Licenses 2 page2

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Theodore Golden, Plaintiff and Respondent v. State of California , Defendant and Respondent; McKesson and Robbins, Inc. (a Corporation) et al., Appellants; United States of America , Intervener and Respondent

In the California District Court of Appeal, First District, Division One, Civil No. 16334, 285 P2d 49, June 15, 1955

Appeal from a judgment of the Superior Court of Alameda County. Affirmed.

[1939 Code Secs. 3670, 3671--substantially unchanged in 1954 Code Secs. 6321, 6322]

Property subject to lien: Priority of lien.--A California on-sale liquor license is property within the meaning of 1939 Code Sec. 3670, and a federal tax lien can attach to it, or to the proceeds of its sale held in escrow as after-acquired property of taxpayer. The federal tax lien, which arose when the assessment list was received by the collector, takes precedence over claims of general creditors, filed according to state law.

Shapro & Rothschild and Raymond T. Anixter for appellants. Golden, Stefan & Fratis for plaintiff and respondent. Leon E. Gold for defendant and respondent. Lloyd H. Burke, United States Attorney, Charles Elmer Collett, Assistant United States, Attorney, Melvin L. Sears, Leon Yudkin and Robert G. Thurtle for Intervener and Respondent.

[Proceeds from Sale Placed in Escrow]

WOOD, Judge:

On March 14, 1949, Henry Fleck agreed to sell his restaurant and bar business including his on-sale liquor license. In accordance with the provisions of section 7.2 of the Alcoholic Beverage Control Act, Deering's General Laws, Act 3796, now sections 24073-24075 of the Business and Professions Code, notice of the intended sale was recorded in the official records of the county; an escrow holder was designated; the purchase price, $7,700, was deposited with him; and the appellants herein, general creditors of the seller, filed their claims with the escrow holder within the prescribed period of seven days after the recording of the notice.

[Prior Lien by Federal Government]

It happened that the seller was also indebted to the government of the United States for internal revenue taxes which the Commissioner of Internal Revenue had assessed against the seller in varying amounts, from time to time, between May 7, 1948, and March 3, 1949. The Collector of Internal Revenue received the assessment lists at various times between May 18, 1948, and March 3, 1949. Notices of lien were filed in the office of the Recorder of the county on various dates between June 7, 1948, and March 3, 1949, except that as to an assessment in the amount of $143.51 made March 3, 1949, and list received by the collector the same day, the notice of lien was filed with the county recorder on June 22, 1949.

The government filed no claim with the escrow holder during the seven-day period, March 18-25, 1949. It did, on the first of April following, serve on him a notice of levy in the amount of $14,274.87.

[Findings of Trial Court]

The trial court found that the government acquired tax liens on all of the "property and rights to property of the seller . . ., including the proceeds from the sale of on-sale general liquor license . . . on the dates that the Commissioner's respective assessment lists were received by the Collector of Internal Revenue . . .; such liens were then valid as to all persons except purchasers, mortgagees, pledgees and judgment creditors; as to such persons said liens became valid on the dates when notices of said tax liens were recorded in the office of the County Recorder . . ."; and that the claims of the appellants are "subordinate and inferior to the claims and liens" of the government.

The trial court concluded therefrom and decreed that the government be paid the sum of $7,035.75, the unexpended balance of the $7,700 purchase price remaining after payment to the escrow holder for his services and expenses.

Appellants contend that the government acquired no interest in or lien upon the liquor license or the proceeds of its sale, and no right to payment from the proceeds until after payment in full of the claims of the appellants.

[License as Property]

(1) The United States acquired a lien upon the license if the license was "property" or a "right to property" within the meaning of those terms as used in section 3670 of title 26 of the United States Code. Section 3670 declares that "if any person liable to pay any tax neglects or refuses to pay . . . after demand, the amount . . . [including interest, penalty, additional amount, addition to the tax, and costs] . . . 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." ^*

"Property" was there used by Congress in a broad, not narrow, sense; designed to include all concepts of the term. (See Citizens State Bank of Barstow v. Vidal, 114 Fed. (2d) 380, 383 [40-2 USTC ¶9603]; Metropolitan Life Ins. Co. v. United States, 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771]; and cases collected in 174 A. L. R. 1373, §6, 1378-1384). "Although "in the interpretation and application of federal statutes, federal not local law applies' [citations], it is necessary to examine the rights which flow under state law from ownership of an on-sale liquor license in determining whether it possesses the characteristics of 'property' within the Bankruptcy Act. [Citations.]" (In re Quaker Room (S. D. Cal., 1950), 90 Fed. Supp. 758, 760-761).

"Property" has been defined as "the thing of which there may be ownership" (Cal. Civ. Code, §654). "There may be ownership of all inanimate things which are capable of appropriation or of manual delivery; of all domestic animals; of all obligations; of such products of labor or skill as the composition of an author, the good-will of a business, trade-marks and signs, and of rights created or granted by statute." (Civ. Code, §655.)

The general on-sale liquor license in California would seem to meet these tests. It is issued to a specific person. Although issued upon an annual basis, it is renewable under the conditions expressed in the statute. (Act 3796, §8.) A renewal is deemed a continuation of the original license. (Saso v. Furtado, 104 Cal. App. 2d 759, 762 [232 P. 2d 583].) It is transferable from one person to another upon approval by the state agency which administers the Alcoholic Beverage Control Act and upon payment of a transfer fee. (Deering's Gen. Laws, Act 3796, §7; Stats. 1947, ch. 1566. pp. 3219, 3221.)

The limitation of the number of on-sale general licenses (Act No. 3796, §38 f; Stats. 1945, ch. 1401, p. 2615 at 2642), coupled with the factor of transferability, tends to create for each license a substantial value; evidenced in the instant case by the sum of $7,700 which the purchaser paid into escrow, the license being the principal item of value in the transfer.

A contract to transfer a license, subject of course to approval by the state licensing agency and the other conditions and restrictions imposed by law, is valid. A refusal to perform such a contract is remediable; e.g., specific performance (Campbell v. Bauer, 104 Cal. App. 2d 740 [232 P. 2d 590]; Saso v. Furtado, supra, 104 Cal. App. 2d 759; Etchart v. Pyles, 106 Cal. App. 2d 549 [235 P. 2d 427]; Leboire v. Black, 84 Cal. App. 2d 260 [190 P. (2d) 634]); rescission and damages (Fong v. Rossi, 87 Cal. App. 2d 20 [195 P. 2d 854]).

Like any other contract, it enjoys constitutional immunity from legislative impairment. The prohibition against pledging the transfer of a license as security for a loan or for the fulfillment of an agreement, expressed in section 7.3 added to the act in 1949 (Stats. 1949, ch. 1348, p. 2349, 2360), could not and did not operate retroactively. (Pehau v. Stewart, 112 Cal. App. 2d 90, 96 [245 P. 2d 692], and cases cited.) We observe, also, that section 7.3 merely narrows the scope of the uses and purposes of an agreement for transfer. It constitutes express recognition of the right to contract for transfer of a license.

We have found no California Supreme or appellate court decision directly in point on the question whether the license here involved is "property" within the meaning of 26 U. S. C. 3670. It was held nontaxable in Roehm v. County of Orange, 32 Cal. 2d 280 [196 P. 2d 550], because under our statutes a tax simply is not imposed upon this kind of property, not because a liquor license is not property, a question not decided. Hevren v. Reed, 126 Cal. 219 [58 P. 536], and State Board of Equalization v. Superior Court, 5 Cal. App. 2d 374 [42 P. 2d 1076], dealt merely with such questions as the revocability of a liquor license and the notice and hearing requirements, if any, applicable thereto.

The federal district court, southern district of California, has held, in a well considered opinion, that the California liquor license is "property" as that term is used in the Bankruptcy Act. (In re Quaker Room, supra, 90 Fed. Supp. 758.) The court of appeal for the District of Columbia has held that a transferable liquor license is a "property right" which is subject to execution to satisfy a judgment, declaring that the "rule of the common law which forbids a levy upon licenses, was confined, and should be confined to non-transferable licenses" and that "the reason for the rule fails in the case of a license which, by express statutory provision, is made subject to transfer . . ." even though subject to limitations and restrictions. (Rowe v. Colpoys, 137 Fed. (2d) 249, 251 [78 App. D. C. 75, 148 A. L. R. 488]; cert. denied, 320 U. S. 783 [64 S. Ct. 190, 88 L. Ed. 470].) Similarly, in Montana a liquor license which is transferable with the consent of a state agency is property which is subject to attachment. (Stallinger v. Goss, 121 Mont. 437 [193 P. 2d 810].) In Washington it is property which passes to a receiver when appointed to conserve the assets of a business. (Deggender v. Seattle Brewing & Malting Co., 41 Wash. 385 [83 P. 898, 4 L. R. A. N. S. 626].) By way of comment upon decisions of this character, including some that we have cited, our Supreme Court recently said: "These decisions recognize the principle that since such a license has a transferable value to the debtor it is property that in fairness ought to be within reach of his creditors. Since by statute a liquor license in this state has in effect been given a transferable value, it has assumed the characteristics of property." (Roehm v. County of Orange, supra, 32 Cal. 2d 280, 283.)

We conclude that the liquor license in question was "property" within the meaning of section 3670 and became subject to the government's lien for taxes.

[U. S. Lien Attached to Proceeds]

(2) Did the United States acquire a lien against the proceeds, the money in escrow?

Appellants seem to concede that if the tax lien attached to the license it attached immediately to the proceeds of the sale of the license. While no case precisely so holding has been brought to our attention it seems sound upon principle. Although not strictly analogous, it is in harmony with the holding that a federal tax lien on real estate which is subject to a prior mortgage attaches to the proceeds of sale upon foreclosure of the mortgage, subject to satisfaction of the mortgage and other prior liens, if any. ( United States v. New Britain , 347 U. S. 81 [74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191]].) Similarly, upon distraint and sale of a taxpayer's personal property for payment of rent accruing, the government by reason of its tax lien under section 3670 had a prior right to the proceeds of sale in Jones v. Mustard (1954), -- Del. -- [109 A. 2d 789 [55-1 USTC ¶9315]].

Even if the government had acquired no lien on the liquor license, there is considerable authority tending to support the view that the tax lien nevertheless attached to the proceeds of the sale when those proceeds came into existence. Sections 3670, 3671 and 3678 of title 26 of the United States Code provide for a continuing lien on all property of the taxpayer, thus including property presently owned and that which is later acquired. (Glass City Bank v. United States, 326 U. S. 265 [66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449]]; In re Salsbury Motors, Inc., (S. D. Cal. 1951), 104 Fed. Supp. 482 [52-1 USTC ¶9191], affirmed in 210 Fed. (2d) 171 [54-1 USTC ¶9217], cert. den. in 347 U. S. 953 [74 S. Ct. 679, 98 L. Ed. 1099].) Thus, it has been held that grapes grown on the taxpayer's land after the government's notice of lien has been filed are subject to that lien (Nelson v. United States (9th Circ., 1944), 139 Fed. (2d) 162 [43-2 USTC ¶9648], cert. den. 322 U. S. 764 [64 S. Ct. 1287, 88 L. Ed. 1591]).

At the very moment the taxpayer and his purchaser entered into the contract for the sale of the liquor license the taxpayer acquired a chose in action for the stipulated purchase price, to which "property" or "right to property" the government's pre-existing tax lien immediately attached. Then when the purchase price money was paid into escrow the tax lien at once attached and later followed the fund when paid into court in this interpleader action.

In this process there was no opportunity for the claims of the appellants (general creditors, not lien holders) to acquire precedence over the government tax lien. The federal statute certainly gave those claims no priority. We do not believe the state statute (§7.2, Act 3796) was intended to give them precedence over the prior government tax lien, nor do we believe it competent for the state in any such manner to impinge upon and thwart the operation of the congressional statute. "The government has plenary power over the property of taxpayers to collect taxes and is in no wise subject to state laws." (Metropolitan Life Ins. Co. v. United States , supra, 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771]. See also United States v. New Britain, supra, 347 U. S. 81, 84 [54-1 USTC ¶9191]; United States v. Division of Labor Enforcement (9th Circ.), 201 F. (2d) 857 [53-1 USTC ¶9219]; United States v. E. Regensburg & Sons, 124 S. Supp. 687, 690 [54-2 USTC ¶9620]; Jones v. Mustard, Del., supra, 109 A. 2d 789, 791-792; United States v. Standard Brass & Mfg. Co., (Tex. Civ. App.) 266 S. W. 2d 407, 409 [54-1 USTC ¶9303].) State exemption laws do not prevent the federal tax lien from attaching. (174 A. L. R. 1373; §7, 1384.)

[Prior Cases Reviewed]

Consonant with these views is the very recent case of United States v. Blackett (9th Circ., March, 1955), 220 Fed. (2d) 21 [55-1 USTC ¶9278]. After liens under 26 U. S. C. 3670-3672 had been perfected, creditors of the taxpayer obtained the sale of his on-sale liquor license in proceedings to enforce their judgment against him. The proceeds were paid to the marshal of the municipal court, as receiver, for proper distribution. The government sued in the district court, which ordered the proceeds paid to the judgment creditor, saying: `. . .; the said on-sale liquor license not being subject to any lien whatever, either in favor of the United States of America or any other person, firm or entity, and the said proceeds from the sale thereof being the result only of an in personam proceeding supplementary to judgment against John R. Blackett in accordance with the laws of the State of California relative thereto.'" (P. 22.) In reversing that judgment the court of appeals said: "The United States at no time attempted to impose its lien against the liquor license, but upon the sale taking place and money having been received therefor, it claims that it has the right to enforce its lien against the money as 'property and right to property' of the delinquent taxpayer. It is true that the sale was precipitated by the judgment creditor, but whatever was received through the sale became the property of the vendor-owner, subject, as any other property belonging to him, to valid liens thereon in the order of their priority, in this case, first the tax lien, second the judgment creditor's lien. [Citations.]" (P. 23.)

Appellants argue that in view of the provisions of section 7.2 of the state statute the taxpayer had a right to that portion only of the escrowed purchase price money as might be left after payment of creditors' claims that were filed within the prescribed seven day period and that the government's tax lien could apply only to that portion. That is specious reasoning. It would permit a person to sell a valuable property and apportion the proceeds among his creditors in utter disregard of the prior tax lien which the federal statute unequivocally declares. Appellants' cases do not support their contention. Thus, Steineck v. Haas-Baruch Co., 106 Cal. App. 228 [288 P. 1104], appropriately held that a certain creditor sued and attached too late. He did so after the debtor-vendor had assigned his interest in the purchase price money by instructing the escrow holder to pay certain other creditors of his. New York Cas. Co. v. Zwerner, 58 Fed. Supp. 473 [45-1 USTC ¶9140], was a case in which the government claimed a lien upon the moneys accruing to a contractor under a construction contract. But the contractor's surety had become entitled to that balance. The surety had paid claims for labor and material under the obligation of its performance and payment bonds; hence, it had an equitable lien on any and all funds remaining unpaid to the contractor (the taxpayer), a lien that related back to the time of execution of the suretyship contract, which in turn antedated the tax lien.

[Necessary Procedure Followed by U. S.]

(3) Did the United States take the necessary procedural steps to perfect its lien and collect the tax? Yes.

Appellants suggest that the government should have filed notice of its claim with the escrow holder within the seven day period prescribed by section 7.2 of the state statute (Act 3796). We find no such requirement in the federal statute, which as we have noted is not dependent upon state law for its implementation. The only "filing" pursuant to state law which the federal statute (26 U. S. C. 3672) prescribes is filing in an "office" (not with a mere escrow holder) when authorized by the law of the state in which the property is situated (the county recorder, Cal. Gov. Code, §27330) and then only to give the lien validity as against a "mortgagee, pledgee, purchaser, or judgment creditor," none of whom is present in this case.

Accordingly, in the instant case the tax lien arose against the property of the taxpayer when the assessment list was received by the collector and attached to the taxpayer's after-acquired property as soon as the latter came into existence. (26 U. S. C. 3671.)

Appellants in their closing brief further suggest that the United States could enforce the lien only by bringing an independent action therefor under section 3678 of the United States Code. They cite only Maryland Cas. Co. v. Charleston Lead Works, 24 Fed. (2d) 836 [1928 CCH D-8246]. The court in that case did refer to the procedure under former Revised Statutes, section 3207 (now 26 U. S. C. 3678-3679) as exclusive but it was dealing with the right of a private owner of a real estate lien to file a petition in the federal district court for a determination of all claims to or liens upon the real estate.

That the filing of an action in the federal district court is not the exclusive mode for collection of the tax by the government is demonstrated by the very existence of the separate and independent remedy of distraint. (26 U. S. C. §§ 3690-3717.)

Where, as here, the United States, at the request of the Commissioner of Internal Revenue and by the direction of the attorney general, has with approval of the court intervened in this interpleader action, and the parties have joined issue and have tried the case upon the merits, it is too late now to question the capacity of the intervener to appear and participate in the action. (Code Civ. Proc., §§ 430-434.)

The judgment is affirmed.

PETERS, P. J., and BRAY, J., concurred.

^* 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 U. S. C. 3671.) The lien is not valid "as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector . . . [i]n the office in which the filing of such notice is authorized by the law of the State . . . in which the property subject to the lien is situated, whenever the State . . . has by law authorized the filing of such notice in an office within the State . . ." (26 U. S. C. 3672.)

 

 

 

In re Main Street Beverage Corporation, et al., Debtors

U.S. District Court, Dist. N.J. , Civ. 97-6123 (JBS), 9/28/98, 232 BR 303, 232 BR 303. Affirming an unreported Bankruptcy Court decision

[Code Secs. 6321 , 6323 and 6871 ]

Tax liens: Validity and priority of: Liquor license: State anti-alienation statute.--A federal tax lien was properly granted priority over a creditor's pre-existing security interest in the sale proceeds of a bankrupt corporation's liquor license. Under state ( New Jersey ) law, the liquor license and the rights granted under it are not subject to creditors' liens. However, tax liens under Code Sec. 6321 attach to any property of the taxpayer, including property, such as liquor licenses, that is subject to state anti-alienation laws. Thus, the IRS had the only valid lien against the license and was entitled to the proceeds from the sale.

[Code Sec. 7402 ]

Appeals: Procedure: Waiver of argument: Failure to file appeal: Appeal of favorable judgment: No right or obligation.--The IRS's failure to file an appeal from a bankruptcy court's ruling in its favor on the issue of lien priority did not preclude it from challenging the validity of a creditor's security interest when the creditor appealed that ruling. The IRS had no right or obligation to appeal a favorable judgment.

Roy E. Scheider, 415 Route 24, Chester, N.J. 07930, Jeremy Galton, Frizell, Clarkson & Jaffe, 450 Main St., Metuchen, N.J. 08840, for Chrysler Capital Corp. Faith S. Hochberg, United States Attorney, Newark, N.J. 07102, Loretta C. Argrett, Assistant Attorney General, Samuel A. Mitchell, Department of Justice, Washington, D.C. 20530, for I.R.S.

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

OPINION

SIMANDLE, District Judge:

This matter is before the court on the appeal by Chrysler Capital Corporation ("Chrysler") of the November 21, 1997 Order for Distribution of Sales Proceeds of Debtor's Liquor License of the United States Bankruptcy Court, which provides that the proceeds from the sale of the debtor's New Jersey liquor license, less certain necessary and reasonable sales expenses, shall be distributed to the Internal Revenue Service ("IRS") because the IRS's valid and subsisting federal tax lien has priority over Chrysler's competing lien interest. Chrysler contends that, having found that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds from the sale of the debtor's liquor license, the bankruptcy court should have applied the "First in Time, First in Right" principle and determined that Chrysler's security interest had priority over the IRS's later-filed federal tax lien. For the following reasons, the court rejects Chrysler's argument and affirms the bankruptcy court's November 21, 1997 Order.

FACTUAL BACKGROUND

The parties to this appeal do not dispute the underlying facts. In January 1990, Chrysler loaned $1,000,000 to debtor, Main Street Beverage Corporation (" Main Street "). In December 1990, Chrysler loaned Main Street an additional $1,608,000. As security for these loans, Main Street granted Chrysler a first priority security interest in all of its present and after-acquired furniture, equipment and fixtures and proceeds thereof.

On June 21, 1991, as further security for the prompt payment and performance of its existing and future liabilities and obligations to Chrysler, Main Street granted Chrysler an additional first priority security interest in its right to payment of "[a]ll proceeds arising from the sale or other disposition of [Main Street's] interest in that certain Plenary Retail Consumption License. . . . issued by or through Voorhees Township to [ Main Street ] . . ." (Chrysler App. at Exhibit A.) Chrysler filed UCC Financing Statements with the Secretary of State of New Jersey on November 27, 1990 and August 31, 1991 and with the Clerk of Camden County on November 27, 1990.

On September 7, 1993, the IRS filed a Notice of Federal Tax Lien with respect to Main Street 's unpaid payroll tax liabilities for the quarters ending June 30, 1992 and March 31, 1993. On October 5, 1993, the IRS filed an additional Notice of Federal Tax Lien with respect to Main Street 's unpaid payroll tax liabilities for the quarter ending June 30, 1993. There is no dispute that the amount of the federal tax liens exceeds the value of the liquor license proceeds at issue in this case.

On January 19, 1994, Main Street filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. Chrysler filed a secured proof of claim on June 4, 1994. On March 29, 1995, Main Street 's Second Amended Joint Plan of Reorganization ("the Plan") was confirmed. The Plan reflected that Main Street owed Chrysler $924,389.32. Chrysler filed continuation statements with the Secretary of State on December 6, 1994 and August 1, 1995 and with the Clerk of Camden County on November 18, 1994 and September 6, 1995.

Main Street eventually defaulted under the Plan. On April 30, 1997, the bankruptcy court ordered that Main Street 's liquor license be sold at a public auction, with the preservation of existing liens. On May 27, 1997, Progress Bank purchased the liquor license at a public auction conducted by the bankruptcy court for the minimum bid of $200,000. The bankruptcy court confirmed the sale on June 25, 1997.

On July 14, 1997, the bankruptcy court conducted a hearing with regard to the distribution of the proceeds of the sale of Main Street 's liquor license. On July 31, 1997, the bankruptcy court entered two orders, each of which provided: (1) that the right to receive payment from the proceeds of a municipal authorized sale of a liquor license is a general intangible under the Uniform Commercial Code, as adopted in New Jersey; (2) that Chrysler has a valid security interest in the proceeds received from the sale of Main Street's liquor license that was perfected as of June 23, 1996 and that was not prohibited by N.J.S.A. 33:1-26; (3) that Chrysler has a valid lien in the general intangible and in the proceeds of the sale of Main Street's liquor license; (4) that the IRS had a duly perfected and filed federal tax lien on Main Street's liquor license; and (5) that the IRS's federal tax lien is entitled to priority over Chrysler's security interest. Accordingly, the bankruptcy court ordered that the remainder of the proceeds of the sale of Main Street 's liquor license after deduction of certain necessary and reasonable costs be distributed to the IRS.

On August 6, 1997, Chrysler filed a Notice of Appeal of the July 31, 1997 Orders. That same day, Chrysler also moved before the bankruptcy court for an order staying distribution of the proceeds from the sale of Main Street's liquor license, as directed by the July 31, 1997 Orders.

On August 8, 1997, during a telephone conference call regarding Chrysler's motion to stay the July 31, 1997 Orders, Chrysler persuaded the bankruptcy court to reconsider that portion of the July 31, 1997 Orders regarding the extent, validity and priority of the federal tax lien held by the IRS. The bankruptcy court entered an order to that effect on August 22, 1997, but the IRS objected to the form of the Order. After conducting a telephone conference call on September 25, 1997 regarding the IRS's objection to the form of the August 22, 1997 Order, the bankruptcy court issued another Order on October 8, 1997 clarifying the issues it intended to reconsider.

On October 21, 1997, the bankruptcy court heard oral argument in connection with its reconsideration of that portion of the July 31, 1997 Orders regarding the extent and priority of the federal tax lien held by the IRS and essentially decided to reaffirm the July 31, 1997 Orders.

On November 21, 1997, the bankruptcy court entered an Order for Distribution of Sales Proceeds of Debtor's Liquor License providing for distribution of the proceeds of the sale of Main Street 's liquor license to the IRS after deduction of certain necessary and reasonable expenses.

Chrysler filed its Notice of Appeal of the November 21, 1997 Order on November 28, 1997. By Order dated December 8, 1997, the bankruptcy court stayed distribution in accordance with the November 21, 1997 Order pending the outcome of this appeal.

DISCUSSION

This court has jurisdiction over Chrysler's appeal of a final order of the bankruptcy court under 28 U.S.C. §158(a)(1). On appeal, a district court applies a clearly erroneous standard to the bankruptcy court's findings of fact, conducts plenary review of the bankruptcy court's conclusions of law, and reduces mixed questions of law and fact into their component parts, applying the appropriate standard to each component. Meridien Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992).

This appeal arises from the seeming inconsistency of the bankruptcy court's decision that the IRS's federal tax lien on Main Street's liquor license is entitled to priority over Chrysler's security interest in the right to payment from the proceeds of the sale of Main Street's liquor license, which the bankruptcy court found Chrysler had perfected more than two years before the IRS filed notice of its federal tax lien.

"Federal tax liens do not automatically have priority over all other liens." United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993). "Absent provision to the contrary, priority for purposes of federal law is governed by the common law principle that 'the first in time is the first in right.' " Id. (quoting United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954)). Under 26 U.S.C. §6323(a), a federal tax lien is not valid against any holder of a security interest until notice of the tax lien has been filed. Thus, Chrysler contends that, having found that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds from the sale of Main Street's liquor license, the bankruptcy court should have applied the "First in Time, First in Right" principle and determined that Chrysler's security interest had priority over the IRS's later-filed federal tax liens.

The IRS defends the correctness of the bankruptcy court's distribution order by challenging the bankruptcy court's conclusion that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds of the sale of Main Street 's liquor license. The IRS maintains that the "First in Time, First in Right" principle never comes into play in this case because its federal tax lien is the only valid lien in existence.

As an initial matter, therefore, this court must address Chrysler's contention that the IRS waived its right to challenge the correctness of the bankruptcy court's conclusion that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds of the sale of the liquor license by not filing a cross-appeal.

It is well-settled that "[an] appellee may, without taking a cross-appeal, urge in support of any decree any matter appearing in the record, although his argument may involve an attack upon the reasoning of the lower court or an insistence upon matter overlooked or ignored by it." Dalle Tezze v. Director, Office of Workers' Compensation Programs, United States Dept. of Labor, 814 F.2d 129, 132 (3d Cir. 1987) (quoting United States v. American Ry. Express Co., 265 U.S. 425, 435 (1924)). The justification for this principle, which has come to be known as the "inveterate and certain" rule, is that "a party who is happy with the judgment of a court should not have to appeal from it." Id. at 132-33. "In fact, a party has no right to appeal from a favorable judgment." Id. (citing Public Serv. Comm'n v. Brashear Freight Lines, Inc., 306 U.S. 204 (1939)).

In light of this authority, there is no merit to Chrysler's contention that the IRS has waived its right to challenge the bankruptcy court's conclusion that Chrysler had a valid and perfected security interest in the right to receive payment from the proceeds of the sale of the liquor license by failing to file a cross-appeal. The decree at issue on this appeal is the bankruptcy court's November 21, 1997 Order for Distribution of Sales Proceeds of Debtor's Liquor License, which provides that the proceeds from the sale of Main Street's liquor license, less certain necessary and reasonable sales expenses, shall be distributed to the IRS because the IRS's valid and subsisting federal tax lien has priority over Chrysler's competing lien interest. The IRS had no right to appeal that judgment because it is favorable to the IRS.

Moreover, under the inveterate and certain rule, the IRS had no obligation to cross-appeal in order to preserve its right to challenge the bankruptcy court's conclusion that Chrysler has a valid and perfected security interest in the right to receive payment from the proceeds of the sale of Main Street's liquor license in this court on Chrysler's appeal of the November 21, 1997 Order. The IRS's opposition to that conclusion of the bankruptcy court is a matter of record below. Indeed, the bankruptcy court expressly noted during the October 27, 1997 oral argument regarding its reconsideration of the July 31, 1997 Orders that the IRS had not waived its right to attack the bankruptcy court's conclusion about the validity of Chrysler's security interest. (See Transcript of the October 21, 1997 Oral Argument ("Tr.") at 2:13--4:15.) The bankruptcy court then proceeded to hear argument from the IRS on that point. (See Tr. at 10:1--15:21.) Under these circumstances, the IRS is not precluded from challenging the bankruptcy court's conclusion in this court on Chrysler's appeal.

Having determined that the IRS may challenge the bankruptcy court's underlying conclusion that Chrysler has a valid and perfected security interest in the right to receive payment from the proceeds of the sale of Main Street 's liquor license, the court turns to the merits of that conclusion.

The IRS's lien arises under 26 U.S.C. §6321, which grants the IRS a tax lien "upon all property and rights to property" of any person who neglects or refuses to pay a federal tax liability after demand. The lien attaches to all property of the taxpayer and continues to attach to all after-acquired property until the assessments are satisfied in full. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267-68 (1945); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516], 790 F.2d 354, 356 (3d Cir. 1986). Because §6321 "is so broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have," United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720-21 (1985), it has been held that a lien under §6321 reaches even property of the taxpayer such as a liquor license that is otherwise subject to state anti-alienation provisions. 21 West Lancaster [86-2 USTC ¶9516], 790 F.2d at 358; In re Tabone, Inc., 175 B.R. 855, 860-61 (Bankr. D.N.J. 1994). Thus, "[i]t is well settled that federal tax liens reach interests immune from attachment by private creditors." In re Atlantic Bus. & Community Dev. Corp. [93-1 USTC ¶50,333], 994 F.2d 1069, 1072 (3d Cir. 1993). The court, therefore, must examine the nature of the property interest inherent in a New Jersey liquor license under the scheme established by the state legislature.

In Boss Co., Inc. v. Board of Comm'rs of Atlantic City, 40 N.J. 379, 387 (1963), the New Jersey Supreme Court held that a New Jersey liquor license is "property" within the meaning and for the purposes of §6321. The court found that a liquor license "has value--not merely the personal value to the licensee that inheres in the right to engage in the business of selling intoxicating liquors, but also the monetary value that arises from the power possessed by the licensee to substitute, with the municipal consent, some other person in his place as licensee." Id. at 384. Thus, the court concluded that a liquor license "is a legal interest in the nature of an economic asset, created and protected by statute, and because it has monetary value and is transferable, either by consent of the licensee or by operation of law . . . it possesses the qualities of property," for purposes of the federal tax lien statute. Id. at 385.

The court also made clear, however, that a liquor license is not "property" under New Jersey law. "A liquor license in New Jersey vests a personal right in the licensee to conduct a business otherwise illegal. As such, it is merely a temporary permit or privilege." Id. at 384. This non-property status of a liquor license is reflected in the statute that governs the transfer of liquor licenses, which provides, in pertinent part:

Under no circumstances . . . shall a [liquor] license, or right thereunder, be deemed property, subject to inheritance, sale, pledge, lien, levy, attachment, execution, seizure for debts, or any other transfer or disposition whatsoever, except for payment of taxes, fees, interest and penalties imposed by any State tax law for which a lien may attach pursuant to R.S. 54:49-1 or pursuant to the State Tax Uniform Procedure Law, R.S. 54:48-1 et seq., or any similar State lien of tax, except to the extent expressly provides by this chapter.

N.J.S.A. 33:1-26 (emphasis added).

Chrysler concedes that, in light of N.J.S.A. 33:1-26, it could not have taken a valid security interest in Main Street 's liquor license itself. The issue in dispute is whether the bankruptcy court correctly determined that Main Street's right to receive payment from the proceeds of the sale of its liquor license does not arise under the liquor license, within the meaning of the term "rights thereunder" as used in N.J.S.A. 33:1-26, such that Chrysler could take a valid security interest in that right.

Chrysler argues that the bankruptcy court correctly determined that Main Street's right to receive payment from the proceeds of the sale of its liquor license is a "general intangible" under the Uniform Commercial Code, separate and distinct from the license itself, and that N.J.S.A. 33:1-26 does not prohibit Chrysler from taking a valid security interest in that right.

Chrysler's argument is premised on the New Jersey Supreme Court's recognition in Boss that a liquor license has economic value and that the purpose of N.J.S.A. 33:1-26 is "to protect the license from any device which would subject it to control of persons other than the licensee." Boss, 40 N.J. at 384-85, 388. Chrysler claims that the legislative history of N.J.S.A. 33:1-26 reveals no legislative intent to preclude a licensee from utilizing the economic value of his liquor license in a manner that would not interfere with the local liquor control board's unfettered control of the license, such as by granting a security interest in his right to receive payment from the proceeds of an approved sale of the liquor license. Chrysler asserts that, because the licensee acquires the right to receive the proceeds of any sale of his liquor license when he acquires the license, the licensee can grant a valid security interest in that right to a holder who can its security interest in that right even though the eventual sale of the license remains a mere contingency. The IRS argues, on the other hand, that Chrysler's interest should be determined as of the time prior to sale, when the license was still in Main Street's hands, and that at that time the only creditor that could have had a perfected lien in the license itself was the IRS, and not a private creditor such as Chrysler, due to N.J.S.A. 33:1-26.

The Third Circuit rejected an argument very similar to Chrysler's in 21 West Lancaster, supra, a case involving a priority dispute between a federal tax lien and a purported security interest in a Pennsylvania liquor license. The defendant licensee granted a security interest in its liquor license to a creditor. 21 West Lancaster [86-2 USTC ¶9516], 790 F.2d at 355. Thereafter, the IRS filed a federal tax lien on the liquor license. Id. Ultimately, a federal district court was called upon to resolve the competing claims to the proceeds of the sale of liquor license. Id. at 355-56. The district court acknowledged that Pennsylvania law prohibited security interests in liquor licenses, but determined that a licensee could grant a security interest in the economic value the license conferred on his business, which the court referred to as the "value enhancement component" of the license. Id. at 356. Accordingly, the district court held that the security interest granted by the licensee was entitled to priority over the later filed federal tax lien. Id.

The Third Circuit reversed, noting that the outcome reached by the district court "would seem to contradict the unambiguous import of the Pennsylvania authority defining the nature of a liquor license, a question of state law." Id. at 359 (emphasis in original). The court characterized the distinction between the license and its value enhancement component as "a highly metaphysical one," noting that there was no support in Pennsylvania law for "the proposition that there exists a value enhancement component to a liquor license separable from the license itself." Id. The court expressed some dissatisfaction with the holding it felt constrained to reach, acknowledging that the result was especially harsh for the creditor, but remarked that "the ability to alter such a result rests with the Pennsylvania legislature, which may choose to redefine the nature of a liquor license under state law." Id.

Guided by the Third Circuit's decision in 21 West Lancaster, this court rejects Chrysler's argument in support of the bankruptcy court's conclusion that Main Street's right to receive payment from the proceeds of the sale of its liquor license does not arise under the license, within the meaning of the term "rights hereunder" as used in N.J.S.A. 33:1-26. To do otherwise "would seem to contradict the unambiguous import of the [ New Jersey ] authority defining the nature of a liquor license, a matter of state law."

As in 21 West Lancaster, the distinction Chrysler urges upon the court is "a highly metaphysical one," and the New Jersey authorities cited by Chrysler provide no support for the proposition that the right to receive payment from the proceeds of the sale of a liquor license is separable from the license itself. ¹ Boss stands for the proposition that a liquor license has economic value, but it provides no support for Chrysler's contention that a licensee can grant a security interest in that economic value without running afoul of N.J.S.A. 33:1-26. Furthermore, the absence of any express prohibition on the granting of a security interest in a licensee's right to receive payment from the proceeds of the sale of his liquor license in the legislative history of N.J.S.A. 33:1-26 does not constitute support for the proposition that a licensee can grant such a security interest. Under these circumstances, this federal court is unwilling to interpret N.J.S.A. 33:1-26--a statute defining the nature of a license created under state law--in the manner Chrysler advocates.

This is not to say that Chrysler's theory is without merit as a matter of commercial law. Perhaps a licensee should be able to utilize the economic value of his liquor license in some fashion that does not interfere with the local liquor control board's unfettered control over the license. As the Third Circuit observed in 21 West Lancaster , however, that is a matter for the state legislature, which may choose to redefine the nature of a liquor license under state law. Interestingly, that is exactly what happened in Pennsylvania the year after the Third Circuit decided 21 West Lancaster, when the Pennsylvania legislature amended the statute defining the nature of a liquor license so as to permit licensees to grant security interests in them. See In re Walkers Mill Inn, Inc., 117 B.R. 197, 199 (Bankr. W.D. Pa. 1990) (discussing July 1, 1987 amendment of 47 Pa. Cons. Stat. Ann. §4-468(d)). Until such time as the New Jersey legislature follows suit, this court must decline Chrysler's invitation to recognize a new exception to N.J.S.A. 33:1-26.

Accordingly, this court holds that Chrysler has no valid security interest in the right to receive payment of the proceeds of the sale of Main Street's liquor license, and that the bankruptcy court's conclusion to the contrary was erroneous. ² There being no other lien on the proceeds of the sale of Main Street's liquor license other than the IRS's valid and subsisting federal tax lien, this court affirms the bankruptcy court's November 21, 1997 Order for Distribution of Sales Proceeds of Debtor's Liquor License, providing that the proceeds from the sale of Main Street's liquor license, less certain necessary and reasonable sales expenses, be distributed to the IRS.

CONCLUSION

For these reasons, the court affirms the bankruptcy court's November 21, 1997 Order for Distribution of Sales Proceeds of Debtor's Liquor License, providing that the proceeds from the sale of Main Street's liquor license, less certain necessary and reasonable sales expenses, be distributed to the IRS. The accompanying Order is entered.

ORDER

THIS MATTER having come before the court on the appeal by Chrysler Capital Corporation ("Chrysler") of the November 21, 1997 Order for Distribution of Sales Proceeds of Debtor's Liquor License of the United States Bankruptcy Court, which provided that the proceeds from the sale of the debtor's New Jersey liquor license, less certain necessary and reasonable sales expenses, be distributed to the Internal Revenue Service ("IRS"), and the court having considered the submissions of Chrysler and the IRS, and for the reasons set forth in the accompanying Opinion;

IT IS on this 28th day of September, 1998, hereby ORDERED that the Bankruptcy Court's November 21, 1997 Order is hereby AFFIRMED.

¹ The court finds the cases involving Federal Communications Commission ("FCC") broadcasting licenses cited by Chrysler to be inapposite because the statute at issue in this case is a New Jersey statute defining the nature of a license created under New Jersey law.

² In light of this holding, the court need not address the IRS's argument that its federal tax lien is entitled to priority over whatever interest Chrysler may have had.

 

 

 

The Boss Co., Inc. t/a The Click, and Chris L. Gross, District Director of Internal Revenue, Camden, New Jersey, Appellants v. Board of Commissioners of the City of Atlantic City, Clock Bar & Grille, Inc., and Sycur, Inc., and Division of Alcoholic Beverage Control, Department of Law and Public Safety, State of New Jersey, Respondents

N. J. Supreme Ct., A-114, 7/1/63

[1954 Code Sec. 6321]

Lien for taxes: Levy on liquor license: New Jersey.--A New Jersey liquor license is "property" within the meaning of Code Sec. 6321 and, consequently, the provision of New Jersey law that a license was not property subject to levy could not prevent the attachment of federal tax liens to a liquor license.

Richard M. Roberts, Department of Justice, Washington 25, D. C. (Alfred Abbotts, Assistant United States Attorney, Trenton , David M. Satz, Jr., United States Attorney. Vincent J. Commisa, Richard A. Levin, Assistant United States Attorneys, Newark, N. J., Sidney E. Zion, Assistant United States Attorney, Dennis C. DeBerry, Regional Counsel's Office, Internal Revenue Service, of counsel, on brief), for appellants. Herbert S. Alterman, Deputy Attorney General, 663 Main Ave., Passaic, N. J. (Arthur J. Sills, Attorney General, Perth Amboy, Herbert S. Alterman, 663 Main Ave., Passaic, N. J., of counsel), for Division of Alcoholic Beverage Control; Chaim H. Sandler, Associated City Solicitor, Schwehm Bldg., Murray Fredericks, 504 Schwehm Bldg., Atlantic City, N. J., for City of Atlantic City; Thomas W. Rauffenbart, Schwehm Bldg., Atlantic City, N. J., for Clock Bar & Grille, Inc., and Sycur, Inc., respondents.

The opinion of the court was delivered by SCHETTINO, Judge:

The Boss Co., Inc., and the District Director of Internal Revenue appealed to the Appellate Division from the Conclusions and Order of the Director of the Division of Alcoholic Beverage Control dismissing their appeals and affirming the action of the Board of Commissioners of the City of Atlantic City in refusing to grant an application by Boss that liquor license C-188 be transferred to it, and in granting the application of Clock Bar & Grille, Inc., to renew said license and to transfer it to Sycur, Inc. While the appeal was pending, we certified the case on our own motion.

[Facts]

While Clock was the holder of a liquor license for premises known as 19-21 South Tennessee Avenue , Atlantic City , it became indebted to the federal government in the amount of $25,914.76, plus interest, for unpaid excise taxes which were assessed on August 15, 1958. By virtue of section 6321 of the Internal Revenue Code of 1954, a lien arose in favor of the United States upon "all property and rights to property" belonging to Clock. 26 U. S. C. A. §6321. On March 15, 1961, a revenue officer, acting pursuant to 26 U. S. C. A. §6331, attempted to seize all rights of Clock in and under the liquor license. That same day notice was given to Clock that the property would be publicly sold on April 10 by the District Director.

On April 6, the Board granted an application by Clock for a transfer of the license from 19-21 South Tennessee Avenue to 22-24 South South Carolina Avenue .

On April 10, the licensee's property was sold to Boss by the District Director, and two days later Boss made application to the Board for the transfer of the license to it and the retransfer of the license to 19-21 South Tennessee Avenue . Clock opposed the application and a public hearing was held. The Board denied this application on May 4 on the ground of lack of jurisdiction to grant the person-to-person transfer because Boss' application was not accompanied by a separate written consent to the transfer by the original licensee, Clock, as required by R. S. 33:1-26. The Board was also of the opinion that Clock had no property rights in the license which could be subjected to levy or sale because R S. 33:1-26 provides, inter alia, that under no circumstances shall a license or right thereunder be deemed property. Boss and the District Director appealed to the Division of Alcoholic Beverage Control. The appeal was heard on June 26.

On May 27, Sycur, with Clock's written consent, applied to the Board for the transfer of said license to it for premises at 22-24 South South Carolina Avenue . Boss and the District Director opposed the application, and a public hearing was held on June 29. That day the Board granted Clock's application for renewal of liquor license C-188 for the term ending June 30, 1962, as well as its transfer to Sycur. Again, Boss and the District Director appealed to the Division of Alcoholic Beverage Control.

All parties agreed that, inasmuch as the issues in both appeals were the same, they should be combined and decided together, with the decision in the earlier appeal binding the latter one. The Conclusions and Order of the Director of the Division of Alcoholic Beverage Control adopted the Hearer's Report in which both reasons given by the Board for the denial of the transfer to Boss--lack of jurisdiction to grant the application and the absence of property rights in the license subject to levy and sale by the federal government--were found valid, and the Director affirmed the actions of the municipal board.

[Extent of Property Interest in Liquor License]

The sole issue before us is whether a liquor license and any rights thereunder are property or rights to property within the meaning of section 6321 of the Internal Revenue Code. The United States Supreme Court has held that, in determining whether and to what extent a taxpayer has property or rights to property to which a federal lien can attach, state law controls; but once it has been determined that state law has created a sufficient interest in the taxpayer to satisfy the requirements of section 6321, federal law governs the attachment and priority of the lien. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 4 L. Ed. 2d 1365 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 2 L. Ed. 2d 1135 (1958). Our Alcoholic Beverage Law in R. S. 33:1-26 provides: "Under no circumstances, however, shall a license, or rights thereunder, be deemed property, subject to inheritance, sale, pledge, lien, levy, attachment, execution, seizure for debts, or any other transfer or disposition whatsoever, except to the extent expressly provided by this chapter."

The language alone of our statute is not dispositive of the issue, for a state legislative pronouncement in and of itself is insufficient to determine the existence or non-existence of a property interest within the meaning of section 6321. In Fidelity & Deposit Co. v. New York City Housing Authority [57-1 USTC ¶9410], 241 F. 2d 142 (2d Cir. 1957), Judge Medina noted that in adopting legislation regarding federal liens for taxes, Congress took for granted the existence of state laws creating and maintaining various interests, but fashioned the statute to require the courts to determine for federal purposes whether a state-created interest was property or rights to property. "That classification of interests is a federal question; the existence of the interests to be federally classified, however, is solely a question of state law." 241 F. 2d at 144. And in In re Halprin [60-2 USTC ¶9564], 280 F. 2d 407 (3d Cir. 1960), Judge Hastie said that the application of section 6321 involves a two-step inquiry in which both state and federal law must be consulted. "State law creates legal interests and defines their incidents, but the ultimate question whether an interest thus created and defined falls within a category stated by a federal statute requires an interpretation of that statute, which is a federal question." 280 F. 2d at 409. The court in Halprin applied its understanding of the nature and characteristics of property rights in order to decide whether the intangible right in issue was one Congress meant to include within the phrase "property and rights to property."

A liquor license in New Jersey vests a personal right in the licensee to conduct a business otherwise illegal. As such, it is merely a temporary permit or privilege. Mazza v. Cavicchia, 15 N. J. 498, 505 (1954); In re Schneider, 12 N. J. Super. 449, 456 (App. Div. 1951). But once granted, it is protected against arbitrary revocation, suspension or refusal to renew. See Blanck v. Mayor & Borough Council, 38 N. J. 484, 489 (1962); R. S. 33:1-22, 1-31.

[Value of a Liquor License]

This license has value--not merely the personal value to the licensee that inheres in the right to engage in the business of selling intoxicating liquors, but also the monetary value that arises from the power possessed by the licensee to substitute, with the municipal consent, some other person in his place as licensee. Moreover, in limited situations, the personal nature of the license is sacrificed so that this value can justly accrue to the benefit of third parties. R. S. 33:1-26 provides that if the operation of the business covered by the license devolves by operation of law upon a person other than the licensee, the issuing authority may, in its discretion, "extend said license for a limited time, not exceeding its term, to the executor, administrator, trustee, receiver or other person upon whom the same has devolved by operation of law as aforesaid." If the license is extended, the holder thereof can exercise the same rights as the original licensee, and by conducting the business or converting the license into money by consenting to a person-to-person transfer, the estate of a deceased licensee will benefit or the assets available for creditors of a financially troubled licensee will be increased. Thus, the liquor license is a legal interest in the nature of an economic asset, created and protected by statute, and because it has monetary value and is transferable, either by consent of the licensee or by operation of law (in the special statutorily-described sense), it possesses the qualities of property.

[Similar Cases Compared]

The somewhat unusual situation before us--the question whether a liquor license can be classified as "property" for federal purposes despite a legislative pronouncement to the contrary--has arisen in two cases. In Midwest Beverage Co. v. Gates, 61 F. Supp. 688 (N. D. Ind. 1945), the licensee sought an interlocutory and permanent injunction to enjoin officials of the State of Indiana from enforcing provisions of a statute which would cancel the license before it was due to expire. Plaintiff argued that the statute deprived it of its property rights without due process of law in violation of the fourteenth amendment. The officials moved to dismiss for lack of jurisdiction of the court to hear the cause on the ground, inter alia, that no property rights of the plaintiff were involved. The statute under which plaintiff's license was issued provided that no person was deemed to have a property right in a liquor license, nor was the license itself or the enjoyment thereof to be considered a property right.

The District Court conceded that while the license as such may not be property, the use and enjoyment of it gave its possessor something of value which had all the qualities of property. The court noted that under Indiana law the license could be transferred from one holder to another, subject to the terms and regulations of the state liquor commission and that an administrator or executor of an estate of a deceased licensee or a receiver or trustee in bankruptcy could continue the business. Once granted, the court declared, "the use of the permit * * * has the elements of property irrespective of what the Legislature may declare about the permit itself, and * * * is property within the meaning of the due process clause of the Federal Constitution." 61 F. Supp. at 691.

The rationale of Midwest was adopted and applied to a case arising under section 6321. Deitsch v. Board of Liquor License Comm'rs, [58-1 USTC ¶9496], at 68, 334 (Md. Cir. Ct. 1958). Like Boss, Deitsch purchased a liquor license from the District Director of Internal Revenue, which the latter seized when the original licensee became delinquent in payment of federal income taxes, and his application to have the license transferred to him was denied by the respondent board on the sole ground that the license was not property or a property right. A Maryland statute declares that liquor licenses are not to be regarded as property or as conferring any property rights. On appeal, the court determined that the legislative purpose was to make clear that a license, at least insofar as the state was concerned, was not entitled to the ordinary protection of the constitution usually afforded property rights. However, the court was of the opinion that, except for that purpose, the license could be considered property. Noting that other sections of the statute provide for the transfer of a license by the personal representative of the estate of a deceased licensee and for the sale or assignment of a license by the licensee or a receiver or trustee, the court stated: "There is no doubt that the license in this case is something of value and the 'something' has attributes of property." 58-1 USTC ¶9496, at 68,335. In the opinion of the court, the liquor license was "property" within the meaning of section 6321, subject to seizure and sale by the federal government, with the rights of the purchaser contingent upon his being approved by the Board of Liquor License Commissioners and meeting any other requirements of Maryland law and regulations adopted pursuant thereto.

A liquor license was held to be "property" within the meaning of the Bankruptcy Act in In re Quaker Room, 90 F. Supp. 758 (S. D. Cal. 1950), despite judicial pronouncements to the contrary in cases decided in California state courts. Those cases were distinguished in Golden v. State, [55-2 USTC ¶9664] 133 Cal. App. 640, 285 P. 2d 49 (Dist. Ct. App. 1955), and a liquor license was declared "property" within the meaning of section 6321, the court emphasizing its transferability and its substantial value. Accord, Division of Labor Law Enforcement v. United States [62-1 USTC ¶9389], 301 F. 2d 82 (9th Cir. 1962).

[Conclusion]

We agree with the sound reasoning of the above cases, and in light of the property characteristics incident to the legal interest created by our statute, we conclude that the liquor license in New Jersey constitutes "property" within the meaning and for the purposes of section 6321. Thus, as far as the federal government is concerned, R. S. 33:1-26 cannot immunize liquor licenses from the attachment of federal liens, for, as stated in United States v. Bess, supra, 357 U. S. at 57, 2 L. Ed. 2d at 1141, "state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States."

Our decision is also consistent with the suggestion of Judge Francis that "the public interest requires liberal interpretation and application of the lien statute [section 6321] because such money is the life blood of government," Tanenbaum Textile Co. v. Vogue Foundations, Inc. [55-2 USTC ¶9653], 36 N. J. Super. 572, 581 (App. Div. 1955), and in no way marks a departure from the principles which have guided our courts in liquor license litigation. See Blanck, supra, 38 N. J. at 490-92. The liquor license, although transferable, is still to be considered a temporary permit or privilege, and not property, as it always has been, even before our Legislature so declared by statute, Voight v. Board of Excise Comm'rs, 59 N. J. L. 358, 360-61 (Sup. Ct. 1896), and this consideration is to continue to govern the relationship between state and local government and the licensee. Likewise, the vitality of R. S. 33:1-26 is in no way diminished and will continue to protect the liquor license from any device which would subject it to the control of persons other than the licensee, Mannion v. Greenbrook Hotel, Inc., 138 N. J. Eq. 518, 520 (E. & A. 1946); Rawlins v. Trevethan, 139 N. J. Eq. 226, 230 (Ch. 1947); Walsh v. Bradley, 121 N. J. Eq. 359, 360 (Ch. 1937), be it by pledge, lien, levy, attachment, execution, seizure for debts and the like. And, finally, the sound discretion of the issuing authority to issue, renew or transfer liquor licenses will not be disturbed, for the seizure by the federal government merely obviates the necessity of securing the consent of the licensee to the transfer; Boss, as transferee, must still make application to the issuing authority as is required in the case of an original application for a license, R. S. 33:1-26, and must measure up to the qualifications required of licensees as set out in R. S. 33:1-25. See Deitsch, supra.

Reversed and remanded.

 

 

 

United States of America, Plaintiff v. Deanne F. Skirko a/k/a, Deanne F. Berrett, Dale W. Sterner, and E. Arlene Sterner, Defendants

U.S. District Court, Dist. Wyo., C84-501-K, 12/16/85

[Code Secs. 6321 and 6323 ]

Collection: Lien for taxes: Licenses: Validity of lien: Recordation of interest.--In ruling that the U.S. was entitled to foreclose its federal tax lien upon a liquor license, the court held that a federal tax lien could attach to the license because under state (Wyoming) law such a license is considered property to which a security interest can attach. Further, the court found that the reassignment of the liquor license from the delinquent taxpayer to the individuals that had initially held the license was insufficient to defeat the government lien where the reassignment was held in escrow and not recorded until after the federal lien attached.

Tosh Suyematsu, Assistant United States Attorney, Cheyenne, Wyo. 82003, John D. Steffan, Department of Justice, Washington, D.C. 20530, for plaintiff. Susan K. Overeem, 239 West First St. , Casper , Wyo. 82601 , for defendants.

ORDER RULING ON MOTIONS FOR SUMMARY JUDGMENT WITH FINDINGS

KERR, District Judge:

The above-entitled matter coming on regularly for hearing before the Court on defendants Sterners' motion for summary judgment and plaintiff's cross-motion for summary judgment; plaintiff appearing by and through its attorney, John D. Steffan, Trial Attorney, Tax Division, United States Department of Justice, and defendants Sterners appearing by and through their attorney, Susan K. Overeem; and the Court having heard the arguments of counsel and having fully and carefully reviewed the briefs, affidavits, exhibits, and memoranda on file herein, and being fully advised in the premises, FINDS as follows:

This is an action to reduce a federal tax assessment to judgment, foreclose a federal tax lien, and sell an item of personal property.

This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§1340 and 1345 and 26 U.S.C. §§7402(a) and (e) and 7403 . Venue is proper in this district under 28 U.S.C. §§1391(b) and 1396 .

The United States filed the complaint herein naming as defendants Deanne F. Skirko a/k/a Berrett (hereinafter Skirko or the taxpayer) and Dale W. Sterner and E. Arlene Sterner (hereinafter the Sterners). The complaint seeks to have $59,746.71 in assessed, unpaid 1980 federal income taxes of Deanne Skirko, plus statutory additions, reduced to judgment and to foreclose a federal tax lien against specific property, Liquor License Number Two issued by the Town of Mills , Wyoming .

Skirko failed to respond to the complaint and default judgment was entered against her on May 7, 1985, reducing $81,466.65 in taxes and statutory additions to judgment and granting plaintiff the right to foreclose on seized properties belonging to Skirko.

The Sterners responded to the complaint asserting that Liquor License Number Two is their property and not that of Skirko by reason of a reassignment of the license from Skirko to them.

The plaintiff and the Sterners filed cross-motions for summary judgment under Rule 56 of the Federal Rules of Civil Procedure and oral argument was heard.

Prior to November 12, 1980, the Sterners were the owners and operators of the Hideaway Bar and Package Store and the holders of retail Liquor License Number Two issued by the Town of Mills , Wyoming .

On or about November 12, 1980, defendant Sterners entered into a Sale and Escrow Agreement with Marie Forsberg and the Bull Pen Restaurant, Inc. (hereinafter Bull Pen) for the sale of the business, including Liquor License Number Two. As part of the terms of the sale, Bull Pen executed a reassignment of Liquor License Number Two in favor of the Sterners. The reassignment was placed in escrow, along with the other documents of sale, with the State Bank of Mills, Wyoming . Liquor License Number Two was thereafter transferred to Bull Pen.

On or about May 12, 1981, Forsberg and Bull Pen assigned their interest in the Sales and Escrow Agreement to Skirko who had executed a reassignment of Liquor License Number Two in favor of the Sterners dated April 1, 1981. The reassignment was first recorded by the Sterners on May 14, 1984, and, even then, only with the Mills Town Clerk. In consonance with the Sale and Escrow Agreement, and upon approval of defendant Skirko's application to the Town of Mills , Liquor License Number Two was transferred to and in the name of Deanne [sic] Berrett. Skirko thereafter operated the business as a sole proprietorship.

On July 19, 1982, the Internal Revenue Service assessed taxpayer $59,746.71 in unpaid 1980 Form 1040 taxes. Notice and demand for payment was made and on March 2, 1983, a Notice of Federal Tax Lien was filed with the Clerk and Recorder of Natrona County, Wyoming.

By letter dated January 9, 1984, pursuant to the Sale and Escrow Agreement's default provisions, the Sterners notified Skirko that she was in default under the purchase contract. Pursuant to those default provisions, the Sterners could declare the Sale and Escrow Agreement terminated and unilaterally break escrow if Skirko failed to pay and discharge the entire balance of the obligation within sixty days after the notice of default was given.

On May 8, 1984, the Internal Revenue Service served a levy on Skirko to collect her outstanding tax liabilities and statutory additions.

On May 9, 1984, Internal Revenue Service agents seized Liquor License Number Two from the wall at the Hideaway Bar. Also on May 9, 1984, the Sterners terminated the Sale and Escrow Agreement by removing the documents from escrow.

On May 11, 1984, the Sterners filed a Liquor License and/or Permit Application with the Town of Mills for the transfer of ownership of Liquor License Number Two from Skirko to themselves.

On May 14, 1984, Sterners filed Skirko's reassignment of Liquor License Number Two with the Mills Town Clerk.

On July 3, 1984, the Sterners again filed a Liquor License and/or Permit Application with the Town of Mills for the renewal of Liquor License Number Two. On September 5, 1984, Sterners' applications were approved by the Town of Mills and thereafter the requisite licensing fee was paid by the Sterners.

A number of subsidiary issues must be determined before this Court can order foreclosure and sale of Liquor License Number Two in favor of the United States: (1) Whether a federal tax lien can attach to a liquor license; (2) whether defendant Skirko held an interest in Liquor License Number Two at the time the federal tax lien attached to all her property and rights to property; (3) whether the Sterners have a claim to Liquor License Number Two which primes any interest of the United States; and, (4) whether the United States has forfeited its interest in Liquor License Number Two.

The United States Court of Appeals for the Tenth Circuit, this Court, and the Wyoming Supreme Court have expressly held that a liquor license issued under the Wyoming Liquor laws is property to which a security interest can attach. Bogus v. American National Bank of Cheyenne , 401 F.2d 458, 461 (10th Cir. 1968) (affirming this Court); Johnson v. Smith, 455 P.2d 244, 251 ( Wyo. 1969). This is predicated on the adoption of the Uniform Commercial Code by the Wyoming legislature, effective January 1, 1962, which broadened previously existing law and made liquor licenses subject to security interests, as well as the Bogus court's holding that a liquor license has specific characteristics of an item of property, i.e. transferability and unique value. Bogus, 401 F.2d at 461. The court concluded: "To that extent, then, it [the Uniform Commercial Code] must be considered as overriding any inference that otherwise might be drawn from the liquor control act that an encumbrance may not be placed on a liquor license issued thereunder." Id.

Federal law dictates to what property a federal tax lien can attach. Aquilino v. United States , 363 U.S. 509 at 513; United States v. Bess, 357 U.S. 51, 55 (1958). Congress has expressly provided that a federal tax lien attaches to all property and rights to property, whether real or personal, belonging to a taxpayer:

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.

26 U.S.C. §6321 .

A section 6321 lien arises at the time the tax assessments are made against the taxpayer, 26 U.S.C. §6322 , which is the date the liabilities are recorded by the Secretary of the Treasury or his delegate, 26 U.S.C. §6203 .

The Internal Revenue Service records regarding defendant Skirko show that the assessment was recorded in the records of the Internal Revenue Service on July 19, 1982, Skirko having filed her 1980 Form 1040 on June 3, 1982. Therefore, on July 19, 1982, a federal tax lien was impressed upon all property and rights to property in the taxpayer as of that date. See United States v. Vermont, 377 U.S. 351, 353 n.3 (1964).

The question becomes what, if any, interest did defendant Skirko hold in Liquor License Number Two as of July 19, 1982. Again, state law controls this question and the applicable state law is the Wyoming Uniform Commercial Code.

Here, after the assignment from Forsberg and Bull Pen of their interest in the Sale and Escrow Agreement to Skirko on or about May 12, 1981, Liquor License Number Two was transferred to and issued in Skirko's name where it remained without question until, at the earliest, the Sterners' termination of the Sale and Escrow Agreement in 1984. The taxpayer held the liquor license in her name subject to an unfiled reassignment held in escrow.

It is necessary to the extent the taxpayer's reassignment of the liquor license was intended to create a security interest in the liquor license in favor of the Sterners, to determine under the Wyoming Uniform Commercial Code the interest in Liquor License Number Two held by the Sterners and the extent that interest is protected against the subsequently arising interest of the United States in the license.

A liquor license is a general intangible as defined in W.R.S. §34 -21-906; U.C.C. §9-106; see Bogus, 401 F.2d at 460. A security interest in a general intangible must be recorded in order to protect it from the claims of third parties. W.R.S. §34 -21-931; U.C.C. §9-302; see W.R.S. §34 -21-930(a); U.C.C. §9-301(1)(b).

Here, since the Sterners failed to properly file their security interest until well after the fact, they only had an unperfected interest in Liquor License Number Two.

Pursuant to W.R.S. §34 -21-930(a)(ii); U.C.C. §9-301(1)(b), an unperfected security interest is subordinate to the rights of a third party who becomes a lien creditor before that security interest is perfected. That is, the subsequent lien asserted by the third party preempts the earlier but unperfected lien.

A lien creditor is a creditor who has acquired a lien on the property by attachment, levy, or the like. W.R.S. §34 -21-930(c); U.C.C. §9-301(3). The United States qualifies as a lien creditor under this definition. United States v. Trigg, 465 F.2d at 1268; L.B. Smith v. Foley, 341 F.Supp. at 813-814 (W.D.N.Y. 1972) (and cases cited therein). Therefore, the federal tax lien attached to the collateral in its entirety without any diminution caused by the Sterners' unperfected security interest in Liquor License Number Two. ¹

The Sterners contend that their unperfected security interest primes the federal tax lien. Therefore, it must be determined which interest in Liquor License Number Two is entitled to priority. This determination is controlled by federal law. Aquilino, 363 U.S. at 513-514 (and cases cited therein).

The issue is whether the Sterners' unperfected security interest can prime the Government's tax lien filed on March 2, 1983. Section 6323(a) of Title 26 controls the priority issue:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

The Wyoming Uniform Commercial Code provides that a security interest in general intangibles must be perfected to prevail over a subsequent lien creditor. W.R.S. §34 -21-930 (a)(iii); U.C.C. §9-301(1)(b).

Therefore, absent perfection, the Sterners' security interest in Liquor License Number Two is not entitled to the protections afforded security interests in §6323(a) and does not prime the federal tax lien.

The Sterners contend that any interest of plaintiff in Liquor License Number Two expired at the end of the year-long term of the license.

Liquor License Number is descriptive of a particular license by number, location, and the extent of the authority granted thereby: License Number Two, for sale of alcoholic beverages at the Hideaway Lounge. The license can be (1) renewed, (2) transferred to new ownership, (3) transferred to a new location, or (4) transferred to a new location and ownership upon approval by the licensing authority. It is pertinent to note that all of the subsequent activities relating to this license beginning with the sale of the Hideaway Bar to Forsberg and Bull Pen, the assignment to taxpayer, the reassignment to the Sterners and subsequent activities regarding the license, to date have all involved transfer or renewal of the license as required by state law. At no time was a new license issued.

The transfers and renewals do not show a demise or cancellation of Liquor License Number Two itself. The source of Liquor License Number Two can be traced chronologically from its issuance through subsequent transfers to that of September 6, 1984 to the Sterners. The source of the Sterners' present right to serve alcoholic beverages at the Hideaway Lounge stems directly from their transfer of the license to Bull Pen and Forsberg in 1980; from Bull Pen and Forsberg to Skirko in 1981; and from Skirko to the Sterners in 1984. The Sterners' claim and right to transfer of Liquor License Number Two is premised on their claim of right as the original transferors and the subsequent reassignments.

The Liquor License and/or Permit Applications before the Court show that the activity regarding Liquor License Number Two constituted transfers and renewals rather than requests for issuance of a new license. The very reassignment upon which the Sterners stake their claim to the license authorizes transfer of the license from Skirko to them.

NOW, THEREFORE, IT IS ORDERED that plaintiff's motion for summary judgment be, and the same is, hereby granted; it is

FURTHER ORDERED that the United States is entitled to foreclosure of the federal tax lien attached to Liquor License Number Two and to sell the license subject to the approval of the successful bidder by the appropriate Wyoming authorities; it is

FURTHER ORDERED that defendant Sterners' motion for summary judgment be, and the same is, hereby denied.

¹ One of the valuable rights inherent in a liquor license is "the 'first chance' or opportunity to apply to the licensing authority for continuation or renewal" of the license. Johnson v. Smith, 455 P.2d 244, 251 (1969); W.R.S. §12 -4-104(c). It is, of course, this right that the Internal Revenue Service hopes to sell--the purchaser having the first right to petition the licensing authority for transfer of the license to him.

 

 

 

United States of America v. R&E Corporation and Commonwealth of Pennsylvania

U.S. District Court, East. Dist. Pa., CIV. 98-1068, 8/31/99

[Code Secs. 6321 and 6323 ]

Federal tax liens: Priority over state liens: Pennsylvania: Creation of lien: Judgment creditor: Notice of lien filed: Lien interest: Superpriority: Supremacy Clause.--Federal tax liens against proceeds from the sale of a delinquent taxpayer's liquor license were superior to most of the state (Pennsylvania) tax liens filed against the taxpayer. Although the state liens attached as soon as proper notice was filed by the state, the notice did not constitute a judgment or allow the state to qualify as a judgment creditor. Accordingly, the federal liens were perfected as soon as the taxpayer's federal deficiencies were assessed, regardless of when the IRS filed notice of them, and only a state lien that was filed prior to the assessment of the taxpayer's federal deficiencies was superior to the federal liens. Finally, state law prohibiting the sale of a liquor license by a party that owed state taxes did not give the state a lien interest in the license; also, to the extent that the law granted the state a reserved interest in the license that amounted to a superpriority over federal tax liens, it was preempted by the Supremacy Clause of the U.S. Constitution.

[Code Secs. 7402 and 7403 ]

District court: Jurisdiction: Tax Injunction Act: Federal tax liens: Foreclosure: State liens.--The Tax Injunction Act, 28 U.S.C. §1341, did not bar the government's action to foreclose federal tax liens against property that was also subject to state (Pennsylvania) tax liens. The foreclosure suit did not qualify as an attempt to enjoin, suspend or restrain the state's assessment and collection action, or to use an injunction or a declaratory judgment to deprive the state of any interest it had in the taxpayer's property.

[Code Sec. 6321 ]

Tax liens: Property subject to: Liquor license.--Under state ( Pennsylvania ) law, a delinquent taxpayer's liquor license constituted property that was subject to federal and state tax liens.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

YOHN, Judge:

The United States brought this foreclosure action against a liquor license owned by R&E Corporation ("R&E"). The United States named Pennsylvania 's Bureau of Employer Tax Operations ("BETO") as a party possibly claiming rights to the liquor license. On November 2, 1998, default was entered against R&E. Shortly thereafter, the court approved a consent decree allowing the sale of the license. This sale occurred on May 11, 1999, and yielded proceeds in the amount of $6,100.00. ¹ Both the United States and BETO now assert that they are entitled to these proceeds. The United States claims that its tax liens were perfected on the date of assessment and have priority over all but one of the Commonwealth's liens. See Pl.'s Trial Brief at 16-17. BETO maintains that the Tax Injunction Act divests the court of jurisdiction to hear this case. Substantively, BETO argues that it is a judgment lien creditor and therefore, under 26 U.S.C. §6323 the IRS's liens can have priority only from the date they were recorded. See Def.'s Trial Mem. at 3-4. Alternatively, BETO contends that the United States has liens only on the amount of the proceeds that exceed R&E's outstanding state tax debt. Defendant bases this claim on the theory that the provision in the Pennsylvania Liquor Code which makes the right to transfer, sell, or renew a liquor license contingent upon payment of state taxes, limits R&E's, and therefore the IRS's, interest in the license to something less than its entire value.

The court held oral argument on these issues. Following this hearing, the parties submitted joint findings of all the facts relevant to a determination of the parties' respective rights in the proceeds. These findings are incorporated herein as follows.

I. FINDINGS OF FACT

1. R&E Corporation t/a Living Room Lounge is a corporation organized under the laws of the Commonwealth of Pennsylvania .

2. The Pennsylvania Liquor Control Board (PLCB) granted a liquor license #R6957 to R&E, which operated a liquor establishment by virtue of that license.

3. Between 1989 and 1996, the Internal Revenue Service (IRS) made various assessments against R&E for unpaid federal employment taxes (withheld income taxes and FICA taxes). These assessments plus statutory additions are summarized as follows:

Tax         Date of   Amount of    Unpaid   Statutory

Period     Assessment Assessment  Balance   Additions

06/30/88     09/18/89  $3,060.62    $966.48  $1,228.97

09/30/88     09/18/89  $3,135.27  $1,380.83  $1,936.76

12/31/88     09/18/89  $3,209.92  $1,449.43  $2,038.38

09/30/89     07/15/96    $698.88  $1,704.10    $421.02

12/31/89     07/15/96    $698.88  $1,661.58    $380.50

03/31/90     07/15/96    $709.80  $1,664.59    $406.36

06/30/90     07/15/96    $709.80  $1,603.71    $396.24

09/30/90     07/15/96    $709.80  $1,563.94    $386.37

03/31/91     07/08/96    $596.70  $1,274.37    $317.62

09/30/91     06/15/92    $865.42    $337.21    $860.49

12/31/91     06/15/92    $865.42  $1,075.38    $979.05

03/31/92     11/30/92    $879.08  $1,040.59  $1,551.76

09/30/92     12/14/92    $890.78  $1,915.69  $1,732.46

12/31/92     07/15/96    $892.72  $1,634.47    $439.53

03/31/93     06/24/96    $596.70  $1,107.45    $311.86

09/30/93     06/24/96    $892.72  $1,509.20    $462.65

12/31/93     06/24/96    $892.72  $1,471.89    $466.65

03/31/94     06/24/96    $892.72  $1,435.77    $470.83

06/30/94     06/24/96    $892.72  $1,398.22    $474.73

09/30/94     10/14/96    $892.72  $1,397.56    $436.16

12/31/94     06/24/96    $892.72  $1,316.05    $480.69

03/31/95     06/24/96    $446.36    $637.37    $241.81

06/30/95     07/01/96    $446.36    $619.25    $240.46

09/30/95     06/24/96    $446.36    $596.13    $242.51

12/31/95     06/24/96    $446.36    $555.71    $233.55

03/31/96     06/24/96    $446.36    $476.55    $212.26

 

4. From 1989 to 1996, the IRS also made assessments against R&E for unpaid federal unemployment taxes. These assessments plus statutory additions are summarized as follows:

Tax         Date of   Amount of    Unpaid   Statutory

Period     Assessment Assessment  Balance   Additions

1989         07/15/96    $112.00    $270.37     $66.81

1991         06/26/92    $112.00     $25.57     $18.25

1992         07/08/96    $112.00    $204.74     $55.49

1993         07/15/96    $868.00  $1,414.74    $404.18

1994         07/15/96    $868.00  $1,289.99    $457.81

1995         07/15/96    $434.00    $545.15    $219.33

The parties agree that the assessments for the 1993, 1994, and 1995 tax periods may be reduced if 940 recertifications are issued by BETO.

5. The IRS issued a notice and a demand for payment to R&E on or about the dates of the assessments.

6. Despite notice and demand for payment, liabilities for federal taxes listed in paragraphs three and four remain unpaid.

7. The Department of Labor and Industry, Bureau of Employer Tax Operations is a state taxing entity that collects state taxes.

8. R&E registered with BETO as an employer offering covered employment for wages subject to state unemployment compensation ("UC") taxes.

9. R&E self-reported and self-assessed UC taxes to BETO. Some of these taxes remain due and unpaid.

10. On October 12, 1984, BETO filed a lien against R&E on behalf of the Pennsylvania Unemployment Compensation Fund ("Pa. UC Fund") in the amount of $335.95 in the Prothonotary's Office of Philadelphia County at Docket Number 2288 October Term, 1984, which lien was timely revived September 28, 1992. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $34.30.

11. On November 23, 1990, BETO filed a lien against R&E on behalf of the Pa. UC Fund in the amount of $1,240.07 in the Prothonotary's Office of Philadelphia County at Docket Number 3782 November Term, 1990, which lien was timely revived September 21, 1995. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $41.00.

12. On November 9, 1992, BETO filed a lien against R&E on behalf of the Pa. U.C. Fund in the amount of $695.48 in the Prothonotary's Office of Philadelphia County at Docket Number 1001 November Term, 1992, which lien was timely revived September 19, 1997. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $41.00.

13. On March 4, 1996, BETO filed a lien against R&E on behalf of the Pa. U.C. Fund in the amount of $742.47 in the Prothonotary's Office of Philadelphia County at Docket Number 297 March Term, 1996. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $903.26.

14. On April 18, 1996, the IRS filed a notice of federal tax lien against R&E in the amount of $6497.58 in the Prothonotary's Office for Philadelphia County , docketed to 020281, for amounts assessed in 1991 and 1992. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $9,536.45.

15. On April 21, 1997, the IRS filed a notice of federal tax lien against R&E in the amount of $31,312.27 in the Prothonotary's Office for Philadelphia County , docketed to 020134, for amounts assessed in 1996. This lien remains unsatisfied as of record. The amount due as of January 1, 1999, is $25,534.15.

16. On April 21, 1997, the IRS filed a notice of federal tax lien against R&E in the amount of $5,972.63 in the Prothonotary's Office of Philadelphia County, docketed to 020135, for amounts assessed in 1996. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $8,104.83, but which amount may be reduced if 940 recertifications are issued by BETO.

17. On April 29, 1997, BETO filed a lien against R&E on behalf of the Pa. UC Fund in the amount of $776.58 in the Prothonotary's Office of Philadelphia County at Docket Number 3098 April Term, 1997. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $921.62.

18. On July 31, 1998, the IRS filed a notice of federal tax lien against R&E in the amount of $5,160.89 in the Prothonotary's Office for Philadelphia County , docketed to 020191, for amounts assessed in 1989. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $9,000.85.

19. At the time of oral argument, liquor license #R6957 had expired, but it was recoverable upon approval of a completed renewal application and payment of the PLCB's renewal fees.

20. In order to expedite the litigation, the IRS and BETO agreed that license #R6957 would be renewed and sold upon renewal. ² The IRS completed a renewal application and agreed to pay the renewal fees. See Pl.'s Mot. for Approval of the Consent Order Allowing the Sale of Liquor License ("Mot. for Consent Order"), Att. A.

21. Liquor license #R6957 was sold on May 11, 1999, for $6,100.

22. BETO issues a tax clearance certificate for each transaction initiated by a liquor licensee, and that clearance certificate is limited to that particular transaction.

23. If the liquor licensee does not have a tax clearance certificate upon application for renewal or transfer, a letter is issued by the PLCB to the licensee to contact the appropriate state taxing authority.

24. The PLCB does not take further action until the tax clearance certificate is issued.

II. CONCLUSIONS OF LAW

A. Jurisdiction

1. This is a foreclosure action by the United States pursuant to 28 U.S.C. §§1340, 1345, and 26 U.S.C. §§7402, 7403.

2. The Tax Injunction Act ("TIA"), 28 U.S.C. §1341, provides that "[t]he district courts shall not enjoin, suspend or restrain the assessment, levy, or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State."

3. Based on the plain language of §1341, the Act is inapplicable to this case. Plaintiff is not seeking to "enjoin, suspend or restrain" Pennsylvania 's tax assessment and collection activities. The United States brought its complaint pursuant to federal law in an effort to foreclose on its federal tax liens against R&E's liquor license. Plaintiff joined the Commonwealth as a defendant because it also had a potential interest in the property. Plaintiff, through this action, is not trying to deprive defendant of any interest it may have in the property by means of an injunction or declaratory judgment. The foreclosure action simply establishes the priority of both parties' interests relative to each other. Consequently, this action does not fall within the ambit of the TIA.

4. Additionally, §1341 does not affect the court's ability to assert jurisdiction when the United States or one of its instrumentalities has initiated the action to "protect [itself] from 'unconstitutional state exactions.' " Department of Employment v. United States, 385 U.S. 355, 358 (1966); accord, Simon v. Cebrick, 53 F.3d 17 (3d Cir. 1995) (holding jurisdiction proper where instrumentality of the United States "sought the protection afforded by a federal statute to prevent its assets from being foreclosed without its consent"); In re Levy v. United States, 574 F.2d 128 (2d Cir. 1978) (finding that §1341 did not prevent jurisdiction where United States sought to prevent unconstitutional taking of its property in form of state taxes on veteran's estate that escheated to federal government).

5. The United States believes that, pursuant to federal law, its interest in the proceeds from the sale of the liquor license is superior to all but one lien held by the Commonwealth and, therefore, it is entitled to the lion's share of the $6001.00. The United States has brought suit to protect this interest in the property. Consequently, §1341 does not preclude the court from hearing this case and jurisdiction is proper.

B. Rules of Attachment and Perfection

6. The IRS has liens that arose automatically when the taxes were assessed on all of R&E's property including the liquor license. See 26 U.S.C. §§6321, 6322 (West 1989); Monica Fuel, Inc. v. Internal Revenue Serv. [95-2 USTC ¶50,477], 56 F.3d 508, 511 (3d Cir. 1995).

7. BETO's liens attached on the date they were filed in the office of the Prothonotary. See 43 Pa. Cons. Stat. Ann. §788.1 (a) (West 1991). ³

8. Federal law determines the relative priority of federal tax liens and any competing liens on the property. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513-14 (1960); United States v. Oswald & Hess Co., 345 F.2d 886, 887 (3d Cir. 1965) ("federal law is determinative where the question involved is the priority to be accorded to a lien of the federal government whatever its source"). As a general matter, priority is established according to the principle that "the first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954)

9. As against most liens (except those enumerated in 26 U.S.C. §6323(a)) federal tax liens are perfected and can be first in time from the day of assessment. See 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516], 790 F.2d 354, 356 (3d Cir. 1986) (stating that "lien arising under §6321 is afforded priority over all other unperfected liens or claims asserted against the taxpayer's property" except those set forth in §6323(a)); Terwilliger's Catering Plus, Inc. v. Internal Revenue Serv. [90-2 USTC ¶50,460], 911 F.2d 1168, 1175 (6th Cir. 1990) (declaring "federal tax lien need not be filed to gain priority over other interests; it is perfected at the time the lien is assessed").

10. Under §6323, federal tax liens cannot have priority over a "security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed" in accordance with state law. 26 U.S.C. §6323(a), (f) (Supp. 1999). Thus, as against these three types of liens, a federal tax lien becomes perfected and can be first in time only when notice of the lien has been properly filed. See In re Fisher v. Bentz [80-2 USTC ¶9583], 7 B.R. 490, 494 (W.D. Pa. 1980) (stating that federal tax lien is perfected against "bankruptcy trustee and other judgment lien creditors upon the filing of the Notice of Federal Tax Lien").

11. For any state law liens to have priority over a federal tax lien, the state lien must be "perfected in the sense that there is nothing more to be done to have a choate lien" prior to the assessment or filing of the federal tax lien (whichever is required). Monica Fuel, Inc. v. Internal Revenue Serv. [95-2 USTC ¶50,477], 56 F.3d 508, 511 (3d Cir. 1995) (quoting United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 355 (1964)); accord, United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449-50 (1993) .

12. A lien is choate and perfected when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." McDermott [93-1 USTC ¶50,164], 507 U.S. at 449 (quoting City of New Britain [54-1 USTC ¶9191], 347 U.S. at 84). To meet the last requirement of choateness, "the lienor must either have obtained judgment on the lien or it must be enforceable against the property by summary proceeding." Oswald & Hess Co., 345 F.2d at 888.

13. UC tax liens filed in accordance with 43 Pa. Cons. Stat. Ann. section 788.1, "attach and [became] choate at the time of their recording in prothonotaries' offices." Almi, Inc. v. Dick Corp., 375 A.2d 1343 ( Pa. Commw. Ct. 1977); accord, Mozingo v. Pennsylvania Dept. of Labor and Indus., 234 B.R. 867 (E.D. Pa. 1999) (stating that valid statutory lien under §788.1 "became choate at the time of its recording").

C. BETO as Judgment Lien Creditor

14. The Federal Tax Regulations on Procedure and Administration contain the following definition of judgment lien creditor:

The term 'judgment lien creditor' means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. . . . The term 'judgment' does not include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity such as the action of State taxing authorities. 26 C.F.R. §301.6323(h)-1(g).

15. The term "judgment creditor," now "judgment lien creditor," is used in its "conventional sense of a judgment of a court of record" according to the Supreme Court. ⁴ United States v. Gilbert Assoc., Inc. [53-1 USTC ¶9291], 345 U.S. 361, 364 (1953). The mere assessment of taxes does not qualify a state or local taxing authority as a judgment creditor. See id. (holding that assessment of taxes did not make town judgment creditor).

16. The term "judgment creditor" generally refers to "[a] person in whose favor a money judgment has been entered by a court of law and who has not yet been paid. One who has obtained a judgment against his debtor under which he can enforce execution. . . ." Black's Law Dictionary 844 (6th ed. 1990).

17. A judgment lien is the "right to subject property of judgment debtor to satisfaction of judgment. A charge on or attachment of property of one who owes a debt and is subject to a judgment thereon." Id. at 845.

18. The crucial element for the creation of a judgment creditor or a judgment lien is receipt of a judgment, which is defined as "[t]he official and authentic decision of a court of justice upon the respective rights and claims of the parties to an action or suit therein litigated and submitted to its determination. The final decision of the court, resolving the dispute and determining the rights and obligations of the parties. . . ." Id. at 841-42.

19. No court of record has issued a decision regarding BETO's tax liens against R & E's liquor license.

20. BETO filed its notice of liens with the Prothonotary's Office of Philadelphia County pursuant to 43 Pa. Cons. Stat. Ann. §788.1. ⁵ Filing a notice of a lien pursuant to section 788.1, involves no "judicial intervention" and "[t]he fact that the legislation stated that the paper should be filed in the office of the Prothonotary does not make it a 'judgment,' even though the Prothonotary also is the repository for judicial records." In re Braxton v. Bureau of Unemployment Compensation Benefits & Allowances, 224 B.R. 564, 569 (W.D. Pa. 1998) (holding that state tax lien was not judicial lien arising from judgment such that it could be avoided in bankruptcy by Chapter 13 debtor); accord, Almi, Inc., 375 A.2d at 1351-53 (determining priority between federal tax liens and state tax liens based on date federal tax liens were assessed--"a Commonwealth lien entered prior to the date of assessment of a United States tax lien is first in time and first in right").

21. Based on the plain language of the regulations, the common definitions of the terms comprising "judgment lien creditor," and the foregoing cases, I conclude that BETO does not qualify as a judgment lien creditor.

22. As BETO is not a judgment lien creditor, the federal tax liens have priority over all of BETO's liens perfected after the IRS assessments.

D. BETO's Interest Pursuant to 47 Pa. Cons. Stat. Ann. §4-477

23. The Pennsylvania Liquor Code provides that a liquor license "shall constitute a privilege between the board and the licensee. As between the licensee and third parties, the license shall constitute property." 47 Pa. Cons. Stat. Ann. §4-468(d) (West 1997).

24. As defendant, a taxing entity, already has filed liens against the liquor license pursuant to section 788.1 and such liens can only attach to "the franchises and property, both real and personal, . . . of the employer," BETO must be a "third party" under section 4-468. See In re Pompeo v. Pennsylvania Dept. of Revenue, 195 B.R. 43, 47 n.5 (W.D. Pa. 1996) (en banc) (determining that "taxing authorities are not the Liquor Control Board but rather third parties" and proceeds from sale of license constitutes property as between taxing authority and licensee). The United States is clearly not the Board and therefore, as between R&E and the United States , the license and its proceeds are also property. See also 21 West Lancaster Corp. [86-2 USTC ¶9516], 790 F.2d at 358 (holding that regardless of state's characterization of liquor license, for purposes of federal law, it is property subject to federal tax lien).

25. The Liquor Code also establishes that PLCB "shall not approve any application for the grant, renewal or transfer of any [liquor license] where the applicant has failed to . . . (3) pay any State taxes not subject to a timely administrative or judicial appeal or subject to a duly authorized deferred payment plan." 47 Pa. Cons. Stat. Ann. §4-477(d)(3) (West 1997).

26. The purpose of section 4-477(d)(3), as declared by the Office of the Attorney General in a previous bankruptcy case involving the same statutory provision, was "to collect taxes" with the method being "to give the State a superior right over other creditors." In re Pompeo, 195 B.R. at 53-54 (quoting statements regarding the history of section 4-477 made during hearing before en banc panel of bankruptcy court in Western District of Pennsylvania).

27. If section 4-477(d)(3) grants to BETO some reserved interest in the liquor license having superpriority over all other creditors' interests regardless of time of perfection, the statute conflicts with the priority scheme set forth in 26 U.S.C. §6323. Cf. In re Pompeo, 195 B.R. at 52 (finding that 4-477(d)(3) conflicts with priority and distribution provisions of federal bankruptcy law); In re Kick-Off, Inc., 82 B.R. 648, 650 (D. Mass. 1987) (holding that similar provision in Massachusetts liquor licensing statute conflicted with priority provisions of federal bankruptcy law).

28. To the extent that section 4-477(d)(3) conflicts with the Internal Revenue Code, it is preempted by federal law pursuant to Article VI, Clause 2, of the United States Constitution (the Supremacy Clause). ⁶

29. If section 4-477(d)(3) creates some other lien interest or lien-like interest on behalf of BETO in the proceeds of the license, any such lien would necessarily be subject to the federal choateness requirements and priority provisions discussed previously. See In re Terwilliger's Catering Plus, Inc. v. United States [90-2 USTC ¶50,460], 911 F.2d 1168 (6th Cir. 1990) (finding that lien created by Ohio liquor code was not choate at time federal assessments made); United States v. Comptroller of the Treasury of Maryland [97-2 USTC ¶50,684], No. MJG-96-3045, 1997 WL 669957, *1 (D. Md. Aug. 12, 1997) (same).

30. Section 4-477(d)(3), however, does not mention the word "lien" anywhere in the text. See In re Pompeo, 195 B.R. at 52 (stating that absence of reference to lien is significant because when Commonwealth "has wished to create a lien, [it] has been clear in doing so"). Moreover, 4-477(d)(3) does not give the state the right to sell the license and apply the proceeds to the tax debt--to do this, the state must actually file a lien. See 47 Pa. Cons. Stat. Ann. §4-477(d)(3); In re Pompeo, 195 B.R. at 52-53 (quoting discussion between court and Commonwealth). Therefore, I conclude that this provision does not create a lien interest on behalf of BETO in the liquor license.

E. Conclusion

31. Defendant filed its first lien in the Prothonotary's office in 1984 for $335.95, $34.30 of which remains unpaid as of January 1, 1999. This lien was perfected before the IRS effected any federal tax assessments.

32. Prior to any further liens being recorded by BETO, the IRS made three tax assessments in 1989 which, as of January 1, 1999, have unpaid balances and statutory additions totaling $9,000.85. See Findings of Fact, ¶¶3, 10-11 supra (detailing unpaid balances and statutory additions on IRS assessments including those made in 1989 prior to BETO's second lien filed on Nov. 23, 1990).

33. Based on the premise that the first in time is the first in right, I conclude that the Commonwealth is entitled to $34.30 of the proceeds from the sale of the liquor license #R6957 and that the United States is entitled to the remaining $6,065.70.

34. As only $6,100.00 in proceeds exist, and the 1984 state lien and first three IRS assessments will deplete this entire amount, any further evaluation of the priorities of the various liens is unnecessary.

ORDER

AND NOW, this -- day of August 1999, upon consideration of the pleadings and oral arguments in this case, IT IS HEREBY ORDERED that the United States has valid and subsisting federal tax liens which attach to the proceeds of the sale of liquor license #R6957 and on the basis of which the United States has foreclosed on the proceeds of the sale of said liquor license. IT IS FURTHER ORDERED that the proceeds of the liquor license in the amount of $6,100.00 held by the Clerk of Courts shall be distributed in the following order of priority:

1. To satisfy the balance of the lien against all property and rights to property of R&E Corporation filed on October 12, 1984 by the Commonwealth of Pennsylvania 's Department of Labor and Industry. The unpaid balance of this lien as of January 1, 1999, was $34.30.

2. To satisfy the liens of the Internal Revenue Service that arose as a result of assessments made against R&E Corporation through September 18, 1989. The unpaid balance of these liens as of January 1, 1999, was $9,000.85.

¹ The Internal Revenue Service ("IRS") deposited the proceeds from the sale with the Clerk of Court on June 1, 1999.

² Pursuant to a consent agreement, approved by the court on November 16, 1998, the United States sold the liquor license and deposited the proceeds with the Clerk of Courts. In the consent agreement, the parties stipulated that the sale of the license would not affect the parties' claims or defenses and that the parties would maintain the same priority to the proceeds that they had to the underlying liquor license. See Mot. for Consent Order, Att. A.

³ Section 788.1 provides that

"All contributions and the interest and penalties thereon due and payable by an employer under the provisions of this act shall be a lien upon the franchises and property, both real and personal, ... of the employer liable therefor and shall attach thereto from the date a lien of such contributions, interest and penalties is entered of record in the manner hereinafter provided."

43 Pa. Cons. Stat. Ann. §788.1(a) (West 1991)

⁴ The subsequent revision to §6323, which inserted the term lien "did not alter the definition courts had traditionally given to 'judgment creditor.' " Air Power, Inc. v. United States [84-2 USTC ¶9732], 741 F.2d 53, 56 n.3 (4th Cir. 1984). Thus, to be a judgment lien creditor, one still needs a judgment from a court of record.

⁵ Section 788.1 states in relevant part:

(b) The department may at any time transmit to the prothonotaries of the respective counties of the commonwealth, to be by them entered of record and indexed as judgments are now indexed, certified copies of all liens imposed hereunder, upon which record it shall be lawful for writs of execution to be directly issued without the issuance and prosecution to judgment of writs of scire facias: Provided, That not less than ten (10) days before issuance of any execution on the lien, notice of the filing and the effect of the lien shall be sent by registered or certified mail to the employer at his last known post office address. No prothonotary shall require as a condition precedent to the entry of such liens the payment of the costs incident thereto....

43 Pa. Cons. Stat. Ann. §788.1 (b) (West 1991).

⁶ Article VI, clause 2, of the United States Constitution provides:

This Constitution and the Laws of the United States which shall be made in Pursuance thereof; and all treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

 

 

 

In the Matter of Alexander's Graham Bell, Inc., Debtor. James A. Lewis, Trustee, Plaintiff v. The United States of America , Internal Revenue Service, Defendant

U.S. Bankruptcy Court, West. Dist. Pa. , 81-3306, 3/13/86, 59 BR 95, (59 BR 95.)

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Licenses.--

The IRS had secured status with respect to proceeds from the sale of a liquor license belonging to a debtor that was sold in connection with a bankruptcy proceeding. The proceeds constituted "property" to which federal tax liens filed against the debtor could attach. Under state law, the application of a license and not the license itself, determined whether a property right existed. Because the sale or application of the license created a property interest under state law, a right to property existed that could be attached under federal law.

MEMORANDUM OPINION

 

MARKOVITZ, Bankruptcy Judge:

Presently before this Court are cross motions for summary judgment. The parties have stipulated to the relevant facts. The only issue remaining is the determination of the Defendant's secured status in the sale proceeds from the Debtor's liquor license. After a review of the pleadings and briefs, along with the relevant case law, we hold that the Defendant is secured in the sale proceeds of liquor license.

FACTS

 

Alexander's Graham Bell, Inc. (hereinafter "Debtor") was a Pennsylvania corporation engaged in the operation of a restaurant and bar in Pittsburgh , Pennsylvania . During the course of its operation the Debtor failed to pay income and social security taxes withheld from employees' wages for the fourth quarter of 1980 and the first, second, and third quarters of 1981. The Debtor also failed to pay the unemployment taxes for 1980. As of November 18, 1981, the total tax assessments were $111,622.61. Notices of federal tax liens were filed with the Prothonotary's office in Allegheny County . No contest has occurred as to the assessment or amounts claimed.

On January 11, 1982, the Debtor filed a voluntary Chapter 11 petition pursuant to the Bankruptcy Code. The Debtor remained in possession until July 10, 1984, when the case was converted to a Chapter 7 liquidation proceeding, and an Interim Trustee was appointed. Said Interim Trustee continued as the Trustee in the case.

In doing business as a restaurant and bar, the Debtor had obtained issuance of a restaurant liquor license issued by the Pennsylvania Liquor Control Board (hereinafter "PLCB"). This license was obtained prior to the assessment of taxes and filing of the liens. After conversion of the case to a Chapter 7 proceeding, and pursuant to applicable state law, the Trustee delivered the liquor license into the care of the PLCB to be held for safekeeping. 47 P.S. §4 -468(b)(1). On October 12, 1984, the Trustee made a motion to the Court to sell this license, contingent upon PLCB approval of the transfer, as required by Pennsylvania law. 47 P.S. §4 -468(b)(1). The defendant raised objections to the sale, claiming that the debt due to the IRS was secured by a federal tax lien pursuant to Internal Revenue Code (hereinafter "IRC") §6321 , and therefore, the lien attached to the liquor license.

On December 4, 1984, the Court allowed the Trustee to conduct the sale, but directed that the Internal Revenue Service (hereinafter "IRS") claim must shift to the fund received from the sale, for a later determination of the validity of the IRS's lien on the license and subsequent sale proceeds. At sale the highest bid was $11,000, and the Court confirmed that sale.

As per the Court's earlier instruction, the parties are presently before the Court on the Trustee's Complaint to Determine the Secured Status of the IRS pursuant to 11 U.S.C. §506.

ANALYSIS

 

Two statutory provisions are in dispute in the case at bar. Section 6321 of the Internal Revenue Code provides that:

[I]f 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 persons.

The other statutory language, 47 P.S. §4 -468(b)(1) of the Pennsylvania Liquor Code states:

[i]n the event that any person to whom a license has been issued . . . . becomes a bankrupt, the license of such a person should be placed in safekeeping with the Liquor Control Board for the balance of the term of the license . . . . The license shall continue as a personal privilege granted by the Board and nothing herein shall constitute the license as property.

In interpreting this state statute, the Pennsylvania Supreme Court in 1412 Spruce, Inc. v. Commonwealth of Pa., Liquor Control Board, 504 Pa. 394, 474 A.2d 280 (1984) most recently held that a liquor license was a privilege and not property, and therefore, could not be subject to the execution process.

The IRS claims that the tax lien should attach to the property rights; in this case the proceeds from the sale of the license, which give the license its value. In determining whether a Pennsylvania liquor license should be characterized as property or rights to property under the Internal Revenue Code and whether the government may put a lien upon the license, it must first be determined whether this is a question of state law or federal law. See 21 West Lancaster Corp. v. Main Line Restaurant, infra; JFWIRS, Ltd. v. U.S. , infra.

The federally controlling case law on this question is Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 US 78 (1940) and In re Halprin [60-2 USTC ¶9564 ], 280 F.2d 407 (3d Cir. 1960). In In re Halprin, the Court found that construction of a federal statute is a federal question. That Court held that state law creates legal interests and defines their incidents, but the ultimate question of whether an interest, once created and defined, falls within a category created by a federal statute is a federal question. Id. at 409 (citing Morgan, supra).

In Morgan, the U.S. Supreme Court explained the relative functions of the State and Federal statutes.

[S]tate law creates legal interests and rights. The Federal Revenue Acts designate what interests or rights, so created shall be taxed . . . If it is found in a given case that an interest or right created by local law was the object intended to be taxed, the Federal law must prevail no matter what name is given to the interest or right by State law. 309 U.S. at 80-81.

In the case at bar, although the Pennsylvania statute created the legal interests and rights of the licensee, the question of whether the proceeds from the sale of the license may be taxed is a federal question to be determined by Federal law. We therefore turn our attention to the relevant state law for a determination of the legal interest and rights created.

In In re Feitz Estate, 402 Pa. 437, 167 A.2d 504 (1961), the Pennsylvania Supreme Court noted that the right to apply for transfer of a license upon the death of a licensee is a right which possesses value. The Court noted that this was so, even though a liquor license per se is a personal privilege and not a property right. Id. at 507. The Court held that "where there is a right of transfer from one to another, the license becomes a valuable property right, subject to barter and sale. It is property with value and quality." Id. at 507 (citing Jaffe v. Pacific Brewing and Malting Co., et al, 69 Wash. 308. 124 P. 1122 (1912). In Feitz, the Court stated that to hold that the right to apply for a transfer of a license is not a property right would ignore reality and be a substitution of abstract theories for the realities of the market. Id. at 508.

In Redevelopment Authority of the City of Philadelphia v. Lieberman, 461 Pa. 208, 336 A.2d 249 (1975), in an eminent domain proceeding, the Pennsylvania Supreme Court held that a liquor license has value for which a private person must be compensated when that value is destroyed by another private person.

In this case, the Redevelopment Authority condemned the premises in which a business had been operated for thirty-five (35) years. The Court found that when a liquor license loses value as a result of condemnation of the premises, the loss of value in the license was compensable.

That Court explained that "property has been used over the years to describe both the physical object which is the subject of ownership, and to describe the aggregate of rights which an owner possesses in or with respect to the physical object." Id. at 252.

The Court further noted that a liquor license adds significant use value to a particular premises, and that while a liquor license is sometimes referred to as a privilege, rigid labels should not apply. Id. at 258.

In 1412 Spruce, supra, this same Supreme Court noted that it is not the license itself which is an item of value, but rather the license as it is applied to the business which produces a value. 474 A.2d at 282. In the instant case, it is the sale of the license which produces the value. Although the license issued by the PLCB has been designated as a privilege by the Pennsylvania statute, it meets the Lieberman Court 's flexible definition of property. It cannot be denied that the Debtor's license added value to the business; that the business is no longer viable does not change the inherent worth attached to the privilege. As Justice Flaherty so aptly stated:

[I]f the retail liquor establishment had no liquor license, it would be worth one figure; if it had a license, it would be worth more. But in any case, it is not the license which itself is an item of value, but rather the license as it is applied to the business which produces a value. This value is a projected income, a livelihood for the license holder and if the business is condemned (Lieberman) . . . or continued by virtue of the exercise of the power to request transfer of a decedent's license (Feitz Estate), it is fundamental that the opportunity for business income, if taken away, must be compensated for, and if preserved, may be taxed. 474 A.2d at 282 (emphasis in original).

That the license in this case is to be transferred pursuant to the earlier sale, shows a business income to the Debtor which can be taxed under applicable Pennsylvania law.

The federal courts sitting in Pennsylvania have had the opportunity to discuss aspects of this issue since the Pennsylvania Supreme Court decided 1412 Spruce.

In Matter of M.J.'s Inc., 49 B.R. 492 (Bktcy. W.D. Pa., 1985), the plaintiff sought a recovery of $40,000.00 lent to the defendant in return for a promissory note and a security agreement. The Court held that the license was a privilege and not personal property capable of being subject to a security interest. 49 B.R. at 493. However, the Court did not reach the issue of whether the proceeds of the liquor license could be the subject of a security interest, and therefore, this decision is of no precedential value to the case at bar.

The most influential decision in this area by a federal court in Pennsylvania is JFWIRS, Ltd. v. U.S. [85-2 USTC ¶9591 ], 607 F.Supp. 566 (M.D. Pa. 1985). The factual situation in JFWIRS is remarkably similar to that presently before this Court, except that in JFWIRS the license in question had not been sold, the levy and/or sale being enjoined by the Court pending final disposition of the action. The Court stated that the preliminary injunction was granted because the Court, at that time, believed that the IRS would fail on the merits. However, after full consideration of the action, the Court reversed its earlier position and granted the summary judgment motion of the United States . In so granting the motion, the Court examined the decision in 1412 Spruce as well as that in Morgan.

In analyzing Morgan, the Court in JFWIRS found that, "It is clear from the context of the [Morgan] opinion that the Court did not intend to be bound by state law definitions of property, but only by whether state law conferred any right in the property upon the taxpayer which could then be attached by the government. Id. at 569. The JFWIRS court held that "Morgan establishes, however, that how a state labels a property right is not dispositive of the reach of federal law. We conclude that 1412 Spruce, Inc., supra, does not control whether the liquor license is 'property' within the meaning of [I.R.C.] section 6321 . That is a federal question." 607 F.Supp. at 569-70. In reaching this conclusion, the Court cites to In re Halprin, supra, the Third Circuit decision in this area. The JFWIRS Court , citing the dissent in 1412 Spruce, went so far as to hold that the liquor license "constitutes property upon which the United States could attach a lien under section 6321 ." Id. at 570.

Following the decision in JFWIRS, the federal court in the Eastern District of Pennsylvania was presented with a similar issue. In 21 West Lancaster Corp. v. Main Line Restaurant, 614 F.Supp. 202 (E.D. Pa. 1985), the Court was faced with the question of whether the assignees of the taxpayer or the Internal Revenue Service had priority interest in the taxpayer's liquor license. The factual dissimilarity between 21 West and the case at bar is that in 21 West the taxpayer's assignee had a perfected interest in the "value enhancement component of the license" prior in time to the recorded federal tax liens. See 614 F.Supp. at 206. The Court discussed the various legal arguments presentd by relying upon Halprin, Lieberman, 1412 Spruce, Feitz, and Morgan, all supra. The Court concluded that "[the] Supreme Court and Third Circuit precedent directs that interpretation of the phrase 'property or rights to property', set forth in 26 U.S.C. §§6321 and 6331 , be a federal question. The Supreme Court has also directed the lower courts to interpret broadly the phrase 'property or rights to property'." (citations omitted) 614 F.Supp. at 207-8.

The Court in 21 West adopted the test employed by the Third Circuit in Halprin, supra. The two-prong analysis requires, first, a determination of the incidences of property associated with a Pennsylvania liquor license under Pennsylvania law, and, second, an examination of whether the interest as created and defined falls within the "property or rights to property" category of the Internal Revenue Code. See 614 F.Supp. at 205.

The Court denied the IRS a right to execute upon the property, only because it determined that the taxpayer had already assigned the "value enhancement component" it had in said liquor license to the party whose perfected interest was prior in time to that of the IRS. Therefore, there was no value remaining with the taxpayer to which the lien could attach. In so reasoning, the Court held that the assignees had "a right to the proceeds from the sale of the liquor license senior to that of the government." Id. The government cited the JFWIRS case as authority for the position that a liquor license is property upon which the government can lien and execute. However, the 21 West Court noted that JFWIRS recognized a governmental right to the proceeds from the sale of the license, not a right in the license itself. Id. p. 208 n. 9.

It cannot be disputed that the license has value beyond the paper upon which it is printed. To argue otherwise would be folly. Such a rigid and inequitable decision would require this Court to completely ignore economic realities in favor of ethereal notions. The Pennsylvania Supreme Court has traditionally given a liberal interpretation to the meaning of the word "property." We agree with the Pennsylvania Supreme Court that the license itself is not an item of value, but rather obtains its value in its application. 1412 Spruce, Inc., supra, at 282. In the present case, as in JFWIRS and 21 West, this application is in the proceeds of the sale. Therefore, the IRS lien should attach to the proceeds of the sale of the license.

For these reasons, we hold that the IRS is entitled to the proceeds of the sale of the license in order to satisfy the unpaid taxes.

An appropriate order will be issued.

ORDER OF COURT

AND NOW, at Pittsburgh in said district this 13th day of March, 1986, pursuant to the accompanying Memorandum Opinion of this same date, it is hereby ORDERED, ADJUDGED and DECREED that Plaintiff's Motion for Summary Judgment is denied, and Defendant's Motion for Summary Judgment is granted.

 

 

 

JFWIRS, Ltd., Plaintiff v. The United States of America , Defendant

U. S. District Court, Mid. Dist. Pa., Civil Action No. 84-0549, 4/23/85

[Code Sec. 6321]

Lien for taxes: Property subject to: Licenses.--A state court's characterization of a Pennsylvania liquor license as being a "privilege" rather than "property" did not preclude an execution upon a liquor license for back taxes because the determination of what constitutes property for the purposes of federal lien law is controlled by federal law. However, as determined by the Pennsylvania law of contracts, the taxpayer's property interest in the license was limited to $7,500 at the time the IRS gave notice to the state's Liquor Control Board and, accordingly, the United States ' interest was limited to that amount.

Richard E. Fehling, Marcia A. Binder, Stevens & Lee, 607 Washington St. , Reading , Pa. 19603 , for plaintiff. James West, Assistant United States Attorney, Harrisburg , Pa. 17108 , Jefferson K. Fox, Department of Justice, Washingon, D. C. 20530, for defendant.

Memorandum

CALDWELL, District Judge:

I. Introduction and Background. Pending at present in this matter are cross motions for summary judgment. At issue is whether the Internal Revenue Service (IRS) may impose a levy upon a liquor license issued by the Commonwealth of Pennsylvania , and sell the same at an execution sale to satisfy a tax claim against the holder of the license.

The parties are in essential agreement on the facts which relate to the present dispute:

1. The taxpayer against whom IRS is proceeding is a corporation known as Guytrak's Scotch N'Sirloin, Inc. (Guytrak's).

2. In 1983 and 1984 the IRS made assessments against Guytrak's for federal employment and unemployment taxes for 1982 and 1983.

3. Between August 12, 1983 and February 27, 1984, Notices of Federal Tax Lien Under Internal Revenue Law on all property and rights to property of Guytrak's were filed in the Prothonotary's Office, Berks County , Pa.

4. On March 8, 1984 IRS notified Guytrak's of the seizure and a levy upon Guytrak's, "property right in and under Pennsylvania Liquor License No. R-2459."

On April 30, 1984, after hearing, we issued a preliminary injunction enjoining the defendant from enforcing its levy or selling the license in question pending disposition of this action. We also directed the defendant to permit the Pennsylvania Liquor Control Board to transfer the license to the plaintiff, and we enjoined the plaintiff from transferring the license until this case is resolved. It appeared that the interests of all litigants would thereby be protected, and reflected our opinion at that time that plaintiff would prevail on the merits in this action. Additional background was stated in our memorandum of April 30, 1984:

The liquor license in question was originally issued to Joseph H. Welsh (Mr. Welsh) who assigned his interest to Guytrak's Scotch N'Sirloin, Inc., (Guytrak's) for $7,500, which sum, apparently, has remained unpaid. Mr. Welsh was also Guytrak's landlord, leasing to them the premises in Muhlenberg Township , Berks County , Pennsylvania which Guytrak's operated as a restaurant. The lease agreement (plaintiff's exhibit 1) provided at article IX for the landlord's option to repurchase the liquor license for $7,500 in the event of termination of the lease. ¹

As of January 23, 1984, Guytrak's owed Welsh Interests, Mr. Welsh's assignee, $84,757.94, which debt included back rent, the unpaid $7,500 for the liquor license, and other obligations. On January 27, 1984, the lease was terminated and Welsh Interests executed its option to repurchase the liquor license which was to be transferred to its nominee, JFWIRS (plaintiff). On February 22, 1984, the liquor license was surrendered to the Pennsvlvania Liquor Control Board (PLCB) pending approval of the transfer.

The IRS levy of March 8, 1984 temporarily derailed the liquor license transfer to plaintiff but our order of April 30, 1984 allowed the transfer to occur, subject to being divested should we later determine that the IRS levy and seizure of the license was valid.

II. Discussion. Under Fed. R. Civ. P. 56 summary judgment is appropriate when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." The material facts are not in dispute in this case so it is appropriate to dispose of it on motion after application of the relevant law. After careful consideration we have reversed our preliminary thoughts in this matter and will grant summary judgment in favor of defendant.

A. Federal Law Controls Whether the Liquor License Is Property Which Can Be Subjected to a Federal Tax Lien. In 1412 Spruce, Inc. v. Commonwealth, Pennsylvania Liquor Control Board, -- Pa. --, 474 A. 2d 280 (1984), the Pennsylvania Supreme Court held that a liquor license was a privilege and not property which could be subject to execution and sheriff's sale to satisfy a judgment creditor. Plaintiff strenuously argues that this court is bound by the state court characterization of the liquor license as a "privilege" rather than "property." The distinction is important because 26 U. S. C. §6321, under which the government assets its lien on the license, provides, in relevant part, as follows (emphasis added):

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.

Hence, plaintiff contends that the government's levy upon the license was wrongful because the liquor license, as a privilege, could not be attached under a statute permitting liens only on property.

The United States asserts, on the other hand, that state law controls only the nature and extent of the delinquent taxpayer's legal interests or rights in the property by way of ownership or otherwise. The determination of what constitutes property for the purposes of the federal lien law is controlled by federal law and this court should view the liquor license as property for that purpose.

We think the defendant's position is the better one. While some of the language in the cases cited by plaintiff support its position, those cases never reached the issue presented in the instant one. In Aguilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960), the dispute was between their party subcontractors and the government over $2,200 owed by a building owner to the delinquent taxpayer, the general contractor. The government had placed a lien on the fund and the subcontractors claimed that a state statute gave them beneficial ownership of the fund with only bare legal title in the taxpayer. The government contended that the statute created only an ordinary lien in favor of the subcontractors. The United States Supreme Court sent the case back to the New York Court of Appeals to resolve this question of state law. The Court stated:

The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the "statute." Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82, 84 L. Ed. 2d 585, 589, 60 S. Ct. 424. Thus, as we held only two terms ago, Section 3670 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law. . . ." United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135, 1140. However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's "property" or "rights to property." [citations omitted].

Id. at 512-14, 80 S. Ct. at 1280, 4 L. Ed. 2d at 1368-69 (emphasis added) (brackets added) (footnotes omitted).

Some of the above-quoted language lends support to plaintiff's position that state law controls the determination of what constitutes property under section 6321. Thus, the court did state that "both federal and state courts must look to state law" to discover "to what extent the taxpayer had 'property,'" id. at 512, 80 S. Ct. at 1280, 4 L. Ed. 2d at 1368, but the rest of the opinion speaks about "property rights" and "property interests" as being controlled by state law. It is clear from the context of the opinion that the Court did not intend to be bound by state law definitions of property but only by whether state law conferred any right in the property upon the taxpayer which could then be attached by the government. This rule was established for the obvious reason that federal law has never played a part in creating rights in property while the states have had a "long-established role" in doing so. Id. at 513 n. 3, 80 S. Ct. at 1280 n. 3, 4 L. Ed. 2d at 1368 n. 3. The Court did not want to impose upon the federal judiciary "the task of attempting to ascertain a taxpayer's property rights under an undefined rule of federal law." Id. To have done so may have led to the anamolous situation where federal law said a taxpayer owned property and state law said he did not. Id.

Our analysis of Aguilino can also be applied to another case cited by plaintiff, Pittsburgh National Bank [81-1 USTC ¶9239], 498 F. Supp. 101 (W. D. Pa. 1980), aff'd., [81-2 USTC ¶9626], 657 F. 2d 36 (3d Cir. 1981). In that case the taxpayer had borrowed money from the bank, giving the latter a note for the loan. The note provided that the bank would have a lien on the taxpayer's deposits equal to the unpaid balance of the loan. Applying Pennsylvania law, the district court held that the government's levy upon the taxpayer's account with the bank was unsuccessful because the money had already passed by operation of law to the bank on the date of the note's maturity. No affirmative act by the bank was required to estinguish the taxpayer's right to the property and there was nothing to which the government's levy could attach.

Pittsburgh National Bank did not turn on the nature of the asset in dispute. No one was contesting whether money was "property." The court looked to state law only to determine whether the taxpayer owned the money in the account at the time of the notice of the government's levy. Because state law required a negative answer, the levy was ineffective.

Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 60 S. Ct. 424, 84 L. Ed. 585 (1940) supports our conclusion that state law cannot define what is property for the purposes of federal law. In Morgan, the executor of an estate contested the application of the federal estate tax to a power of appointment, claiming that under Wisconsin law it was a special power of appointment and not subject to estate tax as a general power would have been. Concluding that it did not have to decide that issue, the Supreme Court stated:

State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed. Our duty is to ascertain the meaning of the words used to specify the thing taxed. If it is found in a given case that an interest or right created by local law was the object intended to be taxed, the federal law must prevail no matter what name is given to the interest or right by state law.

Id. at 80-81, 60 S. Ct. at 426, 84 L. Ed. at 588.

There was no question that the two powers of appointment belonged to the decedent and that she exercised them in her will. State law created and recognized this property right in her. Regardless of how state law would have characterized the powers, however, the Supreme Court concluded that under federal law they were taxable in her estate.

Plaintiff is in the same position as petitioner was in Morgan. Plaintiff claims that a state law characterization of the asset precludes application of federal law. Morgan, establishes, however, that how a state labels a property right is not dispositive of the reach of federal law. We conclude that 1412 Spruce, Inc., supra, does not control whether the liquor license is "property" within the meaning of section 6321. That is a federal question. ² See In re Halprin [60-2 USTC ¶9564], 280 F. 2d 407 (3d Cir. 1960).

B. The Liquor License Is Property Within the Meaning of Section 6321. "[A] liquor license issued by the [Pennsylvania Liquor Control Board] is a valuable item of intrinsic worth subject to bargain and sale in the marketplace." 1412 Spruce, Inc., supra, at --, 474 A. 2d at 286 (Larsen, J., dissenting) (brackets added). As such, it constitutes property upon which the United States could attach a lien under section 6321. ³

C. The Government's Lien Upon the Liquor License Must Be Limited to $7,500. At the time of the notice of levy, plaintiff had exercised an option to purchase the license for $7,500 from the taxpayer, pursuant to Article XI of the lease executed on November 1, 1981. The transfer of the license was subject to the approval of the Liquor Control Board, but no one has suggested that the Board would not have approved the transfer especially since the transfer would only have returned the license, in essence, to the original holder. Under these circumstances, the taxpayer's interest in the license at the time of the notice of levy to the Board was limited to $7,500. Since this was the limit of the taxpayer's property interest in the license under Pennsylvania law of contracts, this is the limit of the government's interest in the license. The value of the license in excess of this amount remains with plaintiff.

We will issue an appropriate order.

Order

AND NOW, this 23rd day of April, 1935, it is ordered that:

1. Defendant's motion for summary judgment shall be and is hereby granted.

2. Plaintiff's motion for summary judgment shall be and is hereby denied.

3. Defendant , United States of America , may execute upon liquor license No. R2459 to the extent of the interest of the taxpayer, Guytrak's Scotch N'Sirloin, Inc., in the license, to wit, the sum of $7,500.

4. Plaintiff shall take all reasonable and necessary steps to permit defendant to execute on the liquor license.

¹ On December 11, 1978, Mr. Welsh conveyed his interests in the lease, liquor license and Guytrak's debt to J. F. Welsh Interests, Inc. (Welsh Interests). This is reflected in a new lease executed November 1, 1981 which lease accorded Welsh Interests the repurchase option.

² State law comes into play here in establishing that Guytrak's owned the liquor license at the time of the IRS levy of March 8, 1984. The license was in the possession of the Pennsylvania Liquor Control Board at that time, awaiting approval for the transfer to plaintiff. Nevertheless, it was still owned by the taxpayer and no provision of state law in the Liquor Code, 47 P. S. §1-101, et seq., or elsewhere provides otherwise. The extent of his ownership interest is discussed below.

³ Because of this conclusion, we will not discuss defendant's argument concerning our lack of jurisdiction to hear this case under 28 U. S. C. §1346.