New Hampshire2

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[77-1 USTC ¶9373]Hinkley & Donovan v. William D. Paine, III, et al. The Exeter Banking Company v. Exeter Depot, Inc., et al. Indian Head National Bank of Portsmouth v. United States of America and State of New Hampshire

U. S. District Court, Dist. N. H., Civil Action Nos. 76-19, 76-104, 76-201, 424 FSupp 1013, 1/14/77

[Code Sec. 6323--result unchanged by the '76 Tax Reform Act]

Tax liens: Priority: Federal v. state.--In two of three consolidated interpleader actions, liens imposed by the United States were determined to be first in time and therefore had priority over liens of the State of New Hampshire involving claims against certain debtors for unpaid taxes. In one action, however, New Hampshire 's lien was "first in time" and the court determined that the state would be entitled to summary judgment except for the reserved question of insolvency for which a later hearing was scheduled. Since there was no implied lien created under New Hampshire law, since the statutory lien was not choate at the time demands for payment were made by the state or before assessment by the United States and since New Hampshire was neither a "judgment lien creditor" nor a "holder of a security interest", the court determined which liens attached "first in time" without regard to perfection by notice. The court further determined that the bankstakeholders were not entitled to attorney's fees from the interpleaded fund where the amount in the fund was insufficient to satisfy state tax liens.

Edward Gage, Scammon, Gage & Whitman, 28 Front St., Exeter, N. H. 03833, for Exeter Banking Co. David H. Souter, Attorney General, James Sargent, State of New Hampshire, Room 208, State House Annex, Concord, N. H. 03301, for N. H. W. H. D. Townley Tilson, Assistant United States Attorney, Concord, N. H., for U. S. John J. Ryan, Casassa, Mulherrin & Ryan, Lafayette Road, Hampton, N. H., for Exeter Depot & Estate. John H. McEachern, Shaines, Madrigan, McEachern, 25 Maplewood Ave. , Portsmouth , N. H. 03801, for Indian Head Nat'l. Bank of Portsmouth .

Partial Summary Judgment

BOWNES, District Judge:

These three interpleader actions were initially commenced in the State Court and removed here by the United States . The facts have been stipulated in each case, and they have been consolidated because the primary parties and the issues of law are the same in each.

The basic issue is whether the United States or the State of New Hampshire has a priority interest in collecting their respective claims for unpaid taxes. A secondary issue is whether attorneys' fees and costs should be paid to the plaintiffs before satisfying the claims of the other parties. The statutes involved are 26 U. S. C. §§ 6321-6323 and 6331, and NH RSA 78-A:7,20 and 21.

The Federal Courts are faced with the recurring problem of whether a lien created by a state statute takes priority over a federal tax lien. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323 (1966); cf. United States v. Town of Marlborough , 305 F. Supp. 718 (D. N. H. 1969); United States v. Town of Pittsfield, 302 F. Supp. 316 (D. Me. 1969). This is because federal law, not state law, determines the priority between a federal tax lien and competing liens. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950); Town of Marlborough , supra, 305 F. Supp. at 720. The reason for applying federal law is the desirability of a uniform application of federal tax laws. United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361 (1953).

The provision of the Internal Revenue Code creating the federal tax liens involved in these cases does not expressly confer upon them priority over competing liens. 26 U. S. C. §6321. Instead, the common law principle that "the first in time is the first in right" is applied, and the priority of liens depends on the time competing liens attach and become choate. Equitable Life, supra, 384 U. S. at 328; United States v. Pioneer American Insurance Company [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). There are certain classes of secured creditors and other parties with an interest in the property to which a federal lien has attached who are protected or given priority by the Internal Revenue Code. 26 U. S. C. §6323. This will be treated separately, infra.

One other consideration is whether or not any of the debtors are insolvent. "Whenever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied . . .." 31 U. S. C. §191. The facts with regard to this issue have not been stipulated, and the issue has been expressly reserved.

The state liens in these cases can only prevail over the federal tax liens if they are choate and attached before the federal liens. United States v. Vermont, 377 U. S. 351 (1964); New Britain , supra, 347 U. S. 81.

A lien is choate "when [1] the identity of the lienor, [2] the property subject to the lien, and [3] the amount of the lien are established." New Britain , id. at 84.

Implied Lien

The State contends that an implied lien is established under NH RSA 78-A. Part II of that statute provides:

Each operator shall keep books and records in a form acceptable to the department showing the amount of all taxes collected. The operator shall pay the taxes over to the state as provided in this section. If the department believes that special action is necessary because payment of taxes collected may be in jeopardy, it may direct an operator to keep all taxes collected separate from any other funds. The department may require that the taxes be periodically deposited in a bank designated by the department, in an account in the name of the commission. The department may withdraw these tax collections from the bank account and apply them to the payment of the taxes due from the operator. When an operator commingles tax money with money belonging to him, the claim of the state for the tax is traceable, is enforceable against all other claims and takes precedence over all other claims against the commingled funds. No taxes collected by an operator under this chapter may be sent outside the state without the written consent of the department.

None of the three elements of a choate lien are met by this "implied lien" at the time of collection by the operator. The State is not aware of the transaction, so the identity of the lienor is not known; the property subject to the lien has not been identified and segregated; nor is the amount of the lien known or established. Had the State exercised its statutory authority to "require that the taxes be periodically deposited in a bank designated by the department, in an account in the name of the commission," the segregated funds, their amount, and the identity of the lienor would be clearly established, and the lien would be choate. As the United States notes in its memorandum at page 7, "[T]he deposited taxes would no longer belong to the taxpayer-operator, but would belong to the State . . .."

The State's contention that an implied lien is created at all is of dubious merit, Flack v. Agency, 96 N. H. 335 (1950); cf. Allen v. Bemis, 99 N. H. 247 (1954); but:

There is no dispute that the State of New Hampshire has, by statute, acquired liens upon ". . . all property and rights to property . . ." of each taxpayer-operator for unpaid meals and rooms taxes, plus statutory additions, and that the lien arose at the time demands for payment of the taxes were made. RSA 78-A:21. U. S. Memorandum, p. 5.

Statutory Lien

The next question is whether the statutory lien was choate at the time demands for payment were made by the State or at some other time before assessment was made by the United States .

In applying the three-part New Britain test to determine the choateness of the State's lien, I note the similarity in the phraseology and structure of the state and federal statutes which create and enforce the liens. ¹ See United States v. Vermont , 337 U. S. at 351, 352, 354. A comparison of the two statutes reveals the following:

1. Identity of Lienor

New Hampshire is identified as the lienor when:

any operator required to collect and transmit a tax under this chapter neglects or refuses to pay the tax after demand . . .. NH RSA 78-A:21.

The United States is identified as the lienor when:

any person liable to pay any tax neglects or refuses to pay the same after demand . . .. 26 U. S. C. §6321.

2. Property Subject to the Lien

The New Hampshire language is:

upon all property and rights to property whether real or personal, belonging to the operator. NH RSA 78-A:21.

The Federal language is:

upon all property and rights to property, whether real or personal, belonging to such person. 26 U. S. C. §6321.

3. Amount of the Lien

The State statute sets the lien as:

the amount [of the tax], together with all penalties and interest provided for in this chapter and together with any costs that may accrue in addition to the tax . . .. NH RSA 78-A:22.

The Federal language is:

the amount [of the tax] (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) . . .. 26 U. S. C. §6321.

There is no substantive difference between the requirements for choateness of the state and federal statutes.

Vermont, supra, is the closest case on point that I have found. In that case, the State of Vermont assessed a solvent taxpayer for past due state taxes pursuant to statutory language virtually the same as that of New Hampshire in this case. The United States assessment followed shortly. The State sued and obtained a judgment in State Court. Then the United States sued in Federal Court to uphold its lien. The District Court held that the State lien had priority and was upheld by the United States Supreme Court.

The United States seeks to distinguish that case because "the statutory scheme in each of those cases [ Vermont and New Britain ] provided for distraint or levy without intervening judicial proceedings." Memorandum, p. 6. The Court in Vermont , supra, 377 U. S. at 359, did note that the statutes involved in Vermont and New Britain were "summarily enforcible," but this was not basic to its discussion. Id. at n. 12. The record in New Britain does not disclose whether New Britain , Connecticut , foreclosed on its lien by admin istrative process, but in Vermont the State did not foreclose by admin istrative process even though it had that statutory right.

The Filing Issue

The next issue is whether New Hampshire is a "judgment lien creditor" or a "holder of a security interest" within the meaning of 26 U. S. C. §6323(a) which 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 . . . has been filed by the Secretary or his delegate.

In Gilbert Associates, supra, 348 U. S. at 363-364, the Supreme Court held that a New Hampshire town was not a judgment creditor within the meaning of the statute. ²

That ruling still controls.

. . . The Supreme Court of New Hampshire held that since notice of the Government's lien was not filed until August 6, 1948, and the Town's taxes were assessed on April 1, 1947, and April 1, 1948, respectively, and such tax assessments are "in the nature of a judgment" under the law of New Hampshire, the Town was a judgment creditor within the meaning of [26 U. S. C. §6323] and the Government's lien was not valid as against the Town's.

Was the Town a judgment creditor within the meaning of [26 U. S. C. §6323]? The New Hampshire Supreme Court in the instant case said:

"It is settled by our decisions that the assessment of a tax is in the nature of a judgment enforced by a warrant instead of an execution Boody v. Watson, 64 N. H. 162, 167; Jaffrey v. Smith, 76 N. H. 168, 171; Nottingham v. Company, 84 N. H. 419. See also, Automatic Sprinkler Corp. v. Marston, 94 N. H. 375." 97 N. H. 411, 414, 90 A. 2d 499, 502.

We would not question or presume to say what the nature and effect of a tax proceeding is in New Hampshire . The state is free to give its own interpretation for the purpose of its own internal admin istration.

The Supreme Court of New Hampshire freely concedes, however, as it must, that the meaning of a federal statute is for this Court to decide. Congress enacted [26 U. S. C. §6323] to meet the harsh condition . . . that a secret federal tax lien was good against a purchaser for value without notice.

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 [26 U. S. C. §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.

We conclude that whatever the tax proceedings of the Town of Walpole may amount to for the purposes of the State of New Hampshire, they were not such proceedings as resulted in making the Town a judgment creditor within the meaning of [26 U. S. C. §6323]. (Cites omitted.)

I now turn to the question of whether New Hampshire is a holder of a security interest. Since I have been unable to find any cases on point, I must determine the congressional intent of the statute.

Public Law 89-719, which amended 26 U. S. C. §6323, added the words "holder of a security interest." The question, which could not have been answered under Gilbert and which has not yet been answered definitively, is whether the State has the status of a "holder of a secured interest." Section 6323(h)(1) provides:

The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

The Senate Report which accompanied P. L. 89-719 elucidated this definition further.

(8) Definitions and special rules (sec. 6323(h) and (i) of the Code)

A number of terms relating to the provisions discussed to this point are defined in the bill. The more significant of these are discussed below.

(a) Security interest.--Under present law, mortgagees and pledgees are given priorities over tax liens, notices of which have not yet been filed. The bill, as previously indicated, applies this priority status to holders of a "security interest." A security interest is an interest in property acquired by contract for the purpose of securing payment or performance of an obligation or as indemnification against loss or liability. The term, which includes mortgagees and pledgees, is used to substantially conform the internal revenue laws in this respect to the terminology of the Uniform Commercial Code. It is intended that if a Federal tax lien is invalid against an initial holder of a security interest, it also is to be invalid to the same extent against any person who succeeds to the interest of the initial holder, whether by purchase or otherwise.

A security interest is considered as arising when the following conditions are met:

(1) the property is in existence and the interest is protected under local law against a subsequent judgment lien arising out of an unsecured obligation; and

(2) to the extent the holder has parted with money or money's worth.

For Federal tax purposes, a security interest is not considered as existing until the conditions set forth here are met even though local law may relate a security interest back to an earlier date and even though it might be an effective security interest as of the earlier date under the Uniform Commercial Code. 89 U. S. Code & Adm. News, 3-3734.

The 1966 Amendment to 26 U. S. C. §6323(a) was an attempt to more closely conform federal law to the Uniform Commercial Code. 89 U. S. Code & Adm. News, 3-3722 and 3-3724. Congress, in changing the term "pledgees" to the words "holders of security interests" did not intend to include noncommercial transactions such as state tax liens.

Congress very specifically provided for various kinds of transactions which would have priority even over filed tax liens. In doing so, they could have included state tax liens in general as they did tax assessments on real property. 26 U. S. C. §6323.

The comment to the amendment to Section 6323(a) in the Senate Report, supra, at 3724-3725 is not particularly helpful except insofar as it emphasizes the nominal nature of the change from "pledgees" to "holders of security interests."

The substitution of "holder of a security interest" for "mortgagee" and "pledgee" replaces the latter terms with a more general term used in the Uniform Commercial Code. More important, however, it is intended that, under the bill, the various types of interests defined in this provision are to have a priority over a nonfiled Federal tax lien if they come within the definitions of these terms (discussed in No. 8 below), whether or not in all other regards they are definite and complete at the time notice of the tax lien is filed.

The second sentence indicates that the concept of "choateness" would be abolished if the term "holders of secured interests" were to be applied broadly outside of commercial settings. If this transaction were to be held a "secured interest" within the meaning of the statute, it would be unnecessary to determine whether it was choate.

The statute also emphasizes the commercial nature of the term "holder of a security interest" by its requirement that the holder must have parted "with money or money's worth." 26 U. S. C. §6323(b)(6)(B).

Although it is true that a taxpayer parts with his money, and it could be argued that a state gives its citizens money's worth, these points are inapposite to the cases at hand. All taxes, both state and federal, involved in this litigation are collected by the businesses as agents of the respective governments. The businesses themselves are not paying the taxes for their own benefit. (The F. I. C. A. tax is paid in part directly by the employer, but the benefit is to the employee.) I, therefore, hold that the State is not a holder of a security interest.

Therefore, I must now determine which liens attached "first in time" without regard to perfection by notice. Equitable Life, supra; Pioneer American, supra; New Britain , supra; Vermont , supra.

In Hinkley & Donovan v. William D. Paine, III, et al, Civ. No. 76-19, Stipulation 5 states:

On January 9, 1975, the State of New Hampshire made an assessment for and demand for payment of amounts due under RSA 78-A . . ..

Stipulation 6(a) states:

On October 27, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Mt. Washington Hotel Corporation for unpaid withholding and Federal Insurance Contribution Act taxes . . ..

Stipulation 6(b) states:

On March 24, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Mt. Washington Hotel Corporation for unpaid Federal Unemployment Tax Act taxes . . ..

Therefore, the State's lien is "first in time," and the State would be entitled to summary judgment except for the reserved question of insolvency.

In The Exeter Banking Company v. Exeter Depot, Inc., et al, Civ. No. 76-104, Stipulation 2 states:

On March 17, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Exeter Depot, Inc., for unpaid Federal Insurance Contributions Act and withholding taxes, penalties and interest for the fourth quarter of 1974 in the total amount of $9,135.84. After application of all payments or credits made against said assessment, there remains due and owing upon said assessment the sum of $6,257.82, which sum is in excess of the fund before the Court.

Stipulation 6 states:

On August 25, 1975, a New Hampshire Tax Return, due July 31, 1975, reporting the amount of $3,944.00 as due from Exeter Depot, Inc., pursuant to RSA 78-A (meals and rooms taxes) for the quarter ending June 30, 1975 was completed by Thomas J. Burke, an officer of said corporation, and a verbal demand for payment of the amount shown as due was made at that time by an agent of the State. Said return was filed on August 28, 1975 together with a check in an amount equal to full payment of the amount shown on the return; however, said check was returned to the State of New Hampshire for lack of funds prior to September 23, 1975 . On September 23, 1975 at 2:30 p. m. the State of New Hampshire personally served notice of its assessment and made demand upon the taxpayer for payment . . ..

The United States is entitled to summary judgment in this case.

In Indian Head National Bank of Portsmouth v. United States of America and State of New Hampshire, Civ. No. 76-201, Stipulation 2 states:

On September 1, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Hart House, Inc. for unpaid Federal Insurance Contribution Act and withholding taxes, penalties and interest for the fourth quarter of 1974 in the total amount of $3,046.70. No payments or credits have been made against said assessment and there remains due and owing upon said assessment the sum of $3,046.70, which sum is in excess of the fund before the Court.

Stipulation 6 states:

On September 4, 1975, the State of New Hampshire personally served notice of assessments and made demands upon Hart House, Inc., d/b/a Hart House General Store and Aaron Conant Coffee Shop for payments of amounts due to be paid over pursuant to RSA 78-A (meals and rooms taxes) for the quarters ending March 31, 1975 and June 30, 1975, remaining unpaid in the net amount of $2,153.40, which amount reflects all payments and credits received to the date of assessment.

The United States is entitled to summary judgment in this case.

Attorney' Fees

26 U. S. C. §6323(b)(8) provides:

Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

* * *

--With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.

In United States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421 F. 2d 519 (2d Cir. 1970), the Court held that "a disinterested bankstakeholder is not entitled to attorney's fees from a fund when the total amount is insufficient to satisfy prior federal tax liens."

Id. at 521. I extend that holding to funds insufficient to pay state tax liens.

In Hinkley & Donovan v. William D. Paine, III, et al, Civ. No. 76-19, the Clerk will set a hearing on the reserved question of insolvency.

In The Exeter Banking Company v. Exeter Depot, Inc., et al, Civ. No. 76-104, and Indian Head National Bank of Portsmouth v. United States of America and State of New Hampshire, Civ. No. 76-201; Judgment for the United States is granted.

¹ If any operator required to collect and transmit a tax under this chapter neglects or refuses to pay the tax after demand, the amount, together with all penalties and interest provided for in this chapter and together with any costs that may accrue in addition to the tax becomes a lien in favor of the state upon all property and rights to property whether real or personal, belonging to the operator. The lien arises at the time demand is made by the commission and continues until the liability for the sum, with interest and costs, is satisfied or becomes unenforceable. Certificates of release of such lien shall be given by the commission on the satisfaction of the lien. NH RSA 78-A:21.

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 rights to property, whether real or personal, belonging to such person. 26 U. S. C. §6321.

² Ironically, the result in Gilbert would now be different due to section 6323(b)(6) which provides in effect that towns with real estate liens have priority over a federal tax lien.

 

 

[69-1 USTC ¶9351] United States of America v. Charles H. Barnard et al.

U. S. District Court, Dist. N. H., Civil Action No. 2107, 2/6/69

[Code Sec. 6323]

Tax liens: Priority: State real estate tax lien.--A town's lien for real property taxes took priority over a Federal tax lien in regard to the marshaled proceeds from the sale of the real property where the property taxes were of general application and were based upon the value of the property. The town's alternate claim that it was entitled to the proceeds as purchaser of record of the property at a tax foreclosure sale prior in time to the attachment of the Federal lien was rejected. The court found that the town was not the owner of the property at the time the Federal lien attached and that even if it were, the property was subject to the Federal lien.

Louis M. Janelle, United States Attorney, Concord , N. H., for plaintiff. Charles H. Barnard, 1875 S. Willow St., Manchester, N. H., pro se, William L. Phinney, 875 Elm St., Manchester, N. H., Luigi J. Castello, 37 Court St., Woodsville, N. H., Devine, Millimet, McDonough, Stahl & Branch, 1838 Elm St., Manchester, N. H., Eaton, Eaton, Ross & Moody, 70 Market St., Manchester, N. H., Hall, Zellers, Morse & Gallagher, 37 Green St., Concord, N. H., Broderick, Craig, Bourque & Costakis, 84 Bay St., Manchester, N. H., Wadleigh, Starr, Peters, Dunn & Kohls, 95 Market St., Manchester, N. H., Donald G. Matson, 63 N. Main St., Concord, N. H., George P. Cofran, 4 Park St., Concord, N. H., for defendants.

Memorandum Opinion

[Priority of Town's Lien]

BOWNES, District Judge:

This civil action brought by the United States of America to foreclose tax liens and for other relief was initiated in 1960. The following findings and rulings should bring the entire matter to a conclusion.

I. The Court finds the amount of fifty-one thousand, two hundred twenty-two dollars and seventy-nine cents ($51,222.79) to be the amount of income tax liability of the defendant Charles H. Barnard. This figure represents the sum of (a) the tax liability as of December 23, 1968 , plus (b) interest accumulation for twenty-three days, at the daily rate of four dollars and eighty-one cents ($4.81), to January 15, 1969 , the date of the final hearing.

The Court rules that, although the defendant Bernard did not contest the government's claim as to the amount of his tax liability, he has not waived his right to claim a refund.

II. Funds, representing the marshaled proceeds from the sale of a certain parcel of realty in Wentworth, New Hampshire, now held by a court-appointed receiver, are claimed in part, and alternatively, in whole, by the Town of Wentworth: First, the Town claims a portion of the funds by virtue of a "super-prior" lien for real property taxes by virtue of section 6323(b)(6)(A) of the Internal Revenue Code of 1954, the "Federal Tax Lien Act of 1966" (Pub. L. 89-719). Alternatively, the Town claims the entire proceeds of the Wentworth Realty sale as purchaser of record of the property at a tax foreclosure sale prior in time to the attachment of the lien of the United States .

The Court rules, pursuant to section 6323 of the Internal Revenue Code of 1954, subsections (a), (b)(6)(A), and (e)(1) and (2), that the Town of Wentworth is entitled to and shall be paid the sum of two thousand two hundred seventy-two dollars ($2,272.00) [the amount stipulated by the parties as the sum of (a) taxes and (b) interest thereupon, for the years 1956 through 1964] plus seven hundred fifty dollars ($750.00) attorney's fees plus reasonable disbursements. [Note: the determination of the amount of the attorney's fees will be ordered at the stated figure unless either party requests a hearing thereupon within ten days from the date of this ruling. Plaintiff's counsel will submit an itemized list of disbursements indicating date and description thereof.]

No discussion is necessary as to the allowance of the Town of Wentworth 's real property tax claim. Section 6323(b)(6)(A), as added by the Federal Tax Lien Act of 1966, in no uncertain terms grants priority to a real property tax lien when, as here, the taxes have general application and are based upon the value of such property.

The alternate claim of the Town of Wentworth is rejected. The Court rules that the Town of Wentworth was not the owner of the property at the time that the tax lien of the United States attached and further rules that even if it was that the property was subject to the government tax lien. SO ORDERED.

 

 

[53-1 USTC ¶9291]The United States of America , Petitioner v. Gilbert Associates, Inc.

In the Supreme Court of the United States, No. 440, October Term, 1952, 345 US 361, 73 SCt 701, April 6, 1953

On writ of certiorari to the Supreme Court of the State of New Hampshire.

Lien for taxes: Town as a judgment creditor: Insolvent taxpayer.--An insolvent corporate taxpayer's property was sold to pay a Town's taxes accrued for the years 1947 and 1948. The Federal Government's lien for taxes due from 1943 to June 30, 1948 was filed after the dates on which the Town's taxes were assessed. Held, the Government had a prior right to the funds in the hands of a state court receiver. Notwithstanding the fact that the Town was a "judgment creditor" under State law, it was not a judgment creditor for purposes of Code Sec. 3672 so as to be entitled to notice of the Government's lien. Therefore, since both had general liens, priority depended upon the dates the liens arose. In any case, the Government was entitled to priority by virtue of Section 3466 of the Revised Statutes which gives priority to it whenever any person indebted to the Government is insolvent. This priority was not overcome by the claim that the Town had a specific lien by virtue of the tax sale, since the nature of the tax sale proceedings appeared not to deprive the taxpayer of title or possession. Two dissents, on the ground that an assessment which has the normal attributes of a judgment creates a judgment creditor status for the purpose of Code Sec. 3672.

Walter J. Cummings, Jr., Solicitor General, H. Brian Holland, Assistant Attorney General, and Ellis N. Slack, A. F. Prescott, and Harry Baum, Special Assistants to the Attorney General, for the petitioner. George R. Hanna, 5 St. James St. , Keene , N. H., for respondent.

MR. JUSTICE MINTON delivered the opinion of the Court.

This case involves the question of whether the Town of Walpole, New Hampshire, or the Federal Government has the prior right to a fund in the hands of a state court receiver of the respondent-taxpayer, an insolvent corporation. The Supreme Court of New Hampshire held the Town was entitled to priority, 97 N. H. 411, 90 A. 2d 499, and we granted certiorari, 344 U. S. 911.

[Property Sold at Tax Sale to Pay Town 's Taxes]

The claims of both arise from tax liens. The Town's lien grew out of an assessment of an ad valorem tax upon certain machinery of Gilbert Associates, Inc., the respondent, for the years 1947 and 1948 in the amounts of $612.95 and $690.85, respectively. The corporation was thereafter declared insolvent, and a temporary receiver was appointed August 12, 1949 , and made permanent January 30, 1950 . The Town's taxes were assessed April 1, 1947 , and April 1, 1948 . On September 25, 1948 , the Town sold the taxpayer's property at a tax sale to pay the taxes accrued for the year 1947. On September 24, 1949 , the Town sold the same property at a tax sale for taxes accrued for the year 1948. The record does not disclose the nature of these tax-sale proceedings. We are informed that the Town bid in the property at its own sales. At least, the Town never took possession of the property, which was later sold by the receiver, creating the fund involved here. The Federal Government's lien was for employment, withholding, and income taxes that became due between 1943 and June 30, 1948 , in the sum of $3,171.97. Notice of this lien was filed in the office of the Clerk of the United States District Court for the District of New Hampshire on August 6, 1948 .

[Town's Right to Notice of Government's Lien]

Under §3672 of the Internal Revenue Code, 56 Stat. 798, 26 U. S. C. (1946 ed.) §3672, the lien of the United States "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector. . . . 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. . . ." The Supreme Court of New Hampshire held that since notice of the Government's lien was not filed until August 6, 1948, and the Town's taxes were assessed on April 1, 1947, and April 1, 1948, respectively, and such tax assessments are "in the nature of a judgment" under the law of New Hampshire, the Town was a judgment creditor within the meaning of §3672, and the Government's lien was not valid as against the Town's.

Was the Town a judgment creditor within the meaning of §3672? The New Hampshire Supreme Court in the instant case said:

"It is settled by our decisions that the assessment of a tax is in the nature of a judgment, enforced by a warrant instead of an execution. Boody v. Watson, 64 N. H. 162, 167; Jaffrey v. Smith, 76 N. H. 168, 171; Nottingham v. Company, 84 N. H. 419. See also, Automobile Sprinkler Corp. v. Marston, 94 N. H. 375." 97 N. H. 411, 414, 90 A. (2d) 499, 502.

[Town as Judgment Creditor]

We would not question or presume to say what the nature and effect of a tax proceeding is in New Hampshire . The state is free to give its own interpretation for the purpose of its own internal admin istration. United States v. Waddill Co., 323 U. S. 353 [45-1 USTC ¶9126]. See also Howard v. Commissioners of Louisville Sinking Fund, 344 U. S. 624.

The Supreme Court of New Hampshire freely concedes, however, as it must, that the meaning of a federal statute is for this Court to decide. United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]. Congress enacted §3672 to meet the harsh condition created by the holding in United States v. Snyder, 149 U. S. 210, when federal liens were few, that a secret federal tax lien was good against a purchaser for value without notice.

[Congressional Intent]

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 in the usual, conventional sense of a judgment of a court of record, since all states have such courts. ¹ 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, ² 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. ³

We conclude that whatever the tax proceedings of the Town of Walpole may amount to for the purposes of the State of New Hampshire, they were not such proceedings as resulted in making the Town a judgment creditor within the meaning of §3672.

[Insolvency as Giving Government Priority]

While the Town was not a judgment creditor, it was the holder of a general lien on all the taxpayer's property. So was the United States a general lienholder on all the taxpayer's property. ⁴ But since the taxpayer was insolvent, the United States claims the benefit of another statute to give it priority, §3466 of the Revised Statutes, 31 U. S. C. (1946 ed.) §191, the provisions of which are set forth in the margin. ⁵

As is usual in cases like this, the Town asserts that its lien is a perfected and specific lien which is impliedly excepted from this statute. This Court has never actually held that there is such an exception. Once again, we find it unnecessary to meet this issue because the lien asserted here does not raise the question.

[Specific Lien]

In claims of this type, "specificity" requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the possession of the debtor. Thelusson v. Smith, 2 Wheat. 396. Until such possession, it remains a general lien. There is no ground for the contention here that the Town had perfected its lien by reducing the property to possession. The record reveals no such action. The mere attachment of the Town's lien before the recording of the federal lien does not, contrary to the holding of the Supreme Court of New Hampshire, give the Town priority over the United States . The taxpayer had not been divested by the Town of either title or possession. The Town, therefore, had only a general, unperfected lien. United States v. Waddill Co., supra; Illinois v. Campbell, 329 U. S. 362, 370. Where the lien of the Town and that of the Federal Government are both general, and the taxpayer is insolvent, §3466 clearly awards priority to the United States . United States v. Texas , 314 U. S. 480, 488.

The judgment of the Supreme Court of New Hampshire is reversed.

¹ See concurring opinion of Mr. Justice Jackson in United States v. Security Trust & Savings Bank, supra, at p. 52.

² The decisions have arrived at the conclusion that assessments are judgments for purposes of preventing collateral attacks upon them, ascertaining rights to a hearing in connection with them, or deciding under local procedure on the applicable method of collecting them. These cases, prior to the instant decision, have never actually declared that the status of a technical judgment creditor has been created. People ex rel. Harding v. Hart, 332 Ill. 467, 163 N. E. 769; Nottingham v. Newmarket Mfg. Co., 84 N. H. 419, 151 A. 709; People ex rel. Glens Falls Ins. Co. v. Ferguson, 38 N. Y. 89; Williams v. Weaver, 75 N. Y. 30; State v. Georgia Co., 112 N. C. 34, 17 S. E. 10; Union Tanning Co. v. Commonwealth, 123 Va. 610, 96 S. E. 780. But see Hibbard v. Clark, 56 N. H. 155, holding that it is not a judgment. 1 Cooley, Taxation (4th ed., 1924), 91-92, points out that assessments, though they may be enough like judgments to definitely establish a demand for taxes, are not technical judgments.

³ First National Bank of Remsen v. Hayes, 186 Iowa 892, 171 N. W. 715; Alexander v. Commonwealth, 137 Va. 477, 120 S. E. 296; Weyerhaeuser Timber Co. v. Piperce County, 97 Wash. 534, 167 P. 35; Simson Timber Co. v. Mason County, 112 Wash. 603, 192 P. 994.

⁴ "§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." §3670 I. R. C., 26 U. S. C. (1946 ed.) §3670.

⁵ R. S. §3466. "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 hereby 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."

[Dissenting Opinions]

MR. JUSTICE FRANKFURTER, whom MR. JUSTICE REED joins, dissenting.

I cannot agree with the opinion of the Court insofar as it supposes that §3672 of the Internal Revenue Code is to be read as requiring that certain procedures--and the same procedures--be complied with in each State before a creditor becomes the magic "judgment creditor." Section 3672 gives the United States priority over other creditors but not over judgment creditors. This is the rule of uniformity enacted by Congress. But it does not demand that the same procedure be followed in every State. Nor does it demand that any particular procedure be followed, that the creditor formally prosecute his claim in the courts and obtain judgment, or even that the common-law requirements be satisfied.

[State Law as Conferring Judgment Creditor Status]

Of course, the State courts cannot by the wand of a label wave away the requirement, which I agree is a matter for federal interpretation, that a creditor be a "judgment creditor." But federal law does not insist on anything more than that the creditor be in the same position as a creditor who holds a judgment "in the usual, conventional sense." Federal law refers to State law, as it does in the closely comparable bankruptcy provisions, to determine whether action taken by a taxing authority of New Hampshire has substantially the same effect as would be given the judgment of a court of record, that is, whether the Town stands--along with creditors who have obtained judgment from a court of record--on a higher footing that those who have yet to establish their claims in court. If the assessment here has, as the New Hampshire Supreme Court informs us, the normal attributes of a judgment, I see no way of escaping the conclusion that the Town is a judgment creditor within the meaning of §3672. In the light of the New Hampshire decisions, see Nottingham v. Newmarket Mfg. Co., 84 N. H. 419; Jaffrey v. Smith, 76 N. H. 168; cf. Automatic Sprinkler Corp. of Am. v. Marston, 94 N. H. 375, 376, there is no reason for believing that the State ruling here simply applies a label and does not express the controlling law of the State unrelated to the implications of §3672. Nothing more ought to be required.

In view of the Court's reluctance not only today but for almost a century and a half to decide the issues that may arise under §3466 of the Revised Statutes, I do not think I ought to embarrass later consideration by the Court of these issues by speaking on them at this time. Compare Conard v. Atlantic Ins. Co., 1 Pet. 386, 441, 444, with United States v. Waddill Co., 323 U. S. 353, 355 [45-1 USTC ¶9126]; see 56 Yale L. J. 1258. But cf. Illinois v. Campbell, 329 U. S. 362, 376 (dissenting opinion). It would be particularly inappropriate to do so in this case, because we are not told what kind of lien has arisen and what effect the tax sales may have in the circumstances of this case.