Prior Law page1

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State of Oregon, by and through the State Board of Higher Education, composed of Charles R. Holloway, Jr., J. W. Forrester, Jr., Philip A. Joss, George H. Layman, Elizabeth H. Johnson, John C. Merrifield, Ralph E. Purvine, John W. Snyder and Ray T. Yasui, Plaintiffs v. Magnolia Lumber Corporation, a Mississippi corporation; Lithia Lumber Company, an Oregon corporation; Lawrence Warehouse Company, a California corporation; the State of Oregon, acting by and through the Department of Employment; the State of Oregon, acting by and through the Public Utility Commission; the United States of America; the County of Jackson, State of Oregon, a political subdivision; Jack Medley and Norman E. Yocom dba Conifer Logging Company; Montgomery Ward & Co., Incorporated, an Illinois corporation; Mautz, Souther, Spaulding, Kinsey & Williamson, attorneys at law; and Collins & Redden, attorneys at law, Defendants

State of Ore. Circuit Court, County of Jackson, No. 64-1008L, 6/2/67

[1954 Code Sec. 6321]

Liens for taxes: Property subject to lien: Mortgage: Mortgagee's taxes.--A U. S. tax lien attached to a mortgagee's promissory note and mortgage (and subsequently, on foreclosure, to the final judgment and decree) when notice of the lien was filed (April 28, 1961), and any offset claimed by the mortgagor by virtue of a subsequent judgment it obtained against the mortgagee on July 15, 1964, did not operate to defeat the Government's lien.

[1954 Code Sec. 6323]

Liens for taxes: Priority over attorney's fees: Mortgage foreclosure.--A U. S. tax lien had priority over a lien for attorney's fees in a mortgage foreclosure proceeding since the attorney's lien did not become choate (that is, fixed by the foreclosure decree) until after the filing of the Government's tax lien.

Wolf von Otterstedt, Assistant Attorney General, Eugene , Ore. , for plaintiffs. Sidney I. Lezak, United States Attorney, Roger G. Rose, Assistant United States Attorney, Portland, Ore., Donald Seymour, George L. Evans, Leon L. Hagen, Assistant Attorney Generals, Salem, Ore., Thomas J. Owens, District Attorney, Medford, Ore., Collins & Redden, 107 E. Main St., Medford, Ore., Mautz, Souther, Spaulding, Kinsey & Williamson, 12th Floor, Standard Plaza, Portland, Ore., Lloyd G. Hammel, Assistant Attorney General, Portland, Ore., for defendants.

Supplemental Findings and Conclusions

KELLY, Circuit Judge:

This case originated as an action in eminent domain in which plaintiff State Board of Higher Education brought action to acquire for Southern Oregon College a tract of land in Ashland of approximately ten acres particularly described in the complaint. At the commencement of the action the land was owned by defendant, Lithia Lumber Company, but was involved in suit for foreclosure of mortgage of the defendant Magnolia Lumber Corporation. Decree of foreclosure was entered July 11, 1963, was appealed to the Supreme Court, and the foreclosure decree was affirmed July 15, 1965, except for remand for the taking of further testimony for determination as to deficiency judgment on the mortgage. See Magnolia Lumber Corporation v. Lithia Lumber Company et al., Case No. 61-633E this Court, 241 Or. 65. Magnolia and Lithia joined in defense of the eminent domain proceeding in this case, stipulated with plaintiff for waiver of jury trial and tried the case to the Court on March 17, 1966. The Court thereafter entered verdict and judgment of just compensation for the taking in the sum of $23,750.00. This sum has been deposited with the Clerk by plaintiff and awaits decree of the Court for its disbursement. Plaintiff has taken possession of the lands involved. Title thereto was vested in plaintiff by judgment previously entered herein.

Under State Highway Commission v. Burke, 200 Or. 211, at 251, the Court on March 18, 1966, received testimony from various defendants and cross complainants to establish their respective claims to the fund, which under Burke, were upon determination and payment of just compensation transferred from the land to the fund. Subsequently they submitted their briefs on the remaining question before the Court, namely, the determination of priority among the claims presented.

This question is somewhat simplified by the fact that the lands involved here were part and parcel of the lands involved in the mortgage foreclosure suit, Magnolia v. Lithia, being Tract No. 8 as described in the mortgage, and with one exception hereinafter noted, the claimants with the highest priority were parties defendant and cross complainants in that suit.

The decree in Magnolia v. Lithia determined the respective priorities so far as liens involving Lithia were concerned, and no appeal was taken by any of them from that portion of the decree which established such priorities. That portion of the decree is thus final and conclusive between such claimants and Lithia. ORS 43.130(2), 43.150, 43.160, Glenn v. Savage, 14 Or. 567, Finley v. Houser, 22 Or. 562, Taylor v. Taylor , 54 Or. 560, 577, Basche Sage Hdwe. Co. v. DeWolfe, 113 Or. 246.

The decree in Magnolia v. Lithia established such priorities as follows:

(1) Liens of the State of Oregon , Department of Employment, in the amount of $1,855.63 filed November 14, 1960, in Volume 19, page 58, and in the amount of $15.20 dated March 14, 1961 filed in Volume 19, page 140.

(2) Mortgage of Magnolia in the sum of $536,644.68 with interest, plus $26,628.81 with interest, and $4,500.00 attorneys fees.

(3) Tax lien of the State of Oregon , Tax Commission No. 7818 filed March 4, 1960 in the Lien Records of Jackson County in the sum of $2,190.18, plus interest.

(4) Tax lien of the United States of America , Lien No. 61283 filed in the Lien Records of Jackson County, April 28, 1960 in the amount of $6,481.14, plus interest.

(5) Judgment of State of Oregon , Department of Employment, entered June 1, 1960 in this Court in the amount of $3,657.08, plus interest.

(6) Tax lien of the State of Oregon, State Tax Commission, Warrant No. 8077 filed in the Lien Records of Jackson County January 10, 1961, in the amount of $2,187.51.

(7) Tax lien of the United States of America No. 64516, recorded in the Lien Records of Jackson County, January 18, 1961, in the amount of $14,380.11, plus interest.

(8) Tax lien of the State of Oregon , Tax Commission, Instrument No. 8204, recorded in the Lien Records of Jackson County on March 14, 1961, in the amount of $136.58, plus interest.

(9) Tax liens of the United States of America bearing No. 63570 in the amount of $844.01, a lien in the amount of $488.01, and Lien No. 65370 in the amount of $529.48, all filed in the Lien Records of Jackson County, April 19, 1961.

(10) Lien of the State of Oregon , Department of Employment, recorded July 21, 1961, in Volume 19, page 298 of the Lien Records of Jackson County in the amount of $75.09, plus interest.

The complication which prevents the priorities determined by the decree in Magnolia v. Lithia from being decisive of distribution of the fund in this case is that in case No. 61-699L in this Court in which Lithia is plaintiff and Magnolia defendant with R. Drew Lamb and others, on July 15, 1964 by jury verdict, Lithia was awarded joint and several judgment against all defendants in that case, including Magnolia, in the sum of $1,700,000.00. In the same judgment, the judgment entered in the foreclosure suit of Magnolia v. Lithia is reentered and thus is merged with and operates as an offset against the Lithia judgment. The case is now on appeal to the Supreme Court, but neither the judgment nor execution thereon has been stayed by supersedeas undertaking, and thus at this time Magnolia's judgment in the mortgage foreclosure is effectively offset by Lithia's larger judgment in which it is presently incorporated. ORS 19.040, Daly v. Wolfard Bros., Inc., 204 Or. 241, Hecht v. James and Farmers Mut. Ins. Co., 218 Or. 251, 49 CJS 1035, Judgments, Sec. 561, annotation 158 ALR 859. This present merger, of course, is subject to the result of the appeal.

The exception previously mentioned of a claimant in this proceeding not before the Court in the Magnolia Lithia foreclosure, is that the United States of America in its amended answer in this case asserts a lien claim for income taxes against Magnolia for fiscal year ending June 30, 1954, assessed December 23, 1960, with lien thereon filed with the County Clerk of Jackson County, April 28, 1961, in the sum of $37,119.25, upon which payments of $749.63 were made April 8, 1963, and $787.21, December 31, 1964. The United States established proof of such lien by its exhibits nos. A1, A3, A4 and A5.

The United States contends that this lien attached to Magnolia's mortgage as of date of assessment on December 23, 1960, and in any event on the date of filing the lien, April 28, 1961, and prior to foreclosure judgment in July, 1963, and that any offset of such judgment as Lithia claims by virtue of it being merged in the judgment in case No. 61-699L, is necessarily subject to the lien of the United States of America for Magnolia's income taxes.

The statute upon which the lien in question is filed and based, Sec. 6321, Internal Revenue Code, USCA, Title 26, provides:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person".

This statute has been held to be a broad, comprehensive statute intended to subject all of the taxpayers' property, except that specifically exempt, to taxes. Citizens State Bank of Barstow, Texas v. Vidal [40-2 USTC ¶9603], 114 F. 2d 380, Cannon v. Nicholas [35-2 USTC ¶9672], 80 F. 2d 934.

In Citizens State Bank of Barstow, Texas v. Vidal, supra, Spade v. Salvatorian Fathers (N. J.) 189 A. 2d 738, and Filipowicz v. Rothernsies [40-1 USTC ¶9250], 31 F. Supp. 716, it was held to include choses in action. And in Citizens Nat. Trust & Savings Bank of Los Angeles v. U. S. [43-1 USTC ¶9426], 135 F. 2d 527, In Re Victor Brewing Co. [45-1 USTC ¶9157], 146 F. 2d 831, Salsbury Motors Inc. v. U. S. [54-1 USTC ¶9217], 210 F. 2d 171, Nelson v. U. S. [43-2 USTC ¶9648], 139 F. 2d 162, In re Burch [50-2 USTC ¶9406], 89 F. Supp. 249, and U. S. v. Taft [42-1 USTC ¶9411], 44 F. Supp. 564, it was held the statutory lien for unpaid taxes attached to after acquired property.

The Court thus holds that the tax lien of the United States upon its filing attached to Magnolia's promissory note and mortgage, and that upon entry of judgment and decree attached as well to such judgment and decree.

Thus Lithia can have no offset or merger of its judgment against Magnolia which would discharge and satisfy the latter's judgment in the mortgage foreclosure without first assuming and discharging the tax lien of the United States which has attached. Thus Lithia has no reasonable basis for objection if the fund be disbursed to payment of the lien of the United States filed against Magnolia, since it would be required in any event in order to discharge such judgment to pay such claim.

If Lithia's judgment against Magnolia should be reversed upon appeal so that there is in fact no merger or offset of judgments, by reason of the high priority of Magnolia's mortgage as decreed in the foreclosure, and by reason of Magnolia's obligation for the taxes claimed by the United States in its lien against Magnolia, Magnolia would have no reasonable basis for objection if the Court directs disbursement of the fund to apply on such tax lien.

The parties stipulated at the supplemental hearing on this matter that the first priority claim to the fund is the amount of the lien of Jackson County plead in its answer under tax deed recorded September 6, 1960, in Volume 495, page 113, under Certificate of Delinquency No. C11199, together with interest to date of payment, and that the second priority claim to the fund are the liens of the State of Oregon, Department of Employment, in the amount of $1,885.63 filed November 14, 1960 in Volume 19, page 58, and in the amount of $15.20 filed in Volume 19, page 140. After payment of these priority claims with interest from the fund, the Court finds and holds that the remainder of the fund should be disbursed to the United States of America in partial payment of principal and interest on the tax lien filed April 28, 1961 for income taxes assessed against Magnolia for the fiscal year ending June 30, 1954.

The Court agrees with the United States attorney that the lien for these income taxes is superior to that of the attorneys for Magnolia in the foreclosure for the reason that the lien for attorneys fees did not become choate until such time as the foreclosure suit became final. Thus such lien did not become choate until long after the tax lien. The tax lien being first in time is also first in right. Gower v. State Tax Commissioner, 207 Or. 288, United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, United States v. Pioneer American Insurance Company [63-2 USTC ¶9532], 374 U. S. 84, United States v. R. G. Ball Construction Company [58-1 USTC ¶9327], 355 U. S. 587, United States v. Buffalo Savings Bank [63-1 USTC ¶9166], 371 U. S. 228.

The Court's statements of fact herein are the Court's findings of fact and the Court's statements of law, the Court's conclusions of law. Each of the parties hereto are granted ten days from receipt of these findings and conclusions within which to file their objections and suggested substitute findings and conclusions.

 

 

 

Commercial Standard Insurance Company, a corporation, et al., Plaintiffs v. Otis Ward, et al., Defendants United States of America, Intervenor Petitioner

Fla. Circuit Court, Escambia County , Fla. , in Chancery, 4/3/62

[1954 Code Sec. 6321]

Tax liens: Attachment to real estate held as tenants by entireties: Proceeds from insurance policies on real estate.--The Government failed to prove fraud on the part of the delinquent taxpayer. The Government's tax lien existing before and after the acquisition of title to real property by the taxpayer did not attach to such property or the proceeds arising from insurance policies covering improvements on the property because the property was acquired and held as an estate by the entireties by the delinquent taxpayer and his wife.

R. A. Hepner, Fisher & Hepner, 406-413 Florida National Bank Bldg., Pensacola, Fla., for plaintiff. J. Montrose Edrehi, 406-413 Florida National Bank Bldg., Bert Lane, Beggs, Lane, Daniel, Middlebrooks & Gaines, 700 Brent Annex, Grover C. Robinson, Jr., Robinson & Roark, 215 Professional Bldg., Patrick G. Emmanuel, Holsberry & Emmanuel, 245 Professional Bldg., Pensacola, Fla., for defendants.

Order

MELVIN, Circuit Judge:

THIS CAUSE coming on to be heard on the 6th day of March, pursuant to the Order of this Court dated 6 February 1962, upon the Petition for Intervention filed by the United States of America (which Petition was granted by said Order of February 6, 1962) and upon Amendment to Petition for Intervention filed by the United States of America; and the Court having received and heard evidence and testimony presented by the United States of America in support of the allegations of its pleadings, and evidence and testimony on behalf of certain of the other parties in this cause in opposition thereto; and all parties having announced that evidence relating to this phase of this matter had been presented to the Court, as required by the Order referred to above; and counsel for the United States of America and the other parties having presented arguments, and the Court having considered said pleadings, evidence, testimony and arguments; and being advised of its opinion;

IT IS, THEREFORE, FOUND, ORDERED, AND DECREED as follows:

1. That the United States of America has failed to prove the fraud alleged by it on the part of the Defendant Otis Ward.

2. That the real estate and improvements located thereon, which improvements were burned in the fire referred to in the pleadings in this cause, were purchased by Otis Ward and Vivian Ward, husband and wife, at the time of the acquisition of said properties, and title to said real and personal property was taken in the name of Otis Ward and Vivian Ward, husband and wife thereby creating an estate in the entireties under the laws of the State of Florida.

3. That the entire purchase price of the real estate, improvements thereon, furniture, fixtures and equipment located therein, and the original stock in trade and inventory, of the property referred to in the various pleadings herein, and generally known as Patti's Bar and Package Store, was financed by the said Otis Ward and Vivian Ward, husband and wife, at the time of the acquisition thereof, part of said financing being a first purchase money mortgage in favor of the Sellers of said properties, and the balance being financed by Escambia Land Co., Inc., as Trustee; and that the only funds paid or contributed by the said Otis Ward and/or Vivian Ward at the time of the purchase of said real and personal property was $185.74, and the Court further finds that the attorneys fees, and miscellaneous costs (stamps, intangible tax, recording fees, and the like) incident to said purchase and the financing thereof more than exceeded said sum of $185.74.

4. That the lien of the United States of America existing of record at the time of the acquisition of title to said property by the said Otis Ward and Vivian Ward, husband and wife, did not attach to said property because of its status as an estate by the entirety, and, in addition thereto, because of the financing thereof in the manner set forth hereinabove. That liens claimed by the United States against Otis Ward filed subsequent to the purchase of said property by Otis Ward and Vivian Ward, his wife, do not constitute liens upon said property because said property was acquired by them as an estate by the entirety.

5. That the proceeds arising from insurance policies insuring improvements upon said premises constitute property held as an estate by the entirety by Otis Ward and Vivian Ward, husband and wife and are not subject to any of the liens claimed herein by the United States .

6. That the Petition filed by the United States of America in this cause be, and the same is hereby, dismissed, with prejudice.

7. Certain of the Defendants in this cause filed Motions to Dismiss the Petition for Intervention, as amended, by the United States of America , and certain Defendants filed Answers to said Petition, as amended. The Court, prior to the hearing referred to hereinabove, took said Motions to Dismiss under advisement, but no rulings on said Motions to Dismiss, as such, are made, in that the Court has heard the evidence and testimony presented by the United States of America in this cause, and the testimony and evidence in opposition thereto, and this Order is based upon the merits of the Claim of the United States of America.

 

 

 

Burton B. Paddock, Trustee in Bankruptcy et al., Petitioners v. C. J. Siemoneit et al., Respondents

In the Supreme Court of Texas , No. A-1976, 218 SW2d 428, March 2, 1949

From Tarrant County , Second District.

Withholding on wages: Civil penalty for failure to pay taxes when due: Willfulness.--The disbursing officer of a corporation, who failed to cause the corporation to pay federal income and social security taxes due on wages paid to employees, was liable for a civil penalty in the amount of the taxes due, even though the reason for nonpayment of the taxes was that the corporation was in a precarious financial condition and was expected to be able to make payment later. Code Sec. 2707(a), imposing a penalty upon "any person who willfully fails to pay, collect or truthfully account for the taxes," intends a civil sanction, so that the word "willfully" does not require a showing of fraudulent or evil purpose, as in the case of criminal penalties, and the finding that the officer intentionally and deliberately failed to pay the taxes when due was sufficient to make him liable for the civil penalty.

Lien for taxes: Homestead : Foreclosure of lien.--The lien imposed to secure the payment of federal taxes extends to homestead property occupied by the person liable for the tax or, in this case, the penalty. However, a lien to secure payment of taxes owing by a husband does not attach to his wife's property, and, since a wife has a vested interest in a homestead in Texas , her interest cannot be subjected to levy and sale for the satisfaction of the federal tax liability of her husband. Reversing the judgment of the Texas Court of Civil Appeals with respect to the intervention of the United States and reforming the judgment of the district court, 214 S. W. (2d) 651, reported at 49-1 USTC ¶9161.

Melvin F. Adler, Fort Worth, Texas, Theron L. Caudle, Assistant Attorney General of the U. S., Andrew D. Sharpe and Frank K. Foster, Special Assistants to the Attorney General of the U. S., Frank B. Porter, U. S. Attorney and A. W. Christian, Assistant U. S. Attorney, Fort Worth, Texas, for the petitioners. Ernest May and Van Zandt Smith, Fort Worth , Texas , for the respondents.

HART, Associate Justice:

The trustee in bankruptcy of Siemoneit Drilling Company, Inc., brought this suit against C. J. Siemoneit and his wife and others, seeking to establish a constructive trust in favor of the bankrupt corporation upon certain real estate and personal property. The United States of America intervened in the suit, asking for a judgment for a tax penalty against Mr. and Mrs. Siemoneit and foreclosure of a tax lien upon the same property. In a trial before the court without a jury, judgment was entered against the trustee in bankruptcy but in favor of the United States , as against C. J. Siemoneit. The Court of Civil Appeals affirmed the judgment against the trustee in bankruptcy, but reversed the judgment in favor of the United States and rendered judgment in favor of Siemoneit. 214 S. W. 2d 651 [49-1 USTC ¶9161].

* * * * * *

[Employer's Failure to Pay Federal Taxes]

The application for writ of error filed by the United States presents the question of the liability of C. J. Siemoneit for a civil penalty in the amount of Federal taxes due to the Government from the corporation. It is admitted that the taxes were due from the corporation and that C. J. Siemoneit was the disbursing officer of the corporation who decided that the taxes would not be paid when they were due. The trial court found the facts to be that C. J. Siemoneit, in failing to cause the corporation to pay the taxes, had no fraudulent motive or intent or purpose to defraud the Government of its revenue, but that he "deliberately and intentionally" failed to cause payment of the taxes when they were due. The court further found as follows:

"At all times after April, 1943, Siemoneit Drilling Company, Inc. was embarrassed financially. Its operations in the interval of April, 1943, to the filing of its petition for reorganization, March 2, 1945, required that it borrow money and liquidate capital assets continually. The executive officers of the corporation, C. J. Siemoneit and E. R. Land, deemed it prudent to delay payment of Federal taxes after the same were due, for each quarter of the period for which such taxes were assessed, in order to conserve funds for operations. If the operations had been successful, the corporation would have recovered from its embarrassment and would have paid the taxes owing the Government."

[Statutory Penalties]

The tax statutes involved are Sections 1400-1432 and 1621-1627 of the Internal Revenue Code (26 U. S. C. A.) relating to Social Security and Withholding taxes. Under Sections 1420 and 1627 the same penalties are provided with respect to these taxes as are prescribed for taxes imposed by Section 2700 of the Internal Revenue Code (26 U. S. C. A.). These penalties are set out in Section 2707 of the Internal Revenue Code (26 U. S. C. A.), which reads as follows:

"§2707. Penalties

"(a) Any person who willfully fails to pay, collect or truthfully account for and pay over the tax imposed by Section 2700(a), or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty of the amount of the tax evaded, or not paid, collected, or accounted for and paid over, to be assessed and collected in the same manner as taxes are assessed and collected. No penalty shall be assessed under this subsection for any offense for which a penalty may be assessed under authority of Section 3612.

"(b) Any person required under this subchapter to pay any tax, or required by law or regulations made under authority thereof to make a return, keep any records, or supply any information, for the purposes of the computation, assessment, or collection of any tax imposed by this subchapter who willfully fails to pay such tax, make such returns, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than one year, or both, together with the costs of prosecution.

"(c) Any person required under this subchapter to collect, account for and pay over any tax imposed by this subchapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this subchapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

"(d) The term 'person' as used in this section includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs. 53 Stat. 290."

The conclusions of law of the trial court as to the liability of C. J. Siemoneit were as follows:

"I. Liability to the civil penalty authorized by Section 2707(a), 26 U. S. C. A. does not depend upon the same criminal intent as required for conviction under Section 2707(b) or (c), but arises when there is a deliberate, intentional failure to pay taxes when due.

"II. C. J. Siemoneit is therefore liable to the government for the penalties assessed by the Commissioner of Internal Revenue."

The Court of Civil Appeals reversed the judgment of the trial court on this part of the case, holding that the findings of fact made by the trial judge did not establish C. J. Siemoneit's liability for the penalties sought to be imposed upon him.

The question before us is the interpretation of "willful" as used in Section 2707(a). In determining the meaning of Federal laws, this Court is controlled by the decisions of the Supreme Court of the United States . Emmons v. Pacific Indemnity Co., 146 Texas 496, 208 S. W. 2d 884; State v. Wynne, 134 Texas 455, 133 S. W. 2d 951; Southwestern Greyhound Lines v. Railroad Commission, 128 Texas 560, 99 S. W. 2d 263, 109 A. L. R. 1235. In this instance, however, there does not appear to be any decision by the United States Supreme Court which is directly in point, and we have to try to arrive at the meaning of the statute from that Court's opinions in more or less analogous cases.

[Criminal Penalties]

It seems to be settled that in the internal revenue statutes imposing criminal penalties, willfulness includes "some element of evil motive and want of justification in view of all the financial circumstances of the taxpayer". See Spies v. United States, 317 U. S. 492, 498 [43-1 USTC ¶9243]. This holding, that the word "willfully" means "an act done with a bad purpose" and that "an evil motive is a constituent element of the crime", is regarded as being in harmony with the interpretation usually given to "willful" in other statutes imposing criminal penalties. See United States v. Murdock, 290 U. S. 389, 394, 395 [3 USTC ¶1194]. However, it is recognized that "willful . . . is a word of many meanings, its construction often being influenced by its context". See Spies v. United States, 317 U. S. 492, 497 [43-1 USTC ¶9243]. And one of the meanings which it may have is "an act which is intentional, or knowing, or voluntary, as distinguished from accidental". See United States v. Murdock, 290 U. S. 389, 394 [3 USTC ¶1194]; Screws v. United States, 325 U. S. 91, 101.

Felton v. United States, 96 U. S. 699, has been cited by respondent as controlling in his favor. In that case, the United States sued to recover a civil penalty of $1000 under an internal revenue statute imposing such a penalty for "knowingly and willfully" failing to equip a distillery with apparatus of an adequate capacity. The trial court refused to instruct the jury that the defendants would not be subject to the penalty if the inadequacy of the apparatus was unknown to the defendants and their superintendent, and judgment was entered against the defendants for the penalty. This judgment was reversed by the Supreme Court. After reviewing the evidence, the court says: (96 U. S. at p. 702):

"There was, therefore, the absence of that knowledge which could render the neglect willful, and therefore actionable. They must have 'knowingly and willfully' omitted to furnish a receiver of sufficient capacity, before the severe penalty prescribed could be imposed upon them and their distilled spirits subjected to forfeiture. Doing or omitting to do a thing knowingly and willfully, implies not only a knowledge of the thing, but a determination with a bad intent to do it, or to omit doing it. 'The word "willfully'", says Chief Justice Shaw, 'in the ordinary sense in which it is used in statutes, means not merely "voluntarily", but with a bad purpose.' Com. v. Kneeland, 20 Pick., 220. 'It is frequently understood', says Bishop, 'as signifying an evil intent without justifiable excuse.' Cr. L., Vol. I, sec. 428."

It seems apparent from a study of the opinion in the Felton case that it could have been disposed of on the ground that the evidence failed to show that the defendants had knowingly or intentionally failed to comply with the law. It was unnecessary for the court to hold that the word "willful" requires the showing of "a determination with a bad intent" or "with a bad purpose" not to do the required act, since the evidence showed that the defendants' failure was unknowing and unintentional. We do not think that the Felton case can be regarded as settling the law in a case such as the one before us, where the trial court has expressly found that there was "a deliberate, intentional failure to pay taxes when due". So far as we can discover, the Felton case has not been cited subsequently by the Supreme Court of the United States as stating the correct rule in suits for civil penalties, but rather as stating the rule which is to be applied where criminal penalties are sought. See Screws v. United States, 325 U. S. 91, 101; United States v. Murdock [3 USTC ¶1194], 290 U. S. 389, 394; Spurr v. United States, 174 U. S. 728, 734; Potter v. United States, 155 U. S. 438, 446.

[Civil Penalties]

Section 2707(a) provides that the penalty imposed therein shall be "assessed and collected in the same manner as taxes are assessed and collected". Thus it is clear that the statute intended a civil, not a criminal, sanction. The imposition of civil as well as criminal sanctions for the same act or omission is permissible; and one sanction which has long been recognized as civil, rather than criminal, in spite of its possible severity, is the payment of fixed or variable sums of money. See Helvering v. Mitchell, 303 U. S. 391, 399-400 [38-1 USTC ¶9152]. Even in a case where the penalty was double the value of goods illegally imported, it was considered that the statute was remedial, as providing indemnity for loss of the Government resulting from expense incident to the enforcement of tax obligations. Stockwell v. United States , 13 Wall. 531.

In United States v. Illinois Central Railroad Company, 303 U. S. 239, suit was brought to recover a civil penalty for violation of a Federal statute requiring the periodical unloading of livestock in transit. The Supreme Court there rejected the argument that "willful" included an evil motive or bad purpose and approved its definition as the attitude of a person "who, having a free will or choice, either intentionally disregards the statute or is plainly indifferent to its requirements." See 303 U. S. at p. 243.

In Allen v. Regents of the University System of Georgia, 304 U. S. 439 [38-2 USTC ¶9321], the Court held that the regents were liable for admission taxes which the Federal statute required to be collected on admissions charged to athletic contests. In its opinion the Court says, ". . . here the assessment is not of a tax payable by respondent but of a penalty for failure to collect it from another". The Court does not discuss the meaning of "willful" as used in the statute involved in that case, but since there was no showing of any evil intent or bad purpose on the part of the regents, the inference which we think must be drawn from the Court's decision is that voluntary and intentional failure to comply with the statute was sufficient to create liability for the penalty.

Respondent in this case argues that "willful" must be given the same meaning in all subdivisions of Section 2707, and therefore that the same evil or fraudulent purpose must be shown in a civil suit brought under subsection (a) as in a criminal prosecution under subsections (b) and (c). The presumption ordinarily is that a term is used throughout the same statute in the same sense. See Pampanga Sugar Mills v. Trinidad, 279 U. S. 211, 218. However, the meaning of "willful" in the different sections of the statute must be considered in the different contexts in which the word is found in the separate sections. We do not believe that the Congress intended to require no more proof of the Government in a case where criminal punishment is sought than where civil recovery is the object of the suit, as in this case. It has been recognized that differences in the nature of the penalties imposed may properly lead to differences in construction of the word "willfull", even when used in different sections of the same statute. See Spies v. United States, 317 U. S. 492, 497 [43-1 USTC ¶9243].

[Intentional Failure to Pay Taxes]

In the light of the decisions of the Supreme Court of the United States, and even though we agree that penalty statutes should generally be construed in favor of the taxpayer, we have concluded that the district court's finding that the respondent intentionally and deliberately failed to pay the taxes when due was sufficient to make him liable for the civil penalty under Section 2707(b). Respondent admittedly knew that the taxes were due. There was no contention that the statute was inapplicable to the taxpayer, as in cases cited by respondent, such as One 1941 Buick Sedan v. United States, 158 Fed. 2d 445 (C. C. A. 10th) or Carson Naval Stores Co. v. United States , 29 Fed. Supp. 818 (D. C., Ga. ) [39-2 USTC ¶9702]. Nor does the proof show that the corporation could not have paid the taxes when they were due. The proof merely shows that it was inconvenient for the corporation to pay the taxes at that time, and that it was thought that the corporation would have a better chance to operate profitably if it postponed the payment of its tax obligation and used the funds for its own purposes instead of paying them over to the Government as the law requires. The choice was knowing, deliberate and intentional, and with the full realization that the law was being violated. In our opinion this is the kind of case which Section 2707(a) was intended to cover. The respondent cannot be excused or justified because he hoped or even reasonably expected that the corporation would at a later date be in a better financial condition so that the payments could be made with less embarrassment. The purpose of the statute, to insure the prompt payment of taxes when due, would obviously be defeated by such an interpretation. The district court correctly held that C. J. Siemoneit was liable for the penalties.

[Interest on Taxes]

We also overrule the respondent's contention that the district court improperly allowed a recovery of interest. Section 2707(a) provides that the penalty shall be assessed and collected in the same manner as taxes are assessed and collected, and the statute provides for the collection of interest on taxes from the date of notice. 26 U. S. C. A. (Internal Revenue Code) Sec. 3655(b).

[Foreclosure of Tax Lien]

The district court decreed a foreclosure of the Government's lien as against both C. J. Siemoneit and his wife, Lelia Mae Siemoneit, of its lien on real property which the defendants admittedly bought and occupy as their homestead. This judgment was entered in spite of the district court's finding that Lelia Mae Siemoneit was not a disbursing officer of the corporation and therefore was not liable for the penalty. Upon appeal the Government has abandoned its claim for personal judgment against Lelia Mae Siemoneit, but asserts that it has a lien against the homestead as a whole. The Court of Civil Appeals did not pass on this point, since it held that even C. J. Siemoneit was not liable for any penalty. Since we have reached a contrary conclusion as to C. J. Siemoneit's liability, we must decide whether the Government's lien extends to and can be foreclosed against the interest of Lelia Mae Siemoneit as well as the interest of her husband.

The lien imposed to secure the payment of federal taxes extends to "all property and rights to property, whether real or personal, belonging to" the person liable therefor. Even the homestead of C. J. Siemoneit therefore is subject to the lien. Shambaugh v. Scofield, 132 F. (2d) 345 [42-2 USTC ¶9826]; Staley v. Vaughn, 50 S. W. (2d) 907 [1932 CCH ¶9420] (Tex. Civ. App., writ of error refused). However, the question remains whether the lien also extends to the interests of Lelia Mae Siemoneit in the property. The statute by its terms applies only to the property belonging to the person who is liable for the tax or, in this case, the penalty, and the cases hold that a lien to secure payment of taxes owing by a husband does not attach to his wife's property. Sheridan v. Allen, 153 Fed. 568 (C. C. A. 8th); Cannon v. Nicholas, 80 Fed. (2d) 934 [35-2 USTC ¶9672] (C. C. A. 10th); Adler v. Nicholas, 166 Fed. (2d) 674 [48-1 USTC ¶9205] (C. C. A. 10th). In Texas , we have held that the homestead is to be regarded as an estate created not only for the protection of the family as a whole, but for the units of the family. Woods v. Alvarado State Bank, 118 Tex. 586, 19 S. W. (2d) 35. The wife has a vested estate in the land of which she cannot be divested during her life except by abandonment or a voluntary conveyance in the manner prescribed by law. As applied to the situation in Oklahoma, where it is recognized that the wife has a vested interest in the homestead, it has been held that the wife's interest cannot be subjected to levy and sale for the satisfaction of the Federal tax liability of her husband. Jones v. Kemp, 144 Fed. (2d) 478 [44-2 USTC ¶9410] (C. C. A. 10th). We think that this conclusion is sound and that the district court erred in decreeing a foreclosure of the lien on the homestead as against Mrs. Siemoneit.

With respect to the suit by the trustee in bankruptcy, the judgment of the district court and the Court of Civil Appeals are affirmed. With respect to the intervention of the United States , the judgment of the Court of Civil Appeals is reversed, the judgment of the district court is reformed so as to eliminate a foreclosure of the government's lien as against Lelia Mae Siemoneit in the real estate therein described, and as so reformed the judgment of the district court is affirmed.

 

 

 

Sydney J. Wallace v. Egidio Mestichelli and Angelina Mestrichelli, his wife, and Alfred Pizzi and Rosella Pizzi, his wife

Court of Common Pleas, Montgomery County, Pa., No. 37, October 16, 1946

Property subject to lien: Husband and wife: Partnership.--Judgment obtained against partnership for unpaid Social Security taxes does not become a lien upon real property held by partners and their wives as tenants by the entireties.

Exceptions to sheriff's distribution.

E. Arnold Forrest, for exceptant. Morris Gerber, of Wisler, Pearlstine, Talone & Gerber, for defendants.

[Nature of Proceedings]

CORSON, J.:

On August 21, 1943, the above-named defendants became the owners of a certain tract of land in Conshohocken as tenants by the entireties.

On May 18, 1944, the United States Government entered judgment on a social security tax claim for tax owed by the partnership of Egidio Mestichelli and Alfred Pizzi.

On May 22, 1944, Mestichelli et ux. and Pizzi et ux. executed a mortgage upon the aforesaid property to Sydney J. Wallace. This mortgage was later assigned to James J. McDade, Jr., the exceptant. Such mortgage having become in default, it was foreclosed and the property sold by the sheriff for the sum of $360 to James J. McDade, Jr., the plaintiff in the execution. The sheriff set forth his schedule of distribution as follows: distribution costs, $195.63; tax lien United States , $164.37; total, $360.

James J. McDade, Jr., the plaintiff in the execution, excepts to the allowance of $164.37 upon the Government tax lien. Counsel for the plaintiff stated that he had sent a copy of the exceptions to the collector of internal revenue on May 20, 1946, and that he had since been advised by an attorney representing such collector that the Government would probably not oppose the allowance of such exception.

[Question]

The question to be decided is whether or not a judgment entered by the Government of the United States against two business partners becomes a lien upon property held by such partners and their wives as tenants by the entireties. We feel that this question must be decided in the negative. Admittedly, under the law of Pennsylvania a judgment against a husband does not become a lien upon property held by such husband and wife as tenants by the entireties. There is apparently nothing in any federal law which would give the Federal Government greater rights than any ordinary judgment creditor to recover for taxes due.

In the case of United States v. Nathanson, 60 Fed. Supp. 193, 194 (1945) [45-1 USTC ¶9194], the court said: "We find no designation in the Federal Revenue Act by which a tax may be imposed upon property held by the entirety for taxes due from the husband alone. Michigan decisions covering property by the entirety follow the common law and have withstood the onslaught of creditors for years." The Pennsylvania rule as to tenancy by the entireties is based upon the common law. Upon the authority of the Nathanson case and the law of Pennsylvania, we feel that the judgment entered by the United States Government against Mestichelli and Pizzi did not become a lien upon any property which they held as tenants by the entireties at the time of such entry of such judgment.

AND NOW, this 16th day of October, 1946, for the reasons given, the exceptions to the sheriff's distribution must be sustained as to the item of $164.37 awarded to the United States of America , and such item is therefore directed to be stricken from such schedule and such purported lien is discharged from the property in question

 

 

 

United States of America , Plaintiff v. Fred A. Kerr, et al., Defendants

U. S. District Court, East. Dist. Tenn. , No. CIV-2-77-110, 11/31/78

[Code Sec. 6321]

Lien for taxes: Fraudulent conveyances hindering collection.--The taxpayers who took title to various parcels of real estate as tenants by the entirety, did not make the conveyances fraudulently with respect to the government so the conveyances were not set aside. Over a 43-year period, the taxpayers neither filed tax returns nor paid taxes. During this period, the taxpayers took title to real estate as tenants by the entirety that the government claimed was fraudulent. There was no evidence that the taxpayers utilized this method of deeding with the intention of insulating themselves from their tax liabilities.

Joe Vaulx Crockett, III, Department of Justice, Washington , D. C. 20530, for plaintiffs. Wendal D. Jackson, 131 Eighth Street & Luther H. Icenhour, 900 Anderson Street, Bristol, Tennessee 37620, for defendants.

Memorandum Opinion

NEESE, District Judge:

The sole remaining contested issue in this lawsuit is whether 6 conveyances of real estate by third-parties to the defendants Mr. and Mrs. Kerr, as tenants by the entirety, should be set aside as fraudulent of the national sovereign in the matter of Mr. Kerr's delinquency in reporting timely and paying his federal income taxes for certain years. A bench trial was conducted on October 2, 1978. This Court has jurisdiction of the subject matter and of the parties. 28 U. S. C. §§ 1340, 1345, 26 U. S. C. §§ 7402, 7403.

Mr. Kerr has engaged in the business of owning and operating amusement devices for some 45 years. He and Mrs. Kerr have been married for the most recent 43 of those years.

Mr. Kerr neglected to pay any federal income taxes at all during those 45 years until an informant "tipped" the Internal Revenue Service (IRS) concerning his continuing illegality. He testified that he commenced his business operations with but little capital and "* * * plowed all profits * * *" back into his business operation. He undertook to explain his failure to report his income and pay taxes due thereon, by saying he was under the initial impression that, unless he "* * * made * * *" more than $600 annually from his operations, he was not required to make any report of his income; that, when he eventually discovered otherwise, he was "* * * scared * * *" to file any federal tax returns. ¹ This fear provided no justification for his continued inaction. Stoltzfus v. United States [68-2 USTC ¶9499], C. A. 3d (1968), 398 F. (2d) 1002, 1005-1006 [5], certiorari denied (1969), 393 U. S. 1020, 89 S. Ct. 627, 21 L. Ed. (2d) 565.

Mr. Kerr operated his business under the name of Kerr Music Company. He commingled his commercial funds with his personal funds and kept no formal business records. He, at all times, and he and Mrs. Kerr for the past 43 years, "* * * lived out-of-the-business * * *" and profited from it far beyond that. Contributions were also made from the funds acquired by Mr. and Mrs. Kerr to the capital of DeLuxe Vendors, operated by their son, which offered for sale through vending devices cigarettes, confections, coffee, etc.

Mrs. Kerr worked in this amusement-device business from the beginning of her marriage to Mr. Kerr, ² in addition to managing their home and family affairs. She not only assisted with the paper-work of that operation but engaged also in manual jobs such as helping load and unload pinball and other machines from their trucks and drove the truck and accompanied the Kerr's sons to "* * * rob * * *" the funds from the devices located in places attracting public traffic.

Neither Mr. Kerr nor Mrs. Kerr received salaries, wages or other compensation for their personal services to their business operation. When either of them required funds for any family or personal use, these were withdrawn from the business account in a bank. When they acquired any type of asset, it was deemed by them to belong to them jointly; ³ title to all real estate they acquired was taken by them as tenants by the entirety. When an indebtedness was created, both Mr. and Mrs. Kerr assumed its repayment.

In 1940 or 1941, the Kerrs purchased, as tenants by the entirety, a parcel of real estate. In 1959 they purchased a farm and took title to it as tenants by the entirety. That same year, as such tenants, they purchased an apartment building. In 1962 and 1964, as tenants by the entirety, Mr. and Mrs. Kerr purchased continguous commercial lots in Elizabethton , Tennessee , and, in the latter year, constructed thereon a building which has served since as a base of operations of both Kerr Music Company and DeLuxe Vendors. The following year, as tenants by the entirety, Mr. and Mrs. Kerr bought an unimproved lot in a subdivision; and the same year, as such tenants, they purchased their present residential property, as well as a lot on which was located a restaurant or salesoffice structure. During this period, they made an unsecured loan of $21,000 to Mr. Ben A. Paduch and took no promissory note or other indicia of indebtedness from him.

Mr. Kerr pleaded guilty in 1970 to charges that he had failed wilfully to file federal income tax returns for the respective tax years of 1963 and 1966. ⁴ As to those years, Mr. and Mrs. Kerr elected to file belated returns jointly and to pay the taxes, interest and penalty thereon. For this and other purposes, Mr. and Mrs. Kerr borrowed jointly $50,000 and hypothecated their joint property as security for its repayment. The Kerrs have not elected to file joint federal income tax returns for any of the other tax years involved in this litigation, viz., 1956-1959, inclusive, 1961, 1964, 1965. ⁵

The plaintiff contends that Mr. Kerr's maximum interest as a tenant by the entirety of the property jointly held with his wife has a value of 20% of its fair cash market value. ⁶ It contends furthermore that Mr. Kerr has escaped paying substantial amounts of income taxes to its IRS over a great many years by the device of having all his property conveyed to his wife and himself as tenants by the entirety; that he has no other property subject to levy from which it may realize unpaid taxes, penalties and interest; that there is no ready market for the sale and purchase of survivorship interests in joint tenancy estates; and that Mr. Kerr's causing his real assets to be conveyed to him and his wife in such a manner worked a fraud on the government.

The parties are in agreement (as is this Court) that the question of whether the foregoing conveyances were fraudulent as to the national government is controlled by Tennessee law. Thereunder, to justify this Court in finding such conveyances fraudulent and setting them aside, this Court must have found either: (1) that Mr. Kerr caused such conveyances to be made to Mrs. Kerr and himself with actual intent to delay, hinder, or defraud the national government as one of his creditors (in which event such conveyances are void), T. C. A. §§ 64-301, 64-315; or (2) that each of the foregoing respective conveyances in 1959, 1962, 1964 and 1966 was fraudulent because it was caused to be made by Mr. Kerr at 3 time when he was insolvent and was without fair consideration, ⁷ T. C. A. §§ 64-309, 64-311, 64-312. The causing of the creation of estates of tenancies by the entirety is within the reach of the Uniform Fraudulent Conveyance Act, T. C. A. §§ 64-308, et seq. Cf. Taylor v. Kaufhold (1954), 379 Pa. 191, 199, 108 A. (2d) 713.

Tennessee has 2 groups of statutes dealing with allegedly fraudulent conveyances and devises, all codified as T. C. A., title 64, chapter 3. The earlier statutes relating thereto appear at T. C. A. §§ 64-301--64-307, and the uniform laws thereon appear at T. C. A. §§ 64-308--64-321. The latter merely enlarged upon the former. Bowery v. Vines (1941), 178 Tenn. 98, 103, 156 S. W. (2d) 395.

T. C. A. §64-315, supra, distinguishes between fraudulent conveyances made with "* * * actual intent * * * to hinder, delay, or defraud * * * either present or future creditors * * *" and fraudulent conveyances made with "* * * intent presumed in law * * * to hinder, delay, or defraud * * * either present or future creditors. * * *" In the former instance, actual intent to defraud must have been shown by a preponderance of the evidence. James v. Joseph (1928), 156 Tenn. 417, 424-426(4), 1 S. W. (2d) 1017. ⁸

The late Mr. Justice R. L. Caruthers long ago defined the statutory words, "* * * hinder, delay, or defraud, * * *" as being in their legal or technical, not their literal, sense; he observed that the "* * * statute only refers to an improper or illegal hinderance or delay--not such as is reasonable and fair in the exercise of the well-established right to prefer creditors. * * *" Hefner v. Metcalf (1958), 38 Tenn. 577, 580. Of course, we have no factual situation herein involving preferential treatment of creditors, but a federal judge, in instructing a jury, once explained the meaning of these words in more congruity with our present situation. He stated:

* * * By hindering and delaying creditors in the collection of their debts is meant the doing of an * * * act which causes or presents an obstacle in the collection of the debt by a creditor. The act done by the debtor may not defraud the creditor in fact, and yet be fraudulent in law, because it hinders and delays creditors in the collection of their debts. Thus, for instance, a debtor may have property more than sufficient to pay all his debts, yet if he puts his property out of his hands so that it cannot be reached by the ordinary process of law, it is hindering and delaying in the eyes of the law, and a legal fraud. Such hindering and delaying of creditors in the collection of their debts, the law denounces and treats as a fraud. * * *

Kellog v. Richardson, C. C. W. D. Mo. (1883), 19 F. 68, 69-70.

This is precisely what the national sovereign claims Mr. Kerr has done here: having put his real estate partially out of his hands, so that it cannot be reached by the ordinary process of law relating to the collection of deliquent taxes and assessments, at times when Mr. Kerr's real estate is more than adequate to pay those taxes and assessments. He does appear to have done so. There is no question that the plaintiff was a creditor of Mr. Kerr; his taxes were due and owing the plaintiff on each date on which he was due to file a federal income tax return. United States v. Adam Bldg. Co., Inc. [76-1 USTC ¶9221], C. A. 6th (1976), 531 F. (2d) 342, 343 fn. 2[2].

The crucial question, accordingly, is whether Mr. Kerr did this with an actual intent to delay, hinder or defraud the federal government as his creditor. This Court FINDS that it has not been shown by a preponderance of the evidence that Mr. Kerr entertained any such intent at the time of the conveyances at issue.

When Mr. Kerr negotiated a transaction for the purchase of any real estate throughout the protracted course of his marriage, in each instance, his attorney made the decision that Mr. and Mrs. Kerr would take title to such real estate as tenants by the entirety. This was because Mr. Kerr felt that his wife and codefendant Mrs. Kerr was an equal partner with him in all aspects of his business, as well as his home and family, transactions; and that "* * * the least he could do * * *" was to join her name with his in all the married couple's real estate conveyances.

There is a dearth of evidence that, at the pertinent times of conveyance, Mr. Kerr even recognized that a joint survivorship relationship was being created with his wife in such property, although it is inferrable reasonably that he understood that Mrs. Kerr would "* * * get * * *" his property if he predeceased her, and that he would own such property outright if she predeceased him. There is no showing that the attraction of insulating himself against viable liability to pay his federal income taxes by this method of deeding ever crossed his mind.

Of course, it is inferrable reasonably also that, after Mr. Kerr became alarmed over the ultimate consequences of his failure ever to have filed federal income tax returns, Mrs. Kerr became aware of the reason for his deep concern. This does not permit reasonably, however, the further inference that Mr. Kerr ever contemplated the protection against the collection by the national government of his income taxes the creation of the entirety tenancies had provided, was providing or might have provided. This Court does not find any actual intent to delay, hinder or defraud the plaintiff on Mr. Kerr's part from this record. So it is that the plaintiff is entitled to no relief herein under the provisions of T. C. A. §§ 64-301, 64-315.

As noted, the plaintiff asserts also its rights to relief under the provisions of T. C. A. §§ 64-309, 64-311, 64-312, on the ground that Mr. Kerr was insolvent in 1959, 1962, 1964 and 1966 where various conveyances were made to him and Mrs. Kerr as such tenants. Mr. Kerr was insolvent at those times under the provisions of T. C. A. §64-309, ⁹ if the fair market value of his property would not then have covered his obligations as they fell due. Hyde Properties v. McCoy [75-1 USTC ¶9470], C. A. 6th (1974), 507 F. (2d) 301, 307[14], citing State ex rel. v. Caldwell, et al., C. A. Tenn. (1937), 21 Tenn. App. 396, 400 [6], ¹⁰ certiorari denied (1937). Under that rule, the Court hereby FINDS that Mr. Kerr was not insolvent at the time of the creation of the respective tenancies by the entirety in 1959, 1962, 1964 and 1966.

Even if, which this Court does not find, the fair cash market value of Mr. Kerr's interest in the real estate involved was as much as 20% of such value, the value of all his property on the market at the given times to a willing, but uncoerced, seller and buyer was not shown to have been in such amount that he was unable at any of those times to meet his obligations as they matured in the usual course of his business operations.

The value of the amusement devices owned by Kerr Music Company at the end of 1966, alone, was more than $175,000, for example. The plaintiff's IRS elected not to include these items of property in their computation of Mr. Kerr's net worth at the pertinent times, because many of them had depreciated (under the government's theory) to the point of no market value. However, the proof is undisputed that, at all pertinent times, the market value of those machines was far greater than the amounts IRS computations found to be the negative net worth of Mr. Kerr. In addition, it is undisputed that Mr. Kerr did pay his obligations as they matured in the ordinary course of his commercial operations. Furthermore, as a matter of policy, IRS decided against making a levy on and offering for sale "gaming" devices in order to enforce collection of Mr. Kerr's assessed taxes, penalties and interest.

It results that the plaintiff is entitled to no relief under the provisions of T. C. A. §§ 64-309, 64-311, and 64-312.

The defendant Mr. Fred A. Kerr has admitted that the plaintiff United States of America is entitled to recover from him $67,410.78 with interest to the date of judgment and the statutory additions. (The final judgment herein will so provide.) Although the Court has found and concluded that the plaintiff is not entitled to the setting aside as fraudulent of the aforementioned 6 conveyances to Mr. and Mrs. Kerr, as tenants by the entirety, this must not be construed as an adjudication that the plaintiff is precluded from pursuing other available methods of undertaking to collect the income taxes due from Mr. Kerr.

"* * * [T]he 'Power to lay and collect Taxes' is a specifically enunciated power of the Federal Government, Const, Art. I, §8 cl. 1, * * *" G. M. Leasing Corp. v. United States [77-1 USTC ¶9140] (1977), 429 U. S. 338, 354, 97 S. Ct. 619, 50 L. Ed. (2d) 530, 544-545. Mr. Justice Brewer stated for the Supreme Court many years ago:

* * * Taxes proper, or general taxes, proceed upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; that for those means it has the right to compel all citizens and property within its limits to contribute; and that for such contribution it renders no return of special benefits to any property, but only secures to the citizen that special benefit which results from protection of his person and property, and the promotion of those various schemes which have for their object the welfare of all. "The public revenues are a portion that each subject gives of his property in order to secure and enjoy the remainder. * * *"

Illinois Central Railroad Co. v. City of Decatur (1893), 147 U. S. 190, 198, 13 S. Ct. 293, 37 L. Ed. 132, 134.

Our government has a need to secure promptly the collection of its revenues. Phillips v. Commissioner of Internal Revenue [2 USTC ¶743] (1931), 283 U. S. 589, 596, 51 S. Ct. 608, 75 L. Ed. 1289, 1297.

Mr. and Mrs. Kerr have created a sizable estate during, and briefly before, their marriage. In so far as this record reflects, neither of them paid any federal income taxes on their acquisitions, at times when citizens generally, as it is noticed judicially, paid taxes on their earnings. It is pertinent that it is easier to accumulate a modicum of wealth while not paying taxes on the income derived than to amass a fortune after making such payments.

Mr. Kerr's liability to the plaintiff for taxes is a debt and is subject to collection in the same manner in which other debts are collectible. Price v. United States [1 USTC ¶158] (1926), 269 U. S. 492, 500, 46 S. Ct. 180, 70 L. Ed. 373, 377-378. Included specifically in the plaintiff's case is its right of collection by summary admin istrative means. Phillips v. Commissioner of Internal Revenue, supra, 283 U. S. at 595, 75 L. Ed. at 1296. Where Mr. Kerr, or any person liable for a federal tax, has neglected or refused to pay it after demand, the amount of that tax, interest and penalty becomes a lien in its favor on "* * * all property and rights to property, whether real or personal, belonging to such person * * *" liable to pay that amount. 26 U. S. C. §6321; Metropolitan Life Ins. Co. v. United States [39-2 USTC ¶9771], C. C. A. 6th (1939), 107 F. (2d) 311, 313.

It may be that from the evidence adduced herein the real estate acquired by Mr. and Mrs. Kerr from their joint activities constitutes equal partnership property, in which he owes a 50% interest. Cf. T. C. A. §61-105. Under the Uniform Partnership Act in Tennessee, T. C. A. §§ 61-101, et seq., when a partnership once acquires realty with partnership funds and for partnership purposes, the realty then becomes personalty for all purposes. Cultra, et al. v. Cultra, et al. (1949), 188 Tenn. 506, 511(2), 221 S. W. 533. Where a partner owes an individual tax, the government's tax lien with respect to partnership property extends to his interest in the surplus of the partnership property. United States v. Kaufman [1 USTC ¶116] (1925), 267 U. S. 408, 414, 45 S. Ct. 322, 69 L. Ed. 685, 689 (headnote 1). Such interest, in other words, is "* * * his full interest in the partnership property free and clear of other partnership indebtedness." F. P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726], C. A. 9th (1961), 297 F. (2d) 692, 3 A. L. R. (3d) 625, 632[13], certiorari denied (1962), 370 U. S. 909, 82 S. Ct. 1256, 8 L. Ed. (2d) 404. The ultimate answer to these questions, in the light of Mr. and Mrs. Kerr's having taken deeds to these properties as tenants by the entirety, would appear to lie within their respective intentions at the times of conveyance to them. It is said:

* * * [T]here was also a presumption that the ownership of real estate was where the minument of title placed it. Thus, if by all the circumstances attending the transaction, it appeared that in the intention of the parties it was purchased for and was treated as a partnership property, the presumption of ownership arising from the face of the deed would be overcome, and the property would be treated as belonging to the partnership. The provision of the Uniform Partnership Act that unless the contrary intention appears, the property acquired with partnership funds is partnership property, must also be applied in this context. [Footnote references omitted.] * * *

60 Am. Jur. (2d) 22, Partnership, §92, citing inter alia (as authority for the last statement hereinabove), Brown v. Brown, C. A. Tenn. (1958), 45 Tenn. App. 78, 320 S. W. (2d) 721, certiorari denied (1959).

In summary then, it is the decision of this Court:

(1) that the plaintiff United States of America recover from the defendant Mr. Fred A. Kerr the sum of $67,410.78 with interest ¹¹ and statutory additions herein relating to the tax years 1956, 1957, 1958, 1959, 1961, 1964 and 1965;

(2) that as to the claim of the plaintiff against the defendants Mr. and Mrs. Kerr, that the conveyances of 6 parcels of real estate conveyed to them in 1959, 1962, 1964 and 1966, respectively, were fraudulent as to the plaintiff as a creditor of the plaintiff, the plaintiff is denied all relief; and

(3) that nothing in the decision of this Court herein shall be construed as precluding the plaintiff from pursuing other available methods of collecting any and all federal income taxes due from the defendant Mr. Fred A. Kerr.

Rule 58(1), Federal Rules of Civil Procedure.

¹ Mr. Kerr was especially frightened of the consequences of his unlawful conduct when he heard that another amusement-device operator had been "* * * sold-out * * *" by the government in another state to satisfy his unpaid federal taxes.

² Mr. Kerr testified to his belief that Mrs. Kerr was entitled to one-half of "* * * all I got. * * *"

³ Mr. Kerr emphasized in his testimony that Mrs. Kerr was working "* * * with * * *" me, not "* * * for * * *" me.

⁴ The Court overruled Mr. Kerr's objection to this evidence at trial but has reconsidered upon more mature judgment and hereby SUSTAINS such objection in light of the fact that Mr. Kerr has withdrawn his contention that the assessment of his tax liability is incorrect. Cf. Kreps v. C. I. R. [65-2 USTC ¶9652], C. A. 2d (1965), 351 F. (2d) 1, 6 [6], and United States v. Wainer [54-1 USTC ¶49,032], C. A. 7th (1954), 211 F. (2d) 669, 671[2]. The conviction is mentioned herein at all only as it is of assistance in establishing a time-frame for the election of Mr. and Mrs. Kerr to file joint tax returns.

⁵ The limitation of 26 U. S. C. §6502 was enlarged by Mr. Kerr's submitting an offer in compromise of the tax liabilities for those of these years which are more than 6 years before the commencement of this action.

⁶ The Court does not accredit the testimony to this effect and gives it no weight, because this estimate is grossly overestimated.

⁷ As indicated, infra, this Court is led toward the conclusion, which would constitute mere dictum herein, that Mr. and Mrs. Kerr may have constituted themselves a partnership, so that the "fair consideration" concept, with reference to Mrs. Kerr's becoming a tenant by the entirety in the transactions involved, is not implicated, in the Court's mind.

⁸ It is only where the creditor presents evidence to create a suspicion that the conveyance involved was fraudulent that the allegedly fraudulent conveyor or conveyee must show freedom from the alleged fraud. James v. Joseph, supra, 156 Tenn. at 424(3).

⁹ "* * * A person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured. * * *" T. C. A. §64-309.

¹⁰ The rule is atually stated therein, as follows: "* * * The only way to tell whether a[n] * * * individual is solvent or insolvent at a given time is to take into consideration the value of all the property on the market at that time, that is, the valuation placed upon such property should be the price it would bring in the open market taking into consideration the fact that the owner would sell, but did not have to sell, and the buyer would buy, but did not have to buy. Alloway v. Nashville , 88 Tenn. 510, 13 S. W. 123; 66 C. J. 418. And, taking all of his property together, if he is unable to meet his obligations as they mature in the usual course of business, he is insolvent. Minton v. Stahlman, 96 Tenn. 98, 108, 34 S. W. 123 S. W. 222. * * *" Idem.

¹¹ Counsel for the parties will undertake to agree on the proper amount of accrued interest and additions on such date and so advise the clerk of this Court.

 

 

 

Batrus, Foldenauer & Madigan, Inc., Plaintiff v. United States of America , et al., Defendants

U. S. District Court, East. Dist. Va., Alexandria Div., Civil Action No. 344-71-A, 5/3/72

[Code Sec. 6321]

Lien for taxes: Tenants by the entirety: Virginia.--Under Virginia law, the United States was not entitled to attach proceeds from the sale of real estate held by taxpayer and his wife as tenants by entireties for taxes due by the husband for this status carried over to the sale proceeds and no partition of the funds had been effected.

Robert J. Madigan, 6201 Leesburg Pike, Falls Church , Va. , for plaintiff. Carrington Williams, 3976 Chain Bridge Rd., P. O. Box 338, Fairfax, Va., for J. P. Burd, H. Harrison Pledger, Jr., 3619 Camelot Dr., Annandale, Va., for I. H. Hoover, for defendants.

Order

BRYAN, District Judge:

THIS MATTER having come on before the Court for trial this 1st day of May, 1972; and the Court having considered the pleadings, the stipulation of facts, and having heard the arguments of counsel; and the Court being of the opinion that the tenancy by the entireties in real estate held by the defendants, Paul M. Burd and Janice P. Burd, upon sale carried over and continued in the cash proceeds from such sale under Virginia law; that those defendants have not effected any partition thereof; and that the claims of the United States of America and of the defendant, Isaac Hoover, being against the defendant Paul M. Burd alone, cannot attach to such proceeds held as tenants by the entireties under Virginia law; it is

ADJUDGED, ORDERED and DECREED that the defendants, United States of America and Isaac Hoover, take nothing in this action; and this interpleader is hereby dismissed.

It is further ORDERED that the Clerk issue a check for all funds ($3,105.81) held in the registry of this Court payable to Paul M. Burd and Janice P. Burd, as tenants by the entireties with survivorship, and forward such check to plaintiff, Batrus, Foldenauer and Madigan, Inc., 6201 Leesburg Pike, Falls Church, Virginia 22044.

The clerk shall forward copies hereof to counsel.

 

 

 

United States of America , Plaintiff v. Meyer Fried and Fannie Fried, Defendants

U. S. District Court, East. Dist. Mo. , East. Div., No. 62 C 224(3), 222 FSupp 760, 8/21/63

[1939 Code Secs. 3678 and 3694--similar to 1954 Code Secs. 7403 and 6342(a)]

Action to enforce lien: Application of proceeds from promissory notes and deeds of trust.--The Government was entitled to judgment for the unpaid tax liabilities of the taxpayers for the taxable years 1952-1954 as determined by a stipulated decision of the Tax Court. Promissory notes and deeds of trust voluntarily placed in the hands of a trustee for the purpose of collection and liquidation to satisfy the tax liabilities of the taxpayers were not "property" under 1939 Code Sec. 3694, since they were not seized upon distraint or subject to a specific tax. Therefore, the tax liabilities for the taxable years 1952-1954 were not extinguished since the Government was not required to apply the amounts collected from the notes and deeds of trust to income tax due in the year of collection to extinguish the tax liability for those years.

John A. Newton, Assistant United States Attorney, 1114 Market St., St. Louis 1, Mo., for plaintiff. Max Sigoloff, 706 Chestnut St. , Gerald Cohn, 722 Chestnut St. , St. Louis , Mo. , for defendant.

Memorandum Opinion

REGAN, District Judge:

This action is brought by the Government under Title 26 U. S. C. 7401 and 7403 to reduce to judgment the unpaid balance due on income tax liabilities of the defendants for the years 1952, 1953 and 1954. The tax liabilities, and penalty and interest additions to the tax, totaling $122,872.55, were determined by a stipulated decision of the Tax Court of the United States in the case of Meyer Fried and Fannie Fried v. Commissioner of Internal Revenue, which decision was entered June 13, 1962. It is undisputed that payments have been made on the tax liabilities so as to diminish the liability as determined by the Tax Court. The Government introduced Form 899 entitled "Certificate of Assessment and Payments" showing the balance unpaid, plus interest and penalties, as computed by the Commissioner of Internal Revenue.

Defendants do not question the validity of the tax lien but answer that the tax liabilities for the years involved have been fully paid. It is defendants' position that during each of the years in question the Government had received from the taxpayer an amount in excess of the income tax liability for each respective year, and that under the provisions of Section 3694 of the Internal Revenue Code of 1939, the amount collected should be first applied to income tax due in the year of collection, thus extinguishing the tax liability for those years.

Section 3694 which is a part of the subchapter entitled "Distraint" and appears under the caption "Distraint on Personal Property", reads as follows:

"Priority of specific tax liability on distrained property. When property subject to tax, but upon which the tax has not been paid, is seized upon distraint and sold, the amount of such tax shall, after deducting the expenses of such sale, be first appropriated out of the proceeds thereof to the payment of the tax. And if no assessment of such tax has been made upon such property, the collector shall make a return thereof in the form required by law, and the Commissioner shall assess the tax thereon. 53 Stat. 452."

The records and the files of the Court show that the payments made during the years 1952, 1953 and 1954 were derived from monthly collections on promissory notes and deeds of trust belonging to the taxpayer which were placed in the hands of a trustee for the purpose of collection and liquidation to satisfy the tax liability of the defendants which was previously assessed and unpaid. The trust arrangement was apparently the result of an agreement between the Collector of Internal Revenue and the taxpayer entered into during April, 1952.

Defendants' reliance upon the application of Section 3694 is untenable. Section 3694 refers to "property subject to tax . . . seized upon distraint and sold." The property, if defendants intend the notes and deeds of trust, was not shown to be seized upon distraint, and furthermore was not property subject to a specific tax. If defendants refer to the proceeds of the collection and liquidation of the notes and deeds of trust as the "property" under Section 3694, the description "seized upon distraint and sold" is not satisfied. The Statute cannot be applied to income tax on the collection proceeds as defendants apparently contend. Income tax liability could not be finally computed until the close of the taxable year and was not assessable on a monthly basis.

Furthermore, the evidence indicates that the taxpayer understood and consented to the application of the proceeds from the promissory notes and deeds of trust to assessments for years prior to 1952.

The Government has established the validity of its claim, and, subject to any payments since the date of the hearing, the amount thereof. Section 3694 does not apply, and, therefore, the liability remains unpaid. Plaintiff is entitled to judgment for the unpaid balance of tax liabilities for the years 1952, 1953 and 1954, plus interest. The entry of judgment will be withheld until the amount thereof has been computed by the parties in accordance with these Findings and Conclusions and has been approved by the Court.

 

 

 

Arthur G. Pettengill and Barbara S. Pettengill v. The United States of America and Fulton D. Fields, District Director of Internal Revenue for the District of Vermont

U. S. District Court, Dist. Vt., Civil No. 3331, 205 FSupp 10, 4/25/62

[1954 Code Secs. 6321, 7421 and 7424]

Lien for taxes: Tenants by entirety: Jurisdiction: Suits to quiet title: Waiver of procedural requirements: Prohibition of suits restraining assessment or collection.--A lien against a home and land owned by a delinquent taxpayer (a member of a dissolved partnership owing withholding taxes) and his wife, as tenants by the entirety, was null and void since a husband's interest in an estate by the entirety, under Vermont law, is not subject to claims for his sole debts. Where the government filed an answer, proceeded through one hearing, and entered an agreed statement of the facts before raising jurisdictional objections, the court held that the United States had waived its right to object on such grounds and had also waived any procedural requirements in Sec. 7424 governing a person's action to clear title to property of a tax lien. Nor did the prohibition of Sec. 7421 against suits to restrain assessment or collection of taxes prevent jurisdiction since the joint interest in the property had a third-party status which was separate and distinct from the taxpayer's sole interests.

Monti, Eldredge, Calhoun & Free, Barre , Vt. , for plaintiff. Joseph F. Radigan, United States Attorney, Rutland, Vt., John G. Penn, Department of Justice, Washington 25, D. C., for defendant.

Order and Decree on Petition for Declaratory Judgment

Statement of Case and Findings of Fact

GIBSON, District Judge:

Arthur and Barbara Pettengill brought this action for declaratory judgment, seeking to free certain property owned by them from the tax liens of the United States of America . After filing an answer to the petition, the United States and the petitioners set forth an agreed statement of facts which bind this Court, and are as follows:

"Arthur G. Pettengill and Barbara S. Pettengill, husband and wife, petitioners, herein, are the owners by the entirety of a certain piece of land, with a dwelling house thereon, located in the Town of Waterbury, in the County of Washington and District aforesaid, which is the home place of the said petitioners, being the same land and premises as conveyed by Ernest C. Perkins, of Waterbury, aforesaid, to Arthur G. Pettengill and Barbara S. Pettengill, as tenants by the entirety, under date of August 24, 1953 and recorded September 2, 1953 in the office of the Town Clerk in said Waterbury in Book 54, Page 116 of the Waterbury Land Records.

2. Petitioner Arthur G. Pettengill, with one Robert P. Flannery, also of said Waterbury, were formerly engaged in business as co-partners doing business under the firm name and style of O'Clair Granite Works, with said business situated at said Waterbury, Vermont. Mrs. Barbara S. Pettengill, wife of the said Arthur G. Pettengill, was at no time connected with the said partnership in any manner and never had any interest therein.

3. There was executed by Arthur G. Pettengill under date of September 18, 1961 and acknowledged the same date before Gelsie J. Monti, Esq., a Notary Public, a cessation of partnership certificate indicating that the partnership of the said Arthur G. Pettengill and Robert P. Flannery, doing business as O'Clair Granite Works, had ceased to do business as of March 10, 1958, the reason for the ceassation of partnership being that the business of the O'Clair Granite Works was dissolved by reason of bankruptcy. No petition in bankruptcy was filed however and no discharge was ever issued by the bankruptcy court. However, the business was insolvent and had been subjected to foreclosure proceedings by the Lamoille County Savings Bank and Trust Company and action by the United States relative to tax liens. This Cessation Certificate was filed with the Commissioner of Taxes and with the Town Clerk in said Waterbury on or about September 18, 1961.

4. There is owing to the United States certain taxes, in the category of Withholding and Social Security Taxes accumulated and assessed during the time that the said Arthur G. Pettengill and Robert R. Flannery, co-partners doing business as O'Clair Granite Works, were engaged in said partnership and owing at the time that said partnership was dissolved. The amount of said taxes claimed due is in excess of $10,000.00 and it is agreed by and between the parties that the current amount of taxes due, together with interest and costs, is to be verified by the Internal Revenue Service and submitted to the Court with the least practicable delay.

5. The United States , in an attempt to collect said taxes, has filed notice of tax liens against all of the real estate of the said partnership of O'Clair Granite Works. These liens have been filed pursuant to the provisions of Section 6321, 6322, and 6323 of the Internal Revenue Code of 1954, which in substance results in the creation of a lien in favor of the United States upon all property and rights to property belonging to the taxpayer and this lien is intended to cover both real and personal property. The question presented and at issue herein is whether, under the said recited provisions of the Internal Revenue Code of 1954, the interest of Arthur G. Pettengill, as a tenant by the entirety in and to the premises recited in Paragraph 1 of this stipulation, can be subjected to or impressed with such a lien.

6. On two separate occasions the petitioners have been approached by purchasers desiring to purchase their home place and sale to either one of these prospective purchasers has been prevented by the refusal of lending agencies to consider loans to prospective purchasers, secured by a mortgage on the property, until the question of the validity of the Federal tax liens as applied against the interest of Arthur G. Pettengill as tenant by the entirety has been resolved and adjudicated."

I find further that the first of the tax liens claimed by the United States was filed and recorded on August 15, 1956. Other liens were recorded in 1956, 1957 and 1958.

Conclusions of Law

This action does not bring into question the validity of any tax assessments. It merely brings into issue the validity of federal tax liens as they relate to one certain parcel of land. Being a "part of the machinery for the collection of federal taxes", the tax liens arise under an Act of Congress providing for internal revenue. This Court therefore has original jurisdiction over the matter by virtue of Section 1340 of Title 28, U. S. C. A. United States v. Coson [61-1 USTC ¶9219], 286 Fed. 2d 453 (C. C. A. 9th Cir., 1961). The plaintiffs present an actual controversy, and properly invoke 28 U. S. C. A. Sec. 2201, which sets out the jurisdiction of this Court to declare the rights and legal relations of the parties.

Defendant has very belatedly raised jurisdictional objections to the maintenance of this action. These I will mention before proceeding to the merits of the case. First, while Section 2201 of Title 28, U. S. C. A. expressly excepts controversies with respect to Federal taxes, this particular controversy is not excluded thereby. Nor does Section 7421 of Title 26, U. S. C. A. prohibit this action. In Tomlinson v. Smith [42-2 USTC ¶9540], 128 Fed. 2d 808 (CCA 7th Cir., 1942), it was held that the above statutory provisions apply to suits by the taxpayer, but not to a suit by a third party, who in that case was seeking to protect a competing lien on the taxpayer's property. Mr. and Mrs. Pettengill, as tenants by the entirety, may be said to have the status of a third party in contradistinction to Mr. Pettengill's position as the taxpayer. In the eyes of the law, their joint property rights in the real estate involved are just as separate from Mr. Pettengill's sole interests as are the rights, whether by lien or otherwise, of any other third party. That this is most obviously true as to Mrs. Pettengill, see Jones v. Kemp [44-2 USTC ¶9410], 144 Fed. 2d 478 (CCA 10th Cir., 1944); it necessarily follows that it must be true as to both Mr. and Mrs. Pettengill. Adler v. Nicholas [48-1 USTC ¶9205], 166 Fed. 2d 674 (CCA 10th Cir., 1948): Botta v. Scanlon [61-1 USTC ¶9293], 288 Fed. 2d 504 (CCA 2nd Cir., 1961).

The second objection of the government is that there is no jurisdiction over the defendant, because the United States has not consented to be sued. This can be answered shortly. Section 2410 of Title 28, U. S. C. A. constitutes consent of the United States to be sued in an action to quiet title to lands on which the United States claims a lien or mortgage. And the government's actions are even more fatal to the objection it now raises. By filing an answer without raising the jurisdictional question, proceeding through one hearing on the matter, and then entering into an agreed statement of facts before raising the question, the United States has waived any objection as to jurisdiction over the parties, and has consented to the action. Rule 12(b) F. R. C. P. governs the objection of lack of jurisdiction over the person and accordingly the objection is not timely in this case.

And finally, any procedural requirements of a person's action to clear title to property of a tax lien, as set out in 26 U. S. C. A. 7424, have been waived by the government. For it to come in with this belated and untimely objection after filing an answer and agreeing to the facts, which must bind this Court in its decision, seems to be a grasping at straws.

This Court therefore has jurisdiction over both the persons and the subject matter of this action. Guttman v. United States [61-2 USTC ¶9586], 196 Fed. Supp. 384 (D. C. N. Y. 1961).

Moving now to the merits of the matter, the precise rights and legal relations in this case involve just this question. Do the tax liens of the United States attach to the property owned by the petitioners as tenants by the entirety? If they do, the declaratory relief sought by petitioners should be denied. If they do not, then the land records relating to that property, and the recordation of the tax liens, must show that the property is free and clear of the tax liens.

Even though matters directly affecting the nature and operation of federal tax liens arising under 26 U. S. C. A. Sec. 6321 are federal questions, there is another factor involved here. That is, state law governs the question of what is "property or rights to property" of the taxpayer to which the government's liens may attach. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 1285, 4 LE 2d 1365, 1371, (1960); United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522, 80 S. Ct. 1282, 1285, 4 LE 2d 1371 (1960).

It is the law in Vermont that tenants by the entirety hold the estate with but one title. Each has no power without the concurrence of the other to convey the estate to third persons. Kennedy v. Rutter, 110 Vt. 332, 6 A. 2d 17 (1939). It is also clear that the wife, holding an estate by the entireties, has a real, separate interest in the estate, by virtue of the so-called married women's statute as set out in 15 V. S. A. Sec. 64. Sargent v. Platt, 111 Vt. 185, 13 A. 2d 195 (1940). And it has long been established that the husband's interest in an estate by the entireties is not one which can be subjected to claims for his sole debts. Corinth v. Emery, 63 Vt. 505, 22 A. 618, 25 A. S. R. 780 (1891). The Vermont Supreme Court in the Corinth case dealt with the provisions of now 15 V. S. A. Sec. 68 which exempt the rents, issues and products of, and the monies and obligations arising from the sale of, the real estate of a married woman. The provisions include real estate held by the married woman before marriage and that acquired after marriage. The Court in the Corinth case made it clear that this rule applied to a married woman's interest in an estate by the entireties. George v. Dutton's Estate, 94 Vt. 76, 108 A. 515 (1919).

Mr. Pettengill's interest in the particular property located in the town of Waterbury , owned by him and his wife as tenants by the entirety, is not property which is available for his sole debts. Cf. 15 V. S. A. Secs. 67 and 68. This determination applies to claims of the United States for taxes arising from Mr. Pettengill's business activities. It applies with equal force to claims of any other creditor.

Judgment Order

It is hereby ordered, adjudged and decreed that the tax liens asserted by the United States against Arthur G. Pettengill for taxes arising out of his business activities in partnership with one Robert P. Flannery, d/b/a O'Clair Granite Works, are null and void as attempted by the United States to be levied on a certain place of land with dwelling house thereon located in the Town of Waterbury owned by petitioners as tenants by the entirety, and to which a more particular description may be had by reference to Book 54, Page 116 of the Land Records of the Town of Waterbury, Vermont. The tax liens levied against the particular piece of real estate in the years 1956, 1957 and 1958 are hereby declared to be null and void and to constitute no encumbrance or cloud whatsoever on the petitioners' title to the aforesaid real estate.

 

 

 

Nettie Mae Moore, Plaintiff v. C. W. Glotzbach, District Director of Internal Revenue, et al., Defendants

U. S. District Court, East. Dist. Va., Norfolk Div., Civil Action No. 3125, 188 FSupp 267, 10/27/60

[1954 Code Sec. 6331]

Collection of tax: Levy and distraint: Rents from real property: Real property held by entireties.--Under Virginia law, the United States was not entitled to levy upon accrued rents derived solely from real estate owned by the plaintiff and her husband as tenants by the entireties for taxes due by the husband.

L. S. Parsons, Jr., Maritime Tower , Norfolk , Va. , for plaintiff. Joseph S. Bambacus, United States Attorney, Post Office Box 60, Norfolk, Va., for defendant.

Memorandum

HOFFMAN, District Judge:

The issue in this case is whether the United States, acting through its District Director of Internal Revenue, may require the tenant of property, owned as tenants by the entireties with the right of survivorship as at common law, to pay to the Internal Revenue Department, pursuant to a notice of levy, the rental due on said property; federal taxes being due and unpaid by one of the tenants by the entireties. Stated otherwise, the question presented is whether rents, which are derived from realty held by husband and wife as tenants by the entireties, are subject to a judgment creditor's levy against the lessee of said property for the debt of the husband only.

No issue has been submitted to the Court as to whether said property is rented furnished and, if so, what proportion of the rental should be properly allocated to personal property contained within the realty; nor is the ownership of such personal property, if any, involved herein. Moreover, the Court is not concerned with the validity of the instrument creating the tenancy by entirety which, according to Virginia law, is presumed to be fraudulent. First National Bank v. House, 145 Va. 149, 133 S. E. 664.

The law of Virginia , which controlls this decision, is silent on the right of parties to hold personal property as tenants by the entireties. There is some suggestion in King v. Merryman, 196 Va. 844, 86 S. E. (2d) 141, 146, that such is permitted where Justice Spratley discusses the effect of §55-20 and §55-21 of the Code of Virginia, 1950. We turn, however, to the history of a tenancy by the entirety and the effect, if any, of those laws known as the Married Woman's Property Statutes.

At common law spouses were considered as one person. They could not hold the estate by moieties as joint tenants or tenants in common--both were seized of the entirety--neither could dispose of any part without the assent of the other, and the whole remained to the survivor. However, during coverture, the husband was entitled to the full control and benefits of property hold by the entirety. This right was not derived from the nature of the estate but from the general principal of common-law vesting of the wife's property in the husband. Not only was the husband's right to rents and profits during their joint lives subject to execution, but the husband could convey the property so as to divest the wife of possession during his life and, in the event he survived her, to vest in the grantee an absolute estate. Fairclaw v. Forrest, D. C. C. A., 130 F. (2d) 829; Vasilion v. Vasilion, 192 Va. 735, 66 S. E. (2d) 599.

The parties agree that, for the purposes of this action, the United States could not levy upon the realty held by Clyde L. Moore and Nettie Mae Moore, husband and wife, as "tenants by the entireties", with the right of survivorship as at common law, to obtain payment of cabaret taxes due by Clyde L. Moore, the husband. Such appears to be the law in Virginia . Vasilion v. Vasilion, supra; In re Black, E. D. Va., 145 F. Supp. 689. But, the United States contends, the rents and profits from such property cannot be held by the entirety as such rents and profits are personalty and Virginia has not recognized tenancies by the entirety in personalty and, even if so recognized, the instrument establishing the entirety in realty does not extend to derivatives therefrom. Plaintiff urges that rents derived from entirety property are governed by the same laws applying to tenancies by the entirety in real estate.

The legislative history of the Virginia Married Woman's Property Act is contained in Vigilant Insurance Company v. Bennett, 197 Va. 216, 89 S. E. (2d) 69, where Justice Miller states:

"Sections 55-35 and 55-36 are parts of what was originally called the Married Woman's Act. . . . These acts and similar acts passed in other states were designed to enlarge the personal rights of married women and secure to them separate legal estates over which they were granted greater dominion and control than they had formerly enjoyed."

Section 55-35 of the Code of Virginia, 1950, now specifies that the husband is not entitled to "the possession . . ., or to the rents, issues, and profits of such real estate (the wife's property) during the coverture." Thus it follows, as Justice Whittle said in Vasilion v. Vasilion, supra, that the husband no longer has exclusive possession or control over any portion of property held as tenants by the entireties. We believe that logic dictates the same rule should apply to the rents, issues and profits derived from such entirety property, and that the rent involved herein is not subject to levy by the United States , subject, however, to the comments previously noted concerning issues not now before this Court.

It is recognized that some states are not in accord with this view. North Carolina and Massachusetts hold that the Married Woman's Property Act has no effect upon tenancies by the entirety, and the husband retains his common-law rights regarding rents, etc. These two states allow judgment creditors of the husband--but not those of the wife--to attach derivatives of entirety property. Lewis v. Pate, 212 N. C. 253, 193 S. E. 20; Pineo v. White, 320 Mass. 487, 70 N. E. (2d) 294. A study of the Vasilion case would not lead to the belief that Virginia intended to adopt this approach to the problem.

Approximately sixteen jurisdictions permit personal property to be held by parties as tenants by the entireties. 64 A. L. R. (2d) 23. Seven states deny the right to hold personal property by the entirety, although permitting such tenancies in realty. 64 A. L. R. (2d) 27. No property of any kind may be held as tenants by the entireties in five jurisdictions. 64 A. L. R. (2d) 30. In four places the statute expressly precludes entireties in personalty. 64 A. L. R. (2d) 30. Five states refuse to permit entireties in personalty except where the personalty is derived from realty held by the entirety. 64 A. L. R. (2d) 31. As stated, with two exceptions (64 A. L. R. (2d) 57):

". . . The conclusion reached was that the derivatives of entirety property particularly in question were, or were to be treated as, entirety property."

The question frequently arises with respect to crops and timber grown on real property held by the entireties. Several states, including Indiana, Michigan, Arkansas, Vermont and North Carolina, while refusing to accept the principle that personalty may be held by the entirety, have treated the derivative from realty held by entirety "in the same manner and subject to the same law as the land itself, and not subject to levy and sale on an execution against the husband."

While not a part of the stipulation in this case, it was suggested to counsel that there are many instances of Virginia residents holding stock certificates as tenants by the entireties with the right of survivorship as at common law. It is also noted that Virginia imposes an inheritance tax upon property, real, personal and mixed, passing by virtue of the fact that the property is held by the decedent and another "as joint tenants or tenants by the entireties, with the right of survivorship." §58-152 of the Code of Virginia , 1950. The practice, while not expressly approved by statute or judicial pronouncement, leads to the belief that Virginia recognizes the right to hold personalty as tenants by the entireties. Furthermore, even assuming that such is not the case, the greater weight of authority supports the view that derivatives of entirety property are treated as such.

We do not have the problem as to whem the rent ceases to be entirety property under the facts of this case. It had never been paid by the tenant of the property to either the plaintiff or her husband. It retained its original character at all times.

Under the provisions of §55-20 of the Code of Virginia, 1950, survivorship between joint tenants was abolished "whether the estate be real or personal". Section 55-20 goes on to state:

"And if hereafter any estate, real or personal, be conveyed or devised to a husband and his wife, they shall take and hold the same by moieties in like manner as if a distinct moiety had been given to each by a separate conveyance."

Having converted, in so far as dower and curtesy are concerned, all joint tenancies into tenancies in common, the General Assembly of Virginia engrafted an exception to §55-20 providing, in part, as follows (§55-21):

"The preceding section shall not apply . . . to an estate conveyed or devised to persons in their own right when it manifestly appears from the tenor of the instrument that it was intended the part of the one dying should then belong to the others."

These statutes, when read together, carry an inference that Virginia recognizes the right to hold personalty as tenants by the entireties. It is also abundantly clear that the tenor of the instrument creating the tenancy by entirety as to the real estate falls within the exception as stated in §55-21.

The United States urges, however, that the deed to plaintiff and her husband conveying the real property does not provide for any rental contract or the proceeds therefrom, and is therefore not an "instrument" creating a survivorship estate in accrued rents owed by the tenant of such real property to the tenants by the entireties. The short answer to this argument is that neither §55-20 nor §55-21 was intended to apply to derivatives of property held by the entireties. Moreover, the lease to the tenant does not qualify as a conveyance or devise to a husband and his wife as provided by §55-20, and hence the exception stated in §55-21 would be inapplicable to the lease and rental flowing therefrom.

Holding that the defendants are not entitled to levy upon accrued rents derived solely from real estate owned by plaintiff and her husband as tenants by the entireties for taxes due by the husband, and assuming, but not deciding, the validity of the instrument creating the aforesaid tenancy in said real property, an appropriate decree will be presented for entry.

 

 

 

Charlie A. Sulli and Vera Sulli, Plaintiffs v. United States of America and Laurie W. Tomlinson, District Director, Defendants

U. S. District Court, So. Dist. Fla. , Tampa Div., No. 2382-Civ, 4/15/58

[1939 Code Sec. 3670--same as 1954 Code Sec. 6321]

Tax liens: Wagering taxes: Florida real properties held as estates by the entireties.--Under Florida law, real property held as an estate by the entireties is not subject to the debt of either spouse while so held. A jeopardy assessment and a Federal tax lien for wagering taxes do not attach to such property where the debt is that of the husband alone, the parties are lawfully married, the properties were acquired with funds accumulated through joint efforts, and title was taken in their joint names in good faith.

Frank Ragano, 308 Tampa Street , Tampa , Fla. , for plaintiffs. Richard Kelly, Assistant United States Attorney, 308 Post Office Building, Tampa , Fla. , for defendants.

Final Judgment and Decree

WHITEHURST, District Judge:

This cause coming on this day to be heard upon plaintiffs' Complaint and Amendment to Complaint and defendants' Answer thereto, Stipulation of Facts of the plaintiffs' and defendants', Affidavit of plaintiffs', and the Court having considered the briefs submitted by counsel of the respective parties hereto, and upon thorough consideration of the facts and the law applicable thereto, the Court finds as follows:

1. On August 3, 1953, the defendant, Laurie W. Tomlinson, issued an immediate assessment, against the plaintiff, Charlie A. Sulli, requiring payment of wagering taxes, pursuant to Section 3285 et seq. of the Internal Revenue Code, as added by Section 471(a) of the 1951 Revenue Act, effective November 1, 1951, in the sum of $13,670.93, including penalties and interest thereon. By Notice of Federal Tax Lien dated August 4, 1953, and recorded August 7, 1953, among the Public Records of Hillsborough County, Florida, the aforesaid defendant purported to establish of record a lien for the foregoing taxes together with penalties, interest and costs that may accrue in addition thereto, upon all property and rights belonging to Charlie A. Sulli. A copy thereof was served upon or delivered to Charlie A. Sulli on August 19, 1953, by mail. The aforesaid immediate assessments and Federal Tax Lien were made against Charlie A. Sulli, individually. The debt for which the Federal Tax Lien was issued and recorded is the debt of Charlie A. Sulli only and is not the debt of Vera Sulli, his wife.

2. A home located at 1907 Carmen Street , Tampa , Florida , and more particularly described as follows:

" Lot Twenty-one (21), Block Seven (7), BENJAMIN'S FIFTH ADDITION TO WEST TAMPA, according to map or plat thereof recorded in Plat Book 2, Page 76, of the Public Records of Hillsborough County, Florida,"

is the residence of the plaintiffs herein and constitutes their homestead under the laws of the State of Florida . The plaintiffs have resided in said home continuously since November 26, 1943. That the aforesaid real property was acquired by the plaintiffs Charlie A. Sulli and Vera Sulli, his wife, from Clare F. Jacobs, a widow, on November 26, 1943, by good and sufficient Warranty Deed; said Warranty Deed being recorded in Deed Book 1258, page 416, of the Public Records of Hillsborough County, Florida. The said real property is held by the plaintiffs in their joint names, as an estate by the entireties, under the laws of the State of Florida .

3. The plaintiffs acquired, in their joint names, the real property located at 205 North Oregon Street , Tampa , Florida , and more particularly described as follows:

"Lot Thirteen (13) less the East Twelve and five-tenths (12.5) feet of the South Seventy (70) feet of Block Five (5), FULLER'S SUBDIVISION, according to map or plat thereof as recorded in Plat Book 1, Page 68, of the Public Records of Hillsborough County, Florida."

The said real property was conveyed by a good and sufficient Warranty Deed to the plaintiffs in their joint names by Nannie E. Logan, a widow, on April 12, 1946, which Warranty Deed is recorded in Deed Book 1374, page 243, of the Public Records of Hillsborough County, Florida. The plaintiffs own the last mentioned real property in their joint names, as an estate by the entireties, under the laws of the State of Florida .

4. The plaintiffs, Charlie A. Sulli and Vera Sulli, were married in the City of Clearwater, Florida, on June 1, 1936. The plaintiffs have co-habitated together as husband and wife continuously since the date of their marriage and have at no time been separated, nor has either one of them ever applied for or obtained a divorce against the other and are lawfully married on the date of the entry of this Final Decree. The aforesaid described real properties were acquired by the plaintiffs with funds accumulated by them through their joint efforts during the time that they have been married. That said real properties were taken by the plaintiffs, as aforesaid, in their joint names, in good faith and not for the purpose of defeating the United States Government or any other creditors of their lawful claims.

Conclusions of Law

1. Under the laws of the State of Florida real property held as an estate by the entireties is not subject to the debt of either spouse so long as the real property is so held by them.

2. The above described jeopardy assessment against the plaintiff, Charlie A. Sulli, under date of August 3, 1953, and the aforesaid Notice of Federal Tax Lien dated August 4, 1953, and recorded on August 7, 1953, among the Public Records of Hillsborough County, Florida, does not attach to the aforesaid real properties and the same are free and clear from said lien or purported lien so long as the said real properties are held by the plaintiffs as an estate by the entireties.

 

 

 

United States of America, Plaintiff v. Lawrence Diamond and Robert L. Gilman and Hattie Gilman, doing business as Republic Textile Equipment Company, Defendants

U. S. District Court, So. Dist. N. Y., Civ. 105-224, 142 FSupp 441, 6/11/56

[1939 Code Sec. 276(c)--substantially similar in 1954 Code Sec. 6502(a)]

Transferred assets: Enforcement of lien: Limitation of action against transferees.--Taxpayers acquired property from a corporate taxpayer for less than its value. It was alleged that the transfer rendered the corporation insolvent and unable to pay its income taxes for a prior year. Although the instant suit for recovery against the transferees might be barred by limitation of time under 1939 Code Sec. 275, the corporation and the transferees held the assets subject to the lien for taxes in favor of the United States under 1939 Code Secs. 3670 and 3671. The liability for the tax did not become unenforceable by lapse of time, since a separate timely action was previously brought against the corporation within 6 years after the assessment of the tax as required by 1939 Code Sec. 276(c). The enforcement of the lien in the present action did not involve liability of the transferees either individually or as constructive trustees. As long as they held the property, it could be taken to satisfy the lien. Motion to dismiss the Government's complaint was denied.

Paul W. Williams, United States Attorney for the Southern District of New York (Arthur B. Kramer, Assistant United States Attorney of counsel), for plaintiff. Greenman, Shea & Zimet, 20 Pine Street, New York 5, N. Y. (Philip Zimet, Robert H. Haines, Bernard Bressler, of counsel), for defendants.

Opinion

DIMOCK, District Judge:

By this action the United States seeks to collect income taxes payable by Edgewater Dyeing and Finishing Company (hereinafter referred to as "Edgewater") a Pennsylvania corporation. The action is brought against alleged transferees of Edgewater's assets. Edgewater is not named as a defendant.

The matter now before me is a motion by the transferees to dismiss the amended complaint on the ground that it shows on its face that the claim is time barred.

[The Facts]

The complaint alleges that the transferees did not pay full consideration for the transferred assets, that the deficiency exceeded the amount of the income tax due and that the transfer rendered Edgewater insolvent. It is further alleged that the transfers were made with the intent of hindering, delaying and defrauding the United States in the collection of the income taxes and that the transferees knew of the indebtedness therefor.

There are three theories on which the United States might succeed in the absence of a time bar:

1. The transferees might be held personally liable for Edgewater's income taxes to the extent that the value of the transferred assets exceeded the consideration paid. Phillips v. Commissioner, 283 U. S. 589, 592 [2 USTC ¶743], citing United States v. McHatton, D. C. D. Mont., 266 Fed. 602 [1 USTC ¶35].

2. A trust might be impressed upon the assets insofar as gratuitously transferred, or their proceeds, for the payment of Edgewater's income taxes. United States v. Updike, 281 U. S. 489 [2 USTC ¶533].

3. The transferees might be declared to hold the transferred assets subject to a lien in the amount of Edgewater's income taxes. United States v. Spreckels, D. C. N. D. Cal. S. D., 50 Fed. Supp. 789 [43-2 USTC ¶9572].

The chronology is as follows:

June 14, 1946             Edgewater filed its return.

August 16, 1946           Assessment against Edgewater.

August 19, 1946           Collector received assessment list.

August 22, 1946           Demand for payment made.

February 20, 1947         Notice of tax lien filed in the United States District Court.

February 24, 1947         Notice of tax lien filed in County Court.

November 7, 1947          Additional assessment against Edgewater.

November 10, 1947         Collector received assessment list.

November 14, 1947         Demand for payment made.

May 28, 1948              Notice of tax lien filed in United States District Court.

May 28, 1948              Notice of tax lien filed in County Court.

                          Action begun against Edgewater in United States District Court

August 15, 1952           for Eastern District of Pennsylvania.

December 2, 1955          This action begun.

[Limitations Involved]

The limitations in the case of deficiencies in taxes, as distinguished from the limitations in the case of liabilities of transferees, are set forth in section 275. The general rule is contained in subdivision (a) to the effect that income taxes "shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period."

Thus an assessment or suit against a taxpayer for the collection of income taxes must be made or begun within three years after the return was filed. Accordingly such an assessment or suit against a transferee must be made or begun within a like period unless there is a different provision made in the remainder of section 311. That section, in subdivision (b), does, however, make a different provision for assessments against transferees. They must be made, as respects an initial transferee, "within one year after the expiration of the period of limitation for assessment against the taxpayer". Thus an assessment must be made against a transferee within four years after the filing of the return. This leaves open the question whether a suit against a transferee to recover the tax must be brought within three years or within four years but that is immaterial here since this suit was not brought within four years. It is thus plain that a suit, under the first theory, upon the personal liability of the transferees for Edgewater's income tax would be barred.

I now pass to the second theory upon which the United States might succeed in the absence of a time bar, i.e. that a trust might be impressed upon the transferred assets or their proceeds. Section 276(c) provides that "[w]here the assessment * * * has been made within the period of limitation, properly applicable thereto, such tax may be collected * * * by a proceeding in court, but only if begun * * * within six years after the assessment of the tax * * *." Where, as here, an assessment has been made against a transferor, an action to impress a trust upon property in the hands of the transferee must be begun within six years of the assessment. United States v. Updike, 281 U. S. 489, supra. This action was not brought within that period and is thus barred insofar as it seeks to impress a trust.

That leaves that third theory, i.e. that the transferees might be declared to hold the transferred assets subject to a lien. Section 3670 provides that, if the taxpayer does not pay after demand, the amount of the tax "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." Section 3671 provides that "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".

The question here is, therefore, whether the liability for the tax has become unenforceable by reason of lapse of time. As appears in the above chronology, on August 15, 1952, an action was brought in the United States District Court for the Eastern District of Pennsylvania against Edgewater to recover the amount of the tax. This action was brought "within six years after the assessment of the tax" as required by section 276(c) above referred to. It was therefore timely. As long as it pends the liability for the amount of the tax will not "become unenforceable by reason of lapse of time" and the lien will continue.

[Enforcement Against Transferees]

It is argued that, while the liability for the amount of the tax has not become unenforceable against the transferor, it has become unenforceable against the transferees. That is immaterial. The lien originated as a lien upon the transferor's property for the transferor's debt. Unlike the first and second theories on which the United States might succeed against the transferees, this third theory does not involve liability of the transferees either individually or as constructive trustees. This third theory is merely that the transferees have received property subject to a lien. As long as they hold that property it can be taken from them to satisfy the lien but, once it passes from their possession, the United States must look to some other theory to collect anything from them. The lien does not depend upon any liability of the transferees so, as long as the liability of the transferor subsists, the lien may be enforced on transferred property in the hands of the transferees. United States v. Spreckels, D. C. N. D. Cal. S. D. 50 Fed. Supp. 789 [43-2 USTC ¶9572], supra.

Thus, insofar as there is transferred property, in specie, in the hands of defendant transferees, the action to enforce a lien thereon is timely.

I am not sure, however, that the United States has a valid claim for the enforcement of a lien under section 3671. It is provided in section 3672(a) that "[s]uch lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector" in accordance with any state law providing for such filing and in the office of the clerk of the United States district court for the district where the property is situated. Unless the notices have been filed before a transfer, the lien of the United States is not superior to the interest of the purchaser even though the purchaser had prior notice of the Government's tax claim. See United States v. Beaver Run Coal Co., 3 Cir., 99 Fed. (2d) 610 [38-2 USTC ¶9540].

Here there is an allegation of the filing of the necessary notices but it is not clear that they were filed before the transfer. Indeed the allegation is that the transfer took place "subsequent to the time that the Collector received the assessment lists" leaving the permissible inference that the transfer took place before the filing of the notices. I cannot indulge in that inference, however, but must construe the pleading con amore under the rule of Dioguardi v. Durning, 2 Cir., 139 Fed. (2d) 774. I will therefore leave that question for the trial. Nor will I prejudge the question whether, even if it appeared that the transfer predated the filing of the notices, the fact that the consideration for the transfer was inadequate would give rise to rights under section 3671 which the United States would not otherwise possess. See National Refining Co. v. United States , 8 Cir., 160 Fed. (2d) 951 [47-1 USTC ¶9221].

The motion to dismiss the complaint is denied.

 

 

 

United States of America, Plaintiff v. John Nasif, Annie Nasif, Elias L. Nasif, Pawtucket Institution for Savings, City of Pawtucket, Rhode Island, Daniel Libutti, John Fleming, d/b/a J. E. Fleming, and Costello Bros. Inc., Defendants

In the United States District Court for the District of Rhode Island, Civil Action No. 1320, March 30, 1954

Liens: The establishment of tax liens.--The lien of the United States against certain property of the taxpayers was declared valid and binding, as the requirements of notice, demand, assessment, and issuance of distraint warrants were properly met. A hearing was set to determine the priority of the liens of the government and other creditors of the taxpayer.

Jacob S. Temkin, United States Attorney, 221 Post Office Building, Providence , R. I., for plaintiff. Clarence L. Woolley, 301 Main Street, Pawtucket, R. I., William A. Flynn, 87 Weybosset Street, Providence, R. I., Walter J. Hennessey, 612 Industrial Trust Building, Providence, R. I., John A. O'Neill, City Solicitor, City Hall, Pawtucket, R. I., for defendants.

Order

This matter came on for hearing before the Court on plaintiff's complaint, and after consideration thereof, the following entries are ordered to be made:

A. Findings of Fact

1. This action arose under the Internal Revenue Laws of the United States of America and was commenced under the direction of the Attorney General of the United States at the request of the United States Commissioner of Internal Revenue.

2. The defendant, Elias L. Nasif, is indebted to the plaintiff in the amount of $27,364.62.

3. The defendant, Annie Nasif, is indebted to the plaintiff in the amount of $21,493.61.

4. The defendants, Annie Nasif and John Nasif, are indebted to the plaintiff in the amount of $17,088.49.

5. As to the defendant, Elias L. Nasif, the assessment list was signed by the Assistant Collector of Internal Revenue at Providence , on March 24, 1949, was signed by the Commissioner of Internal Revenue, at Providence , on April 1, 1949, and was received by the Collector of Internal Revenue, at Providence , on April 5, 1949. Notices and demand were issued on April 5, 1949. Second notices and demands were issued shortly thereafter. Distraint warrants were issued on May 27, 1949. Notices of the tax liens were filed on June 13, 1949 with the City Clerk of the City of Pawtucket, Rhode Island.

6. As to the defendants, John and Annie Nasif, the assessment list was signed by the Collector of Internal Revenue at Providence , on April 26, 1951; was signed by the Commissioner of Internal Revenue at Providence , on May 4, 1951, and was received by the Collector of Internal Revenue at Providence , on May 7, 1951. Notices and demands were issued May 14, 1951. Second notices and demands were issued on June 29, 1951. Distraint warrants were issued on July 30, 1951. Notices of the tax liens were filed on August 6, 1951 with the City Clerk of the City of Pawtucket, Rhode Island.

B. Conclusions

1. The plaintiff is hereby granted judgment against the defendant, Elias L. Nasif, in the amount of $27,364.62, with interest thereon as provided by law.

2. The plaintiff is hereby granted judgment against the defendant, Annie Nasif, in the amount of $21,493.61, with interest thereon as provided by law.

3. The plaintiff is hereby granted judgment against the defendants, Annie Nasif and John Nasif, in the amount of $17,088.49, with interest thereon as provided by law.

4. The lien of the United States, having been established, is hereby declared to be valid and binding, and may be enforced against the proceeds of the foreclosure sale of the real estate held pursuant to the order entered on June 8, 1953 by Mr. Justice Clifford, sitting in this Court by special assignment, subject, however, to the Following condition:

The City of Pawtucket, Costello Bros., Inc. and Daniel Libutti, defendants herein, shall undertake to establish their claims, if any; and thereafter the order of priority as to said proceeds, as between plaintiff, the City of Pawtucket, Costello Bros., Inc. and Daniel Libutti, shall be determined at a hearing subsequently to be held at the convenience of the Court and of counsel for the said four parties.

 

 

 

United States of America , Plaintiff v. William A. Greenlee, Helen Greenlee, Sun Insurance Company, Protection Mutual Fire Insurance Company of Cambria County, Star Insurance Company of America and Louis A. Wechsler, Defendants

In the United States District Court for the Western District of Pennsylvania, Civil Action No. 10553, December 9, 1952

Collection of tax: Fraudulent conveyance.--The Government sought to set aside a conveyance of real property as fraudulent and to enjoin insurance companies from paying insurance money to taxpayer and his wife. The property was conveyed by taxpayer and another person to taxpayer's mother in July, 1930. In May, 1947, taxpayer's mother conveyed the same property to taxpayer and his wife as tenants by entireties for one dollar and other valuable consideration, and at that time taxpayer owed income taxes for 1944, 1946 and 1947. Later, the property was damaged by fire. The agent of the insurance companies was notified that all money due to taxpayer be paid to the Collector. The District Court held that the conveyance from taxpayer and another person to taxpayer's mother was a bona fide transfer and that, as to the conveyance by the mother to taxpayer and his wife, the Government failed to prove a fraudulent intent on the part of taxpayer and his wife.

Edward C. Boyle, United States Attorney, Room 633, New Federal Building, Pittsburgh, Pa., for plaintiff. William W. Matson, 2003 Law & Finance Building, Pittsburgh, Pa., for defendant Star Insurance Co. of America; Kaplan, Finkel & Roth, Frick Building, Pittsburgh, Pa., for defendant Louis Wechsler; Pritchard, Lawler, Geltz & Malone, 514 Grant Building, Pittsburgh, Pa., for defendant Protection Mutual Life Insurance Co. of Cambria County; Dickie, McCamey, Chilcote, Reif & Robinson, Grant Building, Pittsburgh, Pa., for defendant Sun Insurance Co.; and Everett E. Utterback, 330 Bakewell Building, Pittsburgh, Pa., for defendant William A. Greenlee.

Findings of Fact

MARSH, District Judge:

1. United States of America, Plaintiff, brought suit against William A. Greenlee, Helen Greenlee, Sun Insurance Company, Protection Mutual Fire Insurance Company of America and Louis A. Wechsler, agent for the aforementioned insurance companies, to have a conveyance of real property, from Julia R. Greenlee to William A. Greenlee and Helen Greenlee, his wife, set aside as fraudulent to the United States, and to enjoin the above named insurance companies and Louis Wechsler, their agent, from paying any funds in their possession to the defendants, William A. Greenlee and Helen Greenlee.

2. The property in question is located at 1401 Wylie Avenue , Fifth Ward, City of Pittsburgh , Allegheny County , Pennsylvania .

3. Said property was conveyed to Julia R. Greenlee by William A. Greenlee and Richard Gouffney on or about July 7, 1930. Julia R. Greenlee is the mother of William A. Greenlee.

4. The property was conveyed by Julia R. Greenlee to William A. Greenlee and Helen Greenlee, his wife, as tenants by entireties on May 31, 1947, said conveyance being of record in Deed Book Volume 2943, page 539.

5. The conveyance from Julia R. Greenlee to William A. Greenlee and Helen Greenlee recites that the conveyance was made for One ($1.00) Dollar and other valuable consideration and the deed bears two cancelled United States Documentary Stamps totaling fifty-five ($.55) cents.

6. At the time of the conveyance from Julia R. Greenlee to William A. Greenlee and Helen Greenlee, William A. Greenlee owed the United States income tax for the years 1944, 1946 and 1947, which tax totaled $29,722.31 and is shown on Assessment Sheets entered into evidence as plaintiff's exhibit No. 1[not reproduced herein].

7. No funds of William A. Greenlee were paid to Julia R. Greenlee for the property.

8. Subsequent to the conveyance to the defendants, William A. Greenlee and Helen Greenlee, said property was damaged by fire and there is due William A. Greenlee and Helen Greenlee on policies of insurance issued by the defendant insurance companies the following sums:

(a) Sun Insurance Company .................         $3,075.39

(b) Protection Mutual Fire Insurance

Company ...................................         $4,613.08

(c) Star Insurance Company of 

America

 .....         $4,613.08

 

9. Prior to payment to William A. Greenlee and Helen Greenlee, levies were issued and served on Louis Wechsler, Agent for the insurance companies, by the Collector of Internal Revenue as follows:

October 26, 1951 ....         $ 2,145.65

October 29, 1951 ....         $36,272.60

October 29, 1951 ....         $ 3,798.62

demanding that all money due William A. Greenlee and Helen Greenlee be paid to the Collector of Internal Revenue to be applied to the tax liability of William A. Greenlee. Copies of said levies were introduced in evidence as plaintiff's exhibit No. 2 [not reproduced herein].

10. Subsequent thereto the Plaintiff filed the within captioned suit.

Conclusions of Law

1. Conveyance of the property in question from William A. Greenlee and Richard Gouffney on or about July 7, 1930 to Julia R. Greenlee was a bona fide transfer.

2. Julia R. Greenlee was the sole owner of the property on May 31, 1947, the date of the transfer to William A. Greenlee and Helen Greenlee, his wife.

3. Plaintiff has failed to show a fraudulent conveyance by failing to present any evidence showing any intent on the part of the defendants, William A. Greenlee and Helen Greenlee to defraud the plaintiff, or in reality, any fraud on the plaintiff by said conveyance from Julia R. Greenlee to William A. Greenlee and Helen Greenlee.

4. The plaintiff has failed to make out a case that would entitle it to relief.

5. The action should be dismissed for failure of proof on the part of the plaintiff.

Order

AND NOW, to wit, this 9th day of December, 1952, after hearing and upon due and careful consideration, it is ordered that defendants' motion to dismiss be, and the same hereby is granted.

 

 

 

Louis H. (R.) Bernstein and Hattie B. Bernstein, His Wife, Plaintiffs v. United States of America , Defendant

In the District Court of the United States for the Western Division of the Western District of Missouri, No. 7355, 106 FSupp 233, July 8, 1952

Property subject to tax liens: Estate by the entirety.--In an action by husband and wife to quiet title to properties owned by them as estates by the entireties, instituted because the government had filed a tax lien against the properties "and the owners thereof," plaintiffs' motion for summary judgment was denied because both husband and wife are liable for tax on the income from such properties. In this case, the wife had not accounted for her income and, further, the lien was sought to be imposed on the income as well as on the property.

Marcy K. Brown, Jr., for plaintiffs. Sam W. Wear, United States Attorney, William Aull III, Assistant United States Attorney, for defendant.

Memorandum Opinion on Motion for a Summary Judgment

REEVES, Judge:

In this case the plaintiffs seek to quiet title to designated properties owned by them as estates by the entireties. The government has heretofore filed a lien against the same properties "and the owners thereof." (Italics supplied.)

This suit is authorized by Section 2410, Title 28 U. S. C. A. Such section confers upon the property owner the right to sue to quiet title to real or personal property on which the United States has or acquires a mortgage or other lien.

[Income from Estates by Entireties]

In their action the plaintiffs rely on the case of United States v. Hutcherson, 188 Fed. (2d) 326 [51-1 USTC ¶9249]. In that case the lien asserted was against property, and not against the income. Moreover, by an affidavit appended to its brief in opposition to the motion for a summary judgment, the government sets forth in detail that the coplaintiff, Hattie B. Bernstein, though a co-owner in estates by the entireties, has not paid an income tax although she was liable for such from an income derived from the properties in question. Upon this affidavit it would be the right of the government to file a lien against the whole property because of the failure of Hattie B. Bernstein to account for the income to her from these estates held by entireties.

The identical question was presented to Judge Hulen of the Eastern District of Missouri in Morgan v. Finnegan, 87 Fed. Supp. 274 [50-1 USTC ¶9121]. Judge Hulen held that both husband and wife were liable for a tax on income received from properties held as estates by the entireties. And that this was true whether one received all of the income or not. In fact, in the Morgan case, the wife received all of the income and paid a tax on it. The government allowed her a refund on the grounds that her husband should have paid a tax on one-half of the income. The opinion of Judge Hulen was affirmed by the Circuit Court of Appeals, 182 Fed. (2d) 649 [50-1 USTC ¶9345]. The last paragraph of that opinion, 1. c. 650, is pertinent here:

"Under Section 22(a), Title 26 U. S. C. A., the fact that the plaintiff chose not to take rental income from the real estate during the years in suit did not make the share of it which he might have taken any the less his for purposes of federal income taxation."

[Summary Judgment Denied]

It would follow from the foregoing that the motion for a summary judgment should be overruled on two grounds: (a) In this case the government seeks a lien on the income as well as upon the property itself; (b) upon the affidavit submitted by the government, the co-plaintiff, Hattie B. Bernstein, has not paid the tax nor reported her income, and since she is entitled to one-half the amount and same has not been paid, the government probably would be entitled to enforce its lien against both the plaintiffs, and therefore such a lien against both of them would be valid and proper against the real estate as well as the income thereof.

Accordingly, the motion for a summary judgment should be and will be overruled.

 

 

 

United States of America , Plaintiff, v. Sebie B. Phillips, et al., Defendants

District Court of the United States for the Southern District of Georgia--Dublin Division, Civil action. No. 107, 59 FSupp 1006, March 29, 1945

Lien for taxes: Illegal transfer of encumbered property.--A lien against property for unpaid taxes on illegally distilled spirits having been established, transfers of property which had been used as locations for illegal distilleries to members of the family of the delinquent taxpayer are declared null and void although the transfers occurred before demand for or assessment of the taxes. As stated in the opinion, the verdict resulted from evidence that the transfers were fraudulently made to defeat collection of taxes and failure of the transferees to introduce evidence to carry their burden of explaining the circumstances of the transactions.

Harry B. DeAtley, Special Assistant to the Attorney General, Green B. Everitt, Assistant U. S. Attorney, Savannah , Ga. , for plaintiff. Eugene Talmadge, 1422 William Oliver Bldg., Atlanta , Ga. , for defendant.

LOVETT, District Judge:

In the complaint in this case two causes of action are set out, one at law, the other in equity.

The one at law is for adjudication of amount of unpaid taxes on illegally distilled spirits. On that cause of action a verdict was returned by a jury for the plaintiff on March 3, 1944, in the amount of $3,647.44.

In the second cause of action, to which this opinion relates, the United States seeks to have set aside as fraudulent, certain conveyances of real property made by defendant, Sebie B. Phillips, and by his grantee, and to have the property conveyed sold and the proceeds of the sale applied to the payment of the taxes.

The court has heard the evidence and oral arguments, briefs have been submitted and the case is now ready for decision.

[The Facts]

An investigation of defendant Sebie B. Phillips' illegal liquor activities was begun by government officers in 1937. Several stills and considerable non-tax paid whiskey were found on this property. In contemplation of charges being brought against him, a survey was made of his land, and it was found to consist of a total of 572 acres.

On November 10, 1938, Sebie Phillips, along with his son, one of the defendants (the other defendants being his wife, his daughter and his daughter-in-law) was indicted on a charge of conspiracy to violate and the violation of certain internal revenue laws relating to the illegal manufacture and sale of distilled spirits. On December 16, 1938, a warranty deed, dated October 14, 1938, conveying 355 acres of land from Sebie B. Phillips to his wife in consideration of $100 and love and affection, was recorded in the office of the clerk of the superior court of the county where the lands were located. On December 23, 1938, recordation was made in like manner of another warranty deed, dated September 1, 1938, of all the remainder of his property consisting of one 72 acre tract and one 145 acre tract from Sebie B. Phillips to his daughter, Marie Phillips in consideration of $75 and "other valuable consideration."

On January 27, 1939, Sebie B. Phillips was found guilty of the conspiracy charge and was sentenced to serve three years in prison and pay a fine of $2,000. Later in that year, demand was made for payment of the taxes on the illegally made whiskey, and on November 7, 1940, plaintiff's lien for taxes was filed.

On August 8, 1941, defendant Marie Phillips, the daughter of Sebie B. Phillips, conveyed the 72 acre tract, which had been deeded to her by her father in 1938, to her sister-in-law, Mrs. Paul Phillips, for the stated consideration of $500.

All defendants were temporarily restrained, by order of court dated October 29, 1943, from making any further transfers of the property.

In support of its lien for taxes the government relies primarily upon the provisions of 26 U. S. C. A., Secs. 2800(d) and (e)(1):

(d) * * * every person in any manner interested in the use of, any * * * distilling appartus, shall be * * * liable for the taxes imposed by law on the distilled spirits produced therefrom.

(e) The tax shall be a first lien on the spirits distilled, the distillery used * * * the lot or tract of land whereon the said distillery is situated, and on any building thereon from the time said spirits are in existence as such until the tax is paid. (emphasis added).

[Defense Argument]

The defendant properly points out that all the land involved here lies in Treutlen County , Georgia , and that some of the stills from which the whiskey on which the tax was levied was produced were situated in Emanuel County . The defendant then argues that under this statute the land does not become impressed with a lien except when the proof shows that the distilled spirits for which the tax is claimed was produced upon that particular piece of land. The statute declares that the tax shall be a first lien upon the land where the spirits are distilled. It does not say it is per se a lien upon any other land.

[Applicable Law]

I put to one side the merits of this argument by defendants, because however decided the government's lien must be sustained upon another statute, 26 U. S. C. A., Sec. 3670:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property * * * belonging to such person. (Emphasis added.)

The special provisions found in Section 2800, supra, do not forbid the application of the general provision to this section. 26 U. S. C. A., Sec. 3670, n. 5, citing 16 Op. Atty. Gen. 634 (1879).

It is true that the property here involved had already been transferred before demand or assessment was made. However, this debt having been reduced to judgment and a lien having been established, equity will set aside the transfers if fraudulently made to defeat the collection of taxes. All of these transfers must be declared void under the provisions of Ga. Code (1933), Sec. 28-201(2):

The following acts by debtors shall be fraudulent in law against creditors and others, and as to them null and void, viz.:

(2) Every conveyance of real . . . estate . . . made with the intention to delay or defraud creditors, and such intention known to the party taking * * *

The facts indicate that the property had been used as locations for illegal distilleries for several years before the transfers were made. The transferees, all of them being members of Phillips' immediate family, and all of whom I find had knowledge of these activities, must be charged, therefore, with notice that Phillips' land was liable for all taxes owed by him on account of his illegally produced spirits. They can not be looked upon as innocent or bona fide transferees without notice.

The two transfers from Phillips to his wife and daughter, at least, should also be declared void under the provisions of Ga. Code (1933), Sec. 48-110:

An insolvent person may not make a valid gift to the injury of his existing creditors * * *

This rule has been judicially extended to render the conveyance equally void when the donor thereby renders himself insolvent, Mercantile Nat'l Bank v. Stein, 158 Ga. 894, 124 S. E. 697 (1924).

[Transfers Made Obligor Practically Insolvent]

On the defendant's own admission the property was worth $5,000 at the lowest estimate, and he "practically" gave it away. Clearly the actual money consideration, $175, if paid at all, was wholly inadequate. Other material admissions were that Phillips was endorser or surety on several guano notes and his wife was afraid they would lose the property unless the took it over, that by making the transfers he completely divested himself of all property except about $100 worth of clothing and that he was thereafter without assets to pay the liquor taxes.

When a transaction between husband and wife is attacked for fraud by the creditors of either, the burden is on the husband and wife to show that the transaction was fair. Ga. Code, Sec. 53-505; Tucker v. Talmadge, 186 Ga. 798; Parker v. Harling, 189 Ga. 224; Mattox v. West, 194 Ga. 310. There is no reason why the same rule should not apply to transactions between parent and child under the facts here shown to exist.

[Conclusion]

All the elements of fraudulent transfers having been established and the transferees having introduced no evidence to carry their burden of explaining the circumstances of the transactions, each of the transactions is declared null and void as against creditors and the prayers of the petition are granted.

Counsel for the United States will prepare and present on notice appropriate findings of facts and conclusions of law to conform to this opinion and a decree to carry it into effect.