6321 After Acquired Property page4

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Order Granting Motion for Summary Judgment

WOODWARD, District Judge:

This is an action brought by plaintiffs for the refund of income taxes and assessed interest for 1971 in the amount of $403.72, plus statutory interest. Plaintiffs are farmers in Terry County, Texas. Like most farmers who raise cotton, plaintiffs have acquired cotton allotments for use in their farming operation. During the years 1968 through 1970, plaintiffs purchased "cotton allotments" totalling 145.3 acres. For the year 1971, the national cotton allotment was reduced resulting in a 32.53% decrease in plaintiffs' cotton allotment acreage. Plaintiffs claimed a capital loss of $5,365.09 on their 1971 income tax return for the reduction of their cotton allotment.

Upon audit, the Commissioner of Internal Revenue determined that plaintiffs were not entitled to the claimed loss. An additional assessment was made against plaintiffs, plaintiffs paid the assessment, filed a claim for refund, and subsequently instituted this action.

The defendant, United States of America, has filed a motion for summary judgment alleging two grounds: (1) that plaintiffs had no loss in 1971 in respect to the rights purchased as "cotton allotments," and (2) assuming arguendo a diminution of value occurred to plaintiffs' "cotton allotments" in 1971, there was no closed and completed transaction fixed by identifiable events giving rise to a deductible loss. Since the court has decided to grant the motion for summary judgment on the second ground only, it is rendering no decision as to the first ground.

Section 165(a) of the Internal Revenue Code of 1954 (26 U. S. C.) allows "as a deduction any loss sustained during the taxable year" not compensated for by insurance or otherwise. Treasury Regulations on Income Tax (1954 Code), §1.165-1(b) (26 C. F. R.), states that to demonstrate a loss, a taxpayer must show a loss evidenced by a closed and completed transaction fixed by identifiable events. It is undisputed that the plaintiffs' cotton allotment acreage was reduced by 32.53% and no other question of fact is present relevant to this point. The court is of the opinion that the reduction of the plaintiffs' cotton allotment did not as a matter of law result in a closed and completed transaction fixed by identifiable events. John R. Thompson Co. v. United States [73-1 USTC ¶9369], 477 F. 2d 164 (7th Cir. 1973). The court views the plaintiffs' cotton allotment as a unit capable of being expanded and contracted each year as the Secretary of Agriculture adjusts the national cotton allotment. These yearly adjustments by the Secretary of Agriculture should not be viewed as additions to or deductions from a farmer's cotton allotment for to do so would create administrative problems of valuation and reporting of the gains and losses experienced by the numerous farmers across the nation. Viewed as a single unit capable of being expanded and contracted, the cotton allotment is analogous to a share of stock for which a taxpayer may not claim a deduction on account of its value shrinkage. Miami Beach Bay Shore Co. v. Commissioner of Internal Revenue [43-1 USTC ¶9498], 136 F. 2d 408 (5th Cir. 1943). Therefore, plaintiffs are not entitled to a loss deduction for the decrease in their cotton allotment for 1971.

Since there is no question of fact and the defendant is entitled to judgment as a matter of law, the court hereby Grants the defendant's motion for summary judgment.

Jerry Bain v. United States of America

U. S. District Court, East. Dist. Tex. , Tyler Div., No. TY-73-CA-70, 9/25/73

[Code Sec. 7425]

Civil suits: Discharge of liens: Redemption by the United States.--A parcel of real property which had been sold at a foreclosure sale on December 5, 1972, was encumbered by three Federal Tax liens and was redeemed by the United States . Since two Federal Tax liens were assessed and filed against the transferors of real property and attached to the property on the date title to the property was reconveyed to them, and a third Federal Tax lien attached subsequent to the reconveyance and prior to the foreclosure sale, the property was encumbered by the tax liens and was subject to redemption. Also, the Government's good faith tender of $30,711.24 within 120 days of the foreclosure sale was sufficient to preserve redemption rights although the check was rejected.

Jerry Bain, 237 S. Broadway, Tyler , Tex. , for plaintiff. Roby Hadden, United States Attorney, Houston Abel, Assistant United States Attorney, Tyler, Tex., for defendant.

Findings of Fact

JUSTICE, District Judge:

The parties have stipulated to the following facts:

(1) On May 4, 1965, the property that is the subject of this civil action (hereinafter "the King property") was encumbered by a deed of trust in favor of East Texas Savings and Loan Association by its owners, Kenneth R. King and Neva J. King (hereinafter "the Kings"). See Exhibit 1.

(2) On February 24, 1969, the Kings purported to convey the King property to John Cowan. On December 10, 1969, Cowan purported to re-convey the King property to the Kings. See Exhibit 5.

(3) As reflected in exhibits 2, 3, and 4, federal tax liens were assessed and filed against the Kings as follows:

                             Assessed                 Filed            Amount

Mr. King ......         June 19, 1969         June 20, 1969         $8,925.59

Mrs. King .....         June 19, 1969         June 30, 1969          6,719.96

Mr. & Mrs.

King ..........          May 29, 1972         Oct. 17, 1972          1,039.77

 

(4) On December 5, 1972, after giving proper notice to the Internal Revenue Service as provided by the Tax Lien Act of 1966, East Taxes Savings and Loan Association foreclosed its deed of trust on the King property and sold the property, at a foreclosure sale, to Jerry Bain, Esquire (hereinafter "Bain"), for $30,010.00. See Exhibit 6.

(5) On January 8, 1973, Glenn Ray (hereinafter "Ray"), an agent of the Internal Revenue Service, requested by letter certain information from Bain regarding expenses and income in the King property. See Exhibit 7. Bain responded by letter to this request on January 12, 1973 (see Exhibit 8) and responded to a subsequent request for updating of expenses and income on March 26, 1973 (see Exhibit 9). As reflected in both Exhibits 8 and 9, Bain makes the following claims:

1. Cash advanced to East Texas Savings and Loan Association

at foreclosure sale .............................................                        $30,010.00

Six percent interest from Dec. 5, 1972 ..........................                            600.20

2. Preparation of trustee's deed ................................                             30.00

3. Preparation of note and deed of trust to Tyler bank ..........                             30.00

4. Homestead designation ........................................                             25.00

5. Title opinion on property in question ........................                            150.00

6. Recording fees ...............................................                             11.50

7. Fire and Extended Coverage Insurance on the

property in question (annual premium $215)--two

months short-term cancellation rate .............................          58.05

Additional premium ..............................................          37.95              96.00

8. Fair market rental value ($350 per month) ....................         700.00

Additional rental value (2 mo.) .................................         700.00           1,400.00

9. Time and effort expended in his own behalf in connection

with review and research of applicable law and conference

with Internal Revenue Service officials .........................                            500.00

10. Trips to the house to light the furnace and drain

the faucets to protect the property from freezing

(7 trips at $10.00 ea.) .........................................          70.00

2 additional trips ..............................................          20.00              90.00

11. Taxes (contingent liability) as of November 30, 1972 ........                          3,598.44

12. Repair of the roof ..........................................                             40.00

 

(6) On March 28, 1973, two officers of the Internal Revenue Service appeared at Bain's office and placed a check for $30,711.24 on his desk. Bain refused to accept the check. See Exhibit 10.

(7) On March 28, 1973, Bain filed with the County Clerk of Smith County an affidavit contesting any Internal Revenue Service certificate of redemption on the King property. See Exhibit 11 (Deed Records, volume 1444, page 833).

(8) On March 29, 1973, the United States filed a certificate of redemption with the County Clerk of Smith County . See Exhibit 12.

(9) On April 3, 1973, Bain requested by letter to Ray that the Internal Revenue Service revoke its certificate of redemption. See Exhibit 13.

(10) No tender was made by the defendant to Bain before March 28, 1973; and no tender has been made to Bain since March 28, 1973.

(11) Under the ordinary and customary real estate practice in Texas , the expense of preparing the promissory note, deed of trust, homestead designation, and title opinion are borne by the buyer and the expense of preparing the trustee's deed is borne by the seller.

(12) The property is not needed by the United States for any area crucial to national defense or for other public purposes.

Conclusions of Law

(1) This court has jurisdiction of this civil action to quiet title to property under 28 U. S. C. A. §1346(f) (Supp. 1973). See also 28 U. S. C. A. §2409(a) (Supp. 1973) (waiver of immunity by the United States ).

(2) Assuming for purposes of this action that title to the King property was conveyed by the Kings to Cowan on February 24, 1969, and from Cowan back to the Kings on December 10, 1969, the two federal tax liens assessed and filed against the Kings during this interim of Cowan ownership nevertheless attached to the King property on the date title was reconveyed to the Kings, i. e., December 10, 1969. See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945).

(3) The third federal tax lien assessed and filed against the Kings subsequent to December 10, 1969, but prior to the foreclosure sale on December 5, 1972, attached to the King property on the date of assessment, i. e., May 29, 1972. 26 U. S. C. A.

(4) Since title to the King property was held by the Kings on the date of the foreclosure sale, December 5, 1972, and the property was encumbered by the three federal tax liens on that date, such property was subject to redemption by the United States . 26 U. S. C. A. §7425.

(5) The tender in good faith of a check for $30,711.24 by Ray to Bain, on March 28, 1973, within 120 days of the foreclosure sale, was sufficient, despite the rejection of such check by Bain, to preserve the redemption rights of the United States . See Equity Mortgage Corporation v. Loftus [70-2 USTC ¶9722], 323 F. Supp. 144 (E. D. Va. 1970) (dispute between United States and purchaser at foreclosure sale over the amount required for redemption does not give rise to a waiver of redemption rights by the United States).

(6) In order to satisfy the amount specified for redemption in 28 U. S. C. A. §2410(d), the United States must pay the following amounts:

1. The actual amount paid by the purchaser at such sale, i. e., $30,010.00;

2. Interest on the amount paid by the purchaser at such sale at 6 percent per annum from the date of such sale;

3. The amount equal to the excess of (A), the expenses necessarily incurred in connection with such property, over (B), the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property, as follows:

(A) The expenses necessarily incurred in connection with such property:

(i) Note, deed of trust--$30.00

(ii) Homestead designation--$25.00

(Although the matter is not entirely free from doubt, the court concludes that the inclusion of Bain's expense for the promissory note, deed of trust, and homestead designation in financing his purchase that is, under Texas practice, normally incurred by the buyer, is reasonable and is an expense necessarily incurred in connection with the property. Performance of this legal work by Bain, an attorney, for himself as client, does not change the result.)

(iii) Recording fees--$11.50

(iv) Fire and extensive coverage insurance--$96.00

(v) Repair to the roof--$40.00 (By agreement of the United States )

(B) Since the statute allows only those expenses in Section A that exceed the income from the property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property, and since the reasonable rental value claimed by Bain of $1400.00 clearly exceeds the total expenses claimed in Section (A) of $202.50, it is clear that, under Bain's interpretation, he would be entitled to no reimbursement under this third section. Nevertheless, since no evidence was introduced at the hearing that would indicate that Bain either rented or used the property, and since the court agrees with the United States that Bain merely misinterpreted Section (B), the court concludes that it would be unfair to penalize Bain for his misinterpretation.

Thus, all the expenses listed above in Section 3(A) will be included among those to be borne by the United States .

(7) Bain's claim of $30.00 for preparation of a trustee's deed is disallowed on the ground that this expense is not, under Texas practice, normally incurred by the buyer and therefore does not constitute an expense necessarily incurred in connection with the property.

(8) Bain's claim of $150.00 for preparation of a title opinion was not shown by credible evidence at the hearing to be the result of an agreement to pay such sum or the result of an actual out-of-pocket expense and is therefore disallowed.

(9) Bain's claim of $500.00 for conferences with agents of the Internal Revenue and $90.00 for trips to the King property was not shown to be either reasonable or necessarily incurred in connection with the property and are therefore disallowed.

(10) Since Bain's claim of $3,598.44 for real estate taxes is contingent only and was not, at the time of foreclosure, an out-of-pocket expense, such claim must be disallowed.

 

 

 

Natalie Buchman, Plaintiff v. Herman Wasserberger, Defendant United States of America, Defendant and Third Party Plaintiff v. Charles C. Ackley and Madeline M. Ackley, Third Party Defendants

U. S. District Court, East. Dist. N. Y., 66-Civ-392, 2/26/69

[Code Sec. 6323]

Lien for taxes: Action for reconveyance: Conveyance due to misrepresentation.--In 1952 while an income tax dispute was pending the taxpayer gratuitously transferred real estate to his daughter to enable her to care for her mother. In 1963 the daughter transferred the property back to her father in order to make his 1953-1961 tax returns more accurate and to make his 1962 and 1963 financial statements truthful. The tax lien filed in 1961 was effective against the property reacquired from the daughter since she failed to prove that the property was transferred by her to her father subject to an equitable duty to reconvey it before the tax lien against the father was satisfied.

Allan Sturim, Sturim & Nizin, for plaintiff. Charles A. Wolfe, Steven M. Wolfe, 60 E. 42nd, New York, N. Y., for Wasserberger; Joseph P. Hoey, United States Attorney, Cyril Hyman, Assistant United States Attorney, New York, N. Y., for U. S.

Opinion and Findings

JUDD, District Judge:

This is an action to compel reconveyance of real property and remove a cloud on title caused by a lien for United States income taxes. After removal from the state court, jurisdiction under 28 U. S. C. §2410 was sustained on a motion made at an earlier stage of the proceeding. A default against Charles C. Ackley and Madeline M. Ackley, alleged mortgagees, was entered on November 6, 1967.

After trial on the merits, the court is constrained to sustain the tax lien, for the reasons set forth in this opinion.

[Facts]

Plaintiff is the married daughter of defendant Wasserberger. Her complaint alleges that her father and the United States induced her to reconvey to him a small parcel of rental property in Maspeth, Long Island, by misrepresenting to her that the conveyance would be only transitory, that it was necessary to show good faith in connection with the settlement of an income tax assessment against him, and that her father would deed back the property as soon as the income tax assessment was settled. The tax assessment was never in fact settled.

The answer of defendant Wasserberger admitted substantially all the allegations of the complaint. In fact, he executed a deed to his daughter during the pendency of the action. The United States , in a third party complaint, has asked that the validity of its lien be adjudicated and that a judgment of foreclosure be entered. This third party complaint was amended at the trial to add the daughter as a defendant.

The tax liabilities relate to income tax and penalties for the years 1943 to 1945 and 1947 to 1949, which were determined by a decision of the United States Tax Court in 1961 at the sum of $11,405.34 of taxes and $9,486.95 of penalties, together with substantial amounts of accrued interest. The validity of this assessment is not questioned in this proceeding.

[Deed of Property to Daughter]

Defendant Wasserberger had owned the Maspeth property since 1927. In 1952, while the income tax dispute was pending, he transferred record title to his daughter. Plaintiff testified that the purpose of the transfer was to enable her to take care of her mother, who was then separated from defendant Wasserberger, and give protection in the event Wasserberger contracted a second marriage. Wasserberger confirmed this fact, and stated that he did not consider the transfer to be an attempt to avoid income taxes. About a year after the date of the deed, he was divorced from plaintiff's mother, and subsequently married for a second time.

The deed did not reserve any life estate for Wasserberger, but his daughter said she did not need the income and could not manage the property. After the conveyance, Wasserberger continued to receive the rents from the property and pay the expenses just as before. He reported these on his income tax returns, and deducted depreciation against the building on the property. The accountant who prepared his tax returns after 1950 apparently was not aware of the daughter's record title to the property until it was disclosed to him by the revenue officer in charge of collecting the Tax Court judgment.

Wasserberger was a semi-retired bail bondsman, whose only substantial assets consisted of an apparently unsaleable interest in the bail bond business, cash surrender value of life insurance policies, and his interest in the Maspeth property. This property was listed as one of his assets in statements signed by him and submitted to a revenue officer by his accountant after the Tax Court decision, in connection with efforts to work out a partial payment agreement and an offer in compromise of his taxes.

[Return Conveyance of Property by Daughter]

In 1963, when the revenue officer learned that the financial statements were incorrect in that Wasserberger did not have record title to the property, he threatened to institute transferee liability proceedings against the daughter. Wasserberger spoke to his daughter on the telephone, and readily obtained a deed to the property. The deed, dated December 4, 1963, contained no express conditions.

A letter to plaintiff from the accountant had incorrectly stated that "We have been able to settle the old tax matter of your Dad * * *," but made it clear that the Internal Revenue Service insisted on the deed "so that they can have a lien on this property to insure Dad's payment of those old taxes." When called as a witness by the plaintiff, the accountant testified that he had never stated that there was a certainty that the offer of compromise would be accepted, and a revenue officer testified that he had no authority to give final approval of such an offer.

Although plaintiff expected that the transfer would be temporary, she testified that she understood the property would be used as collateral until the debts had been paid. She did not consider or discuss the contingency of her father failing to meet the obligations.

Several months after the conveyance, a formal offer in compromise was submitted to the revenue officer, but was ultimately rejected by the Internal Revenue Service.

[Tax Lien]

The notice of tax lien filed in 1961 was effective against the property from the time it had been placed in Wasserberger's name in 1963. It is established that a tax lien will attach to after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945); In re DeAngelis [67-1 USTC ¶9290], 373 F. 2d 755 (3d Cir. 1967). It is also clear that the lien attaches only to the interest which the taxpayer may have in the property as determined by state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960).

[Constructive Trust]

The daughter argues that her father held the property in constructive trust for her benefit. Under New York law, a constructive trust can arise where there is (1) a confidential relationship, (2) reliance on a promise, explicit or tacit, and (3) a breach of the same, resulting in unjust enrichment through a breach of confidence. Simmons v. Kelly, 195 N. Y. S. 2d 425 (Sup. Ct. Nassau Co. 1959) not officially reported; Farano v. Stephanelli, 7 A. D. 2d 420 (1st Dept. 1959 ).

[Conclusions]

The plaintiff did not sustain the burden of proving that her father acquired the property subject to an equitable duty to reconvey it before the tax lien was satisfied. The father's tacit promise to reconvey the property was to be effected only after the government's claim had been satisfied. The conversations with her father and the letter from the accountant which induced the transfer indicated that the property was to be used as collateral. She necessarily risked the loss of the collateral if the tax debt were not paid. She must have understood that she could not force a reconveyance from her father or his estate until the collateral had served its purpose. Therefore, any promise made by the father was not breached, and there was no unjust enrichment or breach of confidence.

The 1952 deed to plaintiff was made without consideration. It might have been attacked on either of two grounds. Her father might have asserted that she held it on a constructive trust for him, since the purpose was to keep the property from a second wife, but not to impoverish him. Or the United States might have asserted that it was made in fraud of creditors, pointing to the fact that Wasserberger's operation of the property was not changed in any way after the deed was recorded.

Although an attack on either ground might have failed, the daughter avoided having to meet any attack by making a voluntary reconveyance to her father. She also eliminated the risk of a transferee assessment and the burden of defending against a contention that her father was insolvent when the deed was made and that the transfer was in fraud of the government's claim as a tax creditor.

She cites Zeddies v. United States [66-1 USTC ¶9273], 357 F. 2d 897 (7th Cir. 1966) in support of her position, but that is not a parallel case. In Zeddies, the father had transferred property to his daughter while a tax case was pending, but she retained title, and the government failed to prove insolvency at the time of the conveyance. In this case, the issue is not the validity of the original transfer to the daughter, but her charge of misrepresentation by her father in connection with the retransfer.

Having executed a deed which made her father's 1953-1961 income tax returns more accurate and which made his 1962 and 1963 financial statements truthful, the daughter should not be permitted to repudiate the deed because of disappointment over his failure to obtain approval of a tax compromise.

There is nothing unconscionable about the United States enforcing a lien on real property for taxes which accrued during the time that the taxpayer owned the property, and which remained unpaid at the time of a voluntary reconveyance by the intermediate donee of the property.

Any contention that the conveyance was the result of fraud by the government or false assurances that the offer would certainly be accepted is refuted by the testimony. Moreover, relief against the United States on any theory of fraud is precluded by 28 U. S. C. §2680(h). Jones v. United States, 207 F. 2d 563 (2d Cir. 1953), cert. den., 347 U. S. 921 (1954); cf. Ceravolo & Comis, Inc. v. United States [67-1 USTC ¶9266], 266 F. Supp. 215 (N. D. N. Y. 1967).

The complaint should be dismissed, and judgment should be entered on the third party complaint for the foreclosure of the government's lien.

This opinion constitutes findings and conclusions of the court under F. R. Civ. P. §52(a).

Settle judgment within twenty days on five days notice.

 

 

 

In the Matter of Educational Equipment, Inc., Bankrupt

U. S. District Court, Central Dist. Calif., Bankruptcy No. 213,318-FW, 5/23/68

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Priority: Attachment to bankrupt's owned and after-acquired property: State tax liens.--Federal tax liens attached to property owned by the bankrupt taxpayer and to all after-acquired property and took priority over state tax liens which were filed after the federal tax liens to the proceeds from the sale of a residence acquired by the bankrupt estate as after-acquired property. The unpaid balance of the Government's tax liens were to share pro rata with state tax liens in accordance with the priorities set forth in Sec. 64a of the Bankruptcy Act.

Richard M. Moneymaker, Tiernan & Moneymaker, 650 S. Spring, Los Angeles , Calif. , for trustee. William Matthew Byrne, Jr., United States Attorney, Loyal E. Keir, Jerry R. Stern, Assistant United States Attorneys, Los Angeles, Calif., for U. S. Thomas E. Lynch, Attorney General, Neal J. Gobar, Edward J. Hanessian, for the State of Calif., State Board of Equalization and Department of Employment.

Findings of Fact and Conclusions of Law upon Trustee's Application for Instructions for Payment of Tax Liens

MORIARTY, Referee:

The above-entitled matter came on regularly for hearing before the Honorable James E. Moriarty, Referee in Bankruptcy, in his Courtroom, Room 519, United States Court House, Temple and Spring Streets, Los Angeles, California, on April 1, 1968 at 10:00 A. M. upon the application of the Trustee for instructions regarding the payment of tax claims against the bankrupt estate. The Trustee appeared by and through his counsel, Tiernan and Moneymaker, by Richard M. Moneymaker. The District Director of Internal Revenue appeared by and through his counsel, Wm. Matthew Byrne, Jr., United States Attorney, Loyal H. Keir, Assistant United States Attorney, Chief, Tax Division, and Jerry R. Stern, Assistant United States Attorney, by Jerry R. Stern. The State of California , State Board of Equalization and Department of Employment, appeared by and through its counsel, Thomas E. Lynch, Attorney General, Neal J. Gobar and Edward J. Hanessian, Deputy Attorneys General, by Edward J. Hanessian.

The Court having considered the Trustee's application, and being fully advised of the premises,

NOW, THEREFORE, upon the said Application, and on the proceedings at the said hearing, the Court makes the following Findings of Fact, Conclusions of Law and Order:

Findings of Fact

I FINDS that these proceedings were initiated by the filing of a Chapter XI proceeding in bankruptcy on June 27, 1966, and that on July 29, 1966 the United States of America filed an objection to the proposed plan of arrangement.

II FINDS that on or about August 5, 1966, Mr. Earl W. Kaufman, the president and sole stockholder of the bankrupt, transferred his personal residence to the estate for the purpose of creating a cash fund to be used as a deposit for priority creditors in accordance with Section 337 of the Bankruptcy Act.

III FINDS that the proposed plan of arrangement was never confirmed and the debtor was adjudicated a bankrupt on December 14, 1966.

IV FINDS that the following liens were filed by the federal taxing authorities:

1. Federal tax lien filed May 16, 1966, in the sum of $5,376.74.

2. Federal tax lien filed September 7, 1966, in the sum of $2,586.00.

V FINDS that the present balances due on the federal government's liens are as follows:

Lien filed May 16, 1966 .........         $5,331.91

Lien filed September 7, 1966 ....         $2,555.88

 

VI FINDS that the following unpaid liens were filed by the state taxing authorities:

1. State of California , State Board of Equalization lien filed November 22, 1966, in the sum of $3,512.77.

2. State of California , Department of Employment lien filed September 13, 1966 in the sum of $931.73.

VII FINDS that the federal government filed a claim against the estate for additional taxes, not the subject matter of the foregoing liens, in the sum of $1,968.78.

VIII FINDS that a stipulation and order was filed by this Court on July 12, 1967, wherein counsel for the Trustee, United States of America, and State of California agreed that the said residence would be sold free and clear of the aforesaid liens, provided that the proceeds of the sale would be held as a fund subject to said liens and claims in the same manner and with the same priorities such liens and claims would have had if the property had remained unsold.

IX FINDS that the net amount realized from such sale, after the payment of commissions and costs, was $6,376.58.

X Any conclusion of law deemed as or properly constituting a finding of fact is hereby adopted as a finding of fact.

Conclusions of Law

I CONCLUDES as a matter of law that the federal government's lien filed May 16, 1966 attached to the bankrupt's then owned property and to all after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945).

II CONCLUDES as a matter of law that the personal residence acquired by said estate constitutes after-acquired property of the debtor, such as new capital, and title to same did not vest in the Trustee until December 14, 1966, the date of said adjudication. Lehman v. Cameron, 139 N. Y. Supp. 2d 818 (1955); Weiss v. Fleetwood Bank, 26 N. Y. Supp. 2d 583 (1941); In re Dalco Builders, 22 F. 2d 845 (E. D. N. Y. 1927).

III CONCLUDES that the two liens filed by the District Director of Internal Revenue are prior in right to the proceeds of said sale, and that said liens attached to said proceeds.

IV CONCLUDES as a matter of law that the unpaid balance of the federal government's liens, together with the federal government's general tax claims herein, shall share pro rata with the aforesaid liens filed by the State of California taxing authorities, in accordance with the priorities extended such taxes pursuant to Section 64a of the Bankruptcy Act.

V Any finding of fact deemed as or properly constituting a conclusion of law is hereby adopted as a conclusion of law.

 

 

 

United States of America , Plaintiff v. Alex Shonder Birns, Defendant

U. S. District Court, No. Dist. Ohio , East. Div., Civil Action No. 34454, 223 FSupp 94, 11/8/63

[1954 Code Secs. 6321-6323]

Tax lien: Priority of creditors: Chattel mortgagee: After-acquired car.--Where the Government filed tax liens against a delinquent taxpayer, subsequently recovered judgment in the amount of the sums due it, and properly filed the judgment for record under Code Sec. 6323 and Ohio law, the tax liens attached to an automobile when the taxpayer acquired title to the vehicle and were superior to the lien of a mortgagee which was noted on the certificate of title for the automobile. The liens were not merged in, and extinguished by, the subsequently rendered judgment but continued in effect until the liability was satisfied or barred.

Merle M. McCurdy, 400 Federal Bldg., Cleveland , Ohio , for plaintiff. C. Anthony Stavole, Cozza & Steuer, 345 Leader Bldg., Cleveland, Ohio, James R. Willis, 1404 East Ninth St., Cleveland, Ohio, for defendant.

Memorandum

GREEN, District Judge:

This matter is presently before the Court on the question of distribution of funds from the proceeds of sale of an automobile on a writ of execution based on a judgment obtained by the Government. The car in question was titled in the name of Alex Shonder Birns at the time of the seizure by the Government, under which the sale was had.

[Facts]

In 1952 the Government filed tax liens for nonpayment of taxes against Alex Shonder Birns. On August 6, 1958 the United States recovered a judgment in the amount of $146,099.49, representing the sums due the Government on the said taxes. The judgment was filed for record with the Clerk of Courts for Cuyahoga County , Ohio , on August 23, 1958.

On July 13, 1963 Alex Shonder Birns acquired title to a 1963 Cadillac Convertible automobile. On July 15, 1963 a lien for $3,500.00 in favor of James R. Willis was noted on the certificate of title for the said automobile, in accordance with the provisions of §4505.13 of the Ohio Revised Code.

On July 16, 1963 the said Cadillac automobile was seized by the Government, pursuant to a "writ of execution" issued by this Court on the judgment rendered on August 6, 1958.

On August 26, 1963 and order of public sale under sealed bids was entered, and acting thereunder the United States Marshal offered the said automobile for sale. On October 9, 1963 the sale of the said automobile, for the sum of $4,311.00, was confirmed, and all liens ordered transferred to the proceeds of sale.

The Government alleges that it is entitled to the proceeds of sale by virtue of its lien rights under 26 U. S. C. A. §6321 and 26 U. S. C. A. §6331.

[Merger of Lien in Judgment]

James R. Willis contends that he is entitled to be paid his lien of $3,500.00 before any distribution to the Government. It is his position that his lien, noted on the certificate of title, is superior to that of the Government, and that the Government's lien for taxes has been merged in the judgment in this action.

There does not appear to be any question that prior to 1958, when judgment was rendered on the claim for delinquent taxes, that the Government had acquired a lien on the property of Alex Shonder Birns by virtue of 26 U. S. C. A. §6321. That section of the Internal Revenue Code provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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.

It is well settled that the lien provided for in §6321, formerly §3670 I. R. C. 1939, and rights to property, whether real Jur. Internal Revenue,§219.

It is well settled that the lien provided for that the statutory lien of §6321 was merged in, and extinguished by, the judgment rendered in 1958. Examination of the authorities relied upon by mortgagee discloses that this position is not well taken.

The rule, stated at 30A Am. Jur., Judgments, §321, that, under the theory of merger of cause of action, the old debt ceases to exist and the new judgment debt takes its place, is cited by mortgagee. However, at §323 of the same work it is stated:

The general rule is that a lien securing a debt which becomes merged in a judgment is not affected by such merger. If a debt is of such a character that a lien is given by common law or statute, the merger of the judgment does not involve a merger of the lien, and the latter may continue until the debt is satisfied.

Mortgagee has also cited 28 U. S. C. A. 1962 in support of the claim that the statutory lien for taxes has been merged in the judgment. 28 U. S. C. A. §1962 provides that:

Every judgment rendered by a district court within a State shall be a lien on the property located in such State in the same manner, to the same extent and under the same conditions as a judgment of a court of general jurisdiction in such State, and shall cease to be a lien in the same manner and time.

The obvious purpose of this legitlative enactment was to provide an equality between judgments rendered in civil actions in the Federal courts and comparable judgments in the State courts, insofar as they could be enforced as liens against the debtor. There is nothing in the history, or judicial interpretation, of this section of the Judicial Code to indicate that it was intended to, or should, operate to alter a vital aspect of the collection provisions of the Internal Revenue Code.

[Period of Lien]

The plain language of the pertinent provision of the Internal Revenue Code contradicts mortgagee's contention. In §6322 of Title 26 it is provided:

Unless another date is specifically fixed by law, the lien imposed by §6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time.

It will be noted that the lien continues until the liability for tax is satisfied or is barred by time, and not for the effective period of the assessment alone. The liability for the amount of the tax remains enforceable and unsatisfied until such time as the judgment is satisfied or barred. Consequently, the lien remains in full force and effect during the term of the judgment, and co-exists therewith.

The statute authorizing suits to recover for unpaid taxes is consistent with the proposition that the lien of §6321 is perpetuated thereby; §7403 of Title 26 provides:

In any case where there has been a refusal or neglect to pay any tax [basically the language of §6321] . . . the Attorney General . . . may direct a civil action to be filed . . . to enforce the lien of the United States under this title with respect to such tax or liability . . .

Thus it is clearly stated by the Congress that the suit is one to enforce the statutory lien existing by reason of the refusal or neglect to pay the tax.

The decision in Investment & Securities Co. v. United States [44-1 USTC ¶9210], 140 F. 2d 894 (C. A. 9, 1944) is cited by both parties. In that case the Government reduced to judgment a claim for unpaid taxes, and the Court of Appeals held the Government was entitled to prevail over the taxpayer's pledgee by virtue of the lien rights accorded under Sections 3670, 3671 and 3672, I. R. C. 1939 (now 26 U. S. C. A. Sections 6321, 6322, 6323). That authority, therefore, sustains the position of the Government in this action.

It is not denied that the Government complied with filing requirements of 26 U. S. C. A. §6323, and had the judgment recorded in compliance with §317.09, Ohio Revised Code.

It is the Court's conclusion that on July 13, 1963, when Alex Shonder Birns acquired title to the vehicle sold in this action, the Government's lien for taxes attached to the said vehicle.

[Priority of Liens]

This leaves for determination the question of priority of liens.

Mortgagee contends that by virtue of §4505.13 of the Ohio Revised Code the lien noted on the face of the certificate of title, in his favor, is superior to that of the Government. §4505.13, in essence, provides that a mortgage noted on the face of a certificate of title "shall be valid as against the creditors of the mortgagor, whether armed with process or not, and against subsequent purchasers, mortgagees, and other lienholders and claimants."

Section 6323 of Title 26 provides:

(a) Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate.

As previously stated, the notice filing provisions of §6323 were complied with in this case.

Questions of validity and priority of income tax liens are questions to be determined by the Federal courts applying Federal law, United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1954), although state law and procedures have been applied in consideration of foreclosure proceedings involving conceded junior tax liens, United States v. Brosman [60-2 USTC ¶9516], 363 U. S. 237 (1960) explained in United States v. Buffalo Savings Bank [63-1 USTC ¶9166], 371 U. S. 228 (1963).

It is established in the Federal law that a properly perfected tax lien has priority over subsequent liens and claims, including those of subsequent mortgagees, on the basis of first in time, first in right. Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (CA 5, 1953); United States v. Levin [55-1 USTC ¶9354], 128 F. Supp. 465 (D. C. Md., 1955); Knox v. Great West Life Assurance Co. [53-1 USTC ¶9247], 109 F. Supp. 207, (D. C. E. D. Mich., 1952), aff'd [54-1 USTC ¶9373] 212 F. 2d 784 (CA 6, 1954). It is also settled that a Federal tax lien cannot, without the consent of Congress, be displaced by a later lien based on state law. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958); Michigan v. United States [43-1 USTC ¶9225], 317 U. S. 338 (1943); Knox v. Great West Life Assurance Co., supra.

It is the Court's opinion that the provisions of O. R. C. §4505.13 cannot, and do not, create a lien in favor of a mortgagee named on the face of an automible certificate of title which is superior to that accorded the Government pursuant to 26 U. S. C. A. §6321, when the noted lien is subsequent to the recording of the tax lien. The legislative enactment of the State of Ohio cannot vitiate the dictates of Congress in the filed of collection of Federal taxes.

No case squarely in point has been cited by either party. The Government has, however, set forth two decisions supporting its position. In both Merchants Loan Co. v. United States [57-2 USTC ¶9741], 169 F. Supp. 227 (D. C. Ariz., 1957) and Union Planters National Bank v. Godwin [56-2 USTC ¶9671], 140 F. Supp. 528 (D. C. E. D. Ark., 1956) it was held that a properly recorded tax lien had priority over a subsequent motor vehicle mortgage, both cases involving statutes of similar language and effect as O. R. C. §4505.13.

[Judgment of the Court]

The Court concludes that the lien of the United States is superior to that of James R. Willis, and an order will be entered directing the Marshal to disburse the funds received from the sale of the said 1963 two-door Cadillac Convertible automobile, Model No. 62-67, Serial No. 63 FO24271, as follows:

(1) Payment of court costs and Marshal's shal's fee, if any.

(2) Payment of storage costs.

(3) Payment of appraiser's fees.

(4) Payment of any miscellaneous charges connected with the handling or sale of said automobile.

(5) The residue of the funds shall be paid to the District Director of Internal Revenue Service in accordance with the provisions of Title 26, United States Code, Section 7406.

 

 

 

In the Matter of Clinton Crockett, doing business as Crockett Furniture Co., Bankrupt

U. S. District Court, No. Dist. Calif. , No. Div., In Bankruptcy No. 13722, 150 FSupp 352, 4/4/57

[1939 Code Secs. 3670, 3671--similar to 1954 Code Secs. 6321, 6322]

Lien for employment withholding taxes: Bankrupt's property: Taxes owed by partnership: Former partner the bankrupt: After-acquired property: Assessment and demand for payment as prerequisite for lien.--The Government asserted a lien for 1953 federal employment withholding taxes owed by a partnership against a bankrupt's individual property which he acquired after the partnership of which he had been a member ceased doing business. None of the assets of the bankrupt were acquired from the partnership. The referee in bankruptcy gave the bankrupt's individual creditors priority over the Government in the distribution of the bankrupt's estate. The Court held that the tax lien attaches to all after-acquired property of the delinquent taxpayer, and its priority is determined by the general rule that first in time is first in right, regardless of the fact that it is a general lien and not a specific lien. However, the case was remanded to the referee to make appropriate findings of fact concerning the assessment date of the federal taxes and as to whether payment was demanded of the bankrupt and whether there was a refusal to pay--all statutory prerequisites for a perfected lien.

Lloyd H. Burke, United States Attorney, Charles Elmer Collett, Assistant United States Attorney, and Joseph O. Greaves, Attorney, Office of Regional counsel, Internal Revenue Service, for the United States. Herbert C. Coblentz, 306 California Bldg., Stockton , Calif. , for the bankrupt.

Memorandum and Order

HALBERT, District Judge:

The United States of America , as petitioner here, has filed with this Court a petition for review of the order of the Referee denying a tax lien claim by petitioner.

It appears that the above named bankrupt was adjudicated a bankrupt by this Court on July 26, 1954. The United States of America filed a proof of claim of $1511.12 for employment withholding taxes for the first and fourth quarters of 1953 incurred by the partnership of Crockett Brothers, of which the bankrupt was a partner. The partnership apparently discontinued its business operations sometime in 1953. The bankrupt thereafter went into business by himself, individually, with none of the assets of the former partnership.

[Referee's Determination]

Petitioner, in the proceedings before the Referee, claimed that the United States was entitled to the status of a lien creditor, ¹ by virtue of the statutory lien provided for in §3670 of the Internal Revenue Code of 1939. ² (Title 26 U. S. C. A. §6321 [1954]), on the theory that the bankrupt was liable, as a general partner of the former partnership, individually for the tax liability incurred by the former partnership. The Referee determined that petitioner failed to demonstrate that it had a lien on any specific property of the bankrupt, and concluded that the property of the bankrupt should be distributed in the manner prescribed by §5(g) of the Bankruptcy Act (11 U. S. C. A. §23(g)). ³ Accordingly, the Referee relegated petitioner to the status of a partnership creditor, giving all of the bankrupt's inividual creditors priority in the distribution of the estate.

The issue on review, as certified by the Referee, is:

"Whether or not the United States of America can assert a lien on the bankrupt's individual property which he acquired after the partnership ceased business and from which which partnership he secured none of its assets for employment withholding taxes incurred by the former partnership."

[After-acquired Property]

It is well established that the lien provided for in §3670 (I. R. C. 1939) attaches to all after-acquired property of the delinquent taxpayer (Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449]; Salsbury Motors, Inc. v. United States, 210 Fed. (2d) 171 [54-1 USTC ¶9217]), and its priority is determined by the general "first in time is first in right" rule regardless of the fact that it is a general lien and not a specific lien. ⁴ ( United States v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191]). It follows, then, that if the bankrupt in the case at bar is subject to the provisions of §3670, supra, his property would have passed into the hands of the trustee impressed with petitioner's lien (§§ 67(b) and (c) (11 U. S. C. A. §§ 107(b) and (c)); and cf.: United States v. Heffron, 158 Fed. (2d) 657 [47-1 USTC ¶9194]), even though such property was acquired after the time at which the lien attached. Furthermore, it cannot be doubted that if petitioner has a valid lien against the individual property of the bankrupt, petitioner should be considered as an individual lien creditor for the purposes of §5(g) of the Bankruptcy Act, irrespective of the fact that the underlying debt could have been asserted against the partnership estate as well (cf.: Mitchell v. Hampel, 276 U. S. 299; Globe Indemnity Co. v. Keeble, 20 Fed. (2d) 34; and see Lewis v. United States, 92 U. S. 618 [holding, inter alia, that the preferential status of the United States as a creditor of a partnership applies as well to the separate and individual estates of the bankrupt partners]; and see also: Anno. 75 A. L. R. 997, 999).

[Prerequisites for Perfected Lien]

In order for the lien of §3670 (I. R. C. 1939) to attach to the individual property of the bankrupt, it must be established that (1) he is a "person liable to pay" the tax, and (2) he has "neglected or refused to pay the same after demand".

Under the law of California, it is clear that an individual partner may be held liable for the entire amount of a partnership debt (§15015(b) of the California Corporations Code, and cf.: Brazil v. Azievedo, 32 Cal. App. 364), and under that rule, an individual partner has been held liable to the United States for the employment withholding taxes of the partnership (Heller v. United States, Civil No. 33545, N. D. California, So. Div. 1955 [55-1 USTC ¶49,084]) and his individual property has been held subject to the lien of §3670, supra (Underwood v. United States, 37 Fed. Supp. 824 [41-2 USTC ¶9514], aff'd., 118 Fed. (2d) 760 [41-1 USTC ¶9296]. Hence, it is the opinion of this Court that the bankrupt is a "person liable to pay" the tax asserted within the meaning of §3670, supra, and that the lien claimed by petitioner, if perfected, entitled petitioner to the status of an individual lien creditor of the bankrupt with priority over all other individual creditors except those asserting senior liens within the meaning of §3672 (I. R. C. 1939).

It cannot be determined, however, on the record now before this Court, whether petitioner has perfected the lien it asserts against the bankrupt's property. By the plain wording of §3670, supra, the lien does not attach unless and until the delinquent taxpayer "neglects or refuses to pay the same after demand". ⁵ It is incumbent upon petitioner to show that these statutory prerequisites have been fulfilled before the Referee can treat petitioner as a lien creditor.

In view of the state of the record, it is within the power of this Court to remand this proceeding to the Referee to make appropriate findings of fact on this issue (Title 28 U. S. C. A. §2106; Huffman v. United States, -- Fed. (2d) -- [9th Cir., No. 15187 (March 21, 1957) [57-1 USTC ¶9521]]; N. M. Landy, Inc. v. Nicholas, 221 Fed. (2d) 923; and In re Rockford Baseball Club, Inc., 201 Fed. (2d) 685).

IT IS, THEREFORE, ORDERED that the case be remanded to the Referee in Bankruptcy with directions that he make a specific finding on the following questions:

1. Whether the bankrupt neglected or refused to pay the tax after demand; and

2. The date on which the assessment list was received by the collector. (§3671)

If it is determined that the statutory prerequisites necessary to perfect petitioner's lien have been fulfilled, then distribution of the bankrupt's estate shall be accomplished in a manner consistent with the views expressed in this opinion, but if said statutory prerequisites have not been fulfilled, then the Referee's order sought to be reviewed by this proceeding may stand affirmed and approved.

¹ Petitioner claims that it has a lien for taxes within the meaning of §67(b) of the Bankruptcy Act, and contends that by virtue of said lien, it is entitled to distribution after reasonable costs of administration and priority wage claims.

² Section 3670 of the Internal Revenue Code of 1939 provides:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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."

³ Under §5(g) of the Bankruptcy Act, the Referee is required to distribute the assets of an individual partner in bankruptcy first to individual creditors, and if any residue remains after such distribution, then partnership creditors are entitled to receive dividends out of the bankrupt estate.

⁴ The Referee apparently concluded that the lien for taxes asserted by petitioner would be general only with respect to partnership property, which could be traced into the hands of the bankrupt, but as to the individual property of the bankrupt, the lien must have been shown to have attached to some specific property, before it could entitled the United States to any preferred position vis-a-vis other individual creditors of the bankrupt.

⁵ Once, however, the existence of these prerequisites is shown, the time that which the lien attaches is the date on which the assessment list was received by the collector. (§3671, I. R. C., 1939)

 

 

 

United States of America , Plaintiff v. Charles Richard Aley and William R. Cobb, Successor Trustee, Defendant

In the District Court of the United States for the Western District of Kentucky at Louisville, Civil Action No. 2707, August 10, 1954

[1939 Code Sec. 3651--similar to 1954 Sec. 6301]

Liens for taxes: Priority of government's lien.--The government's liens in the amount of $52,000 were declared valid and subsisting against all property and rights to property of the taxpayer, including rights to property which may have been acquired by the taxpayer after the tax assessments

J. Leonard Walker, United States Attorney, for plaintiff. Arthur W. Grafton, Wyatt, Grafton & Grafton, for defendant.

Judgment

SHELBOURNE, District Judge:

This action coming to be heard upon the complaint of the UNITED STATES herein filed December 4, 1953, the answer of the defendant, Charles Richard Aley, filed December 24, 1953, and the answer of William R. Cobb, defendant, filed December 24, 1953, and the reply of the United States filed March 10, 1954, and there appearing to be no genuine issue of fact as to the matters set forth in said pleadings, and the arguments of counsel having been heard, and the Court being otherwise sufficiently advised, it is now:

ORDERED, ADJUDGED AND DECREED that: 1. The defendant, Charles Richard Aley, is indebted to the plaintiff, United States of America, in the sum of Fifty-Two Thousand Two Hundred and Eighty-Six Dollars and Thirty-Five Cents ($52,286.35) plus interest thereon as provided by law, and that judgment therefor be entered for the United States of America against the said defendant Charles Richard Aley.

2. The United States of America has liens, arising out of the assessment of unpaid income taxes of the defendant, Charles Richard Aley, in the amount of $31,417.40, for the year 1950, plus statutory interest thereon from May 15, 1951, for which the assessment list was received by the then Collector of Internal Revenue on May 15, 1951, in the amount of $10,139.61 for the year 1951, plus statutory interest thereon from June 15, 1952, for which the assessment list was received by the then Collector of Internal Revenue June 16, 1952, and in the amount of $10,729.34, for the year 1952, plus statutory interest thereon from May 15, 1953, for which the assessment list was received by the District Director of Internal Revenue on May 14, 1953, which tax liens are prior, valid and subsisting liens upon all property and rights to property belonging to the defendant, Charles Richard Aley, including all property and rights to property in which the said defendant has a right or interest to the extent of his right or interest therein, and all property or rights to property that may have been acquired by the said defendant subsequent to the tax assessments aforesaid.

3. The defendant, William R. Cobb, as successor trustee under a trust instrument dated August 5, 1935, and amended September 25, 1939, now holds as the corpus of said trust One Thousand Twenty-Five (1,025) shares of the common stock of the Standard Oil Company of Kentucky, and the sum of $2,220.74 being dividends received upon said stock since the date of the filing of the action herein, less the sum of One Hundred and Two Dollars and Fifty Cents ($102.50), paid out by said defendant William R. Cobb, in payment of State of Kentucky ad valorem taxes assessed against said shares of stock hled by him.

4. The defendant, C. R. Aley, is entitled to receive from the defendant, William R. Cobb, the net income of the trust estate held by the defendant, Cobb, which net income consists of the gross income from said securities less the expenses of the operation of said trust, including taxes assessed against the corpus of the trust, compensation of the trustee, and the expenses incurred in the administration of the trust estate including attorneys' fees and Court costs arising out of any litigation, including this action.

5. The defendant, William R. Cobb, as trustee, is entitled to be credited with the sum of One Hundred and Two Dollars and Fifty Cents ($102.50) paid out as aforesaid for ad valorem taxes on the securities held in the trust, to the further sum of $207.56, which is adjudged by the Court to be fair and reasonable compensation to the trustee for his services heretofore rendered in the administration of the trust, for the further sum of $150.00 which is adjudged to be a fair and reasonable fee for the services of his attorney in the defense of litigation involving the trust, including this action, and that for ordinary services hereafter the trustee shall be entitled to compensation equal to five per cent (5%) of the income collected by him from time to time.

6. It is further adjudged upon the payment of the fees and expenses set forth above, the remainder of the income in the hands of the trustee shall be paid over to the United States of America to be credited upon the judgment of the United States and that future income received by the trustee during the life of the said Charles Richard Aley shall be likewise so paid over after deduction by the trustee of sums sufficient to pay the taxes and compensation of the trustee as hereinabove set forth.

 

 

 

The Minnesota Mutual Life Insurance Company and Y. C. Meyers v. United States of America

District Court of the United States, Northern District of Texas, Dallas division, No. 3302-537, 47 F2d 942, Decided March 3, 1931Where property of a value of approximately $90,000 is encumbered in the amount of $104,000 prior to the filing by the United States of a lien for unpaid income tax, the United States has no equity in the property, and the holders of the superior lien, having foreclosed and taken title, are entitled to a decree removing the cloud of the Government's lien from their title, a second sale being unnecessary in view of the court's finding that there was nothing in the property for the United States. "The decree will not extinguish the lien against anything else that the debtor may acquire, nor does it extinguish the debt."

Locke, Locke, Stroud & Randolph, Dallas , Texas , for the complainants. Norman A. Dodge, United States Attorney, Fort Worth, Texas, Wright Matthews, Washington, D. C., for the defendants.

ATWELL, D. J.:

All of the provisions mentioned by the two subdivisions of paragraph 136 U. S. C. A., title 26, for the removal of a lien against real estate, have been complied with. The suit is justified by the permission therein given.

The proof shows that the lien of the United States upon the real estate described for income taxes is junior to the lien under which the plaintiffs claim. Prior to the fixing of the government lien the real estate was encumbered for the sum of $104,000.00, which now amounts to approximately $113,000.00. Disinterested qualified witnesses fixed the present maximum value of the property to be between eighty-seven and ninety-five thousand dollars. Under no theory could it be contended or asserted that there is any equity whatever for the defendants.

The holders of the superior lien foreclosed and this action is to remove the cloud from the title of the purchaser.

Notwithstanding the fact that the government could realize nothing on its claim from another sale, it is insisted that the act requires that course to be taken before the title of the purchaser is clean.

The controversy is not a matching of priorities. If that were true the national government must prevail. County of Spokane v. U. S. , 279 U. S. , 80 [1 USTC ¶387]; U. S. v. Snyder, 149 U. S. , 210. It is rather the harvesting of the crop in the order of fixing. The private creditor had made its contract with the debtor and had preserved its rights to priority in collection. This right of sale and contract is valuable and cannot be impaired by any subsequent act of the debtor or of the sovereign.

The last portion of subdivision (a) of paragraph 136 provides, "proceed to adjudicate the matters involved therein, and finally determine the merits of all claims to and liens upon the property in question, and, in all cases where a claim or interest of the United States therein is established, shall decree a sale of such real estate, by the proper officer of the court, and the distribution of the proceeds of such sale according to the findings of the court in respect to the interest of the parties and of the United States." The last part of subdivision (b) is that, "upon the filing of such bill the district court shall proceed to adjudicate the matters involved therein, in the same manner as in the case of bills filed under subdivision (a) of this section." Subdivision (a) relates to actions by the United States to enforce a lien for tax upon real estate; and subdivision (b) relates to the removal of a lien fixed by the United States . The proceedings in either case are at equity. The chancellor is directed to "adjudicate all matters involved therein," and to "finally determine the merits of all claims and liens upon the land in question and in all cases where a claim or interest of the United States is established therein" he shall order a sale with proper distribution.

Manifestly a court of equity is not directed to do a useless and vain thing. If, after having had a full and complete hearing, there is nothing in the property for the United States , then and in that event it should be so decreed.

The latter part of the paragraph was in the interest of the citizen. Tax liens are being constantly fixed. It would be cumbersome and costly to require the prior lien holder to seek a remedy at the seat of national government. To avoid this a general permission, within the terms of the statute, was given, and the national chancery court was given jurisdiction to make the inquiry and decree the result. If the act meant that the court should find that the citizen's claim was senior and that the property against which it ran was wholly insufficient to pay it, but that a sale must be ordered regardless of such showing, the citizen would have a depletion of his just amount regardless of real equities, since the statute requires that "all costs of the proceedings * * * shall be borne by the person filing the bill."

The labor of the chancellor would be vain because the layman could very easily determine the question of priority from the record itself, and the amount of each debt, as well as the value of the property.

The congress vested in the court the power to go into all of the matters and to say whether there was anything in the property for the United States . If not, then the decree would so show, and the flaw in the title would be removed. A sale, whether useless or useful, does not remove clouds. They are judicially dissipated.

There is nothing in the case of Ormsbee v. United States, 23 F., (2d) 926, or, Sherwood v. United States, 5 F., (2d), 991, or, Oden v. United States, 33 F., (2d) 553 [1 USTC ¶400], to the contrary. In the last case Judge Dawkins held that a petition to cancel a government tax lien inferior in rank to a mortgage and vendor's lien, alleging that the proceedings were insufficient to discharge the lien and the prior mortgage, stated a cause of action in equity for the cancellation of the government lien. Judge Campbell, in the Sherwood case, outlined the statute that we are considering and then held that a lien of the United States could not be extinguished by a judgment in a state court, brought to foreclose a prior mortgage, and that a sale must be had under this statute in order that the funds realized therefrom could be prorated, as therein provided; while Judge Clayton, in the Ormsbee case merely held that a lien of the United States for income taxes was subordinate to a mortgage duly executed and recorded prior to the record of the tax lien, and that upon a foreclosure of the mortgage in the federal court, with the United States as a defendant, the real estate would be sold free of the tax lien. I am not sure of the correctness of Judge Clayton's decision since section 136 may be exclusive.

The decree will not extinguish the lien against anything else that the debtor may acquire, nor does it extinguish the debt. It merely removes the cloud from the particular real estate described in this suit because the value thereof is very much less than the prior lien owned by the plaintiffs and there is and would be no equity for the junior lien holder, to-wit, the United States .

Decree for the plaintiffs.

 

 

 

Investment and Securities Company, a Corporation, Appellant, v. United States of America , Appellee

(CA-9), United States Circuit Court of Appeals for the Ninth Circuit, No. 10,531, 140 F2d 894, February 16, 1944

On appeal from the District Court of the United States for the Eastern District of Washington, Northern Division.

Property subject to lien: Stockholders' claim against bank.--Where taxpayers had a claim against an insolvent bank which claim was subject to a lien for unpaid taxes, the Court holds that the subsequent assignment of the claim to a third party did not make the tax lien inferior to that of the third party, that the property was subject to a tax lien, and that the notice required by statute to make the lien effective against third parties was duly recorded in the taxpayer's domicile (Wisconsin) and need not be recorded in Washington where the insolvent bank was situated. The Court further holds that since there is no federal statutory provision as to a period of limitations on the judgment, the liability of the tax now merged in the judgment has not become unenforceable by reason of lapse of time. Affirming District Court decision, 49 Fed. Supp. 620, reported at 43-1 USTC ¶9453.

Witherspoon, Witherspoon and Kelley, William V. Kelley, Spokane , Wash. , for appellant. Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, A. F. Prescott, Edward H. Horton and Maryhelen Wigle, Special Assistants to Attorney General, Washington, D. C. (Edward M. Connelly, U. S. Attorney, Harvey Erickson, Assistant U. S. Attorney, Spokane, Wash., of counsel), for appellee.

Before WILBUR, GARRECHT and HEALY, Circuit Judges.

GARRECHT, Circuit Judge:

[The Facts]

On February 18, 1934, the United States of America made an assessment for income taxes for the year 1928, against Judson G. Rosebush, a resident of Wisconsin , in the amount of $37,220.85. Notices of tax lien were filed with the Clerk of the United States District Court of Wisconsin and with the Register of Deeds for Outagamie County , Wisconsin , during April, 1934.

On April 20, 1937, Judson G. Rosebush submitted an offer of $820 for shares in the Inland Empire Paper Company of Spokane , Washington . At this time, Rosebush was indebted to the appellant, Investment and Securities Company of Spokane , Washington , in the amount of $76,749, on two promissory notes which had been transferred to the appellant as the collection and liquidating organization for the benefit of depositors of the Old National Bank of Spokane , Washington . The Inland Empire Paper Company stock was security for this indebtedness and was being sold by the appellant. At the time Rosebush made his offer to purchase the Inland Empire Paper Company stock, the appellant corporation had discovered that Rosebush had paid up his assessments on certain shares he owned in the Exchange National Bank of Spokane , Washington , and that said bank was planning to pay its creditors in full and pay something to its former shareholders. So, when Rosebush made this bid for the paper company stock, the Investment and Securities Company attempted to get an assignment of his claim against the Exchange National Bank and threatened to bring legal action against Rosebush. To avoid being sued and in consideration of the opportunity to reacquire his stock in the Inland Empire Paper Company, Rosebush finally assigned to the appellant corporation, on July 27, 1937, any recovery which might be made on the assessment paid to the Exchange National Bank. Said assignment was made subject to the prior lien of the United States for income taxes.

In the same year, 1937, the United States brought action in the District Court for the Eastern District of Wisconsin against Rosebush for the nonpayment of taxes; on November 26, 1941, judgment was entered against Rosebush in the amount of $37,220.85.

On November 27, 1941, the United States Attorney for the Eastern District of Wisconsin caused a writ of fieri facias to be issued, commanding the United States Marshal of the Eastern District of Washington to levy on property of Rosebush in his district on account of the said judgment, and the writ was duly served on the Shareholders Agent of the Exchange National Bank of Spokane for the unpaid taxes.

The present action was commenced by Charles P. Robbins, Shareholders' Agent of the Exchange National Bank of Spokane , Washington , in the nature of an interpleader. The agent paid $4,250 into court and prayed that all parties interested be joined to determine the ownership of the funds, and be enjoined from suing the said agent therefor.

The lower court found that the rights of the Investment and Securities Company under the assignment were junior to the tax lien of the United States Government.

The assignment in issue here contained the following statement:

"* * * It is understood that the Collector of Internal Revenue has filed an Order of Distraint against the party of the second part and that this assignment is subsequent and junior to any lien against said recovery that said Collector of Internal Revenue may have acquired by virtue of such Order of Distraint."

There was considerable correspondence between the Investment and Securities and Rosebush, in which Rosebush and the corporation made it very clear that the rights of the Investment and Securities Company would be junior to the rights of the United States Government.

The appellant contends that the federal tax lien was never established in Washington . The statutory provisions with respect to filing of this tax lien are:

§3670. Property Subject to Lien. (Title 26, U. S. C. A.) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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. 53 Stat. 448.

§3671. Period of Lien.

Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of iapse of time. 53 Stat. 449.

§3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

(a) Invalidity of lien without notice.

Such a lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

(1) Under State or Territorial laws.

In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice; or

(2) With the clerk of the District court.

In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law provided for the filing of such notice; or

* * * * * * *

In the absence of the required notice, the Government's lien is valid as to all except those above enumerated. It should be noted that the word "pledgee" was not in the statute prior to 1939, and therefore would not apply to the rights acquired by this assignment in 1937. The lower court found that appellant did not come within any of the above exceptions and we are in accord with this finding.

Nevertheless, the notice required by statute to make the lien effective as to third parties was duly recorded as required by the statute. The taxpayer here is a resident of Wisconsin and the notice of lien was duly recorded there. The appellant's contention that the recording should have been in the State of Washington rather than Wisconsin , the taxpayer's domicile, is in error.

The appellant contends that the rights of the Government are barred here by the Statute of Limitations. The assessment list was received by the Collector of Internal Revenue February 18, 1934; the action for collection of the taxes was begun in 1937, and within the period of limitations. Judgment was entered in 1941. There is no federal statutory provision as to a period of limitations on this judgment; it follows that in the absence of such a limitation a tax can be collected at any time; therefore, the liability of the tax now merged in the judgment has not become unenforcible by reason of lapse of time.

As to whether the property in question is subject to a government lien, this court has already determined that point. See Citizens National Trust and Savings Bank of Los Angeles , 9 Cir., 135 Fed. (2d) 527 [43-1 USTC ¶9426]; George Nelson et al. v. United States, 9 Cir., (November 23, 1943, No. 10453), 139 Fed. (2d) 162 [43-2 USTC ¶9648].

We conclude there is no error and the judgment appealed from is affirmed.

 

 

 

George Nelson, Mrs. Agnes Nelson and Mrs. Ollie Halpin, Appellants, v. United States of America , Appellee

(CA-9), United States Circuit Court of Appeals for the Ninth Circuit, No. 10,453, 139 F2d 162, November 23, 1943, Cert. denied, 322 U. S. 764, 64 S. Ct. 1287

Upon appeal from the District Court of the United States for the Western District of Washington, Northern Division.

Lien for taxes: After acquired property.--A 1940 grape crop was grown on a farm where a notice of lien for taxes had been filed by the Collector. When the crop was severed from the land the Government obtained a prior lien on the grapes as after acquired property. Applying Sec. 3670, Title 26, U. S. C. A., the Court holds that the Government's lien takes priority over other claims against the grapes. The expression of the statute does not limit a lien to property possessed at the time of distraint but "shall continue until liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." Affirming decision of the District Court ( Washington ).

Geo. Nelson, in propria persona, Seattle , Wash. , for appellants. Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, A. F. Prescott, T. Carroll Sizer and Mills Kitchin, Special Assistants to the Attorney General, Washington, D. C., J. Charles Dennis, U. S. Attorney, Seattle, Wash., Harry Sager, Assistant U. S. Attorney, Tacoma, Wash., for appellee.

Before GARRECHT, STEPHENS and HEALY, Circuit Judges.

[The Facts]

GARRECHT, Circuit Judge:

The appellants Nelson are indebted to the United States for income taxes for the years 1933 and 1934. From 1932 to 1937, appellant George Nelson and partners had a garbage disposal contract with the City of Seattle . During the years 1937 and 1938, appellants Nelson made payments on account of income taxes of from $200 to $250 monthly. On September 20, 1937, the Collector of Internal Revenue received from the Commissioner of Internal Revenue the assessment list containing assessments against George and Agnes Nelson for the 1933 and 1934 taxes. After the above installment payments had been made and credited there was due and owing $667.03 from George Nelson and $1,173.75 from Agnes Nelson, plus interest. In 1938, over Nelson's protest, a receiver was appointed for the partnership; thereafter Nelson advised the Collector of Internal Revenue that it was impossible for him to make further payments. After refusal to pay on demand, the Collector of Internal Revenue issued Warrants of Distraint on November 2, 1937.

On July 29, 1938 and April 21, 1939, the Collector filed notices of tax liens with the auditors of King County and Yakima County , respectively. Notices of tax liens were filed with Clark of the United States District Court at Tacoma and Spokane , Washington . On December 13, 1938, Nelson gave an order assigning to the Collector all title and interest to the properties in the Receiver's possession. A suit in the State court in King County against the Receiver netted the Government $1,334.06.

During 1940, the appellant taxpayers raised a crop of grapes on the farm located in Yakima County . By contract dated August 19, 1940, the grapes were sold to the National Wine Company. Upon this contract there were due and owing appellants Nelson $2,999.49.

On October 14, 1940, George Nelson assigned to Ollie Halpin his claim against the Wine Company for the purchase price of the 1940 crop. The consideration for the said assignment was a pre-existing debt. The assignment was accepted by the Wine Company on the same date. On October 25, 1940, the Collector caused to be served on the Wine Company notices of levy and notices of tax lien. These notices were not complied with, so on January 14, 1941 the Wine Company was served with final notice and demand. The present action was then commenced by the appellee against the Wine Company under Section 3710, Title 26, U. S. C. A., which corporation by motion asked that the taxpayers Nelson and their assignee Halpin be interpleaded as additional defendants.

The lower court held that the lien acquired by the United States was prior in right and in time to the claim of said additional defendant, now one of the appellants, Ollie Halpin. The lower court found the validity of the assignment was not in issue. The appeal from this decision is taken by the appellants Nelson and Halpin. The National Wine Company does not join in the appeal.

Section 3670, Title 26, U. S. C. A., provides:

§3670. Property Subject to Lien. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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. 53 Stat. 448. [Italics added]

Section 3710, Title 26, U. S. C. A., provides:

Section 3710. (a) Requirement. Any person in possession of property, or rights to property subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process.

The lower court found that the assignment to Halpin was executed on the 14th day of October, 1940, and was served on and accepted by the National Wine Company on the same date, which was subsequent to the filing of the notice of tax liens by the Government. The tax liens notice was filed in Yakima County on April 21, 1939 and with the Clerks of the United States District Courts of Washington at Tacoma and Spokane , August 1, 1938 and April 22, 1939, respectively.

[Lien on After Acquired Property]

The 1940 grape crop was grown on the farm in Yakima County where the notice of the lien was filed. When severed the Government obtained a prior lien on those grapes as after acquired property. That the Government's lien under this statute applies to after acquired property has already been settled by this Court in Citizens National Trust and Savings Bank of Los Angeles v. United States, 9 Cir., 135 F. (2d) 527 [43-1 USTC ¶9426]. In this case, the taxpayer inherited an interest in an estate after the liens for taxes had been filed. The lower court concluded that the United States acquired a prior lien upon all property belonging to the taxpayer as of the date the Collector received the assessment list, that said liens had continued in force until the present time, and that the liens attached to all property and rights to property to be acquired by the taxpayer.

Our court said:

The statute provides that the United States shall have a lien "upon all property" belonging to the taxpayer. There is no limitation placed on the expression in the statute "the amount * * * shall be a lien * * * upon all property and rights to property." That this expression is not limited to property possessed by the debtor at the time the distraint is laid is plainly indicated by the provision of the statute that the lien "shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time," * * * The claimed liens in this case a upon personal property, but that fact does -- change the situation as the section -- extends to "all property and rights to property, whether real or personal."

Citizens National Trust and Savings Bank of Los Angeles v. United States, supra, quotes extensively from some administrative interpretations of the Revenue Act which provide in short that the lien shall continue until the tax is satisfied and when necessary the Collector should secure an extension of time for collection "whenever it is reasonably possible that the taxpayer may, in the future, acquire property or property rights from which the tax liability may be satisfied."

United States v. Long Island Drug Co., 2 Cir., 115 F. (2d) 983 [41-1 USTC ¶9140], which is cited by the appellants and which appears to be contrary to the ruling of the lower court, is distinguished by the Citizens National Trust and Savings Bank case on the ground that the problem of the government's lien on after acquired property was not directly in issue.

Under the authority of the latter case, the decision of the lower court is affirmed.

 

 

 

 

Citizens National Trust & Savings Bank of Los Angeles, Appellant, v. United States of America, B. Y. Taft and B. Y. Taft and Arthur T. Earl, as Executors of the Estate of Mary Eleanor Taft, Deceased, Appellees

(CA-9), In the United States Circuit Court of Appeals for the Ninth Circuit, No. 10,232, 135 F2d 527, April 28, 1943

Upon appeal from the District Court of the United States for the Southern District of California, Central Division.

U. S. priority of lien on after-acquired property.--Warrants of distraint were issued in 1931 in connection with deficiencies for the years 1926, 1927 and 1928. Taxpayer in 1932 signed an agreement to the effect that the amounts assessed might be collected from him by distraint or by a court proceeding commenced at any time. In 1938 taxpayer inherited an interest in an estate on which appellant bank levied a writ of execution pursuant to a judgment obtained in 1938. The Government commenced civil action in 1941 praying enforcement of its lien against the after-acquired property. Decision for the Government. One dissent. Affirming decision of the District Court ( Cal. ), reported at 42-1 USTC ¶9411, 44 Fed. Supp. 564.

Paul J. Otto and H. Elliot Pownall, Jr., Los Angeles , Calif. , for appellant. Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, Helen R. Carloss, Muriel S. Paul and Willard H. Pedrick, Special Assistants to Attorney General, all of Washington, D. C., Leo V. Silverstein, U. S. Attorney, and E. H. Mitchell, Assistant U. S. Attorney, Eugene Harpole, Special Assistant to the Chief Counsel, B. I. R., Los Angeles, California, for appellee, United States.

Before: DENMAN, MATHEWS and STEPHENS, Circuit Judges.

STEPHENS, Circuit Judge:

Appellant appeals from a judgment of the District Court holding that the United States has a lien upon specified property superior to appellant's lien.

[The Facts]

On March 9, 1938, appellant Bank recovered a judgment against one Taft. On March 13, 1938, Taft inherited an undivided one-fourteenth interest in an estate. On April 9, 1938, the Bank levied a writ of execution on the interest of Taft in the said estate. Subsequently, on September 20, 1940, the Collector of Internal Revenue levied a warrant of distraint on Taft's interest in the said estate claiming a lien thereon for federal income taxes assessed against Taft in the following circumstances. The assessment lists for 1926 and 1927 were received by the Collector of Internal Revenue in December, 1930, and for 1928 in August, 1931. Notice was given to the taxpayer of deficiencies for the years 1926, 1927 and 1928, and payment demanded. Warrants of distraint were issued in February and December, 1931. Notices of liens securing the three tax assessments were duly filed in 1931 with the Clerk of the District Court and with the County Recorder of Los Angeles County . ¹ In 1932 Taft signed an agreement to the effect that the amounts assessed might be collected from him by distraint or by a court proceeding commenced at any time.

A civil action was commenced in the District Court in July, 1941, by the United States praying enforcement of the lien pursuant to §3207 of the Revised Statutes (26 USCA §3678). The Bank, claiming an interest in the estate property of Taft, was made a party defendant. The issue turned upon the correctness of the Bank's claim that its lien by virtue of its judgment and levy of execution was prior in time and therefore was superior to the lien of the United States by virtue of its distraint proceedings.

The District Court concluded as a matter of law that the United States acquired a lien upon all property and rights to property belonging to the taxpayer as of the dates the Collector of Internal Revenue received the assessment lists covering the federal income taxes in issue under the provisions of §3186(a) of the Revised Statutes (26 USCA §3670). It concluded, further, that by virtue of §3186(a) (26 USCA §3671), the said liens have continued in force to the present time, that they attached to all property and rights to property acquired by the taxpayer, including his inherited interest in the estate; that the tax liens are superior to the Bank's liens; and that the United States is entitled to an order for the sale of Taft's interest in the estate.

The controlling statute (Revised Statutes §3186, as amended by §613, Revenue Act of 1928) is as follows:

"(a) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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 USCA §3670] Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time. [26 USCA §3671]

"(b) Such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until notice thereof has been filed by the collector--* * *" [26 USCA §3672(a)]

[U. S. Lien upon all Property]

The Bank appeals.

The Bank contends that the statute gives the United States a lien only upon property possessed by the taxpayer at the time of the distraint and that at the time the Bank's lien became effective, the property in issue was free from any government lien. It argues, further, that the United States may pursue after acquired property not by the enforcement of a lien, but by further distraint proceedings or by direct court action.

The statute provides that the United States shall have a lien upon "all property" belonging to the taxpayer. There is no limitation placed on the expression in the statute "the amount * * * shall be a lien * * * upon all property and rights to property." That this expression is not limited to property possessed by the debtor at the time the distraint is laid is plainly indicated by the provision of the statute that the lien "shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time," an amendment made by §613 of the Revenue Act of 1928. Formerly, the statute decreed that the lien was in effect "until paid." If the lien is not considered as applying to after acquired property, the amendment is meaningless, for the lien would continue in any event as to property owned when the lien arose.

A second indication of the correct interpretation of §3186 lies in the comparison of a federal tax lien and a judgment lien. An analogy between the two may be drawn in accordance with the theory of Bull v. United States, 295 U. S. 247, 55 Sup. Ct. 695, 79 L. Ed. 1421 [35-1 USTC ¶9346], that a federal tax lien has the effect of a judgment. The common law rule and the rule adopted by the weight of authority in the absence of a specific statutory provision is that a judgment lien attaches to after acquired real property of a debtor. Freeman on Judgments, 5th ed., §955, p. 2007; Atlas Portland Cement Co. v. Fox ( Ct. of App. D. C.), 265 Fed. 444; Coad v. Cowhick, 9 Wyo. 316, 63 Pac. 584. Some of the statutes considered adapt themselves less easily to the common law rule than does §3186. The claimed liens in this case are upon personal property, but that fact does not change the situation as the section expressly extends to "all property and rights to property, whether real or personal."

However, if the statute is so general in its terms that an administrative interpretation may be held to be appropriate, we have such interpretation. Helvering v. R. J. Reynolds Tobacco Co., 306 U. S. 110, 59 Sup. Ct. 423, 83 L. Ed. 536 [39-1 USTC ¶9282]; Morrissey v. Commissioner, 296 U. S. 344, 56 Sup. Ct. 289, 80 L. Ed. 263 [36-1 USTC ¶9020].

A memorandum in connection with §613 of the Revenue Act of 1928, amending §3186 of the Revised Statutes, G. C. M. 4715, VII-2 Cum. Bul. 94 (1928), declared that the provision for release of a tax lien did not necessitate removal of the lien before the limitation period because "a delinquent taxpayer may at any time prior to the expiration of the statutory period of limitations become possessed of property against which the lien may attach, thus making the tax enforceable through the lien."

Treasury Decision 4275, VIII-2 Cum. Bul. 167 (1929), after mentioning the fact that tax liabilities are often unenforceable because a taxpayer possesses no property, stressed that the liability continues until the tax is satisfied or until the statutory period for collection has expired and advised that collectors should investigate delinquency where a notice of lien has been filed, in order to obtain an extension of time for collection "whenever it is reasonably possible that the taxpayer may, in the future, acquire property or property rights from which the tax liability may be satisfied."

[When Lien Applies]

Although not binding upon us, we deem it appropriate to quote as follows from Graves v. Commissioner, 12 B. T. A. 124, 133 [CCH Dec. 4001]: "It relates back from the time of notice and demand to the time when the assessment list was received by the collector, and it attaches upon such property as the taxpayer has at the time the lien arises, that is, at the time of notice and demand, United States v. Pacific R. R., 1 Fed. 97, and, of course, to all the property that the tax debtor subsequently acquires."

That §3186 has been understood by those administering the revenue laws to create a lien on after acquired property of the taxpayer is obvious. In none of their expressions of opinion can there be found any indication that additional proceedings are necessary in order to perfect a lien on such after acquired property. They contemplate a lien which automatically attaches to any property acquired subsequent to the date the original lien arose.

Since the promulgation of the departmental view, the section has been twice amended with no addition of a definite provision as to after acquired property and presumably with the Congressional knowledge of the departmental interpretation. Therefore, such interpretation must be taken as approved by Congress. Helvering v. R. J. Reynolds Co., 306 U. S. 110, 59 Sup. Ct. 423, 83 L. Ed. 536 [39-1 USTC ¶9282]; Bryant v. Commissioner (CCA 9), 111 Fed. (2d) 9 [40-1 USTC ¶9404]; Commissioner v. Plestcheeff (CCA 9), 100 Fed. (2d) 62 [38-2 USTC ¶9588].

Only two decisions can be found discussing a question similar to that in issue, United States v. Pacific R. R., (CC Mo.) 1 Fed. 97; and United States v. Long Island Drug Co. (CCA 2), 115 Fed. (2d) 983 [41-1 USTC ¶9140]. In the former case the United States sued to enforce a lien for taxes on property owned by the railroad when the tax accrued, but subsequently, and before any demands were made for the payment of the taxes, conveyed to purchasers without notice of the tax lien. The court held that §3186 of the Revised Statutes referred to property belonging to the taxpayer at the time the demand by which the lien was created was made, not when the tax became due, and thereby protected the intervening innocent purchasers. "By this construction the lien, when it once attaches, relates back to the time when the tax was due, but it does not attach to the property transferred to innocent purchasers prior to demand. This view also harmonizes with the general policy of the law relating to land titles, which is to protect the citizen against loss from sceret liens, not disclosed by any public record nor ascertainable by due diligence." (p. 100.)

The reasoning of the Pacific Railroad case is not applicable here. First, the early opinion was not concerned with the problem of after acquired property but with the situation of property owned at the time the tax became due and transferred to innocent purchasers prior to demand for payment. Second, the case was decided when the pertinent section provided that the amount of the tax "shall be a lien in favor of the United States, from the time it was due until paid," and before the 1928 amendment that the lien "shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." Third, in 1913 the reason underlying the decision, i.e., protection of innocent purchasers from secret liens, was largely destroyed by an amendment to §3186 providing that the tax lien should not be valid as against any mortgagee, purchaser, or judgment creditor until notice was recorded.

The Long Island Drug Co. case arose under §3710 of the Internal Revenue Code (26 USCA §3710), being an action by the government to collect from the Drug Company the amount of delinquent taxes due from one Steinberg on the ground that the Drug Company had in its possession accrued salary due Steinberg. The court held that at the time of the first demand on the Drug Company, Steinberg was indebted to the company, and that before the time of subsequent demands Steinberg had agreed with the company that any salary becoming due might be applied toward the repayment of loans on which he was surety. The court concluded that the Drug Company had no accrued earnings of Steinberg in its possession at the time of the levy. The problem of the government's lien on after acquired property of the taxpayer was not directly in issue although the court supported the Pacific Railroad decision by stating that "rights which do not exist at the time of the demand upon the taxpayer are not subjected to any lien." (p. 986)

The judgment must be affirmed.

¹ See Revised Statutes §3186(b), as amended by §613, Revenue Act of 1928.

[Dissenting Opinion]

DENMAN, Circuit Judge, dissenting:

Congress, for the protection of those dealing with delinquent taxpayers in transactions involving the securing of the taxpayer's obligations, has enacted provisions for the recordation of the delinquency. 26 U. S. C. A. 3672. It is further provided that the period during which the lien upon the property of the delinquent taxpayer shall exist is six years after assessment of the tax. 26 U. S. C. A. 276, 3671.

Congress also provided for an extension of the period during which the delinquent tax claims may be asserted. 26 U. S. C. A. 276c. The majority opinion holds that the tax lien attaches to after-acquired property and, in effect, holds that the recordation advising those dealing with the taxpayer loses all its value and becomes a mere trap to the persons so engaged in such transactions, by the unrecorded agreement of the taxpayer with the Government to extend the time during which the tax obligation shall exist. I do not believe that this was the intent of Congress.

It is true that the party engaged in the transaction with the taxpayer has notice that the taxpayer may have made such an agreement with the Government and, it may be argued, is thereby required to inform himself by inquiry of the taxpayer or the Treasury Department as to the existence of such an extension agreement. There is no statute requiring any Treasury official to disclose the existence of such an agreement. Such an inquiry may produce an erroneous negative answer or no answer at all. It has none of the certitude which Congress seeks to establish in its recordation provision. An untruthful response by the taxpayer may give certain legal remedies, but the purpose of the required recordation of the tax lien is to relieve the party dealing with the taxpayer from just such risk of having a law suit substituted for his security.

It is not necessary to consider what would be the effect of the recordation by the Treasury of the taxpayer's extension agreement or whether the taxing officials have the power to record it. Here it was not recorded and it is alleged, and not denied, that appellant had no notice of its existence. In my opinion Congress intended the recordation of the tax lien to enable third persons to take the property of the taxpayer free of the tax lien, as security for his obligations six years after the assessment, unless such third person has notice of the extension agreement. Since the appellant acquired its lien after the expiration of the six years, without notice of the extension, it should be held superior to that of the Government.

 

 

Glass City Bank of Jeanette , Pennsylvania , Petitioner, v. The United States of America

Supreme Court of the United States , No. 50. October Term, 1945, 326 US 265, 66 SCt 108, November 13, 1945

On Writ of Certiorari to the United States Circuit Court of Appeals for the Third Circuit.

Property subject to lien for taxes: After-acquired property.--A Federal Government tax lien applies to property owned by a delinquent taxpayer at any time during the lifetime of the lien. Consequently, a Government tax lien arising in 1935 had priority, under Code Secs. 3670 and 3671, over a judgment creditor's lien arising in 1941, although the property levied upon was compensation to the delinquent, as a State court receiver, for services rendered subsequent to 1935. Three dissents. Affirming a decision of the Circuit Court of Appeals for the Third Circuit, 146 Fed. (2d) 831, reported at 45-1 USTC ¶9157, which affirmed a decision of the District Court for the Western District of Pennsylvania, 54 Fed. Supp. 11, reported at 44-1 USTC ¶9173.

Fred B. Trescher, Irwin Gas Coal Bldg., Greensburg , Pa. , for petitioner. J. Howard McGrath, Solicitor General, Ralph F. Fuchs, Department of Justice, Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, J. Louis Monarch, Helen Goodner, Special Assistants to the Attorney General, for respondent.

Mr. Justice BLACK delivered the opinion of the Court.

In 1941 the petitioner bank obtained a judgment in a Pennsylvania State Court against one Frank A. Maddas, for about $19,000.00. The United States had unpaid, judicially established, income tax claims against Maddas for the years 1920, 1921, and 1922, ¹ which exceed $1,000,000.00. 40 B. T. A. 572 [CCH Dec. 10,820]; 114 Fed. (2d) 548 [40-2 USTC ¶9596]. Because of Maddas' past services as a State court receiver of a brewing company, the trustee of that company, now in bankruptcy, owes Maddas $3,228.53. The issue here is whether the bank or the government may recover on the debt owed to Maddas. The bank claims under a lien alleged to have been created by an attachment-execution issued on its State court judgment and served on the trustee in bankruptcy February 21, 1941. The United States claimed priority, by virtue of a tax lien under 26 U. S. C., §§ 3670, 3671, ² which both parties admit arose in 1935, five years prior to the taxpayer's services as receiver. The contention of the bank in the District Court ³ was that the statutory tax lien, which became effective in 1935, did not cover Maddas' claim since it did not exist when the lien arose but only thereafter, and that the government, therefore, could reach the debt only by garnishment or distraint as provided by other sections of the Internal Revenue Code. The Circuit Court of Appeals concluded that the statutory tax lien did cover after-acquired property and accordingly affirmed the District Court's judgment for the United States . 146 Fed. (2d) 831 [45-1 USTC ¶9157]. We granted certiorari because of statements made in the opinions of other courts which seemed to conflict with the conclusion below. United States v. Long Island Drug Co., 115 Fed. (2d) 983 [41-1 USTC ¶9140]; United States v. Pacific Railroad, 1 Fed. 97.

By Section 3670, 26 U. S. C., Congress impressed a lien upon "all property all rights to property, whether real or personal, belonging" to a tax delinquent. Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes. Not content with this language, however, Congress also provided that the lien should "continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." 26 U. S. C., §3671. These two sections read together indicate that a continuing lien covers property or rights to property in the delinquent's hands at any time prior to expiration. This is confirmed by Section 3678, which provides that "whether distraint proceedings have been commenced or not", action to enforce the lien may be instituted against "any property and rights to property, whether real or personal, or to subject any such property and rights to property owned by the delinquent, or in which he has any right, title or interest, to the payment of such tax." (Italics supplied.) For here is a plain intent to subject to the lien "property owned by the delinquent" when suit is filed, rather than only that owned when the lien arose. Indeed, the meaning of these sections is so plain as to render superfluous a detailed discussion of the legislative history which is consistent with our interpretation. ⁴

Furthermore the agencies administering the statute have construed it in the same way. Thus, in 1928 General Counsel Memorandum No. 4715, vii-2 Cum. Bul. 94, declared that "a delinquent taxpayer may at any time prior to the expiration of the statutory period of limitation become possessed of property against which the lien may attach, thus making the tax liability enforceable through the lien." Again in Treasury Decision 4275, viii-2 Cum. Bul. 167, Collectors were admonished to keep on the alert where notice of liens had been filed, so as to extend the period of their effectiveness "whenever it is reasonably possible that the taxpayer may, in the future, acquire property or property rights from which the tax liability may be satisfied." And in Graves v. Commissioner, 12 B. T. A. 124, 133 [CCH Dec. 4001], the Tax Board said that the lien applied, "of course, to all the property that the tax debtor subsequently acquired."

The bank's arguments on behalf of a statutory construction supporting its claims are without merit. We are told that to increase unduly the scope of the government's lien is unwise. But most of the objections raised would apply not merely to liens that cover after-acquired property, but also with equal force to most other types of liens. At any rate the wisdom of legislation is a question for Congress. We are further told that the tax lien cannot attach to Maddas' claim because the law of Pennsylvania , where this obligation arose, does not treat "future earning capacity" as "property or rights to property." But the question of whether the tax lien covers future earning capacity is not before us. For the government here seeks to reach an already existing obligation for services rendered, which clearly falls within the statutory language. Cf. Matter of Rosenberg , 269 N. Y. 247. Moreover, the Congressional meaning is not to be determined by resorting to the local law of Pennsylvania . United States v. Snyder, 149 U. S. 210; Helvering v. Stuart, 317 U. S. 154, 161-162 [42-2 USTC ¶9750].

Our conclusion is that the lien applies to property owned by the delinquent at any time during the life of the lien. This is in accord with all the cases that have directly passed upon this question. ⁵ As previously noted, there are two cases which contain language which might lead to another conclusion. But nothing there said offers any persuasive reason for restricting the scope of the lien.

Affirmed.

Mr. Justice JACKSON took no part in the consideration or decision of this case.

¹ There is also a claim for 1936 taxes which raises different questions that need not be considered here.

² "Sec. 3670. Property Subject to Lien.

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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.

"Sec. 3671. Period of Lien.

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

Section 3672 provides that the lien shall not be valid against any mortgagee, pledgee, purchaser, or judgment creditor until notice is filed in an office designated by State law or in the office of the clerk of the United States District Court. Here such notice was duly filed.

³ The District Court acquired jurisdiction because the indebtedness to Maddas was due from the trustee. The procedure by which that jurisdiction was acquired is sufficiently set forth in the opinions below and need not be repeated here. 54 Fed. Supp. 11; 146 Fed. (2d) 831 [45-1 USTC ¶9157].

⁴ 14 Stat. 98, 107; 15 Stat. 125, 167; 37 Stat. 1016; 45 Stat. 791, 875.

⁵ Citizens Nat. Trust & S. Bank of Los Angeles v. United States , 135 Fed. (2d) 527 (C. C. A. 9) [43-1 USTC ¶9426]; Nelson v. United States, 139 Fed. (2d) 162 (C. C. A. 9) [43-2 USTC ¶9648]; Investment & Securities Co. v. United States, 140 Fed. (2d) 894 (C. C. A. 9); United States v. Worley, (S. D. Ind.), decided March 8, 1940 (27 A. F. T. R. 1143) [40-2 USTC ¶9694]; Minnesota Mut. Life Ins. Co. v. United States , 47 Fed. (2d) 942, 944 (N. D. Tex.) [2 USTC ¶682]. See also United States v. Warren R. Co., 127 Fed. (2d) 134 [42-1 USTC ¶9391]; Matter of Rosenberg , supra.

[Dissenting Opinion]

Mr. Justice RUTLEDGE, dissenting:

I am unable to find in the applicable statutes the clear expression of Congressional intent which I think is required to extend the tax lien to after-acquired property. Under §3670 the lien is imposed as to taxpayers delinquent after demand "upon all property and rights to property, whether real or personal, belonging to such person." By §3671 the lien arises, unless another date is specifically fixed by law, "at the time the assessment list was received by the collector" and continues "until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." Nothing in these sections gives any indication that Congress intended the lien to reach after-acquired property. The language used, whether in §3670 or in §3671, is fully satisfied if the lien is held to attach to property belonging to the taxpayer as of the time the lien arises. ¹ Had Congress intended to reach not only every description of property then owned by the taxpayer, but also every species which might later come into his hands, clearer words than "all property" and "belonging to" were readily available to express this purpose. The harshness of the consequences, not only for the taxpayer but for others dealing with him, which this case dramatically examplifies, gives reason beyond the ambiguity of the language used for thinking there was no such intent.

Nor is such an intent supplied by use of the present tense of the verb "has" in the final clause of §3678(a). ² That section merely provides for the manner in which the lien defined by §§ 3670 and 3671 shall be enforced. Section 3678(a), in my opinion, was not intended to add to the scope of the lien or extend its definition beyond the limits defined by those sections. If the lien was designed to reach after-acquired, property, the alternative method specified in §3678(a) for reaching the property then owned by the debtor would seem to be redundant.

I find nothing in the legislative history which discloses any intention, more clearly than the words of the statute themselves, to include after-acquired property within the coverage of the lien. In the absence of clearer statutory foundation, the comparatively recent administrative construction cannot supply the required Congressional intent; and the scanty evidence of established and accepted practice is neither so wholly consistent nor so convincing as to furnish this necessary element.

Accordingly I would reverse the judgment and remand the cause to the Circuit Court of Appeals for the consideration and disposition of the issues presented to but not determined by it in view of its disposition upon the matters now determined here.

Mr. Justice FRANKFURTER and Mr. Justice DOUGLAS join in this opinion.

¹ Although by §3671 the lien "arises" as of the time the assessment list is received by the collector, it relates back to the time of notice and demand, §3670, as against the taxpayer, though by virtue of §3672(a) it is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor "until notice thereof has been filed by the collector" as provided.

² "Sec. 3678. Civil Action to Enforce Lien on Property.

"(a) Filing.--In any case where there has been a refusal or neglect to pay any tax, and it has become necessary to seize and sell property and rights to property, whether real or personal, to satisfy the same, whether distraint proceedings have been commenced or not, the Attorney General at the request of the Commissioner may direct a civil action to be filed, in a district court of the United States, to enforce the lien of the United States for tax upon any property and rights to property, whether real or personal, or to subject any such property and rights to property owned by the delinquent, or in which he has any right, title, or interest, to the payment of such tax." (Emphasis added.)