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UNITED STATES v. MCCOMBS-ELLISON

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK


March 29, 1993

UNITED STATES OF AMERICA, Plaintiff,
v.
NANCY MCCOMBS-ELLISON, JON ELLISON, COLUMBIA BANKING SAVING & LOAN ASSOCIATION, ROBERT J. MCCOMBS, STATE OF NEW YORK, KELLY M. MCCOMBS and MARY MCCOMBS, Defendants.

FISHER

The opinion of the court was delivered by: KENNETH R. FISHER

VERDICT AND OPINION

I. Background

 The complaint in this action was filed on November 24, 1987, by the United States of America against Nancy McCombs-Ellison, Jon Ellison, Columbia Banking Saving & Loan Association ("Columbia Banking"), Robert J. McCombs, State of New York, Kelly M. McCombs and Mary McCombs. *fn1" The United States asks the court to:

 

(1) Declare the federal tax liens assessed against all property and rights to property of defendant Nancy McCombs-Ellison valid;

 

(2) Enter judgment for the plaintiff against defendant Nancy McCombs-Ellison in the amount of $ 30,035.07 plus interest from the date of assessment;

 

(3) Set aside a transfer to defendants Kelly and Mary McCombs of property located at 74 Meadow Creek Lane, Rochester, New York, as fraudulent.

 

(4) Order that the federal tax liens on the property, located at 74 Meadow Creek Lane, Rochester, New York, be foreclosed and the property sold free and clear of titles, liens, claims or interests of any defendants.

 This matter was tried before me on March 19, 1992, pursuant to 28 U.S.C. § 636(c) upon consent of the parties and by order of District Court Judge David G. Larimer, dated February 28, 1992. Immediately prior to trial, the government filed a trial brief with the court on March 17, 1992, in which it set forth its position in the case.

 At trial, the government, relying on the arguments presented in its brief, argued that the filing of the assessments established a prima facie finding of liability on the part of the defendants because of the presumption of correctness of the assessments. The government then argued that

 

as a tax assessment is presumed to be correct, a taxpayer who has been assessed under [26 U.S.C.] Section 6672 is presumed to be both "responsible" and "willful" and has the burden of proving, by a preponderance of the evidence, that she does not owe the tax claimed by the government.

 Government's Trial Brief, pp.3-4. The government further argued that a lien in the amount of $ 26,925.79 was created on June 14, 1982, the date of assessment, which lien immediately attached to the property located at 74 Meadow Creek Lane, then owned by Ms. McCombs-Ellison. A Certificate of Assessment and Penalty was filed in the Monroe County Clerk's Office on September 22, 1982.

 The government further argued that the facts also established a presumption of insolvency, a presumption which established prima facie that Ms. McCombs-Ellison fraudulently conveyed the 74 Meadow Creek Lane property to her daughters, Kelly and Mary McCombs, on September 15, 1982. In its case-in-chief, the government introduced 23 documents into evidence. After the first 22 of these exhibits were admitted into evidence, the government rested without presenting any witnesses. *fn2"

 Defendants Ms. McCombs-Ellison and Robert McCombs immediately moved for summary judgment on the basis that the government failed to establish a prima facie case of liability on the part of the defendants. Defendants Kelly and Mary McCombs moved to dismiss the complaint, on the grounds that the government failed to prove all the elements necessary to establish a prima facie case of fraudulent conveyance. *fn3" For the reasons set forth below, these motions are denied.

 The following is my opinion and memorandum of decision finding the facts specifically in accordance with Fed. R. Civ. P. 52(a).

 II. Findings of Fact

 A. Spinnaker Pole Corporation and Port and Starboard

 The Spinnaker Pole Corporation ("Spinnaker Pole") was incorporated in May, 1979, by Nancy McCombs-Ellison and Jon Ellison. Ms. McCombs-Ellison acted as President of the corporation, and owned 60% of the stock. Jon Ellison owned 40% of the stock.

 Ms. McCombs-Ellison and Mr. Ellison were also partners of an entity called "The Port and Starboard," ("Port and "Starboard") of which they held 60% and 40% interests, respectively. On May 14, 1979, Port and Starboard purchased the Edgewater Restaurant ("Edgewater") for $ 235,000.00. To pay for the restaurant, Port and Starboard gave Edgewater a mortgage in the amount of $ 185,000.00. Ms. McCombs-Ellison supplied the remaining $ 50,000.00 by taking out a mortgage for that amount on her house at 74 Meadow Creek Lane, Rochester, New York. Transcript of Trial Proceedings, March 19, 1992, at p.35, lines 23-28 ("Transcript"). The restaurant was then leased to and operated by Spinnaker Pole, for a monthly rental payment of $ 2,724.75 to Port and Starboard. Government Exhibit 18, P 17.

 Business at the Edgewater did well for a while. There came a time, however, when Port and Starboard was unable to make its monthly mortgage payments to Edgewater. Edgewater filed a foreclosure action against Port and Starboard on April 10, 1981. Government Exhibit 6. Port and Starboard then filed for bankruptcy under Chapter 11 on April 24, 1981. Government Exhibit 7, Complaint, P 1. Spinnaker Pole also filed for bankruptcy in September, 1981.

 It is undisputed among the parties that Spinnaker Pole

 

incurred federal withholding and unemployment tax liabilities for the tax periods beginning October 1, 1979 through September 30, 1981 in the amount of $ 26,925.79 which were assessed on June 14, 1982. A Federal Tax Lien for these assessed liabilities was filed in the Monroe County Clerk's Office on September 22, 1982. Spinnaker Pole incurred additional federal withholding and unemployment tax liabilities for the tax periods beginning October 1, 1981 through June 30, 1982 in the amount of $ 3,091.28 which were assessed on April 16, 1984. A Federal Tax Lien for these assessed liabilities was filed in the Monroe County Clerk's Office on June 21, 1984.

 Government's Trial Brief, pp.1-2.

 The government now seeks to reduce these liens, totalling $ 30,035.07, to judgment and foreclose them against property previously owned by Ms. McCombs-Ellison, located at 74 Meadow Creek Lane, Rochester, New York.

 B. 74 Meadow Creek Lane, Rochester, New York

 The property at 74 Meadow Creek Lane was originally purchased by Robert J. McCombs and his former wife, Ms. McCombs-Ellison, on February 16, 1962. The McCombs financed the property by giving a $ 30,000.00 mortgage to Columbia Banking, Saving and Loan Association. After the McCombs' divorced, Mr. McCombs conveyed his interest in the property to Ms. McCombs-Ellison by quit claim deed dated May 5, 1978. On September 15, 1982, Ms. McCombs-Ellison conveyed the property to her daughters, Kelly M. McCombs and Mary McCombs, by warranty deed, which was recorded in the Monroe County Clerk's Office on September 16, 1982. As consideration for the property, the daughters agreed to assume the unpaid principal remaining on the mortgage loan to Columbia Banking in the amount of $ 10,469.29. They also took the property subject to the remainder of Ms. McCombs-Ellison's $ 50,000.00 Marine Midland Bank mortgage, which was then $ 47,328.65. No other consideration is recited in the deed. On January 18, 1985, Kelly and Mary McCombs obtained a $ 53,000.00 mortgage on the 74 Meadow Creek Lane property from their father, Robert J. McCombs. This mortgage was recorded in the Monroe County Clerk's Office on January 24, 1985.

 III. Conclusions of Law

 A. Jurisdiction

 This court has subject matter jurisdiction over this case pursuant to 28 U.S.C. §§ 1340 *fn4" and 1345, *fn5" and 26 U.S.C. § 7402(a). *fn6" This action was properly commenced by the United States pursuant to 26 U.S.C. § 7401 *fn7" and 7403(a). *fn8"

 B. One Hundred Percent Penalty Assessment (26 U.S.C. § 6672)

 The Internal Revenue Code (26 U.S.C.) requires employers to deduct, withhold and pay over to the federal government, federal income and social security taxes from their employees' wages. 26 U.S.C. §§ 3402(1) & 3102(a)(1); Carter v. United States, 717 F. Supp. 188, 190 (S.D.N.Y. 1989). The amounts so withheld from the employees' paychecks "are held by the employers as a special trust fund for the benefit of the United States . . ." Id., 717 F. Supp. at 191; 26 U.S.C. § 7501(a). *fn9" The withheld amounts are commonly referred to as "trust fund taxes," Slodov v. United States, 436 U.S. 238, 243, 98 S. Ct. 1778, 1783, 56 L. Ed. 2d 251 (1978), and the trust is created "at the moment the relevant payments" to the employees are made. Begier v. I.R.S., 496 U.S. 53, 110 S. Ct. 2258, 2264, 110 L. Ed. 2d 46 (1990). "As the employer withholds taxes from employees' wages a contingent liability is created," which liability "becomes fixed on the due date." Kalb v. United States, 505 F.2d 506, 509 (2d Cir. 1974), cert. denied, 421 U.S. 979, 44 L. Ed. 2d 471, 95 S. Ct. 1981 (1975).

 "Should employers fail to pay trust fund taxes, the government may collect an equivalent sum directly from the officers or employees of the employer who are responsible for collecting the tax." United States v. Energy Resources Co., Inc., 495 U.S. 545, 110 S. Ct. 2139, 2141, 109 L. Ed. 2d 580 (1990); 26 U.S.C. § 6672. *fn10" A penalty imposed pursuant to 26 U.S.C. § 6672 "is itself referred to as a 'tax' in Section 6671." Mazo v. United States, 591 F.2d 1151, 1153 (5th Cir. 1979), cert. denied, 444 U.S. 842 (1979); 26 U.S.C. § 6671(a). See Monday v. United States, 421 F.2d 1210, 1216 (7th Cir. 1970), cert. denied, 400 U.S. 821, 27 L. Ed. 2d 48, 91 S. Ct. 38 (1970) ("Despite its denomination as a 'penalty' assessment, the statutory liability imposed by Section 6672 is essentially civil in nature"); Kalb v. United States, 505 F.2d at 510 (same).

 A tax assessment, made pursuant to § 6672, is presumed correct. Curley v. United States, 791 F. Supp. 52, 56 (E.D.N.Y. 1992). The assessment thus "creates a prima facie case of liability." Carter v. United States, 717 F. Supp. at 191; Schwinger v. United States, 652 F. Supp. 464, 466 (E.D.N.Y. 1987). Because "a Certificate [of Assessment] is presumptive proof of a valid assessment," United States v. Red Stripe, Inc., 792 F. Supp. 1338, 1341 (E.D.N.Y. 1992), the government met its burden of proof at trial on the issue of liability by presenting the Certificates of Assessment for introduction into evidence as Government Exhibit 1.

 "This presumption can be overcome by destroying the assessment's foundation," Curley v. United States, 791 F. Supp. at 54, and "the taxpayer bears both the burden of production and the burden of persuasion in showing that the presumption is unwarranted." United States v. Schroeder, 900 F.2d 1144, 1148 (7th Cir. 1990). Although, "in general, courts will not look behind an assessment to evaluate the procedure and evidence used in making the assessment," Ruth v. United States, 823 F.2d 1091, 1094 (7th Cir. 1987), the taxpayer may overcome the presumption of correctness and show "that an assessment is utterly without foundation," by coming forward with proof that the assessment is "arbitrary and erroneous." United States v. Janis, 428 U.S. 433, 442, 96 S. Ct. 3021, 3026, 49 L. Ed. 2d 1046 (1976). Because defendants never questioned the validity of the assessments, nor did they introduce any documentary or testimonial evidence to that effect, I find that the presumption of correctness of the assessment applies and the liability of defendant Ms. McCombs-Ellison for the assessed amounts is established.

 Once the government has met its burden of proof on the issue of the taxpayer's liability for the withholding taxes by introducing the Certificates of Assessment, as the government has in this case, the burden shifts to the taxpayer to prove that he is not "responsible" or "willful" within the meaning of 26 U.S.C. § 6672. As succinctly stated by the Second Circuit,

 

it is well established that the statute requires two elements to be present before personal liability for unpaid withholding taxes attaches: first, the individual must be a person responsible for the collection and payment of withholding taxes, i.e., he must have the authority to direct the payment of corporate funds; second, the individual's failure to comply must be willful. See, e.g., Caterino v. United States, 794 F.2d 1, 3 (1st Cir. 1986), cert. denied, 480 U.S. 905, 107 S. Ct. 1347, 94 L. Ed. 2d 518 (1987); Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976); Werner v. United States, 374 F. Supp. 558, 560 (D.Conn. 1974), aff'd on opinion below, 512 F.2d 1381 (2d Cir. 1975). The individual against whom the assessment is made bears the burden of proving by a preponderance of the evidence that one or both of these elements is not present. See, e.g., Calderone v. United States, 799 F.2d 254, 258 (6th Cir. 1986); Lesser v. United States, 368 F.2d 306, 310 (2d Cir. 1966) (in banc).

 Hochstein v. United States, 900 F.2d 543, 546 (2d Cir. 1990), cert. denied, 119 L. Ed. 2d 587, 112 S. Ct. 2967 (1992). Thus, "in § 6672 penalty tax cases, the party against whom the penalty is assessed has the burden of proving that he is not a responsible officer or that he did not willfully fail to pay." Curley v. United States, 791 F. Supp. at 56; Ruth v. United States, 823 F.2d at 1093 ("the taxpayer must bear the risk of nonpersuasion as to all issues presented by a section 6672 assessment case").

 1. Nancy McCombs-Ellison is a Responsible Person Within the Meaning of 26 U.S.C. § 6672 *fn11"

 "The issue [of] whether a person is responsible within the meaning of section 6672 presents a mixed question of fact and law." Hochstein v. United States, 900 F.2d at 547. Even though defendants conceded at trial that there were few, if any, issues of fact in this case, Ms. McCombs-Ellison testified at trial to the effect that she was not a responsible person within the meaning of 26 U.S.C. § 6672. Because I find Ms. McCombs-Ellison's trial testimony incredible on this issue, I am unable to give any weight to it. I further find that the government's account of the facts accorded with the evidence introduced at trial. Applying the facts to the law on the issue of responsibility pursuant to 26 U.S.C. § 6672, discussed infra, I find that Ms. McCombs-Ellison was responsible for the collection and payment of the withholding taxes paid to employees of Spinnaker Pole, a responsibility she failed to meet.

 A person responsible for the collection of, accounting for, and paying over of the withheld employee taxes is defined by 26 U.S.C. § 6671. Mazo v. United States, 591 F.2d at 1153.

 

The term "person," as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

 26 U.S.C. § 6671(b). Generally, "responsible persons are subject to a duty to apply any available unencumbered funds to reduction of accrued withholding tax liability." Mazo v. United States, 591 F.2d at 1154. Duty as defined "under § 6671(b) has a much more focused meaning than the generalized duty of all taxpayers to pay taxes and is expressly limited to the duty that attaches to the position an employee holds within the corporation." United States v. Burger, 717 F. Supp. 245, 248 (S.D.N.Y. 1989). Although "this duty is generally found in high corporate officials charged with general control over corporate business affairs who participate in decisions concerning payment of creditors and disbursal of funds," Monday v. United States, 421 F.2d at 1214-1215, an individual is not a responsible person by "the mere holding of [a] corporate office alone, . . ." Schwinger v. United States, 652 F. Supp. 464, 467 (E.D.N.Y. 1987); see Monday v. United States, 421 F.2d at 1214 ("Corporate office does not, per se, impose the duty to collect, account for and pay over the withheld taxes. On the other hand, an officer may have such a duty even though he is not the disbursing officer"). Because "the key element . . . is whether that person has the statutorily imposed duty to make the tax payments," "the duty is considered in light of the person's authority over an enterprise's finances or general decision making." O'Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992).

 A responsible person, then, is generally "any person who has significant control over the corporation's affairs and participates in decisions concerning what bills should or should not be paid and when, and thus determines whether the United States or other creditors will be paid." United States v. Burger, 717 F. Supp. at 248. See Ruth v. United States, 823 F.2d at 1094 ("the 'key to liability' is significant control or authority over an enterprise's finances or general decision making")(quoting Purdy v United States, 814 F.2d 1183, 1188 (7th Cir. 1987)). Knowledge is not a prerequisite. Davis v. United States, 961 F.2d 867, 873 (9th Cir. 1992)("responsibility is a matter of status, duty and authority, not knowledge"); Gustin v. United States Internal Revenue Service, 876 F.2d 485, 491 (5th Cir. 1989)(same); Mazo v. United States, 591 F.2d at 1156 (same).

 In "determining whether an individual is responsible for collecting and paying withholding taxes," Hochstein v. United States, 900 F.2d at 547, the Second Circuit has held that the

 

factors [to be] considered by the court . . . include the individual's duties as outlined in the corporate bylaws, his ability to sign checks, his status as an officer or director, and whether he could hire and fire employees. . . . The central question, however, is whether the individual has significant control over the enterprise's finances.

 Id. (citations omitted); Silberberg v. United States, 524 F. Supp. 744, 747 (E D.N.Y. 1981)(quoted in Schwinger v. United States, 652 F. Supp. at 467)(same). It should also be noted that "the term 'responsible person' is broad and may include many individuals connected with a corporation, and more than one individual may be the responsible person for an employer." O'Connor v. United States, 956 F.2d at 50. When considering these factors,

 

the focus must instead be on substance rather than form. . . . The substance of the circumstances must be such that the officer exercises and uses his authority over financial affairs or general management, or is under a duty to do so, before that officer can be deemed to be a responsible person.

 Id. 956 F.2d at 51 (citations omitted). *fn12"

 Under these standards, therefore, Ms. McCombs-Ellison is clearly a responsible person within the meaning of 26 U.S.C. § 6672. Not only was she President of Spinnaker Pole and had signatory authority (see Government Exhibit 2), she possessed a significant degree of control over the financial affairs of both corporations, evidence of which is the purchase offer she singularly executed when she bought the Edgewater Restaurant. *fn13" She further testified at trial that she did some of the hiring, even though this task fundamentally belonged to Jon Ellison. Transcript, at [ILLEGIBLE WORD]38.

 It was Ms. McCombs-Ellison's testimony concerning her responsibility to "take care of the books," however, that I found most incredible. She repeatedly contradicted what she had said during her 1989 deposition regarding her role as Spinnaker Pole's bookkeeper, and steadfastly maintained that she knew nothing of the books. *fn14" She did acknowledge at trial, however, that she made "sure that everyone got paid," apparently by reminding Jon Ellison to do so. Transcript, at p.42, lines 13-15. But even if Ms. McCombs-Ellison had charged Jon Ellison with the duty to pay the employees, "the mere delegation of responsibility to another does not constitute reasonable cause" to "exclude the failure to collect, account for, or pay over withholding taxes, . . . Mazo v. United States, 591 F.2d at 1155. Similarly, Ms. McCombs-Ellison's claimed delegation of bookkeeping responsibilities to the restaurant's accountant, Mr. Gryman, cannot absolve her of liability for failing in her duty to ensure that the government was paid the taxes it was due. Monday v. United States, 421 F.2d at 1214 ("liability attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the government").

 In short, Ms. McCombs-Ellison failed to present any credible evidence, testimonial or otherwise, to show that she was not a responsible person within the meaning of the statute. She thus failed in her burden of proving that she was not a responsible person.

 2. Ms. McCombs-Ellison Willfully Failed to Pay Withholding Taxes Within the Meaning of 26 U.S.C. § 6672

 "The question whether a particular person willfully failed to carry out her responsibility of causing the corporation to collect or pay over taxes depends upon the facts and circumstances of each case." Feist v. United States, 221 Ct. Cl. 531, 607 F.2d 954, 957 (Ct.Cl. 1979); Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976); Mazo v. United States, 591 F.2d at 1157 (because "the issue of willfulness is necessarily directed to the state of the responsible person's mind, a subjective determination," "this determination is usually factual").

 The general rule is that "[a] person willfully fails to pay withholding taxes within the meaning of section 6672 when he pays other creditors with knowledge that withholding taxes are due." Hochstein v. United States, 900 F.2d at 548. Thus, once a responsible person becomes "aware of the liability to the government, [she is] under a duty to ensure that the taxes were paid before any payments were made to other creditors." Mazo v. United States, 591 F.2d at 1157. "Payment of wages while previously incurred withholding and FICA taxes have not been paid over [to the government] constitutes payments to creditors other than the government." Carter v. United States, 717 F. Supp. 188, 194 (S.D.N.Y. 1989).

 The Supreme Court in Slodov v. United States, 436 U.S. 238, 243, 98 S. Ct. 1778, 1783, 56 L. Ed. 2d 251 (1978), was careful to note, however, that

 

Section 6672 cannot be read as imposing upon the responsible person an absolute duty to "pay over" amounts which should have been collected and withheld. The fact that the provision imposes a "penalty" and is violated only by a "willful violation" is itself strong evidence that it was not intended to impose liability without personal fault.

 Id. 436 U.S. at 254, 98 S. Ct. at 1788. Thus, "the statute cannot be construed to impose liability without fault, . . ." Id. 436 U.S. at 254, 98 S. Ct. at 1789. Accordingly, the willfulness element "denotes intentional, knowing and voluntary acts. It may also indicate a reckless disregard for obvious or known risks." Monday v. United States, 421 F.2d at 1215. Even though "willfulness may be established by a showing of gross negligence involving a known risk of violation," Ruth v. United States, 823 F.2d at 1094), "mere negligence is not sufficient proof of willfulness." Feist v. United States, 607 F.2d at 961. Thus the decision not to remit employee withholding taxes to the government must be "voluntary, conscious and intentional -- as opposed to accidental." Monday v. United States, 421 F.2d at 1216.

 Liability under 26 U.S.C. § 6672, however, "does not depend upon the presence of bad motive or the specific intent to defraud the government or deprive it of revenue." Id. See Hochstein v. United States, 900 F.2d at 549 ("an individual's good or bad motive in failing to collect and pay taxes is irrelevant to the willfulness determination"); Gustin v. United States, 876 F.2d 485, 492 (5th Cir. 1989) ("willfulness under the statute requires a voluntary, conscious, and intentional act, but not a bad motive or evil intent"); Schwinger v. United States, 652 F. Supp. at 468 ("it is well settled that although section 6672 has some characteristics of a penalty, the government need not show criminal or evil intent or motive"). "Willful conduct also includes failure to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the government." Kalb v. United States, 505 F.2d at 511. Such a failure to investigate constitutes "reckless disregard of a known risk that the trust funds may not be remitted to the government, . . ." Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979); Schwinger v. United States, 652 F. Supp. at 469 ("The failure to inquire into the status of withholding taxes after learning of the delinquency constitutes the reckless disregard that meets the willfulness requirement").

 A variation on the reckless disregard test was articulated by the Seventh Circuit in Wright v. United States, 809 F.2d 425 (7th Cir. 1987). In Wright, the court held that a responsible person may also be found liable for failing in his duty to pay withholding taxes "if he (1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily." Id. 809 F.2d at 427. This test is met when "a responsible officer knows that the corporation has recently committed such a delinquency and knows that since then its affairs have continued to deteriorate, [and when such responsible officer] . . . fails to take any steps either to ascertain . . . what the state of the tax withholding account is, . . . or to institute effective financial controls to guard against non-payment. Id. 809 F.2d at 428.

 Applying this standard of "reckless" or "conscious" disregard, I find that Ms. McCombs-Ellison willfully failed to pay over to the government the withholding taxes due it. She testified at trial that she "made sure that [the employees] were paid." Transcript, at p.43, line 9. Ms. McCombs-Ellison thus had some knowledge of, and involvement in, the payroll aspects of the business. Her constant protestations that "she was stupid" and "didn't know anything" cannot excuse her failure to investigate the state of the withholding taxes due the government because she "was in a position to find out for certain very easily." Wright v. United States, 809 F.2d at 427. The fact that she and Jon Ellison were the only officers of Spinnaker Pole, and her testimony that she was otherwise involved in virtually every aspect of the business, lead to the unmistakable conclusion that she "(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid . . ." Id.

 Ms. McCombs-Ellison further acknowledged that she became aware that withholding taxes were due, although it is unclear from her testimony at what point in time that was. Despite this knowledge, there is no evidence that she made any effort "to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the government." Kalb v. United States, 505 F.2d at 511. Even after having received notice that Spinnaker Pole was delinquent on paying its employee withholding taxes, Ms. McCombs-Ellison "failed to take any steps . . . to ascertain . . . what the state of the tax withholding account" was. Wright v. United States, 809 F.2d at 428. Consequently, her "failure to investigate rises to the level of reckless disregard, which is sufficient to establish the willfulness element of § 6672 liability." Schwinger v. United States, 652 F. Supp. at 470 n.5.

 There is one additional factor that merits consideration -- the bankruptcy of Spinnaker Pole. Spinnaker Pole declared bankruptcy in September, 1981. The bankruptcy, as well as Ms. McCombs-Ellison's testimony, clearly show that Spinnaker Pole was in serious financial trouble. It is important to observe, however, that "even adjudication as a bankrupt does not discharge liability for taxes withheld from employees," Kalb v. United States, 505 F.2d at 509, because "an individual's liability under section 6672 is separate and distinct from the corporation's tax liability." Hochstein v. United States, 900 F.2d at 549. Consequently, the Internal Revenue Service may assess the penalty and collect it from the individual, even if the corporation has sought protection under the bankruptcy laws. Id. The Bankruptcy Code "provides a priority for specified tax claims, including those [under 26 U.S.C. § 6672] . . ., and makes those debts nondischargeable." United States v. Energy Resources Co., Inc., 495 U.S. 545, 110 S. Ct. 2139, 2142 *fn15" , 109 L. Ed. 2d 580 (1990).

 Consideration of "the financial condition of the business or the demands of creditors" is therefore "misleading and improper." Monday v. United States, 421 F.2d at 1216. Ms. McCombs-Ellison's trial testimony revealed that other creditors, such as Port and Starboard whose sole income was derived from the rental payments it received from Spinnaker Pole, were paid before the government. Hence, it is evident that she paid "other creditors with knowledge that withholding taxes were due." Hochstein v. United States, 900 F.2d at 548. Notwithstanding the understandable desire to keep the business going, the rule that "the voluntary, conscious and intentional act to prefer other creditors of the corporation over the United States" constitutes willfulness, Gold v. United States, 506 F. Supp. 473, 479 (E.D.N.Y. 1981), aff'd, 671 F.2d 492 (2d Cir. 1981) (quoted in Schwinger v. United States, 652 F. Supp. at 468), "holds true even if the expenditures are necessary to remain in business." Schwinger v. United States, 652 F. Supp. at 468. Consequently, Ms. McCombs-Ellison "willfully disregarded her duty," Feist v. United States, 607 F.2d at 961, when she paid "other creditors with knowledge that withholding taxes were due." Hochstein v. United States, 900 F.2d at 548.

 C. The Lien Attached to 74 Meadow Creek Lane as of Date of Assessment

 26 U.S.C. § 6321 *fn16" "authorizes the imposition by the government of a tax lien upon the property of the taxpayer when she is in default." United States v. 110-118 Riverside Tenants Corp., 886 F.2d 514, 518 (2d Cir. 1989), cert. denied, 495 U.S. 956, 109 L. Ed. 2d 743, 110 S. Ct. 2560 (1990). "The lien imposed by section 6321 arises at the time the assessment is made and . . . continues until the liability for the amount so assessed . . . is satisfied." 26 U.S.C. § 6322. Specifically, upon assessment, "the law creats a lien in favor of the United State on all real and personal property belonging to the [taxpayer]," United States v. McDermott, 113 S. Ct. 1526, 123 L. Ed. 2d 128, 133, 1993 WL 76913, at *1 (1993), and "is effective . . . against all persons, even in the absence of recordation of the lien." Don King Productions, Inc. v. Thomas, 945 F.2d 529, 533 (2d Cir. 1991). *fn17" Accordingly, a lien in the amount of $ 26,925.79 was created on June 14, 1982, and lien attached to Ms. McCombs-Ellison's property located at 74 Meadow Creek Lane on that date. The issue thus becomes whether the government's tax lien has priority over the encumbrances on the property at 74 Meadow Creek Lane. As the following discussion indicates, the government's liens are entitled to priority over all encumbrances on the property.

 D. Priority of United States' Tax Lien

 "The relative priority of a United States lien for unpaid taxes is a federal question." United States v. Equitable Life Assurance Society of the United States, 384 U.S. 323, 330, 86 S. Ct. 1561, 1565, 16 L. Ed. 2d 593 (1966). However, "both federal and state courts must look to state law" when determining whether a taxpayer has property, or property rights, to which a federal tax lien could attach. Aquilino v. United States, 363 U.S. 509, 512-513, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365; United States v. Brosnan, 363 U.S. 237, 240, 80 S. Ct. 1108, 1111, 4 L. Ed. 2d 1192 (1960). But "once the tax lien has attached to the taxpayer's state-created interests, . . . federal law . . . determines the priority of competing liens asserted against the taxpayer's" property rights. Aquilino v. United States, 363 U.S. 509, at 513-514, 80 S. Ct. at 1280; United States v. Rodgers, 461 U.S. 677, 683, 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983)("it has long been an axiom of our tax collection scheme that, although the definition of property interests is left to state law, the consequences that attach to those interests is a matter left to federal law").

 As the facts above indicate, there is no dispute that Ms. McCombs-Ellison owned the property in question at the time the lien arose on June 14, 1982. Nor is it disputed that the property was encumbered by the remaining principal balance of the Columbia Bank Purchase Money Mortgage, as well as by the remaining principal on the $ 50,000 Marine Midland Bank mortgage. Despite the liens created by the mortgages, title to the 74 Meadow Creek Lane property remained in Ms. McCombs-Ellison. Goodell v. Silver Creek National Bank, 48 N.Y.S.2d 572 (Sup. Ct. Chautauqua Co. 1944), aff'd 268 A.D. 1020, 53 N.Y.S.2d 529 (4th Dept. 1944) ("A mortgagor is one, who having some part of the title to property, by written instrument pledges that property for some particular purpose such as security for a debt"). Therefore, she may be said to have had an interest in the property at the time the lien arose, subject, of course, to the Columbia Banking and Marine Midland mortgages. Indeed Ms. McCombs-Ellison conveyed her interest in the property to her daughters on September 15, 1982. In exchange, they assumed the remaining principal balance on the Columbia Banking mortgage, and further agreed to take the premises subject to the Marine Midland Bank mortgage. Because it is clear that Ms. McCombs-Ellison has a state-created property interest, and because "the consequences that attach to those interests is a matter left to federal law," United States v. Rodgers, 461 U.S. 677, 683, 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983), this court must look to federal law, in order to "determine[] the priority of competing liens asserted against the taxpayer's [Ms. McCombs-Ellison]" property rights. Aquilino v. United States, 363 U.S. 509, at 513-514, 80 S. Ct. at 1280; PPG Industries, Inc. v. Hartford Fire Insurance Co., 531 F.2d 58, 61 (2d Cir. 1976) ("The resolution of priority conflicts involving federal tax liens is a matter of federal law requiring an interpretation of 26 U.S.C. § 6323"); Hartford Provision Co. v. United States, 579 F.2d 7, 9 (2d Cir. 1978) (same).

 The Supreme Court addressed the issue of federal tax lien priority very recently, stating that federal tax liens "do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principal that 'the first in time is the first in right.'" United States v. McDermott, supra, 1993 WL 76913, at *2 (citations omitted). In applying this doctrine, the Court referred to 26 U.S.C. § 6323(a). Id. This section protects "certain persons . . . against unrecorded federal tax liens," Don King Productions, Inc. v. Thomas, 945 F.2d at 533, and provides that "the lien imposed by section 6321 shall not be valid as against the purchaser, [or] holder of a security interest, . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. § 6323(a). "Only those persons specifically listed in the statute are entitled to priority over unrecorded federal tax liens." Don King Productions, Inc. v. Thomas, 945 F.2d at 533.

 

Section 6323(f) provides, in substance, that, if under the state law a deed is not valid against a bona fide purchaser unless its filing has been recorded in a public index, the tax lien is not valid against a purchaser unless the fact of its filing is recorded in a public federal tax lien index so that a reasonable inspection of the index will reveal the existence of the lien.

 Burbano v. United States, 723 F. Supp. 193, 194 (E.D.N.Y. 1989). *fn18" "The question is whether [defendants Kelly and Mary McCombs] bought the premises free of the lien, and that turns on whether the United States provided notice of the lien in accordance with section 6323(f) before [defendant] made and recorded the purchase." Id., 723 F. Supp. at 195.

 To provide notice in accordance with § 6323(f), the government must comply with New York's recording statute, N.Y. Real Property Law § 291. *fn19" In New York, a lien is considered a conveyance because it may affect "the title to any real property," N.Y. Real Property Law § 290(3), and thus it must be recorded.

 

The almost universal construction placed by courts upon the recording acts protects a subsequent purchaser as against a prior instrument if he pays value in ignorance of such instrument and makes the record of an instrument notice to the subsequent purchaser, irrespective of whether he actually examines the records so as to obtain such information.

 Cohen v. East Netherland Holding Co., 258 F.2d 14, 17 (2d Cir. 1958) (construing N.Y. Real Property Law § 291). New York is a race-notice state. Goldstein v. Gold, 106 A.D.2d 100, 101, 483 N.Y.S.2d 375 (2d Dept. 1984), aff'd 66 N.Y.2d 624, 495 N.Y.S.2d 32, 485 N.E.2d 239 (1985). Therefore, "in order to cut off a prior lien, such as a mortgage, the purchaser must have no knowledge of the outstanding lien and win the race to recording office." Id., 106 A.D.2d at 101-102 (emphasis in original).

 Subsequent purchasers may be charged with three types of notice in New York. The first is actual notice, which means that if an instrument is properly recorded, potential subsequent purchasers will learn of its existence upon actually searching the record chain of title. Witter v. Taggart, 78 N.Y.2d 234, 238, 573 N.Y.S.2d 146, 577 N.E.2d 338 (1991) ("The recording statutes in a grantor-grantee indexing system charge a purchaser with notice of matters only in the record of the purchased land's chain of title back to the original grantor"). Second, a properly recorded instrument also charges a subsequent purchaser with constructive notice of its existence. A subsequent purchaser is "not chargeable with constructive notice of conveyances recorded outside of that purchaser's direct chain of title. . ." Id., 78 N.Y.2d at 239. Third, the theory of inquiry notice provides that

 

[w]here a purchaser of land has knowledge of any facts sufficient to put him on inquiry as to the existence of some right or some title in conflict with that which he is about to acquire, he is presumed either to have made the inquiry and ascertained the extent of such prior right, or to have been guilty of a degree of negligence equally fatal to his claim to be considered as a bona fide purchaser.

 Sweet v. Henry, 175 N.Y. 268, 276, 67 N.E. 574 (1903) (emphasis supplied); Wardell v. Older, 70 A.D.2d 1008, 1009, 418 N.Y.S.2d 196, 197 (3rd Dept. 1979) ("had an inquiry been made, [a prior] interest would have been discovered"). Thus, where a purchaser is charged with inquiry notice, due to "purchas[ing] with 'knowledge of facts that would lead a reasonably prudent purchaser to make inquiry,'" Berger v. Polizzotto, 148 A.D.2d 651, 652, 539 N.Y.S.2d 401 (2d Dept. 1989) (quoting Morrocoy Marina v. Altengarten, 120 A.D.2d 500, 500, 501 N.Y.S.2d 701 (2d Dept. 1986), the practical effect is that the subsequent purchaser can "not take advantage of [and be protected by] the Recording Act." Wardell v. Older, 70 A.D.2d at 1009, 418 N.Y.S.2d at 197. Absent "knowledge of facts that would lead a reasonably prudent purchaser to make inquiry," Morrocoy Marine v. Altengarten, 120 A.D.2d at 500, "[t]here is generally no requirement that the purchaser make further inquiries to ascertain whether the purported assignee actually possessed the authority" to assign his interest in the property. Andy Association v. Bankers Trust, 49 N.Y.2d 13, 22, 424 N.Y.S.2d 139, 399 N.E.2d 1160 (1979).

 The general rule in New York, therefore, is that "[a] purchaser is not normally required to search outside the chain of title in order to determine if it is defective. . . . The recording acts charge the purchaser with notice only of matters in the record . . . and matters outside of the chain of title do not constitute notice." Doyle v. Lazarro, 33 A.D.2d 142, 144, 306 N.Y.S.2d 268, 270 (3rd Dept. 1970), aff'd 33 N.Y.2d 981, 353 N.Y.S.2d 740, 309 N.E.2d 138 (1974) (citations omitted). "The Recording Act, however, protects only those subsequent purchasers who purchase 'in good faith.' Subsequent purchasers who buy with notice or knowledge of a prior interest or equity take title subject to that prior interest." United Matura Realty, Inc. v. Reade Industries, Inc., 155 A.D.2d 660, 661, 547 N.Y.S.2d 892, 893 (2d Dept. 1989) (quoting N.Y. Real Property Law § 291). Thus, the government has the burden of showing that either daughter, Mary and Kelly McCombs, had notice of the tax lien, or that they were not purchasers in "good faith." N.Y. Real Property Law § 291. The evidence showed the following chronology of recordation of encumbrances on the property at 74 Meadow Creek Lane: Date Lienor Amount n20 Recorded 1. 2/16/62 Columbia Banking n21 $ 30,000.00 2/16/624 2. 5/27/82 Marine Midland Bank $ 50,000.00 5/27/82 3. 6/14/82 United States $ 26,925.79 9/22/82 4. 9/15/82 Transfer to Kelly & Mary McCombs 9/16/82

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