Conflicts of
Law Page3
3
This section exempts wearing apparel and school books, fuel, provisions,
furniture and personal effects, books and tools of a trade, business or
profession, unemployment benefits, undelivered mail and workmen's
compensation benefits.
4
Also in accord with the decision of this Court and the Court of Appeals
is Sec. 157(d) of the Restatement (Second) of Trusts (1959):
"Although a trust is a spendthrift trust or a trust for support,
the interest of the beneficiary can be reached in satisfaction of an
enforceable claim against the beneficiary . . . by the United States or
a State to satisfy a claim against the beneficiary." See also the
Comment on Clause (d).
5
Sec. 64-2201, T. C. A., provides:
To
authenticate an instrument for registration, its execution shall be
acknowledged by the maker, or proved by two (2) subscribing witnesses,
at least.
Opinion
Concurring in Part; Dissenting in Part
BROCK,
Justice:
I concur in
the opinion of the Court in all respects, except its determination that
income from a
Tennessee
spendthrift trust is subject to a federal tax lien.
The United
States Supreme Court has made in clear, I think, that federal law does
not create any property rights or determine the nature, attributes, or
quality of property rights of a taxpayer; instead, it has left that
determination to the several states. Aquilino v. United States
[60-2 USTC ¶9538], 363
U. S.
509, 80 S. Ct. 1277 (1960); United States v. Bess [58-2 USTC ¶9595],
357
U. S.
51, 78 S. Ct. 1054 (1958); Morgan v. Commissioner [40-1 USTC ¶9210],
309
U. S.
78, 60 S. Ct. 424 (1940).
I also think
it clear, as stated in the majority opinion, that under
Tennessee
law the interest of a beneficiary of a spendthrift trust is of such a nature
and quality that it may not be alienated either voluntarily by
the beneficiary-debtor or involuntarily by his creditors; inalienability
is an attribute of such an interest. State v. Caldwell, 181
Tenn.
74, 178 S. W. 2d 624 (1944). Therefore, such a beneficiary, as a debtor
for taxes owed to the United States, does not, insofar as his trust
interest is concerned, own any property or rights to property within the
terms of 26 U. S. C. §63.21. It is not a matter of such a beneficiary
having property which is exempt from the claims of creditors; rather, he
simply has never received from the settlor of the trust any right which
he may alienate or which may be taken from him.
The question
here presented is not answered merely by finding, as does the majority,
that the debtor-taxpayer owns property or rights to property; it is
necessary to go further and ascertain the nature of such property
or rights, i. e., whether it is alienable by the taxpayer. In my view,
the Aquilino decision clearly shows that this determination is
one to be made by state courts based upon state law; it is not
determined by federal statutes and the supremacy clause of the
Constitution has no application.
In Aquilino,
supra, the taxpayer was a general contractor. The government
asserted its tax lien against an indebtedness allegedly owed by a
property owner to the general contractor. A dispute concerning the
nature and extent of the interest of the taxpayer-contractor ensued.
Certain subcontractors, who had performed work on the job, asserted that
the money actually received by the contractor-taxpayer and his right to
collect amounts still due under the construction contract constituted a
direct trust for the benefit of sub-contractors, and that the only
property rights which the contractor-taxpayer had in the trust were to
bare legal title to any money actually received and a beneficial
interest in so much of the trust proceeds as remain after the claims of
sub-contractors should be settled. The Federal Government, on the other
hand, claimed that the New York State Lien Law merely gave
sub-contractors an ordinary lien, and that the contractor-taxpayer's
property rights encompassed the entire indebtedness of the owner under
the construction contract. In dealing with this problem, the Supreme
Court said:
"The
threshold question in this case, as in all cases where the Federal
Government asserts its tax lien, is whether and to what extent
the taxpayer had 'property' or 'rights to property' to which the tax
lien could attach. In answering that question, both federal and state
courts must look to state law, for it has long been the rule that 'in
the application of a federal revenue act, state law controls in
determining the nature of the legal interest which the taxpayer
had in the property . . . sought to be reached by (citation omitted).
Thus, as we held two (citation omitted). Thus, aswe held two Terms ago,
Section 3670 'creates no property rights but merely attaches
consequences, federally defined, to rights created under state law . .
.' United States v. Bess, (citation omitted). However, once the
tax lien has attached to the taxpayer's state-created interest, we enter
the province of federal law, which we have consistently held determines
the priority of competing liens asserted against the taxpayer's
'property' or 'rights to property.' (Citations omitted.) The application
of state law in ascertaining the taxpayer's property rights and of
federal law in reconciling the claims of competing lienors is based both
upon logic and sound legal principles. This approach strikes a proper
balance between the legitimate and traditional interest which the State
has in creating and defining the property interests of its citizens, and
the necessity for a uniform
admin
istration of the federal revenue statutes." (Emphasis added.)
The Supreme
Court continued:
"This
conflict [regarding the nature of the contractor-taxpayer's interest]
should not be resolved by this Court, but by the highest court of the
State of
New York
. We cannot say from the opinion of the Court of Appeals that it has
been satisfactorily resolved. We find no discussion in the court's
opinion to indicate the nature of the property rights
possessed by the taxpayer under state law. Nor is the application to be
made of federal law clearly defined. We believe that it is in the
interests of all concerned to have these questions decided by the state
courts of
New York
. We therefore vacate the judgment of the Court of Appeals, and remand
the case to that court so that it may ascertain the property interests
of the taxpayer under state law and then dispose of the case according
to established principles of law." (Emphasis added.)
80
S. Ct.
at 1280, 1281.
It therefore
conclude that Tennessee is free to determine the nature and quality of
the interest of a beneficiary under a Tennessee spendthrift trust; that
for more than 150 years it has been the law of Tennessee as shown by State
v. Caldwell, supra, and other decisions of this Court and by T. C.
A., §26-601, that such a beneficiary has no interest which may be
alienated either voluntarily or involuntarily and thus is of a nature
and quality which cannot be reached by creditors, even the United States
government. Accordingly, I respectfully dissent from that portion of the
majority opinion which is to the contrary.
[60-2 USTC
¶9632]Desert Air Conditioning, Inc., Plaintiff v. Wilson B. Wood,
District Director of Internal Revenue of the United States of America,
and The United States of America, Defendants
U.
S. District Court, Dist. Ariz., Civil Action No. 3039 Phx., 7/25/60
[1954 Code Sec. 6323]
Tax lien: Validity against transferee: Filing notice: Federal v.
state law.--A Federal tax lien which was not filed strictly in
accordance with state law was held to give the U. S. government a
superior claim on a truck to a transferee for value and without notice
where the state law, in derogation of Sec. 6323, went further than
merely designating a place in which to file notices of Federal tax
liens.
Scott, Cavness
& Yankee, 510 Luhrs Tower,
Phoenix
,
Ariz.
, for plaintiff. Jack D. H. Hayes, United States Attorney,
Phoenix
,
Ariz.
, for defendant.
Findings
of Fact and Conclusions of Law
LING, District
Judge:
The above
styled cause having been submitted to the Court for a decision on an
Agreed Statement of Facts and Briefs, and the Court having been fully
advised in the premises, the Court, pursuant to Rule 52, Federal Rules
of Civil Procedure, makes the following findings:
Findings
of Fact
I. The United
States of America was during all times hereinafter mentioned a
corporation sovereign and body politic.
II. The
counterclaim brought on behalf of the United States of America has been
authorized and requested by the Commissioner of Internal Revenue, a
delegate of the Secretary of the Treasury and is brought under the
direction of the Attorney General of the United States.
III.
Jurisdiction of the counterclaim is conferred on this Court under
Sections 1340 and 1345 of Title 28, U. S. C. and under Sections 7401 and
7403 of Title 26, U. S. C.
[Assessment
of Taxes]
IV. On various
dates and for various periods and in amounts as set out herein below,
and in accordance with law, assessments of corporate income taxes,
Federal Unemployment Tax Act taxes and withholding taxes were made
against D. H. Walker Construction Company, Inc., as follows:
Tax Amount Date Notice and Demand Date Notice
Type of Tax Period Outstanding Assessed Issued of Lien Filed*
IT-CORP .............. 1957 $ 3,034.58
5-2-58
5-2-58
11-28-58
FUTA ................. 1958 133.45
2-20-59
2-20-59
3-27-59
WT & IC ..............
9-30-58
2,467.24
11-14-58
11-14-58
12-17-58
Dep. Rec. Penalty ....
9-30-58
115.02
3-6-59
3-6-59
WT & IC ..............
12-31-58
2,510.44
2-6-59
2-6-59
3-17-59
WT & IC ...
3-31-59
2,418.62
3-16-59
3-16-59
3-17-59
$10,679.35
* Liens filed with
County
Recorder
of
Maricopa County
,
Arizona
.
V. Within ten
days after the assessments alleged above, notices were given and demand
made upon the taxpayer for the payment of the amounts assessed. No part
of the balance due as shown above has been paid up to the present time.
There is now due and owing from D. H. Walker Construction Company, Inc.,
the sum of $10,679.35 plus interest until paid.
VI. On various
dates as shown in paragraph IV above notices of federal tax liens were
duly filed with the
County
Recorder
of
Maricopa County
,
Arizona
.
VII. From the
date of its acquisition up to March 12, 1959, the 1955 International
Winch Truck, Motor Number SD 240H107058, which is the subject of this
action, was the property of D. H. Walker Construction Company, Inc.,
referred to in paragraph IV above.
VIII. At the
time of each assessment set forth in paragraph IV above with the
exception of the last assessment listed, specifically the WT & IC
assessment of $2,418.62 made on March 16, 1959, the 1955 International
Winch Truck, Motor Number 240H107058 was the property of D. H. Walker
Construction Company, Inc.
[Transfer
of Truck]
IX. On March
22, 1959, D. H. Walker Construction Company, Inc., through its president
executed an assignment of its right, title and interest to the 1955
International Winch Truck, Motor Number 240H107058 to the Desert Air
Conditioning, Inc.
X. The
consideration from the Desert Air Conditioning, Inc., to D. H. Walker
Construction Co., Inc., for the assignment of the latter's right, title
and interest to the truck, described in paragraph VII above, was the
cancellation of a debt due Desert Air Conditioning, Inc., from D. H.
Walker Construction Co., Inc., for services in the nature of air
conditioning and sheet metal work rendered prior to January 1, 1959.
XI. On March
16, 1959, the defendant Wilson B. Wood as District Director of Internal
Revenue, through his agents, seized the truck described in paragraph VII
above for the non-payment of federal taxes due and owing from D. H.
Walker Construction Co., Inc., as shown in paragraphs IV and V above.
XII.
Thereafter the instant action was brought by the plaintiff to restrain
the sale of the truck, described on paragraph VII above, on the grounds
that the truck was the personal property of the plaintiff and not
subject to any lien for taxes due from D. H. Walker Construction Co.,
Inc.
XIII. Pursuant
to a stipulation executed by the respective parties on
May 29, 1959
, the truck described in paragraph VII above was sold and the proceeds
of $775.00 deposited with the Clerk of this Court. This stipulation of
sale further provided that the proceeds shall represent and stand for
the property involved in this action and that the sale shall not affect
the rights of the parties in the proceeds of the property as they shall
appear upon the conclusion of this case.
[Transferee
for Value and Without Notice]
XIV. The
conveyance described in paragraphs IX and X, above, was a bona fide
transaction between said transferor and transferee.
XV. The
defendants did not comply with the requirements of Section 11-464 A, A.
R. S. 1956 as amended and 28-325 A. R. S. 1956, in that no lien or
notice thereof was deposited or filed with the Motor Vehicle Division of
the Arizona State Highway Department.
XVI. The
plaintiff had no knowledge of the defendants' lien claims at the time of
the conveyance referred to in paragraph IX above.
Conclusions
of Law
I. This Court
has jurisdiction of this controversy and the parties hereto.
II. Section
6321 through 6323 of the Internal Revenue Code of 1954, and Sections
11-464 and 28-325 of the Arizona Revised Statutes are all applicable to
this litigation.
III. The
filing of the tax liens as found by the Court in paragraph VI of the
Findings of Fact did not company with the requirements of Section 11-464
A, Arizona Revised Statutes 1956 as amended and 28-325 Arizona Revised
Statutes 1956.
[State
Law in Derogation of Code]
IV. This Court
has held in Merchants Loan Co. v. United States, decided May 27,
1957 [57-2 USTC ¶9741] (52 A. F. T. R. 1603) that a federal tax lien
need not be filed in conformity with Section 28-325 of the Arizona
Revised Statutes. The 1958 amendment to Section 11-464 of the Arizona
Revised Statutes was intended to impose the filing requirements
contained in Section 28-325 of the Arizona Revised Statutes upon the
United States
. This amendment is in derogation of Section 6323 of the Internal
Revenue Code of 1954 since Section 28-325 goes further than merely
designating a place in which notices of Federal tax liens need be
filed. Union Planters National Bank v. Godwin, 140 F. Supp. 528
(E. D. Ark.) [56-2 USTC ¶9671].
V. The tax
liens of the United States are prior and superior to any claim or
interest which Desert Air Conditioning, Inc., has in the $775.00
deposited with the Clerk of the Cour; hence the United States, pursuant
to its counterclaim, is entitled to Judgment directing the Clerk to
distribute the $775.00 to it for application against the tax liabilities
due from D. H. Walker Construction Company, Inc. and Judgment dismissing
the complaint filed by Desert Air Conditioning, Inc.
[84-2 USTC
¶9732]Air Power, Inc., Appellant v. The
United States of America
, Appellee
(CA-4),
U. S. Court of Appeals, 4th Circuit, No. 83-1667, 741 F2d 53, 8/9/84
[Code Sec. 6323]
Collection of tax: Wrongful levy: Validity of lien: Priority of
creditors: Judgment creditor: Court of record.--A judgment lien was
superior to a federal tax lien even though the creditor obtained the
judgment through a state circuit court which had been labeled under
statute as a court not of record. By reversing a federal district
court's holding to the contrary, a federal court of appeals determined
that the competency of a local tribunal to perfect a judgment lien for
federal tax purposes was a question of federal law and was not governed
by inconsistent state
admin
istrative practices. To insure uniformity and consistency in the
admin
istration of federal tax policy, the federal court employed its own
criteria to determine the competency of the lower court issuing the
judgment.
David Hugh
Boyd, for appellant. Elsie L. Munsell, United States Attorney,
Alexandria, Va. 22314, Glenn L. Archer, Jr., Assistant Attorney General,
Michael L. Paup, William S. Estabrook, Department of Justice,
Washington, D. C. 20530, for appellee.
Before HALL,
MURNAGHAN, and SPROUSE, Circuit Judges.
SPROUSE,
Circuit Judge:
Air Power,
Inc. (Air Power), appeals from the district court's decision granting a
federal tax lien priority over its earlier state judgment lien against
properties belonging to VWV Utility Construction Company, Inc. (VWV).
The parties agree that Air Power's judgment lien was perfected under
Virginia
state law before the
United States
filed the required notice of its tax lien. 26 U. S. C. §6323(f). The
single issue presented on appeal is whether Air Power's judgment was
secured from a "court of record," as required by Supreme Court
decision and the governing Internal Revenue Service (IRS) regulations,
thus entitling Air Power to "judgment lien creditor" status
and priority over a later-filed federal tax lien. United States v.
Gilbert Associates [53-1 USTC ¶9291], 345
U. S.
361 (1953); 26 C. F. R. §301.6323(h)1(g). See also 26
U. S.
C. §6323(a). The district court resolved this issue in favor of the
United States
, noting that the
Virginia
legislature has characterized the
Virginia
general district court from which Air Power secured its judgment as a
"court not of record." VA. CODE §16.1-69.5(a). We hold 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 and that application of uniform criteria places
the general district courts of Virginia in that category. Accordingly,
we reverse.
I
On
April 22, 1982
, Air Power secured a prejudgment writ of attachment from the General
District Court of Loudon County, Virginia, against personal property
belonging to VWV. The identified property was seized two weeks later by
the Sheriff in satisfaction of VWV's $4,803 debt and default judgment
was entered in Air Power's favor soon afterwards for the full amount of
the debt. After the required legal notices were given, the general
district court authorized the Sheriff to sell the seized property on
June 25, 1982
, with the proceeds to be paid to Air Power, the judgment lien creditor.
Meanwhile, the
IRS had demanded payment from VWV for delinquent federal employment
taxes. Although VWV failed to respond to its demand in early April 1982,
the IRS did not file the required notice of tax levy against VWV with
the Virginia State Corporation Commission until
June 24, 1982
, the day before the scheduled sheriff's sale. The IRS then notified the
Sheriff of Loudon County not to release any proceeds from the sale to
Air Power, contending the federal tax lien superseded its state court
judgment. Air Power responded by bringing this wrongful levy action in
federal district court claiming priority to the proceeds of the
Sheriff's sale by virtue of its earlier perfected lien. See 26 U. S. C.
§7426(a)(1). The district court, on proper motion, awarded summary
judgment to the
United States
, ruling that Air Power's state lien was not entitled to priority
because its judgment was not obtained from a "court of
record." It based its ruling on the language of the
Virginia
statute specifically characterizing the general district court as a
"court not of record."
On appeal, Air
Power contends that the district court erred in relying solely on the
label given by
Virginia
state law to the general district court in determining whether its
judgment lien issued from a "court of record." It argues that
whether a judgment issues from a "court of record" for
purposes of determining priority under 26 U. S. C. §6323(a) is a
question of federal law and that the specific and intrinsic attributes
of Virginia general district courts make them courts of record for this
purpose. We agree.
II
The
United States
possesses a statutory lien against all personal and real property
belonging to a delinquent taxpayer from the time he refuses or neglects
to heed a lawful demand for payment. 26 U. S. C. §6321. A federal tax
lien's priority over other lawful debts is generally determined by
applying "the first in time, first in right" rule. See United
States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374
U.S. 84, 87 (1963). Orginally, a federal tax lien took priority over
virtually all other general liens perfected after the government made a
lawful demand for payment from the delinquent taxpayer, even if the
competing lienholder had no notice of the government's claim. Cf.
United States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81, 84-88 (1954). Although it has retained this basic scheme of priority
for most competing general liens throughout the history of the Internal
Revenue Code, 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 liens. See 26 U. S. C. §6323(a). One such protected class is the
"judgment lien creditor." 1
The
priority of a judgment creditor's lien over a federal tax assessment is
determined from the time the government files its notice of a lien with
appropriate state officials, rather than from the time of its demand for
payment. 26 U. S. C. §6323(a). A qualifying creditor's rights are
superior as long as his judgment is perfected 2
before the government gives constructive notice of its right to the
delinquent taxpayer's assets. Congress' purpose in imposing the notice
requirement on the government was to protect the perfected interests of
innocent third parties from "secret tax liens." Gilbert
Associates, 345
U. S.
at 363-64.
The
dispute between the parties in this appeal turns on whether Air Power
qualifies as a "judgment lien creditor' for the purposes of special
lien priority under section 6323(a). The IRS regulations implementing
this statutory provision define a "judgment lien creditor" as:
.
. . 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 . . . [and] who has
perfected a lien under the judgment on the property involved . . ..
26
C. F. R. §301.6323(h)-1(g) (emphasis supplied).
The "court of record" requirement, which was the basis of the
ruling below in favor of the United States, originates from the Supreme
Court's decision in United States v. Gilbert Associates [53-1
USTC ¶9291], 345 U. S. 361. In that case, the Town of Walpole, New
Hampshire
admin
istratively assessed a local tax lien against a company facing a similar
tax lien from the
United States
government. The town claimed priority over the federal tax lien because
its assessment was perfected under state law before the
United States
filed the notice of its own lien, as required by the predecessor statute
to section 6323. The United States conceded its filing was later in
time, but argued that the town was not a "judgment creditor" 3
within the meaning of the applicable statute, and thus not entitled to
notice of the pre-existing lien. The Supreme Court agreed, explaining
that the need for uniformity in defining "judgment creditor"
required that the effect of the state's tax assessment on the federal
priority question be determined according to federal law:
A
cardinal 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 [predecessor to
¶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
admin
istrative bodies.
Gilbert
Associates,
345
U. S.
at 364 (footnote omitted) (emphasis supplied).
The
crucial language in Gilbert for our purposes is that by which the
Supreme Court equated the term "judgment creditor" with
someone possessing "a judgment of a court of record."
The IRS, which has incorporated Gilbert's "court of
record" requirement into its
admin
istrative regulations. takes the position before this court that the
Virginia
statute labeling its general district courts as "courts not of
record" should control the issue of whether Air Power's state
judgment is entitled to priority over a federal tax lien. The district
court below agreed. Air Power, seeking to overturn this ruling, argues
that allowing the state's label to control would strike at the very
heart of federal tax policy--the need for uniformity.
A.
The
taxing power is one of the most jealously guarded prerogatives exercised
by Congress. State law simply may not provide controlling guidance in
this sensitive area unless "the federal taxing act by express
language or necessary implication makes its operation dependent upon
state law." Lyeth v. Hoey [38-2 USTC ¶9602], 305
U. S.
188, 194 (1938). See also Morgan v. Commissioner, 309
U. S.
78, 80-81 (1940). State law unquestionably defines the property rights
being asserted in section 6323(a) cases, for the very purpose of the
provision is to give effect to certain state-created property interests
when they are competing with a federal tax lien. See 1966 Senate Report,
supra, note 3, at 3722-23. However, nothing in section 6323(a) of
the Internal Revenue Code or its legislative history indicates that
Congress, either explicitly or by necessary implication, contemplated
giving state law preeminence in matters relating to the treatment or
priorty a judgment lien is be accorded when competing with a federal tax
lien. 4
The relevant statutory language simply states that the government's lien
"shall not be valid as against any . . . judgment lien creditor
until notice thereof which meets the requirements of subsection (f) has
been filed by the Secretary or his delegate." 26 U.S.C. §6323(a)
(emphasis supplied). Although the Internal Revenue Code offers no
definition of "judgment lien creditor," 5
the senate committee report discussing this aspect of federal tax law
makes it plain that a person qualifying for judgment creditor status
"will be entitled as such to the protection of this section
irrespective of the designation [state law gives to that person]"
S. Rep. No. 1622, 83d Cong., 2d Sess., reprinted in 1954 U. S.
Code Cong. & Ad. News 4621, 5224. 6
Courts have confirmed congressional intent in this area by holding
uniformly that judgment lien priority is governed by federal law and
federal concerns. See, e.g.,
United States
v. Speers [66-1 USTC ¶9101], 382
U. S.
266, 270-72 (1965); Gilbert Associates, 345
U. S.
at 364; United States v. Hunt [75-1 USTC ¶9327], 513 F. 2d 129,
133 (10th Cir. 1975).
Gilbert's
direction that the term "judgment [lien] creditor" be defined
"in the usual, conventional sense of a judgment of a court of
record." Gilbert, 345
U. S.
at 364, must be interpreted in light of the overriding and
long-established principle that federal law governs tax policy. 7
The
United
State
's position on the resolution of the "court of record" issue
would seriously undermine this principle and be at odds with Gilbert
itself. The Supreme Court in Gilbert held that the Town of
Walpole
could not qualify as a judgment creditor for federal tax purposes simply
because the state of
New Hampshire
conferred that status upon it. The Court, in essence, recognized that
many state practices, although legitimate within their own
jurisdictional sphere, could not be binding on a federal court in a lien
priority case arising under the federal tax laws. The priority rights
conferred by Congress, the Court explained, are distinctly federal in
nature and must be decided accordingly. These rights cannot vary
depending on the locale, but "should have the same application in
all the states." Gilbert, 345
U. S.
at 364. Uniformity, the Court further emphasized, is the guiding
principle in matters relating to the federal government's taxing power.
In short, the unmistakable message of Gilbert is that
inconsistent state practices, though controlling in the host
jurisdiction, must yield to a consistent federal rule to insure uniform
application of the tax laws.
B.
We
obviously cannot intrude on the state of
Virginia
's prerogatives to organize and structure its courts in the way it deems
appropriate to meet local concerns. Our purpose is simply to determine
whether the judgment of one of its general district courts is entitled
to respect from a federal court considering a federal lien priority
case. The answer can only be supplied by analyzing the true character of
the issuing court in light of Congress' expressed desire to confer
special protection to certain qualifying state-created property
interests.
The
design
Virginia
has chosen for its court system generally conforms to the model used by
other jurisdictions. The Virginia Supreme Court of Appeals is at the
apex of the judicial hierarchy and has final appellate jurisdiction over
all civil and criminal matters. See generally VA. CODE §§ 17-93
to -116. Directly below it is the recently created Virginia Court of
Appeals, which will assume appellate jurisdiction over lower court
decisions beginning in 1985. VA. CODE §§ 17-116.01 to -166.014. At the
trial level, the various circuit courts fulfill the function of courts
of general jurisdiction. They have original jurisdiction in all criminal
matters involving felonies and in all civil matters involving more than
$7,000. VA. CODE §17-123. They also possess concurrent jurisdiction
with general district courts for civil cases involving less than $7,000
but more than $1,000, VA. CODE §16.1-76, 77, and may undertake de
novo review of the decisions of "courts not of record" in
certain instances. VA. CODE §16.1-106.
At
the bottom of the judicial ladder are
Virginia
general district courts. Despite their label as "courts not of
record" and their limited jurisdiction in civil and criminal
matters, these courts have many of the attributes of
Virginia
's circuit courts. General district courts keep and preserve a written
record of their proceedings, VA. CODE §16.1-91 and are presided over by
individuals trained in the law, VA. CODE §16.1-69.15. These courts also
possess virtually all the same powers of their circuit court
counterparts. They may punish contemnors, VA. CODE §16.1-69.24, issue
subpoenas, VA. CODE §16.1-69.25,
admin
ister oaths, VA. CODE §16.1-69.27, permit discovery in certain cases,
VA. CODE §16.1-82 to -89, and take affidavits, VA. CODE §16.1-69.27.
Procedurally, it is likewise difficult to distinguish the general
district court from a "court of record" as that institution
was known at common law. Cf. 20 Am. Jr. 2d Courts §26. Suits in
general district court must be initiated by a warrant or motion for
judgment served on the opposing party. VA. CODE §16.1-81. The defendant
in any action has the right to assert counterclaims against the
plaintiff and to have them determined in the same proceeding. VA. CODE
§16.1-88.01. A losing party concededly may appeal an adverse decision
to the circuit court and receive a de novo trial, but he is
precluded from expanding either his claim or request for remedies beyond
those presented to the general district court. VA. CODE §16.1-106. See
also Stacy v. Mullins, 185
Va.
837, 40 S. E. 2d 265 (1946); Addison v. Salyer, 185
Va.
644, 40 S. E. 2d 260 (1946).
Finally,
and perhaps most significantly, the substantive effect of a final
decision from the general district court is the same as that of a final
decision from a circuit court. Its decision not only can be enforced by
the same mechanisms as the judgment of a circuit court, VA. CODE §16.1-116,
but it is entitled to the same preclusive effect from other state
courts. Petrus v.
Rob
bins, 195
Va.
861, 80 S. E. 2d 543 (1954). See also Boyd,
Graves
& Middleditch, Virginia Civil Procedure §12.11 (1982).
Because federal courts are bound to honor state court judgments to the
same extent as the issuing state itself, a
Virginia
general district court decision presumably would be entitled to full
faith and credit if interposed as a defense in a federal suit between
the same parties. See 28 U. S. C. §1738. See also Kremer v. Chemical
Construction Corp., 456
U. S.
461, 466 (1982); Allen v. McCurry, 449
U. S.
90 (1980).
In
sum, the label "courts not of record" given to general
district courts by the Virginia legislature, though no doubt serving a
legitimate state purpose, is not entirely reflective of the true
character of present day competency of those tribunals.
C.
The
label a state gives its own courts, of course, provides some guidance on
whether a judgment springs from a court of record, but it alone cannot
be determinative. See, e.g., Gilbert, 345
U. S.
at 363-64. An individual state's reasons for labeling one tribunal
"a court of record" and another "not a court of
record" may have more to do with the jurisprudential history of the
state than the present day competency of the particular tribunal. The
factors the state weighed in reaching its labeling decision are almost
certain to address different concerns than those implicated in federal
tax policy. Weaving these wholly state concerns into the fabric of
national tax policy could only negatively affect a tax policy designed
to achieve uniform results. To insure consistency and fairness in the
application of section 6323(a), a federal court must look to the basic
structure and competency of the court issuing the judgment. The
dispositive question is not whether the tribunal carries the rubric
"court of record," but whether it has been cloaked by its host
state with the usual and conventional powers of a "court of
record" and operates as a judicial body. The general district
courts of
Virginia
have those powers and operate in the usual manner of courts of record.
D.
Deferral
to diverse state rules which purport to make ultimate conclusions on the
"court of record" question in tax cases not only would defeat
the uniformity Gilbert sought to achieve, but in given cases
could create unconscionable results for individual creditors raising the
same claim in different jurisdictions. The case we consider vividly
makes this point: Air Power prosecuted its $4,800 claim against VWV in
Virginia
general district court, a tribunal with competent jurisdiction to hear
such claims up to $7,000.
Va.
Code §16.1-77. If we are bound to the label Virginia gave this court
rather than the actual judicial powers it possesses, as the government
urges, Air Power's claim could not take priority over a later filed
federal tax lien, even though the state judgment creditor had no notice
of the lien's existence and would be entitled to priority if he were
competing with another state lienor. 8
The rule's application to the very same claim now raised by Air Power in
other states, however, would produce different results. In the adjoining
state of
West Virginia
, for example, Air Power's claim would take priority over the identical
federal lien because that state denominates courts with the power to
rule on $4,800 claims as "courts of record." See generally W.
Va. Code §§ 51-2-1, -2.
Congress
obviously could not have intended such patently unfair and inconsistent
results when it cast the language of section 6323(a). See Gilbert,
345
U. S.
at 364. The lien priority provisions of the Internal Revenue Code were
specifically designed to preserve the perfected interests of innocent
third parties from "secret tax liens." This overriding purpose
completely unravels if a creditor's entitlement to protection becomes
captive to the label the individual states give to the court issuing the
judgment. 9
In
view of all these considerations, we hold that the general district
court of
Virginia
is a "court of record" for the purpose of affording a judgment
lien creditor the special protections contained in section 6323(a) of
the Internal Revenue Code.
REVERSED
1
The applicable provision of the Internal Revenue Code states 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 or his delegate.
26
U. S.
C. §6323(a) (emphasis supplied).
The predecessor provision to section 6323(a) only provided notice
protection to a "mortgagee, pledgee, purchaser, or judgment
creditor." See Priority of Federal Tax Liens and Levies,
Hearings on H. R. 11256 and 11290 Before the House Comm. on Ways and
Means, 89th Cong. 2d Sess. 37 (March 2, 1966) (Statement of Stanley
S. Surrey, Ass't Secretary of Treasury). The 1966 amendments to the
Internal Revenue Code expanded this protected group to include
mechanic's lienors and holders of a security interest. These same
amendments created "superpriorty" protection for certain
creditors whose interests arose before notice of the federal tax lien,
but were not choate until after notice was received. See 26 U. S. C. §6323(b),
(c) and (d). These changes were designed to increase the protection
afforded private sector creditors and to modernize the relationship
between federal tax liens and other commercial creditors. See
United States
v. Kimbell Foods, Inc., 440
U. S.
715, 738 (1979).
2
Courts generally look to state law in determining whether a competing
state court lien is perfected or choate against third party creditors,
but federal law governs the actual legal effect of the judgment for tax
priority purposes. See Hartford Provision Co. v. United States
[78-1 USTC ¶9392], 579 F. 2d 7, 9 (2d Cir. 1978). See also 26 C. F. R.
§301.6323(h)-1(g). Additionally, certain threshold federal requirements
of choateness must be satisfied before the lien can qualify for priority
treatment. See United States v. City of New Britain [54-1 USTC ¶9191],
347
U. S.
81, 84 (1954).
3
Under the predecessor statute to section 6323, a "judgment
creditor" was entitled to notice of an existing federal tax lien.
In its 1966 revisions to the Internal Revenue Code, however, Congress
changed "judgment creditor" to "judgment lien
creditor." The Senate Report discussing this change made it plain
that the addition of the word "lien" did not alter the
definition courts had traditionally given to "judgment
creditor." S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in
1966 U. S. Code Cong., & Admin. News 3722, 3724 [hereinafter cited
as 1966 Senate Report.]
4
There are several references in the provisions of subsection 6323(b),
(c), and (d) allowing lien priority to be determined in accordance with
state law for certain claimants, but no similar expressions for a
section 6323(a) judgment lien creditor. The legislative history
indicates that Congress was satisfied with the interpretations courts
had historically given to the notice provisions of 6323(a) and chose not
to disturb them. Its clear purpose in tying section 6323(b) and (c)
protection to state law, however, was to override federal court
decisions that had made these identified state property interest
subordinate to federal tax liens.
United States
v. Kimbell Foods, Inc., 440
U. S.
at 720 n. 6. Uniformity was not an overriding concern when Congress
allowed state law to control in these special cases because most states
had moved in the direction of incorporating the provisions of the
Uniform Commercial Code into their own laws. The rules controlling
"judgment lien creditor" status were presumably left
undisturbed because the Uniform Commercial Code does not treat this
category of creditors. See U. C. C. §9-104(h).
5
In conjunction with the 1954 revisions to the Internal Revenue Code, the
House of Representatives passed a version of section 6323 that made a
judgment lien creditor's priority rights contingent upon him
"actually obtain[ing] 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," H. R. Rep. No. 1337, 83d
Cong., 2d Sess., reprinted in 1954 U. S. Code Cong. & Ad.
News 4017, 4555. The purpose of this proposed requirement was to make it
clear "that particular persons [will] not be treated as judgment
creditors because State or Federal law artificially provides or concedes
such persons rights or privileges of judgment creditors, or even
designates them as such, when they have not actually obtained a
judgment in the conventional sense."
Id.
The competing Senate version did not contain this requirement and
ultimately became the approach enated into statute. The conferees
adopted the Senate's version to continue in effect existing law,
including applicable rules developed by judicial construction. H. R.
Rep. No. 2543, 83d Cong., 2d Sess., reprinted in 1954 U. S. Code
Cong. & Ad. News 5280, 5340.
6
This discussion of the meaning of "judgment creditor" occurred
before the 1966 revisions to section 6323 of the Internal Revenue Code.
As previously mentioned, however, the only change affecting
"judgment creditor" was the addition of the word
"lien." See not 3 supra.
7
In commenting on Gilbert's "court of record" language,
the American Bar Association's Committee on Federal Liens indicated that
"there appears no reason to discriminate against judgments rendered
by lesser courts if, by docketing, they have become liens." American
Bar Association Final Report of the Committee on Federal Liens, 26
(1959), reprinted in Priority of Federal Tax Liens and Levies:
Hearings on H. R. 11256 and H. R. 11290 Before the House Comm. on Ways
and Means, 89th Cong., 2d Sess. 60, 167 (1966) (statement and
submissions of Laurens Williams, Chairman, Special Committee on Federal
Liens, ABA). The ABA Committee was a driving force in the successful
effort to modernize the federal law respecting lien priority. The
Supreme Court itself implicitly cautioned against a mechanical
interpretation of Gilbert's "court of record language"
in United States v. Speers, 382
U. S.
at 270-71.
8
Although it is true Air Power could have proceeded against VWV in
Virginia Circuit Court, a tribunal carrying the label "court of
record," we see no justifiable reason for penalizing "it"
for making a choice legitimately provided by
Virginia
law as long as the judicial tribunal to which it resorted had the
necessary attributes of a court of record.
9
The IRS makes the argument that deferring to the state's designation
would actually enhance uniformity by drawing a bright lien separating a
"court of record" from a "court not of record." The
uniformity Congress had in mind when it enacted section 6323, however,
relates to ensuring the same treatment for a third party creditor
wherever he resides; it does not refer to the ease with which the rule
is applied. If the states had formulated a universal scheme for defining
a "court of record," the position urged by the IRS would have
more force. Such a scheme, however, does not exist, and federal courts
are thus bound to formulate a rule that protects a
Virginia
judgment lien creditor to the same extent as a lienholder in other
states.
Dissenting
Opinion
HALL,
Circuit Judge, dissenting:
I
cannot agree with the majority's conclusion that the general district
court of Virginia is a "court of record" for the purpose of
affording a judgment lien creditor protection under 26 U. S. C. §6323(a)
(1983). I, therefore, dissent.
As
the majority recognizes, the cardinal principle of federal tax policy is
to advance a uniform application of the federal tax laws among the
states. In striving for such uniformity, the Supreme Court in United
States v. Gilbert Associates, Inc. 1
explicitly stated that only judgments from courts of record can confer
upon a creditor the status of a judgment creditor for federal tax lien
purposes.
All
states have designated certain courts of original general jurisdiction
as courts of record. In the instant case, the
Virginia
legislature determined that its general district courts were
"courts of record."
Va.
Code §16.1-69.5 (1972). 2
The majority's opinion not only ignores the plain language of the
Virginia
statute but also violates the principle of uniformity. The majority's
expansive construction of the phrase "court of record" will
inevitably result in extensive inquiries concerning whether each
particular court in the country is a court of record, and will foster
inconsistent application of the federal tax laws among the states.
Reference
to state statutes, on the other hand, promotes uniformity by providing
consistent results as to whether a particular court is a court of
record. The application of §16.1-69.5 in conjunction with federal tax
laws dealing with judgment lien creditors would not prejudice creditors
such as Air Power because they can proceed in the Virginia Circuit
Court, which has been designated a court of record. Furthermore, the
application of §16.1-69.5 in conjunction with federal tax laws provides
a bright-line test which can easily be followed by both creditors and
courts in other states.
In
my view, Va. Code §16.1-69.5 (1972) is dispositive of this case. Its
use advances a uniform application of the federal tax laws and is
consistent with the principles of comity. Accordingly, I would affirm
the district court.
1
[53-1 USTC ¶9291] 345 U. S. 361, 364 (1953).
2
When the Virginia legislature passed §16.1-69.5, in 1972, it was
undoubtedly aware of the interrelationship the statute would have with
the federal tax laws, as Gilbert had been decided in 1953, and §6623(a)
had been amended to include an express reference to judgment lien
creditors in 1966.
[65-1 USTC
¶9399]United States of America, Plaintiff v. Juan Eduardo Torres Lao;
Ponce Federal Savings & Loan Association; Woodmere Investors
Company; Dolores Corchado; Tomas Bota Caner; Carlos Armstrong e Hijos;
and Pedro Figueroa Torres, Defendants
U.
S. District Court, Dist. Puerto Rico, Civil No. 431-62, 2/24/65
[1954 Code Secs. 6321-6323]
Lien for taxes: Priorities: Place of filing notice of lien: Puerto
Rican law.--At the time federal tax liens arose and notice was filed
in the U. S. District Court in Puerto Rico, the Commonwealth of Puerto
Rico had not by law designated an office for the filing of such notice.
Therefore, the tax liens had priority over other claims except mortgages
which were properly registered before notices of the tax liens were
filed.
Gilberto
Gierbolini, Assistant United States Attorney, Puerto Rico, for U. S. Raúl
Matos, Patrick J. Wilson, 5th Floor, Banco Credito Bldg., Ponce, Puerto
Rico, for Ponce Federal Savings & Loan Ass'n, Caner, and Torres. José
A. Suro, P. O. Box 3404, San Juan, Puerto Rico, for Woodmere.
Findings
of Fact, Conclusions of Law, and Judgment (
2/24/65
)
RUIZ-NAZARIO,
District Judge:
This case,
having heretofore been called, did duly come on for trial on
May 4, 1964
at
9:30 o'clock
in the morning. Assistant United States Attorney Gilberto Gierbolini,
Esquire, appeared for plaintiff
United States of America
. Defendants Ponce Federal Savings and Loan Association, Tomás Bota
Caner, and Pedro Figueroa Torres appeared represented by Patrick J.
Wilson, Esquire, and Raúl Matos, Esquire; defendant
Woodmere
appeared represented by José A. Suro, Esquire. Neither the principal
defendant Juan Eduardo Torres Lao, nor the codefendants Dolores Corchado
and Carlos Armstrong e Hijos were present or represented at the trial.
The Court sat
as trier of the facts to decide the issue of whether at the time that
the Federal tax liens arose and notice thereof was filed in the office
of the Clerk of this Court, the Commonwealth of Puerto Rico had by law
designated an office within said Commonwealth for the filing of such
notice as provided in Section 7323(a)(1)(2), Title 28, United States
Code.
After hearing
argument of counsel, judgment for plaintiff was ordered entered from the
bench on the basis of findings of fact and conclusions of law to be
thereafter made and filed. And now the Court, duly advised in the
premises, makes the following findings of fact:
Findings
of Fact
1. This is an
action where plaintiff seeks relief against defendant Juan Eduardo
Torres Lao under the provisions of Sections 7402 et seq. of Title 26,
United States Code, for the recovery of taxes in the principal amount of
$1,666.78, plus interest, under the Federal Insurance Contributions Act.
2. An
assessment was made on
May 12, 1961
against defendant Juan Eduardo Torres Lao for withholding Federal
Insurance Contributions Act taxes in the sum of $1,416.26 for the first
quarter of 1961. Payment was made of $194.25 on
September 28, 1961
, on the first quarter of 1961 taxes, thus leaving a balance due and
owing plaintiff of $1222.01, plus interest thereon as allowed by law.
Demand was made for said taxes on
May 16, 1961
. Notice of lien was filed on
June 29, 1961
with the United States District Court for
Puerto Rico
.
3. An
assessment was made on
August 18, 1961
against defendant Juan Eduardo Torres Lao for withholding Federal
Insurance Contributions Act taxes in the sum of $1,330.87 for the second
quarter of 1961. Payment was made of $886.10 on
June 8, 1962
on the second quarter of 1961 taxes, thus leaving a balance due and
owing plaintiff of $444.77, plus interest thereon as allowed by law.
Demand was made for said taxes on
August 22, 1961
, and notice of lien was filed on
November 21, 1961
with the United States District Court for
Puerto Rico
.
4. The tax
liens arising from said assessments attached to the real properties
owned by defendant Juan Eduardo Torres Lao, in
Ponce
,
Puerto Rico
, more fully described in paragraph XII of the complaint herein, at the
time the assessments were made and continue to remain valid and
subsisting liens on said properties.
5. All
defendants other than Juan Eduardo Torres Lao were named defendants in
this action for any lien or some interest which they may have or claim
to have in the real properties owned by defendant Juan Eduardo Torres
Lao and attached by plaintiff
United States of America
.
6. Default as
to defendants Juan Eduardo Torres Lao, Dolores Corchado, and Carlos
Armstrong e Hijos was entered on
October 5, 1964
for their failure to answer or otherwise appear in this action, and a
motion for judgment by default against said defendants was filed by
plaintiff
United States of America
on
February 15, 1965
.
7. The
plaintiff and the appearing defendants orally stipulated at the trial of
this case on May 4, 1964 that prior to the filing of the Government
liens herein concerned in the office of the Clerk of this Court on June
29, 1961 and November 21, 1961, pursuant to Sections 6321, 6322 and 6323
of the Internal Revenue Code of 1964, and that prior to either of these
dates, defendants Ponce Federal Savings and Bota Caner had registered or
presented for registration mortgage liens in the appropriate section of
the Registry of Property for Puerto Rico, and that after the
Government's filing of its first tax liens and prior to its filing of
its second tax lien, the lien held by defendant Pedro Figueroa Torres
was presented for registration in the Registry of Property. The parties
further stipulated that the abstract of title certificate attached to
the brief of defendants Ponce Federal Savings, Bota Caner, and Pedro
Figueroa Torres was considered admitted.
Conclusions
of Law
1. Pursuant to
United States v. Boyd (5 Cir. 1957), [57-2 USTC ¶9791] 246 F. 2d
477, the liens of the codefendants which were recorded before notice of
the Federal tax liens was filed in the office of the Clerk of this Court
are entitled to priority over the latter.
2. Articles
23, 2, and 5 of the Mortgage Law of Puerto Rico (30 L. P. R. A. Sections
48, 2, 5) are not applicable to the precise question under consideration
here.
3. There is no
decision of the Supreme Court of the Commonwealth of Puerto Rico
construing the above-mentioned provisions of the Mortgage Law of Puerto
Rico in the sense of requiring or even permitting the registration
thereunder of the notice of Federal tax liens issued pursuant to Section
6323(a)(1)(2), Title 26, United States Code.
4. At the time
the Federal liens arose and notice thereof was filed in the office of
the Clerk of this Court, the Commonwealth of Puerto Rico had not by law
designated an office within the said Commonwealth for the filing of such
notice, and the notice so filed with the Clerk of this Court is a
binding notice on the defendants pursuant to Section 6323(a)(1)(2),
Title 26, United States Code.
5. The Court
is bound to follow herein the legislative history of the statute and the
construction contained in United States v. Union Central Life
Insurance Company (1961), [62-1 USTC ¶9103] 368
U. S.
291.
6. By Act No.
54 of
June 16, 1964
the Legislature of the
Commonwealth
of
Puerto Rico
established a registry of Federal tax liens in favor of the
United States of America
to instrument Sections 6321, 6322, and 6323 of the Federal Internal
Revenue Code.
Judgment
Based upon the
foregoing Findings of Fact and Conclusions of Law, it is hereby
ORDERED,
ADJUDGED, AND DECREED that:
1. The
mortgages constituted by the defendant Juan Eduardo Torres Lao in favor
of Ponce Federal Savings & Loan Association and Tomás Bota Caner,
now substituted by his estate, enjoy priority over both federal tax
liens of the plaintiff on the properties described in paragraph VII of
the complaint.
2. The first
federal tax lien in favor of the plaintiff in the amount of $1,222.01,
enjoys priority over all other mortgages and liens of the remaining
co-defendants affecting said three properties.
3. The
mortgage securing a bearer note held by Pedro Figueroa Torres, enjoys
priority over the second federal tax lien of the plaintiff, amounting to
$444.77.
4. The
aforesaid second federal tax lien enjoys priority over all other liens
and mortgages now encumbering said properties.
It is further
ORDERED, ADJUDGED, AND DECREED that:
5. Plaintiff
United States of America recover from defendant Juan Eduardo Torres Lao
against whom default was entered on October 15, 1964 and upon
plaintiff's motion for judgment by default filed on February 15, 1965,
the principal sum of $1,666.78, plus $386.80 interest to December 30,
1964, plus interest thereafter at a daily accrual rate of .00016 until
paid, plus costs.
6. The tax
liens mentioned in paragraphs X and XI of the complaint herein be
enforced against the real properties owned by defendant Juan Eduardo
Torres Lao, fully described in paragraph XII of said complaint.
7. Said real
property to be sold at public auction, and the proceeds thereof be
distributed in accordance with the priorities as herein determined by
this Court.
Memorandum
(
7/30/64
)
This action
came on for trial before the Court, without a jury, on
May 4, 1964
, at
9:30 o'clock
in the morning.
Neither the
principal defendant, Juan Eduardo Torres Lao, nor the co-defendants,
Dolores Corchado and Carlos Armstrong e Hijos, were present or
represented at the trial. None of them have appeared or filed any
pleadings in the action. However, no default has been requested or
entered against any of them.
All the other
co-defendants were duly represented at said trial.
The plaintiff
and the appearing defendants orally stipulated at said trial that the
facts stated under roman numeral II-STATEMENT OF FACTS and APPENDIX
I-ABSTRACT OF TITLE CERTIFICATE, of DEFENDANTS' TRIAL BRIEF filed on the
same date of the trial, May 4, 1964, be considered admitted, and that
all other points remain submitted to the Court on briefs to be filed by
the parties, simultaneously, within a period of 15 days, they being
allowed an additional period of 5 days thereafter to reply.
The briefs
have been filed and the Court is now duly advised in the premises.
The plaintiff,
in its memorandum filed June 12, 1964, page 4, has conceded that those
liens of the co-defendants which were recorded before notice of the
federal tax liens was filed in the office of the Clerk of this Court,
are entitled to priority over the latter, pursuant to United States
v. Boyd, (5 Cir. 1957), [57-2 USTC ¶9791] 246 F. (2d) 477.
The plaintiff
has further conceded in said memorandum (same page) that its federal tax
liens were never recorded in the Registry of Property of the
Commonwealth
of
Puerto Rico
.
Thus, the only
question at issue is whether at the time that the federal tax liens
arose and notice thereof was filed in the office of the Clerk of this
Court, the Commonwealth of Puerto Rico had by law designated an office
within said Commonwealth for the filing of such notice as
provided in Section 6323(a)(1), (2) Title 26, U.S.C.A.
The
co-defendants contend, and the plaintiff concedes, that the only
provisions of the Mortgage Law of Puerto Rico, 30 LPRA, Sections 1 et
seq. which may be applicable to the matter under consideration herein
are Arts. 23, 2 and 5 (30 LPRA, Sections 48, 2 and 5).
The text of
said provisions, however, does not appear to make them applicable to the
precise question under consideration herein.
Indeed, there
is no decision of the Supreme Court of the Commonwealth of Puerto Rico
construing such provisions in the sense of requiring or even permitting
the registration thereunder, of the notices of federal tax liens issued
pursuant to Sec. 6323(a)(1), (2) Title 26, U. S. C. A.
Therefore, the
inappropriateness of the language of said provisions, as well as the
aforesaid inexistence of any decisions of the Commonwealth Supreme
Court, amply support the conclusion that at the time said federal liens
arose and notice thereof was filed in the office of the Clerk of this
Court, the Commonwealth of Puerto Rico had not "by law designated
an office within the said Commonwealth for the filing of such
notice" and thus the notice so filed with the Clerk of this Court
was a binding notice on the defendants pursuant to Sec. 6323(a)(2) 26
U.S.C.A. U.S. v. Union Central Life Ins. Co. (1961) [62-1 USTC ¶9103]
368 U.S. 291 contains the legislative history of the statute and the
construction thereof, which the Court is bound to follow herein.
In
corroboration of the above conclusion it appears that after this action
was submitted, the Legislature of the Commonwealth of Puerto Rico,
cognizant of the lack of any such statutory provision and desirous to
meet the terms of the federal statute adopted, and the Governor approved
Act No. 54 of June 13, 1964 "to establish a registry of federal tax
liens in favor of the United States of America and to instrument
Sections 6321, 6322, and 6323 of the Federal Internal Revenue
Code."
It, therefore,
follows that plaintiff is entitled to a judgment holding that:
1. That the
mortgages constituted by the defendant, Juan Eduardo Torres Lao in favor
of Ponce Federal Savings & Loan Association and Tomás Bota Coner,
now substituted by his estate, enjoy priority over both federal tax
liens of the plaintiff on the properties described in Par. VII of the
complaint.
2. That the
first federal tax lien in favor of the plaintiff in the amount of
$1,221.01, enjoys priority over all other mortgages and liens of the
remaining co-defendants affecting said three properties.
3. That the
mortgage securing a bearer note held by Pedro Figueroa Torres, enjoys
priority over the second federal tax lien of the plaintiff, amounting to
$444.77.
4. And that
the aforesaid second federal tax lien enjoys priority over all other
liens and mortgages now encumbering said properties.
As the default
of the principal defendant Juan Eduardo Torres Lao and co-defendants
Dolores Corchado and Carlos Armstrong e hijos has not been requested or
entered, no judgment against said three parties can be granted until
said defaults are properly entered.
Once such
defaults are duly requested and entered, counsel for the plaintiff shall
submit proposed findings of fact and conclusions of law, in accordance
with the terms of this memorandum, giving notice thereof to the
attorneys for all the appearing defendants.
[76-1 USTC
¶9394]
United States of America
, Plaintiff-Appellant v. Eduardo Flores, Defendant-Appellee
(CA-1),
U. S. Court of Appeals, 1st Circuit, No. 75-1102, P 9394, 535 F2d 135,
5/5/76, Rev'g and rem'g unreported District Court decision
[Code Secs. 6321, 6323 and 7403]
Lien for taxes: Validity: Place for filing: State v. federal law:
Puerto Rico.--The District Court's granting of summary judgment in
favor of an assignee of property on which the IRS claimed tax liens was
reversed. The
Appeals Court
held that
Puerto Rico
failed to designate a place for the filing of federal tax liens on
personal property. Therefore, the IRS properly filed its notices of
liens for unpaid withholding and FICA taxes against X corporation in the
Office of the Clerk of the U. S. District Court for the District of
Puerto Rico. Such notices were filed prior to assignment of assets by X
corporation to a creditor and gave the IRS a priority interest in the
transferred assets over the assignee and subsequent asset purchaser. The
assignment of assets was made prior to filing of a notice of lien for
FUTA taxes. This gave the assignee priority over the IRS's lien unless
the assignment could be set aside as a conveyance in violation of Puerto
Rican law. The
Appeals Court
held that certain factual issues must be resolved before possible
violation of applicable law could be determined. Therefore, the summary
judgment was reversed.
Libero
Marinelli, Jr., Scott P. Crampton, Assistant Attorney General, Gilbert
E. Andrews, Crombie J. D. Garrett, Department of Justice, Washington, D.
C. 20530, Julio Morales-Sanchez, United States Attorney, Ignacio Rivera
Cordero, Assistant United States Attorney, San Juan, Puerto Rico, for
plaintiff-appellant. Isaias Rodriguez Moreno, for defendant-appellee.
[HON. JOHN H.
PRATT, *
U. S. District Judge]
Before COFFIN,
Chief Judge, MATTHES **,
Senior Circuit Judge, and MCENTEE, Circuit Judge.
MATTHES,
Senior Circuit Judge.
This appeal by
the United States Government requires us to decide whether the district
court properly concluded that the United States Government's liens for
unpaid federal unemployment taxes (FUTA) in the amount of $792.57, and
withholding and federal insurance contribution taxes (FICA) in the
amount of $4,981.58, are inferior and subordinate to the ownership by
appellees Santana Printing Corporation and Eduardo Flores of certain
personal property. We reverse and remand with directions.
[Facts]
A resume of
the background events will lend assistance in understanding the
controversy giving rise to this litigation.
In 1971 the
Internal Revenue Service assessed the FUTA taxes and withholding and
FICA taxes in the amounts above stated against Puerto Rico Litho
Corporation. The assessments were not paid, and pursuant to §6321 of
the Internal Revenue Code of 1954, 26
U. S.
C. §6321, the amounts became a lien in favor of the Government upon all
property owned by the person owing the taxes. 1
Pursuant to 26 U. S. C. §6323, 2
in order to assure priority of the tax liens the IRS filed notices of
liens on January 28, 1972 at or before 9:00 a. m. in the office of the
Clerk of the United States District Court for the District of Puerto
Rico, as to all but the FUTA taxes. The notice of lien for the FUTA
taxes was filed on
March 14, 1972
.
At the time of
the filing of the first notices of tax liens, Puerto Rico Litho Corp.
was indebted to one of the appellees, Eduardo Flores, and entered into a
stipulation with
Flores
which was filed in the Superior Court of Puerto Rico, San Juan Part. The
stipulation provided that Puerto Rico Litho Corp. owed Flores $32,845
and that to discharge the indebtedness the corporation assigned to
Flores machinery and accounts receivable, all of which were, of course,
subject to the Government's liens. The stipulation was filed on
January 28, 1972
, but subsequent to the hour that the IRS had filed its notices of liens
in the clerk's office as to all but the FUTA taxes. The Superior Court
entered judgment approving the stipulation on
February 2, 1972
. On
October 5, 1972
Flores
sold most of the machinery assigned to him by Puerto Rico Litho Corp.
pursuant to the stipulation to appellee Santana Printing Corporation
(Santana).
On the 17th
day of November 1972, the Government filed its complaint in two counts,
pursuant to §§ 7401 and 7403 of the Internal Revenue Code of 1954
against Santana and Flores to enforce its liens against the property
Puerto Rico Litho Corporation had assigned to Flores, some of which had
in turn been sold to Santana. The Government alleged in Count I that its
liens had priority and that it was entitled to have the liens
foreclosed. In Count II the Government alleged that under 10 L. P. R. A.
§1720, the assignment by Puerto Rico Litho Corporation of its property
to
Flores
was a conveyance in fraud of a preferred creditor and therefore should
be set aside.
The government
moved for partial summary judgment as to Count I and
Flores
moved for summary judgment as to both counts. The district court granted
Flores
motion and entered a judgment in favor of Flores and Santana. From this
judgment, the Government has appealed.
[Priority
of Liens]
The crucial
question for decision is whether the Government filed its notice of
liens in the proper place as provided in §6323(f) so that its liens
have priority over any interest which Flores or Santana have in the
subject personal property. Resolution of this issue brings into
consideration provisions of the Internal Revenue Code of 1954 relating
to the proper place for filing of the notice of a tax lien. We begin
with §6323(f), which provides in pertinent part as follows:
(f) Place for
filing notice: form:--
(1)
Place for filing.--The notice referred to in subsection (a) shall be
filed--
(A)
Under State laws.--
*
* *
(ii)
Personal Property.--In the case of personal property, whether tangible
or intangible, 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; or
(B)
With clerk of district court.--In the office of the clerk of the United
States district court for the judicial district in which the property
subject to the lien is situated, whenever the State has not by law
designated one office which meets the requirements of subparagraph (A);
* * *
The appellees
contend that the district court agreed that Puerto Rico has by statute
designated a place for the filing of federal tax liens on personal
property, that the IRS failed to comply with the applicable
Puerto Rico
statutes and consequently that Flores and Santana had a superior right
to that property.
[Place
of Filing Lien]
We turn to
Chapter 91 of Title 30, L. P. R. A., §§ 1921 et seq., entitled
"Registry of Federal Tax Liens," which purports to satisfy the
requirements of §6323(f).
30 L. P. R. A.
§1921 provides:
Every
registrar of property shall keep a book to be known as "Registry of
Liens for Taxes in favor of the United States of America" in which
shall be registered all notices of delinquent federal taxes in
accordance with sections 6321, 6322 and 6323 of the United States
Internal Revenue Code and their corresponding certificates of payment or
release.
30 L. P. R. A.
§1922 provides:
The
notices of federal liens referred to in this chapter shall be presented
for registration in the section of the registry of property of the
district where the real properties affected are located. After their
registration, said notices shall be filed, in correlative number,
in a record to be kept in the registry, subject to the following
provisions. (Emphasis supplied.)
The district
court concluded that §§ 1921 and 1922 were ambiguous as to their
applicability to federal tax liens on personal property and that in
determining whether §1921 applies to liens on both real and personal
property the legislative intent of the Puerto Rico legislature should
govern. Proceeding from that premise the court held that this intent was
"to designate the Office of the Registry of Property as the filing
place of federal tax liens so as to 'give greater publicity to the
federal tax liens'" and that therefore §§ 1921 and 1922 construed
together called for the filing of notices of federal tax liens on
personal property with the Registry of Property. We disagree with the
district court's reasoning and hold that Puerto Rico has failed to
designate an office for filing notices of federal tax liens on personal
property within the meaning of §6323(f).
Careful
analysis of Chapter 91 of Title 30 reveals that §1922 is the only
section designating a place for filing notices of liens. It designates
with precision the place for filing notices of liens on real
property. Neither that section nor §1921 designates specifically the
place for filing notices as to personal property. However, §6323(f)
clearly requires such a specific designation. We are guided by the
United States Supreme Court's decision in United States v. Union
Central Life Insurance Co. [62-1 USTC ¶9103], 368 U. S. 291 (1961).
In that case the IRS had filed a notice of tax lien in the United States
District Court for the District of Michigan in which certain real
property was located. The IRS had refused to file the notice with the
local register of deeds because
Michigan
law required a description of the land upon which the lien was claimed,
and the form of notice used by the IRS did not include such a
description. Since
Michigan
required such a description, the IRS concluded that
Michigan
had not "authorized" filing of the notice within the meaning
of §3672 of the Internal Revenue Code of 1939, the predecessor to §6323,
and that the notices should, therefore, properly be filed in the United
States District Court. The Supreme Court agreed with the IRS, holding
that the State of Michigan could not place obstacles to the enforcement
of federal tax liens not clearly permitted by Congress, and in
attempting to do so, had not "authorized" a place for filing
within the meaning of §3672. In so holding, the court stated
* * * the
subject of federal taxes, including 'remedies for their collection, has
always been conceded to be independent of the legislative action of the
States.'
United States
v. Snyder, 149
U. S.
210, 214. While §3672(a)(1) unquestionably requires notice of a federal
lien to be filed in a state office when the State authoritatively
designates an office for that purpose, the section does not purport to
permit the State to prescribe the form or the contents of that notice.
Id.
at 293-94 (emphasis added). See also United
States v. Estate of Donnelly [70-1 USTC ¶9290], 397
U. S.
286 (1970).
Puerto Rico
's designation of an alternative filing place with respect to personal
property is anything but authoritative. While §1921 read alone could be
said to encompass all federal tax liens on both real and personal
property, §1922 refers only to real property.
Puerto Rico
has throughout Title 30 established specific provisions for recording
interests in real property. 30 L. P. R. A. §1748 provides that the
Commonwealth
of
Puerto Rico
is one sole property registry district; 30 L. P. R. A. §1749 divides
this district into sections and further provides that "[i]n each
section of the Property Registry of Puerto Rico shall be recorded the
titles to the estates located within its respective territorial
jurisdiction." 30 L. P. R. A. §377 provides that with respect to
real property, a special section in the Registry of Property is opened
for each estate, and all subsequent records affecting that estate are to
be entered in that section. In contrast, 30 L. P. R. A. §1806 provides
that all personal property mortgages must be recorded in both the
registry of property of the district in which the property owner
resides, and the registry of property of the district in which
the personal property is located. Given the differing provisions with
respect to the recording of real property and personal property
interests, we hold that §1922, which is consistent with the provisions
of §§ 1749 and 377, designates a place for filing notices of liens
with respect to real property only. Section 1921 is silent as to the
place for filing, and we are unable to extrapolate from §1922 to
determine the place for filing as to personal property. It is
significant that the editors of the CCH STANDARD FEDERAL TAX REPORTER
have also adopted this interpretation. 3
[Conclusions]
In summary, we
hold that the notices of liens for the withholding and FICA taxes were
properly filed in the Office of the Clerk of the United States District
Court, that such filing was timely, and consequently that the
Government's interest in the subject personal property is superior to
the interests of Flores and Santana. If the legislature of
Puerto Rico
in its wisdom desires to designate a place for filing notices of liens
as to personal property for taxes assessed by the United States
Government, it is free to so legislate.
Because of our
holding that the Government's notices of liens as to the withholding and
FICA taxes have priority over the interests of Flores and Santana in the
subject personal property, we need not determine whether, as to those
liens, the transfer of title to said property was a tranfer to the
prejudice of a preferred creditor in violation of 10 L. P. R. A. §1720,
as alleged by the Government in Count II of its complaint. However, the
Government filed its notice of lien as to the FUTA taxes subsequent to
the assignment by Puerto Rico Litho Corp. Therefore, pursuant to §6323(a),
the Government's lien as to the FUTA taxes is not superior unless the
transfer of the property is set aside as a conveyance made in violation
of §1720. As noted above, the district court stated no reasons for
granting summary judgment in favor of defendants as to Count II of the
Government's complaint.
10 L. P. R. A.
§1720 provides in pertinent part:
The
alienation of a commercial establishment or of the whole or greater part
of its stock, sold in a lump to one or several persons on the same day
or within one month, shall be presumed fraudulent, provided such
alienation is made gratuitously or for half or less than half of the
market price, or to a creditor or creditors in payment of debts, to the
prejudice of or in preference to, other creditors having the same or a
better claim. In all the cases mentioned in the preceding paragraph, the
creditors shall have action to have the affected alienation rescinded
and to have the proper value of the establishment or stock sold
deposited at the disposal of the proper court to be divided among the
creditors in accordance with the law.
*
* *
There
shall be excluded from the provisions of this section the usual and
ordinary sales made by wholesale and retail merchants to consumers, in
accordance with business practice and usage.
We hold that
the district court erroneously granted summary judgment as to Count II,
because there existed genuine issues of material fact as to the nature
of Puerto Rico Litho Corp's business. These issues include whether
Puerto Rico Litho Corp. was a merchant engaged in the sale of goods, and
whether Puerto Rico Litho Corp. assigned stock to
Flores
rather than office equipment and/or machinery. These factual issues must
be resolved in order to determine whether §1720 applies here.
The judgment
of the district court is vacated and the cause is remanded with
directions to enter judgment declaring that the Government's liens for
unpaid withholding and FICA taxes are prior to the interests of Flores
and Santana in the subject personal property and to grant relief to the
Government accordingly. The district court is further directed to
consider and decide the issues raised in Count II of the Government's
complaint.
*
Of the District Court for the
District of Columbia
, sitting by designation.
**
Of the Eighth Circuit, sitting by designation.
1
Section 6321 provides in pertinent part that if any person liable to pay
any tax neglects or refuses to pay the same after demand, the amount
shall be a lien in favor of the United States upon all property and
rights ot property, whether real or personal, belonging to such person.
2
Section 6323(a) of the Internal Revenue Code of 1954 provides:
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 or his delegate.
3
The Commerce Clearing House tax service contains a chart specifying the
places to look for notice of federal tax liens in all states and
territories. As to
Puerto Rico
, the service states that notices of liens as to real property are filed
in the Registry of Property in the district in which the real property
is located. It further specifies that the federal district court is the
place where liens attached to personal property are located, explaining
that Puerto Rico law does not designate a place for the filing of
notices as to liens on personal property. 7 CCH 1976 Stand. Fed. Tax
Rep. ¶5362.205, at 62, 243.
[56-1 USTC
¶9143]
United States of America
, Appellant v. Jewel Hawkins, Appellee
(CA-9),
In the United States Court of Appeals for the Ninth Circuit, No. 13,887,
228 F2d 517, December 13, 1955
Appeal from the District Court for the Territory of Alaska, Third
Division.
[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]
Jurisdiction: Service on debtor outside the
Territory
of
Alaska.
--Attachment creditor in
Alaska
obtained court order to serve debtor in
California
. The creditor argued that this order gave no right to the Government to
serve the debtor in
California
because the motion for the order was made by the attachment creditor and
was filed on her behalf. The Court held that the statute did not require
repetitious orders but that the general order of the court gave the
Government the power to make its service in
California
.
[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]
Priority of liens: Attachment lien v. government's tax lien.--A
creditor had an attachment lien against a debtor's property paid into
court, and under Alaskan law an attachment creditor was deemed to be a
purchaser. The Government's tax lien against the debtor's property arose
prior to the attachment lien but was filed after the attachment lien.
The Court decided that the Government's tax lien had priority over the
attachment lien on the grounds that the attachment creditor was not a
buyer of property in the ordinary sense, and thus not a purchaser within
the meaning of 1939 Code Sec. 3672.
H. Brian
Holland, Assistant Attorney General, Ellis N. Slack, A. F. Prescott,
Edward W. Rothe, Special Assistants to the Attorney General, Washington,
D. C., William T. Plummer, United States Attorney, Arthur D. Talbot,
Assistant United States Attorney, Anchorage, Alaska, for appellant. Bell
& Sanders,
Anchorage
,
Alaska
, for appellee.
Before DENMAN,
Chief Judge, and ORR and LEMMON, Circuit Judges.
DENMAN, Chief
Judge:
The United
States appeals from a decision of the District Court of the Third
Division of the Territory of Alaska [53-1 USTC ¶9343] rendered by Judge
Dimond on March 9, 1953, in a suit brought by Mrs. Hawkins against one
Savage. Mrs. Hawkins attached the indebtedness of Warrick Co., to
Savage. Warrick Co., paid that amount into court and the suit became one
of Mrs. Hawkins against Savage's interest in the fund of $2,341.87 held
by the court. The
United States
intervened with a complaint alleging Savage owed it $3,344.37. The court
held Mrs. Hawkins' claim preceded that of the
United States
and awarded the fund to her. This appeal followed.
[Jurisdiction]
Mrs. Hawkins
contends the court never acquired jurisdiction in personam over Savage,
to entitle the
United States
to claim against Savage's interest in the fund. It is apparent that this
always underlying question of jurisdiction must be determined before we
can consider the merits of the question of the precedence of the two
litigants claiming the fund.
Mrs. Hawkins'
complaint was filed on
February 21, 1950
. Her attachment on the debt owed by Savage to the Warrick Co., was on
April 19, 1950
. On
September 21, 1950
, the complaint in intervention of the
United States
was filed. It is not questioned that Savage was not in
Alaska
and was in
California
. An affidavit on behalf of Mrs. Hawkins was filed with the court on
October 31, 1950, showing Savage's absence from
Alaska
and that her complaint showed a cause of action against Savage. On
October 30, 1950, the court made its order ". . . that service of
summons in this action may be made on the defendant by publication . .
."
Section
55-4-10 of the Alaska Code provides that once the order is made for
publication it need not be published at all, stating:
"When
publication is ordered, personal service of a copy of the summons
and complaint out of the Territory shall be equivalent to publication
and deposit in the post office."
After the
entry of the above order on November 14, 1950 the
United States
caused to be served on Savage, by the United States Marshal, the court's
summons and an attached copy of its complaint.
The contention
of Mrs. Hawkins is that, though the order is general in its terms and
refers to service "in this action" and mentions no particular
party's complaint, it gave no right to the United States to serve Savage
in California because the motion for the order was made by her and the
affidavit showing Savage absent from Alaska was filed on her behalf.
We do not
agree. Savage was as completely advised of the government's action
against his interest in the fund held by the court as he would have been
of Mrs. Hawkins' action had she served her summons and complaint without
a publication. We think the statute did not require repetitious motions
and orders but that the general order of the court gave the
United States
the power to make its service in
California
.
On the merits
of the government's appeal from the judgment for Mrs. Hawkins, ordering
the payment of all the fund to her, we think the district court erred.
[Priority
of Lien]
The district
court found that Hawkins' lien was entitled to priority over that of the
government even though the government's lien was first in time. The
Court based its decision on 26
U. S.
C. §3672 (now 26
U. S.
C. §6323(a)) which provided:
"(a)
Invalidity of lien without notice.--Such lien shall not be valid as
against any mortgagee, pledgee, purchaser, or judgment creditor
until notice thereof has been filed by the collector--
"(1)
Under state or territorial laws.--In the office in which the filing of
such notice is authorized by the law of the State or Territory in which
the property subject to lien is situated. . . ." [Italics
supplied.]
Hawkins
had an attachment lien. It arose after the government's tax lien
but before the tax lien was filed. The district court found that she was
a "purchaser" within the protection of 26 U. S. C. §3672(a)(1)
enacted in 1913 because of a statute passed for Alaska by Congress in
1900, Section 55-6-67, A. C. L. A., 1949, providing that:
"From the
date of the attachment until it be discharged or the writ executed, the
plaintiff as against third persons shall be deemed a purchaser in good
faith and for a valuable consideration of the property, real or
personal, attached. . . ."
The question
is whether in so providing for a "purchaser" in Section
3672(a)(1) Congress intended to confer its benefits on buyers of
property who did not have notice of the interest of the government, or
were the benefits to be conferred on those "deemed" purchasers
under local statutes as well.
[Meaning
of Purchaser]
The Supreme
Court has held repeatedly that state statutes and decisions providing
that attachment creditors, or others with similar interests, shall be
deemed purchasers or judgment creditors do not make them purchasers or
judgment creditors within the meaning of Section 3672 of the Internal
Revenue Code. The classes of persons who take priority over the
government's unrecorded tax lien under Section 3672 are those who are
purchasers or judgment creditors in the ordinary sense. See e.g.,
United States v. Scovil, 348
U. S.
218 (1955) [55-1 USTC ¶9137]; United States v. Acri, 348
U. S.
211 (1955) [55-1 USTC ¶9138]; United States v. Gilbert Associates,
345
U. S.
361 (1953) [53-1 USTC ¶9291]. The Supreme Court stated in United
States v. Scovil, 348 U. S. 218, 221 (1955) [55-1 USTC ¶9137] that
a "purchaser within the meaning of Section 3672 usually means one
who acquires title for a valuable consideration in the manner of vendor
and vendee." See also our decision in United States v. England,
226 Fed. (2d) 205 (Cir. 9, 1955) [55-2 USTC ¶9693] to the same effect.
We see no
reason why the
Territory
of
Alaska
should be an exception to these decisions. Congress stated in Section
3672 that it intended to protect judgment creditors, those with a cause
of action which has been established both as to existence and as to
amount in a court. The language of the statute indicates that only
persons with such fixed uncontingent interests were to be protected from
a tax lien of which they had no notice. Mortgagees and pledgees have
existing security interests for which they have given consideration. The
interest of a judgment creditor is fixed as to right and amount as would
be the interest of a "purchaser" if that term were taken to
mean only a buyer of property. An attaching creditor has only an
inchoate lien because at the time of the attachment the fact and amount
of his lien are contingent upon the outcome of his suit for damages.
Purchaser here means buyer no matter who may be given the rights of a
purchaser under the law 1.
[Uniformity
of Taxation Statutes]
Appellee
contends that Congress enacted both the Alaska Code section making an
attachment creditor a purchaser and the Internal Revenue Code excepting
purchasers from tax liens until they are recorded. Congress is presumed
to know its own laws, and a later general statute does not overrule an
earlier specific one unless it does so clearly. However, Section
55-6-67, A. C. L. A., 1949, recognizes that the status of purchaser is a
contingent one based on ultimate victory in a law suit settling the
amount of the judgment. The other items enumerated in Section 3672(a)(1)
are not contingent. Taxation statutes should be construed to apply
uniformly throughout the country. There is nothing to indicate that
Alaskan taxpayers were intended to get a benefit unavailable to the rest
of the
United States
. Appellee Hawkins was not a buyer of property and thus not a purchaser
within the meaning of Section 3672(a)(1).
The judgment
is reversed.
1
The legislative history of Section 3672(a)(1) is discussed in Mr.
Justice Jackson's concurring opinion in United States v. Security
Trust & Savings Bank, 340 U. S. 47, 51 (1950) [50-2 USTC ¶9492].
In United States v. Snyder, 149
U. S.
210 (1893) it was held an unrecorded tax lien was valid even against a
bona fide purchaser. Congress passed Section 3672's predecessor because
"any person taking title to real estate in subjected to the
impossible task of ascertaining whether any person who has at any time
owned the real estate in question, has been delinquent in the taxes . .
." [Italics supplied.] H. R. Rep. No. 1018, 62d Cong., 2d Sess. 2
(1912). The problem Congress was seeking to remedy by use of the word
"purchaser" thus was the problem of a buyer subject to
an unrecorded tax lien which he could not discover.
[2 USTC ¶649]
United States of America
, Appellant v. Bank of
Mount
Hope
, a Corporation, Appellee
(CA-4),
United States Circuit Court of Appeals, Fourth Circuit, No. 3070, 46 F2d
455, Decided January 13, 1931
Appeal from the District Court of the United States for the Southern
District of West Virginia, at Charleston.A Government lien for 1920
income taxes, having been duly filed against the taxpayer's property
with the clerk of a Federal district court, was not invalidated by a
subsequent State statute providing that such a lien should not continue
valid for more than four months after the date of enactment of the
statute unless the lien should be filed with the clerk of the county
court. Such a statute is "repugnant to the laws of the
United States
," and the State was without power to enact it. Reversing District
Court decision.
Clarence E.
Dawson, Special Attorney, Bureau of Internal Revenue, of Washington, D.
C., (James Damron, U. S. Attorney, Okey P. Keadle, Assistant U. S.
Attorney, both of Huntington, W. Va., and C. M. Charest, General
Counsel, Bureau of Internal Revenue, of Washington, D. C., on brief) for
Appellant. Herman L. Bennett, of Charleston, W. Va., (Dillon Mahan &
Holt, of Fayetteville, W. Va., Brown, Jackson & Knight, of
Charleston, W. Va., C. E. Mahan, Jr., of Fayetteville, W. Va., and C. W.
Moxley, of Charleston, W. Va., on brief) for Appellee.
Before
NORTHCOTT, Circuit Judge, and COLEMAN and GLENN, District Judges.
NORTHCOTT,
Circuit Judge:
Dartment Coal
Company, a
West Virginia
corporation, incurred a liability to the
United States of America
for income taxes for the year 1920, in the amount of Eleven Thousand Ten
Dollars and one Cent ($11,010.01) which was duly assessed in August,
1926. On
October 14, 1926
, the Collector of Internal Revenue for the District of West Virginia
filed a notice of tax lien for the amount of this tax upon the property
of the taxpayer in the office of the Clerk of the District Court of the
United States
for the Southern District of West Virginia, at
Charleston
, in
Kanawha
County
. On
April 27, 1927
, the Legislature of the State of
West Virginia
passed an Act authorizing, among other things, the filing by the
United States
of notices of its tax liens in the offices of the clerks of the county
courts of said state, pursuant to the provisions of Section 3186 of the
United States Revised Statutes as amended.
By deed of
trust, dated
January 30, 1929
, recorded in the office of the Clerk of the County Court of Boone
County, West Virginia, on
February 11, 1929
, the Dartmont Coal Company conveyed to C. E. Mahan, Jr., trustee,
certain of its real estate in trust to secure notes payable to the Bank
of Mount Hope, the appellee herein.
The Coal
Company being subsequently adjudicated a bankrupt, an order was entered
on
September 3, 1929
, by the Referee in the bankruptcy proceedings holding the lien of the
Bank of Mount Hope under its deed of trust superior and prior to the
claim of the
United States
for the income tax. Upon a hearing before the U. S. District Court for
review and reversal, the Referee's order was affirmed. This appeal is
prosecuted from that decision.
Section 3186
Revised Statutes as amended by the Act of
February 26, 1925
(43 Stat. 994), reads as follows:
"Sec.
3186. That if any person liable to pay any tax neglects or refuses to
pay the same after demand, the amount shall be a lien in favor of the
United States from the time when the assessment list was received by the
collector, except when otherwise provided, until paid, with the
interest, penalties, and costs that may accrue in addition thereto upon
all property and rights to property belonging to such person: PROVIDED,
HOWEVER, That such lien shall not be valid as against any mortgagee,
purchaser, or judgment creditor until notice of such lien shall be filed
by the collector in the office of the clerk of the district court of the
district within which the property subject to such lien is situated:
PROVIDED FURTHER, That whenever any State by appropriate legislation
authorizes the filing of such notice in the office of the registrar or
recorder of deeds of the counties of that State, and in the State of
Louisiana in the parishes thereof, and in the States of Connecticut,
Rhode Island, and Vermont in the office of the registrar or recorder of
deeds or town or city clerk having custody of the land records of the
towns and cities, then such lien shall not be valid in that State
against any mortgagee, purchaser, or judgment creditor until such notice
shall be filed in the office of the registrar or recorder of deeds of
the county or counties, or parish or parishes in the State of Louisiana,
or in the office of the registrar or recorder of deeds or town or city
clerk having custody of the land records in the States of Connecticut,
Rhode Island, and Vermont of the towns or cities within which the
property subject to the lien is situated."
The Act of
April 27, 1927
, of the West Virginia Legislature (Chap. 56, Acts of Regular Session of
1927), reads as follows:
"Be
it enacted by the Legislature of West Virginia: That a uniform law
relating to the filing of notices of liens for Federal taxes and
certificates for discharging such liens be enacted, so as to read as
follows:
"Section
1. Pursuant to the authority of paragraph three thousand one hundred and
eighty-six of the United States Revised Statutes, notices of Federal tax
liens and certificates discharging such liens may be filed in the
offices of the clerk of the county court of one or more counties of the
state.
"Section
2. As provided in said paragraph three thousand one hundred and
eighty-six, no such tax shall be a valid lien as against any mortgagee,
purchaser, or judgment creditor until such notice shall be filed in the
office of the clerk of the county court of the county or counties within
which the property subject to the lien is situated.
"Section
3. Notices of Federal tax liens heretofore filed with the clerk of a
Federal District court or certified transcripts thereof may be filed by
the collector of internal revenue of the district in the office of the
clerk of the county court of one or more counties in this state:
PROVIDED, That such liens heretofore filed with a clerk of a Federal
district court shall not continue valid liens for more than four months
after the taking effect of this Act, as against any mortgagee,
purchaser, or judgment creditor becoming such after the expiration of
such four months, unless such notice or transcript shall be filed as
above provided. After the filing of such notice or a certified
transcript thereof with the clerk of the county court, following the
expiration of such four months' period, the federal tax lien shall be
valid as against mortgagees, purchasers, or judgment creditors becoming
such subsequent to such filing. If this section shall be held not
authorized by Federal law, it shall not affect the validity of the other
sections of this Act.
"Section
4. The procedure with respect to filing and indexing shall be the same
as that respecting other similar liens so far as applicable.
"Section
5. The fee for filing each notice of lien shall be twenty-five cents and
for each discharge thereof twenty-five cents."
It is well
settled that no state has the power to enact legislation affecting
federal tax liens, except as permitted by an Act of Congress. In United
States v. Snyder, 149
U. S.
210, Mr. Justice Shiras said:
"If
the United States, proceeding in one of their own courts, in the
collection of a tax admitted to be legitimate, can be thwarted by the
plea of a state statute prescribing that such a tax must be assessed and
recorded under state regulation, and limiting the time within which such
tax shall be a lien, it would follow that the potential existence of the
government of the United States is at the mercy of state
legislation."
It was early
definitely settled that the states are prohibited from passing any act
which shall be repugnant to the laws of the
United States
. In M'Culloch v.
Maryland
, 4 Wheat. 316, Chief Justice
Marshall
forever settled this question when he said:
"The
Court has bestowed on this subject its most deliberate consideration.
The result is a conviction that the States have no power, by taxation or
otherwise, to retard, impede, burden, or in any manner control the
operations of the constitutional laws enacted for Congress to carry into
execution the powers vested in the general government. This is, we
think, the unavoidable consequence of that supremacy which the
Constitution has declared."
The
Legislature of the State of
West Virginia
clearly had no power to enact Section 3 of the Act of
April 27, 1927
, above quoted. Indeed, the Legislature itself seems to have been aware
of this fact as is shown in the last sentence in Section 3, and that the
Legislature had no such right was admitted by counsel for appellee in
the argument before this court. It then follows that if any authority
exists to support the contention of appellee that the Government's lien
to remain valid must be recorded as provided in Section 3 of the Act of
April 27, 1927, of the West Virginia Legislature, it must be found in
the Act of Congress itself.
A reading of
Section 3186, Revised Statutes, as amended, shows that no such authority
is expressly given in the statute, nor in our opinion, can any such
construction be given the statute by inference. Section 3 of the Act of
April 27, 1927
, of the West Virginia Legislature, was never in any way accepted or
concurred in by the Government of the
United States
. On the contrary the Commissioner of Internal Revenue by Internal
Revenue Bulletin VI No. 26 on
June 27, 1927
, expressly rejected this section in the following language:
"The
Act of April 27, 1927, passed by the legislature of West Virginia,
effective from the date of its enactment, is accepted by the Bureau of
Internal Revenue (except the provisions of sections 2 and 3 thereof) as
the 'appropriate legislation' referred to in the second proviso of
section 3186, Revised Statutes, as amended by the Act of March 4, 1913
(37 Stat. 1016), and the Act of February 26, 1925 (43 Stat. 994),
authorizing the filing of notices of Federal tax liens with certain
designated county or other officials."
It is admitted
that the lien of the Government, when the notice was filed in the office
of the clerk of the District Court of the United States for the Southern
District of West Virginia, in 1926, was a good and valid lien, and no
subsequent act of the Legislature of West Virginia could in any way
impair its validity. In
United States
v. Curry, 201 Fed. 371, Judge Rose said:
"In
that case, as in all others which have been called to my attention or
which I have myself found, it has been held that, when the requirements
of the assessment and the demand have been complied with, the lien of
the government is superior to that of any one acquiring any interests in
the property after the date of demand. The government's lien is
unaffected by the fact that a subsequent incumbrancer or purchaser
became such without knowledge that the government had any interest in
the property or claim upon it."
See also Blacklock
v. United States, 208
U. S.
75; United States v. Pacific Railroad, 1 Fed. 97;
United States
v. Turner, 28 Fed. Cas. 232.
In 1913,
Congress of the
United States
granted to the legislature of the various states the right to enact
enabling legislation requiring Government liens, in order to be valid,
to be filed in the office of the registrar or the recorder of deeds of a
county within which the property subject to the lien is situated. Such
an act should be strictly construed in favor of the Government.
United States
v. Dickson, 15 Pet. 141; Cornell v. Coyne, 192
U. S.
418;
Hannibal
, etc., Railroad Co. v. Packet Co., 125
U. S.
260.
In the case of
United States
v. Dickson, supra, the Supreme Court said:
"But
if there be any doubt as to the proper construction of this statute (and
we think there is none), then that conclusion must be adopted which is
most advantageous to the interest of the government. The statute being a
grant of a privilege must be construed most strongly in favor of the
grantor."
The
Legislature of the State of
West Virginia
did not see fit to avail itself of the permission given by the Act of
Congress to pass the enabling legislation until the year 1927. In the
meantime, the Government lien in this case had been recorded and become
valid as against the property of the Coal Company. No subsequent act of
the Legislature of West Virginia could, of itself, in any way affect the
validity of that lien. It follows that the action of the court below in
declaring the lien of the appellee to be prior to that of the Government
was erroneous, and the order of the court below is Reversed.
[70-1 USTC
¶9290]
United States
v. Estate of Thomas S. Donnelly, Sr., et al.
Supreme
Court of the United States, No. 104, 397 US 286, 90 SCt 1033, 3/23/70,
Reversing CA-6, 69-1 USTC ¶9393
On Writ of Certiorari to the United States Court of Appeals for the
Sixth Circuit.
[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323(a), before
amendment by P. L. 89-719]
Lien for taxes: Priority: Notice filed in
U. S.
district court: State law requiring description of land as condition to
filing.--The Government did not have to conform its lien notices to
the
Michigan
requirement that such notices must contain a description of the land
upon which the lien is claimed. State law did not authorize state filing
of federal lien notices and the filing of a notice in the appropriate
federal district court was sufficient to give the lien priority against
the subsequent taxpayer-purchasers. The lower court's holding that Union
Central Life Insurance Co., (Sup. Ct.) 62-1 USTC ¶9103, amounted to
an invalidation of the Michigan statute providing for local filing of
federal tax lien notice and that the taxpayer's reliance upon the
statute prior to its invalidation was sufficient to give them priority
was erroneous. Union Central did not invalidate any statute,
state or federal, but merely construed 1939 Code Sec. 3672 to authorize
the filing of tax lien notices in federal court where the state law
failed to provide for local filing. Finally, it held that state law
imposing more onerous requirements of content on lien notices than
federal law did not authorize state filing within the meaning of the
federal statute.
One
concurring and one dissenting opinion.
Erwin N.
Griswold, Solicitor General, Johnnie M. Walters, Assistant Attorney
General, Joseph J. Connelly, Assistant to the Solicitor General, Crombie
J. D. Garrett, William S. Estabrook, III, Department of Justice,
Washington, D. C. 20530, for U. S. Daniel N. Pevos, Pevos & Pevos,
20840 Southfield Rd., Suite 330, Southfield, Mich., for respondent.
[Facts]
MR. JUSTICE
MARSHALL delivered the opinion of the Court:
In 1950, a tax
liability of approximately $26,000 was assessed against the taxpayer
Donnelly, a resident of
Michigan
. Upon assessment, a statutory lien was created in favor of the
United States
"upon all property and rights to property, whether real or
personal" belonging to the taxpayer. Internal Revenue Code of 1939,
§3670. Under §3672 of the 1939 Code, such a lien could become
effective against subsequent purchasers of Donnelly's property in either
of two ways: (1) by filing notice of the lien in the state office in
which filing of such notice was authorized by state law; or (2) if
filing in a state office was not authorized by state law, by filing
notice of the lien in the United States District Court for the district
in which the property was located. 1
[State
Law]
A
Michigan
statute purported to authorize the filing of federal tax lien notice
with the county register of deeds. However, the Michigan statute
expressly required that notices of federal tax liens upon real property
contain "a description of the land upon which a lien is
claimed." 2
The standard tax lien notice form used by the Treasury Department made
no provision for such a description, but was rather a blanket notice
covering all property of the taxpayer in the county. The Department had
taken the position that §3672 permitted state law to dictate the place
for filing the notice of lien, but not the form or content of the
notice. Accordingly, the Department, believing that state law did not
"authorize" filing of the standard federal notice with the
register of deeds, filed its notice of lien on Donnelly's property in
the United States District Court for the Eastern District of Michigan.
The Eastern District includes the land involved in the case, which was
held by Donnelly and his wife as tenants by the entirety. The question
is whether the filing in federal court gave the
United States
priority against a subsequent good-faith purchaser of Donnelly's land.
[No
Collection of Tax]
The
Department did not collect in full on Donnelly's tax liability nor did
it foreclose its lien on any of his property. Rather, between 1950 and
his death in 1963, it obtained waivers from him of the statute of
limitations on the assessed liability, the last of which extended the
time for collection to December 31, 1966. In the meantime, Donnelly's
wife died and he became fee owner of the
Livingston
County
land. Shortly thereafter, in August 1960, he sold the land to
respondents Mr. and Mrs. Carlson, who are the real parties in interest
in this case. An abstract of title, prepared for the Carlsons by the
Livingston
County
abstract office, disclosed no tax liens affecting real property owned by
Donnelly; the same abstract, however, disclaimed any examination of
court records, state or federal. The
United States
concedes that the Carlsons had no actual notice of the lien on
Donnelly's land.
[Union
Central Case]
After
the Carlsons purchased the land, this Court decided in United States
v. Union Central Life Ins. Co. [62-1 USTC ¶9103], 368 U. S. 291
(1961), that the Department had been right in maintaining that it did
not have to conform its lien notices to the Michigan requirement that
such notices must contain a description of the land upon which the lien
is claimed. Thus, this Court held, the state law did not
"authorize" state filing of federal lien notices, and the
filing of a notice in the appropriate federal district court was
sufficient to give the lien priority against subsequent purchasers.
In
1966, just before the last statutory waiver executed by Donnelly
expired, the
United States
brought suit in federal court to foreclose its tax lien on the
Livingston
County
property, now owned by the Carlsons. The District Court held that Union
Central, supra, was distinguishable, and in any event should not be
applied retroactively against a person making a good-faith purchase
before its date of decision, and granted summary judgment for the
Carlsons. [67-2 USTC ¶9706] 295 F. Supp. 557 (D. C. E. D. Mich. 1967).
The Court of Appeals affirmed on the basis of the opinion of the
District Court. [69-1 USTC ¶9393] 406 F. 2d 1065 (C. A. 6th Cir. 1969).
We granted certiorari, 396
U. S.
814 (1969), to consider the apparent conflict with our decision in Union
Central, supra, and we reverse.
The
District Court distinguished Union Central on the ground that
"an attempt had been made in [that case] to file notice with the
Register of Deeds in 1954, which had been refused by the Register of
Deeds pursuant to a Michigan Attorney General opinion rendered in 1953,
which ruled that federal tax lien notices not containing a description
of the property are not entitled to be recorded. In the instant case,
there had been no attempt to file with the Register of Deeds." 295
F. Supp., at 559.
The
attempted distinction is unsatisfactory for two reasons. First, nothing
in this Court's opinion in Union Central or in the record of that
case indicates that any attempt was made to file the notice of lien with
the register of deeds. Second, whether or not such an attempt was made,
state law barred the local office from accepting the federal lien
notice, which lacked the description of the land explicitly required by
the state statute. The presence or absence of the legally futile act of
tendering the noncomplying lien notice to the register of deeds could
not be a factor determinative of the priority to be granted the federal
lien. 3
Further,
the District Court held that when the Carlsons purchased Donnelly's land
in 1960, they were entitled to rely on the law as it appeared at that
time. As the court saw it, the prevailing interpretation of the federal
statute in Michigan, stated in Youngblood v. United States [44-1
USTC ¶9314], 141 F. 2d 912 (C. A. 6th Cir. 1944), required the Treasury
Department to file a complying notice of lien with the register of deeds
in order to gain priority against subsequent purchasers. Conceding that
this Court rejected the Youngblood interpretation in its Union
Central decision in 1961, the District Court nevertheless concluded
that Union Central should not be applied retroactively to give
the 1950 federal lien priority over the Carlsons' 1960 good-faith
purchase of the same land, and thus to upset the Carlsons' allegedly
justifiable expectation of unclouded title.
In
its retroactivity determination, the District Court relied largely on
this Court's decision in Chicot County Drainage District v. Baxter
State Bank, 308 U. S. 371 (1940). The petitioner in that case had
taken advantage of a federal statute which permitted readjustment of
municipal debt, amounting to a reduction of that debt, upon a finding by
a district court that the readjustment plan was fair and equitable and
upon approval of the plan plan by holders of two-thirds of the
outstanding indebtedness. The respondents, holders of bonds issued by
the petitioner, had been parties to that action, had raised no
constitutional challenge to the statute, and had not appealed the final
decree of the District Court approving the plan. Subsequently, in an
unrelated proceeding, the statute was declared unconstitutional. Ashton
v. Cameron County District, 298
U. S.
513 (1936). The respondents then brought suit on the original bonds,
which had been canceled by the original decree, claiming that a decree
obtained under an unconstitutional statute could not support a plea of res
judicata. This Court held that res judicata barred the new
action, stressing the fact that the respondents had not raised the
constitutional claim in the original action. The Court noted generally
that the actual existence of a statute, prior to determination of its
unconstitutionality
"is
an operative fact and may have consequences which cannot justly be
ignored. The past cannot always be erased by a new judicial declaration.
. . . Questions of rights claimed to have become vested, of status, of
prior determinations deemed to have finality and acted upon accordingly,
of public policy in the light of the nature both of the statute and of
its previous application, demand examination." 308
U. S.
, at 374.
[State
Statute Not Invalidated]
The
District Court here found that this Court's decision in Union Central
amounted to an invalidation of the
Michigan
statute providing for local filing of federal tax lien notices, and that
the Carlsons had justifiably relied upon the state statute, prior to its
invalidation, in purchasing Donnelly's property without first searching
the records of the federal court. Quoting the above language from
Chicot
County
the court held that the Carlsons' reliance on the subsequently
invalidated statute was sufficient to give them priority over the
earlier filed tax lien.
In
our view,
Chicot
County
does not support failure to apply Union Central here. In the
first place, the Union Central decision did not invalidate any
statute, state or federal. It merely construed §3672, in accordance
with the clear language of the statute, to authorize the filing of tax
lien notices in federal court where the state law failed to provide for
local filing. It determined, as the courts and other authorities who had
considered the question had all agreed, that
Michigan
law did not authorize the filing of the standard federal lien notice,
which lacked the description of the land required by the
Michigan
filing statute. Finally it held, in accordance with the will of Congress
as expressed in the 1942 amendment to §3672 and the accompanying
legislative history, that state law imposing more onerous requirements
of content on lien notices than federal law did not
"authorize" state filing within the meaning of the federal
statute.)
[Conclusions]
Thus,
the Carlsons did not rely on any statute subsequently declared
unconstitutional by this Court. The most that can be said is that they
may have failed to search for notices of tax lien in the federal court
on the basis of a construction of §3672 given by the Court of Appeals
for the Sixth Circuit in Youngblood v. United States, supra.
However, the Youngblood construction, which the Government never
accepted and which it could not seek to have reviewed in this Court
because the judgment in that case rested on independent grounds, 4
cannot be sufficient to deprive the Government of the fruits of
following what under the statute was the proper filing procedure.
Further,
in Chicot County the petitioner did not merely rely on a federal
statute later declared unconstitutional, but on a final judgment
rendered in his favor in a proceeding in which the respondent did not
even raise the constitutional issue. The analogous situation would be
presented here only if the Carlsons had, before the decision in Union
Central, obtained a decree of quiet title to their property in a
proceeding to which the United States was a party and in which the
United States had not raised the issue of the priority of its lien under
§3672. In short, this case lacks the element of res judicata--reliance
by a party on a final judgment rendered in his favor--which was the
decisive factor in
Chicot
County
.
Acts
of Congress are generally to be applied uniformly throughout the country
from the date of their effectiveness onward. Generally the
United States
, like other parties, is entitled to adhere to what it believes to be
the correct interpretation of a statute, and to reap the benefits of
that adherence if it proves to be correct, except where bound to the
contrary by a final judgment in a particular case. Deviant rulings by
circuit courts of appeals, particularly in apparent dictum, cannot
generally provide the "justified reliance" necessary to
warrant withholding retroactive application of a decision construing a
statute as Congress intended it. In rare cases, decisions construing
federal statutes might be denied full retroactive effect, as for
instance where this Court overrules its own construction of a statute, cf.
Simpson v. Union Oil Co., 377 U. S. 13, 25 (1964), but this is not
such a case.
The
judgment of the Court of Appeals is reversed, and the case is remanded
for further proceedings 5
not inconsistent with this opinion.
It
is so ordered.
1
The Internal Revenue Code of 1939 provided:
"Sec.
3670. Property Subject to Lien.
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, penalty, additional
amount, or addition to such tax, together with any costs that may accrue
in addition thereto) shall be a lien in favor of the United States upon
all property and rights to property, whether real or personal, belonging
to such person" 26 U. S. C. §3670 (1940 Ed.).
*
* *
"Sec.
3672. Validity Against Mortgagees, Pledgees, Purchasers, and Judgment
Creditors.
"(a)
Invalidity of Lien Without Notice.--Such lien shall not be valid
as against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the collector--
"(1)
Under State or Territorial lows.--In the office in which the
filing of such notice is authorized by the law of the State or Territory
in which the property subject to the lien is situated, whenever the
State or Territory has by law authorized the filing of such notice in an
office within the State or Territory; or
"(2)
With Clerk of District Court.--In the office of the cherk of the
United States
district court for the judicial district in which the property subject
to the lien is situated, whenever the State or Territory has not by law
authorized the filing of such notice in an office within the State or
Territory . . .." 26 U. S. C. §3672 (1946 Ed.).
2
Michigan Public Acts, 1923, No. 104, as amended by Michigan Public Acts,
1925, No. 13, repealed by Micigan Public Acts 1956, No. 107, provided in
pertinent part:
"Sec.
1. That whenever the collector of internal revenue for any district in
the United States, or any tax collecting officers of the United States
having charge of the collection of any tax payable to the United States,
shall desire to acquire a lien in favor of the United States for any tax
payable to the United States against any property real or personal,
within the state of Michigan pursuant to section three thousand one
hundred eighty-six of the revised statutes of the United States, he is
hereby authorized to file a notice of lien, setting forth the name and
the residence or business address of such taxpayer, the nature and the
amount of such assessment, and a description of the land upon which a
lien is claimed, in the office of the register of deeds in and for the
county or counties in Michigan in which such property subject to such
lien is situated; and such register of deeds shall, upon receiving a
filing fee of fifty cents for such notice, file and index the same . .
.."
3
Nor is it significant that the lien notice here was filed in 1950,
before the Michigan Attorney General's opinion referred to by the
District Court (opinion of the Attorney General of Michigan, No. 1709,
September 10, 1953), whereas the filing in Union Central came in
1954, after that opinion was rendered. The Attorney General's opinion
merely declared what was already the law of
Michigan
.
4
In Youngblood, the
United States
sought an order in the nature of a writ of mandamus to compel a county
register of deeds in
Michigan
to accept and file a standard federal lien notice, which lacked the
description of the encumbered land required by the state statute. The
Court of Appeals held that the order should not issue, first, because
United States district courts lack jurisdiction to issue original writs
of mandamus or orders in the nature of mandamus; and second, because the
law of Michigan clearly provided in terms that in order to be filed with
the register of deeds, a federal tax lien notice had to contain a
description of the land. The court went on, in apparent dictum, to
confirm its earlier holding in United States v. Maniaci [40-2
USTC ¶9786], 116 F. 2d 935 (1940), aff'g [39-1 USTC ¶9307] 36 F. Supp.
293 (D. C. W. D. Mich. 1939), that §3672 required the United States to
file in the local office lien notices conforming to the state law
requirements as to content. In delivering this apparent dictum, the
Court of Appeals ignored the clear legislative history, summarized in
this Court's Union Central decision, 368 U. S., at 295-296, which
showed that in enacting the 1942 amendment to §3672, Congress had meant
to disapprove the Maniaci holding.
5
The Carlsons have raised additional defenses to the foreclosure suit
brought by the
United States
, but as these defenses were not considered by the District Court or the
Court of Appeals, we do not rule on them here.
[Concurring
Opinion]
MR.
JUSTICE HARLAN, concurring:
I
fully agree that the Government is entitled to prevail in this case, but
I would rest that conclusion on a broader ground than the Court's
opinion might be taken to evince. More especially, I fear that certain
distinctions suggested by the Court's opinion--e.g., between
clear and ambiguous statutes, decisions construing statutes for the
first time, decisions overruling prior constructions of statutes--may
point in the direction of a retroactivity quagmire in civil litigation
not unlike that in which the Court has become ensnared in the criminal
field. See my dissenting opinion in Desist v. United States, 394
U. S.
244, 256 (1969).
The
impulse to make a new decisional rule nonretroactive rests, in civil
cases at least, upon the same considerations that lie at the core of stare
decisis, namely to avoid jolting the expectations of parties to a
transaction. Yet once the decision to abandon precedent is made, I see
no justification for applying principles determined to be wrong, be they
constitutional or otherwise, to litigants who are in or may still come
to court. The critical factor in determining when a new decisional rule
should be applied to a transaction consummated prior to the decision's
announcement is, in my view, the point at which the transaction has
acquired that degree of finality such that the rights of the parties
should be considered frozen. Just as in the criminal field the crucial
moment is, for most cases, the time when a conviction has become final,
see my Desist dissent, supra, so in the civil area that
moment should be when the transaction is beyond challenge either because
the statute of limitations has run or the rights of the parties have
been fixed by litigation and have become res judicata. Any
uncertainty engendered by this approach should, I think, be deemed part
of the risks of life.
These
considerations, I believe, underlie the Court's holdings in Chicot
County Drainage District v. Baxter State Bank, 308 U. S. 371 (1940),
where the Court refused to upset a judgment based on a subsequent
change in the law, and Cipriano v. City of Houma, 395 U. S. 701
(1969), where we held that municipal bonds, authorized by invalid
referenda, would not be subject to challenge "where, under state
law, the time for challenging the election result has . . .
expired." 395
U. S.
, at 706.
To
the extent that equitable considerations, for example,
"reliance," are relevant, I would take this into account in
the determination of what relief is appropriate in any given case. There
are, of course, circumstances when a change in the law will jeopardize
an edifice which was reasonably constructed on the foundation of
prevailing legal doctrine. Thus, it may be that the law of remedies
would permit rescission, for example, but not an award of damages to a
party who finds himself able to avoid a once-valid contract under new
notions of public policy. Cf. Simpson v. Union Oil Co., 377
U. S.
13, 25 (1964). Another instance, though apt to arise infrequently in
federal court, would be where certain real property transactions fail to
anticipate changes in principles governing land usage, for example, the
enforceability of certain kinds of easements or covenants. In such
instances it may be appropriate to withhold an equitable remedy and
confine an award of damages to a limited period, or the like. *
The essential point is that while there is flexibility in the law of
remedies, this does not affect the underlying substantive principle that
short of a bar of res judicata or statute of limitations, courts
should apply the prevailing decisional rule to the cases before them.
On
these premises I join the Court's opinion.
*
I would not, of course, hold this view of retroactivity binding on state
courts and a federal court would, in fact, be obligated to abide by the
applicable state rule should a retroactivity question arise in a
diversity case.
[Dissenting
Opinion]
MR.
JUSTICE DOUGLAS, with whom MR. JUSTICE BRENNAN and MR. JUSTICE STEWART
concur, dissenting:
Respondents
are bona
Livingston County
,
Michigan
. Their purchase
Livingston
County
, Micigan. Their purchase was made in August 1960 from one Donnelly,
against whom the
United States
had acquired a tax lien in 1950. By §3672 of the Internal Revenue Code
of 1939 that lien is not valid against a purchaser until notice thereof
is filed in the office "authorized" by state law. Where state
law "authorized" no such office, notice of lien was to be
filed in the office of the United States District Court for the judicial
district in which the land is located. Ibid.
Michigan
law authorized notice of a federal tax lien containing "a
description of the land" to be filed with the register of deeds in
the county where the land was located. 1
The
United States
refused to be bound by the requirement of
Michigan
law regarding a "description of the land" and filed notice of
lien in the District Court.
Hence
a title search in the accustomed way revealed no notice of lien clouding
Donnelly's title. Hence respondents purchased the land innocently and in
good faith. Thereafter, on
March 20, 1961
, the
United States
filed its notice of lien with the register of deeds of
Livingston
County
, as required by
Michigan
law. 2
On
December 18, 1961, over a year after respondents' purchase, this Court
held in United States v. Union Central Life Ins. Co. [62-1 USTC
¶9103], 368 U. S. 291, that "Michigan law authorizing filing only
if a description of the property was given" ran counter to the
intent of §3672, and consequently no real property filing requirement
could be considered "authorized" by Michigan law.
Id.
, at 296. Therefore, the Court held, a notice of lien was
properly filed in the District Court.
I
dissent from a retroactive application of that holding so as to injure
bona fide purchasers who had relied on the prior law to make their
investments. The Michigan Act had at the time of the purchase been
approved both by the District Court in United States v. Maniaci
[39-1 USTC ¶9307], 36 F. Supp. 293, and by the Court of Appeals for the
Sixth Circuit in Youngblood v. United States [44-1 USTC ¶9314],
141 F. 2d 912.
It
seems manifestly unjust to deprive respondents of their property for the
benefit of a lawless tax collector who knowingly concealed his secret
lien until after the purchase was made. 3
It
is true that later, in Union Central, we ruled that §3672 did
not require the Government to file pursuant to
Michigan
law. Yet this new ruling on federal preemption should not, in my view,
be applied to undo everything done by those relying on the former
construction, as upheld in Youngblood.
I
would hold that the teaching of Chicot County Drainage District v.
Baxter State Bank, 308
U. S.
371, 374, as to statutes ruled unconstitutional, should be applied to
the present situation:
"The
actual existence of a statute, prior to such a determination, is an
operative fact and may have consequences which cannot justly be ignored.
The past cannot always be erased by a new judicial declaration. The
effect of the subsequent ruling as to invalidity may have to be
considered in various aspects--with respect to particular relations,
individual and corporate, and particular conduct, private and official.
Questions of rights claimed to have become vested, of status, of prior
determinations deemed to have finality and acted upon accordingly, of
public policy in the light of the nature both of the statute and of its
previous application, demand examination."
The
majority of the Court in the present case narrowly confines that
statement to the particular facts involved in
Chicot
County
. The principle there involved, however, rooted deeply in
considerations of fairness, clearly applies to the present case. I would
hold that bona fide purchasers, whose purchases antedate our Union
Central decision and who relied on the law as it had been previously
construed, are protected in their investments. I dissent from the
Court's holding to the contrary.
1
Michigan Public Acts, 1923, No. 104, as amended, Michigan Public Acts,
1925, No. 13.
2 Previously, on
November 28, 1950
, the
United States
had filed notice of its lien with the register of deeds of
Wayne
County
.
3
The
Michigan
statute requiring notices of liens to contain a description of real
property upon which a lien was claimed was repealed in April 1956 by Act
No. 107, Michigan Public Acts, of 1956. The
United States
, however, did not thereafter promptly file its notice of lien in the
state office as it was now authorized to do under
Michigan
law. Nor did it stand on its previous filing in the District Court.
Instead, it waited until
March 20, 1961
, on which date it filed a notice of the lien with the register of deeds
of
Livingston
County
.
[62-1 USTC
¶9103]
United States
, Petitioner v. Union Central Life Insurance Company
Supreme
Court of the United States, No. 52, 368 US 291, 82 SCt 349, 12/18/61,
Rev'g and rem'g Michigan Supreme Court, 60-2 USTC ¶9697, 105 N. W. 2d
196
[1954 Code Sec. 6323(a)(1) and corresponding 1939 Code Sec. 3672(a)(1)]
Tax liens: Validity against mortgagee: Notice filed in U. S. district
court: State law requiring description of land as condition to filing.--A
lien for Federal income taxes which was filed in an office of the clerk
of the U. S. district court in which real property belonging to the
taxpayer was situated was superior to the rights of a mortgagee to the
property, where (1) the notice of lien was filed in the district court
before the mortgage was executed and (2) the register of deeds for the
county in which the property was located was authorized by Michigan law
not to accept for recording notices of Federal tax liens which did not
contain a description of any land. A state law which imposes a condition
regarding form or content of the notice, as here, fails to authorize a
state office for filing. The judgment of the Michigan Supreme Court to
the contrary is reversed and remanded.
One
dissent.
Archibald Cox,
Solicitor General, Louis F. Oberdorfer, Assistant Attorney General, I.
Henry Kutz, Fred E. Youngman, Department of Justice, Washington 25, D.
C., for petitioner. H. William Butler, Joseph B. Sherrard, Fred C.
Culver, Jr., Penobscot Bldg., Detroit, Mich., for respondent.
Opinion of the
Court by MR. JUSTICE BLACK announced by MR. JUSTICE FRANKFURTER:
Rob
ert G. Peters, Jr., and his wife, of
Oakland County
,
Michigan
, failed to pay their 1952 federal income taxes. In January 1954 an
assessment for this delinquency was filed in the Internal Revenue
Collector's Office at Detroit, Michigan, at which time a lien arose
"in favor of the United States upon all property" of the two
delinquent taxpayers. 1
Some 10 months after the Government's tax lien arose, Mr. and Mrs.
Peters executed a mortgage on real property they owned in
Oakland
County
to secure an indebtedness to the respondent Union Central Life Insurance
Company. They defaulted in payment of the mortgage, and Union Central
filed this action to foreclose in the
Circuit
Court
of
Oakland
County
, joining the
United States
as a party defendant because of its asserted lien.
[Notice
of Lien]
The company
claimed priority for its mortgage over the earlier created federal lien
because no notice of the federal lien had been filed with the register
of deeds in
Oakland
County
as then required by
Michigan
law. 2
For this alleged priority the company relied on §3672(a)(1) of the 1939
Internal Revenue Code, as amended, providing that a federal tax lien
shall not be valid as against any mortgagee until notice has been filed
"In the office in which the filing of such notice is authorized by
the law of the State or Territory in which the property subject to the
lien is situated, whenever the State or Territory has by law authorized
the filing of such notice in an office within the State or
Territory." The Government, however, claimed that Michigan had not
"authorized" filing within the meaning of the statute and that
the case should be governed by §3672(a)(2) which provides that
"whenever the State . . . has not by law authorized the filing of
such notice in an office within the State," the notice may be filed
in "the office of the clerk of the United States district court for
the judicial district in which the property subject to the lien is
situated." Since the federal lien had been filed in the District
Court months before the mortgage was executed and filed in the county
register of deed's office, the Government claimed that its lien had
priority. The Government's contention that Michigan had not
"authorized" a state office for filing the federal tax notice
was based on the fact that the Michigan law purporting to authorize such
filing expressly required that a federal tax lien notice contain "a
description of the land upon which a lien is claimed," even though
the form long used for filing federal tax lien notices in the District
Courts throughout the United States does not contain a description of
any particular property upon which the lien is asserted. In support of
its contention the Government pointed to the fact that in 1953 the
Michigan Attorney General ruled that federal tax lien notices not
containing such a description are not entitled to recordation, and it is
stipulated that from the time of that ruling, up to 1956, 3
"it was the policy of the office of the Register of Deeds for said
County of Oakland not to accept for recording notices of Federal tax
liens which did not contain a legal description of any land."
[Conflict]
Because the
United States had not filed a notice complying with the Michigan law,
the Michigan Circuit and Supreme Courts held the federal lien to be
subordinate to the mortgage, 361 Mich. 283, 105 N. W. 2d 196. While this
holding is in accord with Youngblood v. United States [44-1 USTC
¶9314], 141 F. 2d 912 (C. A. 6th Cir.), it conflicts with United
States v. Rasmuson [58-1 USTC ¶9399], 253 F. 2d 944 (C. A. 8th
Cir.). In order to settle this conflict and because of the importance of
the question in the
admin
istration of the revenue laws, we granted certiorari. 365
U. S.
858.
[Contents
of Notice]
The Michigan
requirement that notice of the federal tax lien be filed in Michigan is,
of course, not controlling unless Congress has made it so, for the
subject of federal taxes, including "remedies for their collection,
has always been conceded to be independent of the legislative action of
the States."
United States
v. Snyder, 149
U. S.
210, 214. While §3672(a)(1) unquestionably requires notice of a federal
lien to be filed in a state office when the State authoritatively
designates an office for that purpose, the section does not purport to
permit the State to prescribe the form or the contents of that notice.
Since such an authorization might well result in radically different
forms of federal tax notices for the various States, it would run
counter to the principle of uniformity which has long been the accepted
practice in the field of federal taxation. Moreover, a required
compliance with Michigan law would mean that the federal tax lien would
be superior to all those entitled to notice only as to the property
described in the notice even though §3670 broadly creates a lien
"upon all property and rights to property, whether real or
personal, belonging to" a taxpayer. This language has been held to
include in the lien all property owned by the delinquent taxpayer both
at the time the lien arises and thereafter until it is paid. 4
It seems obvious that this expansive protection for the Government would
be greatly reduced if to enforce it government agents were compelled to
keep aware at all times of all property coming into the hands of its tax
delinquents. Imposition of such a task by the
Michigan
law could seriously cripple the Government in the collection of its
taxes, and to attribute to Congress a purpose so to weaken the tax liens
it has created would require very clear language. The history of §3672
belies any such congressional purpose.
[Filing
Requirements]
In 1893 this
Court decided in United States v. Snyder, 149
U. S.
210, that the federal tax lien could be enforced against bona fide
purchasers who had no notice of the lien, despite a state law attempting
to defeat the lien unless it has been recorded. In order to grant relief
from the Snyder rule, Congress in 1913 passed an Act requiring,
much as the provision here in question did, that the tax liens should
not be "valid as against any mortgagee, purchaser, or judgment
creditor" until notice was filed with the clerk of an appropriate
District Court or, whenever a State authorized such filing, in the
office of a county recorder of deeds. 5
This statute was amended in 1928 by adding that the lien would not be
valid until notice was filed "in accordance with the law of the
State or Territory in which the property subject to the lien is
situated, whenever the State or Territory has by law provided for the
filing of such notice. . . ." 6
(Italics supplied.) Following this in United States v. Maniaci
[39-1 USTC ¶9307], 36 F. Supp. 293, aff'd, [40-2 USTC ¶9786] 116 F. 2d
935, both a United States District Court and a Court of Appeals refused
to enforce a federal tax lien on Michigan property because the notice of
lien, although filed both in a District Court and in the office of the
proper Michigan register of deeds, did not contain the description of
the property required by Michigan law. In this holding emphasis was
placed on the clause added in 1928, requiring notice to be filed
"in accordance with the law of the State or Territory in which the
property subject to the lien is situated. . . ."
[Place
"Authorized by Law"]
Less than two
years after the Maniaci holding Congress again amended the lien
notice provisions, struck out "in accordance with the law of the
State or Territory" and substituted the language in the section
here controlling that notice was not valid until filed "In the
office in which the filing of such notice is authorized by the law of
the State or Territory." 7
The reports of the House and Senate Committees reporting this amendment
point strongly to a purpose to get away from the ruling in the Maniaci
case and make it clear that, while notice of a federal lien must be
filed in a state office where authorized by a State, the notice is
sufficient if given in the form long used by the Department
"without regard to other general requirements with respect to
recording prescribed by the law of such State or Territory." 8
The Department never accepted the Maniaci case and its practice
has been to use forms which do not contain a particular description of
any property owned by a delinquent taxpayer. The notice provisions were
once more amended in the 1954 Code, this time providing that the notice
shall be valid if in the Department form "notwithstanding any law
of the State or Territory regarding the form or content of a notice of
lien." 9
The House Report stated that this amendment was merely "declaratory
of the existing procedure and in accordance with the long-continued
practice of the Treasury Department." 10
[No
State Office]
The
Michigan
law authorizing filing only if a description of the property was given
placed obstacles to the enforcement of federal tax liens that Congress
had not permitted, and consequently no state office was
"authorized" for filing within the meaning of the federal
statute. It was therefore error for the
Michigan
courts to fail to give priority to the Government's lien here, notice of
which had been filed in the District Court in accordance with federal
law.
The judgment
of the Michigan Supreme Court is reversed and the cause is remanded to
that court for proceedings not inconsistent with this opinion.
Reversed
and remanded.
MR. JUSTICE
DOUGLAS dissents.
1
Sections 3670 and 3671 of the Internal Revenue Code of 1939, in effect
at that time.
2
Act 104, Public Acts of Michigan of 1923, repealed
April 13, 1956
, by Act 107, Public Acts of Michigan of 1956.
3
Act 104 was repealed
April 13, 1956
.
4
Glass City Bank v. United States [45-2 USTC ¶9449], 326
U. S.
265.
5
37 Stat. 1016.
6
45 Stat. 876.
7
56 Stat. 957, §3672(a)(1) of the Internal Revenue Code of 1939, as
amended.
8
H. R. Rep. No. 2333, 77th Cong., 2d Sess. 173. See also S. Rep. No.
1631, 77th Cong., 2d Sess. 248.
9
Section 6323(b) of the Internal Revenue Code of 1954.
10
H. R. Rep. No. 1337, 83d Cong., 2d Sess. A406-A407.
[60-2 USTC
¶9538]
Rob
ert Aquilino and Joseph Spero, d/b/a Home Maintenance Company, and
Colonial Sand and Stone Co., Inc., Petitioners v. United States of
America, Ada Bottone, et al.
Supreme
Court of the United States, No. 1, 363 US 509, 80 SCt 1277, 6/20/60,
Vacating decision of N. Y. Ct. of Appeals, and remanding case, 58-1 USTC
¶9191, 146 N. E. 2d 774
On Writ of Certiorari to the Court of Appeals of the State of New York.
[1939 Code Secs. 3670-3672--similar to 1954 Code Secs. 6321-6323]
Lien for taxes: Priority of subcontractors' liens: Construction of
state law.--The question of whether a general contractor has
property rights in funds owed by the owner of real estate upon which
construction has been performed, when the general contractor is indebted
to subcontractors for labor and materials, must be decided under state
law. Therefore, when the Government asserts a lien for federal taxes
against the funds, and subcontractors also assert a lien, the conflict
must be resolved by the highest state court.
Charles S.
Friedman, 10 Fiske Place, Mount Vernon, N. Y., and Jacob I. Goodstein,
21 East 40th Street, New York, N. Y. (Harold M. Edwards and Kenneth J.
Breskin, of counsel), for petitioner. J. Lee Rankin, Solicitor General,
Charles K. Rice, Assistant Attorney General, and Howard A. Heffron, A.
F. Prescott, and Myron C. Baum, Department of Justice, Washington 25 D.
C., for respondent.
MR. CHIEF
JUSTICE WARREN delivered the opinion of the Court:
In this case
we are asked to determine which of two competing claimants--the Federal
Government by virtue of its tax lien, or certain petitioning
subcontractors by virtue of their rights under Section 36-a of the New
York Lien Law--is entitled to a sum of money owed under a general
construction contract which was performed by the taxpayer.
[Subcontractors'
Liens]
The taxpayer,
Fleetwood Paving Corporation, is a general contractor, which in July or
August 1952, agreed to remodel a restaurant belonging to one Ada
Bottone, herein referred to as the owner. The petitioners in August and
September of that year entered into a subcontract with the taxpayer to
supply labor and materials for the remodeling job. Shortly thereafter,
the petitioners performed their obligations under the subcontract, but
were not fully compensated by the contractor-taxpayer. Therefore, on
November 3, 1952
, and on
November 10, 1952
, they filed notices of their mechanic's liens on the owner's realty in
the office of the Clerk of Westchester County. In June 1953, they
instituted actions in the New York Supreme Court to foreclose those
liens.
By order of
court, the owner was permitted to deposit with the Clerk of the court
the $2,200 which she still owed under the original construction
contract, and she was thereafter dismissed as a defendant in the action.
The Government, having previously levied upon the owner's alleged
indebtedness to the taxpayer, was permitted by the court to enter the
case as a party defendant.
[Federal
Tax Liens]
The Government
asserted precedence over the claims of petitioners because of the
following facts: The Director of Internal Revenue in December 1951 and
March 1952 received assessment lists containing assessments against the
taxpayer for unpaid federal withholding and social security taxes. On
October 31, 1952
, the Director filed a notice of federal tax liens in the office of the
Clerk of the City of Mount Vernon, New York, which is the city wherein
the taxpayer maintained its principal place of business. The Government
claimed priority for its tax lien under Sections 3670 and 3671 of the
Internal Revenue Code of 1939. 1 The petitioners contended that since the
contractor-taxpayer owed them more than $2,200 for labor and materials
supplied to the job, under the New York Lien Law, Section 36-a, 2
he had no property interest in the $2,200 which the owner still owed
under the original remodeling contract.
The
New York Supreme Court, Special Term, 140 N. Y. S. 2d 355 [55-2 USTC ¶9720],
granted petitioners' motion for summary judgment. The ground for the
decision was that the Government's tax lien was ineffective since it had
not been filed in the office designated by
New York
law for the filing of liens against realty. On appeal, the Appellate
Division affirmed, but on the ground that there was no debt due from the
owner to the taxpayer to which the Government's lien could attach, 2
App. Div. 2d 747, 153 N. Y. S. 2d 268 [57-1 USTC ¶9659]. The court
reasoned that the fund deposited by the owner was a substitute for her
realty to which the mechanic's liens had attached; and that since the
Government had no lien on the owner's property, it could have no lien on
the fund substituted for that property. On appeal, the New York Court of
Appeals held that the tax lien had taken effect prior to the
petitioners' claims. It therefore reversed the lower
New York
courts, and ruled that the motion of the
United States
for summary judgment, rather than that of petitioners, should have been
granted by the Supreme Court, Special Term. 3 N. Y. 2d 511, 146 N. E. 2d
774 [58-1 USTC ¶9191]. We granted certiorari, 359
U. S.
904.
[State
Law]
The
threshold question in this case, as in all cases where the Federal
Government asserts its tax lien, is whether and to what extent the
taxpayer had "property" or "rights to property" to
which the tax lien could attach. In answering that question, both
federal and state courts must look to state law, for it has long been
the rule that "in the application of a federal revenue act, state
law controls in determining the nature of the legal interest which the
taxpayer had in the property . . . sought to be reached by the
statute." 3
Morgan v. Commissioner, 309 U. S. 78, 82 [40-1 USTC ¶9210].
Thus, as we held only two Terms ago, Section 3670 "creates no
property rights but merely attaches consequences, federally defined, to
rights created under state law. . . ." United States v. Bess,
357
U. S.
51, 55 [58-2 USTC ¶9595]. 4
However, once the tax lien has attached to the taxpayer's state-created
interests, we enter the province of federal law, which we have
consistently held determines the priority of competing liens asserted
against the taxpayer's "property" or "rights to
property." 5
United States v. Vorreiter, 355 U. S. 15 [57-2 USTC ¶9956],
reversing 134 Colo. 543, 307 P. 2d 475 [57-1 USTC ¶9415]; United
States v. White Bear Brewing Co., 350 U. S. 1010 [56-1 USTC ¶9440],
reversing 227 F. 2d 359 [55-2 USTC ¶9776]; United States v. Colotta,
350 U. S. 808 [55-2 USTC ¶9680], reversing 224 Miss. 33, 79 So. 2d 474
[55-2 USTC ¶9584]; United States v. Scovil, 348 U. S. 218 [55-1
USTC ¶9137]; United States v. Liverpool & London & Globe
Ins. Co., 348 U. S. 215 [55-1 USTC ¶9136]; United States v.
Acri, 348 U. S. 211 [55-1 USTC ¶9138]; United States v. City of
New Britain, 347 U. S. 81 [54-1 USTC ¶9191]; United States v.
Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291]; United
States v. Security Trust & Sav. Bank, 340
U. S.
47 [50-2 USTC ¶9492]; Illinois v. Campbell, 329
U. S.
362; United States v. Waddill, Holland & Flinn, Inc., 323
U. S.
353 [45-1 USTC ¶9126]. The application of state law in ascertaining the
taxpayer's property rights and of federal law in reconciling the claims
of competing lienors is based both upon logic and sound legal
principles. This approach strikes a proper balance between the
legitimate and traditional interest which the State has in creating and
defining the property interest of its citizens, and the necessity for a
uniform
admin
istration of the federal revenue statutes.
Petitioners
contend that the New York Court of Appeals did not make its
determination in the light of these settled principles. Relying upon the
express language of Section 36-a of the Lien Law and upon a number of
lower New York court decisions interpreting that statute, petitioners
conclude that the money actually received by the contractor-taxpayer and
his right to collect amounts still due under the construction contract
constitute a direct trust for the benefit of subcontractors, and that
the only property rights which the contractor-taxpayer has in the trust
are bare legal title to any money actually received and a beneficial
interest in so much of the trust proceeds as remain after the claims of
subcontractors have been settled. The Government, on the other hand,
claims that Section 36-a merely gives the subcontractors an ordinary
lien, and that the contractor-taxpayer's property rights encompass the
entire indebtedness of the owner under the construction contract.
This
conflict should not be resolved by this Court, but by the highest court
of the State of
New York
. We cannot say from the opinion of the Court of Appeals that it has
been satisfactorily resolved. 6
We find no discussion in the court's opinion to indicate the nature of
the property rights possessed by the taxpayer under state law. Nor is
the application to be made of federal law clearly defined. We believe
that it is in the interests of all concerned to have these questions
decided by the state courts of
New York
. We therefore vacate the judgment of the Court of Appeals, and remand
the case to that court so that it may ascertain the property interests
of the taxpayer under state law and then dispose of the case according
to established principles of law.
Vacated
and remanded.
1
Section 3670:
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, penalty, additional
amount, or addition to such tax, together with any costs that may accrue
in addition thereto) shall be a lien in favor of the United States upon
all property and rights to property, whether real or personal, belonging
to such person."
Section
3671:
"Unless
another date is specifically fixed by law, the lien shall arise at the
time the assessment list was received by the collector and shall
continue until the liability for such amount is satisfied or becomes
unenforceable by reason of lapse of time."
These
provisions also appear in the 1954 Code. Int. Rev. Code of 1954, §§
6321, 6322.
2
McKinney
's N. Y. Laws, Lien Law (1958 Supp.), §36-a, provides as follows.
"The
funds received by a contractor from an owner for the improvement of real
property are hereby declared to constitute trust funds in the hands of
such contractor to be applied first to the payment of claims of
subcontractors, architects, engineers, surveyors, laborers and
materialmen arising out of the improvement, and to the payment of
premiums on surety bond or bonds filed and premiums on insurance
accruing during the making of the improvement and any contractor and any
officer, director or agent of any contractor who applies or consents to
the application of such funds for any other purpose and fails to pay the
claims hereinbefore mentioned is guilty of larceny and punishable as
provided in section thirteen hundred and two of the penal law. Such
trust may be enforced by civil action maintained as provided in article
three-a of this chapter by any person entitled to share in the fund,
whether or not he shall have filed, or had the right to file, a notice
of lien or shall have recovered a judgment for a claim arising out of
the improvement. For the purpose of a civil action only, the trust funds
shall include the right of action upon an obligation for moneys due or
to become due to a contractor, as well as moneys actually received by
him."
Section
36-a was repealed on September 1, 1959, N. Y. Laws 1959, c. 696, §14.
The subject matter covered by §36-a is now included in
McKinney
's N. Y. Laws, Lien Law (1959 Supp.), §§ 70, 71.
3
It is suggested that the definition of the taxpayer's property interests
should be governed by federal law, although supplying the content of
this nebulous body of federal law would apparently be left for future
decisions. We think that this approach is unsound because it ignores the
long-established role that the States have played in creating property
interests and places upon the courts the task of attempting to ascertain
a taxpayer's property rights under an undefined rule of federal law. It
would indeed be anomalous to say that the taxpayer's "property and
rights to property" included property in which, under the relevant
state law, he had no property interest at all.
4
It is said that because of the unique circumstances which existed in Bess,
that case does not control here. However, aside from the fact that Bess
involved proceeds payable under an insurance policy, whereas this case
involves proceeds payable under a construction contract, it is apparent
that the relevant circumstances of the two cases are essentially
identical. In both cases the Government was attempting to assert its tax
lien against what it thought to be the "property and rights to
property" of the taxpayer. In both cases an adverse party claimed
the right to the property in question on the theory that the taxpayer
had never acquired a state-created property interest to which the
Government's tax lien could attach. Finally, in both cases, the
Government attempted to characterize the problem as one involving a
conflict between competing claimants to be settled solely by the
application of federal law.
Bess
held that state law determines the property interests of a taxpayer in
the cash surrender value of an insurance policy, as well as in the
proceeds payable upon death. The same considerations which lead to our
conclusion in Bess require that we look to state law in
determining the general contractor's property interests in this case.
5
It is suggested that the rule announced by Bess and applied in
this case is inconsistent with the mandate that federal law governs the
relative priority of federal tax liens and state-created liens. However,
we fail to perceive wherein lies the inconsistency. It is one thing to
say that a taxpayer's property rights have been and should be created by
state law. It is quite another thing to declare that in the interest of
efficient tax
admin
istration one must look to federal law to resolve the conflict between
competing claimants of the taxpayer's state-created property interests.
6
Subsequent to the Court of Appeals' decision in the instant case, and
after this Court's decision in United States v. Bess, 357 U. S.
51 [58-2 USTC ¶9595], the New York Court of Appeals decided the case of
In re City of New York, 5 N. Y. 2d 300, 157 N. E. 2d 587, pending
on petition for a writ of certiorari sub nom. United States v.
Coblentz, No. 259, this Term. The Coblentz case is not
authority for the disposition of the instant case. The latter involves a
determination of property rights under §36-a of the New York Lien Law,
whereas the Coblentz case was concerned with the taxpayer's
property interests under an assignment contract, §475 of the New York
Judiciary Law, and §B15-37.0 of the New York City Administrative Code.
[Dissenting
opinion in Aquilino case, preceding, and in Durham Lumber Co. case at ¶9539,
following]
MR.
JUSTICE HARLAN, dissenting in Nos. 1 and 23: *
I
am unable to subscribe to the reasoning which underlies the Court's
disposition of these cases. By holding that they both turn on whether
the taxpayer had "property" under state law to which the
Government's lien could attach, the Court has sanctioned a result
consistently prohibited by us in a line of cases dealing with the
priority of federal tax liens. 1
In
both cases, the delinquent taxpayer is a defaulting general contractor
whose subcontractors remain unpaid. The Government's lien is asserted
against the chose in action which the general contractor allegedly holds
against the owner of the real estate on which the improvements were
made, in respect of amounts due from the owner under the construction
contract. If the subcontractors had sought to enforce their claims by
imposing a lien on that chose in action, there is no question that the
Government's lien would prevail. Under the decisions of this Court cited
in note 1, supra, a federal tax lien asserted against a
taxpayer's property under §§ 3670 and 3671 of the Internal Revenue
Code of 1939 2
prevails over all other claims against such property except (1) those
which attach and become "choate" before the federal lien
attaches, and (2) those specifically protected by §3672(a). 3
It is conceded that the interests of the subcontractors in the present
cases are not protected by §3672(a) and would not be considered choate
under the applicable decisions. See United States v. Kings County
Iron Works, 224 F. 2d 232 (C. A. 2d Cir. 1955) [55-2 USTC ¶9536].
The
Court believes, however, that the present cases are different, because
under state law, the general contractor in Aquilino held his
claim against the owner in trust for the subcontractors to the extent of
their claims, and because the subcontractors in Durham Lumber
[60-2 USTC ¶9539] were given, to the extent of their claims, a direct
right of action against the owner in respect of his debt to the general
contractor, and that in these circumstances the rights of the
subcontractors in the owner's debt are superior to those of the general
contractor. It is said that, to the extent of the subcontractors'
claims, the general contractor, under state law, thus had no
"property" interest in the amounts due him from the owner, and
that under the principles enunciated in United States v. Bess,
357 U. S. 51 [58-1 USTC ¶9595], a federal tax lien can attach only to a
property interest which exists under state law.
[Subcontractors'
Rights]
I
cannot see how it makes any difference, for purposes of the federal
tax-lien statute, whether state law purports to prefer subcontractors
over the general contractor and parties claiming through him by giving
the subcontractors a lien on the general contractor's right of action
against the owner or by giving them a prior right to collect the debt
itself. In both instances, the owner is under a contractual duty to pay
the general contractor and the latter is under a contractual duty to pay
the subcontractors. In both instances, the subcontractors are attempting
to satisfy their claims against the general contractor. And in both
instances, they are seeking to satisfy themselves by claiming precisely
the same thing--a prior right in the proceeds of the debt which arises
by virtue of the contractual relationship between the owner and the
general contractor. 4
In neither instance can the subcontractors collect more than that to
which the subcontract entitles them, and in neither can the owner be
required to pay more than that to which the main contract obligates him.
If federal law requires that subordination of the general contractor's
interest be ignored in the one instance, it does so equally in the
other.
The
Bess case does not require a contrary conclusion. That case held
only that while a federal tax lien attached to the cash surrender value
of a life insurance policy owned by the taxpayer, it did not attach to
the proceeds paid on his death, because under state law he had no right
to such proceeds during his life. There was no reason under those
circumstances why state property concepts should not control. To read
that case as standing for the proposition that such concepts must also
be controlling in cases such as these defeats the rule that "the
relative priority of the lien of the
United States
for unpaid taxes is . . . always a federal question to be determined
finally by the federal courts." United States v. Acri, 348
U. S.
211, 213 [55-1 USTC ¶9138]. It is one thing to say, as the Court did in
Bess, that the federal interest in uniform application of federal
tax liens does not require, as a general rule, that state property
concepts be disregarded. It is quite another to permit such concepts to
control the extent of a federal lien's application in situations
indistinguishable from those where the Court has in fact, rightly or
wrongly, enforced a uniform federal rule. Given federal supremacy in
this field, it surely cannot be that the federal courts may not appraise
for themselves the true impact of state-created rights upon the priority
of federal tax liens within the criteria established by this Court. Cf.
Carpenter v. Shaw, 280
U. S.
363, 367; City of
Detroit
v. Murray Corporation, 355
U. S.
489, 492. To recognize the substantial equivalence of the situations is
not to create a new rule of federal property law but to require an
evenhanded application of an already established one. It seems to me
that Judge Fuld of the New York Court of Appeals was quite right in
holding in the Aquilino case that New York could not,
consistently with the past decisions of our Court, defeat the otherwise
superior federal lien upon the owner's debt to the general contractor by
converting the debt into a trust for the benefit of the subcontractor. 5
To
read Bess as the Court does can only lead to confusion in the
admin
istration of the federal tax-lien statute. A taxpayer's property in a
debt is surely diminished by the imposition of a lien on his interest,
for he has no right to collect the liened portion nor to alienate it.
Yet in precisely this situation, we have held that the federal tax lien
is not affected by such diminution. United States v. Liverpool &
London Globe Ins. Co., Ltd., 348
U. S.
215 [55-1 USTC ¶9136]. If this holding is to be preserved after today's
decision, subsequent cases must turn on the elusive distinction between
diminishing a greater property interest and initially conferring a
lesser one. 6
The very difficulty which this Court experiences in trying to determine
whether under New York law the general contractor really holds only a
bare legal title in trust for the subcontractors or has full ownership
of the debt subject to a lien in favor of the subcontractors
demonstrates the futility of attempting to draw such distinctions for
federal purposes. I venture to suggest that on remand, the Court of
Appeals can with equal facility label the subcontractors' interests
"property" or a "lien," the relevant incidents of
the relationship being the same in either case. Why should not that
court, and the legislatures of other States readily respond in choosing
the former alternative?
I
would affirm the judgment in No. 1, and would reverse in No. 23 on the
ground that
North Carolina
can under no circumstances accord subcontractors a right in the proceeds
of the debt arising from the construction contract superior to the
Government's lien without satisfying one of the two requirements laid
down by federal law. If the federal standard of choateness is thought to
be an undesirable restriction on the States' freedom to regulate
property relationships, the cases establishing that standard should be
expressly overruled and not emasculated by dubious distinctions.
MR.
JUSTICE BLACK, while adhering to the dissenting views expressed by him
in Commissioner v. Stern, 357 U. S. 39, 47 [58-2 USTC ¶9594],
and United States v. Bess, 357 U. S. 51, 59 [58-2 USTC ¶9595],
concurs in this opinion.
*
[No. 23 is United States v. Durham Lumber Co. et al., post, p.
522.]
1
United States v. Security Trust & Savings Bank, 340 U. S. 47
(1950) [50-2 USTC ¶9492]; United States v. City of New Britain,
347 U. S. 81 (1954) [54-1 USTC ¶9191]; United States v. Acri,
348 U. S. 211 (1955) [55-1 USTC ¶9138]; United States v. Liverpool
& London Globe Ins. Co., Ltd., 348 U. S. 215 (1955) [55-1 USTC
¶9136]; United States v. Scovil, 348 U. S. 218 (1955) [55-1 USTC
¶9137]; United States v. Colotta, 350 U. S. 808 (1955) [55-2
USTC ¶9680]; United States v. White Bear Brewing Co., 350 U. S.
1010 (1956) [56-1 USTC ¶9440]; United States v. Vorreiter, 355
U. S. 15 (1957) [57-2 USTC ¶9956]; United States v. Ball
Construction Co., Inc., 355 U. S. 587 (1958) [58-1 USTC ¶9327]; United
States v. Hulley, 358 U. S. 66 (1958) [58-2 USTC ¶9926].
2 The text of these sections, applicable in the Aquilino
case, are set forth in note 1 of the Court's opinion in No. 1, ante,
p. 511. The comparable provisions of the Internal Revenue Code of 1954,
§§ 6321 and 6322, applicable in the Durham Lumber case, are
printed in notes 1 and 2 of the Court's opinion in No. 23, post,
p. 524 [60-2 USTC ¶9539].
3
That section as amended provides: "Such lien shall not be valid as
against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the collector . . .." 53 Stat.
882. The comparable provision of the Internal Revenue Code of 1954 is §6323(a).
4
It is noteworthy that the North Carolina law involved in the Durham
Lumber case requires the general contractor to furnish the owner
with a statement of subcontractors' claims "before receiving any
part of the contract price, as it may become due," and that
it is thereafter the duty of the owner to retain an appropriate amount
"from the money then due the contractor." N. C. Gen.
Stat., 1950, §44-8. (Italics added.) Although this section indicates
that the general contractor has no right to collect the proceeds of the
main contract until the statutory conditions are satisfied, it obviously
recognizes the owner's contractual obligation as the real basis of the
transaction and the source of the subcontractors' rights. The
subcontractors' claims are thus not akin to liens on the owner's real
estate, as this Court suggests, but are asserted solely in respect of
the monetary claim held by the general contractor against the owner.
5 "It is, by now, exceedingly well settled that no
state-created rule may defeat the paramount right of the
United States
to levy and collect taxes uniformly throughout the land. (See United
States v. Vorreiter, 355 U. S. 15, revg. 134 Col. 543 [57-2 USTC ¶9956];
United States v. White Bear Brewing Co., 350 U. S. 1010 [56-1
USTC ¶9440], revg. 227 F. 2d 359 [56-1 USTC ¶9440]; United States
v. Colotta, supra, 350 U. S. 808 [55-2 USTC ¶9680], revg. 224 Miss.
33 [55-2 USTC ¶9584]; United States v. Scovil, supra, 348 U. S.
218, 220-221 [55-1 USTC ¶9137]; United States v. New Britain, supra,
347
U. S.
81, 84-87 [54-1 USTC ¶9191];
United States
v. Kings County Iron Works, supra, 224 F. 2d 232, 237 [55-2 USTC
¶9536]). That being so, it follows that the provision in this state's
Lien Law, to which respondents point--that funds received by a
contractor from the owner for the improvement of real property shall be
deemed 'trust funds' for the payment of subcontractors (§36-a; §13,
subd. [7])--may not be construed to affect the rights of the government
or the priority of its tax lien." 3 N. Y. 2d, at 516, 146 N. E. 2d,
at 777-778.
6
It will not do to distinguish the present type of case from the
lien-priority cases on the ground that in the latter cases the taxpayer
remains the owner in a very real sense and can continue to enjoy the
property if he discharges the debt it secures. In both instances, the
taxpayer is temporarily deprived of certain incidents of ownership as a
device for securing the payment of a debt, and is restored to the full
enjoyment of the property only when the debt is discharged. And it is
illusory to say that ownership of a debt which can be neither collected
nor alienated is any more "real" than the ownership of no debt
at all. Whether the diminution of the taxpayer's interest is
sufficiently definite and complete to conclude the federal lien is
precisely the question on which this Court has held federal law must
control. It is admitted that, if the federal standard of
"choateness" developed by this Court in the lien-priority
cases is applied, the incidents of ownership retained by the taxpayers
here must in fact be deemed greater than those retained by taxpayers in
cases where state-created liens imposed on their interests have
prevailed over the Government's lien.
[55-1 USTC
¶9138]United States of America, Petitioner v. Michael P. Acri, Dollar
Savings & Trust Company, The Dollar Savings & Trust Company of
Youngstown, Ohio, Guardian of the Estate of Michael P. Acri, and Edward
Oravitz, Administrator of the Estate of John Oravec, A. K. A., Oravitz,
Deceased
In
the Supreme Court of the United States, No. 33.--October Term, 1954, 348
US 211, 75 SCt 239, January 10, 1955
On Writ of Certiorari to the United States Court of Appeals for the
Sixth Circuit.
[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]
Priorities: Tax lien filed subsequent to attachment lien but prior to
recovery of judgment by creditor: Effect of state law.--A lien for
federal income taxes filed after the taxpayer's property had been
attached by a claimant but before the latter had recovered judgment
against the taxpayer was superior to the attachment lien. Although under
Ohio
law an attachment lien is "an execution in advance, the priority of
the lien of the
United States
for unpaid taxes is a federal question and the federal courts are not
bound by a state's characterization of its liens.
Simon E.
Sobeloff, Solicitor General, H. Brian Holland, Assistant Attorney
General, Charles K. Rice, Ellis N. Slack, A. F. Prescott, Fred E.
Youngman, Special Assistants to the Attorney General, for petitioner.
John A. Willo, 509-10 Union National Bank Building, Youngstown, Ohio,
Francis B. Kavanaugh, 120 Sunset Road, Avon Lake, Ohio, Israel Freeman,
Office of the Attorney General,
Columbus
,
Ohio
, for respondent.
MINTON,
Justice:
This case
involves the relative priority between an attachment lien and the liens
of the
United States
for unpaid taxes. The District Court [53-1 USTC ¶9104] found the
attachment lien prior to the liens of the
United States
, and the Court of Appeals affirmed without opinion [54-1USTC ¶9225].
We granted certiorari, 347
U. S.
973.
[Attachment
Lien]
On
August 11, 1948
, the
United States
filed suit in the District Court for the Northern District of Ohio to
collect unpaid income taxes for the years 1942-1946 against one Acri and
his wife. Acri was at the time in the penitentiary for the murder of one
Oravec, whose personal representative, Oravitz, had, on
August 6, 1947
, in
Mahoning County
,
Ohio
, filed an action against Acri for wrongful death. On the same date,
certain cash and bonds of Acri, which were in his safety deposit box in
the Dollar Savings and Trust Company, were attached by Oravitz. The box
was not opened until September 11, 1948, after the bank had been made
guardian of Acri, at which time an inventory was filed. The personal
representative, Oravitz, and the bank, as guardian of Acri, were made
parties to the Government's suit.
[Tax
Lien]
On
January 19, 1949
, the personal representative of the murdered man recovered judgment
against Acri in the sum of $18,500. In the meantime, on
November 18, 1947
, after the issuance of the writ of attachment, but more than a year
before the judgment in the main action for wrongful death, the
assessment lists for unpaid income taxes of Acri and his wife for the
years 1942-1946 were received in the office of the Collector of Internal
Revenue. On
November 19, 1947
, demand for payment was mailed to Acri. On
November 21, 1947
, a notice of the tax liens was filed in the office of the Recorder in
Mahoning County
,
Ohio
, which is the residence of the defendants and the location of the
Acris' property, and the place where the action for wrongful death was
begun. Notice and levy of the tax liens were served upon the Dollar
Bank. It was stipulated that the only question involved was the relative
priority of the attachment lien of the personal representative and the
tax liens of the
United States
.
The issue here
is identical with that in United States v. Security Trust Co.,
340 U. S. 47 [50-2 USTC ¶9492]. There the question was stated as
follows:
"The
question presented here is whether a tax lien of the
United States
is prior in right to an attachment lien where the federal tax lien was
recorded subsequent to the date of the attachment lien but prior to the
date the attaching creditor obtained judgment." 340
U. S.
, at 48.
Our
answer here is the same as in the Security Trust Company case and
for the same reasons.
[Effect of State Law]
The relative
priority of the lien of the United States for unpaid taxes is, as we
said in United States v. Waddill Co., 323 U. S. 353, 356, 357
[45-1 USTC ¶9126];Illinois v. Campbell, 329 U. S. 362, 371; United
States v. Security Trust Co., 340 U. S. 47, 49 [50-2 USTC ¶9492],
always a federal question to be determined finally by the federal
courts. The state's characterization of its liens, while good for all
state purposes, does necessarily bind this Court. United States v.
Waddill Co., 323
U. S.
353, at 357 [45-1 USTC ¶9126]; United States v. Gilbert Associates,
345
U. S.
361 [53-1 USTC ¶9291]. Therefore, the fact that the Ohio courts had
designated an attachment lien "an execution in advance," Rempe
& Son v. Ravens, 68 Ohio St. 113, 67 N. E. 282, and treated it
as a perfected lien at the time of attachment, does not bind this Court.
We must look at the circumstances as we did in theWaddill case,
where the
Virginia
court had held a landlord's lien was fixed, specific, and not inchoate.
This Court, after examining the facts, found otherwise. In Gilbert
Associates, the New Hampshire court had held that the assessment of
a tax was a judgment and the United States' lien for taxes was not valid
against the tax assessment made by the town within the meaning of §3672
of the Internal Revenue Code. *
We held that although New Hampshire might treat its tax assessments as
judgments for state purposes, the assessment of the tax was not a
judgment within the meaning of §3672. We hold here that the attachment
lien in
Ohio
is for federal tax purposes an inchoate lien because, at the time the
attachment issued, the fact and the amount of the lien were contingent
upon the outcome of the suit for damages.
In argument it
was pointed out that the statute of California involved in the Security
Trust case was different because California courts had held an
attachment lien to be inchoate and a mere notice of a more perfect lien
to come, while Ohio courts had held it to be an execution in advance and
a lien perfected as of the time of attachment. This distinction is
immaterial for purposes of federal law. This case is not to be
distinguished from United States v. Security Trust Co., 340 U. S.
47 [50-2 USTC ¶9492], and the judgment is reversed.
*
"Such lien shall not be valid as against any mortgagee, pledgee,
purchaser, or judgment creditor until notice thereof has been filed by
the collector . . .." etc.
[48-2 USTC
¶9392]United States of America and John Lewis Smith, Receiver of
Aerodynamic Research Corporation, v. Kensington Shipyard and Drydock
Corporation, a Pennsylvania Corporation; Aerodynamic Research
Corporation, a District of Columbia Corporation; Maryland Casualty
Company; Girard Trust Company, Commonwealth of Pennsylvania, a
Corporation Sovereign.
Commonwealth
of
Pennsylvania
, Appellant
(CA-3),
In the United States Circuit Court of Appeals for the Third Circuit.,
No. 9575, 169 F2d 9, Filed June 30, 1948
On Appeal from the District Court of the United States for the Eastern
District of Pennsylvania.
Priority of Federal tax liens: Conflicting jurisdiction of State
courts.--Suit was instituted by the
United States
in the District Court to enforce collection of taxes under Sec. 3678,
wherein a receiver entered into possession and control of taxpayer's
property. Thereafter the
Commonwealth
of
Pennsylvania
filed a receivership action in the state court to enforce its own claim
for taxes, as well as for the claims of local creditors, against such
property, but no possession thereof was taken by the receiver appointed
therein. It was held that the instant suit by the
United States
and its formerly appointed receiver to foreclose the lien for payment of
such Federal taxes, wherein all creditors were made parties, has
priority in jurisdiction in respect to the property over any action that
may be taken by the state court. Motion to dismiss the Federal action
was denied. Affirming an unreported decision of the District Court.
Hyman
Zuckerman and Alexander N. Rubin, both of
Philadelphia
,
Pa.
, for the appellant. Thomas C. Egan and William T. Campbell, both of
Philadelphia, Pa., and Richard E. Wellford and William B. Waldo, Special
Assistant to the Attorney General, both of Washington, D. C., for the
appellee.
Before
MCLAUGHLIN and O'CONNELL, Circuit Judges, and RODNEY, District Judge.
Opinion
of the Court
By MCLAUGHLIN,
Circuit Judge:
This appeal is
from an order denying appellant's motion to dismiss the government's
action under Section 3678 of the Internal Revenue Code 1
to enforce the tax lien of the United States for over two million
dollars against Kensington Shipyard and Drydock Corporation, a
Pennsylvania corporation, and its parent company, Aerodynamic Research
Corporation.
[The
Facts]
Aerodynamic,
chartered as a non-business corporation of the
District of Columbia
, was actually a holding company for several business concerns,
including Kensington. Federal tax liens against Aerodynamic were filed
on
March 31, 1947
and
April 3, 1947
in the
District of Columbia
. Because Aerodynamic had transferred some of its assets to Kensington,
the Commissioner of Internal Revenue levied a jeopardy assessment
against the latter as such transferee. This lien was in the same amount
as against Aerodynamic and was properly filed in
Philadelphia
, April 3, 1947.
Thereafter on
May 20, 1947 the government filed a bill of complaint against
Aerodynamic in
Washington
under Section 3678, supra, for the collection of the tax. John
Lewis Smith was appointed receiver of the corporation and, by a
supplemental order dated June 13, 1947, he was directed "to take
complete possession and control" of the subsidiaries, including
Kensington. On June 25, 1947 Smith, as receiver, entered into possession
and control of Kensington.
Appellant, the
Commonwealth
of
Pennsylvania
, has two tax liens totaling thirty-five thousand dollars which were
settled June 25, 1947 and August 6, 1947 respectively. On August 27,
1947, the Commonwealth brought what was in effect a general creditor's
bill against Kensington in the state court. Neither the
United States
nor Aerodynamic was a party to this suit. The complaint sought to have
Kensington's property "charged primarily with the payment of
Pennsylvania Creditors of Aerodynamic Company and the Kensington
Company". Appellant's motion to appoint a receiver in the cause was
postponed until Kensington's contracts with the United States Maritime
Commission to reconvert two vessels (The Todd and the Woodford) were
completed. Prior to anything further happening in that litigation, the
present suit was started jointly by the
United States
and the Receiver of Aerodynamic. All known creditors were made parties.
Among other things, the complaint prayed for the appointment of Smith as
ancillary receiver of Aerodynamic and Kensington; for the determining
and foreclosing of the government tax lien and for the determining and
marshaling of the other liens upon the property. The court below
appointed temporary receivers, and, on
December 4, 1947
, denying the motion of appellants to dismiss the bill of complaint,
made the receivers permanent.
[Conflicting
Receiverships]
Appellant
urges that its suit vested jurisdiction over the assets of Kensington in
the state court and that the latter was entitled to retain that
jurisdiction to the exclusion of the receivers appointed in the
government's suit under the Internal Revenue Code. Relying upon Princess
Lida v. Thompson, 305
U. S.
456, it asserts that this is so even though the property of Kensington
had not been physically seized under state court process. In a proper
case, unquestionably, actual possession of the property involved is not
essential. 2
As Mr. Justice
Rob
erts said in the Thompson opinion, "The doctrine is
necessary to the harmonious cooperation of federal and state
tribunals." "* * * but where the jurisdiction is not the same
or concurrent, and the subject-matter in litigation in the one is not
within the cognizance of the other, or there is no constructive
possession of the property in dispute by the filing of a bill; it is the
date of the actual possession of the receiver that determines the
priority of jurisdiction." Harkin v. Brundage, 276
U. S.
36, 43. This principle is reiterated in Penn. Co. v. Pennsylvania,
294 U. S. 189, where the court said at page 196: "If the two suits
do not have substantially the same purpose, and thus the jurisdiction of
the two courts may not be said to be strictly concurrent, and if neither
court can act effectively without acquiring * * * control of the
property pendente lite, the time of acquiring actual possession
may perhaps be the decisive factor." Judge Phillips in his oft
cited opinion in Ingram v. Jones, 47 Fed. (2d) 135, 141, stated
the rule to be:
"On
the other hand, where the issues in the subsequent suit are different
from those involved in the first suit and the subject-matter is not
identical, that is, where the two suits involve different controversies
notwithstanding they relate to the same property, there can be no
infringement of the jurisdiction of the court in which the first suit is
pending by reason of the institution of the second suit in a court of
concurrent jurisdiction. Under such circumstances, the court first
acquiring possession of the property may retain it until the suit
pending before it is determined."
In Empire
Trust Co. v. Brooks, 5 Cir., 232 Fed. 641, there was a pending state
court proceeding for the dissolution of a corporation and distribution
of its assets under a state statute. No order appointing a receiver had
been made and there had been no actual or constructive possession of the
property by that court at the time a suit against the property to
foreclose a mortgage was commenced in a federal court, where a receiver
was appointed who took possession of the mortgaged property. The court
said at page 645:
"The
only identity between the two suits in that event is that they relate to
the same property, and, this being true, there is no apparent reason why
the court which first acquires possession of the property should
surrender its possession and thereby defeat its own jurisdiction, a
jurisdiction which does not infringe upon the prior jurisdiction of the
court in which the first suit was brought."
In Moran v.
Sturges, 154
U. S.
256, the state court suit was first and receivers were appointed in that
proceeding. The property involved consisted of ships. Prior to the state
receivers taking possession of the vessels the latter were seized under
federal process to enforce the collection of maritime liens. The Supreme
Court, holding that the jurisdiction was not concurrent, refused to oust
the federal court from control of the res.
[Priority
of Federal Action]
We are
satisfied that under the law as outlined we should not disturb the
possession of the district court's receivers. Despite well presented
argument to the contrary the facts indicate fundamental differences in
the two actions which cannot be ignored. Unquestionably the two suits
relate to the same property. If they did not this controversy would
never have come into being. But that is not enough, and it stands
virtually alone. The state suit is substantially a state receivership
action designed to protect
Pennsylvania
creditors as to local assets. It does not join as a party, either the
United States with a top priority, either the United States million
dollars 3
or Aerodynamic, though Kensington's assets are to be charged with the
claims of Pennsylvania creditors of the parent corporation. On the other
hand, the suit of the
United States
is the formal foreclosing of its tax lien as prescribed by the statute
designed for that purpose. That lien is immune to state action.
United States
v.
Greenville
, 4 Cir., 118 Fed. (2d) 963, 965 [41-1 USTC ¶9381]. Littlestown
National Bank v. Penn Tile Works, 352
Pa.
238, 244. It has been established against property of a taxpayer and may
only be removed as federal laws permit. Metropolitan Life Ins. Co. v.
United States
, 6 Cir., 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771], cert. den. 310
U. S.
630. The statute under which the government sued is titled "Civil
Action to Enforce Lien on Property". Authority for the suit
emanates from paragraph (a) of Section 3678, supra, which
provides for such action to be brought by the Attorney General at the
request of the Commissioner of Internal Revenue. If a receiver were
appointed in the state proceeding and he were to attempt to sell the
Kensington property, he would be unable to dispose of the federal lien.
The situation
in Moran v. Sturges, supra, comes closer to the unusual
circumstances of the instant matter than do any of the decisions
examined. As in that case we have a unique federal situation beyond the
power of the state court. The federal suit in the Eastern District of
Pennsylvania derived directly from the original action in the
District of Columbia
. Both suits are based on the tax liens filed March 31 and
April 3, 1947
almost three months prior to the settlement of the first
Pennsylvania
tax lien and over four months prior to the state suit.
[Conclusion]
The
government's methods in seeking to collect this sizable tax, far from
resembling participation in an unseemly receivership scramble, show a
succession of orderly, sound, legal moves in accordance with the
statute. These would appear to have achieved results which under all the
circumstances are fair to everyone concerned, including the State of
Pennsylvania
, whose claim is fully protected in the federal action. Nor do we find
anything reprehensible in the attitude of Kensington as a party to the
local suit. Whatever delay ensued in that matter was essentially for a
legitimate business purpose, the benefit of creditors. As appellant
frankly concedes, there was not a shadow of fraud in that connection.
The judgment
of the District Court will be affirmed.
1
"SEC. 3678. CIVIL ACTION TO ENFORCE LIEN ON PROPERTY.
(a)
Filing.--In any case where there has been a refusal or neglect to pay
any tax, and it has become necessary to seize and sell property and
rights to property, whether real or personal, to satisfy the same,
whether distraint proceedings have been commenced or not, the Attorney
General at the request of the Commissioner may direct a civil action to
be filed, in a district court of the United States, to enforce the lien
of the United States for tax upon any property and rights to property,
whether real or personal, or to subject any such property and rights to
property owned by the delinquent, or in which he has any right, title,
or interest, to the payment of such tax.
(b) Parties to
Proceedings.--All persons having liens upon or claiming any interest in
the property or rights to property sought to be subjected as aforesaid
shall be made parties to such proceeding and be brought into court.
(c)
Adjudication and Decree.--The said court shall, at the term next after
the parties have been duly notified of the proceedings, unless otherwise
ordered by the court, proceed to adjudicate all matters involved therein
and finally determined the merits of all claims to and liens upon the
property and rights to property in question, and, in all cases where a
claim or interest of the United States therein is established, may
decree a sale of such property and rights to property, by the proper
officer of the court, and a distribution of the proceeds of such sale
according to the findings of the court in respect to the interests of
the parties and of the United States.
(d)
Receivership.--In any such proceeding, at the instance of the
United States
, the court may appoint a receiver to enforce the lien, or, upon
certification by the Commissioner during the pendency of such
proceedings, that it is in the public interest, may appoint a receiver
with all the powers of a receiver in equity."
2
And see Wabash Railroad v. Adelbert College, 208
U. S.
38; Palmer v. Texas, 212
U. S.
118; Farmer's Loan Co. v. Lake Street R. Co., 177
U. S.
51.
3
The
United States
is a necessary party to the state suit since the latter affects its
lien. Adler v. Nicholas, 10 Cir., 166 Fed. (2d) 674, 680 [48-1
USTC ¶9205]; and see Maryland Casualty Co. v. Charleston Works,
E. D. S. C., 24 Fed. (2d) 836 [1928 CCH D-8246]; Czieslik v. Burnet,
E. D. N. Y., 57 Fed. (2d) 715 [1932 CCH ¶9046]. The absence of the
government as a party is an element to be considered in determining
whether the federal and state actions are substantially the same.
United States
v. Humboldt Co., 9 Cir., 97 Fed. (2d) 38, 45.
[43-1 USTC
¶9225]State of Michigan, John J. O'Hara, Auditor General for the State
of Michigan, County of Wayne, a corporate body politic, Jacob P.
Summeracki, Treasurer for the County of Wayne, City of Detroit, a
municipal corporation, and Albert E. Cobo, Treasurer of the City of
Detroit, Petitioners, v. The
United States of America
Supreme
Court of the
United States
, No. 214. October Term, 1942, 317
US
338, 63 SCt 302,
January 4, 1943
On writ of certiorari to the United States Circuit Court of Appeals for
the Sixth Circuit.
Priority of federal lien against subsequent state tax lien: Effect of
state law.--Where the federal lien attached to private property
prior to the acquisition of any interest in that property by a state,
the state lien cannot be given superiority over the federal lien by
virtue of state statutes. Affirming Circuit Court decision, Sixth
Circuit, 42-2 USTC ¶9612, 127 Fed. (2d) 64 which affirmed District
Court decision reported at 40-2 USTC ¶9653.
Paul E.
Krause, Corporation Counsel, John H. Witherspoon, Special Assistant
Corporation Counsel, James H. Lee, John G. Dunn, Bert R. Sogge,
Assistants to Corporation Counsel, William E. Dowling, Prosecuting
Attorney, Samuel Brezner, Helen M. Miller, Assistant Prosecuting
Attorneys, all of Detroit, Michigan, Herbert J. Rushton, Attorney
General, Edmund E. Sheppard, Solicitor General, Daniel J. O'Hara,
Assistant Attorney General, all of Lansing, Michigan, for petitioners.
Oscar Cox, Acting Solicitor General, Samuel O. Clark, Jr., Assistant
Attorney General, Sewall Key, Carl J. Marold, Special Assistants to
Attorney General and Archibald Cox, attorney, for respondent. Francis P.
Burns, city attorney, New Orleans, La., John J. Griffin, city attorney,
Elizabeth, N. J., Cornelius M. Colbert, city attorney, Racine, Wis.,
Everett H. Dueley, City Solicitor, Fitchburg, Mass., C. V. Jones, city
attorney, Durham, N. C., Chris J. Griffin, city attorney, Huntington
Park, Calif., Carroll R. Runyon, city attorney, St. Petersburg, Fla., K.
K. Hoagland, Corporation Counsel, Alton, Ill., Ralph Crary, Corporation
Counsel, Sioux City, Ia., William Minihan, city attorney, Lexington,
Ky., Fernard Despins, Corporation Counsel, Lewiston, Me., Raphael A.
Egan, Corporation Counsel, Newburgh, N. Y., Lester R. Maris, city
attorney, Ponca City, Okla., and Charles S. Rhyne, Counsel, Washington,
D.C., amicus curiae for member cities of National Institute of Municipal
Law Officers.
Mr. Chief
Justice STONE delivered the opinion of the Court:
This is a
companion case to No. 156, The Detroit Bank v. United States,
decided this day [43-1 USTC ¶9224]. It involves the lien for estate
taxes asserted by the Government and considered in our opinion in that
case.
Petitioners,
the City of
Detroit
, the
County
of
Wayne
, and the State of
Michigan
, assert liens for city, county and state taxes on the real estate in
question, accruing subsequent to the federal estate tax lien. As
defendants in the suit brought by the Government to foreclose the lien,
they attack it on all the grounds considered and rejected in our opinion
in the Detroit Bank case. They also contend that the state liens
are given superiority over the federal lien by virtue of state statutes.
Section 3429 of the Compiled Laws of Michigan, 1929, as amended by Act
No. 38 of the Extra Session of 1934, declares that taxes "shall
become a lien upon such real property" on specified dates following
their assessment and, as construed by petitioners, states that they
shall be a "first lien, prior, superior, and paramount."
Section 3746 authorizes the filing of notice of liens as provided in R.
S. §3186, in the office of registers of deeds in the counties of
Michigan
. Petitioners contend that these and other statutory provisions as
construed by Michigan courts give superiority to state tax liens over
other unrecorded liens, including the present estate tax lien of the
federal Government.
We do not stop
to inquire whether this construction of the state statutes is the
correct one for we think the argument ignores the effect of a lien for
federal taxes under the supremacy clause of the Constitution. The
establishment of a tax lien by Congress is an exercise of its
constitutional power "to lay and collect taxes." Article I, §8
of the Constitution.
United States
v. Snyder, 149
U. S.
210. And laws of Congress enacted pursuant to the Constitution are by
Article VI of the Constitution declared to be "the Supreme Law of
the Land; and the Judges in every State shall be bound thereby any Thing
in the Constitution or Laws of any State to the Contrary
notwithstanding."
"It is of
the very nature and essence of a lien, that no matter into whose hands
the property goes, it passes cum onere."
Burton
v. Smith, 13 Pet. 464, 483; Rankin v. Scott, 12 Wheat. 177,
179; Howard v. Railway Co., 101
U. S.
837, 845. Hence it is not debatable that a tax lien imposed by a law of
Congress, as we have held the present lien is imposed, cannot, without
the consent of Congress, be displaced by later liens imposed by
authority of any state law or judicial decision. United States v.
Snyder, supra; United States v. City of Greenville, 118 Fed. 2d 963
[41-1 USTC ¶9381]. Similarly we held that the priority of payment
commanded by R. S. §3466 could not be set aside by state legislation. United
States v. Texas, 314 U. S. 480, 486; County of Spokane v. United
States, 279 U. S. 80 [1 USTC ¶387]; New York v. Maclay, 288
U. S. 290; cf. Missouri v. Ross, 299 U. S. 72.
As the federal
lien with which we are here concerned attached to private property prior
to the acquisition of any interest in that property by the state, we
need not consider the extent to which Congress may give, or intended by
§315(a) to give, priority to a federal lien over a previously perfected
state lien. Compare
New York
v. Maclay, supra, 292;
County
of
Spokane
v.
United States
, supra, 95;
United States
v.
Texas
, supra, 484-6.
Affirmed.
Mr. Justice
MURPHY took no part in the consideration or decision of this case.
