minn. Stat.
§ 270.70(2)(a) (West 1992). As the court of appeals explained (Pet.
App. 11), notice and demand for payment "of the amount due" could
not be sent until the state commissioner examined the taxpayer's returns,
determined the taxpayer's liabilities, calculated the required penalty for
non-payment and interest and added these amounts to the unpaid tax. These
were not merely "ministerial acts"; they were instead "substantial
contingencies" that had to be resolved through an administrative determination
of the amount of the taxpayer's liability "before the state tax liens
could be enforced" and before any "levy c[ould] be made"
under state law (ibid.).*
Petitioner errs in asserting that this interpretation of Minnesota law "mandate[s]
the examination and correction of literally millions of tax returns"
(Pet. 12). Minnesota law parallels federal law in requiring an official
determination of tax liabilities; but neither state nor federal law requires
a formal audit for this purpose. Under the state tax practice (like the
federal practice), the determination of liability is made by an administrative
processing of the return. The state tax commissioner made precisely such
an administrative determination of the taxpayer's liability in this case-a
determination that was completed on August 20, 1992, shortly after the federal
tax lien arose upon the assessment of the unpaid federal taxes (Pet. App.
3).
By processing the [tax returns], Minnesota took administrative action that
established that the taxpayer was liable to the State of Minnesota for unpaid
taxes, including the amount of the unpaid taxes and the amount of any penalty
and interest.
Cannon Valley Woodwork, Inc. v. Malton Constr. Co., 866 F. Supp. at 1252.
As the court of appeals held, it is only upon the completion of that state
administrative process that the federal requirement that the amount of the
lien be "established" and "certain" is fulfilled (Pet.
App. 10-11).
b. Petitioner contends that the court of appeals "ignores * * * reality"
(Pet. 8) in requiring the lien amount to be certain, because interest on
a tax liability continues to accrue. Petitioner further argues that its
liens were, in any event, perfected to the extent of the principal amount
of tax due because, upon filing its returns, the taxpayer "made a disclosure
and declaration as to the tax it owed" and the amount of that liability
was not thereafter changed by the commissioner (ibid.).
These contentions are unavailing. The decision of the court of appeals does
not negate the principle that a tax return constitutes a declaration by
the taxpayer of its asserted liability. Federal law nonetheless requires
that "the amount of the lien [be] established" before the state
lien can be perfected against the federal tax lien. City of New Britain,
347 U.S. at 86. Under Minnesota law, the amount of the lien cannot be determined,
and the lien cannot be enforced, until the return is administratively processed
and notice of the amount due is issued to the taxpayer (Pet. App. 10-11).
Once the lien is thus perfected, interest accrues on that amount by operation
of law, and the sort of constant amendment of the lien postulated by petitioner
is not required. See, e.g., In re Bay State York Co., 204 B.R. 277, 282
(Bankr. D. Mass. 1996); Middlesex Sav. Bank v. Johnson, 777 F. Supp. 1024,
1026 n.3 (D. Mass. 1991).
Contrary to petitioner's claim, the decision below does not render the provision
of state law that defines "the 'assessment' as the date of filing *
* * utterly superfluous" (Pet. 13). With respect to competing claims
under state law, the state statute would presumably govern. The priority
of the federal lien, however, is not governed by state law, and the "characterization
of a lien by the State is not, of course, conclusive against the Federal
Government." City of New Britain, 347 U.S. at 84.
2. There is no conflict among the courts of appeals that have interpreted
and applied provisions of state law similar to those involved in this case.
In the present case, the court of appeals (Pet. App. 11-12) expressly agreed
with the conclusion of the Ninth Circuit, applying similar provisions of
California law, that a state lien "cannot arise prior to the taking
of any administrative steps to establish the lien" and that "[t]he
mere receipt of a delinquent State tax return * * * is too vague and indefinite
[a standard by which to establish a lien that is capable of taking priority
over a federal lien]." In re Priest, 712 F.2d at 1329, citing City
of New Britain, 347 U.S. at 86. Decisions involving similar state laws in
other circuits have reached this same conclusion. See, e.g., Baybank Middlesex
v. Electronic Fabricators, Inc., 751 F. Supp. 304, 310 (D. Mass. 1990) ("in
order for the amount of the [State's] lien to be established, there must
be 'some activity by the State to fix the taxpayer's liability'") (quoting
In re Priest, 712 F.2d at 1328); Brown v. Maryland, 699 F. Supp. 1149 (D.
Md. 1987) (the filing of returns is insufficient to create a perfected lien
under the federal standard even though, for purposes of state law, the state
lien arose upon the due date for such returns), aff'd, 862 F.2d 869 (4th
Cir. 1988) (Table). Review by this Court is therefore not warranted in this
case.
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
LORETTA C. ARGRETT
Assistant Attorney General
BRUCE R. ELLISEN
RANDOLPH L. HUTTER
Attorneys
DECEMBER 1999
* Petitioner errs in asserting that its tax liens were "even more readily
'summarily enforceable' than the tax lien that this Court validated in Vermont"
(Pet. 7). The State's lien in Vermont arose "at the time the assessment
and demand [were] made by the commissioner of taxes" (United States
v. Vermont, 317 F.2d 446, 447 (2d Cir. 1963), aff'd, 377 U.S. 351 (1964)),
and "Vermont * * * could have enforced its lien * * * either by a civil
action in the courts or by direct seizure and public sale" (id. at
448). Under Minnesota law, petitioner could not lawfully have seized the
taxpayer's property on the day the taxpayer filed its tax returns (Pet.
App. 11), for no administrative determination leading to a notice and demand
for payment of the amount due had been made (ibid.). The state lien was
thus not summarily enforceable prior to the dates on which the federal liens
arose.