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In the Matter of Juvenile Products of Pasadena , a Corporation, Bankrupt

In the United States District Court, Southern District of California, Central Division, No. 45,868-WM., 03/03/50

Lien for taxes: Validity against purchaser: Recordation subsequent to purchase.--Where the Government's lien against the taxpayers for 1945 unpaid taxes was not recorded until after the date upon which the taxpayers conveyed certain real property to the bankrupt corporation, such real property in the hands of the bankrupt was not subject to the lien because the bankrupt became at the time of the purchase and recordation of the deed transferring title a "purchaser" within the meaning of Code Sec. 3672 without notice even though the taxpayers were the president and vice-president of the bankrupt corporation and knew at the time the deed was executed that their 1945 income taxes had been assessed and were unpaid and that the Collector had demanded their payment.
Claim for taxes: Debtor corporation: Taxes incurred after confirmation of an arrangement.--The bankrupt corporation while a debtor in possession under a Chapter XI plan of arrangement (Bankruptcy Act §342, 11 U.S.C. §742) ignored the requirement that taxes be withheld and placed in a separate trust fund. The net amount of wages was paid--that is, the gross amount less withholding taxes--but at no time did the debtor have sufficient funds to create a fund of withholding taxes. The referee allowed the Collector, on his claim for withholding taxes, to participate ratably with other claims arising under Chapter XI operation of the debtor, but denied him any priority as to such claims.

Claims and liens for taxes: Taxes incurred by bankrupt's predecessor.--The bankrupt corporation had assumed the liabilities of a predecessor partnership. The partners at the time were liable for unpaid taxes assessed against the partnership. Liens for these taxes were filed and asserted against the partnership and not against the bankrupt corporation. The Collector's claims for these taxes against the bankrupt were allowed by the referee as a tax claim within the provisions of Sec. 64(a) 4 of the National Bankruptcy Act, but such claims were held not to constitute either a lien upon the real property of the bankrupt which was previously sold to a third party or a lien upon the proceeds of such sale.

Eugene Harpole, Attorney for Collector of Internal Revenue. Craig, Weller & Laugharn and C.E.H. McDonnell, Attorneys for Trustee.

Findings of Fact and Order on Order To Show Cause

 

This matter having come on for hearing on the verified petition of the trustee, Paul W. Sampsell, on January 4, 1950, before the undersigned Referee in Bankruptcy at the hour of 2:00 p.m. thereof, and the trustee having been represented and appeared by and through his counsel, Craig, Weller & Laugharn by Hubert F. Laugharn, and the Collector of Internal Revenue having appeared by and through his counsel Eugene Harpole, and evidence both oral and documentary having been educed and submitted to the Court.

Now, Therefore, the Court makes its Findings of Fact, Conclusions of Law and Orders as follows:

[Facts]

 

I. The Court finds that it is true that income taxes and interest were due, owing and assessed against Vance Prather and Virginia Prather for the calendar year 1945 each in the sum of $1,967.05; that thereafter said 1945 income taxes were reduced by a recomputation and the allowance of a loss carryback by the Commissioner of Internal Revenue to the sum of $1,037.00, each, plus interest at 6% per annum, or 20c per day, from January 31, 1950, until paid; the Court finds that the Commissioner of Internal Revenue's Assessment List carrying said assessment of 1945 income taxes against Vance Prather and Virginia Prather, was received in the office of the Collector of Internal Revenue at Los Angeles, California, on the fourth day of December, 1946; thereafter notice and demand for the payment of said 1945 income taxes was issued to Vance Prather and Virginia Prather, the taxpayers but said taxes have not been paid. The Collector of Internal Revenue thereafter and on the seventh day of November, 1947, filed notices of liens securing payment of said taxes to the United States in the office of the County Recorder of Los Angeles County, State of California; the Court finds that liens in favor of the United States arose on December 4, 1946, which attached to all property and rights to property, whether real or personal then belonging to the taxpayers, Vance Prather and Virginia Prather, or thereafter acquired by them and said liens became valid as to all the world upon the filing of notice of them on November 7, 1947, in the office of the County Recorder of Los Angeles, State of California.

[ Sale of Real Property to Bankrupt]

 

II. That the taxpayers, Vance Prather and Virginia Prather were the owners of the following described real property on December 4, 1946 :

"Lots 4 to 13, both inclusive of Mrs. Mary R.D. Gifford's Subdivision of Lot 4 in Block A of San Pasqual Tract, in the City of Pasadena , County of Los Angeles , State of California , as per map recorded in book 18, page 75 of Miscellaneous Records, in the office of the County Recorder of said County."

The said taxpayers, by a grant deed, dated June 27, 1947, and recorded in the office of the County Recorder of Los Angeles County , California , on July 14, 1947, conveyed said real property to "Juvenile Products Company of Pasadena a corporation," in exchange for that corporation's promise to issue certain shares of its capital stock to the grantors. A permit for the issue of said stock was obtained from the California Corporation Commissioner but none of said stock was ever actually issued to the taxpayers nor were they paid any other consideration for the transfer of said real property to the bankrupt. Vance Prather was the president of said corporation and Virginia Prather its Vice-President at the time of the execution of said grant deed. Both Vance Prather and Virginia Prather knew at the time of the execution of said grant deed that their 1945 income taxes had been assessed, were unpaid and that the Collector of Internal Revenue had demanded payment of said taxes.

[Taxes Growing Out of Chapter XI Operation]

 

III. The Court finds that the sum of $1,757.82, is due and owing as withholding tax arising out of this bankrupt corporation's operation under the provisions of Chapter XI and while within the jurisdiction of this Court; the Court further finds that when wages were paid by this bankrupt corporation during its operation under Chapter XI, the requirements that withholding taxes be withheld and placed in a trust fund were ignored, that is to say, the net amount--i. e. the gross amount of wages, less the amount of withholding tax--was at all times paid; the Court further finds that during the said operation under Chapter XI, this bankrupt corporation at no time had the funds to create or did it create a separate trust fund composed of that portion of the wages withheld for the payment of withholding taxes.

The debtor was adjudicated a bankrupt on December 10, 1948.

[Taxes Owed by Bankrupt's Predecessor]

 

IV. That the Court finds that certain tax claims on which liens are asserted have been filed by the Collector of Internal Revenue in this proceeding as follows:

Further interest to accrue on $2,456.81 at 6% per annum from January 31, 1950 .

The Court further finds that the aforesaid liens were on taxes assessed against Metals Arts Co., a co-partnership composed of Vance Prather and Virginia Prather, which co-partnership was a predecessor of the bankrupt corporation herein, which bankrupt corporation assumed the liabilities of the said co-partnership; The Referee further finds that the tax liens as filed were liens against Metals Arts Co., a co-partnership and were not filed or asserted against the bankrupt herein.

[Referee's Orders]

 

Now, Therefore,

It Is Ordered and directed that the Collector of Internal Revenue has no lien against the real property sold by Vance Prather and Virginia Prather to this bankrupt estate by virtue of the fact that this bankrupt estate became at the time of the purchase and recordation of the aforesaid Grant Deed a "purchaser" within the meaning of Section 26 U.S.C.A. 3672a, and that therefore, the said lien of the Federal Government for taxes due from Vance Prather and Virginia Prather for the year 1945, was not good until the recordation of the United States Government lien on November 7, 1947, and that further,

It Is Ordered that the Collector of Internal Revenue has no claim or right in this bankruptcy for the taxes levied against Vance Prather and Virginia Prather for the eyar 1945, and

It Is Further Ordered that the claim on the Collector of Internal Revenue in the amount of $1,757.82 as a result of this bankrupt's operation under the provisions of Chapter XI, be and the same hereby is allowed as a claim to participate ratably with other claims arising under Chapter XI operation of this debtor, and is hereby denied any priority whatsoever over any other claims arising in or out of the operation of this debtor under Chapter XI.

It Is Further Ordered that the claims for taxes in the amount of $2,967.06 plus interest, as due from the predecessor partners the Metals Arts Co., be and the same hereby are allowed as a tax claim within the provisions of Section 64(a) 4 of the National Bankruptcy Act, and

It Is Further Ordered and directed that the said claims for taxes from the Metals Arts Co. do not constitute a lien either upon the real property of this bankrupt corporation which has been sold heretofore to the City of Pasadena or a lien upon the proceeds of such sale.

 

 

 

In the Matter of: Adam Charles Fisher, a/k/a A. Charles Fisher, a/k/a Charlie Fisher, a/k/a Adam C. Fisher, a/k/a A. C. Fisher, a/k/a Adam Fisher, t/d/b/a Charles Fisher Lumbering and Rebecca Elaine Fisher

U. S. District Court, West. Dist. Pa. , C. A. 79-170-k Erie , 7 BR 490, 6/19/80

[Code Sec. 6323]

Tax lien: Bankruptcy: Priority: Unrecorded deed.--A federal tax lien had priority over an unrecorded deed for real estate in a bankruptcy case. The tax lien was filed at a time when the bankrupt had title and possession, although the deed had not yet been recorded.

Memorandum on Government's Appeal from Order of Bankruptcy Court

WILLSON, Senior District Judge:

This civil action comes before me on the appeal of the Government from an Order entered by The Honorable William B. Washabaugh, Jr., Bankruptcy Judge, on October 19, 1979 . On October 30, 1979 , Harold R. Hayes filed a cross-appeal from the same Order of Judge Washabaugh. The Bankruptcy Judge filed his record and the notices of appeal with the Clerk of Court on November 20, 1979 . Counsel for all parties have been heard at argument and the briefs have been considered.

The case is before me under the prior bankruptcy law, and the rules pertaining thereto particularly Rule 810, the first sentence of which reads:

"Upon an appeal the district court may affirm, modify, or reverse a referee's judgment or order, or remand with instructions for further proceedings."

Upon due consideration this Court is satisfied that the Bankruptcy Judge has incorrectly decided this case on undisputed facts.

It is believed unnecessary for this Court to review extensively the rather lengthy memorandums of Judge Washabaugh. It is suffice to say that the crux of his holdings is that the federal tax lien is ineffective as against an unrecorded deed. For instance, on page 2 of his memorandum filed October 19, 1979 , he says in part:

". . . and for the additional reason that the federal tax liens filed against the bankrupts' unrecorded title to the subject premises are invalid as against the lien of the trustee in bankruptcy as an ideal judgment creditor with an unsatisfied writ of execution thereagainst."

The ownership of real property in Pennsylvania is determined by state law, but federal law determines the priority of United States tax liens on that property. Counsel for the United States filed what it terms an appellate brief on November 14, 1979. It is undisputed that the federal tax liens in this case were filed in the Office of the Prothonotary of Erie County Pennsylvania, at a time when the bankrupt had title and possession of the real property in question though his deed was unrecorded. Among the assets of the bankrupt in the trustee's complaint for sale of real estate divested of liens is a description of the property in question.

This Court understands that Judge Washabaugh held two evidentiary hearings on the claim of Harold R. Hayes as presented by his counsel. One hearing was held on October 27, 1977, and another on November 10, 1977.

In the Government's appellate brief, a resume' of the evidence taken before the Bankruptcy Court appears as follows:

"In 1963 Milton C. Payne purchased the subject property for $4,100 granting a mortgage to plaintiff Hayes in the same amount. (Nov., p. 14).

"Both the deed to Payne and the $4,100 mortgage were recorded. (Oct., p. 4). Sometime around 1969 plaintiff Hayes provided Payne with funds to purchase a farm. Payne and Hayes made an oral agreement that Payne would transfer to Hayes the subject property but no deed was ever executed to that effect. (Oct., pp. 36, 37; Nov., pp. 50, 51, 76). Nor was any writing produced during the two evidentiary hearings to evidence this agreement.

"In June of 1970 Payne executed a deed to the bankrupt, Adam Fisher, of the subject property. (Nov., pp. 15-17). Hayes' son (Oct. 10-12; Nov., pp. 38, 39) had the bankrupt execute a $14,000 mortgage in favor of Mr. Hayes. (Oct. p. 13; Nov., p. 39). Neither the bankrupt's deed nor Mr. Hayes' mortgage were recorded. (Nov., pp. 60, 61).

"On or about the Fall of 1976, Payne fully paid off his debts to Hayes including the $4,100 note secured by the 1963 mortgage on the subject property. (Nov., pp. 26, 30, 34, 71)."

The following recital from the appellate brief also refers to the proceedings before the Bankruptcy Court:

"After the two evidentiary hearings, the Court issued an order distributing the proceeds to the plaintiff, which order was vacated upon the Court's being given notice that the United States wished to be made a party to this proceeding. The United States filed its answer to Hayes' complaint and cross-claimed to have the sales proceeds distributed to the United States in partial satisfaction of its tax liens, notice of which were duly filed before institution of these bankruptcy proceedings. The United States then moved for summary judgment on its cross-claim. After the hearings on the United States ' motion the Court reaffirmed its prior order distributing the sales proceeds first to Hayes in satisfaction of its 'secured claim' and the balance to the bankruptcy trustee."

As indicated, both the discussions in the Government's brief on its motion for summary judgment and in its appellate brief filed before me refer to the provisions of the Code and the authoritative decisions on the subject of the priority of a federal tax lien. Apparently Mr. Hayes feels that he should be given consideration with respect to his oral understandings, which he had reached with the bankrupt prior to these proceedings. But in my view the federal tax lien law is clear. The Government has asserted its position very clearly and succinctly in the appellate brief. It is incorporated herein by reference and made a part of this decision.

Judge Clary's decision in Reiter v. Kille, 143 F. Supp. 590 (E. D. Pa. 1956), is based on the position of a subsequent bonafide purchaser, and the evidence he had before him is unlike the issue before this Court.

An Order follows.

Order

AND NOW, June 19, 1980 , for the reasons mentioned in the foregoing Memorandum, the Government's appeal is sustained, and the cross-appeal of Harold R. Hayes is denied. This proceeding is remanded to the Bankruptcy Court for further proceedings, which will give priority to the Government's tax liens against the real property in question.

IT IS SO ORDERED.

 

 

United States of America v. Robert D. Williams, Helen F. Williams, Fulton Federal Savings and Loan Association, and Robert Norman

U. S. District Court, No. Dist. Ga. , Newnan Div., Civil Action No. C81-32N, 9/29/82 , 581 F. Supp. 756

[Code Secs. 6321 and 6323]

Lien for taxes: Foreclosure: Title held by nominee: Priority of claims.--Federal tax liens attached to the taxpayer's interest in a house and were ordered foreclosed. Although legal title to the real property was in the name of the taxpayer's mother, she held the title as the nominee for the taxpayer who had arranged the purchase, paid the mortgage, and lived in the house. Funds that the taxpayer's mother provided for the earnest money deposit and the cash paid at closing were found to be a loan to the taxpayer from his mother. Alternatively, the court found that the mother held the property in trust for the taxpayer pursuant to a resulting trust under Georgia law. A recorded deed to secure debt held by a savings and loan was superior to the tax liens and all other claims. The interest of the mother, limited to the amount of the loan she made, was held to be superior to the tax liens since it arose prior to the existence of the tax liability in question.

Barbara A. Harris, Assistant United States Attorney, Atlanta, Ga. 30335, Lenore DiStefano, Department of Justice, Washington, D. C. 20530, for plaintiff. W. Rhett Tanner, Hansell, Post, Brandon & Dorsey, 3300 First National Bank Tower, Atlanta, Ga. 30383, Dennis C. O'Brien, 260 Washington Ave., Marietta, Ga. 30060, Frank J. Shannon, III, Cliffe Lane Gort, 100 Peachtree St., N. W., Atlanta, Ga. 30303, for defendants.

Order

TIDWELL, District Judge:

This case came on for trial before the court on February 22, 1982. After considering all of the evidence as well as memoranda submitted by counsel subsequent to the trial, the court enters the following findings of fact and conclusions of law:

Findings of Fact

1. This is a civil action brought by the United States , authorized and requested by the chief counsel of the Internal Revenue Service, to reduce federal tax assessments against the defendant Robert D. Williams to judgment and to foreclose a federal tax lien on real property located at 102 Thornton Drive in Fayette County , Georgia .

2. All of the defendants reside within this judicial district and have been properly served.

3. Robert D. Williams filed federal income tax returns for the tax years 1976 through 1979, inclusive, showing a total tax liability thereon in the amount of $43,350.99. Mr. Williams did not, however, pay these taxes with the returns. There is presently due and owing to the United States from Robert Williams the sum of $47,404.23, plus interest and statutory additions according to law. At trial, Mr. Williams, through counsel, admitted his liability for these taxes. On October 12, 1978, and March 23, 1979, the United States filed notices of federal tax lien with respect to the tax liability of Robert D. Williams with the Clerk of Superior Court of Fayette County, Georgia. On March 23, 1979, the United States also filed a notice of federal tax lien in the name of Helen F. Williams as nomine of Robert D. Williams, with respect to the specific property involved in this suit.

4. On September 26, 1975, the subject property was purchased in the name of Helen Williams, Robert D. Williams' mother. Robert Williams found the property and made arrangements for its purchase while his mother was overseas. He signed the sales contract and arranged for the deed to be drawn in his mother's name.

5. The purchase price of the property was $74,700. The subject property was encumbered by a deed to secure debt given by one Grady Stone in favor of Fulton Federal Savings and Loan Association. The deed to secure debt had been duly recorded on May 6, 1974. The parties have stipulated that the interest of Fulton Federal Savings and Loan Association as shown in the deed to secure debt is superior to the lien claimed in the subject property by the United States .

6. At the time that the sale of the property was initially arranged, Robert Williams agreed to pay $5,000 to the seller Grady Stone as earnest money. At closing, Helen F. Williams assumed the first mortgage given by the seller Grady Stone to Fulton Federal Savings and Loan Association in the amount of $48,810.00. Helen Williams also borrowed $10,000 from Robert Norman for which she signed a note and a deed to secure debt, thereby creating a second mortgage on the subject property. Mrs. Williams paid an additional $11,475.39 at closing ($16,475.39 as shown on the closing statement less the $5,000 earnest money deposit). The conveyance from Grady Stone to Helen F. Williams was made by was of warranty deed.

7. The $10,000 note to Robert Norman was subsequently satisfied.

8. At the time of the purchase of the subject property, Mrs. Williams had been retired from her job as a saleswoman at Rich's Department Store for approximately six or seven years. Aside from Social Security, she had no source of income, and she filed no income tax returns after her retirement. Her bank account at the time of the conveyance showed a balance of only approximately $1,200.

9. Mrs. Williams claimed, however, that she had provided the funds for the payment made at settlement, allegedly from her accumulation of a large amount of cash over the years. Specifically, she asserted that she received a $14,000 check from Rich's when she retired in 1968 and that she received over $20,000 in insurance proceeds upon her husband's death. She maintained that she cashed these checks at her local bank, and hid the money she received in a glass fruit jar suspended in a concretelined well behind her house. Mrs. Williams testified that she has had as much as $35,000 in cash hidden in that well.

10. Robert D. Williams testified that the $5,000 earnest money payment was made with funds obtained from his mother's house and belonging to his mother, Helen F. Williams.

11. Robert D. Williams is a convicted drug dealer who dealt exclusively in cash, maintained no bank accounts, and held no property in his name. After the purchase, Robert Williams and his family moved into the house at 102 Thornton Drive . Thereafter, Robert Williams made all of the mortgage payments to Fulton Federal Savings and Loan Association in cash. His mother, Helen Williams, made none of the payments and has never resided in the house at 102 Thornton Drive , but has continued to reside in her own separate home in Luthersville , Georgia .

12. The court finds that although the legal title is in the name of Helen Williams, she holds that title for the use and benefit, and as the nominee of her son, Robert D. Williams. This is the factual conclusion which is mandated by the peculiar facts and circumstances of this case as set out herein.

13. Robert Williams made arrangements for the purchase of the subject property, signed the sales contract while his mother was out of the county, and caused the deed to be drawn in her name. It is clear from Mrs. Williams' testimony that the house was intended to be Robert's home and that it was purchased for his use and benefit.

14. The court finds that although Helen F. Williams provided the funds for the earnest money deposit and the cash paid at closing, as well as having paid off the loan from Robert Norman, the nature of the transaction as between Helen F. Williams and Robert D. Williams was such that these funds were considered to be a loan from Helen D. Williams to Robert Williams, such being the true intent of these parties at the time of the purchase. This is evidenced by Mrs. Williams' testimony that if the property were to be sold, any proceeds remaining after the mortgage was paid off would go to Robert Williams, less the money that she had put into the property.

15. The evidence establishes that the subject property at 102 Thornton Drive, Fayetteville, Georgia, is, in fact, owned by Robert D. Williams and although the title is in the name of Helen Williams, she holds that title as the nominee of Robert D. Williams.

16. Helen F. Williams' interest in the subject property is limited to the sum of $26,475.39, as shown on the closing statement. Although Mrs. Williams testified that she subsequently expended additional sums on the property, the court discounts such testimony as being vague and unsubstantiated.

Conclusions of Law

1. This court has jurisdiction over this action pursuant to 28 U. S. C. §§ 1340 and 1345 and 26 U. S. C. §§ 7402 and 7403.

2. Robert D. Williams is indebted to the United States of America for unpaid federal tax liability in the amount of $47,404.23 plus interest and statutory additions.

3. The United States has a lien upon all property and rights to property of the taxpayer, Robert D. Williams, to satisfy the aforesaid tax liability. 26 U. S. C. §§ 6321-6322. As the court has found as a matter of fact that the property at 102 Thornton Drive is owned by Robert D. Williams, the federal tax liens of the United States of America attach to his interest in the said property and should be foreclosed. See, e.g., United States v. Miller Brothers Construction Corp. [74-2 USTC ¶9817], 505 F. 2d 1031 (10th Cir. 1974).

4. Alternatively, the court concludes that Helen Williams holds the subject property in trust for Robert Williams. Under Georgia law, such trusts are implied "[w]henever the legal title is in one person, but the beneficial interest, either from the payment of the purchase money or other circumstances, is either wholly or partially in another." Ga. Code Ann. §108-106. As this court has found that the money used to pay for the subject property was provided by Robert Williams (the total sum of $26,475.39 having been lent by Helen Williams to Robert Williams for this purpose), and that Robert Williams enjoyed the benefits of the property and paid the mortgage thereon, the court concludes that the property was subject to a resulting trust in favor of Robert Williams. See, e.g., Epps v. Epps, 209 Ga. 643 (1953).

5. As the court has found that the legal title to the property is held by Helen Williams in trust for Robert Williams pursuant to a resulting trust which was created by operation of law, the federal tax liens of the United States of America attach to Robert Williams' interest in that property and should be foreclosed. 26 U. S. C. §§ 6321-6322.

6. The interest of Fulton Federal Savings and Loan Association, by virtue of its security deed which was ordered first in time, is entitled to priority over all other claims.

7. The interest of Mrs. Williams is superior to that of the United States since it arose prior to the existence of the tax liability in question.

8. The property shall be sold free and clear of all liens and claims of the parties by a separate order of this court. . . .

 

 

 

Henry G. Runkel, Jr., Trustee of the Estate of Henry G. Runkel and Executor of the Estate of Rosalie H. Runkel, Plaintiff-Appellee v. United States of America , Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 74-2110, 527 F2d 914, 12/9/75, Affirming unreported District Court decision

[Code Secs. 6321, 6323, and 7425]

Lien for taxes: Real property: Incomplete purchase: Attachment of lien to buyer's equitable interest: Buyer's forfeiture in default of payment: Extinguishment of lien.--A tax lien was already attached to a real estate purchaser's equitable interest at the time of forfeiture of that interest for failing to meet an installment payment, even though the seller had retained title throughout. The forfeiture was not a sale under applicable state law or Code Sec. 7425(b). Because the seller had no actual notice of the tax lien, the lien was extinguished by the declaration of forfeiture.

John E. Weber, Hennings, Maltman & Weber, Central Bldg., Seattle , Wash. , for plaintiff-appellee. Michael L. Paup, Department of Justice, Washington , D. C. 20530, for defendant-appellant.

Before CHAMBERS and KENNEDY, Circuit Judges, and JAMESON, ^* District Judge.

Opinion

CHAMBERS, Circuit Judge:

On November 17, 1969 , Henry G. Runkel sold to Hill & Dale, Inc. the real property involved in this action. The sale was pursuant to a real estate sales contract which was recorded in King County , Washington , on December 9, 1969 . The contract provided that the purchase price was to be paid in semi-annual installments of $3,000, that legal title was to remain in the sellers until the payment was completed, and that upon the default of any installment payment, the sellers could declare the purchaser's interest in the property forfeit. Plaintiffs succeeded to the sellers' interest in the Fall of 1970. Hill & Dale failed to make the installment payment due on December 9, 1971 . The plaintiff notified Hill & Dale on April 12, 1972 , of his intent to declare a forfeiture and an May 17, 1972 , notified the purchaser of the declaration of forfeiture.

The government had made assessments for withholding and FICA taxes against Hill & Dale and demanded payments in the amounts of $2,122.46 on March 26, 1971 ; $1,933.35 on June 22, 1971 ; $1,622.66 on September 14, 1971 ; and $108.44 on April 3, 1972 .

On July 19, 1972 , plaintiff filed a quiet title action in state court seeking to extinguish any claimed government tax liens on the property as inferior to his interest. On April 18, 1973 , the government removed the case to United States District Court. The state court subsequently issued a judgment determining that the interests of all defendants in the quiet title action were inferior to the plaintiff's and quieting title in the plaintiff. The government was expressly excluded from the operation of this decree. The district court entered summary judgment for the plaintiff and this appeal followed.

The issue presented for appeal in this case is whether a declaration of forfeiture of the purchaser's interest under the real estate sales contract served to forfeit any interest the government had in this property based on the tax liens. The first matter for consideration is whether the government had any interest in this realty by reason of the recorded tax liens.

Tax liens arise at the time of assessment and take effect after the government's demand for payment. Once the demand has been made, the liens are treated as effective since the time of assessment. The liens attach to "all property and rights to property, whether real or personal, belonging to" the taxpayer against whom the assessment is made. 26 U. S. C. Sec. 6321. The rights in property to which the liens may attach are created under state law. Hill & Dale, under Washington law, had an equitable interest in the realty even though the seller retained legal title. Eckley v. Bonded Adjustment Co., 30 Wash. 2d 96, 190 P. 2d 718 (1947). Under Washington law, this interest is of the type to which creditor's liens may attach. A federal tax lien may also attach to it. The three tax liens in this action were, therefore, attached to Hill & Dale's interest at the time of the declaration of forfeiture since there had been an assessment and demand.

We come now to the question of whether the tax liens, having attached to the property, were extinguished by the declaration of forfeiture. Both parties agree that state law governs divestiture of federal tax liens except to the extent that Congress has entered the field. United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237 (1960). The real issue is whether the provisions of 26 U. S. C. Sec. 7425(b) and (c) apply in this action.

26 U. S. C. Sec. 7425 provides that before federal tax liens may be extinguished, in certain situations, there must be notice to the government. Sub-section (b) of that section applies this notice requirement to tax liens which were recorded more than thirty days before the nonjudicial sale by which the tax lien is sought to be extinguished. The tax liens in this matter were filed more than thirty days before the declaration of forfeiture. Since the notice requirement applies to nonjudicial sales but not to nonsale dispositions of property, we must decide whether the declaration of forfeiture is a nonjudicial sale.

Both parties agree that the term "sale" as employed by the statute refers to more than the classic real estate sales transaction. The regulations which the service has promulgated under this section would extend the sales concept to a variety of mortgage foreclosure and deed of trust foreclosure situations. There is little case authority on the question of what constitutes a nonjudicial sale under this section. We must, therefore, carefully examine the characteristics of this transaction to determine if it is a sale.

We find that the declaration of forfeiture was not a sale in the meaning of 26 U. S. C. Sec. 7425(b). Upon a declaration of forfeiture under a Washington real estate sales contract there is no passage of legal title to the realty. The seller has always retained legal title; the buyer merely has an equitable interest. The buyer upon default does not sell his interest in the property back to the seller but rather the seller exercises his contractual right to extinguish the interest of the buyer. This is not a sale of property within the meaning of sub-section (b). The distinction between mortgage and deed of trust foreclosures on one hand, and a declaration of forfeiture under a real estate contract, on the other, reinforce this conclusion. Under a declaration of forfeiture, the property is merely returned to the seller. That is not true, in Washington , of foreclosure of a mortgage or deed of trust. In these cases there must be a sale so that others can bid on the property. The creditor must bid at the sale to obtain the property; its return to his possession is not automatic as with a forfeiture under a real estate contract. See Wash. Rev. Code Ann. Secs. 61.12.040, 61.12.060, 61.24.040. There is a clear distinction between the sale of property and the mere forfeiture of an interest in that property. 26 U. S. C. Sec. 7425 does not apply to the case at hand.

Since there is no controlling federal law, we must look to state law to determine if the declaration of forfeiture extinguished the tax liens. The Washington rule is that a declaration of forfeiture under an executory real estate sales contract is effective to extinguish liens upon the buyer's interest in the contract unless the seller had actual notice of the liens. Kendrick v. Davis , 75 Wash. 2d 494, 452 P. 2d 222 (1969). The seller in this case did not have actual notice of the liens, therefore his declaration of forfeiture extinguished those liens.

Affirmed.

^* The Honorable William J. Jameson, United States Senior District Judge for the District of Montana, sitting by designation.

 

 

 

United States of America , Plaintiff v. John Schuster et al., Defendants

U. S. District Court, No. Dist. Ohio , East. Div., No. C70-973, 11/28/72

[Code Sec. 6323]

Lien for taxes: Foreclosure: Real property: Contract purchaser's interest: Statute of limitations: Ohio law.--The Government possessed a valid lien and was entitled to foreclose on real property in the hands of purchasers from the delinquent taxpayers who had purchased the property on contract. The delinquent taxpayers had a valid, equitable interest in the transferred real estate under Ohio law to which the properly filed Government liens could attach. Since the liens were properly filed under Ohio law in the county recorder's office where the property was located, the purchasers of the property were held to have constructive notice of the liens at the time of purchase. Furthermore, the Government liens were not barred by the statute of limitations at the time the foreclosure suit was filed since the Government had properly refiled its liens within the six year limitations period.

Frederick Coleman, United States Attorney, Cleveland , Ohio , for plaintiff. James E. Hoffman, Jr., 1 Valley View Dr., Brookfield, Ohio, John K. Mahaney, Assistant Prosecutor, 160 High St., Warren, Ohio, for defendants.

Memorandum Opinion and Order

CONTIE, District Judge:

This cause was brought on the complaint of the plaintiff, the answer of the defendants, and the evidence.

Plaintiff , United States of America , brought this action in an effort to foreclose federal tax liens against certain real property. Defendants John and Sophie Schuster deny any liability owing the Government in connection with the said real estate tax liens. Defendant Trumbull County , Ohio also claims to be a lienholder due to unpaid 1968 real estate taxes.

[Statement of Facts]

The following shall constitute this Court's findings of fact and conclusions of law pursuant to F. R. Civ. P. 52(a).

Temple and Edna McAllister (hereinafter taxpayers) purchased real estate under a land contract from Mr. George Gentithes and Mr. Pete Paidas on December 13, 1960, said contract being duly and properly recorded on December 20, 1960. On October 31, 1963 , taxpayers conveyed this property under another land contract to Champion Development Company, Inc., a corporation wholly owned by taxpayers. This transaction occurred without any consideration being paid and the deed of conveyance was not recorded.

On November 18, 1963 ; December 17, 1964 ; and October 27, 1965 , the Government filed and property recorded tax liens against the taxpayers in the total amount of $22,899.14. Believing the transfer by taxpayers to Champion Development Company, Inc., to be fraudulent, the Government made a jeopardy assessment against said company for transferee liability and prevailed in the tax court. Champion Dev. Co., Inc., [CCH Dec. 29,131(M)] T. C. Memo. 1968-201, 27 TCM 983 (1968).

In the interim and beginning after January 1964, taxpayers fell in arrears in their payments to Mr. Gentithes and Mr. Paidas. Finally, on April 4, 1967, Mr. Gentithes and Mr. Paidas declared the contract in default and gave taxpayers thirty days' notice as required under the land contract provisions.

Before the decision of the tax court in the Champion Dev. Co., Inc., case was rendered ( May 4, 1967 ) but after notice of default, taxpayers entered into an agreement with defendants John and Sophie Schuster for the sale of the real estate held by them. A warranty deed was signed by the taxpayers on May 17, 1967 , and recorded on May 23, 1967 , transferring the real estate to defendants. Mr. Gentithes and Mr. Paidas conveyed their interest in the property by warranty deed to the same defendants specifically excluding any warranty after December 13, 1960 . Thereafter defendants obtained a mortgage, which mortgage was properly recorded August 23, 1968 , in the amount of $50,000.00 from the Courtland Savings and Banking Company.

The federal tax liens filed November 18, 1963 ; December 17, 1964 ; and October 27, 1965 , were subsequently refiled and recorded on September 10, 1969 , and November 25, 1969 .

One of the taxpayers, Temple McAllister , died on April 2, 1968 . The remaining taxpayer executed a waiver under I. R. C. §6502(2), purporting to waive the statute of limitations. This suit was thereafter commenced on October 20, 1970 .

[Contract Purchaser's Interest]

The facts as outlined above present several basic issues to which this Court addresses itself. Before any tax liability could be incurred by the defendants, this Court must make a determination as to whether or not taxpayers Edna and Temple McAllister had any property interest to which the above-mentioned federal tax liens could attach. The Court finds that the taxpayers named in the instant action had a valid, equitable interest in the real estate in question. Under the laws of Ohio , "A contract for the sale of real estate where the vendee takes possession . . . gives to the vendee an equitable estate equal to the amount paid." Woloveck v. Schueler, 19 O. App. 210 (1922).

It is also clear that it is proper to apply Ohio law, rather than federal law, in determining the property interest of the taxpayer. See Acquilino v. United States, 363 U. S. 509 (1960); United States v. Durham Lbr. Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); Geisiuger v. East Ohio Gas Co., 27 O. O. 2d 31 (1963).

[Argument of Forfeiture]

Having thus determined that taxpayers did obtain a property interest in the real estate, the question then becomes whether or not the taxpayers, by falling in arrears of their payments, forfeited said interest, thus making it impossible for the federal government to attach any lien to the property. The Court finds that such a forfeiture did not occur. The land contract in question stated specifically in regards to default:

"In case default should be made by the parties of the second part . . . it shall and will be lawful for the parties of the first part, if they so elect, and only after giving thirty (30) days' notice in writing of such default and if such default has not then been paid to treat this contract as henceforth void. . . ." (Emphasis added.)

The language of the contract is clear and unequivocal. The evidence of the case indicates that although taxpayers fell in arrears of their payments, Mr. Gentithes and Mr. Paidas did not until April 4, 1967, declare the contract to be in default and thus to treat the contract as void. By this time the Government had properly filed and recorded all of their tax liens.

The Court notes that it was within the following thirty-day period after formal notice was given to the taxpayers, as provided by the land contract, that an agreement was reached between taxpayers, Mr. Gentithes and Mr. Paidas, and the defendants as to a sale of the land. The Court notes also that a warranty deed was signed by the taxpayers in turning over the property to defendants. The Court is of the opinion that had taxpayers forfeited all interests in the real estate in question, they would not have, nor could they have, signed a warranty deed purporting to transfer the property. Therefore, it is the conclusion of this Court that the taxpayers did have property interest to which the federal tax liens could attach, and that said federal tax liens, filed and recorded by the Government, attached to the property now owned by the defendants.

[Statute of Limitations]

Having made this determination, the Court next turns to the issue of the statute of limitations and its applicability to the case at bar. Both parties seem to agree that there is a six-year statute of limitations imposed by the Internal Revenue Code §6502, which reads:

"(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--

(1) within 6 years after the assessment of the tax. . . ."

The Court agrees with the contention of the parties that there is a six-year statute of limitations. However, the evidence illustrates that the Government refiled these liens on September 10, 1969 , and November 25, 1969 . The Court takes notice of Section 6323 of the Internal Revenue Code, which section provides:

"(g) (3) Required refiling period.--In the case of any notice of lien, the term 'required refiling period' means--

(A) the one-year period ending 30 days after the expiration of 6 years after the date of the assessment of the tax. . . ."

The Court interprets this provision of the Internal Revenue Code as making mandatory the refiling of any lien from the period beginning with the fifth year, first month, up to and including the sixth year, first month. Taking this interpretation and applying it to the facts in the case at bar, the Court comes to the conclusion that both the refiled lien of September 10, 1969 , and the refiled lien of November 25, 1969 , were within the appropriate six-year statute of limitations. The Court, therefore, concludes that the liens filed and properly refiled against the property interest of taxpayers are valid.

[Constructive Notice of Liens]

This leaves but one remaining issue for the Court to consider, that being whether or not defendants in this action were aware or should have been aware of the tax liens attached to the real estate in question.

The Internal Revenue Code §6323 entitled, "Validity and priority against certain persons," states in regard to liens as follows:

"(a) 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 or his delegate.

* * *

(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. . . ." (Emphasis added.)

Under Ohio Revised Code §317.09, the place for filing federal tax lien against real property is the county recorder's office where the real property is located. The facts of the instant case illustrate that the plaintiffs properly filed their liens in the county recorder's office in Trumbull County , Ohio . Therefore, this Court is of the opinion that defendants had constructive notice of monies due and owing the Government from taxpayers and that the property that the defendants received from taxpayers was encumbered.

The Court, therefore, comes to the conclusion that since the tax liens of the United States originally filed in 1963, 1964, and 1965 and subsequently refiled in 1969 are valid tax liens against defendants, defendants are, therefore, liable for the monies due from said liens. Costs assessed to defendants.

IT IS SO ORDERED.

 

 

 

United States of America, Plaintiff v. Earl Fox; Florence Fox; William G. Wilson; Milton K. Higgins; John Hagan; Board of University and School Lands; McLean County, North Dakota, a body corporate; and Continental Oil Company, Defendants

U. S. District Court, Dist. N. Dak., Southwestern Div., Civil No. 766, 8/28/69

[Code Sec. 6323]

Tax liens: Priority: Fact finding.--The court assigned the order of priority to claims, including liens for federal income taxes, against five parcels of real property of which the delinquent taxpayer was the actual or equitable owner.

Harold O. Bullis, United States Attorney, Box No. 272, Fargo, N. Dak., Joseph P. Stevens, Box No. 5006, Minot, N. Dak., Milton K. Higgins, Box No. 366, Bismarck, N. Dak., John E. Adams, Assistant Attorney General, Lynn Erickson, State Capitol Bldg., Bismarck, N. Dak., John Romanick, McLean County, States Attorney, Washburn, N. Dak., Hugh McCutcheon, Bosard, McCutcheon & Kerian, Box No. 939, Minot, N. Dak., Fleck, Smith, Mather, Strutz & Mayer, Suite 200, Professional Bldg., Box No. 1436, Bismarck, N. Dak.

Findings and Conclusions

REGISTER, District Judge:

The issues remaining in this lawsuit, viz., those relating to the foreclosure of certain federal tax liens, having been tried to the Court on May 14, 1969, and post-trial briefs having been submitted by the parties interested, the Court makes the following findings of fact and conclusions of law:

Findings of Fact

1. This action was filed at the request of the Commissioner of Internal Revenue Service and with the authorization of the Attorney General of the United States.

2. On March 13, 1968, a summary judgment was granted in favor of the United States and against the defendant Earl Fox, for income taxes due for the years 1945 to and including 1949 in the total amount of $34,275.19, including interest to date of judgment. This sum remains due and owing.

3. On February 16, 1955 , a Notice of Federal Tax Lien relating to the income tax liability of Earl Fox for the years 1945 through 1949 was filed with the Register of Deeds, McLean County , Washburn , North Dakota (Gov't Ex. 7). A Notice of Federal Tax Lien refiling with regard to the aforementioned tax lien was filed with the Register of Deeds, McLean County, on November 28, 1967. (Gov't Ex. 8).

4. On August 20, 1964, the defendant Continental Oil Company obtained a judgment against the defendant William G. Wilson, in the sum of $1,307.59, which sum, together with interest, remains due and owing to date. (Continental's Ex. L).

(a) Findings Relating to Parcels 1 and 2

5. On October 19, 1946, the defendant Earl Fox executed two separate land sale contracts with the Board of University and School Lands, State of North Dakota, wherein he purchased by Contract No. 81 (Gov't Ex. 1) the Northwest Quarter of Section 36, Township 147 North, Range 83 West (hereinafter referred to as Parcel 1), and on Contract No. 82 (Gov't Ex. 2) the Southeast Quarter of Section 36, Township 147 North, Range 83 West (hereinafter referred to as Parcel 2).

6. The Board of University and School Lands, State of North Dakota, retains title to Parcels 1 and 2, and there remains due and owing on Contract No. 81 the sum of $2,788.35, and on Contract No. 82 the sum of $3,855.34 (State's Ex. W).

7. On October 2, 1953, defendant Earl Fox borrowed the sum of $2,100 from Mr. Harry Pochant and in return for the loan assigned Land Contract Nos. 81 and 82 to Henry H. Pochant.

8. The assignment of Contract Nos. 81 and 82 to Henry H. Pochant was for security purposes only and did not transfer any interest in the property to Henry H. Pochant.

9. On February 16, 1955, when the federal tax liens were filed, defendant Earl Fox was the vendee of Parcels 1 and 2, and the tax liens attached to his vendee's interest.

10. On September 29, 1958, defendant Florence Fox paid to Henry H. Pochant the sum of $4,700, which sum was, in part, for repayment of the October 2, 1953 loan from Harry Pochant to Earl Fox (Gov't Ex. 13). Upon payment of the $4,700, Henry H. Pochant assigned land Contract Nos. 81 and 82 to "Florence Fox, the wife and one of the heirs of Earl Fox now living." (Gov't Exs. 11 and 12).

11. The assignment from Henry H. Pochant to Florence Fox referred to in Finding No. 10 above constituted merely a release of Pochant's security interest in Parcels 1 and 2, and did not transfer a vendee's interest to Florence Fox.

12. While Florence Fox is the vendee of record on Parcels 1 and 2, Earl Fox is the actual and equitable vendee.

13. On September 24, 1958, defendant John Hagan loaned Florence Fox and Earl Fox the sum of $2,500 (Hagan's Exs. A and B). This sum is still due and owing to John Hagan from defendants Florence and Earl Fox.

14. On April 17, 1959, Florence Fox assigned whatever interest she had in Land Contract Nos. 81 and 82 to John Hagan (Hagan's Ex. C).

15. At all times relevant hereto Florence Fox had actual knowledge of the tax debts of Earl Fox and of the filing of the tax liens as described in Finding No. 3.

16. At the time he loaned the $2,500 to Florence and Earl Fox on September 24, 1958, John Hagan had knowledge of the federal tax liens filed against Earl Fox and also knew that the assignment of Land Contract Nos. 81 and 82 from Earl Fox to Henry H. Pochant was for security only. (Portions of John Hagan's Deposition introduced into record, pp. 5 and 6).

17. On July 25, 1968, defendant William G. Wilson purchased from McLean County, North Dakota, the following tax certificate and subsequent tax sale certificates relating to Parcel 1:

                                              $156.62, plus interest

1963         

County
 
Certificate

 .....                   from 
12/8/64

             Subsequent Tax Sale              $154.26, plus interest

1964         Certificate ............                  from 
12/14/65

             Subsequent Tax Sale              $149.28, plus interest

1965         Certificate ............                  from 
12/13/66

             Subsequent Tax Sale              $157.88, plus interest

1966         Certificate ............                  from 
12/12/67

             TOTAL ..................                        $618.04

 

18. On July 25, 1968 , the defendant William G. Wilson purchased from McLean County , North Dakota , the following tax certificate and subsequent tax sales certificates relating to Parcel 2:

             

County
 
Certificate

             $150.93, plus interest

1953         of 

Sale

 ..............                   from 
12/8/64

             Subsequent Tax                 $148.61, plus interest

1964         Sales Certificate ....                  from 
12/14/65

             Subsequent Tax                 $143.07, plus interest

1965         Sales Certificate ....                  from 
12/13/66

             Subsequent Tax                 $151.30, plus interest

1966         Sales Certificate ....                  from 
12/12/67

             Total ................                        $593.91

 

19. Real Estate taxes are due and owing to McLean County for the years 1967 and 1968 on Parcel 1 in the amount of $345.19, and on Parcel 2 in the amount of $327.51 (County's Exs. D and E).

20. On September 9, 1968 , the Board of University and School Lands , State of North Dakota , cancelled Land Contract Nos. 81 and 82, relating to Parcels 1 and 2 herein. (State's Ex. X).

(b) Findings Relating to Parcel 3

21. On June 19, 1943 , Olga Fox executed Land Sale Contract No. X612 (Gov't Ex. 3) with the Board of University and School Lands, State of North Dakota, wherein she purchased the Eastern Half of Section 14, Township 147 North, Range 83 West (hereinafter referred to as Parcel 3).

22. The Board of University and School Lands , State of North Dakota , retains record title to Parcel 3; however, the contract price has been paid in full. (State's Exs. V and Y).

23. Earl Fox and Olga Fox were divorced in 1948, and on June 25, 1948 Olga Fox executed a property settlement agreement wherein she agreed to quitclaim any and all interest she had in any real property to the defendant Earl Fox. On July 14, 1948 Olga Fox executed a quitclaim deed wherein she quitclaimed to Earl Fox her entire interest in Parcel 3. (Gov't Exs. 6 and 9). This quitclaim deed was never recorded.

24. The quitclaim deed executed by Olga Fox to Earl Fox is in the possession of Milton Higgins, Earl's agent, and defendants failed to rebut the presumption of delivery and acceptance. (Amended Admissions of Earl Fox to Plaintiff's Request for Admissions of Facts).

25. On May 25, 1953 , Earl and Florence Fox executed a promissory note on behalf of Milton Higgins in the sum of $6,000 (Higgins' Ex. M).

26. As security for the May 25, 1953 note, Earl Fox mortgaged his interest in Parcel 3 to Milton Higgins, which mortgage was duly recorded on May 29, 1953 .

27. On February 16, 1955 , federal tax liens were filed as described in Finding No. 3, supra.

28. William Wilson, through his agent Florence Fox, entered into an agreement with Perry Fox whereby Perry was to obtain an assignment of Land Contract No. X612 from Olga Fox and thereafter assign said contract to Wilson upon payment of $1,000 cash and a promissory note for $10,000.

29. On August 13, 1968 , Olga Fox assigned her interest in Land Contract No. X612 to her son Perry Fox, and said assignment was approved by the Board of University and School Lands (Deft. Ex. CC; State's Ex. Y). Perry Fox has not reassigned the contract to William Wilson.

30. Any interest William Wilson or Florence Fox may have or claim to have pursuant to agreements and arrangements with Perry Fox arose subsequent to the time William Wilson and Florence Fox had notice of the July 14, 1948 quitclaim deed from Olga Fox to Earl Fox. (Response to Request for Admission of Facts and Genuineness of Document executed by Florence Fox and William Wilson).

31. Olga Fox and Perry Fox made an appearance in this action and after due notice were defaulted. They have no claim or interest in the subject property and have admitted, by their failure to deny, that Earl Fox holds the vendee's interest in Parcel 3.

32. Earl Fox is the actual and equitable vendee of Land Contract No. X612 relating to Parcel 3.

33. In September, 1968, William Wilson paid the balance due on Land Contract No. X612, in the total amount of $3,782.40, to the Board of University and School Lands, State of North Dakota.

34. Land Contract No. X612 was cancelled by the Board of University and School Lands but has been reinstated.

35. Real estate taxes are due to McLean County on Parcel 3 for the year 1968 in the amount of $314.48 (County's Ex. G).

(c) Findings Relating to Parcels 4 and 5

36. On March 12, 1948, the defendant Earl Fox executed two separate land sale contracts with the Board of University and School Lands, State of North Dakota, wherein he purchased by Contract No. 191 (Gov't Ex. 4) the Southeast Quarter of Section 4, Township 146 North, Range 82 West (hereinafter referred to as Parcel 4), and by Contract No. 192 (Gov't Ex. 5) the Southwest Quarter of Section 4, Township 146 North, Range 82 West (hereinafter referred to as Parcel 5).

37. The Board of University and School Lands, State of North Dakota, retains title to Parcels 4 and 5, and there remains due and owing on Contract No. 191 the sum of $3,228.68, and on Contract No. 192 the sum of $6,757 (State's Ex. W).

38. On December 31, 1953, defendants Earl and Florence Fox executed a promissory note on behalf of Milton Higgins in the sum of $4,000. (Higgins' Ex. O).

39. On December 31, 1953, Earl Fox mortgaged to Milton Higgins, in return for the loan of $4,000 above referred to, all of his interest in Parcel 3. This mortgage was recorded on October 23, 1964. (Higgins' Ex. P).

40. On February 16, 1955, the Government filed its federal tax lien against Earl Fox for his income taxes due and owing for the years 1945 through the including 1949.

41. At the time the federal tax liens were filed, Earl Fox was the vendee of record on Land Contract Nos. 191 and 192. (Gov't Exs. 4 and 5).

42. On September 9, 1968, the Board of University and School Lands cancelled Land Contract Nos. 191 and 192. (State's Ex. X).

43. On or about July 25, 1968, the defendant Florence Fox purchased from McLean County, North Dakota, the following tax certificate and subsequent tax sales certificates relating to Parcels 4 and 5:

                                            $325.33, plus interest

1963         County Certificate ...                   from 12/8/64

             Subsequent Tax                 $318.76, plus interest

1964         Sales Certificate ....                  from 
12/14/65

             Subsequent Tax                 $303.71, plus interest

1965         Sales Certificate ....                  from 
12/13/66

             Subsequent Tax                 $297.11, plus interest

1966         Sales Certificate ....                  from 
12/12/67

             Total ................                      $1,244.91

 

44. Unpaid real estate taxes are due and owing to McLean County for the years 1967 and 1968 on Parcels 4 and 5 in the total amount of $640.25.

Conclusions of Law

1. This Court has jurisdiction over this matter pursuant to Section 1340, Title 28, United States Code, and Sec. 7402(a), Internal Revenue Code of 1954.

2. The Government's lien which arose under Section 6321 of the Internal Revenue Code of 1954, and which was filed on February 16, 1955, attached to all property and rights to property of the taxpayer, Earl Fox, including his vendee's interest in the subject properties. United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (C. A. 4th, 1955); Citizens Bank v. Vidal, 114 F. 2d 380 (C. A. 10th, 1940); Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, p. 268 (1945). The tax lien thus attaching to the taxpayer's interest encumbers that interest cum onere. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, p. 57 (1958); Carter v. United States 399 F. 2d 340 (C. A. 5th, 1968).

(a) Conclusions Relating to Parcels 1 and 2

3. The assignments of Land Contract Nos. 81 and 82 from Earl Fox to Henry H. Pochant were subject to a defeasance on a condition of repayment and were therefore made for security purposes only rather than transfers absolute.

4. Even if the assignments from Earl Fox to Henry H. Pochant are deemed absolute on their face, a transfer of an interest in property by an instrument absolute on its face may be declared a security transaction if the circumstances and interest of the parties so dictate. North Dakota Century Code, Sec. 53-02-04; Mechtle v. Topp, 78 N. D. 789, 52 N. W. 2d 842; Kolb v. Kolb, 75 N. D. 181, 226 N. W. 2d 484; Wells v. Geyer, 12 N. D. 316, 96 N. W. 289; Miller v. Smith, 20 N. D. 96, 126 N. W. 499. Parole evidence may be taken to determine the intent of the parties. Miller v. Smith, supra.

5. Earl Fox is the actual and equitable vendee on Land Sale Contract Nos. 81 and 82.

6. The federal tax lien filed on February 16, 1955 , attached to and remains a lien on Earl Fox's vendee's interest in Parcels 1 and 2.

7. The Board of University and School Lands has title to Parcels 1 and 2.

8. The cancellation of contracts 81 and 82 by the Board of University and School Lands was improper and the contracts should be reinstated.

9. The priority of claims to the vendee's interest in Parcels 1 and 2 is as follows:

a. McLean County is entitled to first priority for real estate taxes for the years 1967 and 1968 in the sum of $672.70 plus interest. Section 6323(b)(6) Internal Revenue Code of 1954.

b. William Wilson is entitled to second priority for county real estate tax certificates purchased for the years 1963 to 1966 in the amount of $1,070.99 plus interest. The defendant Continental Oil Company has a lien on any amount due to William Wilson by reason of a judgment lien against Wilson in the amount of $1,307.59 plus interest.

c. The United States of America is entitled to third priority on its tax liens in the sum of $34,275.19. It is entitled to priority over John Hagan's claim by the fact that Hagan's interest arose subsequent in time and was never perfected by recordation. Section 6323, Internal Revenue Code of 1954; United States v. New Britain , supra.

d. John Hagan is entitled to fourth priority on his claim of $2,500.

(b) Conclusions Relating to Parcel 3

10. The unrecorded quitclaim deed of July 14, 1948 to Earl Fox is valid and binding on Florence Fox and William Wilson since they had notice of the deed prior to acquiring any interest in Parcel 3. Collins v. Federal Land Bank of St. Paul , 119 F. 2d 228 (C. A. 8th, 1941); State of North Dakota v. Szarkowski, 134 F. 2d 201 (C. A. 8th, 1943).

11. Upon finding of fact, as made here, that quitclaim deed of July 14, 1948 is in the possession of Earl Fox's agent, a presumption of delivery and acceptance arises. Cox v. McLean, 66 N. D. 696, 268 N. W. 686; Adams v. Little Missouri Mineral Assn., 143 N. W. 2d 659 p. 626. This presumption has not been rebutted by the defendants.

12. Earl Fox is the actual and equitable owner of Parcel 3.

13. To the extent that William Wilson paid the balance due on the contract No. X612, in the sum of $3,782.40, he is entitled to be subrogated to the rights of the Board of University and School Lands and has a first and prior interest in Parcel 3.

14. County real estate taxes due for 1968 in the amount of $314 are entitled to priority over the Higgins' mortgage and the federal tax liens. Section 6323(b)(6) Internal Revenue Code of 1954.

15. Higgins' mortgage, being prior in time to the federal tax liens, is entitled to priority over the tax liens. Section 6323, Internal Revenue Code of 1954; United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954).

16. The federal tax lien filed on February 16, 1955 attaches to the subject property and is entitled to a fourth priority.

(c) Conclusions Relating to Parcels 4 and 5

17. The Board of University and School Lands holds the title to Parcels 4 and 5.

18. Earl Fox was the vendee of record on Contracts 191 and 192 when the federal tax liens were filed.

19. The federal tax liens attached to Earl Fox's vendee's interest in Parcels 4 and 5, and remain a lien on that interest.

20. The cancellation of Contracts 191 and 192 by the Board of University and School Lands was improper and the Contracts should be reinstated.

21. The priority of claims to the vendee's interest in Parcels 4 and 5 is as follows:

a. The county real estate taxes due to McLean County for the years 1967 and 1968 in the amount of $692.14 are entitled to first priority. Section 6323(b)(6), Internal Revenue Code of 1954.

b. Florence Fox is entitled to second priority for county real estate tax certificates purchased by her for the years 1963 to 1966, in the amount of $1,244.91.

c. Milton Higgins is entitled to third priority on his mortgage in the sum of $4,000.

d. The United States of America is entitled to fourth priority on its tax claim of $34,275.19.

Counsel for the Government will forthwith prepare and submit appropriate form of Judgment in conformity herewith.

 

 

 

The Detroit Bank, formerly the Detroit Savings Bank, a Michigan Banking Corporation, Petitioner, v. The United States of America

Supreme Court of the United States , No. 156. October Term, 1942, 317 US 329, 63 SCt 297, January 4, 1943

On writ of certiorari to the United States Circuit Court of Appeals for the Sixth Circuit.

Property subject to lien: Estates by entirety: Recording of lien against mortgagee.--The lien for federal estate taxes authorized by Sec. 315(a), 1926 Act, attaches to the interest of a decedent in an estate by entirety. Such lien is not required to be recorded under the provisions of R. S. 3186, in order to give it superiority to the lien of a mortgagee who acquired his mortgage for value in good faith without knowledge of the tax lien. Nor does Sec. 315 violate the Fifth Amendment by authorizing an unrecorded tax lien against property mortgaged to it and by withholding such a lien against innocent purchasers of property which a decedent had transferred inter vivos in contemplation of death. Affirming Circuit Court decision, Sixth Circuit, 42-2 USTC ¶9612, 127 Fed. (2d) 64 which affirmed District Court decision reported at 40-2 USTC ¶9653.

Ferris D. Stone, Cleveland Thurber, Edward S. Reed, Jr., and Emmett C. Eagan, 3456 Penobscot Bldg., Detroit, Mich., for petitioner. Charles Fahy, Solicitor General, Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, J. Louis Monarch, Morton K. Rothschild, and Alvin J. Rockwell, Special Assistants to Attorney General, and Valentine Brookes, Attorney, for respondent.

Mr. Chief Justice STONE delivered the opinion of the court.

[Questions]

The questions for decision are:

(1) Whether the lien for federal estate taxes authorized by §315(a) of the Revenue Act of 1926, 44 Stat. 9, 80, attaches to the interest of the decedent in an estate by the entirety.

(2) Whether the lien is required to be recorded under the provisions of R. S. §3186, as amended, in order to give it superiority to the lien of a mortgagee who acquired his mortgage for value in good faith without knowledge of the tax lien.

(3) Whether §315(a), so applied as to give the lien superiority over such subsequent mortgages, offends the Fifth Amendment.

The Government brought the present suit in the district court pursuant to R. S. §3207, to foreclose an asserted lien for estate taxes assessed under §302(e) upon certain parcels of real estate. The real estate had been owned at the time of his death by decedent and his wife as tenants by the entirety. Following his death the real estate was not included as a part of his estate in computing the federal estate tax. Prior to assessment or payment of the tax, the parcels of real estate in question were mortgaged, some by decedent's widow and others by his children, to petitioner who acted without knowledge of the Government's asserted lien or claim for taxes. Default in payment of the mortgage indebtedness having occurred, petitioner bought in the mortgaged property on foreclosure sale. The trial court found that petitioner acquired the mortgages in good faith and for value.

The Commissioner of Internal Revenue assessed an estate tax deficiency against decedent's estate by reason of the failure to include the value of the estate by the entirety in the computation of the tax, which the Board of Tax Appeals sustained. The Government then brought the prrsent proceeding to enforce the lien. The district court held that the tax lien, although unrecorded, was superior to the mortgage lien and to local, state and county liens for taxes, which had accrued after the death of decedent. The Circuit Court of Appeals affirmed, 127 F. (2d) 64 [42-2 USTC ¶9612]. We were moved to grant certiorari, 317 U. S. 607, by the importance of the questions presented to the administration of the revenue laws.

[Lien Attaches to Estate by Entirety]

Section 315(a) of the Revenue Act of 1926 provides in part that:

Unless the tax is sooner paid in full, it shall be a lien for ten years upon the gross estate of the decedent, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof, shall be divested of such lien. If the Commissioner is satisfied that the tax liability of an estate has been fully discharged or provided for, he may, under regulations prescribed by him with the approval of the Secretary, issue his certificate, releasing any or all property of such estate from the lien herein imposed.

The lien attaches at the date of the decedent's death, since the gross estate is determined as of that date and the estate tax itself becomes an obligation of the estate at that time without assessment. See Hertz v. Woodman, 218 U. S. 205, 220; Ithaca Trust Co. v. United States, 279 U. S. 151, 155 [1 USTC ¶386]; United States v. Ayer, 12 F. (2d) 194 [1 USTC ¶173]; Rosenberg v. McLaughlin, 66 F. (2d) 271 [3 USTC ¶1131]. That the lien attaches at decedent's death without necessity for assessment or demand is implicit in the proviso that such part of the estate as is used for payment of charges against the estate and expenses of administration shall be "divested of the lien."

Petitioner urges that since the lien here asserted is "upon the gross estate of decedent" it does not attach to the land held by the entirety which passed to the decedent's widow, not as a part of his estate but by her right to survivorship. But this argument disregards the fact that the lien is for the particular tax imposed by §302 of the Revenue Act of 1926 upon "the value of the gross estate of decedent" at the time of his death and that that section directs that that "value" shall include "the value at the time of his death of all property real or personal * * * (e) to the extent of the interest therein held * * * as tenants by the entirety by the decedent and spouse * * *."

Since the lien authorized by §315(a) is for the tax which in its computation includes as a part of the taxable estate the value of the estate by the entirety, see Tyler v. United States, 281 U. S. 497 [2 USTC ¶532], we think it too plain for argument that the lien extends to the estate as thus defined and made the base on which the tax is computed. The gross estate of decedent within the meaning of §315(a) is the estate or property on which the tax chargeable to decedent's estate is computed. Congress, in §314(b), similarly denominated the proceeds of insurance on the life of decedent payable to beneficiaries as "a part of the gross estate" in providing for recovery from the beneficiaries of their pro rata shares of the estate tax. We cannot impute to Congress an intention not disclosed by the statute or its legislative history to exclude from the tax lien property which it directs to be included in the decedent's gross estate for the purpose of computing the tax.

[Estate Tax Lien Not Subject to Recording]

Nor can we conclude, as petitioner argues, that the lien for estate tax authorized by §315(a) is subject to the earlier provision for recording tax liens in R. S. §3186. This section, so far as now relevant, provides,

That if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the Collector, except when otherwise provided, until paid * * * upon all property and rights to property belonging to such person, provided, however, that such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until notice of such lien shall be filed by the Collector in the office of the clerk of the district court of the district within which the property subject to such lien is situated * * *

The section contains a further proviso that whenever any state, by appropriate legislation, makes provision for the filing of such notice in the office of a registrar or recorder of deeds "then such liens shall not be valid in that state against any mortgagee, purchaser or judgment creditor until such notice shall be filed" in the appropriate office. Michigan has made provision for filing notices of such tax liens in the offices of the registers of deeds in the counties of the state. §3746 Compiled Laws of Michigan, 1929, as amended by Act No. 38, Extra Session 1934.

The part of R. S. §3186 imposing the lien was enacted in 1866, 14 Stat. 186. The provision for filing notice of government tax liens was added by amendment of March 4, 1913 , 37 Stat. 1016. Before the amendment this Court had held in United States v. Snyder, 149 U. S. 210; cf. United States v. Curry, 201 Fed. 371, 374, that in the absence of a federal statute requiring government tax liens to be recorded they are superior to subsequent mortgages.

Petitioner contends that Congress, in enacting §209 of the Revenue Act of 1916, which, with amendments, became §315(a) of the Revenue Act of 1926, did not impose an independent lien but merely made expressly applicable to the federal estate tax the lien created by R. S. §3186, modifying that lien in some respects as will be further noted. It urges that save where inconsistent with the express terms of §315(a), all provisions of R. S. §3186 are made applicable to the estate tax lien by reason of §211 of the Revenue Act of 1916, which provides:

That all administrative, special and general provisions of law, including the law in relation to the assessment and collection of taxes not heretofore specifically repealed are hereby made to apply to this title so far as applicable and not inconsistent with its provisions.

But we think that the differences between R. S. §3186 and §315(a), and their legislative history as separate enactments, indicate that each was intended to operate independently of the other.

Section 3186 refers only to liens which are made such by that section. Section 315(a) authorizes the lien for estate taxes and makes no reference to R. S. §3186 or to any requirement for recording notice of the lien. The lien of R. S. §3186 is upon all the property of the person liable for the tax, while the lien of §315(a) attaches only to the property included in and taxed as the gross estate not used to pay administration expenses. The lien of R. S. §3186 continues until the tax liability is paid while the lien of §315(a) continues for ten years from the death of the decedent. Of particular significance is the difference in time when the liens attach under the two sections. Under R. S. §3186 there is no lien and no notice can be recorded until there has been a demand by the collector and a refusal to pay it by the taxpayer. Under §315(a) as has been stated, the lien arises on the death of the decedent and becomes effective against purchasers and mortgagees without assessment or demand and obviously before it would be possible to record a notice of lien under the provisions of R. S. §3186.

Since the enactment of Revenue Act of 1916, R. S. §3186 has been amended four times, ¹ and §209 of the Revenue Act of 1916 (which became §315(a) of the 1926 Act) has been amended twice and twice reenacted without amendment. ² With one exception, in none of the amendments or reenactments of the one section was any reference made to the other. Section 409 of the Revenue Act of 1921 added a provision to the estate tax lien section authorizing the Commissioner under certain circumstances to release the lien. A similar provision was not added to R. S. §3186 until the Revenue Act of 1928. By §613 of that Act, §3186 was amended to provide for such release, the amendment, by subsection (f), being made applicable to "a lien in respect of any internal revenue-tax whether or not the lien was imposed by this section."

At the same time, the release provision of §315(a) was repealed. By §809 of the Revenue Act of 1932, however, the latter was reenacted, it having been discovered that there was need for a provision authorizing release of the estate tax lien prior to assessment. H. Rep. No. 708, 72d Cong. 1st Sess. 50. Moreover it is not without significance that Congress, in enacting a gift tax in the Revenue Act of 1932, provided in §510 of that Act that the gift tax should be a lien on the property passing to the donee, using words almost identical to these of §315(a). The Committee Reports state that "by this provision there is imposed a lien additional to that imposed by section 3186 of the Revised Statutes." H. Rep. No. 708, 72d Cong., 1st Sess. 30; Sen. Rep. No. 665, 72d Cong., 1st Sess. 42. This history and the differences between the provisions already noted, would seem to compel the conclusion that §315(a) was intended to operate independently of R. S. §3186, and that the estate tax lien created by the former is not subject to the latter's requirement of recordation.

Sections 313(b) and (c) lend support to this conclusion. Subsection (b) sets up a procedure whereby the Commissioner may be required to certify the amount of the tax due and in that event subsection (c) releases any part of the gross estate subsequently acquired by a bona fide purchaser, from any lien for a deficiency in the tax which may be thereafter assessed--a procedure which would have afforded adequate protection to petitioner from any deficiency lien in this case. These provisions not only recognize that the lien comes into existence before the tax is assessed or demanded, but they are unnecessary and inoperative if notice of the lien is required by R. S. §3186 to be recorded.

It is evident from a comparison of the two sections that Congress, in providing for the estate tax lien, has proceeded on the assumption that in the case of the tax on property passing at death and which is distributed in consequence of the death, there is greater need of a lien in advance of assessment and demand for payment of the tax than in the case of other types of taxes; and that there is less need for protection of third persons by a recorded notice of the lien when the property passing at death is normally dealt with by probate and estate tax proceedings of public notoriety.

This is emphasized by the provisions of §315(b) and (c) which relieve bona fide purchasers of property transferred inter vivos by the decedent in contemplation of death, from the lien which in the case of property transferred at death is enforcible against such purchasers. This provision, like §313(c) would be unnecessary if R. S. §3186 required notice of the lien to be recorded. The conclusion seems inescapable that the two sections apply independently, each of the other, at least to the extent that notice of the lien authorized by §315(a) is not required to be recorded under R. S. §3186. Whether the lien created by §315(a) could be recorded by the procedures established by §3186 and state statutes enacted in accordance with that section need not now be decided.

[Violation of Fifth Amendment]

Petitioner also insists that the statute violates the Fifth Amendment by authorizing an unrecorded tax lien against the property mortgaged to it and withholding such a lien against innocent purchasers of property which a decedent had transferred inter vivos in contemplation of death. Unlike the Fourteenth Amendment the Fifth contains no equal protection clause and it provides no guaranty against discriminatory legislation by Congress. Labelle Iron Works v. United States, 256 U. S. 377, 392 [5 USTC ¶1369, 1 USTC ¶48]; Steward Machine Co. v. Davis, 301 U. S. 548, 584-585; Sunshine Anthracite Coal Co. v. Adkins, 310 U. S. 381, 400, 401 [40-1 USTC ¶9478]; Helvering v. Lerner Stores Co., 314 U. S. 463 468 [42-1 USTC ¶9163]. Even if discriminatory legislation may be so arbitrary and injurious in character as to violate the due process clause of the Fifth Amendment, see Steward Machine Co. v. Davis, supra, 585; Currin v. Wallace, 306 U. S. 1, 13, no such case is presented here.

For reasons already indicated we think there is adequate basis for the distinction made by the statute between innocent purchasers of property which passes at the decedent's death and those of property which he conveyed in his lifetime in anticipation of death. As we have pointed out, the estate tax status of property passing at decedent's death is more readily ascertained than that of property which he has conveyed away in his lifetime and which so far as normal probate and tax proceedings are concerned would not appear to be related to his estate or taxable as a part of it. We do not find in such a classification any basis for saying that the discrimination in the statute is so arbitrary as to violate due process.

Affirmed.

Mr. Justic MURPHY took no part in the consideration or decision of this case.

¹ Act of Feb. 26, 1925 , 43 Stat. 994; Revenue Act of 1928, §613, 45 Stat. 875; Revenue Act of 1934, §509, 48 Stat. 757; Revenue Act of 1939, §401, 53 Stat. 882. The section is now §§ 3670-77 of the Internal Revenue Code.

² Revenue Act of 1919, §409, 40 Stat. 1100; Revenue Act of 1921, §409, 42 Stat. 283; Revenue Act of 1924, §315(a), 43 Stat. 312; Revenue Act of 1926, §315(a), 44 Stat. 80. The section is now §827 of the Internal Revenue Code.