Mississippi2

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[63-2 USTC ¶9657] United States of America , Acting by and through the Internal Revenue Service, Appellant v. William R. Bradley, Trustee, Appellee

(CA-5), 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.

Louis F. 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. Stone, Jackson , Leon L. Porter, Jr., 232 Stevens Bldg., Clarksdale , Miss. , for respondent.

Before PHILLIPS, ^* WISDOM and GEWIN, Circuit Judges.

GEWIN, Circuit Judge:

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.

The United 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 United States liens. The United States 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 ( Wash. 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:

Sect. 67b:

". . . Statutory liens for taxes and debts owing to the United States or to any state or any subdivision thereof, created or recognized by the laws of the United States or of any state may be valid against the trustee, even though arising or perfected while the debtor is insolvent. . . ."

Sect. 64a:

"The 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 United States or any state or any subdivision thereof."

It is clear that neither of these sections answers the question before us, i.e., whether United States tax liens are superior to state tax liens which arose prior to the United States liens. We therefore look for guidance to the statutes creating the liens. The United States liens are created by the Internal Revenue Code of 1954.

Sect. 6321:

"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 to property, whether real or personal, belonging to such person."

Sect. 6322:

"Unless another date is specifically fixed by law, the lien imposed by Sect. 6321 shall arise at the time the assessment is made. . . ."

Sect. 6323:

". . . 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. . . ."

The state liens are created by the following state statutes, Mississippi Code of 1942 (Recomp.):

Sect. 6744:

"Taxes, state, county and municipal, assessed upon lands or personal property, . . . shall be a lien upon and bind the property assessed, . . ."

Sect. 10119:

". . . 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 United States and the State statutes are clear and definite on the question of when the liens arise. However, neither provides any guidance as to priority. The United States 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, while the United States liens upon which there has likewise been no attachment or levy, are choate. The United States 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 United States 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):

"There is 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."

The 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.

The Eighth Circuit in Adams v. O'Malley [50-2 USTC ¶9349], 182 F. 2d 925 (1950) followed Sampsell:

"The United States 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 U. S. C. A.

"Our 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 U. S. 81 (1947); Rankin v. Scott, 12 Wheat. 179.

The judgment is affirmed.

^* Of the Tenth Circuit, sitting by designation.

¹ "Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin 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."

 

 

[57-1 USTC ¶9564]In the Matter of The Mills Company, Inc., Bankrupt

U. S. District Court, So. Dist. Miss. , Jackson Div., In Bankruptcy No. 4123, 148 FSupp 33, 1/21/57

[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 assessed on November 1, 1955 . The municipality claimed priority, asserting that the taxes accrued as of 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 it an admin istrative expense.

Paul G. 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.

DAWKINS, District Judge:

The Mills 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:

[Federal 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 and

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 Referee;

(2) That the City of Jackson has also filed its claim for taxes and is seeking to have such tax apportioned as an admin 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 admin 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.

The Trustee prayed for a hearing "and that an order be entered adjudicating the rights of the claimants."

The Trustee, having sold the assets of the Bankrupt, filed his final account on August 18, 1956 showing:

"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

 

"There will be no dividends for general creditors."

[Federal Liens Entitled to Priority]

On this 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.

The hearing was held accordingly, and on September 21, 1956 , the Referee entered his order as follows:

"That 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 admin 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 filed 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.

The City's original claim that the sum of $298.35 was due, was based upon an alleged assessment of ad valorem taxes to-wit:

                                                        Total Tax

"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."

 

This 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).

By reference 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 the United States 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 .

For these reasons I do not believe it necessary to engage in any extended discussion of the State statutes, or the decisions cited.

[Local Taxes as Administrative Expense]

As to the contention that the City's claim should be paid as an admin 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. United States , 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 United States 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 admin 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 "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 $ accruing.

"2. That 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

                                                                  From 
5/11/54
 to date of

WT 5-5292-54*             1st Qr. 1954            $328.43         payment

                                                                  From 
8/11/54
 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 5-10-54 .

Notice & Demand Issued 5-11-54 .

Notice of Tax Lien filed June 5, 1954 in Hinds County , Mississippi .

** Form 23C signed 9-3-54 .

Notice & Demand issued 8-11-54 .

Notice of Tax Lien filed 9-17-54 in Hinds County , Mississippi ."

"1. That 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, admin istrator, assignee or other person who fails to pay the claim of the United States in accordance with their priority."

² "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 admin istrative expense of the trustee liquidating The Mills Company, Inc., Bankrupt No. 4123.

"Section 9756 of the Mississippi Code of 1942 provides for the assessment and collection of ad valorem taxes from trustees. Gerard v. Duncan , 84 Miss. 731, 36 S. 1034, 66 L. R. A. 461.

"In view of the citations given the city prays that its claim for ad valorem personal property taxes as an admin istrative expense of the trustee will be approved for payment.

"I, Mrs. 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

 

"Witness my signature and official seal of office this 21 day of October, 1955."

³ "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."

⁴ "(a) Invalidity of lien without notice--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

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

"(2) 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 or Territory has not by law designated an office within the State or Territory for the filing of such notice; * * * or

"(3) Form 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."