United States of America
, Acting by and through the Internal Revenue Service, Appellant v.
William R. Bradley, Trustee, Appellee
U. S. Court of Appeals, 5th Circuit, No. 20023, 321 F2d 224, 8/8/63,
Affirming unreported District Court
[1954 Code Secs. 6321-6323]
Lien for taxes: Priorities: State and local tax liens.--State and
county tax liens which arose under the laws of Mississippi prior to the
assessment of federal taxes had priority over the federal tax lien,
although there had been no attachment or levy by the state or county and
the local tax liens were, therefore, general rather than specific liens.
Oberdorfer, Assistant Attorney General, Lee A. Jackson, Frederick E.
Youngman, Joseph Kovner, Department of Justice, Washington 25, D. C., H.
M. Ray, United States Attorney, Oxford, Miss., for petitioner. John E.
, Leon L. Porter, Jr., 232 Stevens Bldg.,
, for respondent.
WISDOM and GEWIN, Circuit Judges.
This is an
appeal by the United States from an order of the District Court for the
Northern District of Mississippi affirming the opinion of the Referee in
Bankruptcy, wherein he found that certain state and county tax liens,
having arisen prior in time to certain United States tax liens, are
superior to the latter and are to be paid out of the limited assets held
by the trustee before the latter.
States argues that, although the local liens did arise first in time,
the United States liens take first claim to the assets because the
United States liens became perfected choate liens as of the day of
assessment, while the local liens require attachment or levy before
becoming choate, and only choate liens which were first in time may take
precedence over such perfected
further argues that the question of whether a lien is choate depends not
on state law, but is always a federal question.
At the outset,
the Federal Priority Statute, 31 U. S. C. A. 191 1
must be put aside. Numerous cases have held that this statute does not
apply in bankruptcy proceedings, and that it yields to §67 of the
Bankruptcy Act. See In re Taylorcraft Aviation Corp. [48-1 USTC
¶9288], 168 F. 2d 808 (1948); In re Knox-Powell-Stockton Co.
[39-1 USTC ¶9277], 100 F. 2d 979 (1939); Reese, Inc. v. United
States [35-1 USTC ¶9126], 75 F. 2d 9 (5 Cir. 1935); Bennett-Ireland,
Inc. v. American Alum. Products [62-1 USTC ¶9425], 369 P. 2d 957 (
1962); United States v. Sampsell [46-1 USTC ¶9186], 153 F. 2d
731 (1946). See also Collier on Bankruptcy, 14th Ed. §67.24 at p. 264:
". . .
the Supreme Court precedents subordinating liens to the federal priority
under Rev. Stat. Sec. 3466 have no application in ordinary bankruptcy
proceedings initiated under Sec. 59. These precedents applied the
section when the debtor's estates involved were in the hands of
non-bankruptcy liquidators, and it accords with the manifest intent of
Congress to treat the scheme of distribution it provided in sections 64
and 67b and c as exclusive of the incompatible order of priority
provided for non-bankruptcy liquidations in Sec. 3466."
We look then
to the Bankruptcy Act:
". . .
Statutory liens for taxes and debts owing to the
or to any state or any subdivision thereof, created or recognized by the
laws of the
or of any state may be valid against the trustee, even though arising or
perfected while the debtor is insolvent. . . ."
debts to have priority, in advance of the payment of dividends to
creditors, . . . shall be (1) the actual and necessary costs. . . .; (2)
wages. . . . (3) (costs of contesting discharge); (4) taxes legally due
and owing by the bankrupt to the
or any state or any subdivision thereof."
is clear that neither of these sections answers the question before us, i.e.,
tax liens are superior to state tax liens which arose prior to the
liens. We therefore look for guidance to the statutes creating the
liens are created by the Internal Revenue Code of 1954.
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 to property, whether real or personal,
belonging to such person."
another date is specifically fixed by law, the lien imposed by Sect.
6321 shall arise at the time the assessment is made. . . ."
". . .
the lien imposed by Sect. 6321 shall not be valid as against any
mortgagee, pledgee, purchasor, or judgment creditor until notice thereof
has been filed. . . ."
state liens are created by the following state statutes, Mississippi
Code of 1942 (Recomp.):
state, county and municipal, assessed upon lands or personal property, .
. . shall be a lien upon and bind the property assessed, . . ."
". . .
the tax imposed by this act [the Revenue Act of 1934 imposing 'sales
tax'] . . . shall constitute a debt due the State of Mississippi from
the time the tax is due until it is paid, and shall be a lien upon the
property or rights to property of any person subject to the provisions
of this act."
It will be
seen that both the
and the State statutes are clear and definite on the question of when
the liens arise. However, neither provides any guidance as to priority.
concedes that the State liens arose first, but argues that since the
State did not attach the bankrupt's property or levy on it prior to
bankruptcy, the State's liens are imperfect, and are in fact nothing
more than inchoate general liens. It is difficult to understand how the
State liens are inchoate, because there has been no attachment or levy,
liens upon which there has likewise been no attachment or levy, are
cites several cases as authority for its contention that before the lien
can be perfected and made specific, the following three conditions must
exist: (1) the identity of the lienor must be certain; (2) the amount of
the lien must be certain; and (3) the property to which the lien
attaches must be made definite and certain. The
concedes that the first 2 conditions existed, but contends that the
third one did not at the time its liens arose; and therefore, the State
liens are inchoate. If the first 2 conditions are met, and the statute
attaches the lien to all of the property, real and personal, of the
debtor, or to "the property assessed", we conclude that the
lien is not thereby necessarily rendered "inchoate"; it is
merely rendered "general" rather than specific. Regardless of
such considerations, we agree with the holding in United States v.
Sampsell [46-1 USTC ¶9186], 153 F. 2d 731 (9 Cir. 1946):
nothing in the Bankruptcy Act or in the Internal Revenue Code . . .
directly providing that perfected liens shall have priority over prior
inchoate liens which is the claim of the government. We are of the
opinion that the government can get no support of any kind from the
statutes in aid of its proposition."
Ninth Circuit held in Sampsell that the State liens being first
in time, though inchoate as to the amount, were first in order of
payment out of the limited assets.
Circuit in Adams v. O'Malley [50-2 USTC ¶9349], 182 F. 2d 925
(1950) followed Sampsell:
asserts that it should be given priority because its liens are specific
and perfected, while those of the County are general and inchoate, since
the County had not levied upon the property of the bankrupt prior to
bankruptcy. It is unnecessary in this case to determine whether that
would be of any importance, since, in our opinion, the statutory liens
of the County were no more general and inchoate than were the liens of
the United States; and, if a seizure was a prerequisite to the
perfection of the County's liens, they were perfected after bankruptcy
by the filing of notice with the court as permitted by §67, sub. b, of
the Bankruptcy Act, §107, sub. b, of Title 11
conclusion is that R. S. §3466, §191 of Title 31 U. S. C. A., is not,
expressly or inferentially, applicable to proceedings in bankruptcy, and
that the tax liens of the County were on a parity with those of the
United States. . . ."
The opinion of
the Referee in this case is a scholarly, well written discourse on the
subject under consideration. The District Court carefully considered the
Referee's opinion and agreed with it. We agree with both opinions. It is
our conclusion that the Referee properly applied the doctrine of
"first in time, first in right". United States v. City of
New Britain, Conn. [54-1 USTC ¶9191], 347
81 (1947); Rankin v. Scott, 12 Wheat. 179.
Of the Tenth Circuit, sitting by designation.
"Whenever any person indebted to the United States is insolvent, or
whenever the estate of any deceased debtor, in the hands of the
istrators, is insufficient to pay all the debts due from the deceased,
the debts due to the United States shall be first satisfied; and the
priority established shall extend as well to cases in which a debtor,
not having sufficient property to pay all his debts, makes a voluntary
assignment thereof, or in which the estate and effects of an absconding,
concealed, or absent debtor are attached by process of law, as to cases
in which an act of bankruptcy is committed."
¶9564]In the Matter of The Mills Company, Inc., Bankrupt
S. District Court, So.
, Jackson Div., In Bankruptcy No. 4123, 148 FSupp 33,
[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323]
Priority of liens: Federal lien perfected before local taxes
accrued.--A federal tax lien was filed in 1954. The taxpayer was
adjudged bankrupt in February, 1955. Local personal property taxes were
November 1, 1955
. The municipality claimed priority, asserting that the taxes accrued as
January 1, 1955
. The court held that even if they did, the federal lien had been
perfected before that date and was entitled to priority. If the local
tax lien could not prevail because the federal lien was the first to
accrue, the local tax lien could not be given priority merely by calling
Alexander, 1013 Deposit Guaranty Bank Building, Val Surgis, City Hall,
Swep S. Taylor, Jr., P. O. Box 912, Jack McDill, Assistant United States
Attorney, Jackson, Miss., for petitioner.
Company, Inc., a general mercantile dealer in the City of Jackson,
Mississippi, filed its voluntary petition and was adjudged bankrupt on
February 17, 1955
. Swep S. Taylor, Jr. was appointed Receiver by the Referee and
thereafter succeeded himself as Trustee. Among claims filed were the
following, which are the only ones now before the Court for review:
v. Local Tax Liens]
1. By the
United States, for the sum of $1,357.26, by the Director of Internal
Revenue for the District of Mississippi 1
2. By the City
of Jackson, through its Tax Attorney, supported by affidavit of its
Asst. Tax Collector 2
on November 4, 1955 for the sum of $298.35, to which was attached
assessment slip or notice of ad valorem "taxes on personal
property" valued at $7,800.00 and dated November 1, 1955.
July 9, 1956,
the Trustee in Bankruptcy filed objections to the City's claim upon
grounds: (1) That the Government's claim for said sum of $1,357.26,
"according to its allegations * * * and the records in Hinds
County" * * * reflect the tax liens * * * had been duly filed in
the office of the Chancery Clerk of that County "on June 5, 1954
and on September 7, 1954 * * * by * * * Enochs, District Director of
Internal Revenue * * *" and on August 8, 1955 in the office of the
(2) That the
City of Jackson has also filed its claim for taxes and is seeking to
have such tax apportioned as an
istrative expense and that other claims by the State of Mississippi and
the Mississippi Unemployment Commission have also been filed; further
that "under the laws of the United States * * * the claim of the
Government" based on its tax lien * * * had been recorded prior to
the adjudication in bankruptcy * * *, therefore had "priority * * *
on all funds remaining in the Trustee's hands after the payment of the
istrative expense up to the amounts claimed by the United States * * *
should be paid to them, and that any amounts remaining * * * should be
paid proratally to the City of Jackson and State of Mississippi and the
other tax claimants.
prayed for a hearing "and that an order be entered adjudicating the
rights of the claimants."
having sold the assets of the Bankrupt, filed his final account on
August 18, 1956
"Total Receipts ....... $5,668.15
Total Disbursements .... 3,688.81
Balance on Hand ........ $1,979.34"
Claims filed and allowed:
Priority Secured Unsecured
$10,980.55 $378.84 $22,733.76
will be no dividends for general creditors."
Liens Entitled to Priority]
report, the Referee issued his order
September 8, 1956
, giving notice of a hearing to be held
September 19, 1956
on all claims, including those of the Government and the City of
Jackson, Mississippi, as to their alleged priorities.
was held accordingly, and on
September 21, 1956
, the Referee entered his order as follows:
there is no merit to the claim of the City of Jackson to have the 1955
ad valorem taxes to the City of Jackson paid as a part of the
Administrative costs in
istrating the estate, and is further of the opinion that the lien claim
filed by the United States of America should be paid in advance of the
City of Jackson's claim for Taxes and the Trustee is therefore Ordered
to pay from the balance of the estate, first, the claim of the United
States of America, their claim for Taxes due and owing for taxes as set
out in their claim as a lien, and after paying said claim, to distribute
the balance of the assets, if there be any, to the remaining creditors,
including the City of Jackson, in the order of their priority."
This order was
October 3, 1956
. Thereafter, on the same day, that is,
October 3, 1956
, the City filed its petition for review, quoting the Referee's order,
alleging that the said "findings and order were erroneous in that
same is not in accordance with the law and the facts in the case."
If any note of
evidence of the hearing before the Referee was taken, it does not appear
in the record which consists of three separate files, the Clerk made up
from a mass of documents at the court's request, and it has been
necessary to examine each carefully to glean the information upon which
to dispose of the matter. Little help has been given by counsel.
original claim that the sum of $298.35 was due, was based upon an
alleged assessment of ad valorem taxes to-wit:
"Merchandise ............... $6,000.00 $298.35
Fixtures .................... 1,000.00
Air Condition, Heating
and/or Sprinkler Systems .... 800.00
Total Valuation ............. $7,800.00
for the year 1955."
assessment bears date
November 1, 1955
and is certified to by the Clerk of the City, "lawful custodian of
the minutes of the Council, and the seal."
It does not
appear necessary to deal here with anything but the claimed priorities
of the Government and City upon the funds in the hands of the Trustee.
That of the United States rests mainly upon Sections 6321 3
and 6323 4
Tit. 26 U. S. C. A. (the Internal Revenue Code of 1954).
to that portion of the Government's claim quoted above, it will be seen
that the taxes claimed were for the year 1954, covering the four
quarters of that year. It also shows the liens for the total amount
claimed were properly filed and notice given. The Trustee, who was his
own attorney, verifies this statement opposing the City's claim and
submitting the matter to the Referee. With no other evidence to the
contrary it is, therefore, found as a fact that the claim and lien of
had arisen and was perfected before bankruptcy on
February 17, 1955
On the other
hand the City's claim, on its face, is for taxes of 1955, which were not
assessed until November 1st of that year. Therefore, even accepting its
theory that the tax and lien accrued from January 1st of each year, no
such condition is present here, because the Government's claim and lien
had been perfected before
January 1, 1955
reasons I do not believe it necessary to engage in any extended
discussion of the State statutes, or the decisions cited.
Taxes as Administrative Expense]
As to the
contention that the City's claim should be paid as an
istrative expense, I believe it sufficient to say that the whole
proceeding was one of liquidation, not a continuation of the business.
While there are expressions in some of the cases cited that might be so
construed, I believe it sufficient to say, without analysis, that the
facts therein were quite different, and those comments were obitur
dictum, when applied here. The Government's lien took effect from
the recording of the notice and was superior to all others. Grand
Prairie State Bank v.
, 206 Fed. (2d) 217 [53-2 USTC ¶9481]. See also Great West
Assurance Company et al., 212 Fed. (2d) 784 [54-1 USTC ¶9373].
If the City's
claim and lien could not prevail over that of the
because the latter was first to accrue and be perfected, the former
could not be elevated to a higher rank by simply calling it an
istrative expense. I accordingly hold the disposition made by the
Referee was correct.
A judgment in
accord with this ruling should be presented for signing.
"1. That the Mills Company, Inc., above named, is justly and truly
indebted to the United States in the sum of $1,357.26 with interest
thereon as hereinafter stated, $ accruing, a total of $
the nature of the said debt is Internal Revenue taxes due pursuant to
law as follows:
With Interest at the
Nature of Tax and Year or Taxable Amount Rate
Statute Involved: Period Ended: of Tax: of 6% per Annum
to date of
WT 5-5292-54* 1st Qr. 1954 $328.43 payment
to date of
WT 8-5186-54** 2nd Qr. 1954 $428.73 payment
WT-2-23-8435-55 3rd Qr. 1954 $448.28
WT-2-23-8436-55 4th Qr. 1954 $151.80
* STATEMENT OF SECURED CREDITOR RIGHTS.
** Form 23C signed
Notice & Demand Issued
Notice of Tax Lien filed
June 5, 1954
** Form 23C signed
Notice & Demand issued
Notice of Tax Lien filed
said debt has priority, and must be paid in full in advance of
distribution to creditors, as and to the extent provided in Section 64
or Section 659 of the Bankruptcy Act, Section 3466 of the revised
statutes, or other applicable provisions of law. Attention is also
called to the provisions of Section 3467 of the revised statutes, with
respect to the personal liability of every executor,
istrator, assignee or other person who fails to pay the claim of the
in accordance with their priority."
"Comes now the City of Jackson, Mississippi, by its Tax Collector,
and presents its claim for 1955 ad valorem personal property taxes in
the amount of $298.35, a certified copy of which is attached hereto and
made a part hereof as if it were written herein, which the City prays
will be approved for payment as an
istrative expense of the trustee liquidating The Mills Company, Inc.,
Bankrupt No. 4123.
9756 of the Mississippi Code of 1942 provides for the assessment and
collection of ad valorem taxes from trustees. Gerard v.
731, 36 S. 1034, 66 L. R. A. 461.
of the citations given the city prays that its claim for ad valorem
personal property taxes as an
istrative expense of the trustee will be approved for payment.
J. R. Skinner, the duly appointed, qualified and acting City Clerk and
lawful custodian of the minutes of the Council and seal of said City,
certify that the assessment in the name of Stuart's, 201 N. Farish
Street, Jackson, Mississippi, as it appears on Page 186, Line 1 of the
Personal Assessment Roll, City of Jackson, Mississippi, for the year
1955 is as itemized below, to-wit:
"Total valuation ....................... $7,800.00
Column #4--Amount of money employed
in merchandise .......................... 6,000.00
Column #6--Office or store fixtures
or equipment and/or adding machines,
cash registers, and typewriters ......... 1,000.00
Column #13--Air conditioning, heating
and/or sprinkler systems ................ 800.00
my signature and official seal of office this 21 day of October,
"If any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount (including any interest, additional
amount, addition to tax, or assessable penalty, together with any costs
that may accrue in addition thereto) shall be a lien in favor of the
United States upon all property and right to property, whether real or
personal, belonging to such person."
"(a) Invalidity of lien without notice--Except as otherwise
provided in subsection (c), the lien imposed by section 6321 shall not
be valid as against any mortgagee, pledgee, purchaser, or judgment
creditor until notice thereof has been filed by the Secretary or
Under state or territorial laws.--In the office designated by the law of
the State or Territory in which the property subject to the lien is
situated, whenever the State or Territory has by law designated an
office within the State or Territory for the filing of such notice; or
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 or Territory has not
by law designated an office within the State or Territory for the filing
of such notice; * * * or
of notice.--If the notice filed pursuant to subsection (a)(1) is in such
form as would be valid if filed with the clerk of the United States
district court pursuant to subsection (a)(2) such notice shall be valid
notwithstanding any law of the State or Territory regarding the form or
content of a notice of lien."