How can the identical proper create two separate property pursuits? | Holland & Knight LLP

The Internal Revenue Service (IRS) can file a lien and levy on any taxpayer's property (and property rights), regardless of how the property is held or titled. 26 USC § 6321. Whether the item is owned by a taxpayer is the subject of ongoing and contentious litigation between third parties and the IRS.

In general, a taxpayer's property rights are governed by state law. Once a taxpayer is determined to have a state-created interest in property, federal law comes into effect. However, sometimes it becomes blurry as to whether there is a government created interest, what the exact situation was at Goodrich v USA, 125 A.F.T.R.2d 2020-1276 (W.D. La. 2020).


Henry Goodrich (Henry) died due to a significant amount of federal income taxes. Prior to his death, Henry had a usufruct resembling a lifelong estate, created by the will of his late wife, which included personal property, real estate, stocks and stock options (collectively the "stocks"), cash and mineral shares. Contrary to personal property, real estate, and mineral interests, Henry sold the stock during his lifetime.

Henry's three children (collectively the "children") were the "naked" owners of property that is subject to Henry's usufruct. After Henry's death, the executor sold the property and personal property and deposited most of the proceeds in a bank account (the "estate's checking account") originally funded by closing Henry's bank account, which Henry funded in part through the sale of the Share.

Several years after Henry's death, the IRS collected levies on funds in the estate's checking account, including cash that Henry received when he sold the stock. The IRS applied the seized funds to Henry's income tax liabilities, and the children filed under 26 U.S.C. Section 7426 in the US District Court for the Western District of Louisiana.

The district court ruled that personal property, real estate and the proceeds of mineral resources were the property of children according to the usufruct; therefore the IRS levy was invalid. The district court further ruled that the usufruct gave the IRS the right to own the proceeds from the stock sale; thus the IRS levy was valid.

Unlawful tax claim under Section 7426

To establish an unlawful tax claim, a third party must demonstrate that (1) the IRS has levied a charge relating to a taxpayer's liability for property of the non-taxable third party, (2) the third party's rights to the property, the rights of the IRS are superior and (3) the levy was unlawful. Oxford Capital Corp. against the United States, 211 F.3d 280, 283 (5th Cir. 2000).

To prove that a levy is unlawful, (1) the third party "must first show some interest in the property in order to substantiate its status, (2) the burden then shifts to the IRS to establish a link between the property and to prove to the taxpayer, and (3) The burden of proof for proving the tax unlawfulness, e.g. that the property actually did not belong to the taxpayer, is then shifted back to the plaintiff. " ID.

Property rights

In United States v. Craft, 535 U.S. 274, 276 (2002), 1 the US Supreme Court examined whether federal tax liens under 26 U.S.C. Section 6321 can seize property that belongs to a defaulting taxpayer and his spouse as a tenant. The Supreme Court began by describing the different roles of state and federal law in determining what property is for tax liens (quotes omitted):

Whether the defendant's husband's interests in the property held by him as a tenant collectively "property and property rights" within the meaning of Federal Tax Lien Act 26 U.S.C. Section 6321 is ultimately a matter of federal law. However, the answer to this federal question largely depends on state law. The federal tax lien itself "does not establish any property rights, but only links federally defined consequences to rights created under state law". Accordingly, “(we) look first at state law to determine what rights the taxpayer has over the property that the government is trying to obtain, and then at federal law to determine whether the state-delimited rights of the Taxpayer as 'property' or 'rights to property' under the Federal Tax Lien Act. " ID. at 278

Accordingly, the target property must be subject to a tax lien for a garnishment. United States v Rodgers, 461 US 677, 680 (1983). But "the federal tax lien … does not create property rights, but only links federally defined consequences to the rights created under state law." Craft, 525 U.S. at 278. As soon as the tax lien is connected with the state-created interests of the taxpayer, federal law determines the result. Aquilino v United States, 363 US 509, 513-14 (1960). With regard to state-created interests, federal courts are bound by the property decisions of the highest court of a state. Commissioner v. Estate of Bosch, 387 US 456 (1967), citing Erie R. R. Co. v. Tompkins, 304 US 64 (1938).

Usufruct under Louisiana law

At Goodrich, Henry was the usufructuary. A "usufruct" is a right to someone else's property, usually for a limited time or until death. Simply put, it is the right to use the property, enjoy the fruits and revenues of the property, rent the property and collect the rents, all to the exclusion of the underlying real or "naked" owner. A usufructuary's rights "vary with the nature of the things underlying him as consumer goods or non-consumer goods". La.Civ. Code Art.No. 535.

According to La.Civ. Code Art.No. 536. “(d) the usufructuary becomes the owner of consumer goods, such as money, and can consume or sell them at his own discretion. As for consumer goods, La. Civ. Code Art. 538, "(a) t the termination of the usufruct he is obliged either to pay the bare owner the value that the things had at the beginning of the usufruct, or to deliver things to him in the same quantity and quality."

Non-consumable things – such as land, houses, stocks, animals, furniture, and vehicles – are those that can be enjoyed without altering their contents, even though their contents naturally occur over time or through the use for which they are used can be reduced or worsened applied. La.Civ. Code Art.No. 537. "(h) e is however obliged to use them as a prudent administrator and to hand them over to the bare owner when the usufruct is terminated." La.Civ. Code Art.No. 539

"The usufructuary may not dispose of non-consumable items unless he has been expressly granted the right to do so." La.Civ. Code Art.No. 568. Henry's wife expressly granted Henry the right to dispose of non-consumable items in her will. As for the stock, Henry made use of that right.

Real estate other than warehouse revenue: non-consumables

The US government generally agreed that the children were entitled to their interests in non-consumer goods (i.e., mineral rights and certain personal property) under Louisiana law. However, the government claimed that the funds could not be traced back to the disputed funds because funds were deposited into the estate's checking account and thus mixed up. The government asserted that the children could not identify the disputed funds and that they were therefore entitled to the funds.

The district court quickly dismissed the US government's argument, finding that it was based on the opinion of another non-binding district court2 and that the children's records were adequate. The district court then applied the usufructuary right to non-consumer goods and found that the children were entitled to the funds derived from the non-consumer goods.

Inventory revenues: consumables

The children and the US government relied on a treatise3 to interpret Louisiana law in relation to consumer goods of usufruct. The children argued that the termination of a usufruct resulted in the "reintegration of property" and the "restoration" of full property or perfect property. That is, when Henry sold the shares, the usufruct of the shares ended and was tied to the proceeds from the sales

The government alleged that the children merely had an unsecured claim against Henry's estate for share proceeds and were not actual owners of any particular cash. The US relied on the same paper, albeit in different sections.5 In addition, the government cited four cases to support its position

The district court found In Re Succession of Catching to be convincing.7 Accordingly, the district court found that the children were entitled to the estate in relation to the money Henry received for the stock, but did not immediately own any particular one Cash was available at the time of Henry's death. The obligation to the children was a debt or obligation of the estate that could only be administered and paid for after the end of the inheritance with sufficient funds to fulfill the obligation. The children's claim was therefore to be regarded as unsecured creditors in relation to this claim.

Following the District Court's decision, the estate and children filed an appeal with the U.S. Fifth District Court of Appeals in a timely manner.

Opinion of the fifth circle

In an advisory opinion published on July 6, 2021, the Fifth Circuit disagreed with the District Court's proposal that In Re Succession of Catching and the Louisiana Civil Law Treatise deny the property interest issue in terms of usufruct. See Goodrich versus USA, —- F.3d —- (5th Cir. 2021)

However, consistent with the observation of the plaintiffs-complainants, the Fifth Circuit found that the courts of Louisiana (including the Louisiana Supreme Court) "have not ruled the precise question of whether the bare owner of (money) has owner status or.. Creditor. "Accordingly, and in order to avoid" any guess as to how the Louisiana Supreme Court would treat the issue, "the Fifth Circuit relied on a decision by the Louisiana Supreme Court to confirm the following questions to the Louisiana Supreme Court:

  1. Does the will of a usufructuary usufructuary consumer goods make bare owners unsecured creditors of the usufructuary's succession?
  2. If not, how does the bare owner relate to these consumables?

The ruling means that the IRS's ability to retain the funds raised is subject to the Louisiana Supreme Court's interpretation of state law relating to usufruct.


For example, the Fifth Circuit ruled that the deliberations and decisions of the lower state courts do not have state property rights. Rather, it is a decision reserved for the country's highest court. Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).

Accordingly, Goodrich recalls that when analyzing the legitimacy of an IRS lien on property (and property rights) it is wise to remember the basics: State law determines property interest, and property law can be exercised by the state's highest court. If the property right is decided by the highest court in the country, federal law applies; otherwise, the individual's financial interests may need to be investigated before an unlawful tax lawsuit can be initiated.


1 In Craft, the Supreme Court considered whether federal tax liens on property of the defaulting taxpayer and his through no fault spouse could be rented in full. The Supreme Court ruled that the tax lien is tied to the property.

2Bregman, Berbert & Schwartz, L.L.C. v. United States, 145 F.3d 664 (4th Cir. 1998)

3 3 A.N. Yiannopoulos, Treatise on Civil Law in Louisiana.

4 See 3 La. Civ. L. Treatise, personal easements §6: 16-§6: 18 (5th edition).

5 See 3 La. Civ. L. Treatise, personal easements (“A usufruct of consumer goods differs from a usufruct of non-consumer goods because the usufructuary acquires ownership of the goods and the bare owner becomes a general creditor of the usufructuary.” § 1: 3, 9. “If the usufruct expires with the death of the usufructuary, are the debts which the usufructuary owes the bare owner, including the restoration of the value of the consumer goods that were subject to the usufruct, debts of the succession. "§ 6:18, 400 n. 2. ).

6Succession of Majoue, 705 So.2d 225 (La.App. 5th Cir. 1997); Catch order, 35 So 3d 449 (La.App. 2. Cir. 2010); Follower of Dittmar, 493 Sun. 2d 221 (La.App. 5th Cir. 1986); Succession from Feingerts, 162 So 3d 1215 (La.App. 4th Cir. 2015), writ. disputed, 171 so 3d 936 (La. 2015).

7 In Catching, the court cited "case law which found that the usufructuary obligation in such cases is" the nature of a testator's debt to the owners. "The court ruled," The usufruct ended with James & # 39; Death and became a debt of succession to the bare owner. "See Catching, 35 So.3d at 451.

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