Arizona

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[95-2 USTC ¶50,588] Sheryl Ann Flake, et al., Plaintiffs v. United States of America , et al., Defendants

U.S. District Court, Dist. Ariz., CIV-93-0306-PHX-SMM, 9/29/95

[Code Sec. 6203 ]

Certificates of assessment: Claimed deductions: Documentation.--Certificates of assessment and payments against a husband and wife established that the assessments were made, notice and demand for payment were sent, and the taxpayer was liable for the taxes. The wife's vague and general references did not show that the documents submitted related to expenses or other claimed deductions, and certain checks and receipts were not admissible as evidence of claimed deductions.

[Code Secs. 6321 and 6331 ]

IRS liens: Insurance proceeds: Statute of limitations: Wrongful levy: Property rights defined.--An IRS levy upon annuities that were funded with life insurance proceeds, received by a widow upon the death of her husband and that she created for the benefit of her children, was not wrongful because the government had a lien on all property and all rights to property belonging to the taxpayer at the time she purchased the annuities. A state ( Arizona ) statute that exempted life insurance proceeds from satisfying the debts of the insured did not apply because the government was concerned with the debt of the wife. Therefore, under the principle of transferee liability, the life insurance proceeds that were subject to a tax lien and which were transferred by the taxpayer to third parties were properly seized by the government.
[Code Sec. 6502 ]

IRS liens: Insurance proceeds: Statute of limitations.--IRS liens on the property and all rights to property of a wife who, upon the death of her husband, used part of the life insurance proceeds she received to purchase two annuities for the benefit of her children were not extinguished at the time of the transfers because the statute of limitations had not run. The applicable state ( Arizona and Utah ) laws applied for the purpose of defining the nature and extent of the property rights involved, not for determining the statute of limitations.

MEMORANDUM OF DECISION AND ORDER

I. INTRODUCTION

MCNAMEE, District Judge:

On February 12, 1993 , Plaintiffs filed a wrongful levy suit against the United States . Plaintiffs' complaint alleges that the United States wrongfully levied against two annuities and three pieces of real property. On October 28, 1994 , the Defendants filed a motion seeking summary judgment in its favor with respect to the two annuities. Plaintiffs timely opposed the motion for summary judgment. Plaintiffs filed a motion for summary judgment. Defendants timely opposed the motion for summary judgment. Defendants also filed a motion for partial summary judgment with respect to the outstanding income tax assessments against Sherman and Karen Flake. Plaintiffs filed a letter addressed to the Court which the Court construed as a response to Defendants motion for partial summary judgment.

II. BACKGROUND

The parties have stipulated to the facts in this action. However, the Court will provide an overview of the nature of the claim. This action arises from the United States ' efforts to collect the delinquent tax liabilities of Plaintiffs' parents, Sherman K. Flake and Karen S. Flake. Plaintiffs allege that the Internal Revenue Service ("IRS") wrongfully levied and seized Plaintiffs' property to pay for a third-party's tax liability.

The tax liabilities of Sherman and Karen Flake accrued prior to the death of Sherman Flake. A delegate of the Secretary of the Treasury properly assessed and gave notice to Sherman Flake and Karen Flake for unpaid federal income taxes for the taxable years 1971-1978 and 1986-1988. Sherman Flake died in October 1988. He had a life insurance policy issued by Beneficial Life Insurance Company ("Beneficial") in the amount of $100,000, of which Karen Flake was the primary beneficiary. Karen Flake claimed and controlled the proceeds from this policy. The cash surrender value of the life insurance policy at the time of Sherman Flake's death was $5,063.69.

On November 5, 1988 , Karen Flake used part of the proceeds from the policy to purchase annuity 1054860 for the benefit of Stacey Diane Flake and annuity 1054861 for the benefit of Shanna Lynn Flake from Beneficial. At the time Karen Flake used part of the policy proceeds to purchase the annuities, she was indebted to the United States for the tax liabilities from the years 1971-1978 and 1986-1988. On December 2, 1991 , a Notice of Federal Tax Lien was recorded in Maricopa County , Arizona in the names of Stacey Diane Flake and Shanna Lynn Flake, nominees of and/or successors in interest to Karen Flake. The IRS issued to Beneficial a Notice of Levy, dated January 14, 1992 , naming the taxpayer as Karen Flake and identifying the levies as attaching to annuities 1054860 and 1054861. On April 10, 1992 , pursuant to the levies, Beneficial transferred to the IRS the following sums: $38,887.65 from annuity 1054861 and $38,578.07 from annuity 1054860.

III. STANDARD OF REVIEW

A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c) (1995); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Substantive law determines which facts are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Id. The dispute must also be genuine, that is, "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.

A principal purpose of summary judgment is "to isolate and dispose of factually unsupported claims." Celotex, 477 U.S. at 323-24. Summary judgment is appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. The moving party need not disprove matters on which the opponent has the burden of proof at trial. Id. at 317. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but ... must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see also Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 585-88 (1986).

IV. DISCUSSION

A. Plaintiffs' Motion for Summary Judgment and Defendants' Cross Motion for Summary Judgment

Plaintiffs allege that the United States wrongfully levied against two annuities and three pieces of real property. The United States counterclaimed in this suit under 26 U.S.C. §7403 to reduce to judgment the delinquent income tax assessments of Sherman and Karen Flake, to set aside certain conveyances as fraudulent, and to foreclose its tax liens against two parcels of real property, held in Plaintiffs' names as nominees to partially satisfy those outstanding assessments.

Defendants filed a motion for partial summary judgment seeking judgment in its favor with respect to the two annuities. Plaintiffs' complaint alleges that the United States wrongfully levied upon two annuities, 1054860 and 1054861, which Plaintiffs own. The United States assert that the levies upon these annuities were not wrongful because the United States had a lien on all property and all rights to property belonging to Karen Flake at the time she purchased the annuities, including the insurance proceeds used to purchase annuities 1054860 and 1054861. Plaintiffs do not dispute that at the time Karen Flake purchased the annuities, tax liens were in place. Plaintiffs, however, argue that these liens do not reach the insurance proceeds that Karen Flake used to purchase the annuities, and if the tax liens attach, they only attach to the cash surrender value of the life insurance policy at the time of Sherman Flake's death. Further, Plaintiffs argue that even if the liens did attach, the United States has failed to timely set aside the transfer of these proceeds from Karen Flake to the Plaintiffs.

1. Statute of Limitations

Plaintiffs assert that the right of the United States to set aside the transfer, the purchase of the annuities, has been extinguished. The United States asserts that it is entitled to such a finding because the transfer of the property subsequent to the attachment of the lien does not affect the lien because the lien passes to whomever the property is passed. Plaintiffs argue that either A.R.S. §44 -1009 or Utah Code Ann. §25 -6-10 are the applicable statutes. The United States argues that the applicable statute of limitations is found in 26 U.S.C. §6502(a)(1) , not a state statute of limitations.

The United States , when acting in its governmental capacity, is not bound by state statutes of limitation, absent its consent. U.S. v. John Hancock Mut. Life Ins., 364 U.S. 301, 308 (1960); United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414 (1940); United States v. St. John's General Hosp., 875 F.2d 1064 (3d Cir. 1989). Even though suits brought by the United States to set aside fraudulent conveyances of a taxpayer's property in order to foreclose on such property depend on state law to define the nature and extent of the property rights involved, it is federal law that governs the consequences of those rights. United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722-73 (1985); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960).

In Summerlin, the United States filed a claim against a Florida estate, and the claim was denied as untimely and therefore void under the Florida statute. Summerlin [40-2 USTC ¶9633 ], 310 U.S. at 415-16. The Supreme Court reversed, holding that

When the United States becomes entitled to a claim, acting in its governmental capacity, and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement. [I]f the statute, as sustained by the state court, undertakes to invalidate the claim of the United States, so that it cannot be enforced at all, because not filed within eight months, we think the statute in that sense transgressed the limits of state power.

Id. at 417.

Plaintiffs rely primarily on United States v. Vellalos, 780 F.Supp. 705 (D.Hawaii 1992), aff'd on other issues, 990 F.2d 1265 (9th Cir. 1993). Plaintiffs state that "the Vellalos case is sound and since the 9th [sic] Circuit has affirmed the Vellalos case, this court should accept the Vellalos holding." Plaintiff's Motion for Summary Judgment, p. 12. However, the Ninth Circuit Court of Appeals held that it did not have jurisdiction over the January 10, 1992 order of the district court, in which the court granted the defendants' motion to dismiss the government's claim based on Hawaii 's Fraudulent Transfer Act. As such, the Court of Appeals never addressed the government's fraudulent conveyance claim.

In Vellalos, the court held that Hawaii 's codification of the Uniform Fraudulent Transfer Act (UFTA) is subject to a state statute of limitation. Vellalos, 780 F.Supp. at 707. The court stated that "there is an important distinction between cases involving the government's common law right to collect on a debt and cases involving a carefully delineated state statutory right." Id. The court reasoned that Hawaii had the power to limit the availability of the cause of action to any litigant because it created the cause of action by statute in the first place. Id. at 708. The court, therefore, found that a state statutory cause of action after a certain time period is not bound by the Supreme Court's holding in Summerlin that a common law debt collection action by the United States is not subject to a state statute of limitations. Id. at 707-08.

Various other courts have held declined to distinguish between the application of Summerlin to common law actions and actions under the UFTA. See United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609 (5th Cir. 1981) (state of limitations applicable to fraudulent conveyances in Florida was not a bar to action by United States; 26 U.S.C. §6502 provided the applicable limitations period); United States v. Moore, 968 F.2d 1099, 1100 (11th Cir. 1992) (small business admin istration's action to set aside fraudulent conveyance subject to federal not state statute of limitations); United States v. Romano, 757 F.Supp. 1331, 1339 n.5 (M.D. Fla. 1989), aff'd, 918 F.2d 182 (11th Cir. 1990) (government's action to foreclose pursuant to UFTA in Florida is subject to federal time constraints and not state statutes of limitation); United States v. Wurdemann [81-2 USTC ¶9757 ], 663 F.2d 50, 51 (8th Cir. 1981) (government's tax claim against taxpayers for fraudulent conveyance was not barred by state statute of limitations); United States v. Gleneagles Inv. Co., 565 F.Supp. 556, 583 (M.D. Pa. 1983), aff'd in part and reversed in part on other issues, sub nom., United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986) (United States was acting in its governmental capacity and, therefore, the state statute of limitations did not apply), cert. denied, 483 U.S. 1005 (1987).

The United States asserts that 26 U.S.C. §6502(a)(1) is the statute of limitations applicable to court actions to collect assessed tax liabilities. 26 U.S.C. §6502(a)(1) provides that the levy must be made or the proceeding must be begun within ten years after the assessment of the tax. ¹ 26 U.S.C. §6502(a)(1) . Plaintiffs filed their complaint on February 12, 1993 . The United States files its answer and counterclaim on May 11, 1993 . The earliest assessments against either Sherman Flake and Karen Flake were made on May 20, 1985 . Stipulation of Facts, p. 3. Therefore, the statute of limitations is not a bar.

2. United States ' Levy Upon the Annuities

Plaintiffs contend that the United States' levy upon the annuities was wrongful because the life insurance proceeds used to purchase those annuities were exempt from the insured's creditors pursuant to A.R.S. §20-1131. The United States asserts that the levies upon the annuities were not wrongful because the United States had a lien on all property and all rights to property belonging to Karen Flake at the time she purchased the annuities, including the insurance proceeds used to purchase both annuities. Citing 26 U.S.C. §6321 , the United States contends that regardless of the source, once the money used to purchase the annuities came into the control and possession of Karen Flake it was impressed with federal tax liens arising from her unpaid taxes.

Section 6321 of the Internal Revenue Code provides as follows:

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

26 U.S.C. §6321 . Tax liens arise at the time of assessment and take effect after the government's demand for payment. Runkel v. United States [76-1 USTC ¶9152 ], 527 F.2d 914, 916 (9th Cir. 1975). Once the demand has been made, the liens are treated as effective since the time of assessment. Id. Moreover, "[t]he statutory language, 'all property and rights to property,' appearing in §6321 ..., is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720-21 (1985). In fact, "[s]tronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945).

In applying the Federal Revenue Act, state law controls in determining the nature of the legal interest that the taxpayer has in the property. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722; Aquilino [60-2 USTC ¶9538 ], 363 U.S. at 513. Once the court rules that the property or the rights to it exist under state law, the consequences are governed by federal law. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 727; Aquilino [60-2 USTC ¶9538 ], 363 U.S. at 513-14.

Federal tax liens arise when unpaid taxes are assessed, U.S. v. Bell Credit Union [88-2 USTC ¶9564 ], 860 F.2d 365, 367 (10th Cir. 1988), and continues until the resulting liability is either satisfied or becomes unenforceable through lapse of time. U.S. v. Cache Valley Bank [89-1 USTC ¶9157 ], 866 F.2d 1242, 1244 (10th Cir. 1989), citing 26 U.S.C. §6322 . The transfer of property after tax liens have attached does not affect the tax lien because no matter into whose hands or what form the property goes it passes with the liens attached. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958); U.S. v. Donahue Industries [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1331 (9th Cir. 1990). The Treasury Regulations provide that: "[p]roperty subject to Federal tax lien which has been sold or otherwise transferred by the taxpayer may be seized while in the hands of the transferee or any subsequent transferee. ..." 26 C.F.R. §301.6331-1(a)(1) . Thus, the Treasury Regulations makes clear that levy may be made by serving a notice of levy on any person in possession of property or rights to property subject to levy. Id.

The United States relies on A.R.S. §47 -9306 for the proposition that an interest in insurance proceeds is of the type to which creditors' liens may attach. Plaintiffs argue that the government's reliance upon this statute is misplaced, and instead, rely upon A.R.S. §20-1131. However, both parties' reliance upon the respective statutes is misplaced. A.R.S. §47 -9306 is part of the Arizona version of the Uniform Commercial Code. This statute allows a secured party's rights to continue in proceeds from the disposition of collateral. Section 9306 provides that a creditor's interest continues in proceeds received from disposition of collateral including casualty insurance proceeds paid as a result of damage to the collateral. As such, the United States reliance upon A.R.S. §47 -9306 is misplaced.

Plaintiffs' discussion about A.R.S. §20-1131 and insurance proceeds is also misplaced. Although section 1131 concerns the exemption of life insurance proceeds and cash values from creditors, the statute is concerned with the debt of the insured, not the wife of the insured who is also liable for their joint tax debt. A.R.S. §20-1131. Plaintiffs also rely upon Bess to support their contention. Bess [58-2 USTC ¶9595 ], 357 U.S. 51.

In Bess, the Supreme Court affirmed the Court of Appeals which overruled the district court and found that a widowed wife was liable for only the cash surrender value of the life insurance policy from which she received proceeds. Id. However, the husband died with outstanding tax liabilities for which the wife was not responsible. Id. Thus, unlike the present case, the wife in Bess had no tax liabilities of her own.

The United States ' levies upon the annuities were based upon the tax liabilities of Karen Flake, not Sherman Flake. Stipulation of Facts, ¶¶2, 5, and 7. Moreover, a levy was issued to Beneficial naming the taxpayer as Karen Flake and identifying the levy as attaching to the annuities. Stipulation of Facts, ¶¶11 and 12. Thus, the United States were concerned with the debt of Karen Flake, not Sherman Flake, and as such A.R.S. §20-1131 does not address this type of situation.

Under the Treasury Regulations, property subject to a federal tax lien which has been sold or otherwise transferred by the taxpayer may be seized while in the hands of the transferee or any subsequent transferee. 26 C.F.R. §301.6331-1(a)(1) ; see also U.S. v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163 (6th Cir. 1983); Valley Finance v. U.S. [80-2 USTC ¶9554 ], 629 F.2d 162 (D.C. Cir. 1980), cert. denied, 451 U.S. 1018 (1981). Levy may be made by serving a notice of levy on any person in possession of property or rights to property subject to levy. 26 C.F.R. §301.6331-1(a)(1) . Moreover, the transfer of property subsequent to the attachment of the lien does not affect the lien because no matter whose hands or what form the property goes, it passes with the liens attached. Bess [58-2 USTC ¶9595 ], 357 U.S. at 57.

Sherman Flake and Karen Flake did not file income tax returns nor pay income taxes for the years 1971-1978 and 1986-1988. Although Sherman Flake attempted to provide for his family by purchasing a life insurance policy naming his wife, Karen Flake, as the beneficiary, the fact remains that Karen Flake was jointly and severally liable for the Flake's tax debt. Consequently, as the beneficiary to Sherman Flake's insurance policy, once the policy was cashed out, it became the sole property of Karen Flake. Karen Flake's motive to use this money to purchase annuities to provide for her minor children might have been altruistic. However, despite the possible altruistic motive, it is irrelevant what Karen Flake chose to do with the money. When Karen Flake used her property, the money, to purchase the annuities, it was already impressed with federal tax liens arising from her unpaid taxes. See, 26 U.S.C. §6321 . Accordingly, judgment should be entered in favor of the United States with respect to Plaintiffs' claim that the United States wrongfully levied upon the annuities.

B. Defendants' Motion for Partial Summary Judgment with Respect to the Outstanding Income Tax Assessments Against Karen Flake and Sherman Flake

On October 28, 1994 , the United States also filed a Motion for Partial Summary Judgment with respect to the outstanding income tax assessments against Sherman and Karen Flake. Pursuant to the stipulation of the parties and order of the Court filed on July 13, 1994 , Karen Flake is appearing in this action in her individual capacity, as the trustee of the S & K Flake Children's Trust, and as the personal representative of the Estate of Sherman Flake. On May 10, 1995 , the Court construed a letter from Karen Flake as a response to the United States ' motion for partial summary judgment with respect to the outstanding income tax assessments against Sherman and Karen Flake.

Rule 56 of the Federal Rules of Civil Procedure dictates that summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). Once the moving party has made the required showing, the adverse party must "go beyond the pleadings and by [its] own affidavits ... designate specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 323-34; Fed. R. Civ. P. 56(e).

The assessments made against Sherman and Karen Flake are reflected on the Forms 4340, Certifies of Assessments and Payments. Declaration of Sean K. McElenney, Exhibits 1, 2, and 3. The Certificates of Assessments and Payments are a proper means of establishing the fact that assessments were made and that notices and demand for payment were sent. Koff v. United States [93-2 USTC ¶50,520 ], 3 F.3d 1297, 1298 (9th Cir. 1993), cert. denied, 114 S.Ct. 1537 (1994); Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531, 535 (9th Cir. 1992). An assessment for unpaid federal taxes, when properly certified, is presumptively correct evidence of a taxpayer's liability. United States v. Janis [76-2 USTC ¶16,299], 428 U.S. 433, 440-41 (1976); Koff [93-2 USTC ¶50,520 ], 3 F.3d at 1298; Hughes [92-1 USTC ¶50,086 ], 953 F.2d at 540. The burden of supporting allowable deductions from income is upon the taxpayer. Rockwell v. Commissioner [75-1 USTC ¶9324 ], 512 F.2d 882, 885-86 (9th Cir.), cert. denied, 423 U.S. 1015 (1975); McKay v. United States [92-1 USTC ¶50,228 ], 957 F.2d F.2d 689, 691 (9th Cir. 1992). Furthermore, where the taxpayer fails to meet his burden of showing the assessments to be incorrect, summary judgment in favor of the Government is appropriate upon submission of the Certificates of Assessments and Payments. Adams v. United States , 358 F.2d 986, 994 (Ct. Cl. 1966).

Ms. Flake's letter does not specifically address the issues set forth by the United States . Indeed, Ms. Flake's letter contains vague and conclusory statements regarding bank deposits made into two checking accounts, and cash advances and rental income from her mother being counted as income. Ms. Flake's Letter, filed May 10, 1995 , p. 2. Further, Ms. Flake states that "[t]here were also cash deposits I have no idea where the money came from. I don't believe all the deposits were income." Id. Ms. Flake also appears to have attached various cancelled checks and receipts for the calendar year 1971.

The United States argues that the attachments to Ms. Flake's letter are not properly before the Court. However, the standard used to evaluate motions filed by pro se litigants is a liberal one. See e.g., Estelle v. Gamble, 429 U.S. 97 (1976); Ivey v. Board of Regents of the University of Alaska, 673 F.2d 266, 268 (9th Cir. 1982). The Court has construed Ms. Flake's letter to the Court as a response to the United States ' motion for partial summary judgment. Therefore, the Court also will construe the attachments to Ms. Flake's letter as being properly before the Court.

Nevertheless, Ms. Flake has not met her burden of proof in showing that the claimed deductions are allowable. Mr. and Mrs. Flake did not file tax returns setting forth their employment, income, and expenses. Yet, Ms. Flake now submits numerous pages of checks and receipts for the year 1971 without any itemization or explanation. Moreover, Ms. Flake does not submit any documents regarding the tax years 1972-1988. As such, Ms. Flake's vague and general references do not show that the attached documents demonstrate expenses or other claimed deductions. Accordingly, the Certificates of Assessment and Payments made against Sherman and Karen Flake establish that assessments were made, notice and demand for payment were sent and that Ms. Flake is liable for the unpaid taxes, penalties and interest shown on those Certificates. Therefore, judgment should be entered in favor of the United States .

V. CONCLUSION

For the reasons stated above,

IT IS THEREFORE ORDERED Plaintiffs' Motion for Summary Judgment is DENIED. (Doc. #57).

IT IS FURTHER ORDERED Defendants' Motion for Partial Summary Judgment is GRANTED. (Doc. #60).

IT IS FURTHER ORDERED Defendants' Motion for Partial Summary Judgment regarding Outstanding Income Tax Assessment against Karen Flake and Sherman Flake is GRANTED. (Doc. 52).

JUDGMENT IN A CIVIL CASE

-- Jury Verdict. This action came before the Court for a trial by jury. The issues have been tried and the jury has rendered its verdict.

-- Decision by Court. This action came to hearing before the Court. The issues have been heard and a decision has been rendered.

IT IS ORDERED AND ADJUDGED that defendants' Motions for Partial Summary Judgment having been granted, that plaintiffs take nothing and the complaint and action are hereby dismissed.

¹ The date on which a levy on property or rights to property is made shall be the date on which the notice of seizure provided in section 6335(a) is given. Id.

 

 

[75-2 USTC ¶9697] United States of America , Appellant v. The Valley National Bank, Executor of the Estate of Maurice H. Berkson, deceased; Shimmel, Hill and Bishop, P. C., a professional corporation; State of Arizona; Great Western Bank and Trust, an Arizona banking corporation; Park Central Development Company; Ernest G. Herman; and United Bank of Arizona, Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 74-1313, 524 F2d 199, 8/22/75, Affirming unreported District Court decision

[Code Sec. 6323]

Lien for taxes: Priority against third parties: Security interest: Commissions.--A valid security interest was found to have been perfected under Arizona law at the time the taxpayer assigned to a bank certain commissions due him, even though the assignment was not recorded, since, under pre-Uniform Commercial Code law, the bank acquired a vested interest in the commissions immediately upon assignment. Further, since the assignment gave the bank an immediate perfected interest in the commissions, subsequent garnishment judgments by the taxpayer's creditors against the bank took priority over federal tax liens.

Dennis M. Donohue, Department of Justice, Washington , D. C., 20530, for appellant. Merle M. Allen, Jr., Harry M. Beggs, 1400 United Bk. Bldg., 3550 N. Central Ave., Phoenix, Ariz., for appellees.

Before BARNES, WRIGHT, and GOODWIN, Circuit Judges.

Opinion

GOODWIN, Circuit Judge:

The United States appeals from a judgment in favor of two banks in a contest among creditors claiming interests in broker's commissions earned by a taxpayer during his lifetime and assigned to a bank. We affirm.

[Facts]

The commissions at the time of trial had a value of $83,702.87. The taxpayer's estate is insolvent. The government bases its claim of first priority on two income-tax assessments for the year 1966. The first assessment, dated October 27, 1967 , was for $25,980.64 plus interest. The notice of a tax lien for this assessment was filed on February 29, 1968 . The second assessment, dated June 14, 1968 , was for $15,211.69 plus interest. The second notice was filed December 30, 1970 .

On February 22, 1966 , approximately two years before the first notice of tax lien was filed, the taxpayer assigned the so-called " Tucson " commission to the predecessor in interest of appellee Great Western Bank & Trust as security for all the taxpayer's existing and future indebtedness. On January 30, 1967 , approximately one year before the first notice of tax lien was filed, the taxpayer assigned the so-called " Phoenix " commission to Great Western's predecessor as security for all the taxpayer's existing and future indebtedness. These assignments were not recorded.

On August 29, 1967 , appellee Ernest C. Herman obtained a judgment against the taxpayer for $5,000 plus interest and costs. Approximately four months before the first notice of tax lien was filed, Herman obtained a garnishment judgment against Great Western's predecessor.

On April 14, 1967 , the predecessor in interest of appellee United Bank obtained a judgment against the taxpayer for $15,000 plus interest, costs, and attorney's fees. Like Herman, United Bank's preducessor caused a writ of garnishment to be issued against Great Western's predecessor in interest with respect to the " Phoenix " commissions. In like manner, approximately four months before the first notice of tax lien was filed, United Bank's predecessor obtained a garnishment judgment against Great Western's predecessor for sums received by Great Western's predecesor in excess of sums owed it by the taxpayer.

The rights of all parties here except the United States , the State of Arizona , and the disinterested stakeholder of the " Tucson " commission were determined by a judgment of the Maricopa County Superior Court in June 1971. That judgment is res judicata and binds the parties to the state-court action. Thus, we are concerned only with the rights of the United States , the sole appellant, in the distribution scheme.

The United States urges that it should be prior to Great Western because the assignment to Great Western was either a mortgage or an assignment of an account receivable, and was not recorded.

The potential relevance of recordation lies in §6323(a) of the Internal Revenue Code, which provides that a tax lien shall not be vaid against a holder of a "security interest" until notice of lien is filed.

Here the notices of lien were filed February 29, 1968 , and December 30, 1970 , after the assignment of the " Tucson " commission. But the government urges that it nonetheless enjoys first priority because the assignment had not created a "security interest".

"Security interest" is defined by 26 U. S. C. §6323(h)(1) as "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time * * * if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation * * *."

The government argues that the unrecorded assignment did not give Great Western an interest protected against a subsequent judgment lien creditor.

Great Western's principal responses are:

(1) The United States did not make the mortgage argument below and should not be allowed to tender it for the first time on appeal.

(2) The assignment was not of an "account receivable" within the meaning of Arizona law.

(3) Because the Uniform Commercial Code was enacted in Arizona before the government filed its notice of lien, the U. C. C. should govern. Under the U. C. C. no recording is required to perfect Great Western's interest in the commission because (a) under Ariz. Rev. Stat. §44-3104(4) [§9-104(d) of the U. C. C.] the Article 9 filing requirements do not apply to a "transfer of a claim for wages, salary or other compensation of an employee"; or (b) under Ariz. Rev. Stat. §44-3123(A)(5) [§9-302(1)(e) of the U. S. C.] filing is not required to perfect a security interest obtained through "[a]n assignment of accounts or contract rights which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts or contract rights of the assignor".

The district court and the parties agree that the commissions "existed" within the meaning of Int. Rev. Code §6323(h)(1). This fact invokes Arizona law in the definition of "security interest". We accord the district judge's interpretation of Arizona law substantial deference. See Gilham v. Burlington Northern, Inc., -- F. 2d -- (9th Cir. March 27, 1975 ).

The district judge did not reach the issue whether enactment of the U. C. C. "cured" any defect in Great Western's security interest because he held that Great Western held a vested interest under pre-Code law. Ariz. Rev. Stat. §44-3201. We believe that he was right.

While recordation was mandatory in order to preserve the priority of assignments of accounts or accounts receivable under pre-U. C. C. law, the assignments here were not of accounts or accounts receivable. See Valley National Bank of Arizona v. Byrne, 101 Ariz. 363, 419 P. 2d 720 (1966). In Byrne, the Supreme Court of Arizona held that an assignment of the proceeds of a contract of plumbing work on 50 homes was valid as against a subsequent creditor. The court did not discuss the issue of recordation, apparently because the parties did not raise it. While the precedential value of the case on the recordation is not overwhelming (cf. United States v. Tucker Truck Lines, 344 U. S. 33, 37-38 (1954); Webster v. Fall, 266 U. S. 507, 511 (1925)), the holding is stated in unequivocal terms: "Once a valid assignment of the proceeds had been made, the Bank acquired a vested interest in them, as soon as they became due including all the right, title, and interest in the proceeds * * *." 419 P. 2d at 722.

The government is correct in arguing that the district court's reliance on our Costello v. Bank America National Trust & Savings Ass'n, 246 F. 2d 807 (9th Cir. 1957), is misplaced. That case turned on a peculiarity in the California state law definition of one category of "accounts". See 246 F. 2d at 812-13. It is thus not binding in cases involving Arizona law. But in light of other indications that the district court correctly followed Arizona law, this point is inconsequential.

Because the government's afterthought about the assignments being mortgages was never addressed to the trial court, we will not pursue it.

We express no opinion upon the Arizona interpretation of the Uniform Commercial Code as it may apply to assignments of wage claims. If the Arizona court has construed and applied the provisions of §9-104 of the U. C. C., the case has not been called to our attention. We do not decide whether the inter vivos assignments here in question were of a significant part of the outstanding accounts or contract rights of the assignor at the time they were made, because that point does not appear to have been deemed important as the case was presented below, and the trial court made no finding upon it.

The decision of the trial court that a valid security interest had been perfected under Arizona law at the time of the assignments was free from error.

The garnishment judgment also gave United Bank and Herman priority over the United States .

Affirmed.

 

 

[68-2 USTC ¶9487]Lorren J. Kuffel, Appellant v. United States of America , Appellee

Ariz. Supreme Court, No. 8422, 441 P2d 771, 5/29/68

[1954 Code Sec. 6323(a)]

Lien for taxes: Priorities: Arizona law: Garnishor as purchaser.--Under Arizona law, filing and service of a writ of garnishment by the garnishor do not amount to an equitable assignment to the garnishor of the debt owed by the garnishee to the delinquent taxpayer. Accordingly the garnishor did not become a purchaser under Sec. 6323(a) entitled to record notice of the federal tax lien.
[1954 Code Sec. 6323(a)(1), prior to enactment of P. L. 89-719]

Lien for taxes: Notice of lien: Personalty: Place of filing.--In a case involving intangible personal property (a debt owed to delinquent taxpayer), notice of federal tax lien was properly filed with the county recorder in the county where the delinquent taxpayer resided.
[1954 Code Sec. 6323, prior to enactment of P. L. 89-719]

Lien for taxes: Priorities: Garnishment proceedings: Attorney's fees.--Where the Government's tax lien was entitled to priority over a garnishment lien, it was also prior to the garnishor's claim for reasonable attorney's fees.

Carroll E. Dietle, II, Stockton & Hing, 234 N. Central Ave. , Phoenix , Ariz. , for appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, J. Edward Shillingburg, Department of Justice, Washington, D. C. 20530, Jo Ann D. Diamos, United States Attorney, Tucson, Ariz., Richard C. Gormley, Assistant United States Attorney, Tucson, Ariz., for appellee.

MCFARLAND, Chief Justice:

Appellant Lorren J. Kuffel appeals from a judgment rendered in favor of appellee United States of America who was an intervenor below in the garnishment proceedings instituted by appellant against Stephen M. A. Young, defendant-debtor. Appellant contends the lower court erred in holding that a federal tax lien was prior to Kuffel's garnishment lien and refusing to set any part of the garnisheed funds aside as attorney's fees for Kuffel's attorney.

The facts of this case are undisputed. Kuffel was a resident of California , and was in the business of selling truck and automobile parts and supplies. Stephen M. A. Young, hereinafter called Young, was a resident of California doing business individually, and as Western Cut Rate Lumber Co., hereinafter designated as Western, and as Edison Trucking Co., hereinafter designated as Edison . As of April 15, 1956 , Young was indebted to Kuffel for a purchase of tires, truck parts, and other merchandise in the amount of $5,170.02, and on that date Young delivered to Kuffel an installment note for that amount. Young made only one payment for $561.67 on the note in June of 1956. Subsequent to April 15, 1956 , Kuffel sold to Young additional merchandise in the amount of $4,915.72 in excess of payments made by Young on the open account at different times. Kuffel made demands for payment of that sum, but Young failed to pay the amount owing.

On April 18, 1958 , federal excise taxes in the amount of $11,972.17 were assessed against Young in California , and, on May 22, 1958 , the District Director of Internal Revenue, San Francisco , California , filed a notice of lien for those assessed taxes with the County Recorder of Stanislaus County , Modesto , California , which was the place of residence of taxpayer Young.

On August 1, 1958, Kuffel commenced action against Young, individually, dba Western and dba Edison, in the Superior Court of Maricopa County, Arizona, based on Young's indebtedness to him. In accordance with Arizona statutes, Kuffel, as garnishor, caused writs of garnishment to issue, and to be served upon Ray Lumber Co., hereinafter designated Ray, and upon United Wholesale Distributors, hereinafter designated Distributors. On August 8, 1958 , garnishee Ray answered the writ of garnishment, stating that it was not indebted to defendant Young. Three days later the other garnishee, Distributors, answered that it was not indebted to any of the named defendants, but that it was indebted to K. A. Spears Lumber Co., hereinafter called Spears, in the amount of $8,753.60 by reason of orders for lumber placed by Distributors with Spears which were invoiced to Distributors upon the invoices of Western, and that it was informed that Western was not owned by Young.

On October 27, 1958 , the United States through the District Director served on the garnishee-Distributors a notice of levy which notified Distributors that all sums of money or other obligations in its possession and belonging or owing to Young were levied upon, seized, and demanded for satisfaction of Young's tax liability. Also, the United States government served a final demand on Distributors on March 23, 1959 .

On April 6, 1959 , the United States filed notices of a lien for taxes assessed on April 18, 1958 , with the County Recorders of Maricopa and Pima Counties in Arizona .

On June 23, 1961 , the United States ' motion to intervene was granted, and its complaint filed. The government claimed that its lien for taxes, based on the 1958 assessments, was prior to rights of Kuffel that were created by the garnishment proceedings.

In July of 1961 Distributors amended its answer to the Writ of Garnishment, and stated that at the time of the service of the writ and at the time of answering said writ it was indebted to defendant Young, individually, dba Western and dba Edison , in the sum of $8,573.60. Default was taken against Young, individually, dba Western, dba Edison , on August 2, 1961 .

Subsequently the United States moved for summary judgment based upon the priority of its existing lien for taxes. On February 4, 1964 , the trial court granted the United States government's motion for summary judgment in the total amount of $8,573.60 against Young, individually, dba Western and dba Edison; Kuffel; and Distributors, which sum was being held by Distributors as garnishee. The court held that the government liens were prior and superior to all other liens, claims and interests of all the other parties in the action, thereby refusing to allow Kuffel the reasonable value for the services of his attorneys.

Kuffel contends his filing and service of the writ of garnishment constituted an equitable assignment to him as the garnishor of the debt owed by Distributors to Young, and hence as garnishor he became a "purchaser" within the meaning of Section 6323(a) of the Internal Revenue Code of 1954 which entitled him to record notice of the tax lien. Kuffel further argues that he did not receive the requisite notice for the reason that notice of the tax lien was not filed in Arizona until after the garnishment proceedings were instituted in Arizona , although notice of the tax lien was filed in California prior to the filing and service of the writ of garnishment in Arizona .

Sections 6321, 6322, and 6323 of the Internal Revenue Code of 1954 set forth the provisions bearing on this case. ¹

The federal tax lien is created by Section 6321 of the Internal Revenue Code of 1954, and it attaches to "all property and rights to property, whether real or personal, belonging" to the delinquent taxpayer. The lien attaches not only to all property held by the taxpayer on the date the lien arose, but also to after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, 66 S. Ct. 108, 90 L. Ed. 56. The lien arises "at the time the assessment is made." Section 6322, Internal Revenue Code of 1954. The federal lien is perfected and choate at the time it arises. United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520.

The priority of a federal tax lien as against other interests created under state law is expressly governed in part by statute. Section 6323(a) of the 1954 Code--the provision relied upon by the garnishor, Kuffel--provides that, as against a holder of certain enumerated interests, including that of a purchaser, the tax lien is not valid until notice has been filed. The question then is: Did Kuffel become a purchaser within the meaning of federal law when he commenced the garnishment proceedings? We hold that he did not. The determination of those to whom Section 6323 is applicable is a federal question. United States v. L. R. Foy Construction Co., Inc. [62-1 USTC ¶9325], 300 F. 2d 207 (C. A. 10th)

In United States of America v. Liverpool & London & Globe Insurance Company [55-1 USTC ¶9136], 348 U. S. 215, 99 L. Ed. 268, 75 S. Ct. 247, in discussing priorities of a tax lien over writs of garnishment issued and served and attorney's fees, the court said:

"The question of priorities is identical with that of Acri, No. 33, this day decided, and United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S. 47, 95 L. ed. 53, 71 S. Ct. 111. On the authority of those cases we hold the tax liens of the United States superior to the lien of the garnisher.

"As to the attorney's fee allowed the garnishee insurance company, Rule 677, Vernon's Texas Rules of Civil Procedure, provides:

"Where the garnishee is discharged upon his answer, the costs of the proceeding, including a reasonable compensation to the garnishee, shall be taxed against the plaintiff; where the answer of the garnishee has not been controverted and the garnishee is held thereon, such costs shall be taxed against the defendant and included in the execution provided for in this section; where the answer is contested, the costs shall abide the issue of such contest."

"The District Court evidently found there was no contest between the insurance company and the other parties, and that the insurance company should be discharged with costs and allowance of a reasonable attorney's fee of $500. It, therefore, ordered the clerk to issue a check to the insurance company, payable out of the funds paid into the court by it.

"If the garnishment lien is not prior to the Government liens, and we have held that it is not, certainly fees allowed in that proceeding are not prior to the Government liens, and the authorization of the payment of the attorney's fees prior to the Government liens was error. The costs and fees should be adjudged against the defendant, as provided by Rule 677."

Kuffel contends the effect of Section 12-1585, A. R. S. ², is to make an equitable assignment by law from Young to him of the debt owed by the garnishee-distributor.

It did not appear from the garnishee-Distributors' answer that it was indebted to Young until after the government had intervened when Distributors amended its answer admitting its indebtedness. Furthermore, the only conceivable argument tending to support this claim would be that immediately upon service of the writ of garnishment Kuffel obtained a perfected, choate lien against Distributors' debt to Young which became an assignment.

In Gillespie Land & Irrigation Co. v. Jones, 63 Ariz. 535, 164 P. 2d 456, we said:

". . . from the date of service of the writ of garnishment any amount due or found to be due from the garnishee to the defendant is in control of the court and held by the court in abeyance until the hearing has been concluded, and cannot be paid to any person except on judgment of the court."

The effect of the writ of garnishment is, therefore, to impound any asset or property of defendant which is found in the hands of the garnishee pending the resolution of the merits of the garnishor's claim. The writ itself constitutes, at most, a lis pendens notice that a right to perfect a lien on the garnisheed property exists, but such perfection must await judicial action.

Any amount due from the garnishee to the debtor at the date of service of the writ is subject to the impounding effect of the writ. Weir v. Galbraith, 92 Ariz. 279, 376 P. 2d 396. The most garnishor Kuffel had after service of the writ of garnishment was an inchoate garnishment lien which could not have been perfected until the time judgment was rendered. At that time Kuffel did not have an absolute right to the funds impounded, but did have a right to have his claim heard without fear that the funds would be dissipated pending judgment. Under our state law Kuffel therefore had no assignment to him of Distributors' debt to Young. Furthermore, under federal law Kuffel did not become a "purchaser" within the meaning of Section 6323 Internal Revenue Code of 1954 upon service of the writ of garnishment, and he cannot claim the benefit of that section which requires that the United States give notice of its tax lien. United States v. L. R. Foy Construction Co., supra; United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d 517 (C. A. 9th).

The United States government took the necessary steps to perfect its lien. Even if Kuffel would have been entitled to record notice, which he wasn't, he did in fact receive such notice before he filed his writ of garnishment. Section 6323(a) of the 1954 Code provides that the federal tax lien is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary of the Treasury or his delegate "In the office designated by the law of the State or Territory in which the property is situated" when the State or Territory had designated an office for the filing of such notice. The property which is the subject of this case--the Distributors debt--was personal property and the situs of such property was in the state of residence and domicile of the taxpayer Young. In Re De Angelis [67-1 USTC ¶9290], 373 F. 2d 755 (C. A. 3d); Walker v. Paramount Engineering Co. [66-1 USTC ¶9106], 353 F. 2d 445 (C. A. 6th); United States v. Goldberg [66-2 USTC ¶9523], 362 F. 2d 575 (C. A. 3d); Marteney v. United States [57-1 USTC ¶9670], 245 F. 2d 135 (C. A. 10th); Investment & Securities Co. v. United States [44-1 USTC ¶9210], 140 F. 2d 894 (C. A. 9th).

Young was a resident of the State of California and the law of that state required that notice of a federal tax lien be filed in the office of the county recorder of the county within which the property subject to the lien was situated. Government Code, 34 West's Annotated California Codes, Section 27330. On May 22, 1958 , the District Director of Internal Revenue filed a notice of tax lien with the County Recorder of Stanislaus County , Modesto , California , the place of residence of Young, more than two months before the garnishor instituted his action and filed his writ of garnishment in the court below on August 1, 1958 . Consequently, the fact that the United States , through the District Director, did not file notices of lien in the State of Arizona until April 6, 1959 , was irrelevant to the Superior Court's resolution of the relative priorities of the tax lien and the garnishment lien.

This result is in accord with the practicalities of this case. To require the government to file notices of tax lien in every place where a delinquent taxpayer has personal property would impose an awesome admin istrative burden on it, particularly with respect to intangible and transitory personal property. See Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (C. A. 5th). On the other hand, the requirement that the government file its notice of lien where the taxpayer resides has the advantage of centralizing the place where the government must file its notice and where creditors of the taxpayer who are entitled to notice under Section 6323 may quickly ascertain what tax liens, if any, are outstanding against their debtor.

Kuffel also contends that even if the tax lien be held superior to the claim he asserts, the trial court erred in refusing to set aside out of the garnisheed funds an amount to compensate his attorneys for services which they rendered in creating and protecting that fund up to the time the United States government intervened in the proceeding below. The amount sought for the reasonable value of attorney's fees is $2,500.00. Kuffel did enter into a contingent-fee arrangement with his attorneys based on thirty-three and a third percent of the amount recovered. It appears that the amount claimed ($2,500.00) is close to the full amount which counsel would have received under their contingent-fee arrangement had they been successful. Kuffel would have the United States , the senior lienor, pay for its opponents' attorneys in addition to its own.

The relative priority of a United States government lien for unpaid taxes is a federal question. United States v. Equitable Life Assurance Society of the United States [66-1 USTC ¶9444], 384 U. S. 323, 86 S. Ct. 1561, 16 L. Ed. 2d 593: United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 283. The general rule in courts of the United States is that each party to the litigation bears the expense of its respective counsel. However, one exception to this rule was noted in Trustees v. Greenough, 105 U. S. 527, 26 L. Ed. 1157. In that case, a holder of certain bonds brought suit against the trustees of the state improvement fund alleging mismanagement and waste of the fund which was to secure the bonds and asking that his claim be allowed, that the fund be charged with the payment thereof, and that an accounting be had. The relief was granted, valuable property was reclaimed to the fund, and agents were appointed for the sale of the property of the fund for the purposes of liquidation. During the liquidation, the holder of the bonds who had initiated the proceedings filed a petition for an allowance from the fund of his expenses, including attorney's fees. The court approved the allowance of attorney's fees, holding that where a bondholder, in good faith, filed a bill to secure the correct application of a fund and succeeded in bringing it under the control of the court for the common benefit of the bondholders, he is entitled to be paid for his costs and counsel fees before distribution. See also Sprague v. Titonic Bank, 307 U. S. 161, 59 S. Ct. 777, 83 L. Ed. 1184. However, the principle announced in the Greenough case has no application to the instant case where counsel for the garnishor, Kuffel, neither created nor protected the debt for the government. It is plain that Kuffel's attorneys did not create an asset where there was none before; they did not reduce a mere cause of action to judgment and thereby create a fund in which the United States government seeks to share.

Kuffel's contention is analogous to that which the Supreme Court of the United States considered in United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770. In that case, a foreclosure proceeding, the mortgagee, whose interest was senior to the tax claims of the United States government, contended that it was entitled to a reasonable attorney's fee ahead of the tax claims under the equitable rules against unjust enrichment. The court rejected this contention as being without merit. It noted that the services rendered by the mortgagee's attorney were rendered for the benefit of the mortgagee to protect his own interest in the property; the United States government, the holder of an adverse interest, received no such benefit from them that its interest was to be charged for them. See also: United States v. Equitable life Assurance Society of U. S. , supra.

In the United States Supreme Court case of United States v. Liverpool & London & Globe Insurance Company, supra, it was held that a tax lien of the United States government was prior in right over a garnishment lien obtained by a creditor of the taxpayer in an action on an open account where the tax lien arose and was filed prior to the date the garnishor obtained judgment against the taxpayer, but subsequent to the date of the garnishment lien. The situation in that case is similar to the one in the instant case, and in that case the Court further held that if a garnishment lien is not prior to a federal tax lien the attorney's fees allowed to the garnishee in the garnishment proceedings are not prior to the tax lien. In that case the attorney's fees were denied to even the garnishee. See also: Nason v. Taylor , 351 Mass. 347, 221 N. E. 2d 400.

The United States Supreme Court has even held where there is a statutory lien under state law it does not take priority over the lien of the United States government for unpaid taxes--that the validity of the lien is a federal question. In United States v. Pay-O-Matic Corp. [58-2 USTC ¶9533], 162 F. Supp. 154, the court held:

"Under Section 475 of the N. Y. Judiciary Law an attorney's lien is more than mere security; it is enforceable by remedy in the nature of foreclosure and may not be extinguished by action of the parties. Here Goldstein's lien arose at the commencement of the suit in condemnation and attached to the award finally made. Reisman v. Independence Realty Corp., 195 Misc. 260, 89 N. Y. S. 2d 763, affirmed 277 App. Div. 1020, 100 N. Y. S. 2d 407; In re Cross Island Pkwy., Nassau County, 171 Misc. 652, 14 N. Y. S. 2d 238. However, 'the relative priority of the lien of the United States for unpaid taxes is, as we said in United States v. Waddill Co. [45-1 USTC ¶9126], 323 U. S. 353, 356, 357, 65 S. Ct. 304, 306, 89 L. Ed. 294; * * * always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this court.' United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213, 75 S. Ct. 239, 241, 99 L. Ed. 264. Whether attorney Goldstein's lein by state tests would be held to be choate, it is clear that under federal tests it is as compared to that of the Government inchoate. It was not established for the amount of the lien was contingent on the outcome of a trial in the state condemnation court to fix the amount of the award to be made to Pay-O-Matic for the property condemned. It was but a 'caveat of a more perfect lien to come' (United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218, 220, 75 S. Ct. 244, 246, 99 L. Ed. 271) and is therefore subordinate to the federal tax lien; United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84, 74 S. Ct. 367, 370, 98 L. Ed. 520."

In the instant case there is no doubt the claim for attorney's fees is inchoate under federal interpretation; this Court must follow the holdings of the United States Supreme Court in determining the validity of the claim for attorney's fees. Accordingly, we hold that the lower court properly held the United States government lien was prior to both Kuffel's garnishment lien and any claim for reasonable attorney's fees.

Affirmed.

STRUCKMEYER, JR., and LOCKWOOD, Justices, concurring.

¹ "Sec. 6321. LIEN FOR TAXES.

"If any person liable to pay any tax neglects to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property rights to property, whether real or personal, belonging to such person." 26 U. S. C. 1958 ed. Sec. 6321.

"Sec. 6322. FERIOD OF LIEN.

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfled or becomes unenforceable by reason of lapse of time." 26 U. S. C. 1958 ed. Section 6322.

"Sec. 6323. VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT CREDITORS.

"(a) Invalidity of Lien Without Notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or . . ." 26 U. S. C. 1958 ed., Sec. 6323.

² "§12-1585. Judgment against garnishee.

"If it appears from the answer of the garnishee, or otherwise, that the garnishee is indebted to the defendant in any amount or was so indebted when the writ was served, the court shall give judgment for plaintiff against the garnishee for the amount so admitted or found to be due defendant from the garnishee unless the amount exceeds plaintiff's judgment against defendant in which case it shall be for the amount of such judgment."