¶9349]Ernest A. Adams, County Treasurer of Douglas County, Nebraska,
Appellant v. George W. O'Malley, Collector of Internal Revenue, Appellee
U. S. Court of Appeals, 8th Circuit, No. 14,116, 182 F2d 925, 6/22/50
Priorities of tax liens.--Section 3466 of the Revised Statutes
does not give tax liens of the United States for social security and
withheld taxes a priority over the liens of a county for personal
property taxes against a bankrupt estate. Reversing and remanding
District Court decision.
Mr. Henry C.
Winters, Deputy County Attorney of Douglas County, Nebraska, (Mr. James
of Douglas County, Nebraska, was with him on the brief) for appellant.
Mr. Carlton Fox, Special Assistant to The Attorney General (Mr. Theron
Lamar Caudle, Assistant Attorney General, Mr. Ellis N. Slack, Miss Helen
Goodner and Mr. Homer R. Miller, Special Assistants to The Attorney
General, and Mr. Joseph T. Votava, United States Attorney, were with him
on the brief) for appellee.
SANBORN, JOHNSEN, and RIDDICK, Circuit Judges.
This is a
controversy between the County of Douglas, Nebraska, and the
over the priorities of their respective tax liens in the bankruptcy
proceedings of Empire Contractors, Inc. The Referee in Bankruptcy and
the District Court, on review of his order, determined that the liens of
for social security and withholding taxes were entitled to priority over
the liens of the County for personal property taxes. The trustee in
bankruptcy was therefore directed to apply the funds in his hands, which
were insufficient to pay the liens in full, toward the payment of the
liens of the
. This appeal was taken by the County from the judgment affirming the
order of the Referee.
which were stipulated, may be summarized as follows: Empire Contractors,
Inc., was adjudged a bankrupt on
January 22, 1948
, and a trustee was elected, and qualified. The County filed its claim
for personal property taxes for the years 1944 to 1948, inclusive, in
the amount of $2,261.06 and interest, alleging that the taxes were first
liens upon all of the personal property of the bankrupt, under §77-205,
Revised Statutes of Nebraska 1943. 1
of Internal Revenue, on behalf of the
, filed a claim for withholding and social security taxes for the
taxable periods ended
June 30, 1944
December 31, 1947
, inclusive, in the total amount of $6,698.40 and interest. The
Collector later filed an additional claim for social security taxes for
1947 in the amount of $35.95 and interest. These federal taxes were
liens by virtue of §§ 3670 and 3671 of the Internal Revenue Code,
Title 26 U. S. C. A.
converted the bankrupt's assets into cash, and, after paying all costs
and claims superior to those of the County and the
, had on hand $1,869.82 available for the payment of tax lien claimants,
the number of which was ultimately reduced to two, namely, the County
The claim of
the County is a valid claim and represents liens for taxes duly assessed
and levied by the taxing authorities of the State of Nebraska, and of
Douglas County and the City of Omaha, the total amount of the County's
claim with interest as of April 18, 1949, being $2,591.13. Distress
warrants for the County's taxes were duly issued, but no levies were
made under such warrants prior to bankruptcy of Empire Contractors, Inc.
filed by the Collector of Internal Revenue are valid tax lien claims,
April 18, 1949
, there was due the
of Sec. 3466, Revised Statutes]
determination of the Referee that the liens of the
are superior to those of the County is based upon the proposition that
§3466 of the Revised Statutes of the
C. A. §191) is applicable to bankruptcy proceedings and is controlling.
That section provides:
any person indebted to the United States is insolvent, or whenever the
estate of any deceased debtor, in the hands of the executors or
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."
in support of his decision, cited United States v. Texas, 314 U.
S. 480; Michigan v. United States, 317 U. S. 338 [43-1 USTC ¶9225];
United States v. Waddill, Holland & Flinn, Inc., 323 U. S.
353 [45-1 USTC ¶9126]; Illinois ex rel. Gordon v. Campbell, 329
U. S. 362, none of which dealt with bankruptcy proceedings. Upon review
of the Referee's order, the District Court affirmed without opinion. It
is apparent that the only question passed upon by the Referee and the
District Court is whether, because of R. S. §3466 (31
C. A. §191), the tax liens of the
were superior to the tax liens of the County.
of Sec. 3466, Revised Statutes]
now virtually concedes that R. S. §3466 (31
C. A. §191), upon which the Referee relied, is inapplicable to
proceedings in bankruptcy. In a footnote on page 7 of the Government's
brief, it is stated:
3466 probably does not apply in bankruptcy proceedings in determining
priorities of lien claimants. It is clear that priorities of unsecured
prior claimants are determined under Section 64 a, Bankruptcy Act, as
amended. Guarantee Co. v. Title Guaranty Co., 224
152. See In re Taylorcraft Aviation Corp., 168 Fed. (2d) 808 (C.
A. 6th) [48-1 USTC ¶9288]. Moreover, Section 3466 does not create a
lien but establishes a priority right. Bramwell v. U. S. Fidelity
483. Thus the referee was apparently technically in error in his
conclusions that this case is governed by Section 3466. But, as we will
show, the principles of cases decided under Section 3466 have a close
of U. S.]
, in its brief, now states its position to be as follows:
67 b, Bankruptcy Act, as amended [§107 b, Title 11, U. S. C. A. 2]
provides that statutory liens including liens of the United States and
states or subdivisions thereof are valid against the trustee in
bankruptcy even though arising within four months of the petition in
bankruptcy. If such liens are not perfected before bankruptcy they still
may be valid if within the time permitted by law they are perfected. If
seizure is required to perfect them they may be perfected by filing
notice with the court. Under the
decisions seizure is apparently unnecessary to give the County a lien on
all personal property of debtor. The lien is provided for under Section
77.205 [R. S. Neb., 1943], and under state law arises on November 1st
following the levy and attaches to all personal property of debtor
apparently without seizure being required, as against other private
statutory or contractual lienholders. Ryder v. Livingston, 145
862, 18 N. W. 2d 507. It seems that the problem here turns primarily on
whether the state law is controlling in fixing the priorities of the
parties or whether, as was decided below, the court should follow the
principles laid down and adjudicated by the federal cases such as those
decided under Section 3466, Revised Statutes [31 U. S. C. A. §191],
which hold that inchoate liens of a state or county unperfected by
seizure or segregation of a debtor's property before insolvency even
though prior in point of time and recognized as valid against subsequent
private lien claimants are not effective to defeat the liens or claims
of the United States. It is our position that even though Section 3466
is inapplicable in determining priorities in straight bankruptcy, the
rationale of cases under that section hereinafter discussed should be
followed in determining priorities of liens under Sections 3670 and 3671
of the Internal Revenue Code.
argument that the unperfected or inchoate lienholders own an interest in
the property and consequently subsequent liens of the
should only attach to debtor's equity is similar to the argument that
has been advanced and repeatedly rejected, as we will later show, in
upholding the priority of the
under Section 3466."
Act Is Applicable]
There can be
no doubt, we think, that the Bankruptcy Act, as amended, provides a
complete and exclusive system for
istering and distributing the estates of bankrupts, and that, in
distributing the assets of a bankrupt, the trustee is obligated to
comply strictly with the provisions of the Act.
Jersey v. Anderson (1906), 203
483, 489, the Supreme Court said:
requirement of the present law [Bankruptcy Act of 1898, §64a, 30 Stat.
563] is a wide departure from the Act of 1867 [14 Stat. 530, c. 176] and
specifically obliges the trustee to pay all taxes legally due and owing,
without distinction between the
and the State, county, district or municipality."
Title & Trust Co. v. Title Guaranty & Surety Co., (1912),
224 U. S. 152, 160, the Supreme Court, in rejecting the contention that
§§ 3466, 3467 and 3468 of the Revised Statutes established the
priority of the United States in a bankruptcy proceeding, said:
* * The act [Bankruptcy Act of 1898] takes into consideration, we think,
the whole range of indebtedness of the bankrupt, national, state and
individual, and assigns the order of payment."
In State of
v. Ross (1935), 8 Cir., 80 Fed. (2d) 329, 331, this Court said:
Bankruptcy Act deals specifically with the question of priority of
claims, and by section 64b(6), 11 U. S. C. A. §104(b)(6), provision is
made for the payment of all taxes legally due and owing by the bankrupt
to the United States, state, county, district, or municipality. It seems
clear that the specific provision for the payment of taxes does not
contemplate any right of priority as between the various taxing
Court affirmed in 299
72, saying (p. 73):
referee and both courts proceeded upon the theory that by §64b, ¶6, of
the Bankruptcy Act, all taxes, whether of the United States, state,
county, district or municipality, were placed on a parity. We agree with
of the Bankruptcy Act, as amended (§104(a), Title 11 U. S. C. A.), so
far as pertinent, now provides:
debts to have priority, in advance of the payment of dividends to
creditors, and to be paid in full out of bankrupt estates, and the order
of payment shall be (1) * * *; (2) * * *; (3) * * *; (4) taxes legally
due and owing by the bankrupt to the United States or any State or any
subdivision thereof: * * *."
In 6 Am. Jur.,
Bankruptcy, §394, page 766, it is said:
* * Payment according to this provision [Bankr. Act, §64a (11
C. A. §104(a))] is not dependent upon the question whether the taxes
are a secured debt, * * *. A claim for taxes due the
from a bankrupt's estate has no priority over a claim for taxes due the
state, but both must be paid pari passu."
In a footnote,
the author of the text says (page 766 of 6 Am. Jur.):
prevailing judicial opinion at the present time is that, as to estates
in bankruptcy, the Bankruptcy Act supersedes Rev. Stat. §3466, 31
C. A. §191, and that the latter section does not apply in cases of
bankruptcy. Hence, in cases of bankruptcy, the priority of taxes due to
is to be determined not by Rev. Stat. §3466, but by Bankr. Act, §64a,
C. A. §104(a)."
v. Pringle, 268
315; In re Knox-Powell-
, 9 Cir., 100 Fed. (2d) 979, 982 [39-1 USTC ¶9277]; United
States v. Sampsell, 9 Cir., 153 Fed. (2d) 731, 734 [46-1 USTC ¶9186];
In re Taylorcraft Aviation Corp., 6 Cir., 168 Fed. (2d) 808, 810
[48-1 USTC ¶9288].
It is true
that in United States v. Reese, 7 Cir., 131 Fed. (2d) 466 [42-2
USTC ¶9763], it was held that in a bankruptcy proceeding a tax lien of
the United States for income taxes was entitled to priority over
inchoate liens of the state for taxes, because of R. S. §3466 (31 U. S.
C. A. §191). Apparently in that case the applicability of that section
to bankruptcy proceedings was mistakenly taken for granted.
It is obvious
that Section 64a of the Bankruptcy Act, as amended, 11
C. A. §104(a), makes no distinction between state and federal taxes. It
is equally true, we think, that Section 67 b and c of the
Bankruptcy Act, being §107(b) and (c) of Title 11, U. S. C. A., does
not give statutory tax liens of the United States priority over
statutory tax liens of a state. Since state and federal taxes and upon a
parity in the distribution of the assets of a bankrupt, it would seem
illogical that tax liens of the
should be accorded priority over state tax liens.
At the time of
the adjudication, all of the property of the bankrupt was subject to
liens for unpaid personal property taxes levied by the County by virtue
of State law and to liens for unpaid
taxes by virtue of federal law. Neither the State nor the
had at that time foreclosed its liens or levied upon any specific
property of the bankrupt.
and Perfected Liens]
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 §67b of
the Bankruptcy Act, §107(b) of Title 11 U. S. C. A.
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
v. Sampsell, supra, 9 Cir., 153 Fed. (2d) 731, 734 [46-1 USTC ¶9186];
In re Taylorcraft Aviation Corp., supra, 6 Cir., 168 Fed. (2d)
808, 810 [48-1 USTC ¶9288].
asks us to direct the manner of distribution of the $1,869.82, asserting
that priority depends upon the time when the respective liens of the
County and the
attached. The question as to the applicable method of distribution in
the event the liens of the United States were not entitled to priority
was not ruled upon by either the Referee or the District Court, and,
while we have no reason to challenge the propriety of the method
suggested by the County, we think that the question should be determined
initially by the Referee and the District Court.
is reversed, and the case is remanded for further proceedings.
4 Revised Statutes of
Personal property taxes; when due; first lien. All general
personal property taxes levied for the state, or for any county, city,
village or other political subdivision therein, shall be due and payable
on November 1 next following the date of levy thereof, and from that
date shall be a first lien upon the personal property of the person to
whom assessed until paid."
provisions of section 96 of this title to the contrary notwithstanding,
statutory liens in favor of employees, contractors, mechanics,
landlords, or other classes of persons, and statutory liens for taxes
and debts owing to the United States or any State or 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 and within four months prior to
the filing of the petition in bankruptcy or of the original petition
under chapter 10, 11, 12, or 13 of this title, by or against him. Where
by such laws such liens are required to be perfected and arise but are
not perfected before bankruptcy, they may nevertheless be valid, if
perfected within the time permitted by and in accordance with the
requirements of such laws, except that if such laws require the liens to
be perfected by the seizure of property, then shall instead be perfected
by filing notice thereof with the court."