The result may
differ, however, where the individual claiming procedural irregularities
which render the lien invalid is not a taxpayer, but a third party. In
its brief, FOA cites only one case from 1965 to support its contention
that third parties may challenge the validity of IRS liens on procedural
grounds. See Falik v. United States [65-1
USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965). That case, however, made
only a passing reference to the issue. Furthermore, McEndree v.
, 774 F.Supp. 1292 (D. Colo. 1991), cited by the Bank during oral
argument, is inapposite. Although McEndree addressed third-party
standing under §2410, that case did not involve a procedural challenge
to the validity of an IRS lien as the plaintiff conceded the validity of
at 1296. Rather, the plaintiff merely sought to assert the priority of
its lien over the federal tax lien. In the present case, no one disputes
that FOA may attempt to argue that its mortgage takes priority over the
federal lien. There is no authority, however, which permits the Bank, as
a third party, to argue that the lien is procedurally invalid. As the
procedural provisions of the Internal Revenue Code appear to exist to
protect the taxpayer only, not third parties, FOA lacks standing to
challenge the procedural regularity of the lien. This challenge to the
IRS' priority must fail.
Collection of Taxes
that any interest that the government had in the property has expired,
as the IRS had only six years from the date of assessment to collect the
tax owed pursuant to 26 U.S.C. §6502(a)(1)
. Because the first assessment issued on
October 11, 1982
, the government's lien only attached until 1988, the Bank argues.
notes, however, that §6502(a)(1)
was amended effective
November 5, 1990
, to give the IRS a ten-year collections period. This ten-year period
applies even to taxes assessed before the effective date, if the
previous six-year period had not yet expired as of
November 5, 1990
. Although counting from the 1982 assessment, the six-year time frame
expired in 1988, the six-year period had not expired by November 1990,
if we count from the
June 13, 1986
assessment. The government would have ten years in which to act. Thus,
if the 1986 assessment is the proper trigger for the collections period,
then the IRS has until June of 1996 to collect the Alts' unpaid taxes.
Due to the
conclusion of the preceding section that FOA does not have standing to
challenge the validity of the assessment, the Court assumes that the
1986 assessment is valid. Accordingly, the period of time in which the
IRS may collect on the deficiency has not expired. This challenge by FOA
Lien as Against Property of Harbor Lab
argues that the federal tax lien did not attach to the Cote La Mer
property as that property was transferred to Harbor Lab by quitclaim
June 2, 1986
. Because the lien recorded in
only referenced the property of the Alts, it did not attach to the
condominium owned by Harbor Lab, the Bank contends. The IRS did not file
a lien against Harbor Lab in
until June of 1991, after FOA had perfected its interest.
The IRS claims
that the transfer to Harbor Lab is ineffective to defeat the tax lien as
the deed was recorded after the assessment of the tax liability. The
Supreme Court has ruled that "[t]he transfer of property subsequent
to the attachment of the lien does not affect the lien." United
States v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51, 57 (1958). Although the transfer
June 2, 1986
, the deed was not recorded in
until August 1st, well after the June 13th assessment. Furthermore, the
IRS had made a previous assessment in October of 1982. In these
circumstances, the Alts should not be given the power to defeat the
federal tax lien through a quitclaim transfer. The lien did attach to
the Cote La Mer property. The Bank's third challenge to the priority of
the government's lien is without merit.
IRS' Notice of Prior Unrecorded Interest
contends that the federal tax lien should not take priority as the
government was on notice of the prior unrecorded interest held by the
law, a lienholder has priority if he or she recorded first and had no
notice of a prior unrecorded interest. The IRS argues that notice of the
mortgage is irrelevant, as priority determinations are controlled by
federal, not state, law.
6323 of the Internal Revenue Code dictates that a federal tax lien
has priority if it has been properly recorded under state law. 26 U.S.C.
§6326(a) , (f).
The Code imposes no notice requirement. State law appears to matter only
to the extent it directs the government where to file the tax lien.
Moreover, any notice requirement would render litigation over competing
liens highly complex. If federal tax liens were forced to yield every
time a governmental department had notice of a prior unrecorded
interest, the tax lien system would be hampered. The government does not
elect to extend credit based upon the security available, but is an
involuntary creditor. Accordingly, the Court finds that notice of a
prior unrecorded interest is irrelevant to determining lien priority
under the Internal Revenue Code.
preceding discussion indicates, the federal tax lien does take priority
over the Bank's mortgage on the Cote La Mer property. Summary judgment
on this question shall issue for the government.
Doctrines of Laches and Estoppel
issue raised in the briefs concerns the applicability of the equitable
doctrines of laches and estoppel. In its brief, FOA contends that
pursuant to the doctrine of laches, the Bank's interest in the Cote La
Mer property should be given priority over the government's tax lien.
FOA notes that the Alts owed their 1981 taxes for almost ten years
before the IRS instituted any legal proceedings or made any effort to
enforce the lien on the condominium. Had the Bank been on notice earlier
of the IRS' interest, FOA argues, it would not have gone ahead with the
initial loan in 1984 or the refinancing agreement in 1988. Further, the
issue is only now before this Court because the Bank forced a sale of
the disputed property and filed the present action. Given these
circumstances, FOA contends, equity demands that the Bank's mortgage
prevail over the federal tax lien.
government notes, however, the doctrine of laches may not be invoked
when it seeks to enforce its rights. See United States v. Weintraub
¶9172 ], 613 F.2d 612, 618 (6th Cir. 1979). This well-established
principle is "based upon the important public policy of preserving
public rights and revenues from the negligence of public officers."
During oral argument, the Bank conceded that the doctrine of laches does
not apply in this case.
FOA argues that the IRS should be estopped from claiming an interest in
the property. But again, estoppel may not be invoked against the
government, unless it is based upon an allegation of affirmative
misconduct. See Federal Crop Ins. Corp. v. Merrill, 332
380, 385, 68 S.Ct. 1, 3 (1947); Giles v. Carlin, 641 F.Supp. 629,
635 (E.D. Mich. 1986) (long-standing tradition that "estoppel may
not be invoked against the government"); Tonkonogy v. United
USTC ¶9447 ], 417 F.Supp. 78, 79 (S.D.N.Y. 1976) (estoppel may be
invoked only where allegation of affirmative misconduct). The only
"affirmative" action which the Bank alleges, however, occurred
during the discovery phase of this litigation. Such conduct has no
bearing on the real issue in this case: Whose interest in the property
should prevail? Estoppel would only apply if FOA demonstrated that the
government had taken an affirmative step which caused the Bank to loan
money to the Alts in exchange for a mortgage in the Cote La Mer property
or to refinance the loan later. No such allegation has been made.
Discovery conduct is simply irrelevant to the estoppel question.
doctrines of laches and estoppel may not be invoked in these
circumstances against the government. Accordingly, there is no dispute
here meriting a trial. The IRS' motion for summary judgment shall be
granted as to these issues.
Doctrine of Marshalling
contends in its brief that the IRS should be required to
the assets from previously seized property. Essentially, the Bank wants
this Court to order the IRS to apply all previously seized assets to the
1981 tax liability, as that is the earliest tax deficiency. FOA argues
that the government is refusing to do so, applying the assets to
deficiencies in later years, in order to protect its interest in the
Cote La Mer property.
of the Internal Revenue Manual, agents of the IRS are required to apply
all proceeds from the sale of seized property toward the satisfaction of
the earliest tax liability. The provision clearly requires the
assets. However, as the government notes, the Manual was developed
solely to guide the internal
istration of the IRS, and confers no legal rights on taxpayers or third
v. Will [82-1
USTC ¶9216 ], 671 F.2d 963, 967 (6th Cir. 1982). Furthermore, there
exists no "right of marshalling" against the
. United States v. Eshelman [87-2
USTC ¶9419 ], 663 F.Supp. 285 (D.
1987). A junior lienholder cannot compel the IRS to
its liens. In re Ackerman [70-1
USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970); United States v.
USTC ¶9135 ], 310 F.2d 846, 848 (2d Cir. 1962).
argument, FOA conceded that the doctrine of marshalling is not
applicable. Rather, the Bank requested that the Court invoke its
"equitable powers" to require the IRS to apply the seized
assets to the earliest tax liability. FOA provided the Court with no
reason why it should exercise its powers in this fashion, however.
Accordingly, the Court finds that the government shall prevail on this
issue raised in the briefs focuses on whether FOA is entitled to a
default or attorney fees as a sanction against the government. Under
Fed. R. Civ. P. 37(b)(2)(C), the Court may render a default against a
party who fails to obey an order to provide or permit discovery.
Alternatively, the Court may require a party against whom a discovery
order is issued to pay the reasonable expenses, including attorney fees,
of the party who sought the order. Fed. R. Civ. P. 37(a)(4). FOA claims
entitlement to these sanctions due to the various discovery battles it
has had with the IRS.
FOA served its
first set of interrogatories and document requests on the IRS in October
of 1992. The IRS refused to respond to fifteen of the 21 interrogatories
and seven of the eight document requests on grounds of relevance.
Magistrate Judge Scoville issued an order on
January 25, 1993
, compelling the government to furnish supplemental answers. In the
first set of supplemental answers which followed, the IRS claimed that
the Alts had underreported their income from 1981 by more than 25%, and
that a notice of deficiency had issued in the spring of 1986. Because
the Alts had misrepresented their income by more than 25%, the
government had six years from
April 16, 1992
, the date of the 1981 filing, to issue notice, and thus the notice was
March 31, 1993
, Judge Scoville issued another discovery order, requiring the IRS to
provide details on the 25% claim. In its second set of supplemental
answers, produced in response to the March discovery order, the
government stated that it did not contend that the Alts had
underreported their 1981 income by more than 25%. Instead, the IRS
contended that notice had issued before
April 15, 1985
, pulling it within the normal three-year period of limitations. The
government also mentioned for the first time the Alts 1985-86 Tax Court
that these responses by the IRS constitute dilatory and obstructionist
conduct, entitling the Bank to default under Rule 37. Default is an
extreme sanction, and appears wholly unwarranted in this case. The
evidence indicates that the IRS has complied with the discovery orders.
The government explains its contradictory responses to FOA's
interrogatories by stating that the file on the Alts was temporarily
misplaced, resulting in incorrect information for a period of time. This
contention is supported by the affidavit of attorney Alexandra
and costs incurred in seeking the two discovery orders from Judge
Scoville, however, may be warranted in this case. It does appear that
the government refused to answer several requests and provided FOA with
information that it did not fully verify. The Bank requests fees and
costs in the amount of $5,916.34. This matter shall be referred to
Magistrate Judge Scoville for further resolution.
Reimbursement for Insurance Coverage
issue presented in this case concerns the fire insurance coverage
obtained by FOA on the Cote La Mer property. After the Alts neglected to
obtain coverage on the condominium in 1991 as requested by the Bank, FOA
independently obtained an insurance policy. FOA now seeks to recover the
$717.18 in premiums it paid from the proceeds now in escrow with the
Court. The IRS refuses to permit the Bank to recover these costs,
claiming that the insurance policy was for the benefit of FOA alone, and
not all creditors.
cites any law in support of their respective positions. It appears the
government should prevail on this issue, as the policy never became the
property of the taxpayer, and thus the tax lien never attached.
Accordingly, if the property had been destroyed, only the Bank would
have been entitled to the insurance proceeds. Thus, FOA is not entitled
to reimbursement for the insurance costs. Summary judgment shall attach
for the government.
In sum, FOA's
motion for summary judgment shall be denied while the
government's motion shall be granted. FOA's request for attorney
fees and costs incurred in seeking the
January 25, 1993
March 31, 1993
, discovery orders shall be referred to Magistrate Judge Joseph G.
Scoville for disposition.
IT IS SO
Previously, the government contended that the notice of deficiency was
issued in the spring of 1986.
The government does note that a Tax Court proceeding was commenced by
the Alts in April of 1985, suggesting that notice was received prior to
that petition. "The notice of deficiency is . . . the 'ticket' into
the Tax Court that allows a taxpayer to challenge the tax assessment
before paying it." Guthrie v. Sawyer [92-2
USTC ¶50,391 ], 970 F.2d 733, 735 (10th Cir. 1992). It thus seems
likely that notice was received sometime in April of 1985 or before.
United States of America
, Plaintiff-Appellee v. Lloyd Ferrell Wingfield, Defendant-Appellee,
County of Boulder
U.S. Court of Appeals, 10th Circuit, 84-2197, 6/15/87, 822 F2d 1466,
Affirming an unreported District Court decision
[Code Secs. 6321 ,
6323 and 7426
--Result unchanged by the Tax Reform Act of 1986 ]
Lien for taxes: Property subject to lien: Property seized during
arrest: Priority: Jurisdiction: Conflict of law: Suit by nontaxpayer.--A
District Court properly exercised its ancillary jurisdiction in
adjudicating the conflicting claims of the IRS and a county government
to a large sum of money seized during a taxpayer's arrest on narcotics
charges, and it did not err in finding that the IRS's federal tax lien
attached prior to a State forfeiture provision. The funds, which were
confiscated by the local law enforcement officials, were in the custody
and control of the local federal District Court in the aftermath of the
taxpayer's trial on federal criminal charges. The taxpayer who, under
State law, could recover any of the money lawfully acquired possessed a
sufficient, if limited, property interest in the seized funds for the
federal tax lien to attach. Since the tax lien attached prior to a State
court's determination that the money was forfeited to the State under
its public nuisance laws, the IRS claim to the funds was entitled to
priority. The subsequent State forfeiture decree could not supplant the
previously filed federal tax lien.
ert N. Miller,
. Francis M. Allegra, Michael L. Paup, Carleton D. Powell, Glenn L.
Archer, Jr., Department of Justice, Washington, D.C. 20530, for
plaintiff-appellee. William D. Meyer, Hutchinson, Black, Hill, Buchanan
& Cook, 1215 Spruce St., Boulder, Colo. 80306, for appellant.
HOLLOWAY, Chief Judge, and BARRETT and MCKAY, Circuit Judges.
presents a series of tangled jurisdictional questions involving the
district court's subject matter jurisdiction of this case and its
jurisdiction as to the Government. The underlying merits involve the
status of a federal tax lien on contents of property seized and
forfeited pursuant to a
statute as a public nuisance because of use for unlawful activities
involving controlled substances. The Government says the contents passed
after the tax lien attached. The
disagrees and claims the property for itself, clear of the tax lien. The
district court agreed with the Government. We affirm.
November 5, 1982
, Lloyd Ferrell Wingfield was arrested at his home by FBI agents
pursuant to a federal arrest warrant charging him with unlawful flight
to avoid prosecution. The arresting FBI agents were accompanied by an
officer of the Boulder Police Department. At the time of the arrest, the
Boulder Police Officer observed marijuana in Wingfield's residence. The
officer obtained a state warrant authorizing a search of the premises.
Execution of the search warrant by federal and county agents and
officers resulted in the seizure of the following items, inter alia:
(1) eighteen grams of cocaine; (2) approximately $89,676.00 in United
States currency; (3) a personal check in the amount of $688.00; and (4)
various foreign currency, mint proof sets, and bars of Englehart silver,
collectively valued at approximately $35,000.
November 8, 1982
, the Government filed a complaint charging Wingfield with possession of
a controlled substance with the intent to distribute. On the same date,
the District Attorney for Boulder County filed a civil action against
Wingfield in the District Court for Boulder County pursuant to the
Colorado Abatement of Public Nuisance Statute, Colo. Rev. Stat. §16
-13-307. The following day local authorities released the seized
items for use as evidence in the federal criminal case. It is that case
against Wingfield which produces the appeal now before us.
November 16, 1982
, the State court granted
's temporary restraining order against the seized items, finding that
the seized items had been used in conducting, maintaining, aiding and
abetting a public nuisance. The State court further ordered pursuant to §16
-13-308 that no person take any action to encumber, transfer, or
assert a right of immediate possession to the seized items.
January 13, 1983
, the Internal Revenue Service (IRS) assessed income tax deficiencies
against Wingfield for federal income taxes and on January 19 filed
notices of federal tax liens with the Clerk and Recorder of Boulder
County. After a trial to the court on written stipulation Wingfield was
February 11, 1983
, on the federal criminal charge.
On May 17,
1983, the State court issued an order effective nunc pro tunc to
the date of seizure of the property (November 5, 1982), finding that the
items seized by federal and state agents in Wingfield's home on November
5, 1982, were seized from premises which constituted a class I public
nuisance and thus were forfeited to the county. Furthermore, the court
held that there was no evidence which would entitle Wingfield to
redelivery of the seized items. Wingfield appealed the State court's
September 1, 1983
, after various conflicting claims to the seized items had been
asserted, the federal district court ordered that the funds be deposited
with the Clerk of that court. The court further ordered that notice be
sent to the IRS, the United States Attorney's Office, and the County of
Boulder "so that claims can be presented and disposition
effectuated." I R. 32.
Wingfield, the IRS, and the
filed claims to the seized items. After a hearing the district court
held that the State forfeiture decree could not supplant a previously
filed federal tax lien, finding that a "State statute cannot
subvert the primary authority of the federal government to collect its
taxes under these circumstances." III R. 14. The court ordered the
clerk of the court to satisfy the claim of the IRS and, if any proceeds
remained, to satisfy the claim of
. The claimant Wingfield was held not entitled to any of the funds.
February 28, 1985
, the Colorado Court of Appeals affirmed in part and reversed in part
the forfeiture judgment of the Boulder County District Court.
23, 707 P.2d 1001 (Colo. Ct. App. 1985). The court affirmed the
State district court's judgment of forfeiture except as to the Englehart
silver bars found in buckets, the Canadian mint sets found in buckets,
and the Canadian currency found in a glass pitcher.
at 1004-05. As to these items Wingfield's rights to ownership were
May 8, 1987
, the Supreme Court of Colorado affirmed in part and reversed in part
the Colorado Court of Appeals decision ordering the reinstatement of the
district court's forfeiture order.
v. Lot 23, 735 P.2d 184 (
1987). The Colorado Supreme Court held that the Colorado Court of
Appeals had misconstrued the proper burden of proof that the State must
necessarily carry in abatement of public nuisance cases. The proper
standard was whether the State has proved by a preponderance of the
evidence that the items seized were used in the criminal activity.
at 12. The court answered in the affirmative, stating that all of the
seized property was properly forfeited to the State. 1
must confront the jurisdictional questions generated by the complex
procedural posture of the case. The case began as a federal criminal
prosecution for possession with intent to distribute a controlled
substance. The defendant in the criminal case was Wingfield. In the
instant appeal, the controversy centers on a dispute between the IRS and
concerning rights to items seized at Wingfield's residence. These items
were held by the district court as possible evidence in the criminal
trial. The court concluded that it had the authority to resolve
conflicting claims to the seized items as a matter of ancillary
contends that the district court could not properly exercise ancillary
jurisdiction in the circumstances.
jurisdiction rests on the premise that a federal court acquires
jurisdiction of a case or controversy in its entirety. Jenkins v.
Weinshienk, 670 F.2d 915, 918 (10th Cir. 1982). The district courts
have jurisdiction to enter orders ancillary to a criminal proceeding
concerning disposition of materials legally seized in connection with
the criminal investigation of a case. See, e.g.,
v. Rangel, 608 F.2d 120, 121 (5th Cir. 1979) (and cases cited
therein). The interests of judicial efficiency dictate that the
conflicting claims to property seized as evidence should be resolved by
the criminal court. United States v. LaFatch, 565 F.2d 81, 83
(6th Cir. 1977), cert. denied, 435 U.S. 971 (1978).
v. United States District Court for the District of Colorado, 699
F.2d 503 (10th Cir.), cert. denied, 464 U.S. 815 (1983), we held
proper the district court's exercise of ancillary jurisdiction to
appoint a receiver in a criminal case to effectuate a disposition of
property to accomplish restitution by the defendant. There the court
proceeding in a
district court is not in a separate compartment with the court
exercising only a limited portion of its authority as the appellants
argue. The federal courts obviously are of limited jurisdiction but the
extent of the authority of the district courts in these circumstances is
not limited or governed by whether the proceeding is criminal or civil.
seized property was to be used as evidence in a federal criminal case.
The property was in the custody and control of the federal district
court. It is this court which must determine the proper distribution of
funds currently in its possession. We conclude that the district court
does have the jurisdiction to enter an order concerning disposition of
seized property in its control. Although the defendant was convicted on
his plea of guilty, the district court had before it the facts and
circumstances of the case. Cf.
v. Ortega, 450 F.Supp. 211, 212 (S.D.N.Y. 1978). It would result in
a needless waste of judicial resources not to exercise ancillary
jurisdiction here. Moreover, the existence of adequate civil remedies
neither discharges the court's duties nor disturbs its jurisdiction. See
, 540 F.2d 1100, 1104 (D.C. Cir. 1976).
court's ancillary jurisdiction was properly exercised to dispose of the
claims to the property in the custody of the court.
argues that this court lacks appellate jurisdiction over this matter. It
also says that the present action is barred by the doctrine of sovereign
immunity. Moreover, the Government contends that the district court
exercised in rem jurisdiction over the seized property and that
such jurisdiction ceased to be valid on the distribution of the res
to the Government. It further argues that it was incumbent upon
to obtain a stay of the district court's order if it desired to preserve
jurisdiction for an appeal.
Government's argument that the action is barred by the doctrine of
sovereign immunity is without merit. In considering suits against the
federal government, we must determine whether a valid waiver of soverign
immunity exists. If not, the Government is immune from suit and we lack
subject matter jurisdiction.
v. Mitchell, 455
535, 538 (1980);
v. Sherwood, 312
584, 586-88 (1941).
Revenue Code §7426(a)(1)
Levy.--If a levy has been made on property . . ., any person (other than
the person against whom is assessed the tax out of which such levy
arose) who claims an interest in or lien on such property and that such
property was wrongfully levied upon may bring a civil action against the
United States in a district court of the United States. Such action may
be brought without regard to whether such property has been surrendered
to or sold by the Secretary.
7426 permits a third party to bring an action challenging the
lawfulness of governmental levies made against property in which he
claims an interest. Interfirst Bank Dallas, N.A. v. United States
¶9635 ], 769 F.2d 299, 304 (5th Cir. 1985), cert. denied, --
1458 (1986); see Crow v. Wyoming Timber Products Co. [70-2
USTC ¶9561 ], 424 F.2d 93, 96 (10th Cir. 1970) (dictum). Congress
has specifically waived sovereign immunity for actions under §7426
through the enactment of 28 U.S.C. §1346(e). Thus to the extent
that a party claiming an interest in property is aggrieved by the
pendency of an existing lien, sovereign immunity is waived. See Three
M Investments, Inc. v.
USTC ¶9185 ], 781 F.2d 352, 354 (10th Cir. 1986). This conclusion
does not change merely because the district court exercised ancillary
jurisdiction. Ancillary jurisdiction permits the district court to
exercise the full range of its civil and criminal jurisdiction.
One of the
essentials of in rem jurisdiction is that the property be within
the court's jurisdiction at the time of suit. 4 C. Wright & A.
Miller, Federal Practice & Procedure §1070, at 270 (1969). Release
or removal of the res from the control of the court ends its
jurisdiction. Generally, the only exceptions to the rule are when the res
is released accidentally, fraudulently, or improperly. See
Currency and Other Coins, 722 F.2d 1457, 1458 (9th Cir. 1984).
Government's analysis fails to consider the fact that in rem and in
personam jurisdiction may co-exist. See Inland Credit Corp. v.
M/T Bow Egret, 552 F.2d 1148, 1152 (5th Cir. 1977). Here both apply.
The district court still has jurisdiction under I.R.C. §7426(b)
to enter a judgment in personam against the Government. Section
7426(b) grants the district court the jurisdiction to order the
Government to return the seized property or its equivalent, i.e.,
a money judgment. Moreover while the Government attorney could not waive
any immunity of the
, we note that our interpretation of §7426(b)
is consistent with representations made to the district judge:
GOOD (Counsel for the County): Judge, I am curious, is there any--if I
can ask for a brief stay of the order until we see if we might be taking
some kind of further action before this Court releases the funds to the
SNOW (Counsel for Wingfield): Judge, excuse me, if I may speak to that.
We're being assessed interest on a daily basis, Mr. Wingfield is, for
that. We would suffer from the stay. We would ask that the order be
GUTHRIE (Counsel for the IRS): Besides that, Your Honor, we have a deep
pocket. We'll have the money. If they bring a successful lawsuit,
we'll have enough money to give it back.
COURT: Well, I'm not going to make any comments about political parties
going into greater debt, but I'll accept that. Okay, the claim is
denied. The assurance of the federal government is that you can
collect from them if you are successful in that.
R. 14-15 (emphasis added). It was upon this assurance by the Government
that the district court denied the motion for a stay.
In sum, the
case is not moot nor is jurisdiction destroyed because of distribution
of the property to the Government. The power to order restitution by
payment of an equivalent value remains.
further argues that the district court should have returned the property
to the State district court under the general principles of comity
because the State court was the first court to have possession of the
seized funds and because the Government had actual notice of the State
court proceedings and failed to intervene, citing United States v.
USTC ¶9327 ], 513 F.2d 129 (10th Cir. 1975).
inapposite. There the IRS intentionally by-passed a State court
proceeding following actual notice by initiating a unilateral action in
federal district court when the funds in question were in the sole
possession of the State district court. Here the State court did not
have control or possession of the seized property, nor did the
Government initiate the suit. Rather, the property was in the custody
and control of the federal district court as possible evidence in a
federal criminal case, and the Government, along with
and Wingfield, asserted claims to the property after Wingfield's
conviction. Although we recognized the importance of "[t]he
promotion of proper Federal-State relations in the interest of sound
istration and in further recognition of the principles of comity," id.
at 138-39, we believe these interests would not have been promoted by
the district court's refusal to adjudicate the claims to the seized
property in its control.
that the district court did not err in exercising ancillary jurisdiction
under Herzfeld and like principles to adjudicate the conflicting
claims to the property in its custody or in deciding not to transfer the
property to the State court.
CLAIMS OF OWNERSHIP
controlling question is whether Wingfield had a property interest in the
seized property sufficient for the federal tax lien to attach at the
time the IRS assessed the tax lien and filed notices thereof. If
Wingfield did have such a property interest in the seized property, then
the federal tax liens attached and the IRS' claim has priority. If, on
the other hand, the taxpayer-defendant had no such property interest in
the seized property, then the federal tax lien could not attach.
A federal tax
lien may attach only to the property of the person liable to pay the
tax. I.R.C. §6321 ;
see also 13 Mertens Law of Federal Income Taxation §54.52, at 208. Section
6321 provides that a federal tax lien shall be applicable to
"all property and rights to the property, whether real or personal,
belonging to such person." (Emphasis added). A federal tax
lien is wholly a creature of federal law. Therefore the consequences of
the lien that attach to property interests are matters of federal law.
See United States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677, 683 (1983) (and cases cited therein);
see also Hunt, 513 F.2d at 133. However the Internal Revenue Code
"creates no property rights but merely attaches consequences,
federally defined, to rights created under state law . . . ." United
States v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51, 55 (1958); see also 13 Mertens, supra
§54.52, at 207. Property and rights to property exist under state law;
priority of federal liens depends on federal law. See Rodgers,
461 U.S. at 683; Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-14 (1960); 21 West Lancaster
Corp. v. Main Line Restaurant, Inc. [86-2
USTC ¶9516 ], 790 F.2d 354, 356 (3d Cir. 1986) (under Pennsylvania
law, state liquor license did not constitute property but it had
sufficient indicia of property to be subjected to federal tax lien).
governs the priority of a tax lien against other claims to property. United
States v. Equitable Life Assurance Society [66-1
USTC ¶9444 ], 384 U.S. 323, 328 (1966). Where Congress has not
prescribed a different priority rule, see I.R.C. §6323
, the basic rule is "first in time is first in right." See
United States v. City of New Britain [54-1
USTC ¶9191 ], 347 U.S. 81, 85-86, (1954). Therefore, a tax lien is
junior to only those liens that not only attached to the asset, but also
became sufficiently choate before the tax lien arose. See id. And
choateness of a competing interest is also a matter of federal law. See United
States v. Pioneer American Insurance Co. [63-2
USTC ¶9532 ], 374 U.S. 84, 88-89 (1963).
to the property interest in question here, the Supreme Court of Colorado
has responded to the following question certified to it by the federal
What is the
nature and extent of the property interest, if any, retained by a person
subsequent to the seizure of his property pursuant to §16
-13-303, C.R.S. 1973, as effective on June 13, 1980, but prior to
judicial determination pursuant to §16
-13-307 et seq., C.R.S. 1973?
States v. Wilkinson [85-2
USTC ¶9825 ], 628 F.Supp. 29, 30 (D.
1985). The Colorado Court answered the question as follows:
We hold that a
person is divested of all rights and interests in property upon its
seizure under the Colorado Abatement of Public Nuisance statute (Public
Nuisance statute), sections
16 -13-301 to -316, 8 C.R.S. (1978 & 1983 Supp.). Therefore, our
answer to the certified question is that there is no property interest
retained during the period in question.
v. Wilkinson (In re Interrogatories of
District Court), 686 P.2d 790,
It is thus
arguable that Wingfield ceased to have any interest in the seized
property as of November 5, 1982, the date of the seizure, and well
before January 19, 1983, the date the IRS filed notices of the federal
tax liens. The tax lien would thus be unenforceable because it was a
lien against nothing, as was reasoned in the Wilkinson case. See
628 F.Supp. at 31.
We are not
convinced that we should apply the reasoning in the Wilkinson
opinion, see [85-2
USTC ¶9825 ] 628 F.Supp 29, which supports the position of the
. We adopt instead the analysis of the district court here and as
explicated in Eggleston v. Colorado [86-2
USTC ¶9552 ], 636 F.Supp. 1312, 1322 (D. Colo. 1986), which upholds
the Government's position.
Insofar as the
Colorado Supreme Court's decision determines the nature of items
forfeited pursuant to the abatement statute as property interests, it is
binding on this court. However, it remains a question of federal law for
us to decide whether the interest was subjected to a federal tax lien
and the priority of the lien. 21 West
Corp., 790 F.2d at 358. Two cases have addressed situations
analogous to the case before us. In Metropolitan Dade Co. v. United
USTC ¶9173 ], 635 F.2d 512 (5th Cir. 1981), the Fifth Circuit was
called upon to determine whether a delinquent taxpayer had a property
interest in confiscated funds seized by the State of Florida under the
authority of a specific gambling statute. Relying on language of the
statute that "no one has any property rights subject to be
protected by any constitutional provision in such contraband," 2
the court held that it was the "unescapable intent of the Florida
legislature . . . that all contraband, including money, escheats upon
Moreover, in rejecting the Government's argument that the taxpayer
retained a property interest in the seized contraband, the court held
that "[u]nder the statute, the 'owners' of seized contraband are
not 'divested' of any property rights; the legislature expressly stated
that 'no one has any property rights' in seized contraband." 635
F.2d at 515. Although the
law provided a means for a claimant to recover seized property if he
could show that the property was lawfully acquired, the court
nevertheless concluded that the confiscation was not analogous to an
inchoate attachment lien. Id. 4
v. Escambron Development Corp. [84-2 USTC ¶9355], 740 F.2d 92 (1st
Cir. 1984), the First Circuit considered whether title to Puerto Rican
land acquired by civil law "acquisitive prescription" was
subject to a federal tax lien against the prior record owners of the
land. The plaintiffs argued that when the thirty-year period for adverse
ran in 1975, the doctrine of relation back made them owners of the land
from the time when they first took possession in 1945.
at 94-95. Under the civil law concept in
, "[w]hen prescription is completed the possessor is deemed to be
owner, not merely from the last day of the delay, but retroactively from
the moment when the prescription began to run." Id. at 94
(quoting I M. Planiol & G. Ripert, Treatise on the Civil Law
599 n.2708 (La. State Law Inst. trans. 1959)). Thus the plaintiffs
argued that the Government's tax lien which arose in 1963 was
ineffective because through the application of the relation back
doctrine they, not the delinquent taxpayers, were the owners of the land
at the time.
Circuit rejected this argument concluding "that, under the federal
tax laws, the government's tax lien passed along with ownership of the
at 100. Of particular import to the court was the fact that the right to
ownership of the land was never extinguished; rather, the right passed
from the taxpayers to the plaintiffs.
at 99. Thus the court distinguished those cases where the attached
property right ceased to exist, leaving nothing against which the
Government could assert its interests.
Our case more
closely resembles Rodriguez than Metropolitan Dade. The
Supreme Court of Colorado did state that "a person is divested of
all rights and interests in property upon its seizure under the Colorado
Abatement of Public Nuisance statute. . . ." Wilkinson, 686
P.2d at 790. Nevertheless examination of the
procedure shows that mere seizure of property does not result in
retroactive divestment of the owner's rights in that property. Under Wilkinson,
a person is divested of rights in property at the time of seizure, but
this is dependent on a final order being entered. 686 P.2d at 792, 794.
Thus the "owner" of seized property under
law retains some interest in the property, even though he may not have
the right to possession. See Eggleston, 636 F.Supp. at 1322. As
noted below, until entry of the final forfeiture order the owner still
had a right to recover his property if it was not found to be subject to
We feel a
further comparison to Rodriguez is persuasive. It is true that in
the instant case the seizure of Wingfield's property was an act on which
forfeiture and ultimate title for the County can be established.
However, this is close, we feel, to the facts in Rodriguez. There
the taking of possession at the start of the period by the adverse
possessors also was an act on which their rights could be established on
completion of the required possession. Nevertheless the intervening tax
lien prevailed because the final completion of the prescription period
had to occur before the adverse possessors' rights were established.
Thus at the
instant tax lien attached to the seized property here, absent the use of
the doctrine of relation back as it is explained in United States v.
Stowell, 133 U.S. 1, 16-17 (1890), the taxpayer Wingfield had a
cognizable interest in the seized property. This must be so because if
the final judgment of forfeiture by the
court had not been entered, Wingfield would have been entitled to the
return of the seized property. 5
Here we cannot agree that before the final judgment of forfeiture was
entered, the taxpayer had no property interest sufficient for the
federal tax lien to attach. Not until that final judgment was entered
was he divested of that interest in favor of the County. Here Wingfield
had an interest in the seized property sufficient for the tax lien to
attach until the final judgment was entered. 6
the use of the relation back doctrine can
argue that Wingfield had no property interest as of the date of seizure.
The district court reasoned that the doctrine of relation back under
state law cannot be held to subvert the constitutional power to lay and
collect taxes. Eggleston, 636 F.Supp. at 1323. We agree. Relation
back cannot "operate to destroy the realities of the
situation." United States v. Security Trust & Savings Bank
¶9492 ], 340 U.S. 47, 50 (1950). "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 (1955).
seizure, but while Wingfield retained an interest in the property until
a final forfeiture judgment, the tax lien attached. We therefore hold
that as a matter of federal law governing priorities, the Government's
tax lien had attached to the seized property of Wingfield before it
and has priority over the County's claim.
ESTOPPEL AND WAIVER
further argues that the Government should be estopped from pressing its
right to the funds because of governmental assurances that it would
waive its claim. We disagree.
Estoppel is an
equitable doctrine invoked to avoid injustice in particular cases. The
Supreme Court has left open the question whether estoppel can never be
applied against the Government. See Heckler v. Community Health
51, 60, 66 (1984). If estoppel were to be applied against the
Government, we have specified these requirements: (1) the party to be
estopped must know the facts; (2) he must intend that his conduct will
be acted upon or must so act that the party asserting the estoppel has
the right to believe that it was so intended; (3) the latter must be
ignorant of the true facts; and (4) he must rely on the former's conduct
to his injury. Lurch v.
, 719 F.2d 333, 341 (10th Cir. 1983). We have also said that there
is an additional consideration of public policy when a party seeks to
estop the Government; if the Government is unable to enforce the law
because of estoppel, the interest of the citizenry as a whole in
obedience to the rule of law is undermined. Che-Li Shen v.
Immigration and Naturalization Service, 749 F.2d 1469, 1473-74 (10th
Here we are
not convinced that
reasonably relied to its detriment on any assurances by the IRS that it
would waive its claims to the seized property. The County has not lost
any rights, or changed its status, because of reliance on claimed
assurances. See Heckler, 467
at 61-62. The conduct of the IRS did not cause
to take or fail to take action that the County could not correct at any
time. See Schweiker v. Hansen, 450
785, 789 (1981) (per curiam).
was able to present its argument forcefully and its counsel has provided
able representation. Because of our conclusion that the County has
failed to show that it reasonably relied to its detriment on assurances
made by the IRS that it would waive its claim, we need not address the
additional public policy considerations when a party seeks to estop the
We hold that
is not entitled to prevail on the basis of the claimed estoppel. 8
We hold that
the district court's exercise of ancillary jurisdiction was proper.
Moreover, Wingfield had an interest in the seized property sufficient
for the tax lien to attach before the final order of forfeiture.
Finally, the court's order that the Clerk of the Court satisfy the claim
of the IRS and, if any proceeds remained, to satisfy the claim of the
was not in error. Accordingly the judgment is
was never made a party to the state forfeiture proceedings. Moreover,
the State forfeiture proceedings did not address the validity and
priority of the federal tax lien, the issue before us; rather, the
precise issue before the State courts was whether Wingfield's residence
constituted a class I public nuisance, and, if so, whether all the
seized property was subject to forfeiture.
635 F.2d at 514.
635 F.2d at 515 (footnote omitted).
We express no opinion as to whether a tax lien could attach to the
taxpayer-claimant's interest (his right to recover the property) under
statutes similar to that of
. As noted, that claimant has a right to recover his property if he
carries the burden of showing the property was lawfully acquired. For
reasons expressed below, we find the instant case is distinguishable
from Metropolitan Dade and the
The Colorado Court of Appeals has recognized this fact in the direct
appeal in Wingfield's state forfeiture proceeding. See Colorado v.
Lot 23, 707 P.2d 1001 (Colo. Ct. App. 1985), aff'd in part and
rev'd in part, 735 P.2d 184 (
1987). There the court found that of the property seized from Wingfield,
the silver bars, the Canadian mint sets, and the currency found in the
glass pitcher were not sufficiently shown to be "connected in any
way with the drugs [seized] or other criminal activity," id.
at 1004, and were ordered returned to Wingfield.
also argues that under Colo. Rev. Stat. §16
-13-303(3) Wingfield had no property interest in the seized
property. Section 16
-13-303(3) provides that "no property rights shall exist"
in the proceeds from the sale of drugs. Section
16 -13-303(3) is analogous to the
provision confronted by the court in Metropolitan Dade. Both the
provision and the
provision characterize the proceeds from the sale of drugs as something
in which no property rights may be held.
the property was seized pursuant to §16
-13-303(1). Thus the funds were seized and forfeited because they
were found to be contents of a building that was adjudged a class I
public nuisance. There has never been a court finding that the property
was proceeds from the sale of drugs. Moreover, this argument was not
presented to the district court.
The opinion of the Supreme Court of Colorado in Wilkinson, 686
P.2d at 792, illustrates the reliance on relation back to establish the
interest acquired by forfeiture "at the time of seizure."
court's order concerning the forfeiture of the property at issue here
was entered nunc pro tunc to the date of seizure. This order
reflects its finding that personal property seized pursuant to sections
16 -13-303(2) and -308(1) is forfeit at the time of seizure.
We further note that the district court held that it is "very clear
that where federal taxes are due, particularly where they are due as a
result of obtaining monies or profits from a criminal enterprise, that
government is not free to waive its rights to funds . . . ." III R.
7122(a) provides discretionary authority to the Secretary of the
Treasury to compromise any civil or criminal case arising under the
internal revenue laws before the case is referred to the Department of
Justice for defense or prosecution. After the case has been referred to
the Department of Justice, only the Attorney General or his delegate may
compromise the case. See I.R.C. §7122(a)
; see also 3 Mertens (Code Commentary), supra §7122
:1, at 74-3 to 74-4.
arguendo, that IRS attorneys represented that the IRS would waive
any claim to the seized property, the IRS attorneys were not shown to
have authority to compromise or waive a claim of the
in these circumstances. See I.R.C. §7122(a)
; 26 C.F.R. §301.7122(a)
. Agents of the Government "who have no authority at all to
dispose of Government property cannot by their conduct cause the
Government to lose its valuable rights by their acquiesence, laches, or
failure to act." United States v. California, 332
19, 40 (1947); see also California ex rel. State Lands Comm'n v.
United States, 457
273, 276 n.4 (1982). Moreover, compromises are required to be in
writing. See 26 C.F.R. §301.7122(d)
; see also 3 Mertens (Code Commentary) supra, §7122
:3, at 74-5 to 74-6. Here no written waiver is said to have been
relies exclusively on alleged oral assurances by IRS attorneys.
III R. 7.
USTC ¶50,312] In re South Independence, Inc., d/b/a
Texaco, EIN #541373038, Debtor. South Independence, Inc., d/b/a Lake
Wright Texaco, Plaintiff v. United States of America, Commonwealth of
Virginia, and Selective Insurance of America, Inc., Defendants
Bankruptcy Court, East. Dist.
Div., 99-25384-S, Chapter 11, APN: 00-2090-S,
, 256 BR 861, 2000 Bankr. LEXIS 1597
Liens: Creation of: Debtor in bankruptcy: Priority: State (Virginia)
law: Federal tax lien v. state lien.--
The IRS's tax liens against the assets of an insolvent corporation's
bankruptcy estate had priority over state (Virginia) liens for unpaid
fuel taxes because the federal liens arose before the state liens became
choate and, thus, were first in time and first in right. The federal
liens were perfected when the IRS made its tax assessments, and the
state liens were created on the later dates when the state's tax
division filed two memoranda of liens indicating that taxes were past
Liens: Creation of: Debtor in bankruptcy: Priority: State (
) law: Federal tax lien v. state lien: State as judgment lien
A state (
) did not qualify as a judgment lien creditor and its claim against an
estate's assets did not have priority over federal tax liens that were
first in time. The state unsuccessfully argued that its lien was
perfected before the IRS filed a notice of federal tax lien. Despite the
law gave the state lien the "effect" of a judgment, the state
did not satisfy the tax code criteria to be a judgment lien creditor
because its lien was not obtained in a court of record or from any type
of judicial authority. Monica Fuel, Inc. (CA-3), 95-2
USTC ¶50,477 , distinguished.
McCreedy II, for debtor. Gregory D. Stefan, Richard G. Jacobus, for
I.R.S. Eric K.G. Fiske, for
Thomas Moore Lawson, Ann K. Crenshaw, for Selective Ins. Co. of America.
Opinion and Order
, Bankruptcy Judge:
came upon the debtor's Complaint to Determine the Extent, Priority and
Validity of Liens, and to Authorize Distribution. The parties involved
have stipulated to most of the facts. With no major facts in contention,
both parties filed summary judgment motions and memoranda in support
thereof. After reviewing their briefs, the Court heard oral argument on
the summary judgment motions and took the matter under advisement.
The facts are
not in dispute. On
August 18, 1999
("debtor") filed a voluntary petition for bankruptcy under
Chapter 11. Following the debtor's bankruptcy filing, this Court
authorized the debtor to sell property of the bankruptcy estate free and
clear of liens pursuant to 11 U.S.C. §363(b). After executing the sale
and making certain payments pursuant to the Court's sale order, the net
proceeds of the sale totaled $67,500, exclusive of closing costs and a
sales commission. The debtor is prepared to distribute the net proceeds
but has filed this Complaint to resolve its concern as to which creditor
has priority relative to the other creditors.
In the instant
case, two creditors vie for priority--the
("Commonwealth") and the Internal Revenue Service
("IRS"). The Commonwealth's claim relates to the debtor's fuel
tax obligations. Pursuant to Virginia Code §58.1-2132.2, the
Commonwealth filed two memoranda of liens--the first on November 17,
1998 and the second on July 26, 1999--in the Circuit Court for the City
of Virginia Beach to secure the fuel tax obligations in the amounts of
$52,834.31 and $10,610.59 respectively. 1
The Commonwealth has accepted $25,707.06 from Selective Insurance
Company of America, Inc. ("SIC"), as a compromise to the
surety company's payment bond of $68,000, which previously secured the
prepetition fuel tax obligation of the debtor. 2
The IRS claim
is also for unpaid taxes. Between
October 31, 1997
October 26, 1998
, the IRS made numerous tax and penalty assessments for various periods
against the debtor, totaling $30,289.26. 3
Since then, the amount of the IRS claim has fluctuated due to accrued
interest, additional penalties, and payments credited against the claim.
In its motion for summary judgment, and consistent with its proof of
claim, the IRS has requested that $32,299.87 be distributed to satisfy
its claim. 5
in sale proceeds to distribute, the estate is unable to pay in full both
the claims of the Commonwealth and the IRS. Accordingly, which creditor
is entitled to distribution first will have a substantial effect on how
much of each creditor's claim will be paid.
issue in this case is which claim has priority. Federal law controls
when the issue turns on the priority to be given to a federal lien. See
v. Sec. Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S. 47, 49,
95 L.Ed. 53, 71 S.Ct. 111 (1950); Monica Fuel, Inc. v. IRS [95-2
USTC ¶50,477], 56 F.3d 508, 511 n.7 (3d Cir. 1995); In re Lehigh
Valley Mills, Inc., 341 F.2d 398, 400 (3d Cir. 1965). Under federal
law, the priority of a claim is governed by the well-known principle
that the "first in time is the first in right." United
States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 123
L.Ed.2d 128, 113 S.Ct. 1526 (1993); accord United States v. Pioneer
Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 87, 10 L.Ed.2d 770, 83
S.Ct. 1651 (1963); United States v. City of New Britain [54-1
USTC ¶9191], 347 U.S. 81, 85, 98 L.Ed. 520, 74 S.Ct. 367 (1954); Air
Power, Inc. v. United States [84-2 USTC ¶9732], 741 F.2d 53, 55
(4th Cir. 1984). 6
In the instant case, the priority between the claims of the IRS and the
Commonwealth depends on which lien arose first. Furthermore, if the
Commonwealth is within a certain class of protected creditors, the issue
of notice may impact the priority dispute involved in this case. Both
issues are examined below.
FIRST IN TIME IS FIRST IN RIGHT
When the Liens Arose
priority of each lien in the instant case depends on which lien was
first in time. See McDermott [93-1 USTC ¶50,164], 507
at 449; Pioneer Am. Ins. [63-2 USTC ¶9532], 374
[54-1 USTC ¶9191], 347
at 85; Air Power [84-2 USTC ¶9732], 741 F.2d at 54; Monica
Fuel [95-2 USTC ¶50,477], 56 F.3d at 511. The liens of the IRS
arose under §6321 of the Internal Revenue Code, which provides:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
U.S.C. §6321 (West 2000). Such a lien arises at the time the IRS
conducts the tax assessment. See id. §6322 ("Unless another
date is specifically fixed by law, the lien imposed by section 6321
shall arise at the time the assessment is made. . . ."); Monica
Fuel [54-1 USTC ¶9191], 56 F.3d at 511 ("Under 26 U.S.C. §§6321
and 6322, federal tax liens arise when the underlying taxes are
assessed."). As noted earlier, the IRS conducted numerous tax
assessments, with the latest occurring on
October 26, 1998
. Applying §6322, it is clear that all of the IRS liens arose no later
October 26, 1998
As for the
Commonwealth's liens, the Supreme Court stated in United States v.
McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 123 L.Ed.2d 128, 113
S.Ct. 1526 (1993): "Our cases deem a competing state lien to be in
existence for 'first in time' purposes only when it has been
'perfected'. . . ."
at 449. The point at which a state lien is perfected depends "on
the time it attached to the property in question and became
[54-1 USTC ¶9191], 347
at 86, quoted in United States v.
[64-2 USTC ¶9520], 377 U.S. 351, 354, 12 L.Ed.2d 370, 84 S.Ct.
1267 (1964); see Monica Fuel [95-2 USTC ¶50,477], 56 F.3d at
A lien may be choate "when there is nothing more to be done . . .
when the identity of the lienor, the property subject to the lien, and
the amount of the lien are established."
[54-1 USTC ¶9191], 347
at 84, quoted in
[64-2 USTC ¶9520], 377
In the instant
case, the Commonwealth's liens arose under §58.1-2132.2 of the Virginia
Code, which provides:
If any taxes
or fees, including penalties and interest, become delinquent or are past
due, the Commissioner may file a memorandum of lien. . . . Such
memorandum shall be recorded in the judgment docket book and shall have
the effect of a judgment in favor of the Commonwealth. . . .
Code Ann. §58.1-2132.2 (Michie 2000). At
the time the memorandum of lien is filed, the lienor and the property
subject to the lien presumably are identified. Moreover, the memorandum
of lien should establish the amount of the lien. Consequently, the
Commonwealth's liens became choate at the time it filed the two
memoranda of liens-specifically, the Commonwealth's liens became choate
November 17, 1998
July 26, 1999
respectively. Therefore, the earliest lien that arose in favor of the
Commonwealth occurred on
November 17, 1998
The IRS Liens Are First in Time
The review as
to when each lien arose in the present case reveals that all of the IRS
liens arose prior to the Commonwealth's two liens. The latest IRS lien
October 26, 1998
, whereas the first Commonwealth lien arose on
November 17, 1998
-nearly a month after the last IRS lien. Applying the principle of first
in time, first in right, it is clear that the IRS liens are first in
time and thus first in right. The Commonwealth, however, asserts that
its liens are first in time because the IRS did not file its notice of
December 28, 1998
. Even then, the Commonwealth argues, the notice was illegible and
therefore ineffective. The relevance of the IRS notice of federal tax
lien depends on whether the Commonwealth is a protected class under the
Internal Revenue Code.
JUDGMENT LIEN CREDITOR
Commonwealth argues that it is a judgment lien creditor and therefore
must have notice of a federal tax lien before such lien may trump the
Commonwealth's lien. As noted above, an IRS lien arises at the time the
tax is assessed. See 26 U.S.C. §§6321, 6322 (West 2000). To be
valid against certain types of creditors, however, the IRS must file a
notice of federal tax lien. Congress saw fit to protect certain types of
creditors by legislating that "the lien imposed by section 6321
shall not be valid as against any purchaser, holder of a security
interest, mechanic's lienor, or judgment lien creditor until notice
thereof which meets the requirements of subsection (f) has been filed by
the Secretary." Id. §6323(a); see also Air Power, Inc.
v. United States [84-2 USTC ¶9732], 741 F.2d 53, 55 (4th Cir. 1984)
("Congress in the last fifty years has chosen to extend special
protection to certain classes of creditors whose interests are perfected
and specific before they have notice of outstanding federal tax
lien creditor is defined in the IRS regulations:
[A] person who
has obtained a valid judgment, in a court of record and of competent
jurisdiction, for the recovery of specifically designated property or
for a certain sum of money. In the case of a judgment for the recovery
of a certain sum of money, a judgment lien creditor is a person who has
perfected a lien under the judgment on the property involved.
C.F.R. §§301.6323(h)-1(g) (2000). The IRS contends that the definition
of a judgment lien creditor requires that the lienor have obtained the
judgment through litigation in a court of law. Conversely, the
Commonwealth argues that under state law, its lien is given the effect
of a judgment in all respects and therefore makes the Commonwealth a
judgment lien creditor for purposes of Internal Revenue Code §6323.
On its face,
Virginia Code §58.1-2132.2 attempts to create a judgment lien once the
lienor files a memorandum of lien. See
Code Ann. §58.1-2132.2 (Michie 2000). The state statute, however, is
not determinative of whether it is a judgment, because "federal law
governs the actual legal effect of the judgment for tax priority
purposes." Air Power [84-2 USTC ¶9732], 741 F.2d at 55 n.2
(4th Cir. 1984) (citing Hartford Provision Co. v. United States
[78-1 USTC ¶9392], 579 F.2d 7, 9 (2d Cir. 1978)). In Air Power,
the Fourth Circuit Court of Appeals held that "whether a judgment
issues from a 'court of record' for purposes of section 6323 priority
under the Internal Revenue Code is a question of federal law. . .
at 54. The Air Power court based its holding on the need
for uniformity in defining "judgment creditor" as expressed in
United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U.S.
361, 97 L.Ed. 1071, 73 S.Ct. 701 (1953):
principle of Congress in its tax scheme is uniformity, as far as may be.
Therefore, a "judgment creditor" should have the same
application in all the states. In this instance, we think Congress used
the words "judgment creditor" in §3672 [now §6323] in the
usual conventional sense of a judgment of a court of record, since all
states have such courts. We do not think Congress had in mind the action
of taxing authorities who may be acting judicially as in New Hampshire
and some other states, where the end result is something "in the
nature of a judgment", while in other states the taxing authorities
act quasi-judicially and are considered
364 (footnotes omitted), quoted in Air Power [84-2 USTC ¶9732],
741 F.2d at 56. Likewise, in the instant case, that a state statute
declares that it "shall have the effect of a judgment," Va.
Code Ann. §58.1-2132.2, is not enough to render the state a judgment
lien creditor for the purpose of §6323 of the Internal Revenue Code. See,
e.g., Brown v. Maryland [87-2 USTC ¶9639], 699 F.Supp. 1149, 1153
(D. Md. 1987) ("Although, under
law the recording of a notice of a tax lien may be similar to or in the
nature of a judgment, this is not sufficient under the Gilbert
case. "). Rather, the creditor must meet the criteria enumerated
under the Internal Revenue Code to qualify as a judgment lien creditor.
In the instant case, the Commonwealth does not qualify as a judgment
regulations note that a judgment lien creditor is one who has obtained a
judgment in a "court of record." 26 CFR §§301.6323(h)-1(g)
(2000). The regulations go on to state that "the term 'judgment'
does not include the determination of a quasi-judicial body or of an
individual acting in a quasi-judicial capacity. . . ."
These comments make it clear that anything less than a judgment in a
court of record with judicial authority will not suffice. A state
legislature cannot overcome this barrier by simply declaring its lien to
be a judgment. The Commonwealth's lien in this matter was not born from
a court of record or any sort of judicial authority. Consequently, the
Commonwealth is not a judgment lien creditor and cannot enjoy such
protection. Cf. Foust v. Foust [98-1 USTC ¶50,202], No. IP
96-0196-C-T/G, 1997 WL 1037872, at *7 (S.D. Ind. July 9, 1997)
("Therefore, even though the [Indiana Department of Revenue
("IDR")] has a judgment lien under Indiana law, this lien does
not qualify the IDR as a 'judgment lien creditor' under federal law that
is entitled to the additional protection of section 6323(a). The IDR
does not have a judgment granted by a court of record, and would need
such a judgment before the IRS filed its notice . . . in order to have
priority over the federal tax lien."). Without the status of
judgment lien creditor, the timing, as well as the illegibility of the
notice of federal tax lien becomes irrelevant. The federal tax liens
arose when they were assessed, and as noted above, were first in time
relative to the Commonwealth's liens. Under the principle of first in
time, first in right, the IRS liens take priority over the
MONICA FUEL, INC. V. INTERNAL REVENUE SERVICE
Court must address the case that the Commonwealth argues should control
the outcome. In Monica Fuel, Inc. v. Internal Revenue Service
[95-2 USTC ¶50,477], 56 F.3d 508 (3d Cir. 1995), the Third Circuit
Court of Appeals faced an issue similar to the one faced by this Court
today--namely the relative priority of a §6321 lien versus a state
fuels tax lien. See id. at 508-09. The state statute in Monica
Fuel is substantially similar to the one at issue today. In Monica
Fuel, the statute created a lien for fuel taxes owed to the state. See
id. at 509. By issuing either a certificate of debt or a warrant of
execution, the lien would be "given the same force and effect as
any entry of a docketed judgment. . . ."
In holding that the state tax liens "were choate and, therefore,
entitled to priority over the liens of the IRS," id. at 513,
the court noted that the "liens were 'given the force of a
judgment' upon assessment."
(quoting United States v. Vermont [64-2 USTC ¶9520], 377 U.S.
351, 359, 12 L.Ed.2d 370, 84 S.Ct. 1267 (1964)).
The holding in
Monica Fuel is notable as much for its holding as for what it did
not hold. The court noted that on reargument the district court
"concluded that . . . the Division did not acquire judgment lien
creditor status because a certificate of debt 'does not qualify as a
"valid judgment, in a court of record and of competent
jurisdiction" as specifically required by 26 C.F.R. §301.6323(h)-1(g).'
at 510 n.5 (quoting Monica Fuel, Inc. v. IRS, No. 91-748, at 7
(D. N.J. May 10, 1994)). On appeal, the Division did not contest this
ruling and therefore the Third Circuit in Monica Fuel did not
have to address whether the Division was a judgment lien creditor.
Yet this is
precisely the issue before this Court. In Monica Fuel, whether
the Division was a judgment lien creditor was not outcome determinative
because, as the court found, the Division was first in time with regard
to when the liens arose. 8
In the instant case, the Commonwealth's first lien arose nearly a month
after the IRS made its last tax assessment. Having lost this race, the
Commonwealth had to pin its hopes on protection as a judgment lien
creditor. As noted above, this attempt has been proven futile in that
the Commonwealth is not a judgment lien creditor.
The sole issue
in this case is which liens have priority: the Commonwealth's liens or
the IRS liens. With "first in time, first in right" as the
guiding principle, the dates that each lien arose are critical. Under
state law, the Commonwealth's liens arose when the Commonwealth filed
the two memoranda of liens. Conversely, under federal law, the IRS liens
arose at the time the IRS assessed the fuel taxes. Applying this to the
undisputed facts, it is clear that all of the IRS liens arose prior to
the Commonwealth's liens.
To avoid the
consequences of perfecting its lien subsequent to the IRS tax
assessments, the Commonwealth seeks protection as a judgment lien
creditor. A judgment lien creditor is not bound by the date of tax
assessment for purposes of priority, but rather the date of when the
notice of federal tax lien was filed controls. Who is a "judgment
lien creditor," however, is governed under federal law. The
Commonwealth does not fit into this definition despite the state statute
giving the lien the effect of a judgment, because the lien was not
obtained in a court of a record or from any type of judicial authority.
status of a judgment lien creditor, the first lien in time must prevail.
Accordingly, in light of the fact that the IRS liens preceded the
Commonwealth's liens, the Court finds that the IRS liens have priority
over the Commonwealth's liens. The Court, therefore, orders that the
amount of $67,500 being held in trust be distributed first to the IRS in
satisfaction of its claim for $32,299.87, with the remainder to be
applied to the Commonwealth's liens.
IT IS SO
shall mail a copy of this Memorandum Opinion and Order to Gregory D.
Stefan, Esq., and Richard G. Jacobus, Esq., counsel for the IRS, Eric
K.G. Fiske, Esq., counsel for the Commonwealth of Virginia, Thomas Moore
Lawson, Esq., and Ann K. Crenshaw, Esq., counsel for Selective Insurance
Company of America, and W. Greer McCreedy, II, Esq., counsel for the
May 19, 1999
July 28, 1999
, the Commonwealth also filed memoranda of liens for various sales tax
and employer withholding tax assessments against the debtor for various
periods, totaling $5289.18. The Commonwealth, however, does not contend
that this amount is entitled to priority over the IRS claims, as these
liens were recorded after the IRS filed its notice of federal tax lien.
SIC is a party to this adversary proceeding. In its pleadings, SIC has
adopted the position of the Commonwealth in all respects.
IRS Tax Assessments
For the tax period ending Assessment Date Amount
September 30, 1997
October 31, 1997
February 2, 1998
February 2, 1998
February 2, 1998
February 2, 1998
March 9, 1998
December 31, 1997
January 31, 1998
April 13, 1998
April 13, 1998
April 13, 1998
April 13, 1998
May 18, 1998
March 31, 1998
April 30, 1998
June 29, 1998
June 29, 1998
June 29, 1998
June 29, 1998
August 3, 1998
June 30, 1998
July 31, 1998
September 21, 1998
September 21, 1998
September 21, 1998
September 21, 1998
At trial, the parties noted an apparent discrepancy in the amounts the
IRS claimed in its notice of federal tax lien as compared with its proof
of claim. In the notice of federal tax lien, the IRS stated that the
amount secured was $30,353.48. In its proof of claim, however, the IRS
stated that the amount secured was $32,299.87. To resolve the matter,
the IRS submitted a supplemental affidavit in support of its motion for
summary judgment. In the affidavit, Pamela Anderson, an
"Advisor/Reviewer" for the IRS, explained that the differing
amounts reflected activity since the dates the taxes were assessed, as
well as since the notice of federal tax lien was filed. Specifically, in
addition to the tax assessments previously noted, the proof of claim
amount reflects one payment of $4215, a dishonored check penalty of $15,
failure-to-pay penalties of $3233.94, and further accrued interest
totaling $2976.67. When these amounts are added to the amount of the
original tax assessments, which totaled $30,289.26, see supra
note 3, the combined total matches the IRS proof of claim--$32,299.87.
December 28, 1998
, in compliance with 26 U.S.C. §6323(f) and Virginia Code §55-142.1(C)(1),
the IRS filed a notice of federal tax lien with the Virginia State
Corporation Commission. The parties dispute the legibility, or lack
thereof, of the notice of federal tax lien. The parties further dispute
who should bear the responsibility for such alleged illegibility. The
Court makes no finding on these issues as this opinion makes those
issues moot. As discussed in greater detail below, the notice of federal
tax lien ultimately has no bearing on the outcome of this proceeding.
This principle goes back to the days of Chief Justice Marshall, who
is believed to be universal, that a prior lien gives a prior claim,
which is entitled to prior satisfaction out of the subject it binds,
unless the lien be intrinsically defective, or be displaced by some act
of the party holding it, which shall postpone him in a Court of law or
equity to a subsequent claimant.
(12 Wheat) 177, 179, 6 L.Ed. 592 (1827).
As the Supreme Court noted in Vermont, "the requirement that
a competing lien must be choate in order to take priority over a later
federal tax lien stems from the decision in United States v. Security
Trust & Savings Bank [50-2 USTC ¶9492], 340 U.S. 47, 71, 95
L.Ed. 53, 71 S.Ct. 111 ."
[64-2 USTC ¶9520], 377
As in our case, the court in Monica Fuel faced several liens. In Monica
Fuel, the IRS made seven tax assessments between
September 18, 1989
June 4, 1990
. The Monica Fuel court concluded that on
August 30, 1989
--nearly three weeks prior to the first IRS assessments--the state tax
liens became sufficiently choate under the
test and therefore were first in time and first in right relative to the
IRS liens. See id. at 512.
United States of America
, Plaintiff v. State of
District Court, West.
[Code Secs. 6323 and
7403 --Result unchanged
by the Tax Reform Act of 1986 ]
Lien for taxes: Priority: State taxes.--The U.S. was granted
summary judgment in a suit brought against
for the wrongful conversion of a tax lien interest. The state was not
immune from suit because federal judicial power extends to all cases
brought by the
The state's characterization of its tax warrant as a judgment was not
binding because federal law controlled on the issue of priority. Since
the state tax lien was quasi-judicial under federal law, the first in
time-first in right rule applied and the federal lien, which arose
first, was superior.
O'Connor, Assistant United States Attorney, Buffalo, N.Y. 14202, Daniel
F. Brown, Department of Justice, Washington, D.C. 20530, for U.S.
Anthony R. Wannick, New York State Department of Law, Brooklyn, N.Y.,
John P. Balanis, New York State Department of Law, Albany, N.Y., Peter
B. Sullivan, New York State Department of Law, Buffalo, N.Y., for State
of New York.
District Court: In this action, brought pursuant to 26 U.S.C. §§7401
& 7403, judgment is sought for an alleged wrongful conversion of
a tax lien interest. The plaintiff has moved and the defendant has
cross-moved for summary judgment.
An agent or
delegate of the Secretary of the Treasury made an assessment
May 5, 1977
against Delta Protective Service, Inc. ("Delta") for unpaid
income tax withholding and Federal Insurance Contributions Act
("FICA") taxes. The assessment allegedly concerned taxes for
the first quarter of 1977 in the amount of $20,735.56 and penalties in
the amount of $2,060.10. Affidavit of T.F. O'Hare, sworn to
July 16, 1986
Notice of the federal tax lien was filed with
's Secretary of State in
July 1, 1977
and such notice was filed with the Erie County (N.Y.) Clerk
July 5, 1977
at Schedule A; Affidavit of Daniel F. Brown, exhibit 1, dated
August 6, 1986
The office of
the Industrial Commissioner of the State of
June 15, 1977
an industrial commission tax warrant against Delta for unpaid
unemployment insurance contributions and interest thereon in the total
amount of $14,068.82. Such warrant was filed
June 17, 1977
in the Erie County Clerk's judgment docket.
A state tax
compliance agent served
October 4, 1977
a specification and levy upon Peter J. Schmitt Co., Inc.
("Schmitt"), which had been a debtor of Delta. The state
thereby sought seizure of any funds owing by Schmitt to Delta for
application to Delta's state tax liabilities. The United States, acting
through the Internal Revenue Service ("the IRS"), served on
Schmitt November 10, 1977 a Notice of Levy in the amount of $22,160.71
("plus accruals") and thereby sought to seize any funds owing
to Delta for application to Delta's federal tax liabilities.
December 2, 1977
the sum of $2,435.80. That sum represented the entire amount Schmitt
owed Delta. Delta filed a bankruptcy petition
March 13, 1978
March 2, 1979
letter from the IRS to the Comptroller of the State of
, Department of Audit and Control, requested that the amount of
$2,435.80 be remitted to the IRS because of the federal government's
alleged superior interest in the funds Schmitt had owed Delta. By a
March 9, 1979
declined to turn over the funds and indicated that any remedy the IRS
might have would properly lie against Schmitt. This action for
conversion was commenced
December 5, 1980
raises in its memorandum of law in support of its cross-motion for
summary judgment, for the first time in this litigation, the claim that
venue is improper. No pre-answer motion was filed by the defendant and
the defendant failed to raise the issue of venue in its Answer. The
defense of improper venue has been waived pursuant to Fed.R.Civ.P. rule
12(h)(1) and the defendant cannot now, at this late date, be heard to
complain of any impropriety of venue.
also argues that the federal government may not maintain this conversion
action against it. It concedes that it may not invoke the protection of
the Eleventh Amendment but then claims, however, that the plaintiff may
not recover because the State's collection of taxes had been an act of
sovereignty and immune from challenge. The argument, while not clearly
stated, appears to be that the plaintiff may not recover here because
the State has not waived its immunity to suit.
the defendant's claim, it is well established that the United States
Constitution extends federal judicial power to controversies to which
is a party--U.S. Const. Art. III, §2
, cl. 1--and that the United States Supreme Court has original
jurisdiction over all cases in which a state is a party including suits
by the United States against a state--U.S. Const. Art. III, §2
, cl. 2;United States v. Texas, 143
621, 642 (1892);United States v. California, 328 F.2d 729, 732
(9th Cir.), cert. denied, 379 U.S. 817 (1964). Each state has
thus impliedly consented to being so sued. It is equally well
district courts have been granted concurrent jurisdiction over such
suits. 28 U.S.C. §1345; United States v. Illinois, 454 F.2d 297,
301 (7th Cir.), cert. denied, 406 U.S. 918 (1972).
jurisdiction of a federal district court extends to suits by the
against a state "without regard to the subject matter of such
controversies." United States v. Texas, supra, at 646. See
, supra, at 723. In addition, the
may avail itself of any type of action or suit in equity available to
creditors generally to collect debts. United States v. Harr, 27
F.2d 250 (5th Cir.), cert. denied, 278 U.S. 634 (1928). The
defendant is not immune to this suit for conversion.
law, an action for conversion lies against any person, including
attaching creditors, who wrongfully converts money or specific property.
A conversion of property is any unauthorized exercise of dominion or
control over the property by one who is not the owner thereof which
interferes with another person's superior possessory rights therein. Meese
v. Miller, 79 A.D.2d 237, 436 N.Y.S.2d 496, 500 (4th
); Bunge Corp. v. Manufacturers Hanover Trust Co., 37 A.D.2d 409,
325 N.Y.S.2d 983, 988 (1st
), aff'd., 31 N.Y.2d 223, 335 N.Y.S.2d 412 (1972). In order to
succeed in a cause of action for conversion, the plaintiff must
establish that its right to possession of the property was superior to
the defendant's and that the defendant exercised unauthorized control
over the property to the exclusion of the plaintiff's superior rights. Gold
Medal Products, Inc. v. Interstate Computer Services, Inc., 80
A.D.2d 600, 436 N.Y.S.2d 312, 313 (2d
appears to argue that the plaintiff has failed to show that Delta's debt
remains outstanding. 2
However, the affidavit of T.F. O'Hare states that the IRS has received
from Delta credits in the amount of $4,976.34 which left, as of
August 1, 1986
, an outstanding balance of $44,364.62. In addition, a Bankruptcy Court
order for a final meeting of creditors and notice of filing of final
accounts, suggests that, after payment of the trustee and attorney, the
trustee's account for Delta showed a balance on hand of $2,740.82. Such
amount could not have satisfied the federal government's lien. It is
clear to this Court that the plaintiff has proved the fact that Delta's
debt to it has not been satisfied.
The State also
implies that Schmitt's payment to it extinguished any lien the federal
government may have had in the property. No authority is cited for this
position. It is beyond debate that "[t]he transfer of property
subsequent to the attachment of the lien does not affect the lien, for
'it is the very nature and essence of a lien, that no matter into whose
hands the property goes, it passes cum onere . . . .' "United
States v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51, 57 (1958) (quoting from Burton v.
(13 Peters) 464, 483 (1839)). The State, therefore, received the funds
subject to any valid lien of the
further claims that the plaintiff failed to demand payment from it and
thus argues that the plaintiff may not pursue an action for conversion. See
Agawam Trading Corp. v. Mayer Malbin Co., 37 A.D.2d 946, 325
N.Y.S.2d 757 (4th Dep't 1971); Apex Ribbon Co. v. Knitwear Supplies,
Inc., 22 A.D.2d 766, 253 N.Y.S.2d 643, 644 (1st Dep't 1964).
March 2, 1979
letter from the
to the Comptroller of the State of
, Department of Audit and Control, stated the basis for the
's claim and demanded that the State remit $2,435.80 to the IRS. Exhibit
4 to Affidavit of David F. Brown, dated
August 6, 1986
March 9, 1979
letter reply from the Department of Audit and Control failed to remit
any funds and indicated that any remedy the IRS might have would lie
against Schmitt rather than versus the State.
at Exhibit 5. The exchange of those letters fulfilled the requirement
that a demand for the property be made and that such demand be denied
before a conversion action may be maintained.
argues, however, that the demand should have been made upon
's Department of Labor which had been aware of Delta's bankruptcy
action. Again, the State cites no authority for its position. The text
of the March 9th letter from the Department of Audit and Control
indicates that that office was familiar with this controversy between
and the State. It also fails to suggest that the Department of Labor be
contacted and in fact suggests that future correspondence should be
directed to the Comptroller. This Court finds no cause to hold deficient
the plaintiff's demand.
contends that, because the plaintiff has not brought legal action
against Schmitt, it should not be permitted to sue the State. While the
federal government may have a cause of action against Schmitt, a cause
of action in conversion clearly lies against the defendant. The State
has cited no authority, and this Court has found none, supporting the
contention that seeking judgment against Schmitt is a prerequisite to
seeking judgment against the State.
The core issue
is priority. Both the State and the federal government claim that their
lien has the upper hand. The question of priority is to be determined as
a matter of federal law. Aquilino v. United States [60-2
USTC¶9538 ], 363 U.S. 509, 513-514 (1960); United States v. Acri
¶9138 ], 348 U.S. 211, 213 (1955).
6321 of the Internal Revenue Code, 26 U.S.C. §6321
, provides that
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount * * * shall be a lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to such person."
lien arises when the assessment is made and it continues until the
amount is satisfied or it becomes unenforceable due to lapse of time. 26
U.S.C. §6322 . The
federal government's lien, therefore, arose
May 5, 1977
state-created lien must be "choate" under federal law to
compete with a federal tax lien. See
USTC ¶9191 ], 347 U.S. 81, 84 (1954). A state's lien is choate if
it sets forth the identity of the lienor, the property subject to the
lien and the amount of the lien. Ibid. An imperfected or
"inchoate" lien of a state is inferior to an unfiled federal
tax lien which arises before or after the date of such state-created
lien. U.S. v. Pioneer American Ins. Co. [63-2
USTC ¶9532 ], 374 U.S. 84, 88 (1963); United States v. Erlandson
¶9559 ], 311 F.Supp. 399, 400 (D.Minn. 1969).
As between a
perfected, choate state-created lien and a federal tax lien, the rule of
priority is that the "first in time is first in right."
v. New Britain, supra, at 87. That general rule of priority,
however, is modified by 26 U.S.C. §6323(a)
. That section provides that, with respect to claimants who are
purchasers, holders of security interests, mechanic's lienors and
judgment creditors, notice of a federal tax lien must be filed first in
time in accordance with the requirements of 26 U.S.C. §6323(f)
in order to be "first in right."
claims that it is a judgment lien creditor within the meaning of 26
U.S.C. §6323(a) .
Section 573, subd. 2, of
's Labor Law provides that a warrant for state unemployment taxes may be
filed with a county clerk and that such clerk
enter in the judgment docket the name of the employer mentioned in the
warrant and the amount of the contribution, interest, and penalties for
which the warrant is issued and the date when such copy is filed.
Thereupon the amount of such warrant so docketed shall become a lien
upon the title to and interest in real property and chattels real of the
employer against whom the warrant is issued in the same manner as a
judgment duly docketed in the office of such clerk."
the State's characterization of its tax warrants as a judgment is not
binding upon this Court.United States v. Acri, supra, at 213
(1955); United States v. Gilbert Associates [53-1
USTC ¶9291 ], 345 U.S. 361, 363-365 (1953). Treasury Regulations
define "judgment lien creditor" as
who has obtained a valid judgment, in a court of record and of competent
jurisdiction, for the recovery of specifically designated property or
for a certain sum of money. * * * The term 'judgment' does not include
the determination of a quasi-judicial body or of an individual acting in
a quasi-judicial capacity such as the action of State taxing
authorities." 26 C.F.R. §301.6323(h)-1(g)
despite the State having filed its tax warrant with the county clerk,
which is deemed, under its law, to be a judgment just the same as any
other judgment docketed with the clerk, the State's tax warrant is not
the judgment of a court of record. Rather, it is simply a determination
by an individual acting in a quasi-judicial capacity. As such, the
defendant cannot properly be construed to qualify as a judgment creditor
under federal law. The parties' competing claims of priority must,
therefore, be determined under the general rule of "first in
time--first in right."
plaintiff's tax lien arose, pursuant to 26 U.S.C. §6321
, in "all property and rights to property, whether real or
personal," of the taxpayer on
May 5, 1977
--the date of the assessment. The date for the comparison is the date
upon which the State's tax lien became "choate." As the
plaintiff notes, section 573 of the Labor Law provides that the
docketing of the state tax warrant creates a lien upon "the title
to and interest in real property and chattels real of the
employer." The State's docketing of the warrant on June 17, 1977
gave it a lien only upon Delta's real property and failed to give it a
lien upon Delta' personal property, such as the payment due from
Schmitt. The State's lien became choate as to the money owed to Delta
only upon the
October 4, 1977
levy. In re Reiber's Inn of Westchester, Inc., 1 B.R. 304,
307-308 (Bkrptcy S.D.N.Y. 1979), aff'd, 3 B.R. 706, 708 (S.D.N.Y.
1980). Thus, the State's lien came later in time than the plaintiff's
lien. The latter having come first in time is first in right.
further argues that its lien arises from the fact that the unsatisfied
warrant was in the possession of a tax compliance agent of
's Commission of Labor who, pursuant to section 573, was acting as a
deputy sheriff on the behalf of a judgment creditor. The State suggests
that it is a judgment creditor pursuant to section
's Civil Practice Law and Rules. However, that section requires
perfection by levy and fails to advance the defendant's position. Thriftway
Auto Rental Corp. [72-1
USTC¶9311 ], 457 F.2d 409, 411 (2d Cir. 1972); In re Reiber's
Inn of Westchester, Inc., supra, at 308.
it is hereby ORDERED that the defendant's motion for summary judgment is
denied and that the plaintiff's motion for summary judgment is granted.
The amount claimed to be owed as of
August 1, 1986
The defendant's papers in support of its contentions are extraordinarily
¶9389]United States of America, Plaintiff v. J. Francyl Howard, a/k/a
J. F. Howard; Mary G. Howard, wife of J. Francyl Howard; James P.
Howard; Elaine M. Howard, wife of James P. Howard; Mary Anice Howard
Roe; George J. Roe, husband of Mary Anice Howard Roe; Tyba Manufacturing
Co., an Oregon corporation; Tyba Pulp Corp., an Oregon corporation; Eli
E. Bangs, Individually and as President of Tyba Manufacturing Co.;
Sherman E. Shine, Dean A. McKean and Clara McKean, a copartnership d/b/a
Lebanon Electric Co., and Dean A. McKean and Clara McKean, Individually,
d/b/a Lebanon Electric Co.; County of Linn, State of Oregon; Oregon
State Tax Commission; Department of Employment, State of Oregon; and Lou
Scott, and City of Albany, an Oregon municipal corporation, Defendants
S. District Court, Dist. Ore., Civil No. 65-155, 254 FSupp 499, 4/22/66
[1954 Code Sec. 6323]
Tax liens: Priority.--Liens for federal taxes were superior to
subsequent liens for local taxes. The relative priority of federal tax
liens is a matter of federal law, not state law, and a municipality may
not avoid the priority rules by characterizing local liens as expenses
Lezak, United States Attorney, Jack G. Collins, Roger G. Rose, Assistant
United States Attorneys, U. S. Court House, Portland, Ore., for
plaintiffs. Nels Peterson, Donald H. Londer, Mercedes F. Deiz, 300 S. W.
Madison, Portland, Ore., Courtney R. Johns, P. O. Box 672, Albany, Ore.,
Merle A. Long, 425 W.
, for defendant.
on the issues now before the Court, are the relative rights and
priorities of the tax lien claims of the plaintiff, the title of
, acquired through county tax lien foreclosure proceedings culminating
in a sheriff's deed, as to Tracts No. I and III, and the rights of
defendant, City of Albany, under a later conveyance from Linn County to
Lots 1 through 6 of Block 2, Lots 1 through 5 of Block 3, and all of
Block 5 of Tract I. Since the paramount rights of the City of
are dependent on the nature of the title acquired by the
on the tax foreclosure, my decision on the rights of the county will
dispose of the major issue raised by the city. However, the city, in
addition to its claim under the conveyance from the county, claims a
sewer improvement assessment lien for $83.67 assessed on
October 24, 1962
, and the same type of a lien in the sum of $34.50 assessed on the 24th
day of January, 1962, against the property which was later conveyed by
to the city.
In the spring
commenced a foreclosure suit in the Circuit Court of the State of
, for the purpose of foreclosing its tax liens against said tracts for
the assessments made on October 15th in the tax years 1960-1961,
1961-1962 and 1962-1963. years 1960-1961, 1961-1962 and 1962-1963.
of were named as parties defendant in said foreclosure suit. A final
decree was entered in said suit on
April 1, 1963
, foreclosing said liens and directing the sheriff to issue a sheriff's
certificate of sale to defendant
. Later, the sheriff, pursuant to law, issued his deeds to said county
purporting to convey the real property with which we are here concerned.
Later, as above mentioned, pursuant to the provisions of ORS 310.280,
defendant city exercised its rights to purchase the real property
subject to its sewer assessment liens. The deed from the county to the
city, being dated
September 3, 1965
, and recorded on
September 27, 1965
. The parties agree that on
December 6, 1961
, the tax liens of the
attached to and became valid and subsisting liens on the real
property described in said Tracts I and III.
circumstances, the validity of the tax foreclosure proceeding would be
law. Guthrie v. Ham, 159
50, 76 P. 2d 292 (1938); Murphy v.
423, 264 P. 2d 1040, 266 P. 2d 1065 (1963).
validity of plaintiff's lien is conceded, and the United States was not
made a party pursuant to the provisions of 28 U. S. C. §2410(a)(b), 1
and since the statute under construction, is federal rather than state,
the decisions of the United States Courts must govern. Empire State
Collateral Co. v. Bay Realty Corp., 232 F. Supp. 330 (E. D. N. Y.
1964); Aquilino v. United States [60-2 USTC ¶9538], 363
509 (1960). Furthermore, a municipality may not avoid the priority rules
of federal tax liens by characterizing local liens as expenses of sale. United
States v. Buffalo Savings Bank [63-1 USTC ¶9166], 371
228 (1963). In Buffalo Savings Bank the question involved was the
distribution of the proceeds of a sale of real property on a mortgage
foreclosure proceeding instituted by the bank. The state court held that
real estate taxes which became liens subsequent to the government's
federal tax liens should be paid out of the proceeds of sale, as part of
the expenses of the sale, prior to the payment of the government lien.
The Supreme Court reversed stating, ". . . federal tax liens have
priority over subsequently accruing liens for local real estate taxes,
even though the burden of the local taxes in the event of a shortage
would fall upon the mortgagee whose claim under state law is subordinate
to local tax liens. . . ." The principle that federal tax liens are
superior to subsequent local tax liens, despite the fact that, under
state law, local tax liens have priority over earlier liens, was first
established in United States v. City of New Britain [54-1 USTC ¶9191],
347 U. S. 81 (1954). The same general principles are stated in United
States v. Vermont [64-2 USTC ¶9520], 377
351 (1964) and United States v. Pioneer American Ins. Co. [63-2
USTC ¶9532], 374
84 (1963). I find no distinction between the general lien of the county
and its title against those under the sewage assessment lien of the
city. For that matter, the assessment lien of the city was probably
merged in the title which it later acquired.
It is my
finding and conclusion that plaintiff has a first, prior and superior
right and lien on the real property described as Tracts I and III and
that out of the proceeds of the sale in this proceeding, the agreed
amounts owing to plaintiff on its tax liens, as shown in the pre-trial
order, shall first be paid. Tract No. III should be first sold and if
the proceeds are not sufficient to pay plaintiff's claims, interest and
costs, then that portion of Tract I, if any, now owned by the county, or
those claiming under the county, if any, (excepting the city) shall be
sold, and if those proceeds, together with the proceeds of Tract III
shall not be sufficient to satisfy plaintiff's claims, then that portion
of Tract I, previously conveyed to the city, shalll be sold and the
proceeds of said sale applied toward the satisfaction of the balance of
the amounts due plaintiff.
or any one of the defendants, may purchase at such sale. Plaintiff shall
be entitled to a deficiency judgment against J. Francyl Howard and Mary
G. Howard, husband and wife, for the unsatisfied portion, if any, of its
claims as finally fixed in the decree. Plaintiff is entitled to its
costs and disbursements, except as to the fraud claims against certain
plaintiff shall forthwith prepare, serve and present an appropriate
shall serve as my findings and conclusions on the issues here presented.
28 U. S. C. §2410(a)(b).
Under the conditions prescribed in this section and section 1444 of this
title for the protection of the United States, the United States may be
named a party in any civil action or suit in any district court, or in
any State court having jurisdiction of the subject matter, to quiet
title to or for the foreclosure of a mortgage or other lien upon real or
personal property on which the United States has or claims a mortgage or
complaint shall set forth with particularity the nature of the interest
or lien of the
. In actions in the State courts service upon the United States shall be
made by serving the process of the court with a copy of the complaint
upon the United States attorney for the district in which the action is
brought or upon an assistant United States attorney or clerical employee
designated by the United States attorney in writing filed with the clerk
of the court in which the action is brought and by sending copies of the
process and complaint, by registered mail, or by certified mail, to the
Attorney General of the United States at Washington, District of
Columbia. In such actions the
may appear and answer, plead or demur within sixty days after such
service or such further time as the court may allow."
* * *
¶9846] In the Matter of the Estate of Vincent M. Igoe, Respondent v.
United States Internal Revenue Service, Appellant
Court of Mo., No. 68315, 10/14/86
[Code Secs. 6321 and
Lien for taxes: Priority: State law.--Homestead and family
allowances allowed under a Missouri state statute took priority over
assessed federal tax liens in an insolvent estate.
and family allowances were debts of the estate and not debts of the tax-
delinquent decedent. The IRS did not object to the payment of funeral
expenses or attorneys' fees incurred in
istering the estate (expenses that the court stated were similar to
homestead and family allowances) and the state statute gave priority to
homestead and family allowances over funeral expenses.
appeal was first heard in the Missouri Court of Appeals, Eastern
District, and decided by an opinion authored by the Honorable
ert O. Snyder. The appeal was then transferred to this Court pursuant to
The appeal has
now been heard in this Court and the Court adopts the opinion of Judge
Snyder as its decision.
States Internal Revenue Service appeals from a judgment of the Probate
Division of the Circuit Court of the City of
, which gave priority to homestead and family allowances over a federal
tax lien in an insolvent estate. The judgment is affirmed.
Igoe died on
June 28, 1983
. The decedent had filed a delinquent 1980 federal income tax return in
1981. In 1982, the IRS filed notice of a federal tax lien with respect
to the unpaid 1980 tax liability. On
January 7, 1983
, the decedent paid $43,989.94 of his delinquent taxes to the IRS. No
other payments to the IRS were made prior to decedent's death. After
decedent's death, the IRS filed a proof of claim against the estate in
the amount of $81,607.40 for the unpaid tax balance, interest and
Igoe, the surviving spouse and
istratrix of the estate filed a petition seeking her homestead allowance
of $7,500.00 pursuant to section 474.290, RSMo 1978. In addition, the
guardian of the decedent's six minor children from a previous marriage
claimed the right to the family allowance authorized by section 474.260.
objected to the claims of the surviving spouse and minor children,
contending that under section
6321 of the Internal Revenue Code of 1954, the IRS tax lien had
priority because it was effective before decedent's death.
December 6, 1984
, the trial court ruled that the IRS tax lien "does not take
priority over costs, expenses of
istration, exempt property, family and homestead allowances, and funeral
expenses under section 473.397 RSMo." The court awarded $7,500.00
to Cheryl A. Igoe, the surviving spouse, less $1,485.00 for business
furniture she elected to keep. The court awarded $28,888.00 as a
reasonable family allowance for the six surviving minor children. The
decedent's estate was insufficient to satisfy both the tax lien and the
homestead and family allowances.
appealed, alleging that as a matter of law the trial court erred by
ruling that homestead and family allowances "primed," that is,
had priority over, assessed federal tax liens. The point is denied and
the trial court's judgment allowing the homestead and family allowances
court based its judgment on section 473.397, RSMo 1978, which classifies
and sets forth the priority of claims against a decedent's estate.
CLASSIFICATION OF CLAIMS AND STATUTORY ALLOWANCES
All claims and
statutory allowances against the estate of a decedent shall be divided
into the following classes:
property, family and homestead allowances;
(5) Debts and
taxes due to the
United States of America
of the last sickness, wages of servants, claims for medicine and medical
attendance during the last sickness, and the reasonable cost of a
(7) Debts and
taxes due the state of
, any county, or any political subdivision of the state of
rendered against the decedent in his lifetime and judgments rendered
upon attachments levied upon property of decedent during his lifetime;
(9) All other
claims not barred by section 473.360.
court applied the
statute and ruled that the family and homestead allowances claimed
against the decedent's estate had priority over the IRS tax lien.
of a federal tax lien over other claims is a question of federal law. United
States v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51, 56-57 (1958). The case under review,
then, requires an interpretation of federal statutes.
6321 of the Internal Revenue Code (26 U.S.C. sec.
6321 (1982)) establishes a lien against the property of a person
liable for taxes. It reads:
6321 . LIEN FOR TAXES
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
agree that state law determines who owns property. Aquilino v. United
USTC ¶9538 ], 363 U.S. 509, 512 (1960). United States v. Bess
¶9595 ], 357 U.S. 51, 55 (1958).
did not own property after his death according to
law. His property passed to his heirs at law inasmuch as he died
intestate. §473.260, RSMo 1978. But before it reaches the heirs at law
it flows through the estate where the
istratrix in this case is chargeable with expenses of
istration, claims, and allowances to the family. South St. Joseph
Live Stock Exchange v. St. Joseph Stock Yards Bank, 223 Mo. App.
623, 16 S.W.2d 722, 727 (1929). Because this estate was insolvent, no
property ever reached the heirs at law.
argues that the federal tax lien arose prior to, and was not
extinguished by, decedent's death. Therefore, any party who takes
possession of the decedent's property takes subject to the pre-existing
tax lien. Appellant also supports its argument by relying on I.R.C. sections
6321 and 6323 which
create the federal lien for taxes and establish its priority. Section
6323 specifically lists those claims having superiority over the
federal tax lien. Because homestead and family allowances are not
listed, the IRS argues that they are not to be given priority.
It is doubtful
if a lien under I.R.C. section
6321 automatically attaches to property in the estate of a
delinquent taxpayer. The IRS lien attaches to the property of the
taxpayer only by the plain terms of section
6321 . Because the estate assets are no longer the property of the
taxpayer, it is difficult to see how the lien could be effective.
The IRS cites
v. Bess, supra, for authority that a lien for tax liability
attached to the cash surrender value of a life insurance policy after
the death of the taxpayer. The case is distinguishable, however, because
no probate estate was involved as there is in the case under review.
United States [62-2
USTC ¶9773 ], 309 F.2d 45, 46-48 (5th Cir. 1962), cert. denied,
372 U.S. 913 (1963), also cited by the IRS, dealt with a homestead
provision of the state constitution, a set of facts not similar to those
before this court.
authorities relating to the issue of the priority of federal tax liens
are not consistent. Some courts have ruled that claims to homestead
rights are superior to federal tax liens while others have held to the
contrary. Comparison of cases in this area is made even more difficult
because both state statutes and fact patterns differ from case to case.
v. Pilley, 5 A.F.T.R.2d 437 (Probate Ct. Tenn, 1959), the court
examined the priority of a federal tax lien on a decedent's estate. The
decedent's wife filed a petition for a year's support, homestead and
filed a claim for unpaid taxes for which a lien was filed prior to
decedent's death. The amount of taxes owed exceeded the assets of the
petition for a year's support was denied because she failed to comply
with the state statute which required her to dissent from her husband's
will in open court within nine months after probate of the will.
at 430. The widow was granted her homestead right because the court
ruled it had vested prior to the liens on her deceased husband's estate.
at 441. But see
v. Heasly, 170 F.Supp. 738 (D.C.N.D. 1959). In addition, the
case does not answer the question of whether the court would have
granted the year's support had the widow timely filed her petition.
argues that the government should have proceeded under 31 U.S.C. section
3713 (1982) which provides as follows:
of Government Claims
(a)(1) A claim
of the United States Government shall be paid first when--
(A) a person
indebted to the Government is insolvent and--
(i) The debtor
without enough property to pay all debts makes a voluntary assignment of
of the debtor, if absent, is attached; or
(iii) an act
of bankruptcy is committed; or
estate of a deceased debtor, in the custody of the executor or
istrator, is not enough to pay all debts of the debtor.
subsection does not apply to a case under title 11.
representative of a person or an estate (except a trustee acting
under title 11) paying any part of a debt of the person or estate before
paying a claim of the Government is liable to the extent of the payment
for unpaid claims of the Government. [Emphasis supplied].
argues that this section of the United States Code is applicable because
the decedent's estate was insolvent.
A case decided
under section 191 and
section 192 ,
forerunners of the current section 3713, held that a claim for one
year's support and an exemption for a minor child was not a debt
of the decedent and thus took priority over the tax claims of the
federal government. In re Carl's Estate, 94 N.E.2d 239, 243 (Ohio
Probate Ct. 1950). This case involved the priority given the federal
government's claim for income and social security taxes owed by the
decedent. The court reasoned that the exemption and year's support were
not debts of the decedent but charges on the estate.
v. Dennett, 626 P.2d 473 (
1981), the court held that the state statute granting priority to
istrative expenses of an estate over the debts of the deceased is
controlling as to claims against the estate.
at 475. In Martin, the federal government filed a tax lien prior
to decedent's death. The lien was created under I.R.C. section
6321 . The priority of the lien was determined by 31 U.S.C. section
191 (now section 3713). The court ruled that section
191 accords federal priority over only those debts "due from
the deceased," and not debts of the estate. The court held that the
istrative expenses of an estate have priority over a federal tax lien
filed prior to decedent's death.
This case is
decided by using the Martin rationale that homestead and family
allowances are debts of the estate and not debts of the decedent.
and family allowances are similar to funeral expenses and costs of
istration. Section 473.397 gives priority to homestead and family
allowances over funeral expenses.
did not object to the payment from Mr. Igoe's estate of his funeral
expenses nor the attorney's fees incurred in
istering the estate. These estate debts are not listed in I.R.C. section
6323 . Yet they were allowed without appellant's protest suggestion
that section 6323 is
not as all inclusive a list as the
would have this court believe.
sought relief in a
state court and is therefore bound by the same rules which bind and
govern other litigants. Pollyea v. Grodsky, 315 S.W.2d 460,
¶9431]Wm. N. Cash, Plaintiff and Cross-Defendant v. Don Deramus, etc.,
et al., Defendants; Pacific Employers Insurance Company, etc.,
Defendant, Cross-Defendant and Respondent; United States of America,
Cross-Defendant and Appellant; State of California, Defendant,
Cross-Complainant and Respondent
Department, Superior Court, State of
, No. C-709, 4/6/76
[Code Sec. 6323]
Lien for taxes: Priority of claims: Security interest: Judgment lien
creditor.--The California appellate court reversed the finding of
the lower court and held that the government's perfected lien had
priority over the unperfected claim of a secured creditor. The creditor
had a security interest in an obligatory disbursement agreement and
claimed that such interest was protected against the government's claim
since the government was a judgment lien creditor. However, since the
court did not agree that the government was a judgment lien creditor,
the creditor's argument was found to be without merit.
, First American Bldg., 675 N.
, for plaintiff and cross-defendant. Montgomery, Bottum, Regal &
McNally, 1100 Glendon Ave., Suite 1250, Los Angeles, Calif., for Pacific
Employers Ins. Co. William D. Keller, United States Attorney, Charles H.
Magnuson, Mason C. Lewis, Assistant United States Attorneys,
ert L. Meyer, United States Attorney, Bruce A. Tondre, Los Angeles,
Calif., for United States. Harry S. Fenton, Joel G. Philipp, Department
of Public Works, 1120 N St., P. O. Box 1499, Sacramento, Calif., for
State of Calif.
ert L. Martin, Wild, Christensen, Carter & Blank, Eighth Floor, Helm
Bldg., Fresno, Calif., for John Birges.
Adrian W. Adams, Municipal Court. Appellate Judges, Memorandum Opinion
written by John L. Cole, Arthur K. Marshall, (Presiding Judge) and
Arthur L. Alarcon concurred.
Opinion and Judgment
appeals from a summary judgment in favor of Pacific Employers Insurance
Company (Pacific Employers). The two parties assert conflicting claims
to a sum of money interpleaded in the court below by the State of
. The facts are undisputed; the issue presented is the relative priority
of a tax lien claim of the
against Don Deramus and of a claim by Pacific Employers which paid out
money pursuant to a bond it had issued with Deramus as obligor. We
conclude that the claim of the
is entitled to priority. Accordingly, we reverse.
I. This case
arises out of a
May 29, 1969
contract for construction work on Highway 5, entered into by Deramus and
the State of
. Pursuant to sections 4200, et seq., of the Government Code,
Deramus filed with the State a labor and material bond and a performance
bond executed by Pacific Employers, as surety. A
contract--"Agreement of Indemnity"--was executed by Deramus in
favor of Pacific Employers in consideration of the issuance of said
On October 27,
1969, a notice of federal tax lien with respect to a May 23, 1969
assessment against Deramus, the current balance of which is $230.11, was
filed in Riverside County; additionally, on December 15, 1969, a notice
of federal tax lien, with respect to a September 26, 1969 assessment
against Deramus in the amount of $6,643.21, was filed in Riverside
County. No issue has been raised by any of the parties to this action
concerning the validity, under the federal and state laws, of the
notices of federal tax liens, as to their having been perfected by the
filings of October and December of 1969. 2
December 4, 1969
, William Cash filed a verified Notice of Claim and Notice to Withhold
with the State for unpaid wages. Pursuant to the terms of sections
1190.1, et seq. of the Code of Civil Procedure, the state
withheld from Deramus certain sums to answer the Notices of Claim and
Notices to Withhold filed by Cash and other State notice claimants.
These sums were interpleaded.
its obligations under its bonds, Pacific Employers on June 24 and 27,
1970, made payments of $1,880.00 to Cash and paid various sums to other
claimants for unpaid wages and materials supplied by them to Deramus.
United States contends that the previously perfected tax liens of
October 27 and
December 15, 1969
, take priority over unperfected security interests of Pacific
Employers, which arose at the time of the disbursements made by that
company under its bond obligations on June 24 and 27, 1970. Pacific
Employers, on the other hand, argues that it has a security interest in
qualified property covered by the terms of the written agreement with
Don Deramus entered into before the tax lien was filed.
United States did perfect its federal tax liens, which form the basis of
its claim to the interpleaded fund in this case, prior to the actual
disbursement of funds by Pacific Employers in 1970 under its bond
obligations, the question before us is whether federal law, when read in
conjunction with state law, includes any provision which nevertheless
would give priority to Pacific Employers' interest.
26 U. S. C.
section 6323(c)(1) provides:
general.--To the extent provided in this subsection, even though notice
of a lien imposed by section 6321 has been filed, such lien shall not be
valid with respect to a security interest which came into existence
after tax lien filing but which
is in qualified property covered by the terms of a written agreement
entered into before tax lien filing and constituting--
a commercial transactions financing agreement,
a real property construction or improvement financing agreement, or
an obligatory disbursement agreement, and
is protected under local law against a judgment lien arising, as of the
time of tax lien filing, out of an unsecured obligation."
concedes that Pacific Employers has a "security interest" in
"qualified property covered by the terms of a written agreement
entered into before tax lien filing" which constitutes an
"obligatory disbursement agreement." The issue, then is what
the statute means by requiring the security interest to be
"protected under local law against a judgment lien arising, as of
the time of tax lien filing, out of an unsecured obligation."
Employers' argument is, in essence, that under
law a judgment itself has no effect on personal property; when the
abstract is recorded the judgment becomes a lien on real property in the
county of recordation. 3
Since the interpleaded funds in question here constitute personal
property, the argument continues, Pacific Employers' security interest
is "protected under local law against a judgment lien" within
the meaning of 26 U. S. C. section 6323, subdivision (c)(1).
also recognizes that it has been held that, under California law, in
order that a "judgment creditor may obtain a lien upon the personal
property under a judgment, it is necessary that a writ of execution
issued under the judgment be levied on said property . . ." (Miller
v. Bank of America, N. T. & S. A. [9 Cir. 1948] [48-1 USTC ¶9185]
166 F. 2d 415, 419.) It is urged, without citation of authority, that
the lien which is created on real property by recording an abstract of
judgment "is much different" from the lien created by a levy
of a writ of execution. ". . . Since it is the levy and not the
mere issuance of the writ which creates the lien . . ., as between
execution creditors priority goes to the creditor who first
Proc. [2d ed. 1971] p. 3448.) We do not see why such a creditor's
priority against one in the position of Pacific Employers is not as good
as that of a judgment creditor who achieves priority over one with an
interest in land by means of a recorded abstract of judgment.
with Pacific Employers' argument is that under 26 U. S. C. section
6323(c)(1) the reference to "judgment lien" refers to just
such a hypothetical judgment lien creditor.
legislative history of the Federal Tax Lien Act of 1966 (Public Law
89-719), which added subsection (c) to 26 U. S. C. section 6323,
indicates that Congress did not intend the construction argued for by
Pacific Employers. Senate Report Number 1708, 89th Congress, 2d Session
(1966), in its general explanation of subsection (c), states:
priority over filed tax liens for advances made after, or with respect
to property coming into existence after, the filing of a tax lien is to
occur only if local law gives priority in such cases. This protection
under local law must be provided against a judgment lien creditor
as of the time of the tax lien filing for the priority to be
available." (Emphasis added.) (U. S. Code Cong. and Admin. News
 p. 3728.)
decisions control the interpretation of federal statutes dealing with
tax lien priorities (Ersa, Inc. v. Dudley [3 Cir. 1956] [56-2
USTC ¶9621] 234 F. 2d 178, 180; United States v. Hunt [10 Cir.
1975] [75-1 USTC ¶9327] 513 F. 2d 129, 133); but the question whether
and to what extent a lien is created is one of state law (Dugan v.
Missouri Neon & Plastic Advertising Company [8 Cir. 1973] [73-1
USTC ¶9211] 472 F. 2d 944, 949). Miller v. Bank of America, supra,
denied priority to a judgment creditor whose judgment was obtained
before the competing tax lien was secured. It did so because the
judgment creditor had not secured a lien upon the debtor--taxpayer's
personal property (a bank deposit) by levying execution thereon. That
decision controls us here. Pacific Employers simply is not protected
from a levying judgment creditor.
fortified in this result by the observation it would be absurd to
conclude that Congress intended to give priority to all security
agreements merely because they pertain to personal property, thus
placing the government at a tremendous disadvantage in enforcing its tax
reject Pacific Employers' basic argument for the reasons stated above,
we need not dwell on the subordinate contention that a surety cannot
protect itself under the Uniform Commercial Code and therefore need not
file a financial statement. The remedy for that situation is
legislative, not judicial.
In view of our
conclusion, we find it unnecessary to reach appellant's second
contention, namely, that respondent Pacific Employers is not entitled to
recover for attorneys' fees and other costs.
Paragraph Sixth of the contract provides: "That should The
Contractor in 'Such Bonds' be declared in default by the obligee or
obligees therein named, then The Company shall have the right to collect
and receive all reserved percentages and all money due and to become due
The Contractor under any such contracts guaranteed by 'Such Bonds', and
to hold and apply the same as collateral to this Agreement of Indemnity
. . ."
The notices of federal tax liens related to liens which arose by
operation of federal law against Don Deramus upon his failure to pay an
Internal Revenue assessment after demand. These liens are provided for
in 26 U. S. C. section 6321:
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, additional amount, addition
to tax, or assessable penalty, together with any costs that may accrue
in addition thereto) shall be a lien in favor of the United States upon
all property and rights to property, whether real or personal, belonging
to such person."
of federal law regarding the relative priority of tax liens, vis-a-vis
other claims against the taxpayer, appear in 26 U. S. C. section
imposed by section 6321 shall not be valid as against any purchaser,
holder of a security interest, mechanic's lienor, or judgment lien
creditor until notice thereof which meets the requirements of subsection
(f) has been filed by the Secretary or his delegate."
This is a correct statement of law. The
judgment lien statute is Code of Civil Procedure section 674. It
provides, inter alia, that the recordation of an abstract of
judgment with the county recorder creates a lien on all non-exempt real
property of the judgment debtor in that county.
United States of America
, Plaintiff v. Bollinger Mobile Home Sales, Inc., et al., Defendants
S. District Court, No Dist. Tex., Dallas Div., Civil Action No.
3-75-1177-H, 492 FSupp 496, 7/9/80
[Code Sec. 6323]
Lien for taxes: Priority over third parties: Place for filing
notice.--A federal tax lien on the dealer reserve accounts of a
taxpayer was entitled to priority over the judgment lien of another
claimant, who failed to establish that he was a lien creditor under
Texas law and thus was not entitled to priority. The federal lien was
properly filed in the office of the county clerk in the county where the
taxpayer had his principal place of business at the time of filing in
accordance with Texas law and Code Sec. 6323 and was not a security
interest within the meaning of the Texas Uniform Commercial Code so the
place of filing was not governed by that statute.
McCown, United States Attorney, Charles Cabaniss, Assistant United
States Attorney, Dallas, Texas 75202, Kenneth J. Mighell, United States
Attorney, Fort Worth, Texas 78102, Howard A. Weinberger, William Guild,
Johnny D. Mixon, Joe Earnest, Department of Justice, Washington, D. C.
20530, for plaintiff. Thomas R. Helfand,
ert L. Trimble, Winstead, McGuire, Sechrest & Trimble, 1700
Mercantile Dallas Building, Dallas, Texas 75201, for Sam & E. W.
Bollinger, John B. Garrett, Garrett, Burkett & Bodin, Suite 102 Oil
& Gas Building, Fort Worth, Texas 76102, for Commercial Credit Corp.
Arch A. Beasley, 2001 Bryan Tower, Dallas,
75201, for General Electric, defendants.
This case is
before the Court on cross motions for summary judgment filed by
Plaintiff United States of
May 16, 1980
, and by Defendant Sam Bollinger on
June 6, 1980
. The facts are not disputed. The sole question for the Court is whether
the federal tax lien on the property of taxpayer-Defendant Bollinger
Mobile Home Sales, Inc. ("BMHS") (specifically, certain dealer
reserve accounts of BMHS currently held by Defendants General Electric
Credit Corporation and Commercial Credit Corporation) is entitled to
priority over the judgment lien which Defendant Sam Bollinger asserts
against the same property.
Motion for Summary Judgment is GRANTED and Defendant's Motion for
Summary Judgment is DENIED.
determination of priorities, Plaintiff relies on its Notices of Federal
Tax Lien filed in
January 16, 1970
, and in
January 19, 1980
. Defendant relies on a judgment in favor of Bollinger Mobile Air
Conditioning, Inc. against BMHS, dated December 17, 1970, an abstract of
which judgment was filed of record in
, on January 14, 1971. Defendant contends that Plaintiff's Notice of Tax
Lien was not properly filed in accordance with the requirements of 26 U.
S. C. §6323(f)(1)(A)(ii), and therefore, that Defendant's lien as a
judgment creditor is superior to the federal tax lien.
finds that, prior to the adoption in
of the Uniform Tax Lien Registration Act, as
's Tex. Rev. Civ. Stat. Ann., Title 122A, art. 1.07C (effective January
1, 1972), the place of filing for notices required under 26
C. §§ 6323(f)(1)(A)(ii), (2)(B) was controlled by
's Tex. Rev. Civ. Stat. Ann., art. 6644, which contemplated that a
Notice of Federal Tax Lien affecting intangible personal property was to
be filed in the office of the county clerk in the county in which the
taxpayer-corporation had its principal place of business at the time of
filing. American Surety Co. of New York v. M-B Ise Kream Co., 38
S. W. 2d 118 (Tex. Civ. App.--Dallas, 1931), aff'd, 65 S. W. 2d
287 (Tex. Comm. App. 1933, holding approved); United States v. Ray
Thomas Gravel Co., 373 S. W. 2d 333 (Tex. Civ. App.--Waco, 1963), rev'd
on other grounds, 380 S. W. 2d 576 (Tex. 1964); Gulf Coast Marine
Ways v. The J. R. Hardee [52-2 USTC ¶9448], 107 F. Supp. 379, 383
(S. D. Tex. 1952). Plaintiff's filings were in accord with the
provisions of art. 6644 and its lien was perfected and entitled to
priority with regard to the dealer reserve accounts as against all
claimants not perfected prior to the dates of filing.
It is not
disputed by either party that, since 1972, art. 1.07C has controlled the
determination of the proper place for filing of Notices of Federal Tax
Lien. Nor can it be disputed that the cases cited above establish that,
prior to the enactment of art. 1.07C, the place of filing was controlled
by art. 6644 from the time of its enactment in 1923. Defendant contends,
however, that by the adoption of the Uniform Commercial Code in 1967
designated a different method for filing federal tax liens, which was in
effect from 1967 to
January 1, 1972
The Court does
not find persuasive the argument by Bollinger that place of filing was
controlled by Section 9.401 of the Tax. Bus. and Comm. Code. Defendant
cites no authority in support of the applicability of the Commercial
Code to the mechanics of the recording of tax liens or in support of the
argument that a federal tax lien may be a "security interest"
within the meaning of Tex. Bus. and Comm. Code §1.201(37). There are
cases that suggest the contrary, however, where, for the period between
1966 and 1972, Notices of Federal Tax Liens were deemed properly filed
for the purposes of §6323(f) if filed in Texas pursuant to art. 6644. See,
e.g., Kurio v.
[68-1 USTC ¶9382], 281 F. Supp. 252, 256 (S. D. Tex. 1968). In
sum, Plaintiff's Notice of Federal Tax Lien was properly filed.
Defendant has failed to establish that he enjoys the status of a
judgment lien creditor, under applicable
law, with regard to the dealer reserve accounts. Defendant admits that
these accounts are the intangible personal property of BMHS. In order to
perfect a judgment lien in
on personal property, a form of execution such as garnishment is
required; no lien on the personal property of the debtor is created by
filing an abstract of judgment. Donley v. Youngstown Sheet and Tube
Co., 328 S. W. 2d 192 (Tex. Civ. App.--Eastland, 1959, writ ref'd n.
r. e.), Herndon v. Cocke, 138 S. W. 2d 298 (Tex. Civ. App.--El
Paso, 1940, no writ); Fore v. United States [65-1 USTC ¶9101],
339 F. 2d 70 (5th Cir. 1965). Bollinger has not alleged that he sought a
writ of garnishment on his judgment in order to create the lien on the
personal property of BMHS. The Court, in any event, is unable to
conclude that these accounts were subject to garnishment because the
right of BMHS to receive the amounts held in the dealer reserve accounts
was and is subject to a number of contingencies. Alexander v.
Berkman, 3 S. W. 2d 864, 867 (Tex. Civ. App.--Waco, 1927, writ
ref'd); First National Bank of Burkburnett v. Friend, 23 S. W. 2d
482 (Tex. Civ. App.--Fort Worth, 1929, no writ); Uhlhorn v. Reid,
398 S. W. 2d 169 (Tex. Civ. App.--San Antonio, 1965, writ ref'd, n. r.
Under 26 U. S.
C. §6323(a), the federal tax lien becomes valid as against purchasers,
holders of security interests, mechanic's lienors and judgment lien
creditors only upon the filing of a notice thereof which meets the
requirements of §6323(f). The federal tax lien would be superior to any
competing claim even though the government failed to file or improperly
filed a Notice of Federal Tax Lien, unless the competing claim fell
within one of the four types specified in §6323(a). Therefore, if
Bollinger does not enjoy the status of a judgment lien creditor or one
of the other three classes of protected claimants, his claim would not
be entitled to priority over the federal tax lien even if the Court were
to hold that Plaintiff had improperly filed its Notice of Federal Tax
foregoing reasons, the Plaintiff's Motion for Summary Judgment on the
Issue of Priority of Liens is GRANTED, and Defendant's Motion for
Summary Judgment is DENIED. Plaintiff will submit to the Court by
Monday, July 14, 1980
, a proposed Final Judgment suitable for entry in this cause.
with the Memorandum Opinion filed on July 9, 1980 on the issue of
priority, and in accordance with the Stipulations between the United
States and Commercial Credit Corporation and between the United States
and General Electric Credit Corporation on the question of amount, it is
ADJUDGED, and DECREED as follows:
(1) That the
United States of America is entitled to recover all sums now due, or
hereafter to become due, from General Electric Credit Corporation and/or
from Commercial Credit Corporation to Bollinger Mobile Homes Sales, Inc.
from the proceeds of the dealer reserve accounts which are the subject
of this action;
(2) That none
of the named defendants are entitled to recover anything from General
Electric Credit Corporation or Commercial Credit Corporation by virtue
of any claim they might have had to the dealer reserve accounts of
Bollinger Mobile Home Sales, Inc. now held by General Electric Credit
Corporation and Commercial Credit Corporation;
(3) That the
United States of America recover $11,997 from General Electric Credit
Corporation as the full amount now due, or hereafter to become due, from
General Electric Credit Corporation to Bollinger Mobile Homes Sales,
Inc., from the proceeds of the dealer reserve account which is subject
to this action; and
(3) That the
United States of America recover $2,223.47 from Commercial Credit
Corporation as the full amount now due, or hereafter to become due, from
Commercial Credit Corporation to Bollinger Mobile Homes Sales, Inc.,
from the proceeds of the dealer reserve account which is subject to this
(4) That the
Default Judgment entered on May 14, 1980, against Bollinger Mobile Homes
Sales, Inc. in favor of the United States in that amount of $414,916.77
remain in full effect; and
(5) That all
parties to this action bear their own costs of action.
¶9396]Laurence B. Howard, Jr., Petitioner (and Respondent) v.
United States of America
, Respondent (and Petitioner) and William F. Howard, Trustee, Respondent
Court of Tenn., at
, 566 SW2d 521,
[Code Secs. 6321, 6331 and 6334--result unchanged by '76 Tax Reform Act]
Spendthrift trust: Income interest: Subject to tax lien: State v.
Federal law.--Income from a spendthrift trust was subject to a lien
for the payment of federal taxes. Under federal law, the income right
was a property right reachable by a tax levy. Federal law, and not
state law, determined whether the income was exempt from federal
Sec. 6323--result unchanged by '76 Tax Reform Act]
Tax lien: Notice of: Filing: Legal registration: State v. federal
law.--Two certified notices of tax lien were legaly registered and
admissible as evidence in a state trial. They did not meet the state law
requirements for admissibility, but they were validly filed under
federal law, and federal law was held to be controlling.
Davis, Jr., Elliott Warner Jones, Waller, Lansden, Dortch & Davis,
One Commerce Place, Nashville, Tenn. 37239, for petitioner (and
respondent). Harold D. Hardin, United States Attorney,
, for respondent (and petitioner). M. Carr Ferguson, Assistant Attorney
General, Gilbert E. Andrews, Crombie J. D. Garrett, Carleton D. Powell,
Department of Justice, Washington, D. C. 20530, for respondent (and
petitioner). William F. Howard, pro se.
In this action
of interpleader, the principal inquiry is whether the income from a
spendthrift trust is subject to a lien for the payment of federal taxes.
The last will
and testament of Laurence B. Howard established a residuary trust with
his two sons, Laurence B. Howard, Jr. and William Felder Howard,
designated as income beneficiaries, with income payable quarterly during
their respective lives, and with the trust being terminated upon the
death of the survivor. Item VI(m) reads, in pertinent part, as follows:
the principal nor the income of the trust estates shall be liable for
the debts of any beneficiary nor shall the same be subject to seizure by
attachment, garnishment or execution, nor by any writ of proceeding at
law, in equity, in bankruptcy or receivership; nor shall the
beneficiaries thereof have the right or power to sell, assign, transfer,
pledge, mortgage or in any other manner encumber or anticipate or
dispose of their interest in the trust estates or in the income
agree, and we hold, that this language operates to create a spendthrift
It should be
emphasized that the income beneficiaries do not have the legal title to
the corpus of the trust estate, nor do they have any right to the use or
possession of any part of the corpus. They are purely income
September 24, 1974
, the Nashville District of the Internal Revenue Service served upon
William F. Howard, as trustee, a Notice of Levy reciting an indebtedness
in the sum of $27,068.95 owed by Laurence B. Howard, Jr., for federal
Laurence B. Howard, Jr., disputes the entitlement of the Internal
Revenue Service to levy upon the trust proceeds and makes other defenses
to the claim. 1
Chancellor, after a full evidentiary hearing, concluded that the federal
tax lien attached to the trust income while in the hands of the trustee.
The Court of Appeals "affirm[ed] the abstract legal conclusion of
the Chancellor that the Federal Government is entitled to attach income
from a spendthrift trust in spite of Tennessee Decisions and
Statute" but declined to affirm the Chancellor's award in favor of
the government on the basis of its view that the evidence necessary to
document the government's claim was not competent.
Is the income from a spendthrift trust subject to seizure in
satisfaction of a federal tax lien?
We respond to
the captioned question in the affirmative and thus affirm both the
Chancellor and the Court of Appeals as to this phase of the controversy.
We specify our reasoning in some detail in view of the fact that there
are no guiding precedents under
At first blush
the answer would appear to be determined by Section 26-601, T. C. A.,
which reads as follows:
Grounds for discovery and subjection--The creditor whose
execution has been returned unsatisfied, in whole or in part, may file a
bill in the chancery court against the defendant in the execution, and
any other person or corporation, to compel the discovery of any
property, including stocks, choses in action, or money due to such
defendant, or held in trust for him, except when the trust has been
created by, or the property so held has proceeded from some person other
than the defendant himself, and the trust is declared by will duly
recorded or deed duly registered. Provided, however, that where the
state of Tennessee shall be such judgment creditor, the chancery court
shall have jurisdiction to subject such property to the satisfaction of
the claims of the state, despite the fact that the trust has been
created or the property so held has proceeded from some person other
than the defendant himself and the trust declared by will duly recorded
or deed duly registered.
The history of
this statute is simultaneously significant and interesting. In 1831
abolished imprisonment for debt. 2
As stated in 35
Law Review 319, at 320, "[a]lthough this was entirely in
keeping with the moral sense of Tennesseans at the time, it did have the
effect of eliminating a part of the plaintiff's remedy at law."
decisions are conflicting, the case of Erwin v. Oldham, 14 Tenn.
185 (1834) (decided under the law as it existed prior to the adoption of
Chapter 11, Public Acts of 1832), is clear authority for the proposition
that in the absence of fraud, the court has no power to subject
"stocks, credits, and rights of action" held by a debtor to
the satisfaction of his indebtedness. The Court specifically relied upon
case of Donovan v. Finn, 1 Hopk. Ch. 59, 14 Am. Dec. 531 (N. Y.
1823), as "conclusively settling the point."
By Chapter 11,
Public Acts of 1832, the Tennessee Legislature enacted a statute
patterned after a
act designed to meet Donovan. This statute forms the basis for
Sec. 26-601, T. C. A.
Thus within a
two-year period, a
creditor lost the remedy of imprisonment for debt, but gained the right
to discover assets in equity and subject them to his demands.
equitable remedy was withheld for trust funds when the trust was created
by a third person by recorded will or registered deed. This provision
breathed the breath of life into spendthrift trusts in
. The landmark case is Jourolmon v. Massengill, 86 Tenn. 81, 5 S.
W. 719 (1887).
Court, in an opinion by Justice Lurton, held that the 1832 act was
"a rule of property, and . . . very many such trusts have been
created in reliance upon it."
at 126, 5 S. W. at 734.
proviso of Sec. 26-601, T. C. A., excepts from the application of the
statute cases where the state of
is the judgment creditor. This proviso, with additional language making
it retroactive, was adopted by Chapter 108, Public Acts of 1943, in an
abortive effort to reach the assets of three spendthrift trusts created
for Rogers Caldwell by his parents, in satisfaction of an indebtedness
to the state in an amount in excess of four million dollars. This Court,
in State v. Caldwell, 181
74, 178 S. W. 2d 624 (1944), declared the 1943 amendment "invalid
insofar as it is retrospective in character." The court declared
that the 1832 act was a rule of property and "not an exemption
statute for the benefit of poor debtors."
spendthrift trusts are solidly entrenched in our law and it is clear
that Sec. 26-601 is a rule of property and not an exemption statute.
If we were
dealing solely with
statutory and decisional law, we would be inclined to hold that the
income from spendthrift funds is insulated against the claims of all
creditors, including the Internal Revenue Service; however, such is not
clause 2 of the Constitution of the
contains the Supremacy Clause:
Constitution, and the laws of the United States which shall be made in
pursuance thereof; [and all treaties] shall be the supreme law of the
land; and the judges in every state shall be bound thereby, anything in
the Constitution of laws of any state to the contrary notwithstanding.
paragraph requires that all judges, state and federal, "shall be
bound by oath or affirmation, to support this Constitution."
and collection of federal income taxes are governed by federal laws
deriving their validity from the sixteenth amendment to the federal
constitution. As a general rule, where there is a conflict between state
laws and federal laws, the latter must prevail. United States v.
Dallas National Bank [46-1 USTC ¶9117], 152 F. 2d 582 (5th Cir.
Under 26 U. S.
C. Sec. 6321, it is provided that unpaid federal taxes, after demand
shall be a
lien in favor of the
upon all property and rights to property, whether real or
personal, belonging to such person. (Emphasis supplied).
There is no
exception in favor of income beneficiaries under spendthrift trusts and
most assuredly such income is embraced within the phrase "property
and rights to property."
creates no property rights but merely attaches federally defined
consequences to state created rights. See United States v. Bess
[58-2 USTC ¶9595], 357
1054, 2 L. Ed. 2d 1135 (1958) (construing a similar provision of the
Internal Revenue Code of 1939). State law governs the question of the
existence of "property" or "rights to property" and
the "nature of the legal interest" that the taxpayer has in
the property. Aquilino v. United States [60-2 USTC ¶9538], 363
1277, 4 L. Ed. 2d 1365 (1960).
law, it is essential to the creation of a spendthrift trust that (1)
legal title be vested in the trustee, (2) the gift to the donee be of an
equitable interest in the income, and (3) the trust be active.
ertson v. Brown, 13
App. 211 (1931). In the instant case these criteria are met; petitioner
as income beneficiary has a vested property right in the income
generated by the trust.
Once we have
made the determination that under
law petitioner owns property or rights to property, federal law takes
over for the purpose of determining whether a lien will attach. United
States v. Bess, supra; Broday v. United States [72-1 USTC ¶9269],
455 F. 2d 1097 (5th Cir. 1972); United States v. Taylor [66-2
USTC ¶9522], 254 F. Supp. 752 (N. D. Cal. 1966).
As we have
heretofore indicated, we are in full accord with petitioner Howard's
position that Sec. 26-601, T. C. A., is not an exemption statute.
, supra. If it were, the results we reach would be no different.
This follows from the established legal proposition that federal law
exclusively governs what is exempt from federal taxation. United
States v. Mitchell [71-1 USTC ¶9451], 403
1763, 29 L. Ed. 2d 406 (1971).
The lien for
federal taxation arises under 26 U. S. C. Sec. 6321 and covers "all
property and rights to property." Levy is governed by Section
6331(a), and exemptions are enumerated in Section 6334(a). 3
Section 6334(c) specifically provides that "no property or rights
to property shall be exempt from levy other than the property
specifically made exempt by subsection (a)."
The fact that
we do not deal with an exemption statute is of no significance. What is
significant is the fact that we deal with "property and rights to
property." The argument of petitioner Howard is precisely the same
as was made by the taxpayer in Leuschner v. First Western Bank and
Trust Company [58-2 USTC ¶9723], 261 F. 2d 705 (9th Cir. 1958). The
Court responded thusly:
the bastion of the claim built up by Leuschner is that he had a property
right to receive this income. . . . It is for the very reason that
Leuschner acquires a property right that the government has the power to
levy thereon. (Emphasis supplied).
F. 2d at 708.
Howard relies upon Meyer v. United States [64-1 USTC ¶9111], 375
233, 84 S. Ct. 318, 11 L. Ed. 2d 293 (1963). But Meyer stands for
the proposition that state law determines what is "property or
rights to property," and generally it is the policy of Congress to
recognize and give effect to state exemption laws. This holding was made
in the context of the applicability of the doctrine of marshaling
assets. The holding is not at variance with the general rule that
federal law determines exemptions from federal taxation.
of the Court of Appeals is fully validated by the cases it cited,
notably United States v. Dallas National Bank, supra; Leuschner v.
First Western Bank and Trust Company, supra; and In re
Rosenberg's Will [35-2 USTC ¶9650], 269 N. Y. 247, 199 N. E. 206
(1935). We fully agree with petitioner that we are not bound by the
decisions of the courts of our sister states nor of the federal system;
however, we respect their decisions and are entitled to follow the
conclusions reached in any well-reasoned opinion irrespective of source.
We affirm the
action of the Chancellor and Court of Appeals and hold that respondent's
share of the income generated by the spendthrift trust may be subjected
to the payment of federal taxes, assuming a proper levy and the
observance of all requisite procedural steps. 4
The Certificates of Assessments
The Court of
Appeals held that the Certificates of Assessments and Payments were not
properly validated or certified under Rule 44.01, Tenn. R. Civ. P.,
because (1) the signature of the Director of the Internal Revenue
Service was affixed thereto by a deputy and (2) there is no provision in
Rule 44.01 for certifying a "true extract."
We dispose of
the latter contention first. Rule 44.01 provides for the proof of an
official record "by a copy attested by the officer having the legal
custody of the record, or by his deputy." We do not think it even
arguable that the right to evidence an official record by the
presentation of a certified copy does not carry with it the right to
certify pertinent parts of the record. If other parts are germane, our
rules contain ample procedures to require their production and
44.01, Tenn. R. Civ. P., official records, if in the custody of any
public official within this state, "may be evidenced by an official
publication thereof or by a copy attested by the officer having the
legal custody of the record, or by his deputy." Clearly, under this
rule the Certificates of Assessments and Payments could have been
certified by Claude A. Kyle, the Director of the
for the Southeast Region, at
, or by his deputy, Dale Crimpley, Branch Chief of the Certification
Branch, who had been designated to sign Kyle's name.
in this case stems from the fact that the Certificates bear the
purported signature of Kyle, affixed by Crimpley, without any indication
that it was so signed. The failure of Crimpley to sign his own name as
Branch Chief, and therefore, as Kyle's "deputy," is
unexplained in the record. While we view this as incredibly sloppy
procedure, under the facts of this case, we hold that these records were
Not only were
the documents certified over an official signature and under an official
seal, but also the government presented these records by a senior
technician employed at the
, who testified that they were made under her supervision and personally
verified by her. Further, the accuracy of these figures is not
challenged. In the last analysis we deal with a formality that should
not be permitted to frustrate the orderly reception in evidence of an
Notice of Tax Liens
notices of tax lien were received in evidence by the Chancellor. Each
was certified by the Deputy Register of
, but neither was acknowledged by an official of the Internal Revenue
Service, and neither was witnessed. Instead, they contained a
certificate over the signature of a Revenue officer. Below the signature
of the Revenue officer appears this notation:
Certificate of officer authorized by law to take acknowledgments is not
essential to the validity of Notice of Federal Tax Lien G. C. M. 26419,
C. B. 1950-51, 125.)
The Court of
Appeals, relying upon Sec. 64-2201, T. C. A., 5
held that these notices were not legally registered and were
inadmissible in evidence. We disagree.
It is true, as
noted by the Court of Appeals, that Haynes v. State, 213 Tenn.
447, 374 S. W. 2d 394 (1964), stands for the general proposition that an
instrument will not be considered legally registered unless acknowledged
by the maker or properly witnessed.
The filing of
tax liens in
is governed by Sec. 64-2110, T. C. A., which reads, in pertinent part,
liens for taxes payable to the
United States of America
and certificates discharging such liens shall be filed in the office of
the register of deeds of the county within which the property subject to
such liens is situated.
It will be
noted that there is no requirement that they be acknowledged or
witnessed--merely that they be filed.
authorization for the filing of tax liens derives its efficacy from
federal statutes, since remedies for the collection of federal taxes
have "always been conceded to be independent of the legislative
action of the States," and the federal statute (now 26 U. S. C.
Sec. 6323[f]) "does not purport to permit the States to prescribe
the form or the contents of that notice." United States v. Union
Central Life Insurance Co., [62-1 USTC ¶9103], 368
291, 293-94, 82 S.Ct. 349, 351, 7 L. Ed. 2d 294, 296-97 (1961). In the
cited case the Court points out that allowing the respective states to
prescribe the form and contents of tax notices would run "counter
to the principle of uniformity which has long been accepted practice in
the field of federal taxation."
at 294, 82
at 351, 7 L. Ed. 2d at 297. See also Atlas Finance Co. v. Wilkerson,
619, 382 S. W. 2d 529 (1964).
held in United States v. Estate of Donelly, 397 U. S. 286, 294,
90 S. Ct. 1083, 1038, 25 L. Ed. 2d 312, 319 (1970):
of Congress are generally to be applied uniformly throughout the country
from the date of their effectiveness onward.
federal law relating to form and contents is contained in 26 U. S. C.
form and content of the notice referred to in subsection (a) shall be
prescribed by the Secretary. Such notice shall be valid notwithstanding
any other provision of law regarding the form or content of a notice
of lien. (Emphasis supplied).
The place of
filing personal property liens is governed by 26 U. S. C. Sec.
6323(f)(1)(A)(ii), which provides that the notice shall be filed
"in one office within the State (or the county, or other
governmental subdivision), as designated by the laws of such State, in
which the property subject to the lien is situated." Sec. 64-2110,
T. C. A. is
's designation. Notices so filed must meet the requirement of federal
law. We hold that such notices need not be acknowledged or witnessed.
Finally, it is
the declared purpose of Sections 64-2110-64-2115, T. C. A., to
"authoriz[e] the filing of notices of liens in accordance with the
provisions of Sections 6321-6326 of the United States Internal Revenue
Code of 1954, and any acts or parts of acts of Congress amendatory
thereof." Sec. 64-2114, T. C. A. This section points unerringly to
federal law and by that law we are bound.
There is for
further consideration the fact that the lien imposed by Sec. 6321 arises
at the time the assessment is made; and, therefore, unlike other liens
its perfection does not depend upon its recordation. In re
Reconstruction, Borough of Brooklyn, City of
, 11 App. Div. 2d 240, 205 N. Y. S. 2d 125 (1960), aff'd mem.,
12 N. Y. 2d 1051, 190 N. E. 2d 240, 239 N. Y. S. 2d 880 (1963).
The Specific Claims
involves two claims, asserted by the government. One of them was based
on petitioner's ownership of Harding at Harding Car Wash; the other on
his status as a responsible officer of Roman International, Inc.
Involved were unpaid Withholding and Federal Insurance Contribution Act
(FICA) taxes. Separate notices of tax liens were filed in the Register's
May 30, 1974
. A notice of levy was served on the Trustee on
September 24, 1974
, and prior demand had been made upon the Petitioner.
There is a
presumption that tax assessments are valid and the burden is on the
taxpayer to prove that they are erroneous. United States v. Rexach
[73-2 USTC ¶9527], 482 F. 2d 10 (1st Cir. 1973). We agree with the
Chancellor that there is no such proof in the record. Actually the
taxpayer agreed to the assessment against Roman International. We concur
in all factual findings made by the Chancellor and in the conclusion he
The taxes in
question were due and unpaid; assessments were legally made; the
taxpayer had actual notice of the claim and demand for payment had been
made; notices of liens were seasonably filed. We find nothing in this
record that would justify giving relief to this taxpayer. Absent a bona
fide dispute as to tax liability, we do not look with favor upon
technical objections which, if sustained, would frustrate the government
in the collection of tax revenues. This record does not reflect a bona
fide defense to the claims asserted by the government.
This action is
remanded to the Chancery Court at
for the entry of a final order containing the current amount of the tax
liability and such other matters as may be appropriate. The judgment
heretofore entered in chancery will bear interest at the legal rate. All
costs--both those in the trial court and those incident to this
appeal--will be taxed one-half to the
United States of America
and one-half to the Petitioner. The entire judgment and Petitioner's
share of the court costs are payable out of the income of the trust
Simultaneously with the filing of the Complaint, the trustee tendered
into the registry of the court all funds in his hands belonging to
Laurence B. Howard, Jr., and has since paid into court all sums due him
when and as income has accrued. The total so deposited as of the date of
the hearing in Chancery Court was approximately $28,000.00.
Ch. 40, Public Acts of 1831, "An Act to abolish imprisonment for
debt except in cases of fraud." This act would be suspect today--it
prohibited the imprisonment of female debtors under any circumstances.