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U.S. v. NEW YORK DEPT. OF TAXATION AND FIN.

March 9, 2001

UNITED STATES OF AMERICA, PLAINTIFF,
V.
NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, GLENN H. RIPA, ESQ., AND BENEDETTO ROMANO, DEFENDANTS.



The opinion of the court was delivered by: Curtin, District Judge.

INTRODUCTION

On November 17, 1983, Benedetto Romano drove across the Peace Bridge from Buffalo, New York, to Ontario, Canada, with $359,500 in undeclared currency in his trunk. He was stopped by Canadian officials, denied entry into Canada, and sent back to the United States' side of the bridge. Because Mr. Romano had failed to file proper forms declaring that he was transporting over $5,000 in U.S. currency outside of the United States, U.S. Customs officials seized the funds pursuant to 31 U.S.C. § 5311, 5316, and 5317 (1994). In this interpleader action, the court determines the rights of the rival claimants to the seized funds. The Internal Revenue Service, Glenn Ripa (Mr. Romano's current attorney), Mr. Romano, and the New York State Department of Taxation all have claims on the funds.*fn1

Presently before the court is a motion for summary judgment submitted by Mr. Ripa and Mr. Romano (Item 19), and a cross-motion for summary judgment submitted by the Internal Revenue Service. Item 22. The New York State Department of Taxation has not opposed Romano's and Ripa's motion. Item 26. New York admits that its claim is subordinate to that of the United States' federal income tax claim. Item 18.

BACKGROUND

As noted earlier, on November 17, 1983, the U.S. Customs Service seized $359,500 in undeclared currency from Romano pursuant to 31 U.S.C. § 5311, 5316 and 5317 (1994) as he drove his car across the Peace Bridge from Buffalo, New York, into Ontario, Canada. On the same day, the IRS made a termination assessment*fn2 against Mr. Romano for his 1983 income tax in the amount of $169,973, pursuant to 26 U.S.C. § 6851. Item 23, ¶ 2. On November 18, 1983, the IRS filed a notice of federal tax lien. Id. ¶ 3. Romano failed to file a tax return for the year 1983. The New York State Department of Taxation and Finance has also docketed tax warrants against Mr. Romano.*fn3

In 1984, the United States Department of Customs filed a civil asset forfeiture action against the seized funds, pursuant to 31 U.S.C. § 5316 and 5317. United States v. $359,500 in United States Currency, 645 F. Supp. 638 (W.D.N.Y. 1986). On August 6, 1987, the seized currency was deposited into the U.S. Customs Suspense Account, located at the Federal Reserve Bank of New York. Item 23, ¶ 4. On September 29, 1986, this court denied the government's petition for forfeiture, holding that a civil forfeiture, based on a failure to declare currency prior to transporting it outside of the country, requires that the owner have actual knowledge of the obligation to report. The government appealed. The Second Circuit Court of Appeals reversed, ruling that constructive knowledge is sufficient to support a forfeiture, and remanded for a determination of Romano's constructive knowledge of the obligation to report. United States v. $359,500 in United States Currency, 828 F.2d 930 (2d Cir. 1987).

This court stayed the action when Romano invoked his Fifth Amendment right against self-incrimination based upon a pending criminal tax evasion indictment.*fn4 After the criminal proceedings ended, this court found that Mr. Romano did not have constructive knowledge of the reporting requirement and that forfeiture to the government of the $359,500 was improper. United States v. $359,500 in United States Currency, 25 F. Supp.2d 140 (W.D.N.Y. 1998). On January 28, 1999, an order was issued allowing an interpleader action in order that the interested parties could litigate the proper distribution of the seized funds. Item 89.*fn5 The court also required that the funds, plus accrued interest, be deposited with the Clerk of the Court. Id.

Concurrent with the forfeiture proceeding, Mr. Romano appeared in a number of other courts on tax-related matters. In 1985, Mr. Romano filed a petition in the United States Tax Court challenging the 1983 deficiency notice. Romano v. Commissioner, 101 T.C. 530, 1993 WL 512365 (1993). In November 1989, while the Tax Court deficiency action was pending, the United States filed suit in the U.S. District Court for the Eastern District of New York to reduce the 1983 termination assessment against Mr. Romano to judgment. Item 22, p. 2. On December 19, 1990, the District Court granted summary judgment in favor of the United States in the amount of $169,981 plus statutory interest, as allowed by law, for taxes owed pursuant to the termination assessment. Item 11, Exh. 2. That judgment was affirmed by the Second Circuit on May 6, 1992. Item 11, Exh. 3. Subsequently, Romano's full-year 1983 tax liabilities were the subject of a Tax Court decision, entered on May 13, 1996. Item 22, p. 2. As of August 31, 1999, the amount of the termination assessment, [p]lus statutory interest, due the IRS exceeded $750,000. Item 22, p. 19. Mr. and Mrs. Romano also petitioned the Tax Court with respect to notices of deficiency issued by the IRS for tax years 1981, 1982, 1989 and 1990. The Tax Court found for the IRS. Romano v. Commissioner, CCH. Dec. 50,876 (1995). The IRS assessed further tax liabilities against Mr. Romano.*fn6

Murray Appleman, Esq. initially represented Mr. Romano in the termination assessment litigation in the Eastern District of New York, the Tax Court litigation, the civil forfeiture case, and the criminal tax prosecution. Following Mr. Appleman's death, Mr. Romano retained Glenn H. Ripa on August 28, 1995 to undertake representation for the remand of the civil forfeiture proceeding. They agreed on a one-third contingency fee arrangement, later modified to include a $7,500 advance payment by Mr. Romano. Item 19, ¶¶ 5, 7.

Mr. Ripa, appearing pro se, has now come before this court to argue, among other theories, that he is entitled to a statutory attorney lien with superpriority status over the federal tax lien pursuant to 26 U.S.C. § 6323 (b)(8). He reasons that the superpriority would entitle him to one-third of the total recovery of $491,236.69 (the originally seized $359,500 plus $131,736.69 interest accrued as of January 1999), which equals $163,745.56, less $7,500.00 in advance legal fees, totaling $156,245.56. He further argues that the IRS has second priority for $169,973.00 in satisfaction of the November 17, 1983 notice of levy, that New York has third priority for $48,549.15 in satisfaction of its warrant dated March 23, 1994, and the IRS has fourth priority for the remaining funds m satisfaction of its 1997 and 1998 federal tax liens.

DISCUSSION

I. Standard for Summary Judgment

Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The district court must draw all reasonable inferences in favor of the nonmoving party and grant summary judgment only if no reasonable trier of fact could find in favor of the nonmoving party. See Taggart v. Time Inc., 924 F.2d 43, 46 (2d Cir. 1991).

In this case, there are no material facts in dispute and the court may grant summary judgment as a matter of law on the matter of lien priority.

II. Lien Priority

A. Common Law Rule: First in Time, First in Right

A federal tax lien takes priority over a competing lien unless the competing lien falls within one of the statutory priorities set forth in the Internal Revenue Code, or is a valid state-created lien that ...


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