Texas2

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[94-1 USTC ¶50,017] Western National Bank, Plaintiff v. United States, et al., Defendants United States, Defendant-Appellee v. Comptroller of Public Accounts for the State of Texas, Defendant-Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, 93-8074, 11/19/93, 8 F3d 253, Affirming a District Court decision, 93-1 USTC ¶50,182 , 812 FSupp 703

[Code Secs. 6321 and 6323 ]

Validity of lien: Priority of creditors.--The IRS's tax lien on an oil refinery corporation's accounts receivables seeking delinquent excise taxes had priority over a competing state (Texas) lien. The federal tax lien attached when the IRS made its first assessment against the corporation. Subsequently, the state served "freeze" notices on the bank where the accounts were located in an attempt to recover the balance of fuel taxes owing. The state claim did not have priority over the federal claim because the state had not perfected its lien before the federal lien was filed. Further, the state was not entitled to "superpriority" status because, as a collector of tax revenue, it did not qualify as a purchaser that acquired the accounts for full and adequate consideration. In addition, a superpriority for state fuel taxes has not been recognized under either Texas or federal law.

Before WISDOM, HIGGINBOTHAM, and SMITH, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

The United States and the State of Texas both claim the same bank account to satisfy tax liabilities. We affirm the district court's grant of summary judgment for the federal government, persuaded that the federal lien attached to the account before the state's claim arose.

I.

This case stems from a secured transaction among oil companies. In August 1991, 3-B Rattlesnake Refining Limited and 3-B Rattlesnake Refining Corporation executed a UCC-1 financing statement in favor of Enron Oil Trading and Transportation Company, which was filed with the state on August 12, 1991 . ¹ The parties then renegotiated the agreement on November 21, 1991 , to create a "lockbox" deposit account arrangement with Western National Bank.

Under the lockbox arrangement, 3B opened a demand deposit account in its name at Western, for which the only signatories were two Enron employees. 3B's invoices told its customers to make their checks payable to 3B and to mail payment, addressed to 3B, to a post office box maintained by Western. Western forwarded undepositable checks, such as checks without signatures or checks with incorrect endorsements, to 3B for disposition. Additionally, 3B forwarded checks mistakenly sent to 3B's offices to Western for deposit in the account. Neither 3B nor Enron could unilaterally terminate the agreement. If a customer was late in making a payment to the lockbox, 3B could take it to court.

In late 1991, creditors began vying for 3B's assets. The IRS assessed federal excise taxes against 3B on September 16 and December 23, 1991 , and March 23 and May 21, 1992 . The IRS recorded a notice of federal tax lien on 3B's property in the appropriate county property records on April 22 and 23, 1992, and then filed with the Texas Secretary of State on May 8, 1992 . The IRS filed notice of later assessments with the county on June 22 and with the Secretary of State on June 25. Meanwhile, the Texas Comptroller of Public Accounts filed notices of motor fuels taxes on May 11, 1992 . It served "freeze" notices on Western on May 22 for a total of $205,011.59, the balance of fuels taxes then due the state. On that day the account had about $1.7 million on deposit.

Later that month, 3B and Enron settled litigation arising out of their business dealings. As part of the settlement, Enron waived any lien it had on the lockbox account, and 3B became immediately entitled to collect all the money in the account. Enron then released the account leaving only the $205,011.59 claimed by the state on deposit on May 26, 1992 .

On June 4, the IRS served a notice of levy on Western stating it had assessed a total of $1,932,221.13 against 3B. Faced with conflicting claims to the same account, the bank filed an interpleader action in July 1992 in state court and the IRS removed to federal court. Both sides moved for summary judgment and in January of 1993 the district court ruled for the IRS.

II.

The accounts receivable generated by 3B's sales to customers created rights under state law that constituted "property" under the Internal Revenue Code. See, e.g., United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 167 (6th Cir. 1983). A federal tax lien attached to this property on September 16, 1991 , when the IRS made its first assessment against 3B. ² See 26 U.S.C. §6322 . That property remained subject to the IRS lien after the negotiation of the lockbox arrangement with Enron. See United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958) ("[I]t is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere.")

Once a tax lien attaches, the question of its priority against other liens is determined by the rule that "the first in time is the first in right." To defeat the federal lien under these circumstances, the competing state lien must have been "perfected" before the federal lien was assessed on September 16, which means that the identity of the lienor, the property subject to the lien, and the amount of the lien must have been established before September 16. United States v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526, 1528 (1993); United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 86 (1954). Since no evidence in the record shows the existence of a state claim prior to the notices filed on May 11, 1992 , the federal lien has priority.

The state contends that Enron had a prior-perfected security interest in those accounts receivable. As a result, the state argues, the IRS lien was "not . . . valid" since the IRS did not file public notice about its lien until almost a year after Enron entered the arrangement. See 26 U.S.C. §6323(a) . This contention fails for two reasons. First, section 6323(a) governs lien priority in a dispute with a secured creditor; it does not address the creation or elements of a lien. The lien existed even if Enron had priority over the IRS for a period of time. Second, Enron had no such priority when the IRS levied, as Enron released all of its interest in the account in favor of 3B on June 1, three days before the levy.

The state next contends that its claim enjoys the "superpriority" status of 26 U.S.C. §6323 . Section 6323 provides that a lien is not valid against the purchaser of a security who lacked actual knowledge of the lien at the time of purchase. 26 U.S.C. §6323(b)(1)(A) . The state contends that since "money" is a security, it qualified as a purchaser of a security by serving a freeze notice on the bank. See 26 U.S.C. §6323(h)(4) .

This argument, inventive as it is, has two flaws. First, Texas is not a purchaser. A "purchaser" is one who for adequate and full consideration acquires an interest in property. 26 U.S.C. §6323(h)(6) . We see no exchange of consideration in the collection of tax revenue. Further, Congress has established a superpriority for real property tax and special assessment liens. 26 U.S.C. §6323(b)(6) . The decision to go further and establish another superpriority for state fuel taxes is a decision for Congress rather than this court. See William T. Plumb, Jr., Federal Liens and Priorities-Agenda for the Next Decade III, 77 Yale L.J. 1104, 1108 (1968) (noting that "[f]urther study might lead to the conclusion that additional superpriorities may deserve federal recognition" in the area of "sales, gasoline, and other taxes collected from the consumer").

Lacking a foundation for a superpriority in federal law, the state next seeks one in Texas law. It cites a Texas statute requiring the collectors of fuels taxes to hold them in trust for the state. Tex. Tax Code Ann. §111.016 ( Vernon 1992). See also Dixon v. State, 808 S.W.2d 721, 723 (Tex. App.-Austin 1991, writ dism'd w.o.j.). It argues that the IRS lein could not attach to funds in the lockbox account collected to pay fuel taxes, as those funds were being held in trust for the state. See Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 515 (1960).

Congress has not given state sales taxes the superpriority under the Internal Revenue Code enjoyed by state property taxes, and we are not persuaded that the Texas legislature has either. However the state characterizes its claim for sales taxes, the first-in-time rule determines the priority of conflicting state and federal claims for taxes when a section 6323 provision does not apply. See United States v. Vermont [64-2 USTC ¶9520 ], 377 U.S. 351, 358-59 (1964); In re Thriftway Auto Rental Corp. v. Herzog, 457 F.2d 409; (2d Cir. 1972) (both looking to the New Britain test to determine priority of conflicting liens rather than state or local lien characterization). See also Michael I. Saltzman, IRS Practice and Procedure ¶16.04[2] [f], at 16-35 (2d ed. 1991) ("Obviously, significant state and local taxes, such as state and local . . . sales taxes, are not covered by the [§6323(b)(6) ] superrpriority. Liens for these taxes, even if the lien has arisen before the federal tax lien, must qualify as 'choate' liens . . .."). Assuming that Enron acted as a collector of fuels taxes, triggering the Texas statute, the federal claim has priority because Texas's equitable interest did not arise until after the IRS asserted its interest by assessing 3B on September 16, 1991. See State v. Bar Coat Blacktop, Inc. [86-2 USTC ¶9598 ], 640 F.Supp. 407, 411-12, 415-16 (W.D. Wisc. 1986) (federal tax lien had priority over later-arising state's equitable lien for tax liability).

The state directs us to bankruptcy law to support its trust fund argument. The cases it cites address various threshold questions under bankruptcy law, such as the dischargeability of a state claim for fuel taxes or whether money collected for payment of fuel taxes falls within the debtor's estate. See. e.g., Matter of Al Copeland Enterprises, 991 F.2d 233, 235 (5th Cir. 1993); In re Avant, 110 B.R. 264, 265 (Bankr. W.D. Tex. 1989). The inquiry in this case takes place a step later, after the court has identified the nature of the state's claim, and asks about the priority of that claim relative to a federal one. The state cites no bankruptcy cases speaking to that separate issue.

AFFIRMED.

¹ It covered: "All furniture, supplies, machinery, inventory and nonfixture equipment and personal property now or hereafter located on any of the land described in Exhibit A, attached hereto and made a part thereof for all purposes, and/or used in connection with any present or future building(s) or other improvement(s) upon any of the said lands, excluding the platinum catalyst in the reformer."

² As the first lien involved an assessment of $233,143.91, more money than the account held when the levy was served, we do not analyze the strength of the other liens.

 

 

[58-1 USTC ¶9271]Audrey Lefors, Plaintiff v. Charles Melton Lefors, Defendant

44th Judicial District Court, Dallas County, Tex., No. 103893-B/J, 11/20/57

[1954 Code Sec. 6321--similar to 1939 Code Sec. 3670]

Lien for taxes: Priority.--In distributing the assets of taxpayers, the court awarded the United States the sum of $3,737.77 owed for withholding taxes. The payment of this amount was in full and final satisfaction of the claims of the United States against taxpayers and their receiver.

Clyde G. Hood, Attorney, Davis Bldg., Dallas , Texas , for plaintiff. Frank Ivey, Attorney, Texas Bank Bldg., Dallas , Texas , for defendant.

THORNTON, Judge:

On the 7th day of October, 1957, pursuant to notice, came on to be heard the application of the Receiver for final discharge and for the allowance or disapproval of all claims of creditors, for the fixing of priority of claims, and for the final payment of claims, and distribution of assets, allowances of receiver's and attorney's fees, and came the parties and claimants in person and by their attorneys, whereupon the Court proceeded to hear evidence on said application and upon the claims of creditors. Said hearing was adjourned and, pursuant to notice, again had on the 21st day of October, 1957, at which hearing the claimants appeared in person and by their attorneys, and the Court thereupon proceeded to hear evidence on the claims, both secured and unsecured.

The Court finds from the evidence as follows:

1. That heretofore on June 28, 1957, this Court confirmed a sale of the assets of Sonny's Food Store, described therein, to James and Ruth Lacey for the sum of Nine Thousand Three Hundred Dollars ($9,300.00) subject to the outstanding mortgages therein described, and ordered said sum paid into the Registry of the Court.

2. That said sum of money was not paid by the purchasers into the Registry of the Court until the 8th day of July, 1957, at which time Emery Wiley, as Receiver, executed a Bill of Sale to James and Ruth Lacey, conveying whatever right, title or interest that the Receiver, Charles Melton Lefors and Audrey Lefors had in said assets.

3. That Emery Wiley, Receiver, has collected in addition to the monies in the Registry of the Court the sum of Nine Hundred Eighteen and 03/100 Dollars ($918.03).

4. That the following are preferred claims against the assets of this receivership above set out, and are allowed and approved by the Court, to be paid out of the funds in the Registry of this Court in the following order of priority:

(a) The claim of United States of America in the amount of Three Thousand Seven Hundred Thirty Seven and 77/100 Dollars ($3,737.77), being taxes duly and legally assessed against Charles Melton Lefors, Jr. and Emery Wiley, Receiver, in the nature of withholding taxes and set out in the First Amended Original Plea of Intervention of the United States filed herein on August 13, 1957. These taxes arose during the operation of said property by the Receiver and are in the nature of a trust fund under the laws of the United States and are to be paid by the Receiver. The payment of this claim out of said funds shall be in full and final satisfaction of the claims of the United States of America, and in satisfaction of any and all liens that may have been filed by the United States against the said Charles Melton Lefors and Audrey Lefors, and shall be in settlement of any and all claims of the United States against the Receiver, Emery Wiley.

(b) The claim of the City of Dallas in the sum of One Thousand Two Hundred Thirty Four and 46/100 Dollars ($1,234.46). This claim represents taxes due the City of Dallas , a municipal corporation, by Charles Melton Lefors and wife, Audrey Lefors, and the Receiver for the years 1954 through 1957.

(c) The claim of the State of Texas and the County of Dallas for taxes due by Charles Melton Lefors and wife, Audrey Lefors, and the Receiver for the years 1954, 1955, 1956 and 1957 to the extent of $249.60, said claim being in the total amount of Six Hundred Twenty Five and 57/100 Dollars ($625.57), and the allowance of $249.60 thereof being without prejudice to the claimant's assertion of all other legal remedies as hereinafter set out.

(d) The claim of Rose, Rose and Crutcher, insurance agents, for insurance premium on policy of general coverage on the assets of the receivership for the years 1955 to 1957, said policy being taken out by the Receiver as part of the cost of admin istration of this receivership. This claim is allowed to the extent of $1,500.00, which is the amount agreed to be accepted by the claimant in full settlement of all claims against the Receiver, as well as the said Charles Melton Lefors, and wife, Audrey Lefors, by reason of any insurance policies issued.

(e) The claim of Dallas Power & Light Company, filed herein on September 21, 1957, in the amount of $223.07, being in payment of electrical service at Sonny's Food Store during the receivership up to the 8th day of July, 1957, which amount is in full satisfaction and settlement of any and all claims of the claimant against the Receiver, Charles Melton Lefors and Audrey Lefors for services up to said time; it being understood no claim will be allowed against the Receiver for any electrical service after July 8, 1957, the date of the execution of the aforesaid Bill of Sale.

(f) The claim of Emery Wiley, Receiver, in the amount of Two Thousand Six Hundred Sixty and 16/100 Dollars ($2,660.16), which is an overdraft said by the Receiver out of his personal funds to First National Bank in Dallas, and which overdraft represented monies expended by the Receiver in due course of admin istration of this estate and being in fact a part of the costs of admin istration, provided, however, that there be deducted from said amount of Two Thousand Six Hundred Sixty and 16/100 Dollars ($2,660.16) the Nine Hundred Eighteen and 03/100 Dollars ($918.03) above referred to, which has been collected by the Receiver and not paid in to the Registry of the Court, so that the Clerk of this Court will pay to the said Emery Wiley, Receiver, the difference between the $2,660.16 and the $918.03, or a balance of One Thousand Seven Hundred Forty Two and 13/100 Dollars ($1,742.13).

(g) The claim of Howard L. Busby Company and L. A. Busby, Auditors, employed by the Receiver in the amount of Three Hundred Twenty-five Dollars ($325.00) which will be in full payment, satisfaction and settlement of all claims by him incurred in connection with this receivership.

(h) The Clerk of this Court is ordered to reimburse himself out of said funds for the actual court costs that may be shown on his books as being due and payable hereunder.

(i) The balance, if any, of said fund is to be paid by the Clerk of this Court to Lanham Croley, as attorney for the Receiver, as his fee herein.

5. That the payment of the above claims, court costs, etc. fully exhausts the funds on hand either in the Registry of the Court or in the possession of the Receiver.

6. That as shown by the report of the Receiver on file herein, the Receiver has been paid monthly payments to the extent reflected by said report, and that there are no funds available for the payment of any additional fees to the Receiver.

It is, therefore, ORDERED, that the Clerk of this Court be, and he is hereby, authorized, directed and instructed to issue his checks or vouchers against the aforesaid fund of Nine Thousand Three Hundred Dollars ($9,300.00), payable to the respective claimants as hereinabove set out, in full satisfaction, settlement and payment of all claims and demands of said claimants against the Receiver and the assets of this receivership and to deliver the same to either the Receiver, Emery Wiley, or Lanham Croley, attorney for the Receiver, for mailing to the respective claimants.

It is further ORDERED that the Receiver be denied any further fee herein.

The State of Texas having heretofore intervened in this cause asserting its claim against Emery Wiley, as receiver, for taxes, penalty and interest in the total amount of $625.57 and said Receiver only having sufficient funds on hand to pay the amount of $249.60 on said claim, and said State of Texas having impleaded and joined as defendants in said intervention Ruth Lacy, Elizabeth Lefors Lacy and Warren Refrigerator Company, a Texas corporation, alleging the right to foreclose a tax lien against all the money, notes, bonds, stocks, credits, leases, portable and moveable buildings, stocks of goods, wares, merchandise, fixtures, tools, equipment, automobiles, trucks, stoves, heaters, refrigerators, ice boxes, tables, radios, televisions and all other property except real estate owned, possessed, used or operated in and on account of the business known as Lefors Food Store at 1905 Singleton Boulevard, Dallas, Texas, during the years 1955, 1956 and 1957, and there being a present balance remaining on said claim in the amount of $375.97, after applying said credit of $249.60, which balance the State seeks to recover by such foreclosure of said tax lien against said property and said impleaded defendants who own and claim an interest therein;

It is, therefore, ORDERED by the Court that said claim as against Emery Wiley, Receiver, be and the same is hereby approved and allowed to the extent of $249.60, as aforesaid, which is the only amount remaining in his hands from which same can be paid and that the payment of same will fully and completely release said receiver from any further liability on account thereof.

It is further ORDERED by the Court that neither the filing of said claim with said Receiver nor the acceptance of the aforesaid credit shall be construed as a waiver of any balance claimed, and the State shall have the right without prejudice to continue the prosecution of said claim to a final conclusion in this suit for the balance it alleges to be due against all of said impleaded defendants and for the foreclosure of any lien it has against said property.

It is further ORDERED that the rendition and entry of final judgment herein as to the rights of any and all parties and creditors other than those paid under this order, and as to the issues hereinbelow set out, be withheld and suspended and this receivership be kept open until

(a) further hearing on the claims of general creditors, if such hearing be necessary;

(b) the termination of the rights of the State of Texas and the County of Dallas to continue to prosecute its claim against any person or property it considers liable therefor other than the said Emery Wiley and any funds that have come into his possession or may come into his possession as Receiver, and the allowance of said claim to the State of Texas, County of Dallas, without prejudice to the State's right to assert such claim against such other persons and property;

(c) the adjustment and final settlement of any claim that the Receiver may have against James Lacey and Ruth Lacey, purchasers of the assets of this receivership, by reason of any matter pertaining to the operation of said Sonny's Food Store; and

(d) the final discharge of the receiver and his sureties herein.

 

 

[64-1 USTC ¶9247]Security State Bank of Pharr, Texas, Appellant v. W. B. Uhlhorn, d/b/a Uplhorn Construction Company, et al., Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 20681, 325 F2d 92, 11/27/63, Affirming District Court, 63-1 USTC ¶9149, 211 F. Supp. 798

[1954 Code Sec. 6323]

Lien for taxes: Priority of liens: Assignment of subcontractor to secure bank advances: Existence of mortgagee status.--An assignment by a subcontractor of his contract rights to a bank to secure advances is not a protected assignment superior to the Government's lien for unpaid taxes, although prior in point of time to the Government's lien, as it had not complied with the Assignment Act of the State of Texas in that it had failed to describe the land on which the subcontractor was building and had not been recorded in the county in which the land was located. Therefore, the bank, because of such failure, did not acquire the status of a protected mortgagee under Code Sec. 6323, as its lien was inchoate and unperfected. In so holding, the court overruled objections to the constitutionality of the 1957 amendment to the Texas state statute incorporating such recording provisions, based on the contention that the caption of the amendatory act did not authorize the amendment as finally passed, in violation of Article III, Sec. 35 of the Texas constitution.

Ralph L. Alexander, 216 S. Closner St. , Edinburg , Tex. , for appellant. Orrin W. Johnson, Texas Reserve Bldg., Harlingen, Tex., James R. Gough, Assistant United States Attorney, Houston, Tex., Louis F. Oberdorfer, Assistant Attorney General, Meyer Rothwacks, Ralph A. Muoio, Department of Justice, Washington, D. C. 20530, for appellee.

Before TUTTLE, Chief Judge, BROWN and GEWIN, Circuit Judges.

PER CURIAM:

We have carefully considered the contention of the appellant that House Bill No. 698, Acts of 1957, 55th Leg., page 818, chapter 348, of the State of Texas, requiring the assignment of certain contracts to be recorded in a specific manner, is unconstitutional. The relevant facts and the discussion of the constitutional issue are fully set out in the judgment of the district court in [63-1 USTC ¶9149] 211 F. Supp. 798. We conclude that the determination of the trial court as set forth in its opinion should be affirmed.

Approving the decision, as we do, we affirm the judgment on the reasoning contained in the opinion of the trial court.

¹ Joseph Brown and Estate of Tillie Brown, Deceased, Joseph Brown, Administrator v. Commissioner of Internal Revenue, Docket No. 48639 (T. C. 1954).

 

 

[42-1 USTC ¶9162]The United States of America , Petitioner, v. The State of Texas , et al., Respondents

Supreme Court of the United States , No. 44. October Term, 1941, 314 US 480, 62 SCt 350, December 22, 1941

On writ of certiorari to the Court of Civil Appeals, Second Judicial District, State of Texas.

Liens for taxes: Order of preference.--Claim of the United States for gasoline taxes, in a general equity receivership of a manufacturer and distributor of motor fuel who was doing business in Texas, has precedence over claims of the State of Texas for gasoline taxes, the state lien being nothing more than an inchoate and general lien which could not be enforced without assistance of the courts. Reversing decision of Court of Civil Appeals, Second Judicial District, State of Texas , reported at 41-1 USTC ¶9410.

Charles Fahy, Acting Solicitor General, Francis Attorney General, Samuel O. Clark, Jr., Assistant Attorney General, and Arnold Raum, Sewall Key, J. Louis Monarch, and Clarence E. Dawson, Special Assistants to Attorney General, for petitioner. Gerald C. Mann, Attorney General of Texas, Pat M. Neff, Jr., and Geo. W. Barcus, Assistant Attorney Generals of Texas, for respondent.

Mr. Justice BYRNES delivered the opinion of the Court.

[The Facts]

W. L. Nix was a manufacturer and distributor of motor fuel, doing business in Texas under the name of Texas Refinery. On November 20, 1933 , M. R. Ingraham, who held a demand note secured by a chattel mortgage on certain tanks belonging to Nix, brought an action in the District Court of Gregg County, Texas. He alleged that demand had been made on the note, that it had not been paid, that Nix owned no property in Texas other than that of Texas Refinery, that the value' of the mortgaged tanks was insufficient to discharge the note, that the tanks were not used "for a separate purpose" but in the "operation of the said refinery as a unit," and that Nix was insolvent. He asked that judgment be entered in his favor for the amount of the note, that the mortgage be foreclosed, and that in the meantime a receiver be placed in charge of "the whole of the property" of Texas Refinery. On the same day a receiver was appointed, and he was subsequently authorized to sell all of the refinery property.

On November 21, R. P. Ash intervened in the proceedings as the holder of an overdue note secured by a mortgage on the physical plant of the relinery not subject to the Ingraham mortgage. Both the state of Texas and the United States then intervened with the claims for state and federal gasoline taxes which are the subject of the present dispute. Later both the Ingraham and Ash mortgage notes were assigned to Howard Dailey.

The District Court found that Nix was insolvent on November 20, 1933 , and continued to be insolvent thereafter. The sum available for distribution after sale of the refinery property by the receiver was $7466.92. The court found that of these proceeds $1294.80 was allocable to those assets which was subject to the mortgages held by Dailey, and it ordered that his claim to that amount be first satisfied. It determined that Nix was liable to the United States for $19,343.91 in federal gasoline taxes, and to Texas for $40,312.51 in state gasoline taxes. As between the state and federal claims, it decided that the United States was entitled to priority and concluded that nothing would be left to apply to the Texas claim.

From this order Texas appealed to the Court of Civil Appeals for the Second District. That court certified the controlling questions to the Supreme Court of Texas. The Supreme Court, on the authority of State v. Wynne, 134 Tex. 455, a companion case decided the same day, answered the questions in such a way as to require that the claim of Texas be first satisfied, that of Dailey second, and that of the United States third. The Court of Civil Appeals thereupon so ruled, noting that the assets available would not completely satisfy even the claim of Texas and that Dailey and the United States would receive nothing. A motion by the United States for a rehearing was denied, and the Supreme Court of Texas refused to review the decision of the Court of Civil Appeals. We granted the petition of the United States for certiorari because of the important question of the fiscal relationship between state and federal governments which is involved.

[The Question at Issue]

No question as to the rights of Dailey, the mortgagee, is raised by this appeal. We confine ourselves, therefore, to the only question presently open to decision; the relative priority of the claims of the United States and Texas .

The United States rests its assertion of priority upon §3466 of the Revised Statutes. ¹ Despite the contention of Texas to the contrary, that section clearly applies to this proceeding. As we recently remarked in United States v. Emory, ² §3466 covers in terms the case of an insolvent debtor who has committed an act of bankruptcy, and there are few more familiar examples of an act of bankruptcy than the appointment of a receiver because of the debtor's insolvency. Cf. §3(a)(4) of the Bankruptcy Act , U. S. C., Title 11, §21(2)(4). Here the district court expressly found that Nix was insolvent, and it appointed a receiver. It is true that the original petition was filed by a mortgagee rather than by a general creditor. But if any limitations upon the operation of §3466 might otherwise have flowed from this circumstance they were removed by the subsequent character of the proceeding. The receiver was placed in control of all of Nix's assets, rather than only those subject to the mortgage, and all of the assets were eventually liquidated. Parties other than the mortgagee, including Texas itself, intervened and were heard. We think that realities require us to treat the proceeding as a general equity receivership within the scope of §3466.

We are thus brought to the important issue in the case. Article 7065a-7 of the Texas Civil Statutes declared that all gasoline taxes due by any distributor to the state "shall be a preferred lien, first and prior to any and all other existing liens, upon all the property of any distributor, devoted to or used in his business as a distributor * * *." ³ It is the state's position that under this section it held a specific and perfected lien upon the refinery property which entitled it to priority despite §3466 of the Revised Statutes.

[Exception to Priority Requirement of Sec. 3466]

Section 3466 mentions no exception to its requirement that "the debts due to the United States shall be first satisfied." It is nevertheless true that in several early decisions this Court read an exception into the section in the case of previously executed mortgages. Thelusson v. Smith, 2 Wheat. 396, 426; Conard v. Atlantic Insurance Co., 1 Pet. 386; Brent v. Bank of Washington, 10 Pet. 596, 611, 612. This doctrine seems to have been based on the theory that mortgaged property passes to the mortgagee and is no longer a part of the estate of the mortgagor. See Conard v. Atlantic Insurance Co. , supra, at 441-442. The question of whether the priority of the United States under §3466 would also be defeated by a specific and perfected lien upon property whose title remained in the debtor was reserved in those cases. Ibid.; Brent v. Bank of Washington, supra, at 611-612. However, it was determined that a general judgment lien upon the lands of an insolvent debtor does not take precedence over claims of the United States unless execution of the judgment has proceeded for enough to take the land out of the possession of the debtor. Thelusson v. Smith, supra, at 425-426.

In more recent years the Court has had occasion to consider the argument that liens created in favor of states or counties by state statutes entitled them to priority over the United States under §3466. In Spokane County v. United States, 279 U. S. 80 [1 USTC ¶387], the priority of the United States was upheld. The state statutes involved provided that if a certain personal property tax was not paid, and if the personal property against which it had been assessed was no longer in the hands of the delinquent taxpayer, the amount of the unpaid tax should become a lien upon all the real and personal property of the taxpayer. They went on to prescribe the procedure by which the lien was to be enforced. The court determined that the statutory lien did not become specific until this procedure had been followed. Since these procedural conditions had not been satisfied in the case before it, the Court refused priority to the tax claims of the county. It specifically declined to consider what "the effect of more completed procedure in the perfecting of the liens under the law of the State" would have been. 279 U. S. at 95 [1 USTC ¶387].

The New York statute in New York v. Maclay, 288 U. S. 290, declared that the corporate franchise tax there involved should "be a lien and binding upon the real and personal property of the corporation * * * until the same is paid in full." 288 U. S. at 292. Although the franchise taxes in question were overdue, the state had taken no steps to perfect and liquidate its lien at the time the receiver was appointed for the insolvent corporation. Under such circumstances, the Court was of the opinion that the tax claim of the state did not deprive the claim of the United States of its priority under §3466. It was at pains to make clear, however, that it intended by its decision to lend no support to the assumption that the doctrine of the mortgage cases, whatever its current vitality, would require the subordination of unsecured claims of the United States to a specific and perfected lien. 288 U. S. at 293-294. ⁴

We think that it is equally unnecessary to test that assumption here. Prior to the appointment of the receiver on November 20, 1933 , the state of Texas had made no move to assert the lien proclaimed in Article 7065a-7. And the priority which attached to the claim of the United States on that day (United States v. Oklahoma, 261 U. S. 253, 260) could not be divested by any subsequent proceedings in connection with the state's lien. New York v. Maclay, supra, at 293.

[Effect of State Law]

It is urged, however, that Article 7065a-7 by its own force creates a specific and perfected lien. Support for this contention is said to lie in the fact that the statutory lien purports to affect only the property of the distributor which is "devoted to or used in his business as a distributor' rather than his property in general. This is thought to make the lien sufficiently specific. Moreover, the State argues, and the Supreme Court of Texas has declared, ⁵ that the provisions of the Texas Civil Statutes which govern the levy, seizure and sale of the property of delinquent taxpayers generally are inapplicable to the gasoline tax. We are of course bound by this authoritative construction of the statute.

With respect to this contention it may first be said that the "property devoted to or used in his business as a distributor" is neither specific nor constant. But a more important consideration is that the amount of the claim secured by the lien is unliquidated and uncertain. As we said in New York v. Maclay: "If the state were to * * * omit to ascertain the debt, it would never be able to sell anything, for it would not know how much to sell." 288 U. S. at 293. That the legislature of Texas recognized this is revealed by another section of the statute. Article 7065a-8(d) declared that in the event of default, when it might become necessary for the state "to bring suit or to intervene * * * for the establishment or collection" of its claims in judicial proceedings, the tax reports required of the distributor by other provisions of the statute ⁷ should be "prima facie evidence of the contents thereof," but "the incorrectness of said report or audit may be shown." Thus it was clearly envisaged that the amount of the taxes due, for which the lien was security, should be left to determination by the courts.

[Conclusions]

As to the nature of the proper procedure for levy, seizure, and sale, it is enough to say that some procedure is essential. As we have indicated, the statutory scheme reveals that the legislature contemplated resort to the courts. In addition to the statutory provisions referred to above, Article 7065a-8(e) regulates the pleadings in suits by the Attorney General to collect the tax, and Article 7065a-9 determines the venue of such suits. Consequently, while it was clearly intended by Article 7065a-7 to create a lien in favor of the state, we must conclude that of necessity it was nothing more than an inchoate and general lien. Certainly it did not of its own force divest the taxpayer of either title or possession. It could not become specific until the exact amount of the taxes due had been determined, and it could not be enforced without the assistance of the courts. Like the tax lien in New York v. Maclay, supra, it served "merely as a caveat of a more perfect lien to come." 288 U. S. at 294.

We are not now called upon to decide whether the chattel mortgages held by Dailey are entitled to priority over the claim of the United States . ⁸ We hold only that the tax claim of the United States is entitled to priority over the tax claim of Texas . The case is remanded to the Court of Civil Appeals for proceedings not inconsistent with this opinion.

Reversed.

Mr. Justice JACKSON took no part in the consideration or decision of this case.

¹ U. S. Rev. Stat. §3466 (U. S. C., Title 31, Section 191) provides: "Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."

² No. 33, Oct. Term 1941.

³ The full text of the paragraph, as of Nov. 20, 1933, when the receiver was appointed read: "All taxes, fines, penalties and interest due by any distributor to the State shall be a preferred lien, first and prior to any and all other existing liens, upon all the property of any distributor, devoted to or used in his business as a distributor, which property shall include refinery, blending plants, storage tanks, warehouses, office buildings and equipment, tank trucks or other motor vehicles, or any other property devoted to such use, and each tract of land on which such refinery, blending plant, tanks or other property is located, or which is used in carrying on such business." This section was repealed on May 1, 1941 by Article XVII, §28 of the Acts of the 47th Legislature, and simultaneously replaced without significant change by a new Article 7065b-8.

⁴ In United States v. Oklahoma, 261 U. S. 253, the question was not reached because it was found that the "insolvency" upon which the operation of §3466 is conditioned was absent. The Court sustained the priority of the United States under §3466 in United States v. Knott, 298 U. S. 544. The Florida statutes there involved required foreign surety corporations to deposit certain bonds with the State Treasurer for the protection of Florida residents. This arrangement was held to create no more than "an inchoate general lien" for the benefit of unknown persons who might become entitled to the fund, and not to limit the effect of §3466.

⁵ State v. Wynne, 134 Tex. 455, at --.

⁶ See, esp., Articles 7266, 7272, and 7275 of the Texas Civil Statutes.

⁷ Article 7065a, Sections 2(b), 2(d), 8(a), and 8(b).

⁸ The texts of the mortgages are not contained in the record; and Dailey did not appear in this Court.

 

 

[67-1 USTC ¶9118] City of Dallas , Texas , Appellant v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 23160, 12/12/66, (369 F. 2d 629), Affirming an unreported District Court decision

[1954 Code Sec. 6323]

Lien for taxes: Priority: Municipal personal property tax lien.--The Government's tax liens which were filed on 5/2/63, 5/10/63 and 7/15/63 had priority over the City of Dallas' tax lien on personal property as of January 1, 1963, for taxes to be levied on September 1, 1963. Under the City ordinance, the levy and lien as of January 1, 1963 , were never operative and were superseded by the levy ordinance of September 16, 1963 , and by this time the Federal tax lien had attached.

N. Alex Bickley, City Attorney, Ted P. MacMaster, Max E. Noller, Assistant City Attorneys, Dallas, Tex., for appellant. Richard M. Rob erts, Acting Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Jeanine Jacobs, Department of Justice, Washington, D. C. 20530, Melvin M. Diggs, United States Attorney, Abilene, Tex., W. E. Smith, Assistant United States Attorney, Fort Worth, Tex., for appellee.

Before BROWN, COLEMAN, and AINSWORTH, Circuit Judges.

COLEMAN, Circuit Judge:

This is an appeal from the Judgment of the District Court which affirmed the findings and opinion of the Referee in Bankruptcy that a tax lien in favor of the United States was superior to a municipal personal property tax lien in favor of the City of Dallas . We affirm.

On and after January 1, 1963, the taxpayer was located and doing business in the City of Dallas, his personal property being subjec to ad valorem taxes lawfully imposed by the city.

On August 13, 1963 , taxpayer filed a petition in bankruptcy.

On May 2, 1963 , May 10, 1963 , and July 15, 1963 , the District Director of Internal Revenue assessed and made demand upon the bankrupt for payment of income, withholding, and F. I. C. A. taxes amounting to $8,318.41. From the date of the assessments, the United States had a lien upon all property and rights to property belonging to the taxpayer, §§ 6321 and 6322, Internal Revenue Code of 1954; 26 U. S. C. §§ 6321 and 6322.

The first meeting of creditors was held September 10, 1963 , a trustee was elected, and the estate was thereafter liquidated. After the costs of admin istration had been paid there remained the sum of $1475.32, which is the subject of the competing liens of the United States , above described, and of the City of Dallas , which we shall now describe.

There is no dispute that by §194 of its Home Rule Charter Dallas had a tax lien on the property as of January 1, 1963 , for taxes to de levied the following September. ¹ Obviously, the exact amount of the lien was unknown and could not be known until the levy was made on September 16, 1963 .

The Government therefore argues, and the District Court held, that since the City's lien was not certain in amount on the dates the federal liens were perfected it was inchoate and inferior to the federal lien.

United States v. Bradley, 5 Cir., 1963 [63-2 USTC ¶9657], 321 F. 2d 224, is not decisive because it was there stipulated that the amount of state taxes was certain.

Although there has been authority to the contrary, ² we regard it as being now well settled that an inchoate right cannot defeat a federal tax levy, United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954); United States v. Security Tr. & Savings Bk. [50-2 USTC ¶9492], 340 U. S. 47, 75 S. Ct. 111, 95 L. Ed. 53 (1950); United States v. Allen, 5 Cir., 1964 [64-1 USTC ¶9272], 328 F. 2d 377; 94 ALR 2d 748, at 771.

The City of Dallas says, however, that the amount of its lien was made definite, certain, and therefore choate, by the provisions of §44-12 of the Revised Code of Civil and Criminal Ordinances of the City of Dallas, as amended by Ordinance 9581 of December 26, 1962. ³ We agree that if these provisions are applicable then the amount of the taxes as of January 1, and consequently the amount of the lien, was definite and certain.

The problem is found in the following language in the last paragraph of the Ordinance:

"The provisions of this ordinance shall be in force and effect during the interim period hereinabove mentioned provided such taxes are actually paid prior to enactment of the Tax Levy Ordinance, and shall be operative only during that interim period, and shall be superceded by that ordinance when passed as to that particular year. This ordinance shall have prospective application and shall continue in full force and effect from year to year until modified or repealed."

We think this language plainly provides that the interim levy (and thus the interim lien) shall apply only if "such taxes are actually paid prior to enactment of the Tax Levy Ordinance."

Of course, the taxes were not so paid.

It necessarily followed, as the ordinance states, that the levy and lien as of January 1, 1963 , were never operative and were superseded by the levy ordinance of September 16, 1963 . But by that time the federal tax liens had attached.

Nor is the City's position helped by assuming that the bankruptcy adjudication had the effect of an involuntary sale within the meaning of the phrase "in the event the property is sold voluntarily, involuntarily, or in the custody of the law." (See note 3). The thing which triggers the indeterminate January-September lien is an event which occurred subsequent to the perfection of the said tax lien. Until that moment it was potential only. And that is not enough.

The basic principle of first in time, first in right, thus gave superiority to the federal liens and the Judgment of the District Court must be affirmed.

¹ "Sec. 194. A lien is hereby created on all property, personal and real, in favor of the City of Dallas , for all taxes, ad valorem, occupation or otherwise. Said lien shall exist from January 1st in each year until the taxes are paid. Such lien shall be prior to all other claims, and no gift, sale, assignment or transfer of any kind, or judicial writ of any kind, can ever defeat such lien, but the Assessor and Collector of Taxes can pursue such property; and whenever found out, may seize and sell enough thereof to satisfy such taxes.

"All persons or corporations owning or holding personal property or real estate in the City of Dallas on the first day of January of each year shall be liable for all municipal taxes levied thereon for such year.

"The personal property of all persons owing any taxes to the City of Dallas is hereby made liable for all of said taxes, whether the same be due upon personal or real property, or upon both."

² United States v. Sampsell, 9 Cir., 1946 [46-1 USTC ¶9186], 153 F. 2d 731.

³

Ordinance No. 9581

"An Ordinance Amending Section 44-12, Chapter 44, of the Revised Code of Civil and Criminal Ordinances of the City of Dallas, Texas (1960), by providing for the assessment, levying, and collection of ad valorem taxes in certain contingencies during an interim period of January 1 to the date in September when the City enacts its annual tax levy ordinance providing for the continued levy and assessment of taxes to support outstanding ad valorem bonds; providing for the levy of taxes for support of the Park Board, Public Library, and general current expenses of the City during the same period, on the same contingencies above referred to; providing for the purpose of this ordinance; and declaring an emergency.

Be it Ordained By The City Council Of The City of Dallas:

Section 1. That Section 44-12 of Chapter 44 of the Revised Code of Civil and Criminal Ordinances of the City of Dallas, Texas (1960) be and it is hereby amended so as to hereafter read as follows:

"Sec. 44-12. During the interim period beginning January 1 and ending the following September when the City passes its annual tax levy ordinance, for the purposes hereinafter stated, there is hereby levied an ad valorem tax, supported by a lien as of January 1, as provided by the Section 194 of the Charter of the City of Dallas and the Texas Constitution, for all municipal purposes, upon all taxable property, real, personal and mixed, within the City of Dallas, based upon current valuations and the same rate which the City levied for those purposes for the preceding year. In the event any such taxable property was not on the tax roll for the preceding year but becomes subject to taxation as of January 1 for the then current calendar year, the same tax at the same rate is hereby levied, based upon the current valuations of all other taxable property.

"Taxes at the rate and in the manner hereinabove provided are likewise levied upon all taxable property that was not on the tax roll for the preceding year by reason of not being in the jurisdiction of the City of Dallas, or improvements not in existence on January 1 of the next preceding year, or property that was tax exempt by reason of public, charitable or religious order ownership and has lost its tax exempt status prior to January 1 or thereafter loses such status during the calendar year.

"That all taxes heretofore levied and necessary to meet the City's obligations in connection with ad valorem tax supported bonds or so much thereof as may be necessary are hereby confirmed, and the levy shall be a continued levy so long as such bonds or any additional bonds issued subsequent to the passage of this ordinance are outstanding.

"This ordinance is enacted for the purpose of enabling the Assessor of Taxes on request to furnish the amount of taxes to be due and owing for the current calendar year beginning January 1 to the owner or purchaser of property subject to taxation who may desire to prorate taxes in the event the property is sold voluntarily, involuntarily or in the custody of the law, or becomes subject to taxation after the first of the year by reason of losing its tax exempt status during the current calendar year.

"The taxes levied and assessed herein also shall likewise apply in all cases where taxes become due and payable under the ordinances and Charter of the City of Dallas and the State law at an earlier date than provided for by law, by reason of special circumstances that may arise.

"The provisions of this ordinance shall be in force and effect during the interim period hereinabove mentioned provided such taxes are actually paid prior to enactment of the Tax Levy Ordinance, and shall be operative only during that interim period, and shall be superceded by that ordinance when passed as to that particular year. This ordinance shall have prospective application and shall continue in full force and effect from year to year until modified or repealed.

Section 2. Whereas, the City Council of the City of Dallas is of the opinion that the ordinances of the City of Dallas with reference to the above subject matter are inadequate, creates an urgency and an emergency for the immediate preservation of the public peace, health, and safety, requiring that this ordinance shall take effect from and after its passage, and it is accordingly so ordained.

Passed: Dec. 26, 1962 ."

 

 

[57-2 USTC ¶9803]Exchange Bank & Trust Company and Briggs Weaver Machinery Co., First National Bank in Dallas and City of Dallas, Texas, Intervenors, Appellants v. Tubbs Manufacturing Company, Inc., and United States of America, Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16565, 246 F2d 141, 6/29/57, Reversing and remanding unreported District Court decision

[1954 Code Sec. 6323--similar to 1939 Code Sec. 3672; Revised Statutes, Sec. 3466]

Lien for taxes: Priority in admin istration: Chattel mortgage liens and city property tax liens.--The property of an insolvent corporation was subject to several chattel mortgage liens, the lien of the City of Dallas for unpaid personal property taxes, and a Federal tax lien for unpaid excise and withholding taxes. The liens of the chattel mortgage claimants were entitled to priority over the Federal tax lien within the meaning of 1954 Code Sec. 6323. As a result, the claim of each chattel mortgagee was to be paid out of the sale proceeds of the insolvent corporation's property on which its lien was fixed, subject, however, to first payment of the City's taxes due on the respective properties. The balance of the proceeds was to be distributed to the United States .

H. P. Kucera, City Attorney, Ted P. McMaster, Assistant City Attorney, Rob ert A. Wilson, Clinton Foshee, Rob ert S. Trotti, James H. Walker, Melvin A. Bruck, Addison M. Bradford, Jr., Dallas, Tex., for appellants. John C. Ford, Assistant United States Attorney, Dallas, Tex., Charles K. Rice, Assistant Attorney General, Ellis N. Slack, Department of Justice, Washington, D. C., for appellees.

Before HUTCHESON, Chief Judge, and TUTTLE and CAMERON, Circuit Judges.

HUTCHESON, Chief Judge:

Submitted on stipulated facts, ¹ this case presented below, it presents here a single question. This is whether under the priority statute, Rev. Stat. 3466, 31 U. S. C. A. §191, the United States, the appellee, was entitled to have its debt for taxes first satisfied out of the proceeds of the sale of all of the assets of Tubbs Manufacturing Co., an insolvent taxpayer corporation, ahead of the tax lien claims of the City of Dallas and the mortgage lien claims of the Exchange Bank & Trust Co., the First National Bank, and the Briggs Weaver Machinery Co., the appellants herein.

The district court, after a trial, held that under the provisions of the priority statute, ² the claim of the United States was prior and superior to all the other claims and gave judgment for the United States.

[Contention of Mortgage Lien Claimants]

Appealing from that judgment, the mortgage lien claimants are here contending that the liens created by their chattel mortgages were valid first liens on the respective properties covered, that they attached to the proceeds received from the sale of the respective properties and that they are, therefore, entitled to have applied to their claims the amount of such respective proceeds necessary to satisfy their claims in full.

The appellant, City of Dallas , contends that under the provisions of Sec. 194 of its charter, its claim for taxes is secured by a lien prior and superior to all other claims and it is therefore entitled to be paid ahead of everyone else.

On its part, the appellee, the United States of America , is here contending that the holding of the trial court was correct, and insisting that the judgment should be affirmed.

In support of their claims, the lien claimants invoke and rely strongly on the decision of this court in United States v. Atlantic Municipal Corporation, 212 Fed. (2d) 709 [54-1 USTC ¶9392], in which, holding that the priority statute has no application to a valid, specific and perfected, a fully choate lien, the court declared:

"* * * This statute applies only as against unsecured debts, that is, debts not secured by a specific and perfected lien. It has never been, we think it will never be, applied as it is sought to be applied here, to accord payment to a debt due the United States in preference to a claim secured by a lien which is prior in time and superior in law to the lien of the United States securing the debt for which preferential payment is sought."

Urging upon us that under that decision and Sec. 6323 of the Internal Revenue Code of 1954, formerly Sec. 3672, I. R. C. 1939, mortgage liens cannot, under a claim of priority, be postponed to a federal tax debt, they insist that the judgment was wrong and must be reversed.

[Government's Contention]

The United States, on its part, urging upon us that the claim of the United States, by virtue of the provisions of Sec. 3466 of the Revenue Statutes, the priority section, will be accorded priority over the unperfected, the inchoate tax claim of the City of Dallas, and that it in turn is clearly superior to the chattel mortgage lien claims of the other appellants, insists that of necessity its claim must be prior to those claims, since it is admitted that their claims are subject to the City's tax lien. In addition, arguing that the Supreme Court has never held that even a specific and perfected lien would defeat a Sec. 3466 priority claim and that if the liens of the claimants are specific and perfected, this would not avail them, it insists that under federal law appellants' liens are not so specific and perfected since the debtor had not on the date of insolvency been divested either of title or possession of the mortgaged property.

We cannot agree with these views. On the contrary, for the reasons stated by us in the Atlantic case, supra, and for the additional reason that in this case the mortgage liens are within Sec. 6323, I. R. C. of 1954 (formerly Sec. 3672) and are specifically preserved by that statute against federal tax liens, U. S. v. Sec. Trust and Savings Bank of San Diego, 340 U. S. 47 [50-2 USTC ¶9492], concurring opinion page 51, and United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137], we are in no doubt that the claim of the United States to priority over the mortgage claims is without foundation.

We will not, therefore, contribute to the confusion arising from the decisions dealing with the relative standing as to priority of federal tax debts and liens and the numerous and unavailing attempts