Theodore Golden, Plaintiff and
Respondent v. State of
, Defendant and Respondent; McKesson and Robbins, Inc. (a Corporation)
et al., Appellants;
United States of America
, Intervener and Respondent
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.
[1939 Code Secs. 3670, 3671--substantially unchanged in 1954 Code Secs.
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.
& 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.
Placed in Escrow]
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
Lien by Federal Government]
that the seller was also indebted to the government of the
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.
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.
of Trial Court]
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
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
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
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
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." *
was there used by Congress in a broad, not narrow, sense; designed to
include all concepts of the term. (See Citizens State Bank of
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).
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.)
on-sale liquor license in
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,
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,
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
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]).
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.
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.
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
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
219 [58 P. 536], and State Board of Equalization v. Superior Court,
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.
district court, southern district of California, has held, in a well
considered opinion, that the
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
783 [64 S. Ct. 190, 88 L. Ed. 470].) Similarly, in
a liquor license which is transferable with the consent of a state
agency is property which is subject to attachment. (Stallinger v.
437 [193 P. 2d 810].) In
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
2d 280, 283.)
that the liquor license in question was "property" within the
meaning of section 3670 and became subject to the government's lien for
S. Lien Attached to Proceeds]
acquire a lien against the proceeds, the money in escrow?
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. (
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
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
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
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.
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.
, supra, 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771]. See also
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.)
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
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.]"
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
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.
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.
Procedure Followed by U. S.]
take the necessary procedural steps to perfect its lien and collect the
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.
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.)
in their closing brief further suggest that the
could enforce the lien only by bringing an independent action therefor
under section 3678 of the United States Code. They cite only
Cas. Co. v.
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.
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.)
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.)
judgment is affirmed.
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
, Civ. 97-6123 (JBS), 9/28/98, 232 BR 303, 232 BR 303. Affirming an
unreported Bankruptcy Court decision
Secs. 6321 , 6323 and
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 (
) 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.
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
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.
This court has designated this opinion as NOT FOR PUBLICATION. Consult
the Rules of the Court before citing this case.
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.
to this appeal do not dispute the underlying facts. In January 1990,
Chrysler loaned $1,000,000 to debtor, Main Street Beverage Corporation
"). In December 1990, Chrysler loaned
an additional $1,608,000. As security for these loans,
granted Chrysler a first priority security interest in all of its
present and after-acquired furniture, equipment and fixtures and
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
] . . ." (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
September 7, 1993, the IRS filed a Notice of Federal Tax Lien with
'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
'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.
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
's Second Amended Joint Plan of Reorganization ("the Plan")
was confirmed. The Plan reflected that
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.
eventually defaulted under the Plan. On April 30, 1997, the bankruptcy
court ordered that
'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
On July 14,
1997, the bankruptcy court conducted a hearing with regard to the
distribution of the proceeds of the sale of
'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
's liquor license after deduction of certain necessary and reasonable
costs be distributed to the IRS.
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.
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.
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.
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
's liquor license to the IRS after deduction of certain necessary and
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.
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.
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.
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.' "
[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.
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
'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.
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.
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."
at 132-33. "In fact, a party has no right to appeal from a
(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.
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.
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
's liquor license, the court turns to the merits of that conclusion.
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
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
[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
liquor license under the scheme established by the state legislature.
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
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
also made clear, however, that a liquor license is not
law. "A liquor license in
vests a personal right in the licensee to conduct a business otherwise
illegal. As such, it is merely a temporary permit or privilege."
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
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.
33:1-26 (emphasis added).
concedes that, in light of N.J.S.A. 33:1-26, it could not have taken a
valid security interest in
'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.
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.
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.
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
[86-2 USTC ¶9516], 790 F.2d at 355. Thereafter, the IRS filed a
federal tax lien on the liquor license.
Ultimately, a federal district court was called upon to resolve the
competing claims to the proceeds of the sale of liquor license.
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.
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.
Circuit reversed, noting that the outcome reached by the district court
"would seem to contradict the unambiguous import of the
authority defining the nature of a liquor license, a question of
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
law for "the proposition that there exists a value enhancement
component to a liquor license separable from the license itself."
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
legislature, which may choose to redefine the nature of a liquor license
under state law."
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 [
] authority defining the nature of a liquor license, a matter of state
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
, 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
Cons. Stat. Ann. §4-468(d)). Until such time as the
legislature follows suit, this court must decline Chrysler's invitation
to recognize a new exception to N.J.S.A. 33:1-26.
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
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.
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.
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
statute defining the nature of a license created under
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
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.
Roberts, Department of Justice, Washington 25, D. C. (Alfred Abbotts,
, David M. Satz, Jr.,
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.
of the court was delivered by SCHETTINO, Judge:
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.
was the holder of a liquor license for premises known as
19-21 South Tennessee Avenue
, 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
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
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
19-21 South Tennessee Avenue
22-24 South South Carolina Avenue
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.
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.
of Property Interest in Liquor License]
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
509, 4 L. Ed. 2d 1365 (1960); United States v. Bess [58-2 USTC ¶9595],
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."
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
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.
of a Liquor License]
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.
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.
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
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
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
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.
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
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).
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
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."
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.
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.
United States of America, Plaintiff
v. Deanne F. Skirko a/k/a, Deanne F. Berrett, Dale W. Sterner, and E.
Arlene Sterner, Defendants
District Court, Dist. Wyo., C84-501-K, 12/16/85
[Code Secs. 6321 and
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.
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.
, for defendants.
RULING ON MOTIONS FOR SUMMARY JUDGMENT WITH FINDINGS
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.
has jurisdiction over the subject matter and the parties pursuant to 28
U.S.C. §§1340 and 1345 and 26
and (e) and 7403
. Venue is proper in this district under 28 U.S.C. §§1391(b)
and 1396 .
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
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.
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.
plaintiff and the Sterners filed cross-motions for summary judgment
under Rule 56 of the Federal Rules of Civil Procedure and oral argument
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
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,
. 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
and Escrow Agreement, and upon approval of defendant Skirko's
application to the Town of
, Liquor License Number Two was transferred to and in the name of Deanne
[sic] Berrett. Skirko thereafter operated the business as a sole
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.
dated January 9, 1984, pursuant to the
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
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
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
for the transfer of ownership of Liquor License Number Two from Skirko
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
for the renewal of Liquor License Number Two. On September 5, 1984,
Sterners' applications were approved by the Town of
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.
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
, 401 F.2d 458, 461 (10th Cir. 1968) (affirming this Court); Johnson
v. Smith, 455 P.2d 244, 251 (
1969). This is predicated on the adoption of the Uniform Commercial Code
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."
dictates to what property a federal tax lien can attach. Aquilino v.
509 at 513;
v. Bess, 357
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:
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
upon all property and rights to property, whether real or personal,
belonging to such person.
U.S.C. §6321 .
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
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
351, 353 n.3 (1964).
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
the assignment from Forsberg and Bull Pen of their interest in the
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
and Escrow Agreement in 1984. The taxpayer held the liquor license in
her name subject to an unfiled reassignment held in escrow.
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.
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).
the Sterners failed to properly file their security interest until well
after the fact, they only had an unperfected interest in Liquor License
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.
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
qualifies as a lien creditor under this definition.
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
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
at 513-514 (and cases cited therein).
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:
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.
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).
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.
Sterners contend that any interest of plaintiff in Liquor License Number
Two expired at the end of the year-long term of the license.
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.
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.
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.
THEREFORE, IT IS ORDERED that plaintiff's motion for summary judgment
be, and the same is, hereby granted; it is
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
ORDERED that defendant Sterners' motion for summary judgment be, and the
same is, hereby denied.
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
District Court, East. Dist. Pa., CIV.
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.
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.
Tax liens: Property subject to: Liquor license.--Under state (
) 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
brought this foreclosure action against a liquor license owned by
R&E Corporation ("R&E"). The
'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
and BETO now assert that they are entitled to these proceeds. The
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
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.
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.
FINDINGS OF FACT
Corporation t/a Living Room Lounge is a corporation organized under the
laws of the
Liquor Control Board (PLCB) granted a liquor license #R6957 to R&E,
which operated a liquor establishment by virtue of that license.
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
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.
notice and demand for payment, liabilities for federal taxes listed in
paragraphs three and four remain unpaid.
Department of Labor and Industry, Bureau of Employer Tax Operations is a
state taxing entity that collects state taxes.
registered with BETO as an employer offering covered employment for
wages subject to state unemployment compensation ("UC") taxes.
self-reported and self-assessed UC taxes to BETO. Some of these taxes
remain due and unpaid.
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.
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.
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.
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
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
, 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
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
, docketed to 020134, for amounts assessed in 1996. This lien remains
unsatisfied as of record. The amount due as of January 1, 1999, is
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.
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
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
, docketed to 020191, for amounts assessed in 1989. This lien remains
unsatisfied of record. The amount due as of January 1, 1999, is
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.
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
of Liquor License ("Mot. for Consent Order"), Att. A.
license #R6957 was sold on May 11, 1999, for $6,100.
issues a tax clearance certificate for each transaction initiated by a
liquor licensee, and that clearance certificate is limited to that
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.
PLCB does not take further action until the tax clearance certificate is
CONCLUSIONS OF LAW
1. This is
a foreclosure action by the
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
3. Based on
the plain language of §1341, the Act is inapplicable to this case.
Plaintiff is not seeking to "enjoin, suspend or restrain"
's tax assessment and collection activities. The
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
Additionally, §1341 does not affect the court's ability to assert
jurisdiction when the
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).
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
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.
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).
liens attached on the date they were filed in the office of the
Prothonotary. See 43
Cons. Stat. Ann. §788.1 (a) (West 1991). 3
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
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").
§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,
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
at 449 (quoting City of New Britain [54-1 USTC ¶9191], 347
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
1977); accord, Mozingo v.
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").
BETO as Judgment Lien Creditor
Federal Tax Regulations on Procedure and Administration contain the
following definition of judgment lien creditor:
'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).
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).
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).
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."
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. . . ."
court of record has issued a decision regarding BETO's tax liens against
R & E's liquor license.
filed its notice of liens with the Prothonotary's Office of Philadelphia
County pursuant to 43
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").
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
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.
BETO's Interest Pursuant to 47
Cons. Stat. Ann. §4-477
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
Cons. Stat. Ann. §4-468(d) (West 1997).
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
is clearly not the Board and therefore, as between R&E and the
, 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).
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
Cons. Stat. Ann. §4-477(d)(3) (West 1997).
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
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
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
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).
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
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.
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).
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
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.
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:
satisfy the balance of the lien against all property and rights to
property of R&E Corporation filed on October 12, 1984 by the
's Department of Labor and Industry. The unpaid balance of this lien as
of January 1, 1999, was $34.30.
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
The Internal Revenue Service ("IRS") deposited the proceeds
from the sale with the Clerk of Court on June 1, 1999.
Pursuant to a consent agreement, approved by the court on November 16,
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,
Section 788.1 provides that
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
Cons. Stat. Ann. §788.1(a) (West 1991)
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
Section 788.1 states in relevant part:
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....
Cons. Stat. Ann. §788.1 (b) (West 1991).
Article VI, clause 2, of the United States Constitution provides:
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
Bankruptcy Court, West.
, 81-3306, 3/13/86, 59 BR 95, (59 BR 95.)
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.
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.
Graham Bell, Inc. (hereinafter "Debtor") was a
corporation engaged in the operation of a restaurant and bar in
. 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
. No contest has occurred as to the assessment or amounts claimed.
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.
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
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.
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
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.
statutory provisions are in dispute in the case at bar. Section
6321 of the Internal Revenue Code provides that:
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
upon all property and rights to property, whether real or personal,
belonging to such persons.
statutory language, 47 P.S. §4
-468(b)(1) of the Pennsylvania Liquor Code states:
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.
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
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.
federally controlling case law on this question is Morgan v.
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.
at 409 (citing Morgan, supra).
the U.S. Supreme Court explained the relative functions of the State and
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
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
In In re
Feitz Estate, 402
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
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."
at 507 (citing Jaffe v. Pacific Brewing and Malting Co., et al,
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.
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
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.
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."
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.
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
statute, it meets the
'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:
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).
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
courts sitting in
have had the opportunity to discuss aspects of this issue since the
Pennsylvania Supreme Court decided 1412 Spruce.
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.
influential decision in this area by a federal court in
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
. In so granting the motion, the Court examined the decision in 1412
Spruce as well as that in Morgan.
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.
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
, citing the dissent in 1412 Spruce, went so far as to hold that
the liquor license "constitutes property upon which the
could attach a lien under section
the decision in JFWIRS, the federal court in the Eastern District
of Pennsylvania was presented with a similar issue. In 21 West
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.
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.
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."
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.
p. 208 n. 9.
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.
reasons, we hold that the IRS is entitled to the proceeds of the sale of
the license in order to satisfy the unpaid taxes.
appropriate order will be issued.
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
JFWIRS, Ltd., Plaintiff v. The
United States of America
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
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
' interest was limited to that amount.
Fehling, Marcia A. Binder, Stevens & Lee,
607 Washington St.
, for plaintiff. James West, Assistant United States Attorney,
, Jefferson K. Fox, Department of Justice, Washingon, D. C. 20530, for
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
, and sell the same at an execution sale to satisfy a tax claim against
the holder of the license.
are in essential agreement on the facts which relate to the present
The taxpayer against whom IRS is proceeding is a corporation known as
Guytrak's Scotch N'Sirloin, Inc. (Guytrak's).
In 1983 and 1984 the IRS made assessments against Guytrak's for federal
employment and unemployment taxes for 1982 and 1983.
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,
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
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:
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
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
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.
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.
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.
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
C. §6321, under which the government assets its lien on the license,
provides, in relevant part, as follows (emphasis added):
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.
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.
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.
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
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:
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],
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
51, 55, 78
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
at 512-14, 80
at 1280, 4 L. Ed. 2d at 1368-69 (emphasis added) (brackets added)
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.
at 513 n. 3, 80
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."
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.
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
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.
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.
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
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:
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
at 80-81, 60
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.
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.
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
could attach a lien under section 6321. 3
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
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
issue an appropriate order.
this 23rd day of April, 1935, it is ordered that:
Defendant's motion for summary judgment shall be and is hereby granted.
Plaintiff's motion for summary judgment shall be and is hereby denied.
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.
Plaintiff shall take all reasonable and necessary steps to permit
defendant to execute on the liquor license.
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.
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.
Because of this conclusion, we will not discuss defendant's argument
concerning our lack of jurisdiction to hear this case under 28