United States of America
, Appellant v. Commonwealth of Kentucky et al., Appellees
the Court of Appeals of
, 288 SW2d 664
Appeal from Fayette Circuit Court.
[1939 Code Secs. 273(a), 3672--similar to 1954 Code Secs. 6861, 6323,
Liens: Priority: Kentucky and federal income tax liens: Date liens
accrued.--Where, under Kentucky law, the state's lien for income
taxes for tax years 1941-1951 accrued prior to the federal income tax
lien for tax year 1952, the state lien was superior to the federal lien
regardless of the fact that notice of the federal lien was filed first
in the county court. Under
law, the state lien became perfected at the time the liability became
fixed, which, for tax year 1951, was May 1952. Under the 1939 Code, the
federal tax lien arose at the time the assessment list was received,
which, for tax year 1952, was January 1953. The court also pointed out
that there was no evidence that the taxpayer was insolvent or that
demand for payment of the federal taxes had been made prior to the
federal jeopardy assessment based upon the taxpayer's alleged
bankruptcy. In the absence of proof that the taxpayer waived the demand,
the federal lien never attached to funds held by the Master Commissioner
of a state court. In addition, the appellate court held that, even if
the federal government was entitled to the funds, the court had no
jurisdiction to direct that the money be paid to the United States since
the money had already been paid into the state treasury pursuant to the
judgment of the trial court, and, under the Kentucky Constitution, the
only way the money could be withdrawn from the treasury is by an
appropriation by the General Assembly.
Denney, United States District Attorney, Joseph C. Lewis, Assistant
United States District Attorney, Lexington, Ky., for appellant. J. D.
Buckman, Attorney General, Joseph L. Schoepf,
, for appellees.
The two major
questions for determination on this appeal are: 1. Did the income tax
lien of the Commonwealth for $3,862.80 for the year 1951 attach or
become perfected on certain funds of the delinquent taxpayer, Ed W.
Curd, before the federal income tax lien for 1952 attached or became
perfected on these same funds; 2. did the income tax lien of the federal
government for 1952 ever attach or become perfected on these funds of
Curd so as to give the United States priority over the Commonwealth's
lien for $15,069.80 for income tax Curd owed the Commonwealth for the
years 1941 to 1950 upon which Curd had made partial payments?
judge decided both questions in favor of the Commonwealth and this
appeal followed. The facts are not in dispute and the questions for
decision are purely legal ones.
Curd was a
, and seems to have been successful in earning large sums of money by
devious methods. The state income tax reports filed by Curd for each of
the years in question did not show his full income and on examination of
same the State made additional assessments against him, including
penalty and interest, upon which Curd made payments from time to time.
He owed the State $3,862.80 on his 1951 income tax, as well as a balance
of $15,069.80 on various assessments made against him by the State for
the years between 1941 and 1950. He owed a federal income tax of
$26,591.47 for the taxable year 1952, and the
made a jeopardy assessment against Curd in this sum on
January 15, 1953
Stat. at L. §273, p. 84.
In 1952 Curd's
prosperity dwindled and he became involved in litigation, and in 1953
both the Commonwealth and the
became active in attempts to enforce their respective tax liens. In
March 1953, the Master Commissioner of the Fayette Circuit Court had
something like $17,000 in his hands going to Curd in the suit of Curd
v. Longridge Plantation, et al. On
March 30, 1953
, the Commonwealth attached this money in the hands of the Master
Commissioner to satisfy its lien and the
April 4, 1953
, intervened in the case, asserting that its lien was superior to that
of the State. Curd seems to have fled the realm to escape prosecution
for income tax fraud and is now said to be without the confines of the
The State is
given a lien to secure the payment of income tax by KRS 134.420(2) which
provides: "This lien shall accrue at the time the liability becomes
fixed." The date the Commonwealth's lien accrued on Curd's 1951
income tax under this statute was on
May 19, 1952
, the day Curd filed his income tax return with the State showing he
owed it $3,862.80. In its brief the
practically admits the Commonwealth's lien for the 1951 tax is prior to
the federal lien which was precipitated by an attempted jeopardy
January 15, 1953
, for the 1952 tax. But it is argued by the United States that the
Commonwealth's lien did not become perfected until notice thereof was
recorded, citing Louisville Title Mortgage Co. v. Com., 299 Ky.
224, 184 S. W. 2d 963. That case is not controlling here. We there held
a recorded vendor's lien was superior to an unliquidated unemployment
compensation tax which had not accfued at the time the mortgage lien was
put to record. In the instant case the Commonwealth's lien for the 1951
tax became perfected under KRS 134.420(2) on May 19, 1952, the day Curd
filed his return showing he owed the State this sum.
In the brief
for the United States it is admitted that the jeopardy assessment made
against Curd by the federal government under 53 U. S. Stat. at L. §273,
p. 84 was based on Curd's insolvency under §274 of this same statute.
There is nothing in the record before us to show that Curd was insolvent
or that the United States ever made demand upon him for the payment of
his 1952 tax as is required by 53 U. S. Stat. at L. §3655, p. 446 as a
condition precedent to the tax becoming a lien. Nor is there anything in
the record to show that Curd waived the demand. In re
v. Pearl Hominy Co., 5 Fed. (2d) 553. Therefore, we agree with the
trial judge that the federal lien never attached to the funds held by
the Master Commissioner of the Fayette Circuit Court.
Should we be
wrong in this conclusion, there is another reason why the State must
prevail. Under §3671 of the Internal Revenue Code (53 U. S. Stat. at L.
p. 449) the federal tax lien arises "at the time the assessment
list is received" by the Director of Internal Revenue from the
Commissioner of Internal Revenue. In the case at bar the Director
received the assessment from the Commissioner on
January 15, 1953
, and the next day he filed notice of the federal tax lien in the office
of the Fayette County Court Clerk. The State's lien under KRS 134.420(2)
accrues "at the time the liability becomes fixed," which is
when the taxpayer files his return with the State showing the amount of
tax he owes it. The State did not file notice of its lien in the office
of the Clerk of the Fayette County Court until February 13, 1953, and it
is argued in the brief for the United States the Federal lien takes
superiority over the State's lien because notice of the Federal lien was
filed on January 16, 1953.
The time of
the filing of the respective notices does not control the time when
these liens attach under the statutes, but the notices are merely for
the benefit of mortgagees, pledgees, purchasers or judgment creditors.
Section 3672 Internal Revenue Code (53
Stat. at L. p. 449) so states as to the Federal lien, and Louisville
Title Mortgage Co. v. Com., 299
224, 184 S. W. 2d 963, so holds as to the State's lien. As between the
and the Commonwealth the lien which first arises is superior, or as has
been written, "first in time, first in right."
v. City of
, 118 Fed. (2d) 963 [41-1 USTC ¶9381]; U. S. v. City of New
Britain, 98 L. Ed. 520, 347 U. S. 81, 74 S. Ct. 367 [54-1 USTC ¶9191].
As the lien of the Commonwealth for $15,069.80 arose prior to the
federal lien for $26,591.47, it is superior to the federal lien
regardless of the fact that notice of the federal lien was first filed
in the office of the Clerk of the Fayette County Court.
There is still
another reason why the
cannot recover the $15,069.80 from the Commonwealth. It did not
supersede the judgment of the Fayette Circuit Court and the money was
paid into the State Treasury. Section 230 of the Kentucky Constitution
provides: "No money shall be drawn from the State Treasury, except
in pursuance of appropriations made by law." Therefore, the court
has no jurisdiction to direct that this money be turned over to the
. Should the
be entitled to this money, and we hold it is not, the only way the
Federal Government could obtain same would be for the General Assembly
to appropriate this sum to it. See Unemployment Compensation
Commission v. Savage, 283
301, 140 S. W. 2d 1073; Ky. Color & Chemical Co. v. Barnes,
681, 162 s.W. 2d 531.