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[96-2 USTC ¶50,394] Sandclay Trucking, Inc., and Sandstone Excavating, Inc., Plaintiffs v. Free Piping, Inc., Centex-Great Southwest Corporation, and United States of America, Department of the Treasury, Defendants

U.S. District Court, Mid. Dist. Fla., Orlando Div., 95-702-CIV-ORL-18, 6/24/96

[Code Sec. 6323 ]

Judgment lien: Tax lien: Priority: Notice of levy: Notice of federal tax lien.--A corporation's judgment lien against a delinquent taxpayer was superior to the IRS's tax lien with respect to funds owed to the taxpayer by a third party. Although the IRS served the third party with a notice of levy before the corporation's writ of garnishment was issued, the IRS did not perfect its lien until it filed its notice of federal tax lien several months later. Thus, the judgment lien was entitled to priority.

[28 U.S.C. §2410 ]

Statute of limitations: Claims against third parties: Priority of liens.--A corporation's action seeking a judicial declaration regarding the priority of its judgment lien over a tax lien on funds owed to a delinquent taxpayer was timely instituted under 28 U.S.C. §2410. Regardless of whether the suit was in the nature of interpleader or of an action to quiet title, its purpose was to resolve the priority of claims against funds held by the third party, and §2410 was enacted for that purpose. The government unsuccessfully attempted to characterize the action as a time-barred wrongful levy suit.

William R. Barker, 20 N. Eola Dr. , Orlando , Fla. 32801-1695 , for plaintiff. Linda M. Dickhaus, Paul M. Woodson, James E. Glass Assocs., 6161 Blue Lagoon Dr. , Miami , Fla. 33126 , for garnishee. Karen L. Gable, 80 N. Hughey Ave., Orlando, Fla. 32801, Brian L. Schwalb, Department of Justice, Washington, D.C. 20530, for intervenor-defendant.

ORDER

SHARP, District Judge:

This case is before the court on Plaintiffs' motions for summary judgment against the United States of America , Department of the Treasury (IRS) (Doc. 25) and against Centex-Great Southwest Corporation (Centex) (Doc. 27), and on the IRS's cross-motion for summary judgment against Plaintiffs (Doc. 30). Plaintiffs Sandclay Trucking, Inc. and Sandstone Excavating, Inc. (collectively "Sandclay") and the IRS both have liens on certain funds that Centex possesses arising out of debts owed by Defendant Free Piping, Inc. (Free Piping). Centex owes Free Piping $26,696, and both the IRS and Sandclay have sought to acquire that money to satisfy Free Piping's debts. Sandclay and the IRS each contends that its lien has priority and therefore should be satisfied first. The court concludes that Sandclay's judgment lien has priority over the IRS's tax lien.

I. Facts

Most of the facts in this case are undisputed. Sandclay originally brought this action in state court against Free Piping seeking payment of an overdue account in the amount of $12,058.08. The state court entered a final judgment against Free Piping on July 27, 1994 , in that amount. During discovery in its effort to collect on its judgment Sandclay discovered that Centex owed Free Piping $26,696 for a construction project. Sandclay sought a writ of garnishment against Centex, which was issued by the state court on October 14, 1994 .

Meanwhile, on September 1, 1994 , the IRS served a Notice of Levy on Centex seeking to collect on Free Piping's federal tax liabilities. The IRS had assessed $39,068.69 in taxes against Free Piping in early 1994 that had not been paid. On August 15, 1995 , the IRS filed a Notice of Federal Tax Lien (NFTL) in the Orange County, Florida public records, and filed a NFTL with the Florida Secretary of State in Tallahassee on August 21, 1995 .

In its answer Centex claims that Free Piping failed to complete its subcontract for which Centex owed Free Piping money. Because of Free Piping's breach of its subcontract Centex paid $4,448.48 on Free Piping's account to satisfy the claims of unpaid vendors and suppliers in December 1994. Sandclay argues that Centex's payment on Free Piping's account violated the writ of garnishment and asserts that Sandclay is entitled to the money.

Recognizing the multiple claims on the funds in Centex's possession, on June 7, 1995 , Sandclay brought a "complaint on interpleader" in state court against Free Piping, Centex and the IRS. Sandclay brought the action seeking a judicial declaration that its right to the Centex funds was senior to the IRS tax lien. The IRS removed the case from state court to this court on July 12, 1995 .

II. Legal Discussion

The primary legal issue before the court is the relative priority of Sandclay's judgment lien and the IRS's tax lien. Sandclay contends that its claim on the Centex funds is superior because the IRS did not perfect its tax lien until August 1995, when it filed its NFTL. The IRS maintains that its lien has priority because its Notice of Levy was sufficient to establish its right to the Centex funds. The IRS also argues that Sandclay's suit was brought outside the appropriate statute of limitations. The court will consider the statute of limitations issue and the priority issue separately.

A. Statute of Limitations

The IRS claims that Sandclay brought this action under 26 U.S.C. §7426(a) (1994), which in the event that a levy has been made permits "any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon" to bring an action against the IRS. The Internal Revenue Code provides that "no suit or proceeding under section 7426 shall be begun after the expiration of nine months from the date of the levy or agreement giving rise to such action." 26 U.S.C. §6532(c)(1) (1994). The IRS served its notice of levy on Centex on September 1, 1994 ; under section 6532 Sandclay should have brought its action against the IRS before June 1, 1995 . Because Sandclay filed its complaint on June 7, 1995 , the IRS argues that this action is time-barred.

Sandclay filed its action as one "in the nature of interpleader" under 28 U.S.C. §2410(a)(5) (1994), which permits a party to file an action against the United States with respect to "real or personal property on which the United States has or claims a mortgage or other lien." The IRS contends that Sandclay is not entitled to sue under section 2410 because "[t]he only remedy available to a taxpayer who possesses an interest in property upon which the government has levied is a civil suit to regain the property. 26 U.S.C. §7426(a)(1) ." Trust Co. of Columbus v. United States [84-2 USTC ¶9614 ], 735 F.2d 447, 448 (11th Cir. 1984). Though Sandclay asserts that it does not claim the IRS's levy is wrongful and argues that therefore section 7426 does not apply, the IRS notes that a levy is considered "wrongful" if it "will or does effectively destroy ... [an] interest in the property which is senior to the federal tax lien." Id. (quoting 26 C.F.R. §301.7426-1 -(b)(iv)(d) (1995)) (emphasis in original).

The IRS argues that Congress did not intend for section 2410 to provide an alternative basis to challenge a tax levy. See, e.g., United Sand and Gravel Contractors, Inc. v. United States [80-2 USTC ¶9626 ], 624 F.2d 733, 738 (5th Cir. 1980) (noting that the intent of Congress would be undercut to permit third parties to challenge an IRS levy under section 2410). Courts have uniformly not permitted third parties to attack the validity of a tax assessment in actions under section 2410. See, e.g., Johnson v. United States [93-1 USTC ¶50,201 ], 990 F.2d 41 (2d Cir. 1993); James v. United States [92-2 USTC ¶50,389 ], 970 F.2d 750 (10th Cir. 1992). However, even courts that have not permitted actions under section 2410 questioning the validity of the underlying tax assessment have permitted suits where the third party disputes only the priority of the IRS lien and not its legitimacy. See Estate of Johnson v. United States [88-1 USTC ¶9165 ], 836 F.2d 940, 945-46 (5th Cir. 1988). See also Harrell v. United States [94-1 USTC ¶50,137 ], 13 F.3d 232, 234 (7th Cir. 1993) ("If the government claims a lien ... by virtue of a levy, the sorting out of competing property claims that is then required is just the task for which [section 2410] was designed.").

The court holds that Sandclay properly brought this action against the IRS under section 2410. Regardless of whether the parties deem the suit "in the nature of interpleader" or as an action to quiet title, the purpose of Sandclay's suit is to resolve the priority of claims on Centex's funds between itself and the IRS. Congress enacted section 2410 for this purpose. The IRS does not argue that Sandclay's action is time-barred under section 2410 and the court therefore rejects the IRS's statute of limitations argument.

B. Priority of Sandclay's and the IRS's Claims

Though the IRS makes several other arguments, the principal issue for the court in resolving the relative priority of the IRS tax lien and Sandclay's writ of garnishment appears to be the effect of the IRS's Notice of Levy served on Centex on September 1, 1994 . The IRS asserts that its service of the Notice of Levy established its superiority to all liens filed afterward, including Sandclay's writ of garnishment issued on October 14, 1994 . Sandclay contends that under 26 U.S.C. §6323(a) (1994) the IRS did not perfect its lien until it filed its NFTL in August 1995, and therefore Sandclay's lien should have priority.

Section 6323(a) provides that tax liens imposed by the IRS "shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the [IRS]." Subsection (f) then establishes that for personal property, notice shall be filed pursuant to state law in one office within the state, county or other governmental subdivision. 26 U.S.C. §6323(f)(1)(A)(ii) (1994). The IRS complied with the requirements under Florida law when it filed its NFTL in August 1995. However, the plain language of section 6323(a) suggests that the IRS did not establish its priority until it filed the NFTL, after Sandclay served its writ of garnishment.

Though the Eleventh Circuit has not ruled on this specific issue, the IRS has directed the court to a number of cases in which courts have held that service of the Notice of Levy, and not the filing of a NFTL, establishes the priority of a federal tax lien against other creditors. See, e.g., Chevron U.S.A., Inc. v. United States [83-1 USTC ¶13,523 ], 705 F.2d 1487, 1489 (9th Cir. 1983); In re Brewster-Raymond Co. , 344 F.2d 903, 910 (6th Cir. 1965). The weight of more recent authority, however, supports Sandclay's position that the IRS must file a NFTL to establish priority under section 6323 . See United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 721 (1985) ("[T]he levy does not determine whether the Government's rights to the seized property are superior to those of other claimants. ..."); Maisano v. United States [90-2 USTC ¶50,399 ], 908 F.2d 408, 410 (9th Cir. 1990) ("[T]he Code expressly contemplates, and requires, disclosure of the lien to establish the lien's priority vis a vis other security interests."); Southern Rock, Inc. v. B & B Auto Supply [83-2 USTC ¶9529 ], 711 F.2d 683, 688 (5th Cir. 1983) ("We simply hold that serving a notice of levy on accounts receivable does not by itself entitle the government to priority in those accounts over a subsequently perfecting secured creditor.").

The court finds this authority in support of Sandclay's position to be persuasive. Permitting the IRS to establish priority for its lien merely by serving its Notice of Levy would override the congressional intent evident in section 6323 to require notice of a tax lien. Accord First N.H. Bank v. Carrabassett Inv. Corp., 813 F. Supp. 919, 923-24 (D.N.H. 1993). Under section 6323 the IRS did not perfect its lien until it filed its NFTL in August 1995. The court therefore holds that Sandclay's claim is superior to that of the IRS by virtue of its writ of garnishment issued on October 14, 1994 .

III. Conclusion

For the reasons stated above the court concludes that Sandclay's judgment lien is superior to the IRS's tax lien; the court therefore GRANTS Sandclay's motion for summary judgment against the IRS (Doc. 25) and DENIES the IRS's motion for summary judgment (Doc. 30). The remaining issues surrounding Centex's payment of funds on Free Piping's account are questions of state law, and the court remands the case to state court for their resolution.

It is So Ordered.

 

 

[91-2 USTC ¶50,502] In re Daniel G. Aiken, Debtor

U.S. District Court, Dist. Me., Civ. 91-0122-B, 10/11/91, 133 BR 258, Reversing and remanding a Bankruptcy Court decision, 91-2 USTC ¶50,394 , 128 BR. 4

[Code Sec. 6323 ]

Lien for taxes: Personalty: Filing requirements.--An IRS lien on accounts receivable was properly filed with a Maine county registry of deeds. The applicable state statute, as then in effect, applied to personal as well as real property.

ORDER ON APPEAL AND MEMORANDUM OF OPINION

BRODY, District Judge:

The question presented in this bankruptcy appeal is whether a Maine statute--since superseded--designating the county registries of deeds as the office(s) in which the Internal Revenue Service was required to file notices to perfect tax liens on a taxpayer's "property" applied to personal as well as real property.

This case is before the Court on a stipulated record. Daniel Aiken filed a voluntary bankruptcy petition under Chapter 7 on July 29, 1988 . The bankruptcy estate comprises only personal property, principally proceeds of certain of Aiken's collected accounts receivable. On August 10, 1990 , the IRS filed a proof of claim against the estate for approximately $51,000 of unpaid taxes, including accrued interest and penalties, for 1978, 1982, 1983 and 1984. The IRS asserted that it is entitled to priority when the estate is distributed because it perfected tax liens in Aiken's property by filing notices in the Penobscot County Registry of Deeds on July 16, 1979 (refiled March 6, 1985), June 16, 1983, December 31, 1984, and August 22, 1985, for each of the respective tax years. The trustee for the bankruptcy estate filed an objection to the IRS's proof of claim on January 23, 1991, arguing that the IRS filed the notices in the wrong office and thus failed to perfect its tax liens.

The legal framework is straightforward. The Internal Revenue Code creates a lien in favor of the United States "upon all property and rights to property, whether real or personal" for unpaid taxes once a demand for payment is made. 26 U.S.C. §6321 (1988). The government's lien, however, is not valid against certain persons--purchasers, holders of security interests, mechanic's lienors and judgment creditors--until the IRS files notice of the tax lien. 26 U.S.C. §6323(a) . The Internal Revenue Code permits states to designate "one office within the State (or the county, or other governmental subdivision)" as the place for filing notices of tax liens on personal property. 26 U.S.C. §6323(f)(1)(A)(ii) . ¹ If no office is designated by state law, the IRS must file notices of tax liens with the clerk of the United States district court for the judicial district in which the property is situated. 26 U.S.C. §6323(f)(1)(B) . ² From 1925 to 1989, Maine law provided:

Notices of liens for internal revenue taxes payable to the United States of America and certificates discharging such liens, prepared in accordance with the laws of the United States pertaining thereto, may be filed in any county in this State in the registry of deeds for that county or counties within which the property subjected to such lien is situated.

33 M.R.S.A. §664 . ³

The sole issue raised on appeal is whether the term "property" in §664 applied to personal as well as real property for purposes of designating the county registries of deeds as the office in which the IRS had to file notices of tax liens. The United States Bankruptcy Court for the District of Maine (Haines, J.) determined that §664 applied only to real property. Holding that the IRS did not properly perfect its tax liens on Aiken's personal property by filing notices in the Penobscot County Registry of Deeds, the Bankruptcy Court sustained the trustee's objection. The United States appealed. Because we interpret the term "property" to include personal as well as real property, we now reverse.

We review the bankruptcy court's rulings and conclusions of law de novo. In re BWL, Inc., 123 B.R. 675, 682 (D. Me. 1991). Questions of statutory construction are questions of law. See, e.g., Irons v. FBI, 880 F.2d 1446, 1446-47 (1st Cir. 1989) (en banc).

The principles of statutory interpretation we apply are well established. " 'The starting point in every case involving construction of a statute is the language itself.' " Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976) (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975) (Powell, J., concurring)). Section 664 referred to "property" generically without modification or limitation. Nothing in the statute indicated that the legislature used the term "property" in a restricted manner. In common usage, "property" encompasses both real and personal property. Indeed, the trustee, concedes that "[t]he term property is all inclusive. It means real property, personalty, and choses in action." Brief of the Trustee in Bankruptcy at 3. The plain language of §664 is naturally read as applying to both real and personal property.

We next examine the legislative intent and the purpose underlying Maine 's tax lien filing statute to determine whether they undercut the literal terms of the statute. "Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive." Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). As is often true of older state legislation, there is no legislative history. We cannot conclude that legislative history suggests that the term "property" should be narrowly construed.

Interpreting §664 to apply to personal as well as real property is also consistent with the purpose of the statute. Tax lien notices are simply public records which prospective creditors should be able to easily find and review as they decide whether to deal with a potential customer or borrower. The location selected for filing need only be "simple, obvious and natural." Dimmitt & Owens Financial, Inc. v. United States [86-1 USTC ¶9326 ], 787 F.2d 1186, 1190 (7th Cir. 1986). Maine 's use of the Registry of Deeds is consistent with each of these criteria. Furthermore, states have regularly assigned responsibility for recording and filing federal tax liens on personal as well as real property to their registries of deeds or counterparts. See generally [1990] 11 CCH Stand. Fed. Tax Rep. ¶39,060.205 (summary listing of the proper offices for filing tax liens on all types of property in all fifty states shows that a clear majority use (or have used) registries of deeds). See also, e.g., Dimmitt & Owens [86-1 USTC ¶9326 ], 787 F.2d at 1189 ( Illinois law designated Register of Deeds); Corwin Consultants, Inc. v. Interpublic Group of Cos. [75-1 USTC ¶9299 ], 512 F.2d 605, 608 n.10 (2d Cir. 1975) ( New York law designated county clerk's or city register's office); S. D'Antoni, Inc. v. Great Atlantic and Pacific Tea Co. [74-2 USTC ¶9552 ], 496 F.2d 1378, 1381 (5th Cir. 1974) (Louisiana law designated office of parish recorder of mortgages); In re Autorama Tool & Die Company [69-2 USTC ¶9464 ], 412 F.2d 369, 371-72 & 372 n.5 (6th Cir. 1969) (Michigan law required federal tax lien filings on "property, real or personal" to be made with the county registers of deeds); United States v. Bollinger Mobile Home Sales, Inc. [80-2 USTC ¶9644 ], 492 F.Supp. 496, 497 (N.D. Tex. 1980) ( Texas required filings affecting intangible property to be made in the office of the county clerk); In re Schons [85-2 USTC ¶9764 ], 54 B.R. 665, 667-68 (Bkrtcy. W.D. Wash. 1985) ( Washington state law designated county recorder's office). Though establishing a security interest in personal property under the Uniform Commercial Code now generally requires filing documents with the Secretary of State's office, many of the states' federal tax lien filing statutes antedate the UCC. Adopted before modern modes of communication and transportation made it possible for creditors to rely on and have access to a single, centralized filing office, it is hardly surprising that state legislation designated local offices as the place in which to file notices of federal tax liens. We cannot say that the purpose of §664 requires us to depart from the plain language of the statute and to interpret §664 as applicable only to tax lien filings regarding real property.

The Bankruptcy Court's narrow view of the term "property" flowed from its interpretation of United States v. Flores [76-1 USTC ¶9394 ], 535 F.2d 135 (1st Cir. 1976) and its reading of the statutory subchapter in which §664 was located. In Flores, the First Circuit examined two intimately related sections of Puerto Rico tax lien law to determine whether " Puerto Rico [had] by statute designated a place for the filing of federal tax liens on personal property." Flores [76-1 USTC ¶9394 ], 535 F.2d at 137. The first section of the law provided:

Every registrar of property shall keep a book to be known as "Registry of Liens for Taxes in favor of the United States of America" in which shall be registered all notices of delinquent federal taxes in accordance with sections 6321 , 6322 and 6323 of the United States Internal Revenue Code and their corresponding certificates of payment or release.

30 L.P.R.A. §1921. The following section provided:

The notices of federal liens referred to in this chapter shall be presented for registration in the section of the registry of property of the district where the real properties affected are located. After their registration, said notices shall be filed, in correlative number, in a record to be kept in the registry, subject to the following provisions.

30 L.P.R.A. §1922 (emphasis added). The First Circuit noted that "[w]hile §1921 read alone could be said to encompass all federal tax liens on both real and personal property, §1922 refers only to real property." Id. at 138. Maine's §664 has no directly related provision which clearly limits its scope to "real property." ⁴

The Bankruptcy Court, however, looked beyond §664 to the loosely related provisions of the subchapter--entitled "Records and Recording"--which deals with the duties of the Registry of Deeds generally. Surveying the subchapter, the bankruptcy court noted that most of its sections dealt with real property. See slip op. at 5 n.2. The Bankruptcy Court judge apparently concluded that "[i]f §664 were found to have been a designation of the recording office for tax liens as to personalty, it would be the only section of the lengthy subchapter providing for recording instruments affecting personal property rights in the registry of deeds." Slip op. at 5. The government notes and the trustee concedes that §654, dealing with "Miscellaneous Records," provides for recording "certificates of advertised stallions and copies of processes against domestic corporations filed for service by officers in the registry [to be kept] on file for the inspection of parties interested and enter[ed] in suitable books, properly indexed." 33 M.R.S.A. §654. We are unpersuaded by the Bankruptcy Court's analysis primarily because the subchapter is not strictly limited to records dealing with real property. We are further convinced that the term property in §664 applies to personal as well as real property because, even within the subchapter, when the Maine legislature intended that a provision apply only to real property, it used the terms "land" or "real property." See 33 M.R.S.A. §§651 , 658, 662 , 663 , 665 , 666 , 669. See also 33 M.R.S.A. §653 (mentioning "property" but immediately restricting its scope to "real estate").

We conclude that the term "property" as used in §664 of Maine's former federal tax lien filing statute applied to personal as well as real property. The IRS's filings of tax lien notices in the Penobscot County Registry of Deeds properly perfected the government's liens on Aiken's personal property. The decision of the Bankruptcy Court is, therefore,

REVERSED AND REMANDED for further proceedings consistent with this opinion.

¹ States may designate the same, or another, office for filing liens on real property. 26 U.S.C. §6323(f)(1)(A)(i) .

² Personal property is deemed to be situated at the residence of the taxpayer at the time notice is filed. 26 U.S.C. §6323(f)(1)(B) . In the instant case, all parties agree that Aiken resided in Penobscot County at all relevant times.

³ After Aiken filed for bankruptcy, Maine enacted the Uniform Federal Lien Registry Act, effective June 30, 1989 , which requires that tax lien notices regarding personal property be filed with the office of the Secretary of State and tax lien notices regarding real property continue to be filed with the county registries of deeds. 33 M.R.S.A. §1903 et seq.

⁴ In addition, the First Circuit noted that the editors of CCH Standard Federal Tax Reports read sections 6321 and 6322 as applicable only to real property. Without indicating how much weight is appropriately given to editorial interpretation of state tax lien filing statutes, the First Circuit has noted it "is significant that the editors of the CCH Standard Federal Tax Reporter have also adopted this interpretation." Flores [76-1 USTC ¶9394 ], 535 F.2d at 139. In the instant case, the editors of CCH read §664 as applicable to both personal and real property. [1990] 11 CCH Stand. Fed. Tax Rep. ¶39,060.205 at 65,423.

 

 

[79-2 USTC ¶9630]Miller & Miller Auctioneers, Inc. v. United States of America , et al.

U. S. District Court, No. Dist. Tex. , Fort Worth Div., Civil Action No. CA 4-75-20-E, 9/24/79

[Code Sec. 6323]

Lien for taxes: Validity: Retroactive effect of public indexing requirement.--The public indexing requirement amendment of Code Sec. 6323 was not applicable to interests arising before the effective date of the amendment. Therefore, the filing of such lien was irrelevant in this case. The court further held that the state of Texas was not a judgment lien creditor, but had to submit by affidavit the dates of the assessments made so that the priorities could be determined. Additionally, the priorities of the judgment lien creditors who served writs of garnishment against the federal tax liens will be determined by comparison of the dates of garnishment with the dates of the filing of the liens.

Rufus S. Garrett, Jr., 2900 Fort Worth National Bank Bldg., Fort Worth, Texas 76102, for plaintiff. Richard Vance, Assistant United States Attorney, Fort Worth , Texas 76102 , Louise G. Parks, Department of Justice, Dallas , Texas 75242 . For U. S., Gilbert J. Bernal, Jr., Assistant Attorney General, Austin, Texas 78711, for State of Texas, Lawrence F. Blais, Blais, Butcher & Gray, 3309 Winthrop Avenue at 600 Camp Bowie, Fort Worth, Texas 76116, for Bill Schwausch, James F. Buchanan, Kleberg & Weil, 1200 State National Bank Bldg., Corpus Christi, Texas 78403, for B. D. Holt Co., Dan Hoffmeyer, Schroeder & Hoffmeyer, 1800 Mercantile Dallas Bldg., Dallas, Texas 75201, for Southwest Welding and United States Gypsum, Alto B. Cervin, Republic National Bank Tower, Dallas, Texas 75201, for intervenor Romco, Inc., Wayne V. Agee, 6801 North Lamar, Austin, Texas 78765, for intervenor Texas Emulsions.

Memorandum Opinion and Order

MAHON , District Judge:

Came on for consideration the motion of defendant United States requesting the Court to grant a new trial, to alter the judgment, or to open the judgment and permit the submission of additional evidence. Having carefully considered the motion, the responses, the briefs filed in support thereof, the argument of counsel, and the previous record, the Court has concluded that the judgment and opinion previously entered on October 25, 1978 , should be AMENDED as follows:

I. Retroactive Effect of 26 U. S. C. §6323(f)(4) (as amended October 4, 1976 ) The previous opinion and judgment was based in part upon the assumption that the public indexing requirement of §6323(f)(4), as amended in 1976, was applicable retroactively to liens already the subject of pending litigation. The Court has concluded that these filing requirements were not intended to affect the priority of liens in the process of adjudication.

Although a federal tax lien arises under §6322 on the date the tax is assessed, it is not valid against the particular classes of lienholders described in §6323 until it has been properly filed in the manner set out in that statute. The October 4, 1976 , amendments to §6323 imposed an additional place of filing, i.e., in the public index maintained at the district offices of the Internal Revenue Service, with an effective date fixed by the following language:

(3) The amendments made by subsection (c) shall take effect--

(A) in the case of liens filed before the date of the enactment of this Act [ October 4, 1976 ], on the 270th day after such date of enactment [ July 1, 1977 ].

Section 2008(d)(3) of Pub. L. 94-455. The apparent purpose of the delayed effective date was to give the Internal Revenue Service time to meet the requirements for notices of lien already filed in the manner specified by the previous version of the statute. However, the provision is silent, or at least ambiguous, as to whether the change was to affect priorities established among existing liens. The interpretation most consistent with the declared purpose of §6323, and its numerous predecessors since old section 3672(a) of the Internal Revenue Code of 1939, is that amendments to filing requirements operate only for the protection of interests arising after the effective date.

The essential purpose of the filing of a federal tax lien is to give constructive notice of its existence and provide would-be purchasers, lenders, or other persons dealing with delinquent taxpayers a means of readily ascertaining that tax liability. United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361 (1953); United States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746 (2nd Cir. 1966), cert. dismissed 386 U. S. 901. No such purpose would be served by giving a retroactive effect to changes in filing requirements so as to alter priorities established among outstanding liens, especially where those priorities are already in the process of adjudication. United States v. Amos [69-2 USTC ¶9609], 287 F. Supp. 886 (N. D. Ill. 1968). This is not a case where a party is attempting to claim reliance upon an aberrant circuit court opinion, subsequently corrected by a higher court. Cf. United States v. Donnelly's Estate [67-2 USTC ¶9706], 295 F. Supp. 557 (D. C. Mich. 1967), reversed [70-1 USTC ¶9706], 397 U. S. 286 (1969). It is undisputed that the tax liens in the instant case were correctly filed as of the date suit was instituted.

The Court, accordingly, concludes that the 1976 amendments of §6323(f)(d) do not affect the validity of the federal tax liens made the basis of this suit and that the subsequent filing of any such liens in compliance with §6232(f)(d) is irrelevant to this proceeding. The Court, therefore, DENIES the government's motion to reopen the evidence for the purpose of showing compliance with the public indexing requirement.

II. Status of State Tax Liens The previous opinion and judgment were also based in part upon the assumption that the State of Texas was in the position of a judgment lien creditor. The Court has concluded that the State of Texas in this instance is not among the classes of creditors entitled to the protections afforded by the filing requirements of §6323.

Persons to be accorded priority over an unfiled tax lien include purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. 26 U. S. C. §6323(a). The term "judgment lien creditor" is used in its conventional sense to mean the holder of a judgment of a court of record. "Judgment" is defined by Treasury Regulations to specifically exclude the quasi-judicial determination of a state taxing authority. 26 C. F. R. §301.6323(h)-1(g). Therefore, the State of Texas may achieve priority as to local liens admin istratively by merely filing its tax lien in the county of the taxpayer's residence. TEX. TAX-GEN. ANN. art. 1.07(1)(c) ( Vernon 's 1969). However, in order to achieve status as a judgment lien creditor under §6323(a), the State must reduce its claim to judgment and then perfect its judgment lien in accordance with State law. Since the State has not done so, the principle that governs priorities among these federal and state tax liens is the common law rule of "first in time, first in right." United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1953). Their relative priorities will be established chronologically by the dates the liens arose, i. e., the dates of assessment. 26 U. S. C. §6322; TEX. TAX-GEN. ANN. art. 1.07(1)(b) ( Vernon 's 1969).

Since the only dates available in the record as to the state tax liens are the dates of filing, the Court has concluded that the judgment should be opened in the interest of a legally correct division of the fund to allow the State to submit by affidavit the dates of assessment of all taxes made the basis of this suit regardless of the county in which they were filed.

III. Circular Priorities. The problem of circular priorities is an anomaly that has resulted from imperfect coordination of state priorities with federal law. In this case, certain of the state tax liens will in all probability be prior to the federal tax liens because assessed before the federal liens arose. However, certain of the judgment lien creditors who perfected their liens as to personal property by serving writs of garnishment may be at once prior to subsequently filed state tax liens under state law while subordinate to federal tax liens that have priority under federal law over those same state liens. The formula for reconciling circular priorities is found in United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). The amount of money that represents claims prior to the federal tax liens is set aside first. The federal tax liens are then paid out of the remaining amount. Finally, the sum of the amount set aside plus the amount remaining after payment of the federal tax liens is distributed to the state claimants in accordance with state priorities.

IV. Priority of Judgment Lien Creditors. The Texas judgment lien statute provides that a properly recorded and indexed judgment operates as a lien upon the debtor's real property only. TEX. REV. CIV. STAT. ANN. art. 5449 ( Vernon 's 1958). Ordinarily, the only means available to a judgment creditor of obtaining a lien effective against subsequently-acquired interests against personal property is execution of the judgment, which perfects a lien as of the date of actual levy of execution. TEX. R. CIV. P. 621, et seq. However, a post-judgment writ of garnishment perfects a lien against the personal property of the debtor in the hands of the garnishee as of the date served. TEX. REV. CIV. STAT. ANN. art. 4084 ( Vernon 's 1966). See Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1965) cert. denied 381 U. S. 912.

Therefore, the Court has concluded that the priorities of those judgment lien creditors who have served writs of garnishment upon the auctioneer, Miller & Miller, as against federal tax liens will be determined by a comparison of the dates of service of the writs of garnishment with the dates of filing of the tax liens. State priorities will be determined by comparison of the dates of service with the dates of filing of the state tax liens. The judgment creditors who did not serve writs of garnishment are subordinate to all other claimants.

It is, accordingly, ORDERED that on or before October 1, 1979, the defendant State of Texas submit by affidavit the dates of assessment of the unpaid state taxes made the basis of this suit, regardless of the county in which filed.

It is further ORDERED that on or before October 1, 1979 , each of the following named parties submit computations of allowable interest and penalties, if any, with respect to their liens, calculated up to and including October 1, 1979 , together with a daily incremental figure:

United States of America

State of Texas

Bill Schwausch, d/b/a Bill's Auto Supply

B. D. Holt Company

United States Gypsum Company

Southwest Welding Equipment Company

All other relief, including the claims of any parties not satisfied out of the subject fund, is specifically DENIED.

 

 

[54-1 USTC ¶9412]N. Phillips, Plaintiff v. Oscar M. Jonas, Collector of Internal Revenue for the District of Wisconsin, and the United States of America, Defendants

In the United States District Court for the Eastern District of Wisconsin, Civil Action No. 5217, 122 FSupp 773, March 19, 1952

Collection of taxes: Priority of liens.--In 1940 notice of a tax lien against all real and personal property of taxpayer was filed in the proper Register of Deeds office. This lien was held prior to a chattel mortgage covering taxpayer's household furnishings which was filed in 1949, and the proceeds from the sale of certain personal property were properly applied against taxpayer's delinquent taxes.

Irving D. Gaines, for plaintiff. Howard W. Hilgendorf, Assistant United States Attorney, for defendants.

Memorandum Decision

TEHAN, District Judge:

The above-entitled action having come on for trial before the court on November 20, 1951 , and at the conclusion of the trial, the defendants having moved for judgment dismissing the plaintiff's complaint, upon a careful consideration of the evidence submitted herein and of the arguments and briefs submitted by the attorneys, the court concludes:

1. That the tax liens of the United States of America were effective and valid and entitled to priority over the chattel mortgage of the plaintiff.

2. That the property sold to satisfy the tax liens was the property of C. C. Grill against whom the tax liens were filed and that the plaintiff is not entitled to any of the proceeds of the sale.

3. That the complaint of the plaintiff be dismissed.

Counsel for the defendants shall present his findings of fact and conclusions of law for approval by the court on ten (10) days' notice to the plaintiff.

Findings of Fact and Conclusions of Law (August 13, 1952)

The above action having come on for trial before the Court on November 20, 1951, and Irving D. Gaines having appeared for the plaintiff and Howard W. Hilgendorf, Assistant United States Attorney having appeared for the defendants, and the Court having heard the evidence of the parties and the oral arguments of counsel, and having considered the written memoranda filed by counsel for the parties, and having entered a written memorandum decision on March 19, 1952, the Court now makes the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. That the plaintiff is an individual with office located at 212 West Wisconsin Avenue , Milwaukee , Wisconsin , and is an attorney-at-law.

2. That the defendant, Oscar M. Jonas, is the Collector of Internal Revenue for the District of Wisconsin; that the defendant, United States of America , is a body politic and a sovereign corporation.

3. That the Court has jurisdiction over the parties by virtue of Section 1340 and 2410 of Title 28, United States Code.

4. That on June 27, 1949, a chattel mortgage was executed by one Rob erta Grill and C. C. Grill of Racine, Wisconsin, mortgagors, to N. Paley Phillips, the said plaintiff, covering various and sundry household furnishings, which chattel mortgage was recorded in the office of the Register of Deeds of Milwaukee County, as Document Number 832967 on July 6, 1949, and also in the office of the Register of Deeds of Racine County, Wisconsin, on July 7, 1949.

5. That prior thereto, to-wit, on February 9, 1940, the defendant United States of America, filed in the office of the Register of Deeds for Milwaukee County, Wisconsin, a Notice of Tax Lien covering all property and rights to property, whether real or personal, belonging to Casper Charles Grill arising out of delinquent federal taxes for the years 1932 to 1938 inclusive, totaling $7,172.10.

6. That collection waivers in writing were executed by said Casper Charles Grill extending the time for collection of said delinquent taxes until December 31, 1950 .

7. That on December 27, 1950 the defendant, Oscar Jonas, Collector of Internal Revenue for the District of Wisconsin, acting through the agents and employees of the Bureau of Internal Revenue, seized certain personal property of said Casper Charles Grill by virtue of a distraint warrant for delinquent taxes, which property is fully listed and described in the Answers to Interrogatories filed by the defendants herein.

8. That on February 13, 1951 the defendant, Oscar Jonas, Collector of Internal Revenue for the District of Wisconson, acting through the agents and employees of the Bureau of Internal Revenue, sold at public auction all the "right, title, and interest of Casper Charles Grill in and to the property seized" for which a total sum of $6,307.25 was received, less a warehouse lien of $736.30, and auctioneer's commission of $557.10, leaving a net sum of $5,013.85 which was received by the plaintiff, Oscar Jonas, Collector of Internal Revenue for the District of Wisconsin, and applied on the delinquent taxes of Casper Charles Grill.

Conclusions of Law

9. That the tax liens of the United States of America were effective and valid and entitled to priority over the chattel mortgage of the plaintiff.

10. That the property sold to satisfy the tax liens was the property of Casper Charles Grill against whom the tax liens were filed, and that the plaintiff is not entitled to any of the proceeds of the sale.

11. That the complaint of the plaintiff be dismissed upon the merits.

 

 

[86-2 USTC ¶9598] State of Wisconsin, (Department of Revenue) Plaintiff v. Bar Coat Blacktop, Inc., Defendant and City of Schofield, Garnishee v. United States of America and Real Estate Management, Inc., Intervenors

U.S. District Court, West. Dist. Wis. , 84-C-884-C, 4/9/86 , 640 FSupp 407

[Code Sec. 6323 ]

Liens for taxes: State tax liens: Priority of tax lien: Wisconsin.--Both the IRS and the State of Wisconsin had choate liens against a bankrupt corporation's legal property interest in its right to receive payments due under a contract between the corporation and a Wisconsin city. It was not necessary for the IRS to seize specific personal property in order to secure its interest in that property because the notice of lien, not a notice of levy, perfected the tax lien. Furthermore, funds supposedly held for garnishment proceedings in the custody of a Wisconsin state court did not defeat the perfected liens held by the United States . Both the state and federal liens became choate upon their respective assessments of taxes against the corporation and not by a simultaneous attachment at the time that the city accepted the corporation's bid on a contract. The federal tax liens, filed before the garnishment action, had priority over the equitable lien obtained upon the filing of the garnishment action; however, the state and federal tax liens were effective upon their various dates of assessment. Wisconsin was poorly situated to argue that the federal levy and intervention in the garnishment action were unfair because Wisconsin failed to notify the IRS of the garnishment action.

F. Thomas Creeron, III, Assistant Attorney General, Madison , Wis. 53707 , for plaintiff. Beth Ann Sabbath, Department of Justice, Washington , D.C. 20530 , for defendant.

ORDER

CRABB, District Judge:

In cross motions for summary judgment, the State of Wisconsin and the United States Internal Revenue Service ask the court to determine which of the parties has priority of interest in certain funds seized by the Wisconsin Department of Revenue in a state court garnishment proceeding.

A brief procedural history of the dispute is as follows: On September 13, 1983 , the Wisconsin Department of Revenue filed a garnishment action in the Circuit Court for Marathon County , Wisconsin to collect on final state tax warrants entered against Bar Coat Blacktop, Inc., naming the City of Schofield , Wisconsin as garnishee. In July, 1984, after the State of Wisconsin had obtained judgment in the garnishment proceeding in the Marathon County court, Real Estate Management, Inc. and the United States Internal Revenue Service filed motions to intervene in the action as a competing creditors. The Marathon County court granted the motions on October 11, 1984 . The United States removed the action to this court on November 7, 1984 .

Since the removal of the action, all of the parties with the exception of the United States and the State of Wisconsin have been dismissed pursuant to stipulation.

On April 23, 1985 , the parties stipulated that the garnished funds held in the custody of the Marathon County court be transferred to the custody of the clerk of this court pending the resolution of this dispute. As of the date of this order, the funds have not been transferred to this court.

From the parties' stipulated proposed findings of fact, and for the sole purpose of deciding these motions, I find that there is no genuine dispute about the following material facts.

FACTS

Between October 1, 1981 and August 3, 1983 , the Wisconsin Department of Revenue made six state tax assessments against Bar Coat Blacktop, Inc. After making each assessment, the department filed a delinquent tax warrant-judgment with the clerk of the Marathon County court with respect to that assessment. ¹

Between June 14, 1981 and February 20, 1984 , the Internal Revenue Service made five assessments against Bar Coat Blacktop, Inc. for federal taxes. Subsequent to each of the assessments, the Internal Revenue Service filed notices of a federal tax lien with the Wisconsin Secretary of State and with the Register of Deeds of Marathon County. ²

On June 29, 1983 , Bar Coat Blacktop, Inc. submitted a bid for a paving contract to the City of Schofield , Wisconsin . The City of Schofield accepted the bid on August 10, 1983 .

On September 13, 1983 , the State of Wisconsin filed a garnishment summons and complaint in the Circuit Court for Marathon County , naming Bar Coat as defendant and the City of Schofield as garnishee. In an order dated November 1, 1983 and entered November 4, 1983 , the Marathon County court directed the City of Schofield to remit a sum of $24,490.94 to the Wisconsin Department of Revenue and discharged the City of Schofield from Bar Coat's demands for that sum. ³

On June 7, 1984 , the Internal Revenue Service served a notice of levy on the City of Schofield relating to the federal tax liabilities of Bar Coat. ⁴

OPINION

In their cross motions for summary judgment, the parties assert differing views of the issues in this case and the factors controlling the priority of interest to the funds in question.

The State of Wisconsin contends that its filing of the state court garnishment action and the final judgment in that action established the state's right to the garnished funds and placed those funds beyond the reach of the subsequently served federal levy. The state argues that the general federal tax liens based on assessments made prior to the commencement of its garnishment action against Bar Coat either did not attach to the specific property subject to that action or are subordinate to the interests of the State of Wisconsin . Also, the state contends that the November 4, 1983 order of the Marathon County court divested Bar Coat of the funds garnished by the state, leaving no property for the federal government to reach in its June 7, 1984 notice of levy. The state further argues that funds held in custody of the state court following final judgment in a garnishment proceeding may not be reached by federal tax levy.

The state has two additional arguments that are equitable in nature: first, it maintains that but for the diligence of the Wisconsin Department of Revenue in initiating a garnishment proceeding to collect on delinquent state taxes, the City of Schofield would have paid its debt to Bar Coat and there would have been no action in which the federal government could have intervened; and second, it argues that the federal government's wrongful levy of the funds already garnished by the Wisconsin Department of Revenue violates public policy.

For its part, the federal government views the case as a matter of competing state and federal tax liens, and asserts that neither the commencement of the state garnishment proceedings nor the entry of final judgment therein is sufficient to establish priority to the funds at issue. The United States bases its claim to the funds at issue in this case not upon the notice of levy, which it maintains is merely an admin istrative device to seize property, but upon the perfected liens which created a right to that property, contending that the state could assert priority over the federal government only if the state had become a judgment lien creditor before the filing of the federal tax liens. It claims priority to the disputed funds on two interrelated grounds:

(1) the federal tax lien upon Bar Coat's property became choate on August 10, 1983 , when the City of Schofield 's acceptance of Bar Coat's bid brought into existence the property subject to the federal tax lien. The United States argues that the state and federal liens attached simultaneously upon the city's acceptance of the construction bid, and that in such a situation, the federal interest prevails;

(2) the Internal Revenue Service filed three notices of lien with the Wisconsin Secretary of State and the Marathon County Register of Deeds before the state had commenced its garnishment action and before that action had ripened into judgment.

Arguing that final judgment has yet to be rendered in this garnishment action, the United States also asserts priority to Bar Coat's unpaid employment taxes for the third quarter of 1983. The United States argues that the filing of notices of federal tax lien provided notice of the Internal Revenue Service's interest in all of Bar Coat's property. The United States denies that its notice of levy was wrongful and maintains that intervention in the state court garnishment proceeding was necessary to avoid a conflicting order concerning the disputed funds.

The nature of Bar Coat's interest in the garnished funds. The threshold question in this case is whether taxpayer Bar Coat had a property interest in the money owed to it by the City of Schofield at the time the federal liens arose upon the assessment of federal taxes. Only after it is ascertained that the taxpayer had an interest in the disputed property can the court proceed to consider which party has priority of interest in the property. United States v. Trigg [72-2 USTC ¶9642 ], 465 F.2d 1264 (8th Cir. 1972).

The extent to which a federal tax lien can reach a taxpayer's property depends on the nature of the taxpayer's legal interest in that property. That interest is determined by state law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-513 (1958). The general federal tax lien created by 26 U.S.C. §6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." Avco Delta Corporation of Canada Ltd. v. United States [72-1 USTC ¶9359 ], 459 F.2d 436, 440 (7th Cir. 1972)(quoting United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958)). "In other words, the rights of the government rise no higher than those of the taxpayer whose property is sought to be levied upon." Avco Delta, 459 U.S. at 441 (citation omitted). Accord Wagner v. United States [78-1 USTC ¶9340 ], 573 F.2d 447, 451 (7th Cir. 1978). Once it is determined that the federal lien has attached to interests created by state law, the relative priority of the federal lien and competing liens is governed by federal law. Aquilino, 363 U.S. at 513-14.

The lien stage. The State of Wisconsin argues that the general federal tax liens did not attach to the specific property subject to the garnishment action because under Wisconsin law the state's commencement of the garnishment action left no property for the liens to reach. In support of this argument, the state cites Wis. Stat. §§812.18(1)(a) and 812.19(7), which provide that a garnishee may be held liable for debts that have not yet become due to the defendant and that a court may render judgment on a debt that has not yet matured.

However, I can find no support in these sections for the proposition that a taxpayer loses his property interest in contract rights as soon as those rights become the subject of a garnishment action. The filing of the garnishment action gives the state an equitable lien upon the taxpayer's property, Elliot v. Regan, 274 Wis. 298 (1956), that is, a lien that may be satisfied out of debts due or to become due. The action is premised upon the taxpayer's right to collect an amount owed: a right that yields to the superior claims of the garnishor only upon judgment in the action.

The state's reliance on these statutory sections appears to be based in part on its assertion that the City of Schofield 's debt to Bar Coat did not mature until several months after judgment in the garnishment action, when the contract was performed and the total amount owed had been ascertained. The state contends that the federal interest in these specific funds did not attach until after the city's debt had matured, whereas the state had already obtained an interest in the funds by filing its garnishment action to collect them.

There is no competent evidence in the record to indicate when Schofield approved the final bill for Bar Coat's labors. The state cites no provision of state law to indicate when a contractor obtains a property right to payment under a construction contract: whether upon acceptance of the bid, commencement of significant work, or upon satisfactory completion of contractual duties. However, even if I assume that Bar Coat did not have an enforceable contractual right until some time after the state filed its garnishment action, I am unconvinced by the argument that the federal lien attaches only after the property right matures, whereas the state claim attaches at an earlier stage.

Federal tax liens arising upon the assessment of taxes attach to all after-acquired property of the taxpayer. Glass City Bank of Jeanette, Pa. v. United States [45-2 USTC ¶9449 ], 326 U.S. 265 (1945). The fact that Bar Coat's right to the proceeds of the contract were dependent on its performance of the contract and its acceptance by the city does not affect the federal tax liens. See Seaboard Surety Co. v. United States [62-2 USTC ¶9653 ], 306 F.2d 855, 859 (9th Cir. 1962). See also Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770 ], 542 F. Supp. 270 (5th Cir. 1976). I conclude that the federal government's liens attached immediately to all Bar Coat's rights under its contract with the City of Schofield when the city accepted Bar Coat's bid on August 10, 1983, approximately one month before the state filed its garnishment action.

The state argues next that even if the federal liens did attach to the specific indebtedness at issue in this case, the state's filing of a garnishment action before the filing of the federal notice of levy renders the federal government's interest in the debt subordinate to the state's. The relative priority of the state's garnishment lien and the federal tax lien is a question of federal law, Aquilino v. United States [60-2 ustc ¶9538], 363 U.S. 509, 512-13, and will be discussed below.

The levy stage. As a separate basis for its claim to the funds at issue, the state argues that the judgment in the state court garnishment proceeding extinguished Bar Coat's interest in payment under the construction contract, leaving no property for the federal levy to reach. In support of this argument, the State cites Pittsburgh National Bank v. United States [81-1 USTC ¶9239 ], 498 F.Supp. 101 (W.D. Pa. 1980), aff'd [81-2 USTC ¶9626 ] 657 F.2d 36, (3d Cir. 1980) for the proposition that a general federal tax lien is insufficient to establish federal priority to funds in a case where a taxpayer's rights to those funds are extinguished by operation of state law before notice of the federal levy is served. In that case, a taxpayer borrowed money from a bank, giving the bank a note that provided that the bank would have a lien on the taxpayer's deposits equal to the unpaid balance of the loan. The demand note securing the debt expired on September 12, 1977 . On September 14, the Internal Revenue Service served notice of levy on the bank in an effort to collect on delinquent taxes assessed on March 24, 1975 . Under Pennsylvania law, the bank's right to the monies on deposit in the borrower's account vested on September 12, 1977 when the note matured, automatically extinguishing the taxpayer's interest in the deposits.

Citing the language of 26 U.S.C. §6331(b) , which provides that the Internal Revenue Service may levy "only property . . . possessed and obligations existing at the time thereof," the district court ruled that the federal levy was ineffective. The court noted that "[a]lthough the tax lien will apply to after-acquired property, the levy will apply only to such property or property rights as actually exists at the time the levy is made.' " 498 F.Supp. 101 at 103 (quoting 9 J. Mertens, Law of Federal Income Taxation ¶54.52 (1977 Revision)).

The State of Wisconsin argues that just as the taxpayer in Philadelphia National Bank had no property right because he could not compel the bank to deliver his deposits, 498 F.Supp. 101 at 104, Bar Coat had no property right because the November 1, 1983 order of the Marathon County court released the City of Schofield from its obligations to pay Bar Coat for the construction work. However, the state's reliance on Pittsburgh National Bank is misplaced. Although the state argues that the federal interest in a taxpayer's property is not perfected until the Internal Revenue Service files a notice of levy, this argument misconceives the purpose and effect of the federal levy. The Internal Revenue Code does not require the federal government to seize personal property in order to secure its interest in that property. "Seizure of personal property is not a method of perfecting the tax lien but rather the means of enforcing an existing lien." 9 J. Mertens, Law of Federal Income Taxation ¶54.52 (1977 revision). The federal government perfects its claim to a taxpayer's property by filing notice of its lien. 26 U.S.C. §6323 . Unless the Internal Revenue Service has filed a notice of lien, it will be unable to assert priority over the perfected claim of a competing creditor merely by serving a notice of levy upon a person holding the property of the taxpayer. Southern Rock, Inc. v. B & B Auto Supply [83-2 USTC ¶9529 ], 711 F.2d 683, 687 (5 Cir. 1983). A levy does not "determine whether the taxpayer actually owes the taxes underlying the assessment, lien or levy; nor does it determine whether the government's rights to the secured property are superior to those of other claimants, such as the taxpayer's other creditors." 4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.5 (1981).

Unlike Pittsburgh National Bank, in which the federal levy failed because the United States had not filed a notice of lien before the state-created property right expired, the present case involves a situation in which the United States had perfected its liens before the competing claimants had done so. ⁵

Funds held in custody of the court. As a separate state law basis for its argument that the federal levy was ineffective, the State of Wisconsin argues that funds held in custody of the court cannot be reached by a federal levy. The state cites Williams v. Smith, 117 Wis. 142, 145 (1903), in which the Wisconsin supreme court held that funds "in custodia legis, the management and distribution of which are already under the control of the court," could not be reached in garnishment proceedings by competing creditors. The exemption of these funds from garnishment was intended to protect the court from the inconvenience of conflicting orders with respect to funds in its custody. The state also relies on Welch v. Fiber Glass Engineering, Inc., 31 Wis. 2d 143, 145-51 (1966), in which the supreme court extended this exemption to funds held in the custody of a court which had entered an order directing disbursement of the funds.

This argument for exemption from federal tax levies of court-held funds is unpersuasive, and irrelevant as well, since the parties' proposed findings of fact contain no indication whether the garnished funds at issue in this case were ever placed in the custody of the state court. I have found as fact only that the Marathon County court ordered the City of Schofield to remit a sum to the State of Wisconsin . It appears from the record that the funds were not paid into court until after the federal government served its notice of levy upon the City of Schofield . Moreover, even if I were to find that the funds were in the custody of the court, I would not conclude that such custody would defeat the perfected liens of the United States .

Relative priority of the competing federal and state tax liens. Having concluded that the federal government's general tax liens attached to the property of taxpayer Bar Coat Blacktop, Inc., I turn to the question of the relative priority of the state and federal liens, a question that is governed by federal law. Aquilino v. United States , 363 U.S. 509 at 513-14. I look first to the statutory bases of the federal and state federal liens.

The failure of a taxpayer to pay federal taxes gives rise to a general lien in favor of the Internal Revenue Service upon "all property and rights to property" belonging to the taxpayer at the time the assessments are made. 26 U.S.C. §6321 . That lien becomes effective upon the date those taxes are assessed, and continues until liability for the amounts assessed is extinguished. 26 U.S.C. §6322 .

Under Wis. Stat. §71.13(2m), when a taxpayer fails to pay a tax, the state obtains a general lien upon all of the taxpayer's property, effective on the date the taxes are assessed. The statute provides that

If any person liable to pay any income or franchise tax neglects, fails, or refuses to pay the tax, the amount, including any interest, addition to tax, penalty or costs, shall be a perfected lien in favor of the department of revenue upon all property and rights to property. The lien is effective at the time the taxes are due or at the time an assessment is made and shall continue until the liability for the amount to be paid or for the amount so assessed is satisfied. The perfected lien does not give the department of revenue priority over lienholders, mortgagees, purchasers for value, judgment creditors and pledges whose interests have been recorded before the department's lien is recorded.

The principle of "first in time, first in right" governs the relative priority of competing state and federal tax liens. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954). In order to have priority over a federal lien, a competing lien must meet the federal standard of choateness before the federal lien arises. Choateness requires that the identity of lienor, the identity of the property subject to the lien, and the amount of the lien be ascertained. Id.

The United States argues that both the Internal Revenue Service and the Wisconsin Department of Revenue identified the amounts of their respective liens when they assessed taxes against Bar Coat, but that neither government's lien became choate until specific property of the taxpayer had been identified. According to the United States , both the federal and state liens became choate when the City of Schofield accepted Bar Coat's construction bid on August 10, 1983 . The United States claims all of its liens are entitled to priority under the principle that a tie goes to the federal government.

I find this argument unpersuasive. Both the federal and state liens are general in nature. The fact that they are directed at all of the taxpayer's property rather than specific items of property does not defeat the requirement of choateness. U.S. v. Vermont, 377 U.S. 351 (1964); McAllen State Bank v. Saenz [83-1 USTC ¶9146 ], 561 F.Supp. 636, 639 (S.D. Tex. 1982). Both governments' liens were choate upon their assessments of taxes against Bar Coat.

The question is how the federal priority rules apply to specific property that comes into existence after two separate taxing authorities have acquired choate liens upon all of the taxpayer's property. The United States cites a line of cases as support for the proposition that federal tax liens have priority when they attach to property at the same time as other liens, but none of these cases squarely holds that a federal tax lien has priority in such a situation. Furthermore, each of the cases cited by the United States on this issue is inapposite to the facts of the present case.

The simultaneous attachment issue arose as a hypothetical question in United States v. Graham, 96 F. Supp. 318, (S.D. Cal. 1951), aff'd sub nom California v. United States, 195 F.2d 530 (9th Cir.), cert. denied 344 U.S. 831 (1952), a case in which the district court held that federal tax liens had priority over a state's purported right to offset taxes owed to it by a taxpayer against the state's debt to the taxpayer because notice of the federal liens had been filed before the state's setoff rights ever accrued. In that case, none of the state taxes involved had been determined or assessed when notices of the federal liens was filed. In dictum, the court observed in dictum that in the event the state's interest and the federal tax liens had attached simultaneously, the federal lien would be entitled to priority. 96 F. Supp. at 321. However, the holding in that case is limited to its particular facts. Accord McAllen State Bank, 561 F. Supp. 636 at 639.

In United States v. Meyer [72-1 USTC ¶9401 ], 346 F. Supp. 554, 557 (S.D.N.Y. 1972), another case relied upon by the United States, the court concluded that the facts before it did not present a situation of simultaneous attachment, but if they did, the principle asserted in United States v. Graham would apply. The court's holding was that an unperfected security interest was not entitled to priority over perfected federal tax liens. 346 F.Supp. at 557-8.

Finally, the United States cites MDC Leasing v. New York Property Ins. Underwriting [79-1 USTC ¶9122 ], 450 F. Supp. 179, 181 (S.D.N.Y. 1978), a case involving the competing claims of the Internal Revenue Service and the assignee of the proceeds of a fire loss insurance policy. In that case, the federal government filed notices of tax liens before the amount of the insurance proceeds was fixed through proof of loss. The court held that the Internal Revenue Service had priority over the assignee because the assignee's interest in the insurance proceeds did not become choate until proof of loss was filed. Citing United States v. Graham, the court noted that even if the federal liens were deemed to attach upon proof of loss, when the insurance proceeds came into existence, the federal liens would be entitled to priority because the federal interest and that of the competing creditor attached simultaneously. 450 F. Supp. at 181.

Unlike the competing creditors in the cases cited by the United States , in this case the Wisconsin Department of Revenue obtained choate and perfected liens upon all of the taxpayer's property by virtue of its assessment of state taxes. The fact that certain specific property of the taxpayer did not come into existence until after the state and federal liens became choate does not alter the priority rules established in United States v. New Britain . In such a situation, "there appears to be no legal or policy reason that would mandate a deviation from the first in time, first in right rule." McAllen State Bank, 561 F. Supp. at 639.

Relative priority of the state garnishment lien and the federal tax liens. The State of Wisconsin argues that the state has priority of interest in the funds at issue because the state department of revenue filed a garnishment action to collect upon Bar Coat's delinquent taxes before the federal government served notice of its levy. This argument is without merit. The filing of a garnishment action gives rise to an equitable lien upon the property of the taxpayer. Elliot v. Regan, 274 Wis. 298. When federal tax liens are recorded before judgment is obtained in a garnishment action, those liens have priority over the equitable lien obtained upon the filing of the garnishment action. United States v. Liverpool & London & Globe Insurance Co., Ltd. [55-1 USTC ¶9136 ], 348 U.S. 215 (1955); United States v. Acri, 348 U.S. 211 (1955).

The state argues that the Liverpool case undermines the federal government's position because in that case the federal government filed a notice of levy before judgment had been obtained in the state court garnishment action, whereas in the present case, the federal government did not file a notice of levy until well after judgment had been entered by the Marathon County court. As noted above, it is notice of lien, not notice of levy, that perfects the federal government's tax lien. 4 B. Bittker, Federal Taxation of Income, Estates, and Gifts ¶111.5.5 (1981). The dispositive factor in both Liverpool and Acri was the federal government's action in filing notices of lien before the competing garnishment liens had ripened into judgment.

Effect of judgment lien creditor status. The federal government's contention that the State of Wisconsin could have established priority to the funds at issue in this case only if it had become a judgment lien creditor before the notice of the federal liens was filed is premised upon the validity of the argument that all of the federal liens are superior by virtue of simultaneous attachment. Having concluded that the state's liens were choate upon assessment and that the federal government's simultaneous attachment argument is invalid, I will address the question of judgment creditor status only briefly.

Originally, federal tax law provided that the federal tax lien had priority over virtually all other general liens perfected after the Internal Revenue Service demanded payment from a delinquent taxpayer, whether or not the competing lienholder had notice of the federal government's claim. See United States v. City of New Britain , 347 U.S. 81 at 84-88. Subsequently, Congress extended special protection to certain classes of creditors whose interests were perfected and specific before they received notice of federal tax liens. Under 26 U.S.C. §6323 , a lien arising under §6321 is not effective against a judgment lien creditor until notice of the lien has been filed. The special protection afforded by judgment creditor status has no bearing upon state liens that are perfected before competing federal liens. When the state's lien is prior to that of the federal government, the state has priority whether or not it has taken the additional step of obtaining judgment creditor status with respect to specific property. ⁶

Fairness. Finally, I address the State of Wisconsin 's argument that it would be unfair to grant priority to a general federal tax lien over a state's specific garnishment lien and garnishment judgment. The facts in this case establish that the federal government stated its claim to Bar Coat's property by filing notices of tax lien with the Wisconsin Secretary of State and the Marathon County Register of Deeds. The state was on constructive notice of the federal government's claim to Bar Coat's property before the state filed its garnishment action to enforce collect Bar Coat's unpaid taxes. A review of the file in this case reveals that the United States did not become aware of the state's garnishment action until after judgment had been rendered by the Marathon County court. (Brief of the United States in support of its motion to intervene at 2.) In view of its failure to notify the Internal Revenue Service of its competing claims to Bar Coat's property under these circumstances, the state is poorly situated to argue that the federal levy government's levy and subsequent intervention in the garnishment action were unfair.

ORDER

IT IS ORDERED that the funds deposited by the City of Schofield with the Marathon County Clerk of Court, plus any accrued interest, be applied to the outstanding liens of the United States and the State of Wisconsin in the following order:

 1. Federal lien arising 
9/14/81
 ................................. $10,139.81

 2. State lien arising 
10/1/81
 ...................................     640.57

 3. State lien arising 
10/15/81
 ..................................     844.88

 4. State lien arising 
11/25/81
 ..................................   2,024.22

 5. Federal lien arising 
12/31/81
 ................................   6,366.61

 6. State lien arising 
1/28/82
 ...................................   2,280.08

 7. Federal lien arising 
3/22/82
 .................................   6,366.61

 8. State lien arising 
6/1/82
 ....................................       6.00

 9. State lien arising 
8/3/83
 ....................................  15,365.82

10. Federal lien arising 
1/2/84
 ..................................     163.20

11. Federal lien arising 
2/20/84
 .................................   3,491.35

 

IT IS FURTHER ORDERED that by April 28, 1986 each party shall submit a proposed judgment setting forth the total amount of the fund to which they are entitled according to the priorities set forth herein.

                          APPENDIX A

                         STATE TAXES

                            Date Warrant--Judgment

                              Filed in 
Marathon
         Amount

Type of Tax  Date Assessed         County               Due * 

Withholding     
10-01-81
           
04-06-82
        $   640.57

Withholding     
10-15-81
           
05-05-82
            844.88

Withholding     
11-25-81
           
04-06-82
          2,024.22

Withholding     
01-28-82
           
08-03-82
          2,280.08

Sales           
06-01-82
           
08-04-82
              6.00

Sales           
08-03-83
           
09-08-83
         15,365.82

 *  Interest computed to 
November 29, 1984
.

 

                              APPENDIX B

                             FEDERAL TAXES

                                                Date Lien

                                                Filed With

                                    Date Lien    Register

                                    Filed With  of Deeds,     Amount

                                    Secretary    
Marathon
  Outstanding

                        Assessment   of State    County,      as of

Type of Tax  Tax Period    Date    of Wisconsin 
Wisconsin
  
June 7, 1984

Employment    
06-30-81
   
09-14-81
    
10-07-81
    
10-07-81
   $10,139.81

Employment    
09-30-81
   
12-21-81
    
01-12-82
    
01-12-82
    12,889.50

Employment    
12-31-81
   
03-22-82
    
06-14-82
    
06-14-82
     6,366.61

Employment    
09-30-83
   
01-02-84
      None        None         163.60

Unemployment  
12-31-81
   
02-20-84
    
05-14-84
    
05-14-84
     3,491.35

 

¹ A list of the state assessments and warrant judgments, as provided by the parties in their proposed findings of fact, is attached to this order as Exhibit A.

² A list of the federal assessments and levies, as provided by the parties in their proposed findings of fact, is attached as Exhibit B.

³ Attached to the State of Wisconsin 's brief in support of its cross motion for summary judgment are two letters written by Raymond Thums, counsel for the City of Schofield . The first letter, dated January 18, 1984, and addressed to James Harnett, counsel for the State of Wisconsin, indicates that by that date the City of Schofield had paid the Wisconsin Department of Revenue the amount required by the garnishment judgment, but was withholding payment of the balance of its debt pending the resolution of a dispute with Bar Coat over Bar Coat's claims for payment. In the second letter, dated June 13, 1984 , Thums informed Jeffrey R. Henry of the Internal Revenue Service that because of a disagreement about additional work to be performed under the construction contract, it was not until June 7, 1984 that the City of Schofield approved a final invoice for Bar Coat's performance in the amount of $29,563.41.

These letters are unauthenticated documents and inadmissible hearsay, and therefore will not be considered on these motions for summary judgment. Rule 56(e), Federal Rules of Civil Procedure.

⁴ The record indicates that at some point after a July 11, 1984 hearing on the United States ' motion to intervene in this action, the Wisconsin Department of Revenue placed the proceeds of Bar Coat's construction contract in the custody of the Marathon County court. State of Wisconsin v. Bar Coat Blacktop, Inc., No. 83-CV-763, slip op. at 1 (Cir. Ct. Marathon County, Branch IV, Oct. 11, 1984)(order granting United States' motion to intervene).

⁵ Wagner v. United States [78-1 USTC ¶9340 ], 573 F.2d 447 (7th Cir. 1978), another case the state relies upon, is distinguishable for the same reason: the federal government had not perfected its lien by filing a notice of lien before the competing claimants had perfected their liens.

⁶ The United States cites both federal and state law as support for its argument that the Wisconsin Department of Revenue could not obtain judgment creditor status with respect to Bar Coat's contract rights until the department obtained final judgment in its garnishment action.

Treasury Department regulations specify that in order to qualify as a judgment lien creditor, a creditor competing with a federal lien must have "obtained a valid judgment, in a court of record and competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money." 26 C.F.R. §301.6323(h)-1(g) .

Under Wisconsin law, the docketing of a warrant for delinquent state taxes is treated as a final judgment. Wis. Stat. §71.13(b). Final judgments create a perfected lien upon real property, but not upon personal property. Wis. Stat. §806.15. The United States argues that the state of Wisconsin is required to take additional steps to acquire a judgment lien upon personal property.

The judgment lien procedures do not affect the priority of interests in this case. While the state may not have a perfected judgment lien upon personal property until it obtains judgment in a garnishment action, the state's assessment of taxes against Bar Coat gives rise to a perfected tax lien upon all of Bar Coat's property. Wis. Stat. §71.13(2m). The state's perfected tax lien establishes its priority of interest against competing creditors. The state court garnishment proceedings are simply the admin istrative process through which the state enforces its claim to personal property.

 

 

[86-2 USTC ¶9557] In re: William L. Barnett, Debtor. Roger Schlossberg, Trustee, Plaintiff v. United States of America , Department of the Treasury, Internal Revenue Service, Defendant

U.S. Bankruptcy Court, Dist. Md., Rockville, 83-A-1599, 7/8/86

[Code Sec. 6323 ]

Collection: Validity of lien: Bankruptcy-liens-trustee's powers-tax priority, etc.--

The part of a levy that was paid over by the debtor's bank in order to satisfy his tax liabilities due under the debtor's 1981 individual income tax return was a payment on an unperfected claim subject to the trustee's in bankruptcy avoiding powers. In the case of personal property, in order to perfect a lien, the Notice of Levy must be filed with the appropriate office in the county in which the taxpayer resides. In this instance, the notice was filed in a county in which the debtor no longer resided. Therefore, the U.S. was an unsecured creditor at the time of levy because it did not hold a perfected lien.

MEMORANDUM OF DECISION

MANNES, Bankruptcy Judge:

Prior to this individual Chapter 7 filing, the Internal Revenue Service ("IRS") levied upon debtor's bank account. The notice of the lien was filed in the wrong county. After the IRS received debtor's funds, it filed a proper notice of lien a few days prior to debtor's Chapter 7 filing. The question presented is whether the Chapter 7 trustee prevails over the Internal Revenue Service in this situation.

THE FACTS

Roger Schlossberg, Chapter 7 trustee for the bankruptcy estate of William L. Barnett, sued the United States of America ("the United States") pursuant to §547(b) of the Bankruptcy Code seeking the return of an alleged preference. The trustee alleges that between July 31, 1983 , and October 28, 1983 , or within 90 days before the date of the filing of the petition in this case, property of the debtor in the amount of $3,148.87 was transferred to the Internal Revenue Service on account of an antecedent debt. More particularly, the transfer was said to have been made on September 22, 1983 , by a notice of levy which the United States served on the First National Bank of Maryland . It is undisputed that the debtor was insolvent at the time of that transfer and that if it was an unsecured creditor, the defendant received more than it would receive under Chapter 7 of the Bankruptcy Code if the transfer had not been made.

The facts are not disputed. On May 25, 1981 , an assessment was made by the United States against the debtor on account of his 1980 individual income tax return. On June 6, 1982 , the United States caused a Notice of Federal Tax Lien for 1980 taxes to be filed against the debtor in the records of the Circuit Court for Montgomery County , Maryland , debtor's then residence. On August 23, 1982 , the United States assessed income taxes due under debtor's 1981 individual income tax return, and on December 10, 1982 , a Notice of Federal Tax Lien again was filed in the records of the Clerk of the Circuit Court for Montgomery County . At the time that the second tax lien was served, however, the debtor no longer lived in Montgomery County but had moved to Prince George's County, Maryland. Thereafter, on August 29, 1983 , the United States served a Notice of Levy on the First National Bank of Maryland on the basis of its liens and the debtor's tax liabilities for 1980 and 1981. On September 22, 1983 , the bank transferred the sum of $3,148.87 to the United States pursuant to the levy and the debtor was notified of the transfer. The receipt of the funds reduced debtor's antecedent debt to the Internal Revenue Service. On October 19, 1983, after the levy had been made and the funds transferred to the defendant, the United States filed a third Notice of Federal Tax Lien (this time on account of both the 1981 and 1982 individual tax return liabilities) in the Circuit Court for Prince George's County, Maryland, where the debtor in fact lived.

The debtor filed a petition under Chapter 7 on October 28, 1983 .

DISCUSSION

There is no dispute that the portion of the levy which relates to the lien filed June 6, 1982, for 1980 taxes is unavoidable: that lien was perfected and secured well outside the preference period, and therefore, the levy did not enable the United States to receive more than it would under Chapter 7. The dispute centers around the portion of the levy which relates to the lien for 1981 taxes. The United States urges that because that lien dates back to the Notice which was filed December 10, 1982 , also outside the preference period, the levy again only enables the United States to realize on a perfected, secure claim, not to receive more than it would under Chapter 7. The trustee urges that the United States was in fact an unsecured creditor at the time of the levy because it did not hold a lien perfected in accordance with the requirements of 26 U.S.C. §6323(f)(1)(A)(ii) and §6323(f)(2)(B) .

The applicable sections of the Internal Revenue Code are stated below:

26 U.S.C. §6323 . Validity and priority against certain persons.

(a) Purchases [Purchasers], holders of security interests, mechanic's lienors, and judgment lien creditors. 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 which meets the requirements of subsection (f) has been filed by the Secretary.

* * *

(f) Place for filing notice; form.

(1) Place for filing. The notice referred to in subsection (a) shall be filed--

(A) Under State laws.

(i) Real property. In the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and

(ii) Personal property. In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated . . .

* * *

(2) Situs of property subject to lien. For purposes of paragraphs (1) and (4), property shall be deemed to be situated--

(A) Real property. In the case of real property, at its physical location; or

(B) Personal property. In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, and the residence of a taxpayer whose residence is without the United States shall be deemed to be in the District of Columbia.

The court finds that the residence of the taxpayer at the time the December 10, 1982, Notice of Federal Tax Lien was filed was Prince George's County, Maryland, and not Montgomery County and therefore the notice of lien was a nullity. The United States did not get the protection described under 26 U.S.C. §6323(a) as to purchasers, holders of security interests, mechanic's lienors and judgment lien creditors. Furthermore, the court finds no authority for the proposition that when the United States corrected its error by filing a Notice of Federal Tax Lien on October 19, 1983 , it thereby perfected a lien for 1981 taxes which related back to the defective December 10, 1982 , filing.

If there is one thing that is obvious under the Bankruptcy Code, it is that the trustee, endowed by the Code with the strong arm powers of §544 , is the perfect litigant without flaw. It was the intent of Congress to expand the trustee's powers under the strong arm clause to the fullest extent possible. See generally, Levin, An Introduction to the Trustee's Avoiding Powers, 53 Am. Bkr. L. Journal 173 (1979). See also, Norton Bankruptcy Law and Practice, §§30.1 et seq., Avoidance Powers of Trustee Generally (1986).

One text writer has described the position of the United States as follows:

§10.01 Creation and Period of Lien

If the taxpayer neglects or refuses to pay a tax after demand, the tax (including any interest, penalty, and cost) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the taxpayer. In general, the lien imposed by §6321 arises at the time the assessment is made and the lien continues until the tax liability for the assessed amount (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of a lapse of time.

Although a lien under §6321 of the Internal Revenue Code arises at the time the assessment is made, such lien remains unperfected and unsecured until a notice of lien is filed in accordance with §6323(f) . Until such notice of lien is filed, the lien remains unsecured and is a secret lien because the lien is generally unknown to everyone except the Internal Revenue Service (IRS) and the taxpayer.

McQueen and Crestol, Federal Tax Aspects of Bankruptcy, §10.01 (1986). (Emphasis in original.)

In other words, with respect to the levy for 1981 taxes, the United States finds itself today in the position of an unsecured creditor that has received a preference, and as with any other creditor it is subject to the attack of the trustee under §547(b) of the Bankruptcy Code. It does not reach the safe harbor of §547(c)(6) regarding a statutory lien not avoidable under §545 . The United States falls short because the statutory lien had not been perfected under 11 U.S.C. §545(2) .

FINDINGS AND CONCLUSIONS

The court finds therefore that, other than the 1980 tax, for which there was a perfected, unavoidable lien, the part of the levy paid over on September 22, 1983 , for tax is a payment on an unperfected claim and is subject to the trustee's avoiding powers.

The result today is no deviation from prior law. In accordance with the general policy against secret liens, the Supreme Court in the case of United States v. Speers [66-1 USTC ¶9101 ], 382 U.S. 266, 86 S.Ct. 411 (1965), upheld the trustee's position that a statutory lien under §70 of the Bankruptcy Act made him a statutory judgment creditor who under §6323 of the Tax Code was in a position superior to the United States' claim for unpaid taxes. As Mr. Justice Fortas said speaking for the court:

Whether this result is inadvisable need not detain us, for the question is one of policy which in our view has been decided by Congress in favor of the trustee. In any event, it is possible for the Government in cases which it deems appropriate, to avoid a result which it regards with unhappiness by promptly filing notice of its lien. Should experience indicate that inclusion of the trustee within §6323 is inadvisable, the fact will not be lost upon Congress.

382 U.S. at 276-77. Indeed, in the dissenting opinion Mr. Justice Black indicated, "A bankruptcy trustee cannot be treated as a judgment creditor except by giving that term an entirely artificial, fictional meaning." 382 U.S. at 279. Surely, the enactment of §544(a)(1) answers unmistakably that it is the intention of Congress under the Bankruptcy Code that the trustee be treated as the perfect judgment creditor.

All is not lost for the government. As the Sixth Circuit notes in the case of In the matter of Autorama Tool & Die Company, 412 F.2d 369, 370-71 (6th Cir. 1969) cert. denied, 397 U.S. 1043 (1970), the government has the priority given by §507(a)(6)(A) of the Bankruptcy Code, ¹ which provides that,

§507 Priorities.

(a) The following expenses and claims have priority in the following order:

* * *

(6) Sixth, allowed unsecured claims of governmental units, to the extent that such claims are for--

(A) a tax on or measured by income or gross receipts--

(i) for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;

(ii) assessed within 240 days, plus any time plus 30 days during which an offer in compromise with respect to such tax that was made within 240 days after such assessment was pending, before the date of the filing of the petition; or

(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case.

Lastly, the court finds that the reliance by the United States upon In re Debmar, 21 BR 858 (BC S.D. Fla. 1982) is misplaced. In anticipation of the fact pattern of this case, the bankruptcy court in Debmar pointed out that "if the federal tax lien on the account due from Systems Development Corporation or another bank account is not perfected or enforceable against a bona fide purchaser as a result of §6323(b) of the Internal Revenue Code, then the federal tax lien on those counts should be avoided." 21 BR at 861-62. Debmar is no help to the position urged by the IRS.

Counsel for the trustee shall submit an order in accordance with the foregoing after conferring with counsel for the United States as to the exact amount subject to this order.

¹ The effective statute at the time of the instant case filing.

 

 

[40-2 USTC ¶9603]Citizens State Bank of Barstow, Texas, Appellant, v. S. P. Vidal, Collector of Internal Revenue for the District of New Mexico; Magnolia Petroleum Company, a corporation; Montgomery Transportation Company, Inc.; K. P. Kistler, doing business as "Buckeye Grocery Store"; Ed Chase; R. W. Cowell; D. B. Dehart; A. B. Flippin; J. W. Green; R. O. Johnson; L. J. Adkins; J. E. McDaniel; Arnold Nuttall; W. R. Rash; Bernice Warren; J. W. Wiles; L. B. Hancock; Grady Thompson, doing business as "Thompson Hardware Company"; and Harry V. Vance, Trustee in Bankruptcy. Appellees

(CA-10), United States Circuit Court of Appeals, Tenth Circuit, No. 2076, 114 F2d 380, Decided July 19, 1940

Appeal from the District Court of the United States for the District of New Mexico.

Tax lien on assigned fund: Priority of claims.--In a suit to establish priority of claims, including a federal tax lien, against receivables which had been assigned by the taxpayer to the appellant, the Court affirms the decision of the trial court that the order of precedence of various claims is as follows: Labor and materials, first; Collector of Internal Revenue, second; and the bank (appellant), third. Affirming District Court decision.

William L. Kerr (H. C. Buchly and W. W. Hubbard were with him on the briefs) for appellant. L. W. Post, for appellees.

Before PHILLIPS and BRATTON, Circuit Judges, and MURRAH, District Judge.

MURRAH, District Judge, delivered the opinion of the court.

[The Facts]

The Magnolia Petroleum Company, a corporation, ¹ appropriately filed its bill of interpleader, ² acknowledged its debt to the Montgomery Transportation Company, Inc., ³ for work, labor, and materials furnished to it by Montgomery, deposited the debt, in the sum of $5,151.49, in the Registry of the Court and asked to be discharged. All parties defendant, including Appellant and Appellees, answered, claiming prior and superior rights to the fund, Appellee, S. P. Vidal, Collector of Internal Revenue for the District of New Mexico, ⁴ claims the fund in satisfaction of a deficiency assessment for income tax in the sum of $4,472.13, with penalties, for taxes for the year of 1936, due the United States Government. To perfect the said lien, the Collector filed notice of the same in the office of the Clerk of the United States District Court at Santa Fe, New Mexico, on December 13, 1938; in the office of the County Clerk of Lea County, at Lovington, New Mexico, (the domicile of Montgomery), on December 14, 1938; in the office of the County Clerk of Eddy County, State of New Mexico, at Carlsbad, New Mexico, (where part of the work was performed and material furnished), on March 13, 1938; in the office of the Clerk of the United States District Court for the Western District of Texas, at Pecos, Texas, on December 16, 1938, and in the office of the County Clerk of Winkler County, at Kermit, Texas, (where part of the work was performed and material furnished), on December 13, 1938, as provided by applicable statutes. ⁵

The warrant for distraint and notice of levy was served upon Magnolia June 16, 1939 , based upon a deficiency income tax assessment against Montgomery . Appellant, Citizens State Bank of Barstow, Texas, ⁶ made claim to the fund by virtue of written assignments, executed and delivered to it by Montgomery, for which it paid a valuable consideration, without actual notice of the filing of notice by the Collector, and which said assignments covered work in Texas and New Mexico for and on behalf of Magnolia, prior to the date warrant for distraint and notice of levy was served upon the Magnolia, but after the filing of the notice of the lien aforesaid.

The fund, in question, represents the payment of a debt from the Magnolia to Montgomery for work, labor and materials furnished, evidence of which was assigned to the Bank in the manner aforesaid and the sole question presented here is the priority of the claim of the Collector and the Bank.

The trial court held that the laborers and materialmen had first claim to the fund; that the Collector of Internal Revenue had second claim to the fund; that the Bank had third claim to the fund. The Bank appeals "only from that portion of the said judgment which denies its priority to the claim of the Collector." The facts are agreed and are correctly set forth in the Court's findings. They evidence the following material facts: Montgomery Transportation Company, Inc., a New Mexico Corporation, was engaged in what might be termed oil field work; was employed and did perform labor and furnish materials in Texas and New Mexico for the Magnolia. To obtain money with which to meet current obligations, meet its payroll and operating expenses, Montgomery carried its itemized statements of work performed and material furnished, approved by Magnolia, to the Bank and for a cash consideration transferred and assigned to the Bank the itemized statements of money due and to become due thereunder. It was understood between the Bank, the Magnolia and Montgomery that from the amount due Montgomery from Magnolia there would be deducted the purchase price of Magnolia Petroleum products purchased from the Magnolia by Montgomery, in the operation of its business, and the net amount due after deductions, from time to time, would be retained by the Bank and the amount so retained credited in payment of the written assignments on due date. This course of dealing continued from the year of 1936 until about the 16th of June, 1939, but the assignments in question were for May 1, 13, 16, 22, 31, June 6, 12 and 14, 1939. At that time the assignments aggregated $13,637.42 for work, labor and materials furnished Magnolia by Montgomery , but after deducting the credits for petroleum products furnished by Magnolia to Montgomery there remained the sum now deposited in the Registry of the Court by Magnolia.