Prior Law page2

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United States of America, Plaintiff, v. Louis Nathanson, doing business as General Painting and Decorating Company, B. Hughes and Pauline Mueller, Defendants

District Court of the United States for the Eastern District of Michigan, Southern Divison, No. 4290, 60 FSupp 193, February 2, 1945

Collection of taxes: Validity of lien for taxes owing by one spouse against rents due an estate held by the entirety in Michigan.--Where one spouse is liable for federal taxes, the Government, to enforce collection, cannot, under the Revenue Act of 1926, successfully levy on rents from an estate held by the entirety in Michigan. The Court based its conclusion in part on Michigan decisions that neither the husband nor the wife has an individual, separable interest in entirety property wherein one cannot convey an interest without the aid of the other.

John C. Lehr, District Attorney, Arnold W. Lungerhausen, Assistant District Attorney, 829 Federal Building, Detroit, Mich., for plaintiff. Joseph B. Beckenstein, 401 Guaranty Building, Detroit , Mich. , for defendant.

Opinion of the Court

PICARD, D. J.:

The question in this case relates to the right of plaintiff to enforce collection of excise taxes, penalties and interest, assessed against defendant Louis Nathanson, from rents due defendant and wife on property which they are purchasing under land contract as an estate by the entirety. The amount of the lien and the propriety or manner of procedure by which the government claims its lien are not material in making the decision and only one point of fact over which there is any dispute need be touched upon.

The government claims that the husband alone made the verbal lease with tenants for payment of rent and substantiates its position by testimony of the tenant. On the other hand, defendant claims the wife was right in the room when the verbal agreement was made.

If this point is very material this court now holds that in any event the husband was obviously acting for both himself and wife and did not have exclusive control of the rent money since the evidence shows that part of the rent money went directly to the vendor to apply on the purchase price while the balance was held by the wife alone to meet contingencies. As a matter of fact it appears that the wife had more control over the actual cash than the husband, and we so find.

This disposes of government's contention that under the decisions, when the husband has complete control of rents from an estate by the entirety, creditors of the husband can reach those assets. But even if the facts were true, as contended, the government fails to follow the distinction between the husband's right to "manage and control" an estate of the entirety--which is complete, and his creditors' rights to the proceeds from that estate--which is denied. That difference is pointed out in the review of similar cases made by the court in American State Trust Co. of Detroit v. Rosenthal, 255 Mich. 157. See also Bankers Trust Co. of Detroit v. Humber, 264 Mich. 71; Hiller v. Olmstead, 54 Fed. (2d) 5; Building Material Co. v. Milanowski, 236 Mich. 622; Annapolis Bkg. & T. Co. v. Smith (1933) 164 Md. 8, 164 Atl. 157; Arrand v. Graham, 297 Mich. 559, 561. None of the cases cited by plaintiff is authority for its position that creditors can successfully levy on the rents from an estate by the entirety.

This brings up the remaining question as to whether Congress by the most generous interpretation of the tax law involved has specified or designated such an estate (by entirety) as subject to tax, for Congress undoubtedly has the right to determine by designation what interest or rights in property created by the states are taxable by the Federal government. Morgan v. Commissioner, 309 U. S. 78 [40-1 USTC ¶9210]; Helvering v. Stuart, 317 U. S. 154 [42-2 USTC ¶9750]; Tyler v. United States, 281 U. S. 497 [2 USTC ¶532].

But here again we must find against plaintiff for it appears that there is only one tax reference to estate by the entirety in the Revenue Act of 1926 and that is paragraph 302 which imposes a tax upon

"the value of the gross estate of decedent" at the time of his death, including "the value at the time of his death of all property, real or personal, * * * (e) to the extent of the interest therein held * * * as tenants by the entirety by the decedent and spouse"

Detroit Bank v. United States, 317 U. S. 329 [43-1 USTC ¶9224]; Tyler v. United States, 281 U. S. 497 [2 USTC ¶532].

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 entirety follow the common law and have withstood the onslaught of creditors for years. Neither the husband nor the wife has an individual, separable interest in entirety property. Neither can convey an interest without the aid of the other. Neither husband nor wife can sever the tenancy. They take the estate as one person and they take but one estate. Naylor v. Minock, 96 Mich. 182; Way v. Root, 174 Mich. 418, 427; Vinton v. Beamer, 55 Mich. 559, 561; Speier v. Opfer, 73 Mich. 35, 38; Nurmi v. Beardsley, 275 Mich. 328, 330; Long v. Earle, 277 Mich. 505; Arrand v. Graham, 297 Mich. 559, 561.

There being no authority for plaintiff's contention, an order dismissing the bill of complaint may be prepared for our signature.

 

 

 

Charlotte G. Shaw, Plaintiff, v. United States of America , Cary P. Stiff and Helen C. Stiff, Defendants

United States District Court for the Western District of Michigan, Southern Division, In Equity No. 2828, 94 FSupp 245, Decided March 16, 1939

Lien for Federal taxes: Tenancy by the entirety.--Under the laws of Michigan an estate by the entirety is not subject to a lien for Federal taxes due from the husband only.

Messrs. Knappen, Uhl, Bryant & Snow, Grand Rapids , Mich. , for plaintiff. Mr. Shelby B. Schurtz, Assistant United States Attorney, and Mr. Francis T. McDonald, United States Attorney, Grand Rapids, Mich., and Mr. J. H. Layne, Special Attorney, Treasury Department, for the United States.

RAYMOND, District Judge:

Findings of Fact

1. On May 6, 1911, the plaintiff and her husband, Harry E. Shaw, who had been married for a number of years, acquired title as tenants by the entirety to the following described real estate by virtue of a certain warranty deed naming them as grantees, which deed was recorded in the office of the Register of Deeds for Kent County, Michigan, in Liber 394 of Deeds at page 294, the real estate being situated in the City of Grand Rapids, County of Kent and State of Michigan, described as follows, to-wit:

"Lot 106 of Kellogg & Bemis Addition to the City of Grand Rapids , Kent County, Michigan, according to the recorded plat thereof."

2. This real estate was acquired by plaintiff and her husband as tenants by the entirety in good faith, and not in fraud of the creditors of either spouse; the parties occupied it as their home from 1911 until October 28, 1937; the immediate source of the consideration for the above mentioned deed was certain other property in Grand Rapids which the parties had theretofore owned as husband and wife, the money for these two properties coming from Mr. Shaw's earnings and the joint endeavors of Mr. and Mrs. Shaw as husband and wife.

3. On June 22, 1934, an assessment was made against H. E. Shaw for additional income tax for the years 1920, 1921, 1922, 1923, 1924, 1925, 1926 and 1928 for $66,815.00, the assessment list being received by the Collector of Internal Revenue at Detroit on June 25, 1934; on December 7, 1934, an assessment was made against H. E. Shaw for additional income tax for the year 1927 in the sum of $494.66, the assessment list being received by the Collector of Internal Revenue at Detroit on December 10, 1934; and notice and demand were duly made upon said H. E. Shaw, and no part of said assessment had been paid at the trial hereof.

4. On September 5, 1934, John M. Terwilliger, Acting Collector of Internal Revenue for the District of Michigan, filed with the Register of Deeds of Kent County, Michigan, Register's File No. 105, notice of tax lien under internal revenue laws, being Collector's No. 3945, which was also filed in the office of the Clerk of the District Court of the United States for the Western District of Michigan, Southern Division, under which notice of tax lien, the Collector claimed a lien on all property and rights to property belonging to H. E. Shaw, for the collection of $66,815.00 for additional income tax for the years 1920 to 1926, inclusive, and for the year 1928.

5. On February 13, 1935, John M. Terwilliger, Acting Collector of Internal Revenue for the District of Michigan, filed with the Register of Deeds of Kent County, Michigan, Register's File No. 123, notice of tax lien under internal revenue laws, being Collector's No. 4312, a copy of which was also filed in the office of the Clerk of the United States District Court for the Western District of Michigan, Southern Division, under which notice of tax lien, the Collector claimed a lien on all property and rights to property belonging to H. E. Shaw, for the collection of $494.66 for additional income tax for the year 1927.

6. The said assessments, notices of tax liens, and claims of The United States of America for taxes are solely against Harry E. Shaw.

7. On October 28, 1937, said Harry E. Shaw released to his wife, plaintiff herein, his entirety interest in the real estate in question by a quit claim deed recorded the same day in the office of the Register of Deeds for Kent County, Michigan, in Liber 977 of Deeds, at page 127; and on the same day the plaintiff entered into an executory contract for the sale of said real estate to the defendants Cary P. Stiff and Helen C. Stiff, who have since been in possession of said real estate, and whose default has been duly entered herein.

8. Pursuant to 26 U. S. C. A. sec. 1569, the plaintiff, on November 1, 1937, made written request upon the Commissioner of Internal Revenue to forthwith direct the filing of a bill in chancery pursuant to 26 U. S. C. A. sec. 1568, with respect to the two claimed liens on the real estate in question, to the end that the validity of said two claimed liens might be adjudicated; on November 19, 1937, the Commissioner of Internal Revenue refused this request of the plaintiff, and said Commissioner of Internal Revenue failed to direct the filing of such a bill within six months after receipt of such written request; after giving notice to the Commissioner on May 4, 1938, the plaintiff filed her petition in this court for leave to file the bill of complaint.

Conclusions of Law

1. The extent of the taxpayer's interest in Michigan real estate held with his wife as tenants by the entirety, including whether or not one spouse has any individual or separable interest, property or right to property with respect thereto, is governed by the property law of the State of Michigan .

2. When the two notices of tax lien were filed on September 5, 1934, and February 13, 1935, respectively, the real estate in question was owned by plaintiff and her husband, Harry. E. Shaw, as tenants by the entirety, and neither then nor at any time since, has Harry E. Shaw had any individual or separable interest, title, property or right to property in said real estate.

3. The inability of a creditor of one spouse to reach Michigan entirety property is based on the incidents of such a tenancy under Michigan property law, including the lack of any individual or separable interest of either spouse, and not on any exemption laws.

4. The defendant United States of America has no right, title or interest in the real estate described in the bill of complaint.

5. The title of plaintiff to said real estate cannot be affected by said notices of tax lien, and the plaintiff is entitled in these proceedings to have the government's claimed tax liens removed as clouds on her title.

[Government's Contention]

The findings of fact herewith filed disclose the basis for the only issue of law involved here. The contention of the government is that the lien of the United States for the taxes assessed attached to the interest of Harry E. Shaw as one of the tenants holding the property in an estate by the entireties and that it is entitled to have that interest sold under an order of the court.

[ Michigan Law]

While the rule in a number of states is to the contrary, the Supreme Court of Michigan has consistently aligned itself with what appears to be the majority rule to the effect that no portion of an estate by the entireties may be subjected [to] a lien for the individual indebtedness of either spouse. Vinton v. Beamer, 55 Mich. 559; Dickey v. Converse, 117 Mich. 449; Schliess v. Thayer, 170 Mich. 395; Turner v. Davidson, 227 Mich. 459; 35 A. L. R. 147. This immunity is not an exemption but arises from the peculiar nature of the estate as interpreted by the Michigan Supreme Court. See In re Berry , 247 F. 700; McMullen v. Zabawski, 283 F. 552; Gorelick v. Shapero, 222 Mich. 381; Moore v. Van Goosen, 250 Mich. 67.

[ Michigan Law Controls]

In the enforcement of the taxing laws of the United States , the federal courts, in determining the extent of a taxpayer's property interest in real estate, are bound by state rules of property. Poe v. Seaborn, 282 U. S. 101 [2 USTC ¶611]; Cannon v. Nicholas, 80 F. (2d) 934 [35-2 USTC ¶9672]; Lang v. Commissioner of Internal Revenue, 61 F. (2d) 280 [1932 CCH ¶9492].

It follows that plaintiff is entitled to the relief prayed. A decree in conformity herewith may be presented for signature.

 

 

 

W. J. Rothensies, Collector of Internal Revenue, Appellant, v. David L. Ullman and Gertrude Ullman, His Wife, Appellees

(CA-3), United States Circuit Court of Appeals for the Third Circuit, No. 7110. October Term, 1939, 110 F2d 590, Filed March 15, 1940

Appeal from the District Court of the United States , for the Eastern District of Pennsylvania.

Distraint: Joint account of husband and wife.--A warrant of distraint issued against a joint deposit account of husband and wife for taxes due from the husband as transferee. In answering the contention of the appellant (which is here raised for the first time) that the lower court was without jurisdiction to quash the warrant of distraint, the instant Court holds that while the order of the District Court does not restrain the Collector from distraining upon any property of the husband for collection of the amount claimed, Code Sec. 3653 was not intended to deprive the courts of jurisdiction to restrain officers from illegally collecting taxes out of property which does not belong to the person indebted to the Government. Further, inasmuch as the appellees have since properly withdrawn the funds from the bank account distrained upon, the appeal is dismissed without discussion of its merits, there being no subject matter upon which the judgment of the Court can operate. Dismissing appeal from District Court decision reported at 39-1 USTC ¶9333.

W. Croft Jennings , Washington , D. C., for appellant. Walter I. Summerfield, Philadelphia , Pa. , for appellee.

Before BIGGS, MARIS, and JONES, Circuit Judges.

Opinion

MARIS, Circuit Judge:

The Commissioner of Internal Revenue having assessed a tax against David L. Ullman as transferee of the Trainor Company for income taxes due from that company for the year 1933, the appellant caused a warrant of distraint to be issued against a joint deposit account of Ullman and his wife in the Tradesmens National Bank and Trust Company. The bank refused to honor the distraint. On February 27, 1939, the District Court for the Eastern District of Pennsylvania upon the petition of the appellees entered an order quashing the warrant of distraint upon the ground that the appellees held as tenants by entireties the account against which it was directed and that such an estate under the laws of the Commonwealth of Pennsylvania cannot be attached or levied upon for an obligation due by either spouse individually. The period of ten days fixed by Sec. 1007 Rev. Stat. as amended (28 U. S. C. A. §874) having expired and no appeal having been taken or stay obtained by the appellant, the appellees on March 15, 1939, withdrew the entire balance on deposit in their joint account in the Tradesmens National Bank and Trust Company. Sixty-nine days later notice of appeal from the order of the district court quashing the warrant of distraint was filed by the appellant. Thereafter the appellees moved to dismiss the appeal for the reason that the issues involved had become moot.

Although the question was not raised in the district court the appellant now contends that the court was without jurisdiction to quash the warrant of distraint. Sec. 934 Rev. Stat. (28 U. S. C. A. §747) provides that "All property taken or detained by any officer or other person, under authority of any revenue law of the United States, shall be irrepleviable, and shall be deemed to be in the custody of the law, and subject only to the orders and decrees of the courts of the United States having jurisdiction thereof." It was early held that property of a third party seized under a warrant of distraint for the payment of taxes was "property taken or detained by any officer" within the meaning of this section. Treat v. Staples, Holmes 1, Fed. Cas. No. 14, 162; Brice v. Elliott, 2 W. N. C. ( Pa. ) 560, Fed. Cas. No. 1,854. It has been held by the Supreme Court that district courts having jurisdiction of property "taken or detained" by revenue officers are given power by the last clause of the section to decide claims of title and to award to the rightful owner possession of the property seized. Ex parte Fassett, 142 U. S. 479. Such property, although seized by executive warrant, is as the act expressly provides, "in the custody of the law" and subject to "the order and decrees of the courts of the United States " having jurisdiction of the officer and the property under Sec. 24(5) of the Judicial Code (28 U. S. C. A. §41(5)).

We do not think that the district court was deprived of jurisdiction by Sec. 3653 Int. Rev. Code (26 U. S. C. A. §3653) which provides as to a taxpayer that "* * * no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court," and as to a transferee that "No suit shall be maintained in any court for the purpose of restraining the assessment or collection of (1) the amount of the liability, at law or in equity, of a transferee of property of a taxpayer in respect of any income, war-profits, excess-profits, or estate tax * * *"

In the case before us the district court was not called upon to determine the validity of the assessment against the Trainor Company or its transferee. It was not requested to restrain the collection of the tax as such. The effect of the court's order was merely to dissolve the levy made upon the property which the court found the collector had no legal right to seize as the property of the transferee. The order of the district court does not restrain the collector from distraining upon any property of Ullman for the collection of the amount claimed. We think that the section of the Internal Revenue Code which we have quoted was not intended to deprive the courts of jurisdiction to restrain revenue officers from illegally collecting taxes out of property which does not belong to the person indebted to the government. Long v. Rasmussen, 281 F. 236. It follows that the court below had jurisdiction to make the order appealed from.

[Funds Withdrawn from Bank]

As has already been pointed out, more than ten days after the entry of the order quashing the warrant of distraint and long before an appeal was taken the appellees withdrew the funds from the bank account distrained upon. In view of the failure of the appellant to apply for or obtain a supersedeas within the ten days' period the appellees were entitled to treat the account as unaffected by any lien dependent upon the warrant of distraint which had theretofore been quashed by the district court acting, as we have seen, within its jurisdiction. The controversy, therefore, now relates to a res which is no longer in existence. Since there is now no subject matter upon which the judgment of this court can operate the appeal must be dismissed without considering its merits. Mills v. Green, 159 U. S. 651; American Book Co. v. Kansas, 193 U. S. 49; Brownlow v. Schwartz, 261 U. S. 216; Northwestern Light & Power Co. v. Town of Milford, 82 F. 2d 45.

The appeal is dismissed.

 

 

 

David L. Ullman, and Gertrude E. Ullman, his Wife, v. W. J. Rothensies, Collector of Internal Revenue

District Court of the United States for the Eastern District of Pennsylvania, M-845, Decided February 23, 1939

Distraint against joint bank account of spouses for taxes due from husband.--Under the law of Pennsylvania a joint bank account of husband and wife, with rights of survivorship and equal withdrawal rights, was an estate by entireties and was not subject to distraint for taxes due from the husband alone. Such an estate is beyond the reach of creditors in Pennsylvania and the State law as to the nature of title in the property is binding on the rights of the Federal Government.

Walter I. Summerfield, 728 Bankers Securities Bldg., Philadelphia , Pa. , attorney for plaintiff. J. Cullen Ganey, United States Attorney, Thomas J. Curtin, Assistant United States Attorney, James W. Morris, Assistant Attorney General, and Andrew D. Sharpe and Jerome P. Carr, Special Assistants to the Attorney General, attorneys for the defendant.

Sur Petition to Quash Warrant of Distraint

Before KIRKPATRICK, J.:

A tax was assessed against the plaintiff, as transferee of a corporation, for income taxes due from the corporation, and, after demand and due filing of notices of tax lien, a warrant of distraint was issued against a bank account which had been opened by the plaintiff and his wife jointly and which had stood in their names since a time prior to the filing of the lien. The contract with the bank under which the account was opened provided that the account should be the joint property of husband and wife with right of survivorship and with full power in either to draw against the account to its extinction.

[Motion]

The plaintiff and his wife have filed this petition to quash the warrant of distraint and testimony has been taken. The foregoing statement covers all the relevant facts.

[Question]

The single question involved is whether any part of the bank account standing in the names of husband and wife may be taken by distraint and levy for unpaid Federal income taxes due from the husband alone.

[Status Under Pennsylvania Law]

It is conceded that, by the law of Pennsylvania , the account was owned by the entireties. Madden v. Gosztonyi S. & T. Co., 331 Pa. 476; Werle v. Werle, 332 Pa. 49. The "chief distinguishing incident" of an estate by entireties is that it may not be taken on levy or execution for the individual obligation of one of the spouses. This, however, is not by reason of any exemption statute or any policy of the law exempting property belonging to a debtor from the claims of his creditors. Confusion in this regard probably arises from such general statements of the Pennsylvania courts as, "It is this striking peculiarity of the estate--the entirety alike in the husband and wife--that operates to exempt it from execution and sale at the suit of a creditor of either separately." Beihl v. Martin, 236 Pa. 519, 523. The next sentence of that opinion, however, shows what the Court meant by the estate being "exempt." The Court said, "The enforcement of such process would be the taking of the property of one to pay the debt of another."

The interest of either spouse in an estate by the entirety is beyond the reach of creditors in Pennsylvania because of its inherent nature--because there is no title or ownership in either spouse, but only in the marital unit, a distinct legal entity. These considerations dispose of the Government's argument based upon the rule that the Federal law may reach property withdrawn from amenability to state execution process by the state exemption laws, as was decided in Kyle v. McGuirk, 82 F. (2d) 212 [36-1 USTC ¶9121].

[Effect of State Law]

The Government also invokes the general rule stated in Burnet v. Harmel, 287 U. S. 103, 110 [3 USTC ¶990], to the effect that "State law may control only when the operation of the Federal taxing act, by express language or necessary implication, makes its own operation dependent upon the state law." This rule, however, applies to taxing statutes where the thing taxed is either income (property made subject to federal taxation by constitutional amendment and consequently within the power of Congress to define) or the transmission of property upon death, as in Tyler v. U. S., 281 U. S. 497 [2 USTC ¶532], a case which had to do with the taxability of the transfer which takes place upon the death of one of the spouses, dissolving the marital unit which owned an estate by entireties.

Congress could not, if it desired, subject to levy and distraint against a taxpayer property in which the law of the state says that he has no title, ownership or interest, no matter how clearly its intention to do so might be expressed in the statute. As a matter of fact, there is nothing in the relevant statutes in this case from which an intention to reach estates by entireties can be deduced. The Revenue Act of 1928, Sec. 613, providing for the lien for taxes, merely says that taxes "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." The Revenue Act of 1924, Sec. 1016, providing for distraint, says that levy may be made upon "the goods, chattels, or effects, including * * * bank accounts * * * of the person delinquent." Whether or not this bank account is property belonging to the husband or is a bank account of the husband depends upon the law of the state of Pennsylvania . The state law is plain to the effect that it is neither.

The prayer of the petition to quash is granted, and an order quashing the warrant of distraint may be entered.

 

 

 

Eleanor M. Benson, James A. Travis, Appellants v. United States of America

(CA-DC), U. S. Court of Appeals, Dist. Col. Circuit, No. 23,859, 442 F2d 1221, 3/16/71, Rev'g and rem'g an unreported District Court decision

[Code Sec. 6321--Result unchanged by '69 Tax Reform Act]

Lien for taxes: Attachment: Estate by the entirety: Termination of estate: Debt of one tenant.--
The taxpayers acquired property as tenants by the entirety and executed a property settlement agreement while they were married that was adequate under a District of Columbia statute to preserve their estate by the entirety after a divorce. Subsequent refinancing transactions (to place record title to the property in someone with a good credit standing), whereby the property was conveyed and simultaneously reconveyed, did not interrupt their beneficial ownership. Thus, their estate by the entirety was not converted into a joint tenancy, and a federal tax lien for the separate debt of one of the taxpayers did not attach to the property.

Robert Sheriffs Moss, 1815 H St., N. W. , Washington , D. C., for appellants. William S. Estabrook, New York, Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Leonard J. Henzke, Jr., Department of Justice, Washington, D. C. 20530, for U. S.

Before MCGOWAN, ROBINSON and MACKINNON, Circuit Judges.

PER CURIAM:

This appeal, brought by the co-owners of real property situated in the District of Columbia , is from the District Court's adverse disposition of their suit to quiet title to that property. Their action, seeking a decree that their property is not subject to a federal tax lien filed by appellee, raises a serious and novel question with regard to the form in which this jurisdiction recognizes the common law estate of tenancy by the entirety. For the reasons hereafter stated, we reverse the decision of the District Court.

The facts are not in dispute. Appellants, James A. Travis and Eleanor M. Benson (formerly Eleanor M. Travis), were married in 1944. In 1959 they acquired as tenants by the entirety two lots in the District of Columbia . Appellants' subsequent transactions with reference to this property have created the controversy in this case.

[Property Settlement]

Early in 1961 appellants separated and, in May of that year, entered into a formal property settlement agreement. Central to the settlement was appellants' agreement to continue to hold the property as tenants by the entirety notwithstanding a future decree of divorce. Travis was to manage the property and pay a specified sum ($215 per week) to Benson during the minority of their children. Insofar as possible that amount was to be paid out of the net income from the property. If the $215 figure exceeded one-half of the net income, the excess would be considered support and maintenance paid by Travis. After all the children attained majority (the agreement called for the payment plan to remain in effect for 23 years rather than for 21, apparently providing a 2-year cushion) Benson would be entitled thereafter to one-half of the net income. ¹

The stated purpose of this arrangement was "to provide the wife with an independent income so long as she may live . . . and to permit her to meet the obligation . . . to support, maintain and educate the minor children of the parties" (of which there were eleven). Appellants obtained a divorce by a Maryland decree dated August 4, 1962, which did not mention the property settlement agreement. Travis remarried shortly thereafter.

[Refinancing Agreement]

Approximately 18 months after the settlement agreement had become effective, Travis, being in default on notes secured by three deeds of trust against the property, began to search for a method of refinancing the property. ² Since his credit would not support a loan, his second wife's parents (Donald and Olive Crawford) agreed that the loan could be taken out in their names. In appellants' own words, the Crawfords "agreed to lend them [Travis and his second wife] credit."

The refinancing was carried out in several steps. By deeds dated January 16, 1963, appellants deeded the real estate to the Crawfords as tenants by the entirety (referred to as the "deed out") simultaneously the Crawfords reconveyed it to appellants by a separate deed (referred to as the "deed back"). The deed back purported to reconvey the property to appellants in exactly the same form in which it had been held at all times since its acquisition, i.e., as tenants by the entirety. Both deeds were executed and delivered on the same day. Still pursuant to their prearrangement, the deed out was recorded on January 31, 1963 and the Crawfords obtained a $41,000 loan secured by a new first deed of trust on the property, which was executed on March 10. With the proceeds of the loan, Travis's outstanding debts were paid off and, once the refinancing was completed, the deed back was recorded on April 23. Correspondence passing from Travis to Benson at the time makes clear that both appellants understood that the sole purpose of this deed arrangement was to place a loan on the property and that it would "in no wise or manner affect or modify [the] property settlement agreement or [Travis's] obligations and responsibilities . . . under said agreement."

[Tax Lien]

The Government's interest in this case arose in March, 1964, when the Internal Revenue Service assessed a 100 percent penalty against appellant Travis in the amount of $28,461.79 pursuant to Section 6672 of the Internal Revenue Code. The assessment grew out of Travis's activities as an officer of a Maryland-based electrical contracting company. The amount of the penalty was equal to the amount of federal income withholding and social security taxes allegedly withheld by the company in 1959-1960 but not turned over to the Government. On March 23, 1964, a federal tax lien in the amount of the unpaid assessment was filed by the Government against appellants' property. The District Court was not called upon to rule on the substantive merit of the assessment but was only presented with the question whether this lien for a separate debt of appellant Travis could attach to the property in question. ³ The case was heard on cross-motions for summary judgment, and the District Court found for the Government.

Appellants' primary assertion is that since the property is owned by the parties as tenants by the entirety it cannot be subjected to a tax lien representing the debt of only one of the tenants. The Government concedes that, if the property were being held by the entireties, the tax lien could not attach. See Alpher v. Preston , No. 22,507 (D. C. Cir., Feb. 23, 1971); American Wholesale Corp. v. Aronstein, 56 App. D. C. 126, 10 F. 2d 991 (1926). Its contention is, rather, that the refinancing transactions destroyed the tenancy by the entirety and left appellants as joint tenants. The Government's theory is that the deed back, which purported to convey the property to appellants by the entirety, was legally ineffective for that purpose because appellants failed to satisfy the first prerequisite for such an estate--they were not married. See, e.g., Coleman v. Jackson , 109 U. S. App. D. C. 242, 286 F. 2d 98 (1960); Fairclaw v. Forrest, 76 U. S. App. D. C. 197, 130 F. 2d 829 (1942), cert. denied, 318 U. S. 756 (1943). And, based on the rule applied in this jurisdiction, an ineffective effort to establish an estate by the entirety creates instead a joint tenancy. See Cobb v. Gilmer, 124 U. S. App. D. C. 398, 365 F. 2d 931 (1966); Coleman v. Jackson , supra. ⁴ As a joint tenant, Travis's one-half interest could be subjected to the payment of his individual debts.

[Termination of Estate]

The Government's argument focuses on the refinancing conveyances rather than upon the divorce and property settlement, recognizing, as we think it must, that, at least until such time after the divorce as appellants entered upon their program of refinancing, the property was legally held by them as tenants by the entirety. While at common law, and today in all jurisdictions other that our own which have retained this form of concurrent ownership, the existence of the marital relation is indispensible, ⁵ by statute in the District of Columbia it is possible for the parties to a divorce decree to retain any property interest they may have held as tenants by the entirety. Section 910 in pertinent part reads as follows:

"Upon the entry of a final decree of annulment or absolute divorce, in the absence of a valid antenuptial or postnuptial agreement in relation thereto, all property rights in . . . tenancy by the entirety shall stand dissolved . . . and the court may . . . apportion [the property] in such manner as seems equitable, just, and reasonable."

16 D. C. Code §910 (1967) (emphasis supplied).

The few cases construing this Section have adopted a reading which is consistent with its plain wording. In Health v. Heath, 89 U. S. App. D. C. 68, 69, 189 F. 2d 697, 698 (1951), the court determined that "[t]his section of the code permits a husband and wife to retain the incidents of a tenancy by the entirety . . . after their marriage is dissolved if they so agree." The court further found that a property settlement agreement was a sufficient vehicle for the preservation of such a marital estate. See also Hardy v. Hardy, 250 F. Supp. 956, 959 (D. D. C. 1966). It is clear then that, as the property was initially acquired by the parties during coverture, the property settlement agreement was adequate under the statute to preserve the parties' estate by the entirety after the Maryland divorce. ⁶

The only substantial issue then is whether the subsequent refinancing transactions operated to terminate appellants' statutory right to utilize this particular form of concurrent ownership. Stated differently, the question turns on the degree to which the existence of the statute mitigates the inflexibility of the common law maxim that persons who are not man and wife may not acquire property as tenants by the entirety. The maxim derives from the common law fiction of marital unity which viewed husband and wife as but one person. ⁷ With the advent and proliferation of married women's property acts, the marital unity fiction has disappeared; and with it has gone the tenancy itself in over half of the States. In this and other jurisdictions in which the estate by the entirety is still recognized, however, it has enjoyed continued vitality because of the several beneficial incidents this estate offers to its owners. Among the most significant preferential incidents are those enumerated by this court in Alpher v. Preston, supra--"[a] unilaterally indestructible right of survivorship, an inability of one spouse to alienate his interest, and . . . a broad immunity from claims of separate creditors. . . ." In no jurisdiction, save our own, have these favorable attributes been made available, either judicially or legislatively, to classes of persons other than presently legally married couples: The common law maxim, even without its fictional justification, has been consistently and rigidly applied.

The unquestionable effect of the statute in question here has been to create one small but logical exception to the rigid common law limitation by establishing a narrow class of co-owners of property who could hold by the entirety. Section 910's scope encompasses only those who (1) acquired the property as tenants by the entirety during coverture, and (2) explicitly agreed prior to their divorce to continue to hold it in the same form. Considerable research has failed to disclose any illuminating legislative history. ⁸ In the absence of evidence of explicit legislative purpose, we can only surmise as to the considerations which prompted the passage of Section 910.

The fact that Congress has retained tenancies by the entirety for the District of Columbia at all indicates, we think, a preference for marital community interests over the often competing interests of creditors. Due to the tenancy's core incidents of inalienability and immunity from claims for separate debts, the owners may enjoy the assurance of a relatively sheltered source of support for the marital estate. ⁹ The promulgation of this statute, which permits the tenancy by the entirety to continue after the dissolution of the marriage, seems a logical extension of the tenancy in recognition of the fact that a formal decree of divorce often does not dissolve interspousal support obligations. The case before us offers an appropriate example and most probably represents the rule rather than the exception. Since Travis's responsibility to provide for his ex-wife and children outlived the divorce, the parties agreed that certain property should be set aside and devoted to the fulfillment of those obligations. The statute, by allowing them to hold that property as tenants by the entirety, guarantees that the chosen source of income cannot be depleted through unilateral alienation or attachment by creditors to satisfy the separate debts of either party.

The statutory exception to the common law tradition is a narrow one. Obviously, it does not apply to property newly acquired by divorced parties; and, if we were convinced that as a result of appellants' refinancing conveyance, any new or enlarged property interest was acquired by them, we would be compelled to affirm the District Court. Certainly it is true, as that court found, that there was a conveyance to Benson and Travis and that they were unmarried at the time. For us to rule, however, on the basis of those two facts alone that appellants acquired any new or different interest in property not susceptible of ownership by the entirety would be to disregard the practical effect of these transactions.

Travis was heavily in debt and his credit would not support the borrowing necessary if the property was to continue to serve the purposes of the settlement agreement. One alternative, and the one he pursued, was to put record title to the property in someone whose credit would support the requisite loan. But, because of his exwife's concurrent interest, he could not convey away or encumber the property without her consent. ¹⁰ The incident of inalienability stood in his way, and his exspouse would not go along unless she could be assured that no alteration of the status quo would result from the transaction. Travis agreed, and their correspondence as well as the deed back, which was executed and delivered simultaneously with the deed out, reflect that no modification of existing relationships was contemplated. Travis continued to remain in possession and to manage the property, and Benson's right to periodic payments out of the net income of the estate continued unabated. In short, appellants have been the uninterrupted beneficial owners of the property since their initial acquisition of it in 1959. Recognizing that appellants have not been engaged in any postcoverture new acquisitions, we find that they still hold the property as tenants by the entirety and that, therefore, the federal tax lien can not attach. ¹¹

We think this case is closely analogous to Alpher v. Preston . There husband and and wife held realty as tenants by the entirety. There, as here, the husband was confronted with serious financial problems. With foreclosure on the realty threatened, the couple entered upon a plan whereby the property was sold and the proceeds were placed on deposit as "substituted security for an indebtedness previously secured by the lien of a deed of trust on the realty." Upon the husband's death, the creditors of his estate sought to establish a one-half interest in the deposited fund.

The position there taken on behalf of the marital community was that the fund was held, as was the pre-existing realty, as tenants by the entirety and that, therefore, it was immune from the separate creditors' claims. This contention rested squarely on the proposition that "an estate by the entireties pre-existing in particular property continues automatically in its derivatives on disposition." The court's discussion of this attribute of tenancies by the entirety is instructive:

"In this jurisdiction, the rule has been given specific application, in a situation similar to that now presented, over the protests of separate creditors.

This, we think, is as it should be. The rule continuing in derivatives the estate previously subsisting in the realty subserves the policy justifying present-day ownership by the entireties and enjoyment of its related incidents. . . . And since the estate in the derivative is an extension of the estate, and not an interest newly created, the rule does not operate to alter, one way or the other, the rights of existing creditors. . . ."

Alpher v. Preston, supra at 10-11 (emphasis supplied.)

While in Alpher the parties were married at the time of the sale, we do not think, in view of Section 910, that that fact should be determinative. That Section, in extending the estate when the parties have agreed before the date of divorce to continue to hold by the entirety, necessarily extended the incidents of that estate, including this favorable one of continuation of the estate into its derivatives upon disposition. Therefore, if Travis had, for instance, sold the property and segregated the proceeds, or exchanged the property for other property, we would not hesitate to invoke the teaching of Alpher. We are able to see no difference in substance between such changes in the form of the derivative of the estate and the refinancing conveyances which took place here. Neither involves an "interest newly created" but is merely an "extension of the estate." Neither type of transaction operates "to alter, one way or the other, the rights of existing creditors." Logic compels the same result vis a vis creditors in both cases.

Of course, if these conveyances had operated to defraud the Government we would be swift to strike them down as we would any conveyance designed to "hinder, delay or defraud creditors." ¹² The Government has made no such claim nor do we see how it could. On the uncontroverted facts before us, we do not think that appellants' refinancing transactions changed the nature of their estate from a tenancy by the entirety to a joint tenancy. Their realty is, therefore, immune from the Government's tax lien. ¹³

The judgment of the District Court is reversed and the case remanded with directions to enter judgment in appellants' favor.

¹ The agreement further stipulated that the property could not be sold or encumbered unless both parties agreed.

² Travis was also in default on payment of federal income taxes for which both he and appellant Benson were liable. A federal tax lien (unrelated to the tax lien in issue on this appeal) for approximately $2,000 was filed against property owned by them in Maryland .

³ Although the Government concedes that the District Court has jurisdiction to hear suits to quiet title to real property against which a federal tax lien has been filed (28 U. S. C. §1340, 2410), it contends that there is no jurisdiction in this case because appellants' suit is in reality an attack upon the merits of the tax assessment "through the guise of a quiet title action." See, e.g., Falik v. United States [65-1 USTC ¶9295], 343 F. 2d 38 (2d Cir. 1965). We think that the Government's jurisdictional challenge is illfounded since appellants nowhere question the merits of the underlying assessment.

⁴ Compare Sebold v. Sebold, (No. 23,014, decided February 12, 1971). In Sebold the issue was whether upon dissolution, as distinct from an abortive creation of a tenancy by the entirety, the parties held as joint tenants or as tenants in common. We held in the former that the divorced contenants become tenants in common. Sl. op. 9-13 and footnote 12. The distinguishing line between these two situations is clear. In the one, the court is seeking to effectuate the supposed intent of the parties to a deed by giving them the estate most similar to a tenancy by the entirety, i. e., a joint tenancy with the right of survivorship. In the other, the concern is only with the resulting estate when a pre-existing valid estate by the entireties is destroyed by operation of law upon a decree of divorce.

⁵ See generally 4 R. Powell, Real Property §622 (1968); C. Moynihan, Law of Real Property 229-35 (1962).

⁶ Whether the divorce was local or foreign is inconsequential in determining whether a postnuptial agreement satisfies the statute. See Heath v. Heath, 89 U. S. App. D. C. 68, 189 F. 2d 697 (1951) ( Florida divorce); Hardy v. Hardy, 250 F. Supp. 956 (D. D. C. 1966) ( Maryland divorce).

⁷ See Huber, Creditor's Rights in Tenancies by the Entireties, 1 B. C. Ind. & Com. L. Rev. 197, 199 (1960); Ritter, A Criticism of the Estate by the Entirety, 5 U. Fla. L. Rev. 153, 155 (1952).

⁸ Upon request by the panel at oral argument, the parties undertook a thorough re-examination of the legislative history of this statute. The scanty materials available, which their research uncovered, failed to shed light on the Congressional intent underlying the passage in question. The Section appears to have been a minor part of a larger bill introducing various new grounds of divorce. What few references there are regarding this Section indicate that its primary purpose was to authorize the court to apportion property among the parties to the divorce in such manner as it saw fit. See S. Rep. No. 720, 74th Cong., 1st Sess. 2 (1935).

⁹ See Fairclaw v. Forrest, 76 U. S. App. D. C. 197, 200-01, 130 F. 2d 829, 832-33 (1942); Huber, supra note 7, at 205.

¹⁰ Travis was also barred by the terms of the property settlement agreement from conveying without Benson's assent, but, even in the absence of such a clause, as a tenant by the entirety he could not convey without her signature.

¹¹ Appellants have argued that through these transactions a resulting trust was created. They contend that under the circumstances here the conveyance to the Crawfords as "straw" parties gave them merely "naked" legal title, the beneficial interest remaining at all times in the transferors. See 5 A. Scott, Trusts §404 (3d ed. 1967). We do not think it necessary to the resolution of this case to rely on appellants' resulting trust theory. Indeed, on these facts the conveyance away with a definite agreement to reconvey more closely resembles an express or constructive trust. We might be faced with the need to rely on one of these trust theories if, for instance, the Crawfords had taken under the deed out and later refused to reconvey or if the mortgagee who made available the $41,000 loan was here claiming that it had been fraudulently obtained. Such fact situations would raise questions as to who has an interest in the property, which is not the isue in this case. Since the only issue here concerns the nature of appellants' present ownership, it is enough to point out that through the conveyance out appellants never gave up the physical enjoyment of the property and that the deed back did not create any new property interest.

It should also be noted that as between the Crawfords and appellants neither legal nor equitable title was interrupted by the simultaneously delivered deeds. The deed back as well as the deed out became effective contemporaneously when delivered rather than on their respective dates of recordation so that there was never a span of time during which appellants were without legal title. See 45 D. C. Code §501 (1967).

¹² 28 D. C. Code §3101 (1967); Alpher v. Preston , No. 22,507 (D. C. Cir., Feb. 23, 1971).

¹³ Appellants have also pursued the independent contention that the Government's assessment was wiped out by Travis's discharge in bankruptcy in 1965. Having determined that the lien did not attach in the first instance, it is unnecessary for us to pass on this issue.

 

 

 

United States of America , Appellant v. American National Bank of Jacksonville and Title & Trust Company of Florida , Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16989, 255 F2d 504, 5/26/58, Reversing and remanding unreported District Court decision

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]

Tax liens: Priority over mortgage: Estate by the entireties: Effect of dragnet clause.--A husband and his wife held title to Florida real property as an estate by the entireties. After liens were filed against the husband only for unpaid taxes, the husband and wife mortgaged the property to a bank. The mortgage, in addition to securing payment which loan evidenced by a note, contained a dragnet clause securing "all sums of money which may now be due or may hereafter become due to the mortgagee from the mortgagors." The court ruled that the government's lien for taxes owing by the husband did not attach to the property held by the entireties until the wife's death which occurred sometime after the execution of the mortgage. Therefore, the mortgage had a priority of lien over the government's tax lien. However, the dragnet clause of the mortgage did not secure other obligations to the bank for which the husband was personally liable. The other obligations included a pre-existing liability on a note of a partnership of which the husband was a member, a pre-existing liability as endorser of an individual's note, and a subsequent liability as an accommodation endorser of corporate notes. Accordingly, the bank's mortgage had priority over the government tax lien only to the extent of the note of the husband and wife, with interest, advances for taxes, and the costs, fees and charges of foreclosure.

Edith House, Assistant United States Attorney, Jacksonville, Fla., Charles K. Rice, Assistant Attorney General, Lee A. Jackson, Robert N. Anderson, David O. Walter, Department partment of Justice, Washington, D. C., for appellant. W. Gregory Smith, Ray W. Richardson, Jacksonville , Fla. , for appellees.

Before RIVES, TUTTLE and JONES, Circuit Judges.

[Facts]

JONES, Circuit Judge:

C. Albert Kimbel and his wife, Ida T. Kimbel, owned a residence in Jacksonville , Florida . The title was held as an estate by the entireties. The United States filed tax liens on various dates prior to June 18, 1953, against C. Albert Kimbel for tax assessments aggregating about eleven thousand dollars. Thereafter further liens were filed on tax assessments of about twelve hundred dollars. None of these taxes was a liability of Mrs. Kimbel. On June 17, 1953, Mr. and Mrs. Kimbel gave a mortgage on the residential property to The American National Bank of Jacksonville to secure a note signed by each of them payable to the Bank in the principal sum of $24,000. The mortgage was recorded June 18, 1953. It authorized the mortgagee to advance funds for taxes and insurance premiums. It secured the payment of the principal and interest of the mortgage note, advances for taxes and insurance and, in the event of foreclosure, the costs of foreclosure including attorneys' fees. The mortgage, partly printed and partly typewritten, included among its provisions the following typed clause:

"The Mortgagors hereby agree that the lien of this mortgage shall, in addition to the note hereby secured, secure all sums of money which may now be due or may hereafter become due to the Mortgagee from the Mortgagors. This additional security provision shall remain in effect for so long as the promissory note hereby secured remains unpaid."

The mortgage also contained a printed provision that:

"It is understood that each of the words, note, mortgagor and mortgagee respectively, whether in the singular or plural anywhere in this mortgage, shall be singular if one only and shall be plural jointly and severally if more than one, * * *."

At the time the mortgage was given, the Bank held a collateral note made by Duval Electric Co. This note was dated February 13, 1953. It is signed "Duval Electric Co. C. A. Kimbel, Pres." It pledged warehouse receipts covering electrical equipment and materials. The original principal amount was $7,903.07, which had been reduced to $5,869.66. At the time this note was given, Duval Electric Company was a partnership. There were three partners, C. Albert Kimbel and two others. The note was endorsed by C. A. Kimbel. At the time the mortgage was given, Mr. Kimbel had endorser liability on a note of T. H. Thompson discounted by the Bank which was payable to and endorsed by Duval Electric Co. in the amount of $600. Interest accrued on all of these obligations. Mrs. Kimbel was not personally liable for the payment of any of them. Mrs. Kimbel died on December 1, 1954. The Bank instituted a suit in the Circuit Court for Duval County , Florida , for the foreclosure of the mortgage. The United States was made a party defendant pursuant to 28 U. S. C. A. §2410. Invoking 28 U. S. C. A. §1444, the United States removed the cause to the United States District Court for the Southern District of Florida.

[District Court's Decision]

Pending the foreclosure the property was in the custody of a court appointed receiver who collected rents. The property was sold by a special master at foreclosure sale for $35,000. The special master, undder order of the court, retained $14,000 to be disbursed upon a determination of lien priorities as between the Bank and the Government. Payment of the remaining funds was made to the Bank. The district court held, initially, that the Bank had a prior lien for the so-called primary obligations consisting of the principal balance of the $24,000 note, interest thereon, property taxes, abstract costs, and attorneys' fees and court costs in foreclosure. The district court also held, initially, that the claims of the United States became liens upon the property on the death of Mrs. Kimbel, that the mortgage did not secure the obligations for which Mrs. Kimbel was not liable, and that the United States should receive the proceeds to the extent of the excess over the primary obligations. Judgment was accordingly entered. On rehearing, it was determined that the mortgage was ambiguous. Parol evidence was received as to the intent of C. Albert Kimbel and Ida T. Kimbel in executing the mortgage with respect to securing the individual obligations of Mr. Kimbel. On this evidence the district court found that it was the intent of Mr. and Mrs. Kimbel that the mortgage should secure the individual obligations of C. Albert Kimbel to the Bank, both those existing at the time of and those incurred subsequent to the mortgage. So finding, the district court concluded that the Bank had a lien for all of the Kimbel obligations, several as well as joint, and irrespective of whether incurred prior or subsequent to the mortgage, and that the Bank's lien was, in its entirety, superior to the claims of the Government. As a result of these determinations an amended judgment was entered awarding all proceeds of the foreclosure sale to the Bank. From this judgment the United States has appealed.

[Tax Lien Did Not Attach to Estate by Entireties]

At the time the mortgage to the Bank was given the property was held by the Kimbels as an estate by the entireties. As was recently said by the Supreme Court of Florida,

"The required elements of unity of possession, interest and control peculiar to an estate by the entirety are so well known that an extensive discussion would not be justified. The estate is one peculiar to the relationship of husband and wife and is not available to people in any other relationship. Aside from unity of control, possibly the most important incidents of a tenancy by the entirety are that the survivor of the marriage, whether husband or wife, is entitled to the whole estate and that any property so held is not subject to execution to satisfy the debts of either of the parties individually." Winters v. Parks, Fla. , 91 So. (2d) 649. See Ohio Butterine Co. v. Hargrave, 79 Fla. 458, 84 So. 376; Stanley v. Powers, 123 Fla. 359, 166 So. 843; Vaughn v. Mandis, Fla. , 53 So. (2d) 704; Sheldon v. Waters, 5th Cir. 1948, 168 Fed. (2d) 483; 5 Miami L. Q. 592.

We do not question the rule that liens for Federal taxes and the manner of their enforcement are matters which are governed by the Federal law. Bank of Nevada , 9th Cir. 1957, 251 Fed. (2d) 820 [58-1 USTC ¶9228]. However, the rules of property and fixing the incidents of property ownership are rules of state law which the Federal courts will respect. Poe v. Seaborn, 282 U. S. 101, 51 S. Ct. 58, 75 L. Ed. 239 [2 USTC ¶611]. The question as to whether a lien for taxes owing to the United States by a husband attached to property held by the entireties was considered by the Eighth Circuit Court of Appeals. It said:

"* * * the individual interest of the husband or wife in an estate by the entirety is, like a rainbow in the sky or the morning fog rising from the valley, not such an estate as may be subjected to the grasp of an attaching creditor or which will permit the adherence thereto of a tax lien. We are not at liberty to change the nature of either." United States v. Hutcherson, 8th Cir. 1951, 188 Fed. (2d) 326 [51-1 USTC ¶9249], affirming Hutcherson v. United States, D. C. W. D. Mo. 1950, 92 Fed. Supp. 168 [50-2 USTC ¶9471]. See Raffaele v. Granger, 3rd Cir. 1952, 196 Fed. (2d) 620 [52-1 USTC ¶9321].

While refraining from concurrence in dicta regarding rainbows and fogs, we express our concurrence in the conclusions of the Hutcherson case regarding the attaching of a tax lien upon an estate by the entireties. Plumb, Federal Tax Collection and Lien Problems, 13 Tax Law Review, 247. The husband, C. Albert Kimbel, did not have any interest in the subject property during his wife's lifetime to which a lien for Federal taxes, owed by him but not by her, could attach. Upon Mrs. Kimbel's death the tax lien attached to the property as of the time of her death. Johnson v. Leavitt, 188 N. C. 682, 125 S. E. 490. Cf. Moralis v. Matheson, 75 Fla. 589, 79 So. 202; Newman v. Equitable Life Assur. Soc., 119 Fla. 641, 160 So. 475. The mortgage, executed by both Mr. and Mrs. Kimbel, had a priority of lien over the tax lien of the Government. The mortgage secured the principal and interest of the note which was specifically described in the mortgage, advances of the Bank for taxes on the mortgaged property and the costs and charges incident to foreclosure. Remaining for our consideration is the question whether the mortgage secured other obligations to the Bank for which C. Albert Kimbel was liable to the Bank.

[Effect of "Dragnet" Clause]

The mortgage provision which is to be construed is commonly known as a dragnet clause. It has been said that such clauses should be carefully scrutinized and strictly construed. First v. Byrne, 238 Iowa 712, 28 N. W. (2d) 509, 172 A. L. R. 1072. In construing such a clause in a collateral pledge agreement the Supreme Court of Florida used this language:

"What everybody knows the courts are assumed to know, and of such matters may take judicial cognizance. It is a matter of common knowledge that banking institutions, in transactions wherein they advance money with or without security, dictate the terms upon which such money will be loaned or advanced, and the borrower in such cases must agree to the terms and conditions stated and made by the bank in order to procure the loan. Therefore the court may legally presume that the bank dictated the terms and conditions under which the sum of $2,312 was procured by Aylin from the bank, and the terms and conditions under which the other notes were deposited by Aylin with the bank as collateral security. When this presumption is indulged in, as it was evidently indulged in by the chancellor, then the rule that one of the parties to a contract, having chosen the language applied and being responsible for any alleged uncertainty and ambiguity, must suffer the result of having such language construed against him, may be invoked." St. Lucie County Bank & Trust Co. v. Aylin, 94 Fla. 528, 114 So. 438, 440.

Here it is unnecessary to indulge in a presumption that the words of the dragnet clause are those of the bank. Its counsel testified that he had inserted the clause in the mortgage. Estates by the entireties have been regarded with tender solicitude by the Florida courts. Peterson v. Brotman , Fla. , 100 So. 2d 821.

It may well be that the mortgage would not have secured a note given to the Bank by Mr. Kimbel alone or by Mrs. Kimbel alone prior to the execution of the mortgage. The dragnet clause purports to secure sums due the Bank from the "mortgagors". We think the reasoning of the Supreme Court of Georgia is sound. It held:

"Since the 'grantor' consisted of the three individuals who executed the security deed, a note signed by only one of them for a debt of himself alone was not an indebtedness of the grantor within the meaning of the security deed." Americus Finance Co. v. Wilson , 189 Ga. 635, 7 S. E. 2d 259. See Monroe County Bank v. Qualls, 220 Ala. 499, 125 So. 615.

The only doubt which we have as to the applicability of the doctrine stated in the foregoing quotation to the case before us arises from the provision that "mortgagor" shall be "plural jointly and severally if more than one." Cf. Torrance v. Third National Bank, 3rd Cir. 1914, 210 Fed. 806; Heffner v. First National Bank, 311 Pa. 29, 166 A. 370, 87 A. L. R. 610. The obligations represented by the note of Duval Electric Co. and Thompson were owed to the Bank by C. Albert Kimbel only as a partner or as an endorser. They were not his liabilities in an individual and personal capacity. In construing the Florida statutes, where the context will permit, "the word 'person' includes * * * partnerships * * *." F. S. A. §1.01(3). It is unnecessary for our decision here that we determine whether a partnership is a true legal entity. See 40 Am. Jur. 137, Partnership §18. The Supreme Court has said, "The partnership is a distinct thing from the partners themselves and it would seem that debts of the firm are different in character from other joint debts of the partners." Forsyth v. Woods, 78 U. S. (11 Wall.) 484, 20 L. Ed. 207. So, a fortiori, debts of a partnership differ in character from the debts of a husband and wife or either of them. In an early, but frequently cited, New York case it was held:

"The plaintiff [bank] was dealing with him individually, and it was obtaining security for his individual and personal obligations, and a fair construction of the language shows that it was intended to secure such obligation, and such only. * * *"

"This mortgage must be regarded as a commercial instrument, executed in commercial transactions, and must be construed as ordinary commercial men would understand the language used; and we think that among business men a distinction is made between the firm, as an entity, and the members who compose it; and that this language would not be understood as broad enough to cover the indebtedness of a firm of which Thompson was a member, and for whose debts jointly with the other members of the firm he could be made responsible." Bank of Buffalo v. Thompson, 121 N. Y. 280, 24 N. E. 473."

[Partnership Obligations Not Secured by Mortgage]

We conclude that it was not the intent of the parties to regard the obligations of a partnership of which the husband was a member as obligations "due to the mortgagee from the mortgagors." If it was intended that the mortgage should secure the obligations of the partnership and the liabilities of C. Albert Kimbel as an endorser, language different from that which was used was required to declare such intent. Heffner v. First National Bank, supra; New Bethlehem Trust Co. v. Spindler, 315 Pa. 250, 172 Atl. 309. See Waterman v. Alden, 143 U. S. 196, 12 S. Ct. 435, 36 L. Ed. 123; In re Evans, 3rd Cir. 1917, 238 Fed. 543; Torrance v. Third National Bank, supra; Commissioner v. Lehman, 2nd, Cir. 1948, 165 Fed. (2d) 383 [48-1 USTC ¶9121]. That the rule here stated is the law of Florida is indicated by St. Lucie County Bank & Trust Co. v. Aylin, supra. The Bank's advances on the partnership paper were to and for the benefit of the partnership. Hence we need not consider whether a different rule would be applicable if the proceeds of the partnership paper had been received by Kimbel individually for his personal use. Cf. Silva v. Exchange Nat. Bank, Fla. , 56 So. 2d 332. The instrument before the court in the St. Lucie County Bank case, and in some of the other cases herein cited, was a pledge of personal property rather than a mortgage upon real estate, but there is no reason why the construction of a dragnet clause in one should be different when it is found in the other.

[Obligation As Endorser of Corporate Notes Not Secured by Mortgage]

C. A. Kimbel was an accommodation endorser upon eleven notes of Duval Electric Company, Inc., a corporation, to the Bank given subsequent to the execution and delivery of the mortgage. It follows, of course, that since the mortgage was not security for Kimbel's pre-existing liability on the note of the partnership and his obligation as an endorser, the subsequent notes of a corporation upon which he was an accommodation endorser were not secured. We think there are further reasons why these subsequent obligations were not secured by the mortgage. To hold that such obligations could be so secured would authorize a husband to so increase the extent of a mortgage lien upon an estate by the entireties without the wife's knowledge as to extinguish the remaining interest in the mortgaged property. Such a construction should not be adopted. First Bank & Trust Co. v. Welch, 219 Iowa 318, 258 N. W. 96. There was no compliance with the conditions of the Florida statute relating to mortgages securing future advances which requires a statement as to the maximum amount to be secured. F. S. A. §697.04. Downing v. First National Bank, Fla. , 81 So. 2d 486.

Ordinarily the construction of a contract is a question of law. City of Leesburg v. Hall, 96 Fla. 186, 117 So. 840. In applying to the dragnet clause of the mortgage the proper rules of construction we do not think there is any ambiguity in the language such as requires extrinsic evidence to ascertain its meaning. O'Brien v. Elder, 5th Cir. 1957, 250 Fed. (2d) 275.

[Decision]

Deciding, as we do, that the mortgage to the Bank had priority over the Government tax lien only to the extent of the note of both of the Kimbels, with interest, advances for taxes, and the costs, fees and charges of foreclosure, a different judgment must be entered. To that end, the judgment appealed from is Reversed and Remanded.

 

 

 

United States of America , Appellant v. Stock Yards Bank of Louisville , Kentucky , Appellee

(CA-6), In the United States Court of Appeals for the Sixth Circuit, No 12505, 231 F2d 628, April 2, 1956

Appeal from the United States District Court for the Western District of Kentucky.

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321; 1939 Code Sec. 3710--similar to 1954 Code Sec. 6332]

Lien for taxes: Government bonds in "co-ownership form": Separable interests.--A bank holding Government bonds on a loan of debtor-taxpayer was not obligated to surrender them as property subject to distraint under 1939 Code Sec. 3710, where such bonds were issued and registered in "co-ownership form" in the names of taxpayer and his wife, it appearing that the assessment was against taxpayer alone and his separate interest in the bonds was not established.

Louise Foster, Washington, D. C. (H. Brian Holland, Ellis N. Slack, A. F. Prescott, Washington, D. C., J. Leonard Walker, Louisville, Ky., were with her on brief), for appellant. John P. Sandidge, Woodward, Hobson & Fulton, Louisville , Ky. , for appellee.

Before MCALLISTER, MILLER and STEWART, Circuit Judges.

STEWART, Circuit Judge:

On August 10, 1950, the Commissioner of Internal Revenue assessed income taxes, penalties, and interest against Clarence J. Theobald in the total amount of $129,960.67 for the years 1943 through 1946. Theobald was a resident of Jefferson County , Kentucky . Notice of the resulting tax lien was filed with the County Clerk of Jefferson County on October 5, 1950. On October 23, 1950, warrants of distraint and a notice of levy were served upon the appellee bank, advising the bank that all property then in its possession belonging to or payable to Clarence J. Theobald was being thereby seized and levied upon for the payment of Theobald's tax liability.

[The Facts]

At that time the bank had in its possession one hundred and fifty Series E United States Savings Bonds of a maturity value of $25.00 each, and each registered in the names of "Clarence J. Theobald or Mrs. Theas Theobald." Theas Theobald was Clarence J. Theobald's wife. She was not a delinquent taxpayer. The bonds had been left by Clarence J. Theobald with the president of the bank more than two years earlier, when Theobald received a $2,500 loan from the bank and executed a promissory note for that amount. ¹

The bank advised the Collector of its refusal to surrender these bonds to him in response to his demand. This action was then brought by the United States against the bank under Section 3710 of the Internal Revenue Code of 1939 for the value of the bonds, plus interest from the date of the levy.

The district court concluded as a matter of law that the bonds were owned by Clarence J. Theobald and his wife as joint tenants, that Mrs. Theobald had the right at any time to demand delivery of the bonds from the bank and collect what was due on them by simply endorsing them, and that this right could not be taken from her by a levy or distraint based upon an assessment against her husband. Accordingly, the court entered judgment dismissing the complaint [55-1 USTC ¶9113], and from that judgment the government has appealed.

The relevant provisions of Section 3710 of the Internal Revenue Code of 1939 are as follows:

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

"(b) Penalty for Violation.--Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy. . . . (26 U. S. C. 1952 ed., Sec. 3710)."

[Opinion]

As this court has said, "the proceeding authorized is not an action in rem nor is it a suit for the collection of a tax. It is a suit to enforce personal liability for failure to surrender property belonging to a delinquent taxpayer."Commonwealth Bank v. United States , 115 Fed. (2d) 327, 330 (6 Cir., 1940) [40-2 USTC ¶9769].

That the bank was in possession of the bonds, and that it refused to surrender them upon demand, it conceded in its answer. The bank made no claim that the bonds were subject to an attachment or execution under any judicial process at the time demand was made for their surrender. In order to prevail, therefore, the government contends that it was incumbent upon it to establish only (1) that the bonds were subject to distraint, (2) that a levy had been made upon them, and (3) that they were "property, or rights to property" of Clarence J. Theobald, the delinquent taxpayer. In asking us to reverse the district court's dismissal of the complaint, the government argues that upon the facts above set forth these three elements were all established.

The appellee bank, on the other hand, takes the position that the bonds were not property subject to distraint, and that in any event no levy was made upon them. The bank insists further that the United States had the additional burden of establishing the value of the delinquent taxpayer's "property or rights to property" which the bonds represented, and that it failed to do so.

Whether the bonds were "property subject to distraint" depends upon whether the United States was a judgment creditor within the meaning of the Treasury Regulations under which the bonds were issued. 31 Code Fed. Reg. §315.13. Whether a levy was made upon the bonds depends upon what technical requirements are necessary to constitute a levy. Section 3692 of the Internal Revenue Code of 1939 does not set out any method for accomplishing a levy upon property. The bank argues that in addition to issuing warrants of distraint and serving notice of levy, it was incumbent upon the government to serve a notice of lien. Cf. United States v. O'Dell, 160 Fed. (2d) 304, 307 (6 Cir., 1947) [47-1 USTC ¶9190];Commonwealth Bank v. United States, 115 Fed. (2d) 327, 328 (6 Cir., 1940) [40-2 USTC ¶9769]. These questions are not reached, however, in the view we take of this case.

We cannot agree with the district court that Clarence J. Theobald and his wife held the bonds in joint tenancy. Under the applicable Treasury Regulations there are only three forms under which Series E Bonds may be registered: in the name of one person, in the names of two persons in "co-ownership form," or in the names of two persons in "beneficiary form." 31 Code Fed. Reg. §315.4. The bonds in the present case were issued in co-ownership form.

[Joint Tenancy Distinguished]

This court has held that co-ownership by husband and wife of Series E Bonds is not the equivalent of tenancy by the entirety under state law, but rather is an estate the limitations and conditions of which are delineated by the terms of the contract and by federal law. Guldager v. United States , 204 Fed. (2d) 487 (6 Cir., 1953). See Clearfield Trust Co. v. United States , 318 U. S. 363 (1943); Bank of America National Trust & Sav. Assn. v. Rocco, 226 Fed. (2d) 297, 299 (3 Cir., 1955). The incidents of the estate of co-ownership are spelled out in some detail in this court's opinion in the Guldager case.

For the same reasons that co-ownership cannot be equated to tenancy by the entirety, it cannot be equated to joint ownership. While co-ownership and joint ownership possess many of the same incidents, notably the right of survivorship, they are not the same. One of the important differences is that a co-owner may alone present the bond for redemption, receive payment in full, and thereby eliminate the other co-owner's interest in the bond, so far at least as the issuer is concerned. 31 Code Fed. Reg., §315.45.

As between two-co-owners, however, the regulations as well as judicial decisions have recognized that the extent of the property interest of each is a question of fact, not of law. One co-owner may as a matter of fact be the sole owner of the bond; he may be a half owner; he may have some other fractional ownership. Thus, the regulations provide that "a claim against an owner or co-owner of a savings bond andconflicting claims as to ownership of or interest in such bond as between co-owners . . . will be recognized when established by valid judicial proceedings. . . ." They further provide that "if a debtor, or bankrupt, or insolvent is not the sole owner of the bond, payment will be made onlyto the extent of his interest therein, which must be determined by the court or otherwise validly established." 31 Code Fed. Reg., §315.13. See Barrett v. Barrett, 91 Fed. Supp. 680, 684 (N. D. Ohio, 1950); United States v. Ridley, 120 Fed. Supp. 530, 537 (N. D. Ga., 1954) [54-1USTC ¶9229]; Guldager v. United States, 204 Fed. (2d) 487, 488, 6 Cir., 1953).

[Interest Must Be Determined]

Beyond showing that it was the delinquent taxpayer who had left the bonds with the president of the appellee bank, the government adduced no evidence to establish the extent, if any, of his property interest in them. Proof of the actual value of the taxpayer's interest was an essential element of the government's case under the statute, and for lack of such proof the case falls. United States v. Aetna Life Ins. Co. of Hartford , Conn. , 46 Fed. Supp. 30 (D. Conn., 1942) [42-1USTC ¶9266].

Although the precise question here in issue has not apparently previously been decided, the decisions relating to joint bank accounts and insurance policies are closely analogous. Almost uniformly, those decisions support the conclusion we have here reached. Raffale v. Granger, 196 Fed. (2d) 620, 623 (3 Cir., 1953) [52-1 USTC ¶9321]; United States v. Emigrant Industrial Savs. Bank, 122 Fed. Supp. 547 (S. D. N. Y. 1954) [54-2 USTC ¶9447]; United States v. Massachusetts Mut. Life Ins. Co., 127 Fed. (2d) 880 (1 Cir., 1942) [42-1 USTC ¶9342];United States v. Aetna Life Ins. Co. of Hartford, Conn., 46 Fed. Supp. 30 (D. Conn., 1942) [42-1 USTC ¶9266]; Cannon v. Nicholas, 80 Fed. (2d) 934 (10 Cir., 1935)[35-2 USTC ¶9672]; United States v. Penn Mut. Life Ins. Co., 130 Fed. (2d) 495 (3 Cir., 1942) [42-2 USTC ¶9623]; United States v. Metropolitan Life Ins. Co., 130 Fed. (2d) 149 (2 Cir., 1949) [42-2 USTC ¶9609]. But see United States v. Third Nat. Bank & Trust Co., 111 Fed. Supp. 152 (M. D. Pa., 1953) [53-1 USTC ¶9255].

Whether and how it would have been possible to establish the value of one co-owner's property in an action in which neither of the co-owners was a party, we need not now decide. Nor do we here determine whether the delinquent taxpayer and his wife could properly have been made parties to this proceeding. See Rule 19, Federal Rules of Civil Procedure.United States v. Aetna Life Ins. Co. of Hartford , Conn. , 46 Fed. Supp. 30 (D. Conn., 1942) [42-1 USTC ¶9266].

It should be pointed out, however, that distraint is a rough and ready remedy. This short cut form of self-held developed by the common law has been available to the government in pursuit of delinquent taxpayers since the eighteenth century. See United States v. Metropolitan Life Ins. Co., 130 Fed. (2d) 149 (2 Cir., 1942) [42-2 USTC ¶9609]. Where the value and nature of the taxpayer's property rights are not in question, distraint is no doubt a useful tool in the effective enforcement of the Internal Revenue laws. But it is a blunt instrument, ill-adapted to carve out property interests where their nature and extent are unclear.

There is available to the government an alternative remedy well-designed to resolve the issues in the present case. Under Section 3678 of the Internal Revenue Code of 1939, the United States can bring suit against the bank to enforce a lien on the bonds and name both the taxpayer and his wife co-defendants. ² In such a proceeding the extent of the taxpayer's interest in the bonds can be finally adjudicated, and the rights of all parties fully protected. 26 U. S. C., §3678 (1952 Ed.).

The judgment of the district court is affirmed.

¹ The bonds could not be hypothecated. 31 Code Fed. Reg., §315.11. The bank therefore was a bailee not a pledgee of the bonds. See 26 U. S. C. (1952 Ed.) Section 3672.

² Compare §7403 of the Internal Revenue Code of 1954. 26 U. S. C. A., §7403. We are advised that after the dismissal of the present action the government filed suit under §3678 of the 1939 Code, and that proceedings in that litigation have been informally stayed pending determination of this appeal.

 

 

 

United States of America , Plaintiff v. James Dobbs Beggerly, Marie Beggerly, et al., Defendants

In the District Court of the United States for the Southern District of California, Central Division, No. 12297-C, December 18, 1951

Lien for taxes: Property subject to lien: Property held in joint tenancy v. community property.--Taxpayer and his wife took title to certain California real property as joint tenants rather than as community property although the real estate was purchased with community funds. The lien of the United States for unpaid withholding tax attached to the one-half interest of the joint tenancy property which belonged to the taxpayer, free from any homestead exemption. State exemptions are available against the government only in those cases where the state exemption has been incorporated into federal law. The other half of the property, belonging to taxpayer's wife, was not subject to the government's lien. A bank's trust deed was, however, prior and superior to the interests of all other parties including the lien of the government.

Ernest A. Tolin (Walter S. Binns), States Attorneys, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, Eugene Harpole and Frank W. Mahoney, Special Attorneys, Bureau of Internal Revenue, 600 Federal Building, Los Angeles 12, California, for plaintiff. Hugo A. Steinmeyer & Winfield Jones, 650 South Spring Street, Los Angeles 14, California, for defendant Bank of America National Trust & Savings Association; Paul Taylor, 215 West Seventh Street, Los Angeles 14, California, for defendant Marie Beggerly; Fred N. Howser, Attorney General, William L. Shaw and Vincent P. Lafferty, Deputy Attorneys General, 400 Plaza Building, Sacramento 14, California, for defendant State of California; Edmund G. Brown and Edward Summer, Attorneys General, 600 State Building, Los Angeles 12, California, for defendant Department of Employment, State of California; LaVerne M. Hayes, for the United States Credit Bureau.

Memorandum Decision

CARTER, District Judge:

In the above entitled matter heretofore submitted, the court now renders its decision:--

The court finds that title to the real property in question was taken by the husband and wife in their names as joint tenants. This created a rebuttable presumption that the property is joint tenancy property. Siberell v. Siberell, 214 Cal. 767.

The court finds that the property was purchased with community funds, but that this alone is not sufficient to overcome the presumption. In re Rauer's Collection Co., 87 C. A. (2d) 248.

What was the intent of the Beggerlys when they purchase or acquired the property? Both husband and wife showed by their testimony that they did not know the difference between property held as community property and property held in joint tenancy. It is difficult therefore, to determine what was their intent at the time of acquisition, except by reliance upon the presumption growing out of the joint tenancy deed.

The court finds also that the wife, in her affidavit in the divorce action, stated unequivocally that the property was community. Certainly the execution of the affidavit would not in itself have the effect of changing the character of the property from joint tenancy to community. At best, it is an admission on the part of the wife; but when coupled with her testimony on the witness stand and her lack of knowledge of the distinguishing characteristics between joint tenancy and community property, plus the additional fact that the affidavit was prepared by her attorney and merely handed to her to sign, the court cannot find that the presumption has been overcome.

[Property Held in Joint Tenancy]

The court concludes that the property is joint tenancy property and not community property.

The declaration of a homestead by the defendant, Marie Beggerly, pursuant to California law, cannot affect the government's tax lien. State exemptions are only available against the government in those cases where the state exemption has been incorporated into Federal law.

Accordingly, the court finds that the liens of the government attached to the one-half interest of the joint tenancy property that belonged to James D. Beggerly, free from any homestead exemption; that the other one-half of the property belongs to Marie Beggerly and is not subject to the lien of the government.

Counsel for plaintiff will prepare findings and judgment within the time provided by the rules of this court.

Findings of Fact and Conclusions of Law (May 2, 1952)

This cause came on regularly for trial on December 6, 1951, before the Honorable James M. Carter, District Judge; Ernest A. Tolin, United States Attorney, and Edward R. McHale, Assistant United States Attorney, appearing for plaintiff, United States of America; Winfield Jones appearing for defendant, Bank of America National Trust & Savings Association; and Paul Taylor appearing for defendant, Marie Beggerly; and it appearing that James G. Bryant, Director of Employment of the State of California, the State of California and the Department of Employment of the State of California by its attorneys, Edmund G. Brown, Attorney General, and Edward Sumner, Deputy Attorney General, filed a disclaimer in said action; and it appearing that the United States Credit Bureau, a Corporation, by its attorney, LaVerne M. Hayes, filed a disclaimer in said action; and no one appearing for the other defendants sued and served herein; and it appearing that due and proper notice of the trial of said action had been given in the time and manner as required by law; and it further appearing that each and all of the other defendants not appearing in said trial had been duly and regularly served with process and failed to appear in said action or to answer the complaint of plaintiff on file herein, that the default of said defendants and each of them for so failing to appear or to answer the complaint of plaintiff has been duly and regularly entered; and evidence having been duly offered and received in evidence and the evidence being closed, the cause was submitted to the court for its consideration and decision, and the court being fully advised now files its Findings of Fact and Conclusions of Law in writing as follows:

Findings of Fact

I. This action was authorized by the Commissioner of Internal Revenue and was brought under the direction of the Attorney General of the United States .

II. At all times mentioned herein plaintiff was and now is a corporation sovereign and body politic.

III. At all times mentioned herein, the defendant, James Dobbs Beggerly, resided at or near Gardena , Los Angeles County , California .

IV. During all times mentioned herein, the defendant, Marie Beggerly, resided at or near Gardena , Los Angeles County , California .

V. The defendant, Bank of America National Trust & Savings Association, is a National Banking Association organized and existing under and by virtue of the banking laws of the United States of America and has its principal place of business located at Los Angeles, Los Angeles County, California, and has a branch office located at Gardena, Los Angeles County, California.

[Taxpayer Failed to Pay Withholding Taxes]

VI. During all the time between March 31, 1948, and June 30, 1948, divers individuals performed services for the defendant, James Dobbs Beggerly, and by whom they were paid wages. On account of said employment and the payment of wages, said Commissioner made an assessment for the quarter-year period ending June 30, 1948, of the amount deducted and withheld by said defendant from said wages as a collection of taxes upon the income of said employees (otherwise known as a "withholding tax"); and said defendant having failed to file a return of such withheld taxes when due, and to pay the amount of said taxes when due, a penalty and interest were included in said assessment. Said assessment consists of taxes of $1,667.10, a penalty of $416.77 and interest of $50.01, a total of $2,133.88. The Collector of Internal Revenue for the Sixth District of California, received the list of said assessment on January 21, 1949, and thereupon gave notice thereof to said defendant and demended payment of the said assessment from him. On February 3, 1949, said Collector filed a written notice with the County Recorder of Los Angeles County , California , as No. 1123, wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment or the interest thereon has been paid. Additional penalties and interest continue to accrue on the assessment as provided by law.

VII. During all the time between June 30, 1948 and September 30, 1948, the divers individuals performed services for the defendant, James Dobbs Beggerly, and by whom they were paid wages. On account of said employment and the payment of wages, said Commissioner made an assessment for the quarter-year period ending September 30, 1948, of the amount deducted and withheld by said defendant from said wages as the collection of taxes upon the income of said employees (otherwise known as a "withholding tax"); and said defendant having failed to file a return of such withheld taxes when due, and to pay the amount of said taxes when due, a penalty and interest were included in said assessment. Said assessment consists of taxes of $169.10, a penalty of $25.36 and interest of $2.54, a total of $197.00. The Collector of Internal Revenue for the Sixth District of California, received the list of said assessment on January 21, 1949, and thereupon gave notice thereof to said defendant and demanded payment of the amount of the assessment from him. On February 3, 1949, said Collector filed a written notice with the County Recorder , Los Angeles County , California , as No. 1123, wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment or the interest thereon has been paid. Additional penalties and interest continued to accrue on said assessment as provided by law.

VIII. During all the times between March 31, 1948 and June 30, 1948, the defendant, James Dobbs Beggerly, employed divers persons to each of whom wages were paid by him on account of such employment, and because of the aforesaid employment and the payment of wages, said Commissioner made an assessment for the quarter-year period ending June 30, 1948, of the amount of the percentages of the wages deducted and withheld by such defendant from such wages paid by him to said employees, in addition to all other taxes, as taxes upon the income of such employees (otherwise known as taxes under the Federal Insurance Contributions Act) and said defendant having failed to file a return of such withheld percentages when due, and to pay them, a penalty and interest were included in such assessment. Said assessment consists of taxes of $302.88, a penalty of $75.72 and interest of $8.42, a total of $387.02. Said Collector received the list of said assessment on January 19, 1949, and thereupon gave notice to said defendant and demanded payment of said assessment from him. On January 27, 1949, said Collector filed with the County Recorder of Los Angeles County , California , a written notice, as No. 1246, wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment has been paid. Additional penalties and interest continue to accrue on said assessment as provided by law.

IX. During all the times between June 30, 1948, and September 30, 1948, the defendant, James Dobbs Beggerly, employed divers persons to each of whom wages were paid by him on account of such employment; and because of the aforesaid employment and payment of wages, said Commissioner made an assessment for the quarter-year period ending September 30, 1948, of the amount of the percentages of the wages deducted and withheld by said defendant from such wages paid by him to said employees, in addition to all other taxes, as taxes upon the income of such employees (otherwise known as taxes under the Federal Insurance Contributions Act); and said defendant having failed to file a return of such withheld percentages when due, and to pay them, a penalty and interest were included in such assessment. Said assessment consists of taxes of $21.42, a penalty of $3.21 and interest of 28¢, a total of $24.91. Said Collector received a list of said assessment on January 19, 1949, and thereupon gave notice thereof to said defendant and demanded payment of said assessment from him. On January 27, 1949, said Collector filed a written notice, as No. 1246, with the County Recorder of Los Angeles County , California , wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment has been paid. Additional penalties and interest continue to accrue on said assessment as provided by law.

X. During all of the time between December 31, 1947, and December 31, 1948, the defendant, James Dobbs Beggerly, employed divers persons to each of whom wages were paid by him on account of such employment; and, because of the aforesaid employment and the payment of wages, said Commissioner made an assessment for the year ending December 31, 1948, of a percentage of the wages paid by said defendant to said employees, in addition to all other taxes, as a tax upon such employer (otherwise known as Federal Unemployment Taxes); and said defendant having failed to file a return of such percentages when due, and to pay them, a penalty and interests were included in such assessment. Said assessment consists of taxes of $1,064.63, a penalty of $266.16 and interest of $47.91, a total of $1378.70. Said Collector received the list of said assessment on October 31, 1939, and thereupon gave notice thereof to said defendant and demanded payment of said assessment from him. On November 28, 1949, said Collector filed a written notice, as No. 1698, with the County Recorder , Los Angeles County , California , wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment has been paid. Additional penalties and interest continue to accrue on said assessment as provided by law.

XI. During all the times between December 31, 1943, and December 31, 1944, the defendant, James Dobbs Beggerly, employed divers persons to each of whom wages were paid by him on account of such employment; and, because of the aforesaid employment and payment of wages, said Commissioner made an assessment for the year period ending December 31, 1944, of a percentage of the wages paid by said defendant to said employees, in addition to all other taxes, as a tax upon such employer (otherwise known as Federal Unemployment Taxes); and said defendant having failed to file a return of such percentages when due, and to pay them, a penalty and interest were included in said assessment. Said assessment consists of taxes of $71.63, a penalty of $17.91 and interest of $20.35, a total of $109.89. Said Collector received the list of said assessment on November 1, 1949, and thereupon gave notice thereof to said defendant and demanded payment of said assessment from him. On December 2, 1949, said Collector filed a written notice, as No. 1948, with the County Recorder , Los Angeles County , California , wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment has been paid. Additional penalties and interest continue to accrue on said assessment as provided by law.

XII. During all the time between December 31, 1945, and December 31, 1946, the defendant, James Dobbs Beggerly, employed divers persons to each of whom wages were paid by him on account of such employment; and, because of the aforesaid employment and the payment of wages, said Commissioner made an assessment for the year period ending December 31, 1946, of a percentage of the wages paid by said defendant to said employees, in addition to all other taxes, as taxes upon such employer (otherwise known as a Federal Unemployment Tax); and said defendant having failed to file a return of such percentages when due, and to pay them, a penalty and interest were included in such assessment. Said assessment consists of taxes of $53.12, a penalty of $13.28 and interest of $9.14, a total of $75.54. Said Collector received the list of said assessment on December 23, 1949, and thereupon gave notice thereof to said defendant and demanded payment of said assessment from him. On January 26, 1950. said Collector filed a written notice, as No. 1503, with the County Recorder of Los Angeles County , California , wherein a lien is claimed by the United States for the payment of said assessment. No part of said assessment has been paid. Additional penalties and interest continue to accrue on said assessment as provided by law.

XIII. During all the time between December 31, 1946, and December 31, 1947, the defendant, James Dobbs Beggerly, employed divers persons to each of whom wages were paid by him on account of such employment; and, because of the aforesaid employment and payment of wages, said Commissioner made an assessment for the year period ending December 31, 1947, of a percentage of the wages paid by said defendant to said employees, in addition to all other taxes, as taxes upon said employer (otherwise known as a Federal Unemployment Tax); and, said defendant having failed to file a return of such percentages when due, and to pay them, a penalty and interest were included in said assessment. Said assessment consists of taxes of $239.74, a penalty of $59.94 and interest of $26.88, a total of $326.56. Said Collector received the list of said assessment on December 23, 1949, and thereupon gave notice to said defendant and demanded payment of said assessment from him. On January 26, 1950, said Collector filed a written notice, as No. 1503, with the County Recorder , Los Angeles County , California , wherein a lien is claimed by the United States for the amount of said assessment. No part of said assessment has been paid. Additional penalties and interest continue to accrue on said assessment as provided by law.

XIV. Plaintiff has incurred additional expense of recording the aforesaid liens in the amount of $5.00.

[Promissory Note Secured by Deed of Trust]

XV. On October 11, 1947, the defendants James Dobbs Beggerly and Marie Beggerly, executed a promissory note in favor of the Bank of America National Trust & Savings Association for $6,000.00 with interest at the rate of five per centum per annum, payable in installments. The payment of the indebtedness evidenced by this promissory note is secured by a deed of trust, dated October 11, 1947, executed by the said defendants as Trustors, conveying the real property described as:

"Lot 7, Tract No. 14005, in the City of Gardena, County of Los Angeles, State of California, as per maps recorded in Book 301, pages 47-49, inclusive, of Maps, in the office of the County Recorder of said County, also known as premises 1119 West 162nd Street, Gardena, Los Angeles County, California,"

to Corporation of America , a California Corporation, as Trustee for Bank of America National Trust & Savings Association, as Beneficiary. This deed of trust was recorded November 18, 1947, in Book 25602, Page 33 of Official Records of the County of Los Angeles , State of California . The balance due on said promissory note had been reduced to $4,394.32 as of June 15, 1951. Said note and trust deed are not in default.

XVI. The real property was conveyed by the Property Management Corporation to the defendants, James Dobbs Beggerly and Marie Beggerly, husband and wife, as joint tenants, by Corporation Grant Deed signed and acknowledged on September 30, 1947, and recorded November 18, 1947, in Book 25602, Page 113 in the Official Records of Los Angeles County, State of California.

XVII. On August 17, 1948, there was recorded in the Official Records of Los Angeles County, State of California , in Book 28041, Page 78, a Declaration of Homestead by Marie Beggerly, as wife of James Dobbs Beggerly.

[Liens of United States Are Subordinate to Trust Deed]

XVIII. The liens of the United States of America and the interests of the defendants, Marie Beggerly and James Dobbs Beggerly, in and to the property described in paragraph XV hereinabove, are subordinate to the interests of the defendant, Bank of America National Trust & Savings Association.

XIX. James Dobbs Beggerly and Marie Beggerly have been, and are, unaware of the distinguishing characteristics of joint tenancy and community property.

XX. The real property described in paragraph XV hereinabove, was held by James Dobb Beggerly and Marie Beggerly in joint tenancy and not as community.

XXI. The declaration of a homestead by the defendant, Marie Beggerly, does not affect the tax liens of the plaintiff or prevent them from attaching to the interest of James Dobbs Beggerly in the said real property.

XXII. The liens of the United States described in paragraphs VI, VII, VIII, IX, X, XI, XII and XIII, hereinabove, attach to the one-half joint tenancy interest of James Dobbs Beggerly in the property and not to the one-half joint tenancy interest of Marie Beggerly.

XXIII. The real property, described in paragraph XV hereinabove, is a lot on which is located a single family dwelling; said property is not susceptible to partition without great prejudice to the owners and all parties in interest; a sale of the whole property in bulk is for the best interest of all concerned.

Conclusions of Law

I. James Dobbs Beggerly has a one-half joint tenancy interest in the property, described as follows:

"Lot 7, Tract No. 14005, in the City of Gardena, County of Los Angeles, State of California, as per maps recorded in Book 301, pages 47-49, inclusive, of Maps, in the office of the County Recorder of said County, also known as premises 1119 West 162nd Street, Gardena, Los Angeles County, California,"

against which interest the lien of the United States , described in paragraph IV hereinafter, attaches.

II. The lien of the plaintiff, United States of America , does not attach to the one-half joint tenancy interest of Marie Beggerly in and to the real property, subject of this action, described in paragraph I hereinabove.

III. The Bank of America National Trust & Savings Association has a trust deed upon the whole of said real property, prior and superior to the interests of all other parties hereto, including the liens or interest of the plaintiff, United States of America, and the defendant, Marie Beggerly, securing the principal remaining indebtedness of $3,969.44, together with interest at the rate of five per centum per annum on the unpaid balance from April 16, 1952.

IV. That there is due, owing and unpaid to the plaintiff, United States of America, from the defendant, James Dobbs Beggerly, the sum of $5,684.44, together with interest at the rate of six per centum per annum on the sum of $4,633.50, which accrues from May 2, 1952, until the latter sum is paid, which amount is a lien upon the interest of James Dobbs Beggerly in and to the real property, subject of this action.

V. The real property cannot be partitioned without great prejudice to the owners and a sale of the whole property is necessary, the proceeds to be allocated to the parties hereto in proportion to their rights to the realty.

VI. The plaintiff, United States of America , is entitled to a decree foreclosing its liens against James Dobbs Beggerly's interest in the said real property and to a sale of the said real property, with the proceeds of the sale to be applied as follows:

First, to the payment of the marshal's fees, disbursements, and expenses of said sale;

Secondly, to the costs of this action;

Thirdly, to the Bank of America National Trust & Savings Association, the sum of $3,969.44, together with interest at the rate of five per centum per annum on the balance from April 16, 1952, until paid;

Fourthly, to the payment to the defendant, Marie Beggerly, one-half of the balance remaining; and to the plaintiff, United States of America, the other one-half of the balance remaining to the extent of its lien, in the sum of $5,684.44, together with interest accrued at the date of the sale, any surplus remaining thereafter from that one-half to be paid to the defendant, James Dobbs Beggerly.

VII. The plaintiff, United States of America , is entitled to a deficiency judgment against the defendant, James Dobbs Beggerly, to the extent that the sum realized by said plaintiff from the judicial sale is insufficient to pay the lien, with interest, of said plaintiff as set out in paragraph VI hereinabove.

Let judgment be entered accordingly.

 

 

 

United States of America, Appellant v. Lois G. Hutcherson, Raymond W. Hutton and Mary S. Hutton, his wife, Appellees

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 14,257, 188 F2d 326, April 17, 1951

Appeal from the United States District Court for the Western District of Missouri.

Property subject to lien for taxes: Estate by the entirety.--A lien for unpaid federal income taxes owed by a husband does not attach to the interest of the husband in Missouri real estate owned by the husband and his wife as tenants by the entirety, because under Missouri law such interest is not attachable by creditors or subject to a tax lien and therefore is not a "right to property" or "property" under the federal tax lien law.  Affirming the decision of the District Court, 92 Fed. Supp. 168, reported at 50-2 USTC ¶9471.

Harry Marselli, Special Assistant to the Attorney General (Theron Lamar Caudle, Assistant Atorney General, and Ellis N. Slack, Special Assistant to the Attorney General, were with him on the brief, Sam M. Wear, United States Attorney, and William Aull, III, Assistant United States Attorney, of counsel), for appellant. Marcy K. Brown, Jr., for appellees.

Before COLLET and STONE, Circuit Judges, and DELEHANT, District Judge.

COLLET, Circuit Judge, delivered the opinion of the Court:

This action involves the question of whether the lien of the United States for unpaid federal income taxes owed by a husband, attaches to the interest of the husband in Missouri real estate owned by the husband and wife as tenants by the entirety so that the husband may not joint with the wife in conveying the property free from the lien. That question arises from the following facts.

On March 26, 1947, the real estate involved was conveyed to J. E. Hutcherson and Lois G. Hutcherson, his wife, as tenants by the entirety. For the year 1947 Hutcherson and his wife filed separate income tax returns. On December 15, 1947, Hutcherson filed a suit for divorce against his wife. May 26, 1948, the United States filed in the office of the Recorder of Deeds for Jackson County, Missouri, (in which county the real estate was located) a Notice of Federal Tax Lien in the sum of $1,091.61 for unpaid 1947 income taxes assessed against Hutcherson individually. There was and is no claim made that the United States had any claim against Mrs. Hutcherson. On June 9, 1948, Hutcherson and his wife entered into a written pre-divorce property settlement agreement by which it was provided, among other things, that the real estate in question was to be conveyed by both Hutcherson and his wife to a third person. Although the written agreement does not expressly so provide, it is assumed that the understanding at the time was that the third person was to reconvey the property to Mrs. Hutcherson after the divorce so as to vest in her the entire interest in the real estate. Pursuant to that agreement, Hutcherson and his wife conveyed the property to Esther C. Moberly on June 9, 1948. There was and is no contention that the transfer of the title to Moberly and through her to Mrs. Hutcherson was without consideration for the purpose of defrauding the United States of the opportunity to collect its tax claim against Hutcherson or to defraud any creditor, or for any purpose other than to pass the entire title to Mrs. Hutcherson as a part of the divorce settlement. Therefore this case is not complicated by any issues of fraud or related questions. A divorce was granted Mrs. Hutcherson on her cross bill on June 30, 1948. July 2, 1948, Esther C. Moberly conveyed the property to Lois G. Hutcherson alone. On December 1, 1949, Lois G. Hutcherson sold and deeded it to Raymond W. Hutton and Mary S. Hutton, his wife. Thereafter, Lois G. Hutcherson, Raymond W. Hutton and Mary S. Hutton filed this action in the Jackson County Circuit Court against the United States to quiet the title to the real estate in question in Raymond W. Hutton and Mary S. Hutton, and specifically to obtain a judgment that the United States had no interest in the property as a result of the notice of the federal tax lien. The cause was properly removed to the United States District Court where it was tried and a judgment was entered quieting the title in the Huttons and decreeing that the Notice of Tax Lien was not a cloud upon the title. It is from that judgment that this appeal was taken. The trial court's Memorandum Opinion is reported 92 Fed. Supp. 168 [50-2 USTC ¶9471].

[Property Subject to Tax Liens]

Appellant contends the provision of Section 3670 of the Internal Revenue Code, 26 U. S. C. 1946 ed., Sec. 3670, ¹ that the United States shall have a lien upon all property and rights to property belonging to the taxpayer, results in the attachment of the lien to the interest of Hutcherson in the real estate on the date the tax notice was filed. And that the lien having attached, his interest in the property could not thereafter be conveyed free of the lien. ² The entire problem turns upon the question of whether the lien actually attached to the husband's interest. If it did, then his voluntary conveyance could not defeat the lien. Michigan v. United States, 317 U. S. 338, l. c. 340 [43-1 USTC ¶9225]. But if the lien did not attach to the property interest, then it could not follow the title.

[State v. Federal Laws of Property]

To determine whether the lien attached to the husband's interest in the property it is necessary to examine that interest and to ascertain whether it is such an interest to which any lien can attach. That ascertainment will be made by the application of the law of Missouri determining and defining the law of property rights in that state Tyler v. United States, 281 U. S. 497, Warburton v. White, 176 U. S. 484, l. c. 496.

In the Warburton case the rule is stated (l. c. 496):

". . . where state decisions have interpreted state laws governing real property or controlling relations which are essentially of a domestic and state nature; in other words, where the state decisions establish a rule of property, this court when called upon to interpret the state law will, if it is possible to do so, in the discharge of its duty, adopt and follow the settled rule of construction affixed by the state court of last resort to the statutes of the State, and thus conform to the rule of property within the State."

And in the Tyler case it is reiterated in the following language. l. c. 501:

"The decision of the courts of Maryland and Pennsylvania follow the common law and are in accord in respect of the character and incidents of tenancy by the entirety. In legal contemplation the tenants constitute a unit; neither can dispose of any part of the estate without the consent of the other; and the whole continues in the survivor. In Maryland , such a tenancy may exist in personal property as well as in real estate. These decisions establish a state rule of property, by which, of course, this court is bound. Warburton v. White, 176 U. S. 484, 496."

Counsel for the United States concede that property rights are to be determined in accordance with state law, but say that federal law, in this instance Section 3670 of the Interal Revenue Code, supra, "controls the application of the federal tax lien to whatever 'property' or 'rights to property' a taxpayer may have under state law." Citing Michigan v. United States, 317 U. S. 338 [43-1 USTC ¶9225]; Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449]; and Detroit Bank v. United States, 317 U. S. 329 [43-1 USTC ¶9224]. They further say that the federal statutes governing federal tax liens are controlling and override any conflicting provisions of state law and cite in support thereof Michigan v. United States , supra, United States v. Rosenfield, 26 Fed. Supp. 433 (E. D. Mich.) [39-1 USTC ¶9204], and In re Dartmont Coal Co. , 46 Fed. (2d) 455 (4 Cir.). Insofar as the foregoing authorities relate to the subject now under consideration, they deal with the question of whether federal estate taxes may be levied on the inheritance of one of the tenants by the entirety upon the death of the other tenant and the dissolution of the tenancy, and whether state statutes may be enacted overriding Acts of Congress fixing the time liens for federal taxes shall take effect, the nature of the liens. The answer to for perfecting such liens. The answer to neither of these questions determines or affects the rule of property in Missouri defining without discrimination between the state's interests and those of the United States , the nature of the estate by the entirety in Missouri . For present purposes it may be assumed that Section 3670, supra, requires the attachment of the federal tax lien to a "right to property" created by state law and that Section 3670 would override a state law (if any existed) providing that a federal tax lien should not apply to a specified "right to property" created by state law. But as indicated, neither of these assumptions aids in defining the interest which one of two tenants by the entirety has in Missouri and hence does not answer the question whether that interest is such an interest in real estate or such a "right to property" to which a lien may attach.

[Estates by Entirety]

The estate by the entirety is of ancient origin. It comes from the common law and exists in Missouri by reason of its adoption by that state. It is built upon the fiction of the law that a husband and wife are one and only one legal entity. It is described in Winbush v. Danford, 292 Mo. 588, 238 S. W. 460, l. c. 466, as follows:

"The character of estate known as an estate by the entirety has long been firmly intrenched in the law of this state. As early as Gibson v. Zimmerman, 12 Mo. 385, 51 Am. Dec. 168, and Garner v. Jones, 52 Mo. 68, the common-law doctrine that a conveyance in fee of real estate to a husband and wife created a tenancy by the entirety was accepted and adopted with judicial approval. In Hall v. Stephens, 65 Mo. 670, 27 Am. Rep. 302, Bains v. Bullock, 129 Mo. 117, 31 S. W. 342, and Bank v. Fry, 168 Mo. 492, 68 S. W. 348, the estate was further recognized. With the adoption of the common-law doctrine, there was necessarily adopted the attributes of the estate, viz.: That neither the husband nor wife was seized of moieties but of entireties, each being the owner of the entire estate; that if either died the estate continued in the survivor; and that, upon the death of both, the heirs of the last surviving would take to the exclusion of the heirs of the first deceased. Tiedeman on Real Property (3d Ed.) Sec. 181. In Wilson v. Frost, 186 Mo. loc. cit. 319, 85 S. W. 377, 105 Am. St. Rep. 619, 2 Ann. Cas. 557, Judge Valliant, in speaking of this estate, said:

'In an estate of the entirety, the husband and the wife during their joint lives each owns, not a part, or a separate or a separable interest, but the whole, and therefore the death of one leaves the other still holding the whole title as before, with no one to share it.'

"In Frost v. Frost, 200 Mo. loc. cit. 481, 98 S. W. 528, 118 Am. St. Rep. 689, it was said:

'Neither the husband nor the wife in an estate of entirety can so destroy the character of the estate as to prevent the survivor becoming the sole owner.'

"And as recent as Ashbaugh v. Ashbaugh, 273 Mo. loc. cit. 357, 201 S. W. 73, this court has said:

'An estate by the entirety is created by a conveyance to the husband and wife by a deed in the usual form. It is one estate vested in two individuals who are by a fiction of law treated as one person, each being vested with the entire estate. Neither can dispose of it or any part of it without the concurrence of the other, and in case of the death of either the other retains the estate.'"

The estate with its attributes has been retained in Missouri after the adoption of the Married Women's Act. Otto F. Stifel's Union Brewing Co. v. Saxy, 273 Mo. 159, 201 S. W. 67; Ashbaugh v. Ashbaugh, 273 Mo. 353, 201 S. W. 72; A. J. Meyer Co. v. Schulte, 189 S. W. 2d 183 ( Mo. App.).

Instances of deviation from the pure fiction of one entity exist. Grose v. Holland , 357 Mo. 874, 211 S. W. 2d 464; Morgan v. Finnegan, 182 Fed. (2d) 649 [50-1 USTC ¶9345]. But there can be no question that in Missouri the estate has retained the characteristic of immunity of the interests of each spouse in the estate from attachment, levy, or the liens of the creditor of one only of the tenants, as an essential characteristic. After reviewing the authorities generally on the nature and characteristics of the estate, the Missouri Supreme Court said in Otto F. Stifel's Union Brewing Co. v. Saxy, supra:

". . . we conclude that where a judgment and execution thereon are against a husband alone, not including the wife, such judgment and execution cannot affect in any way property held by them by the entireties, nor can it affect any supposed separate interest of the husband therein, for he has no separate interest." (Italics supplied)

And in the Meyers case, supra:

"It is established law that neither husband nor wife alone has power to subject to a lien property held as an estate by the entirety."

And in Blodgett v. United States , 161 Fed. (2d) 47, l. c. 51, this court said:

"There is no dispute that the title acquired from Adams vested an entirety in appellant and his wife and that the land so held was not an asset in this bankruptcy."

Citing Shipman v. Fitzpatrick, 350 Mo. 118, 164 S. W. 2d 912; Baker v. Lamar , Mo. Sup., 140 S. W. 2d 31; Dickey v. Thompson, 323 Mo. 107, 18 S. W. 2d 388.

The characteristic of immunity from the individual debt of either spouse must, under the Missouri law, exist or the estate is not one by the entirety. Destroy that attribute and the estate is effectively destroyed. It is as much an incident to the existence of the estate as the requirement that the estate may exist only in a husband and wife, that neither has, during its existence, any separable or distinguishable individual interest therein, and that it is dissolved by operation of law upon the dissolution of the marital status by death or divorce. It is true that the estate may be conveyed by the joint act of the husband and wife during coverture, but that does not destroy or qualify the other characteristics. The basis for such immunity lies in the long established rule in Missouri that neither spouse individually has such an interest in an estate by the entirety as will permit the adherence thereto of the claims or liens of the creditor of only one spouse. Otto F. Stifel's Union Brewing Co. v. Saxy, supra; Ashbaugh v. Ashbaugh, supra; A. J. Meyer Co. v. Schulte, supra.

We are invited to depart from this rule of property in Missouri because the existence of the rule and its application to tax liens may make the collection of delinquent tax claims more difficult. We do not conceive it to be an appropriate exercise of the power and authority of a federal court to strike down a rule of property, not repugnant to any law of the United States , long established in the state, and upon which many valuable property rights are based.

Local laws establishing a community interest in both the husband and wife of the income of either have given rise to situations analogous to this. In those states having community property laws under which the husband and wife each had an equal interest in the income of either, the federal tax authorities undertook, for the determination of the amount of income taxes due, to assess all of the income earned by the husband or wife to him or her alone, regardless of the local statute. But the Supreme Court recognized the right of the states to establish such rules of property and refused to override the law of the states having community property laws, although their recognition and enforcement resulted in disparity and inequality of treatment by the federal tax authorities of taxpayers in different states. Poe v. Sanborn, 282 U. S. 101, 51 S. Ct. 58; Commissioner of Internal Revenue v. Harman, 323 U. S. 44, 65 S. Ct. 103 [44-2 USTC ¶9515].

When the community property law of California gave to the wife only an expectancy in the community income of the husband and wife, the Supreme Court said, United States v. Robbins, 269 U. S. 315 l. c. 326 [1 USTC ¶154]:

"If on the whole this notion seems to us to be adopted by the California courts it is our duty to follow it, so far as material, even if contrary expressions should be found here or there in the books; and it is no concern of ours whether the prevailing decision is a legitimate descendant from its parent the Spanish law or otherwise."

But later when the California law had been changed by the legislature, giving to the wife a present vested interest in the community income, the Supreme Court followed the law of California as changed. United States v. Malcolm, 282 U. S. 792, 51 S. Ct. 184 [2 USTC ¶650]; Commissioner of Internal Revenue v. Harmon, supra. There could hardly be a clearer demonstration of the policy of the federal courts to follow the rules of property of the states.

Under Missouri law the individual interest of the husband or wife in an estate by the entirety is, like the rainbow in the sky or the morning fog rising from the valley, not such an estate as may be subjected to the grasp of an attaching creditor or which will permit the adherence thereto of a tax lien. We are not at liberty to change the nature of either. The definition of the nature of the Missouri estate by the Missouri courts has become the "inveterate policy" of the state. Commissioner of Internal Revenue v. Harmon, supra. It is applied by the state courts in determining whether liens arising under state law may attach to the individual interest of either spouse. Uniformly it is held that such liens may not. Not because State or Federal liens are withheld from this particular "right to property", but because the interest of one spouse in the estate by the entirety in Missouri is not a right to property or property in any sense. We may not change the nature of the estate or the interest of one spouse therein for purposes of federal taxation.

It is argued that the United States only sought to hold a lien against the husband's possible future interest and that the trial court had no right to defeat that right. The answer is that the husband had no separate interest to which the lien could attach prior to the divorce and before the latter event all possibility of the husband attaining any interest in the property to which a lien could attach was extinguished by the valid transfer of the title to Esther C. Moberly, and since no lien for the tax claim attached to Hutcherson's interest in the estate prior to its conveyance to Esther C. Moberly, the conveyance to her was free of the tax lien.

The judgment of the trial court was correct and is affirmed.

¹

"Subchapter B--Lien for Taxes

"Sec. 3670. Property Subject to Lien.

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

(26 U. S. C. 1946 ed., Sec. 3670.)

² "Sec. 3671. Period of Lien.

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

(26 U. S. C. 1946 ed., Sec. 3671.)

 

 

 

S. P. Beecher, Appellant v. The Leavenworth State Bank and The Federal Land Bank of Spokane , et al., Appellees

(CA-9), In the United States Circuit Court of Appeals for the Ninth Circuit, No. 11,499, 160 F2d 294, March 10, 1947

Upon Appeal from the District Court of the United States for the Eastern District of Washington, Northern Division.

Lien for taxes: Sequestration of funds in hands of third party: Validity.--Sequestration of funds of an alleged bankrupt taxpayer against whom a deficiency has been assessed is a proper protection of the government's tax lien, although the sequestered funds are in the hands of a third party and proceedings under the provisions of the Bankruptcy Act are in progress. Affirming orders of the District Court.

S. P. Beecher, in propria persona. Henry R. Newton and C. D. Randall, Spokane, Wash., and Herman Howe, Seattle, Wash., for appellee.

Before: DENMAN, STEPHENS and HEALY, Circuit Judges.

DENMAN, Circuit Judge:

This is an appeal from orders made on our mandate in the former appeals in causes No. 10789 and No. 10391 providing

It is further ordered, adjudged and decreed that this proceeding be, and hereby is returned to the court below for the prompt compliance with the requirements of Section 75(s) for the making of the three year stay order, and if there be none, for the appointment of a conciliation commissioner and referee for his (the farmer's) and the court's advice in "all matters" arising under Section 75(s) including, inter alia, any receivership accounting. (August 3, 1945, as amended by order of February 25, 1946.) YOU, THEREFORE, ARE HEREBY COMMANDED that such further proceedings be had in the said cause in accordance with the opinion and decree of this court, and as according to right and justice and the laws of the United States ought to be had.

Pursuant to such mandate the district court on April 30, 1946, entered two orders: the first an order of reference to Robert F. Murray, Conciliation Commissioner of Chelan County, for all further proceedings therein, and second, an Order on Mandate. The conciliation commissioner was appointed to whom further proceedings were referred. The debtor was ordered given the possession of this property, but under the supervision and control of the conciliation commissioner.

Appellant contends that he is entitled to the free use of the moneys produced from the orchard without certain controls ordered by the court. Among others, he specifically objects to an order of the court sequestering $800.00 of funds of the estate in the possession of the Leavenworth Fruit & Cold Storage Co. The facts with reference to this objection are that appellant neglected to make a proper income tax return for the year 1942 and the Collector of Internal Revenue issued a deficiency assessment against appellant; the tax not being paid, he filed a claim against the receiver. Prior to that date when the Order on Mandate was entered, the Collector filed a lien against the funds of the bankrupt in the possession of the Fruit & Cold Storage Co.

We think the order was a proper protection of the government's tax lien.

* * * * *

The orders are affirmed.