Tangible property in the taxpayer's possession

---

 

In the Matter of Thomas Lloyd King and Joan P. King, Debtors

U.S. District Court, Dist. Neb., CV 89-0-451, 10/31/91, Reversing and remanding a Bankruptcy Court decision, 89-2 USTC ¶9559

[Code Secs. 6321 and 6334 ]

Levies: Liens: Exempt property.--The government's tax lien attached to the debtors' personal property even though the property was exempt from levy. The plain language of Code Sec. 6321 allows the attachment of a federal tax lien to all of the debtors' property, including property exempted from levy under Code Sec. 6334 .

MEMORANDUM OPINION AND ORDER

The United States of America, a creditor in debtors' bankruptcy proceeding, appeals the order of the bankruptcy court, dated May 9, 1989, sustaining the debtors' objection to the government's claim with respect to §6334 of the Internal Revenue Code. Having reviewed the record on appeal and the government's brief on the matter, ¹ the Court finds that the decision of the bankruptcy court should be reversed and the matter remanded for further proceedings consistent with this Memorandum Opinion.

Factual Background

The relevant undisputed facts, as set out in the bankruptcy court's memorandum opinion, are as follows:

Debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code on May 24, 1988 . The debtors' plan was confirmed on August 31, 1988 . Debtors' plan provided for payment of a priority claim of the IRS for the tax year ending December 31, 1985 , in the amount of $3,728.80. The plan also provided for the secured claim of the IRS by the surrender of debtors' interest (estimated at $2,100.00) consisting of earnings, clothes, tools of trade, and household goods. The remainder of the IRS claim is treated as a general unsecured claim.

The IRS filed a second amended proof of claim, dated December 28, 1988 , which asserts various unpaid federal income tax liabilities owed by the debtors. The December 28th proof of claim lists secured tax liabilities in the amount of $4,360.99 arising from debtors' unpaid income taxes for the years 1980 and 1981. In addition, the IRS asserts priority claims with respect to the debtors' unpaid 1985 income taxes.

In re King [89-2 USTC ¶9559 ], 102 B.R. 184, 185 (Bankr. D. Neb. 1989).

The debtors filed an objection to the claim of the IRS, and hearings were held on February 6 and 27, 1989. At the hearings, the government acknowledged that its $4,360.99 claim should be reduced to $2,261.00, ² and thus the bankruptcy court considered debtors' objection only with respect to that amount. The debtors argued that §6334 of the Internal Revenue Code (26 U.S.C. §6334 ) exempted certain items of a debtor's personal property and wages from a tax lien of the IRS and that their property (household furnishings, $1,226.00; carpet laying tools, $500.00; clothing, $485.00; and money, $50.00), totalling $2,261.00, fell under this exemption. The debtors relied on In re Barbier, 84 B.R. 190 (Bankr. D. Nev. 1988), which held that, "Section 6334 * * * exempts property from all forms of execution, not Just levy." Id. at 192. The government argued that although §6334 prohibits levy on exempt property, it does not preclude the attachment of a tax lien on such property. Relying on Barbier, the bankruptcy court sustained the debtors' objection. The government now appeals.

Discussion

This Court may review the bankruptcy court's legal conclusions de novo, but the bankruptcy court's "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Bankruptcy Rule 8013; In re Apex Oil Co., 884 F.2d 343, 348 (8th Cir. 1989).

The sole issue on appeal is whether the bankruptcy court erred in allowing the debtors to exempt personal property under section 6334 ³ of the Internal Revenue Code, with respect to the government's tax lien claim. The government has called the Court's attention to the fact that Barbier, supra, which was relied upon by the bankruptcy court, has since been reversed by the Ninth Circuit Court of Appeals. See United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990).

In United States v. Barbier, supra [90-1 USTC ¶50,107 ], 896 F.2d at 377, the debtor had argued that 26 U.S.C. §6334 , which exempts certain property from administrative levy, also prohibits the attachment of a federal tax lien on the exempted property. The district court agreed, holding that the government's tax lien could not attach to the debtor's §6334 exempt property. The Ninth Circuit reversed the district court, after considering the plain language of 26 U.S.C. §6321 , stating:

Federal tax liens attach to an extremely wide range of property. Section 6321 , relating to tax liens, states: "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 upon all property and rights to property, whether real or personal, belonging to such person.

* * *

The Supreme Court has stated that "[t]he statutory language 'all property and rights to property, appearing in §6321 . . ., is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720-21 (1985).

* * *

Holding that a lien does not extend to property exempt from levy under section 6334 would be inconsistent both with Supreme Court precedent and the statutory purpose of ensuring that the government is able to secure collection of tax revenues.

Id. at 378-79 (emphasis original). The court then proceeded to discern the distinction between a levy and a lien, stating:

A levy forces debtors to relinquish their property. It operates as a seizure by the IRS to collect delinquent income taxes. The IRS's levying power is limited because a levy is an immediate seizure not requiring judicial intervention. A levy connotes compulsion or a forcible means of extracting taxes from "a recalcitrant taxpayer."

* * *

A lien, however, is merely a security interest and does not involve the immediate seizure of property. A lien enables the taxpayer to maintain possession of protected property while allowing the government to preserve its claim should the status of property later change. If, for instance, the debtor later sells his exempt personal property for cash, the IRS would be entitled to obtain such proceeds.

Id. at 379 (citations omitted) (emphasis added). The court concluded, stating:

Reading sections 6334 and 6321 together leads to the conclusion that the former section is a limitation on the government's ability forcibly to seize the taxpayer's property, but not a bar to the government's ability to assert a security interest in such property. The plain words of section 6321 allow a tax lien to be attached to all of the taxpayer's property, including property exempt from IRS levy.

Id. Accord In re Beard [90-1 USTC ¶50,260 ], 112 B.R. 951, 953-54 (Bankr. N.D. Ind. 1990); In re Jackson [88-1 USTC ¶9186 ], 80 B.R. 213, 215 (Bankr. D. Colo. 1987). See also In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63, 64 (Bankr. D. Or. 1987); In re Ridgley, 81 B.R. 65, 69 (Bankr. D. Or. 1987); In re Driscoll, 57 B.R. 322, 327 (Bankr. W.D. Wis. 1986).

The Court agrees with the analysis in United States v. Barbier [90-1 USTC ¶50,107 ], supra, 896 F.2d at 378-79. The plain language of §6321 allows the attachment of a federal tax lien to all of the taxpayer's property, including property exempted from levy under §6334 . Therefore, the Court concludes that the government's tax lien in this case did attach to the §6334 property of the debtors, notwithstanding that such property was exempt from levy. As pointed out in the government's brief, "[T]he Government was not seeking to enforce its tax liens by means of levy, but simply to require the debtors to make provision in their bankruptcy plan for payment that reflected the value of the tax liens." Appellant's Brief at 5. The government is entitled to such provision.

IT IS THEREFORE ORDERED that the bankruptcy court's order of May 9, 1989 , sustaining the debtors' objection to the government's claim, i.e., tax lien, is reversed and this matter is remanded for proceedings consistent with this Memorandum Opinion and Order.

Dated this 31st day of October, 1991.

¹ The debtors did not submit a brief to the Court in this appeal.

² Apparently, the IRS had a $2,100.00 secured claim in debtors' 1980 Ford Bronco. Nebraska State Bank had a $900.00 security interest in the same vehicle. Around the time of confirmation, debtors surrendered possession of the vehicle to Nebraska State Bank, because its claim was superior to the tax lien on the vehicle. Upon learning of such surrender, the government agreed that its secured claim should be reduced to $2,261.00.

³ Section 6334 of the Internal Revenue Code provides in pertinent part:

(a) Enumeration.--There shall be exempt from levy--

(1) Wearing apparel and school books.--Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

(2) Fuel, provisions, furniture, and personal effects.--If the taxpayer is the head of a family, so much of the fuel, provisions, furniture, and personal effects in his household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $1,500 in value;

(3) Books and tools of a trade, business, or profession.--So many of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $1,000 in value.

 

 

 

United States of America (IRS), Plaintiff v. James Luther Stowe, Defendant

U.S. District Court, No. Dist. Ind. , South Bend Div., S87 -497, 9/21/90 , 121 BR 549, Affirming and reversing an unreported Bankruptcy Court decision

[Code Sec. 6871 ]

Bankruptcy and receivership: Prepetition interest: Priority treatment.--The bankruptcy court committed reversible error in determining that the prepetition interest component of the IRS's claim against a debtor should be afforded only general priority treatment. Prepetition interest is to be accorded the same priority as the underlying claim for taxes.

[Code Secs. 6321 , 6323 and 6334 ]

Lien for taxes: Levy and distraint: Exempt property: Bankruptcy.--The bankruptcy court erroneously valued the amount of the IRS's allowed secured claims by improperly exempting certain wearing apparel and household goods from a federal tax lien. Although such property may be exempted from a tax levy, the same exemption does not apply to a tax lien.

MEMORANDUM AND ORDER

MILLER, JR., District Judge:

This cause is before the court on cross-appeals filed by creditor, the United States Internal Revenue Service ("IRS"), and debtor James Luther Stowe from a decision of the bankruptcy court on June 29, 1987 with respect to the IRS's claim against Mr. Stowe's assets. The IRS seeks fulfillment of unpaid taxes and delinquencies assessed against the debtor for several tax years. Both debtor and creditor filed motions to alter and amend the June 29 order; those motions were denied, and the bankruptcy court ruled that the legal determinations rendered in its order of June 29, 1987 were final and fully appealable. The parties then appealed to this court.

Factual Background and the Decision Below

Mr. Stowe petitioned for relief under Chapter 13, Title 11 of the United States Code, and later filed his Chapter 13 Statement and Chapter 13 Plan. Several meetings for creditors were held with respect to Mr. Stowe's bankruptcy filing, and the bankruptcy court confirmed a proposed plan. About five months later, Mr. Stowe was permitted to file a First Amended Chapter 13 Plan which generally provided for full payment of the IRS's priority tax claims.

The IRS filed a claim against Mr. Stowe's assets in the sum of $61,423.33, specifying that its claim included the following items: (1) $5,968.19 representing an unsecured priority claim for general taxes due and pre-petition interest; (2) $55,455.14 as a secured tax claim representing interest due on its claim to the date of filing Mr. Stowe's petition and penalty claims; and (3) $723.86 representing a general unsecured claim in the form of computed non-pecuniary loss penalty assessments to date of Mr. Stowe's petition.

Mr. Stowe filed an objection to the IRS's claim, at which point such claim became a contested matter under Bankruptcy Rule 9014. Later, he filed a supplemental objection to the IRS's claim. Following the parties' submission of briefs, the bankruptcy court entered an order determining the legal issues raised by the parties in their memoranda. The cross-appeals before this court challenge two of those legal determinations.

Standard of Review

Bankruptcy Rule 8013 provides:

On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy court's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.

This rule makes it clear that the court's review of the bankruptcy judge's findings of fact is to be under the clearly erroneous standard. In re Weber, 892 F.2d 534, 538 (7th Cir. 1989); In re Excalibur Automobile Corp., 859 F.2d 454, 457 n.3 (7th Cir. 1988); In re Hillingoss, 849 F.2d 280, 282 (7th Cir. 1988); First Wisconsin Nat'l Bank v. Federal Land Bank, 849 F.2d 284, 286 (7th Cir. 1988). Under this standard, if the trial court's account of the evidence is plausible in light of the record viewed in its entirety, a reviewing court may not reverse even if convinced that it would have weighed the evidence differently as trier of fact; the factfinder's choice between two permissible views of evidence cannot be clearly erroneous. Anderson v. City of Bessemer City , 470 U.S. 564, 573-574 (1985); EEOC v. Sears, Roebuck & Co., 839 F.2d 302, 309 (7th Cir. 1988).

A bankruptcy court's conclusions of law are reviewed de novo on appeal. In re Newman, 903 F.2d 1150 (7th Cir. 1990); Calder v. Camp Grove State Bank, 892 F.2d 629 (7th Cir. 1990). The bankruptcy court's conclusions do not bind the district court and are entitled only to such deference as the district court sees fit. In re Cricker, 46 Bankr. 229 (N.D. Ind. 1985); Rushville Production Credit Ass'n v. Mohr, 42 Bankr. 1000 (S.D. Ind. 1984); In re Schaller, 27 Bankr. 959 (W.D. Wis. 1982). In addition, the court must determine whether the bankruptcy court applied the proper legal standard to the facts. In re Stratton, 23 Bankr. 284, 287 (D.S.D. 1982).

Both the debtor and the IRS raise questions of law on appeal. This court must, therefore, review the bankruptcy court's decision as to the legal issues de novo.

Mr. Stowe's Argument on Appeal

Mr. Stowe contends that the bankruptcy court committed reversible error in determining that the pre-petition interest component of the IRS's claim should be afforded priority treatment. Alternatively, he argues that pre-petition interest should be afforded only general priority treatment. In his brief, Mr. Stowe argues that the legislative history of 11 U.S.C. §507 ¹ and a minority of cases support the conclusion that Congress did not intend to include pre-petition interest as part of the general tax claim and so give that item priority status along with the claim. Mr. Stowe's arguments in part concede that the majority of cases oppose such an argument on appeal, but he argues that such precedent is faulty in its reasoning.

The bankruptcy court noted that "the overwhelming majority of cases clearly weigh in favor of according the pre-petition interest the same priority status as the tax itself." The court went on to list several cases supporting this legal conclusion, notably the decision in In re H.G.D. & J. Mining Company, Inc. [87-1 USTC ¶9344 ], 15 B.C.D. 384 (S.D.W.V. 1986), aff'd, 836 F.2d 546 (4th Cir. 1987).

In rejecting Mr. Stowe's position, the bankruptcy court found that several cases cited by Mr. Stowe were less persuasive both in their facts and in legal basis than those cited by the IRS and relied on by the bankruptcy court. Specifically, the court noted as lacking in persuasive effect the decision in In re Razorback Ready-Mix Concrete Co., 45 B.R. 917 (Bankr. E.D. Ark. 1984), and an unpublished opinion from the Southern District of Illinois in Barger v. United States, No. 85-5386, slip op. (S.D. Ill. July 31, 1985). Hindsight shows that the bankruptcy court correctly stated the law on the issue of pre-petition interest.

Recent case law uniformly rejects Mr. Stowe's arguments both before the bankruptcy court and on appeal. The holding in In re Razorback was explicitly overruled in In re Stonecipher Distributors, Inc., 80 B.R. 949 (Bankr. W.D. Ark. 1987). Barger was remanded by the Seventh Circuit on April 28, 1986 by joint stipulation of the parties noting an error in law.

In an opinion rendered earlier this year, the Seventh Circuit Court of Appeals explicitly he!d that pre-petition interest is to be accorded the same priority as the underlying claim for taxes. In In re Larson, 862 F.2d 112, 125 (7th Cir. 1990), the court noted that the definition of a claim under the bankruptcy code section 101(a)(A), 11 U.S.C. §101(4)(A) , as a "right to payment" includes interest accumulated on that claim. 862 F.2d at 125; see also In re Young, 70 B.R. 43, 45 (Bankr. S.D. Ind. 1987); In re Brinegar, 76 B.R. 176, 178 (Bankr. D. Colo. 1987); In re Treister [85-2 USTC ¶9672 ], 52 B.R. 735, 737 (Bankr. S.D.N.Y. 1985).

If this issue was alive in controversy at the time of the bankruptcy court's June, 1987 ruling, the issue has now been definitively ruled on in this circuit. Accordingly, this court must affirm the bankruptcy court's finding with respect to the priority afforded the pre-petition interest accrued on Mr. Stowe's tax liability.

The IRS's Argument on Appeal

The IRS argues on appeal that the bankruptcy court erroneously valued the amount of its allowed secured claim. Initially, the IRS finds fault with the bankruptcy court's determination that certain of Mr. Stowe's personal property was exempt from a federal tax lien pursuant to 26 U.S.C. §6334(a) . Although the IRS presents several alternative arguments on this point, the court finds the first argument persuasive and so declines to address the subsequent grounds for appeal.

The bankruptcy court held that certain wearing apparel and household goods listed by Mr. Stowe as exempt from tax liability on his Schedule B-4 filing were not subject to a federal tax lien. As authority for this conclusion, the court cited to 26 U.S.C. §6334 . However, while that statute exempts certain property (including wearing apparel, personal effects, and furniture) from a tax levy, it does not grant a delinquent taxpayer with exemption from a tax lien on such items. 26 U.S.C. §6334(a)(1) . Notably, 26 U.S.C. §6321 generally 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 upon all property and rights to property, whether real or personal, belonging to such person.

There is a clear distinction between a creditor's rights through levy and those through a lien. Federal tax liens, in particular, are very broad and may attach to a wide range of property, while the procedure of satisfying such claims through a levy (or the seizure or actual possession of the property) are more narrowly circumscribed. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720-721 (1985); see also In re Jackson [88-1 USTC ¶9186 ], 80 B.R. 213, 215 (Bankr. D. Colo. 1987); United States v. Aetna Life Insurance Company of Hartford, Connecticut [42-1 USTC ¶9266 ], 46 F. Supp. 30, 36 (D. Conn. 1942).

Since the bankruptcy court's decision in June, 1987, the federal courts have decidedly held that federal tax liens may be secured on property exempt from levy under 26 U.S.C. §6334(a) . IRS v. Barbier, 896 F.2d 377, 378 (9th Cir. 1990); In re Beard [90-1 USTC ¶50,260 ], No. 87-11501, slip op at 4-5 (Bankr. N.D. Ind. April 3, 1990 ); In re Ray, 48 B.R. 534 (Bankr. S.D. Ohio 1988); In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63 (Bankr. D. Ore. 1987); In re Ridgley, 81 B.R. 65 (Bankr. D. Ore. 1987); In re Driscoll, 57 B.R. 322, 327 (Bankr. W.D. Wis. 1986).

Accordingly, the bankruptcy court's decision that certain personal property of Mr. Stowe may be exempted from a federal tax lien pursuant to 26 U.S.C. §6334 was contrary to law. Neither the statute cited by the bankruptcy court nor established precedent supports the bankruptcy court's holding. This court, therefore, must reverse the bankruptcy court's decision on this issue, finding that Mr. Stowe's reported wearing apparel and household goods are not exempt from federal tax liens.

Conclusion

For the reasons set forth above, the decision of the bankruptcy court is AFFIRMED IN PART and REVERSED IN PART in accordance with this order.

SO ORDERED.

¹ That section of the Bankruptcy Code sets forth various standards for determining the priorities among the claims of different creditors, including the government's claim for unpaid taxes. Section 507(a)(7) generally gives the IRS's claim for unpaid taxes priority status, but does not state whether interest on such tax amounts also receive priority status.

 

 

 

United States of America , Plaintiff v. Warren Ronald Coan and Janis Ruth Coan, Defendants

U.S. District Court, Mid. Dist. Fla., Tampa Div., 85-1806-CIV-T-17, 2/21/86

[Code Secs. 6321 and 6322 ]

Lien for taxes: Bankruptcy: Property subject to tax lien: Personal property.--The United States was not required to make a levy prior to a bankruptcy action in order to perfect its secured interest in a delinquent taxpayer's personal property. State law requirements for perfection of interest are inapplicable to federal tax liens.

George T. Rita, Department of Justice, Washington , D.C. 20530 , for plaintiff. C. Kathryn Preston, Tampa , Fla. , for defendants.

ORDER

KOVACHERICH, District Judge:

This cause is before the Court on appeal from determination by the Bankruptcy Judge. 28 U.S.C. §158(a).

The legal issue on appeal is whether the Bankruptcy Judge erred, as a matter of law, in holding that tax liens of the United States do not attach to the Debtor's personal property upon assessment and filing of the notice of federal tax lien.

In this action, the United States filed a proof of claim. Thereafter, on objection, the Bankruptcy Judge determined that the filing of the notice of tax lien by the United States was not sufficient to attach to personal property.

Federal law governs the perfection of a federal tax lien. Pursuant to §6321 and 6322 of the 1954 Code, a federal tax lien arises and becomes perfected after an assessment has been made of the tax, notice of assessment has been given to the taxpayer, and demand has been made for its payment. At that time, the federal tax lien attaches to all of the taxpayer's property: real, personal, tangible, and intangible, including the taxpayer's after-acquired assets. The filing of the notice of lien validates the lien against certain security interests enumerated in §6323 . A levy has no relation to the perfection and priority to be given to the federal tax lien, but merely results in vesting constructive possession of the taxpayer's property in the United States . State law requirements for perfection do not apply to federal tax lien. Accordingly, it is

ORDERED that the Bankruptcy Judge's determination be remanded for clarification, this Court holding the Government established appropriate secured creditor status. The Clerk of this Court is directed to: enter judgment in accordance with this Order; dismiss this action; and forward a copy of this Order to the Bankruptcy Judge.

 

 

 

West Coast Credit Corporation, a corporation, Plaintiff v. Elmer E. Renfro and Valeria G. Renfro, his wife; United States of America; and Webb Tractor & Equipment Co., a corporation, Defendants

U. S. District Court, West. Dist. Wash. , No. Div., No. 4393, 167 FSupp 480, 7/25/58

[1954 Code Sec. 6321]

Lien of taxes: Foreclosure of chattel mortgage: Priority over mortgagees: Notice of liens filed while property removed from county.--A caterpillar tractor, the subject of this mortgage foreclosure action, had been taken out of the county in which the notice of tax liens was filed prior to the date of filing, January 31, 1956, and was returned to that county on May 10, 1956. The mortgagees received their chattel mortgages at a later date. The tax lien attached to the tractor on the date it was brought back to the county and is valid as against the mortgagees, even though the property was temporarily absent from the county at the time the notice of tax lien was filed.

Mifflin & Mifflin, 718 Jones Building, Seattle , Wash. , for plaintiff. Thomas R. Winter, Special Assistant to the Regional Counsel, 223 United States Courthouse, Seattle, Wash., for United States. Halverson, Applegate & McDonald, 418-421 Miller Building, Yakima, Wash., for Webb Tractor & Equipment Co.

Memorandum Decision

BOLDT, District Judge:

Plaintiff (hereafter referred to as WCCC) brought an action in the Superior Court of King County, Washington to foreclose a chattel mortgage on a D-7 caterpillar tractor. Defendants in the action were the mortgagors, Elmer E. Renfro and wife, and the United States of America . Cross-complainant Webb Tractor & Equipment Company (hereafter referred to as Webb) joined the action after it had been removed to this court by the United States .

At all times relevant to this case Renfro and wife were and now are permanent residents of and domiciled at Cle Elum in Kittitas County, Washington. On February 5, 1953 Webb sold the tractor in question to Renfro on a duly executed conditional sales contract filed with the auditor of Kittitas County on the same date.

On November 30 and December 23, 1955, federal withholding, FUTA and FICA taxes were assessed against Renfro. The taxes totalled $6,177.04 on January 31, 1956 on which date, pursuant to 26 U. S. C. 6323(a)(1), a notice of federal tax lien in said sum was filed in the office of the Kittitas County auditor.

From the time of its purchase in 1953 until the first of December, 1955 the mortgaged tractor was located at Cle Elum. About the latter date the tractor was taken out of Washington temporarily while Renfro engaged in logging for a short time at Pendleton , Oregon . During this period the government filed its notice of tax lien in Kittitas County . On May 1, 1956 the tractor was moved from Pendleton to Dayton, Washington and on May 10, 1956 again returned to Cle Elum where it remained until late November, 1956 when it was taken to Seattle in King County. On November 30, 1956 at Seattle , WCCC received the chattel mortgage from Renfro which plaintiff contends has precedence over the government tax lien. This mortgage was given as security for a loan to Renfro, WCCC refusing to make the loan unless Webb would cancel its rights under the conditional sales contract and accept a mortgage junior to that of WCCC. Both these mortgages were duly executed and filed in King County .

Both WCCC and Webb assert that their respective chattel mortgages should have priority over the government tax lien. They contend that as the lien notice was filed in the county of the taxpayer's residence and not in a county where the tractor was located at the time of filing, the provisions of R. C. W. 60.68.010 ¹ were not complied with and the lien may not be enforced against mortgages under 26 U. S. C. 6323(a)(1). ²

The evidence shows that the tractor was brought back into Kittitas County on May 10, 1956 , over six months prior to the date of the WCCC and Webb mortgages and while the previously filed lien notice was in effect. It is well settled that a federal tax lien attaches to any property of the taxpayer acquired after assessment of the tax. Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449]; Salsbury Motors, Inc. v. United States, 210 Fed. (2d) 171 (9 Cir. 1954) [54-1 USTC ¶9217]. In Citizens Nat. Trust & Savings Bank of Los Angeles v. United States , 135 Fed. (2d) 527 (9 Cir. 1943) [43-1 USTC ¶9426] a government tax lien filed in 1931 was held enforceable and entitled to priority over the 1938 lien of a judgment creditor as to property the taxpayer acquired in 1938; accord, Nelson v. United States, 139 Fed. (2d) 162 (9 Cir. 1943) [43-2 USTC ¶9648] cert. den. 322 U. S. 764. This principle of federal law is cited and applied in numerous other cases. In view thereof 26 U. S. C. 6323(a)(1) should not be interpreted so as to bar enforcement of a tax lien on tangible personal property of the taxpayer brought in to the taxpayer's residence county where a lien notice is of record and in effect, even though the property was temporarily absent from such county at the time the lien was filed. Since the tax lien became enforceable as to subsequent mortgages when the tractor returned to Kittitas County on May 10, 1956 , it is unnecessary to consider whether the lien was effective at the time of its filing on January 31, 1956 . The priority of the lien was not affected by the later removal of the property from Kittitas County to King County . Grand Prairie State Bank v. United States , 206 Fed. (2d) 217 (5 Cir. 1953) [53-2 USTC ¶9481]; c. f. Mayer v. Andrew [53-2 USTC ¶9548], par. 72,704 P. H. Fed. Tax Serv. 1953, 45 AFTR 1239.

The contentions of WCCC and Webb as to subrogation, the two-funds theory of marshaling, reinstatement of the conditional sales contract, and estoppel against the United States have been examined and found to be without merit.

Findings, conclusions and judgment in conformance herewith may be presented at the convenience of counsel.

¹ "60.68.010 Notice of lien and of discharge may be filed. Notices of liens for internal revenue taxes payable to the United States and certificates discharging the liens may be filed in the office of the county auditor of any county or counties in which the property subject to the lien is situated."

² "(a) Invalidity of lien without notice.--. . . the [tax] lien . . . shall not be valid as against any mortgagee, . . . or judgment creditor until notice thereof has been filed . . .

(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory . . . has by law designated an office within the State or Territory for the filing of such notice; . . ."

 

 

 

Calvin & Company, Plaintiff and Appellant v. The United States of America , Intervenor and Respondent

State of Calif., Court of Appeals, Civ. No. 23801, 8/1/68, (70 Cal. Rptr. 578)

[1954 Code Sec. 6321]

Lien for taxes: Property subject to lien: Borrowed funds: California law.--Under California law, money borrowed by the delinquent taxpayer from his wife and a bank for use as a cash bond to release an attachment belonged to him rather than the lenders. Accordingly, the money was subject to the Government's tax lien.

Raymond H. Levy, 211 Sutter, San Francisco , Calif. , for plaintiff and appellant. Cecil F. Poole, United States Attorney, Richard L. Carico, Assistant United States Attorney, San Francisco, Calif., Mitchell Rogovin, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, for intervenor and respondent.

BROWN (H. C.), Judge:

This is an appeal from a judgment following the granting of a motion for summary judgment to the United States as intervenor in the San Francisco Superior Court action entitled "Calvin & Company, a California corporation, plaintiff v. Joseph Slavin, et al., defendant."

[1] The only question presented by this appeal is whether there was a triable issue of fact concerning Joseph Slavin's ownership of $7,575 which he borrowed and deposited as a cash bond to release appellant's attachment.

Calvin & Company claims that the $7,575 should remain under its attachment. Calvin & Company argues that this money, having been loaned to Slavin for the sole and exclusive purpose of being used as a deposit with the sheriff to release the attachment, did not become Slavin's property and, therefore, was not subject to the tax lien of the United States.

The parties are in agreement as to the facts.

The District Director of Internal Revenue at San Francisco made two assessments against Joseph Slavin and Francis Martin for employment and withholding taxes, penalties and interest, the first on November 3, 1964 in the sum of $7,004.86 and the second in February of 1965 in the sum of $5,849.36. No payment was made on either assessment, and notices of federal tax liens were filed with the Alameda County Recorder in January and March of 1965. (See Gov. Code, §27330.)

On December 23, 1964, Calvin & Company filed a complaint seeking to recover $13,010 with interest from Joseph Slavin and others and thereafter proceeded to have the Sheriff of Alameda County attach certain money credits and debts due and owing to Joseph Slavin. These attachments were released on January 6, 1965, when Slavin posted with the sheriff a cash bond in the amount of $7,575, as permitted by section 540 of the California Code of Civil Procedure.

Slavin obtained the money used as a cash bond by borrowing $2,600 from the Bank of Fremont. His wife loaned him $4,825 from her separate assets and Slavin advanced $75 from his personal cash to comprise the total of $7,575. Both the Bank of Fremont and Mrs. Slavin were informed that the money was to be used to release the attachment in the Calvin & Company v. Slavin lawsuit.

The United States filed and served a complaint in intervention in the action brought by Calvin & Company against Joseph Slavin on October 11, 1965, seeking a personal judgment against Slavin for the taxes, penalties and interest which had been assessed against him and for a judgment foreclosing the tax lien against the cash bond of $7,575, which had been posted to release the attachment. Calvin & Company answered denying that the bond had been posted with money belonging to Joseph Slavin, as set forth in the United States complaint in intervention. Thereafter the trial court made its order granting the motion, and a judgment based on the order was entered in favor of the United States and against appellant and Joseph Slavin. The judgment provided that "any rights or claims that Plaintiff CALVIN & COMPANY may have against the property and rights to property of Defendant JOSEPH SLAVIN are subject to and inferior to the tax liens of the Intervenor UNITED STATES OF AMERICA for the third and fourth quarters of 1964 against said Defendant . . ."

This appeal followed.

The Internal Revenue Code of 1954, section 6321, provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." (26 U. S. C. 1964 ed.) §6321.)

Section 6322 states: "Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." (26 U. S. C. (1964 ed.) §6322.)

The amount of any unpaid tax, together with interest, penalties and other additions thereto generally constitutes a lien on all property and rights to property, whether real or personal, belonging to the taxpayer. (Internal Rev. Code of 1954, §6321.) The lien arises on the date of assessment and continues until the liability secured thereby is satisfied or becomes unenforceable by reason of lapse of time, usually six years if there is no collection activity. (Internal Rev. Code of 1954, §§ 6322, 6502). The lien attaches automatically to all property and rights to property acquired by the taxpayers during the life of the lien as well as to property and rights to property which belonged to the taxpayers at the date of assessment. (Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 [90 L. Ed. 56, 66 S. Ct. 108].)

The tax lien which arises on the date of the assessment is superior to any subsequently arising claim, including the claim of a bona fide purchaser, in the absence of a federal statute requiring filing or recordation. ( United States v. Snyder, 149 U. S. 210 [37 L. Ed. 705, 13 S. Ct. 846].)

Internal Revenue Code of 1954, section 6323, has provided for certain exceptions applying to purchasers, judgment lien creditors and others until a notice is filed, at designated offices. (In California notice is filed with the county recorder.) (See Gov. Code, §27330.) The appellant does not come within the exceptions set forth in section 6323.

An "inchoate" claim such as appellant's attachment lien does not take precedence over an unfiled tax lien. If a notice of tax lien is filed before an "inchoate" claimant perfects his status as a purchaser, judgment lien creditor or other person protected by section 6323, the tax lien has priority. (United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 [99 L. Ed. 264, 75 S. Ct. 239]; United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U. S. 47 [95 L. Ed. 63, 71 S. Ct. 111].)

The assessments for tax penalties and interest in the sum of $7,004.68 was therefore a lien on all property owned by Slavin as of November 3, 1964, or thereafter acquired by him, and the assessment for taxes, penalties and interest in the sum of $5,849.36 was a lien on all the property owned by Slavin as of February 26, 1965, or thereafter acquired by him. The intervention by the United States here was well within the six-year period prescribed by section 6502. (26 U. S. C. (1964 ed.) §6502.)

Calvin & Company contends, however, that the money used for the cash bond was loaned by Mrs. Slavin and the Bank of Fremont for the sole purpose of releasing the attachment and was not the property of Slavin, and therefore not subject to the tax lien. The California Civil Code distinguishes between a loan for use (Civ. Code, §1884) and a loan of money (Civ. Code, §1912). A loan for use is a contract by which one person gives to another the temporary possession and use of personal property, and the latter agrees to return the same property at a future time (Civ. Code, §1884) while "[a] loan of money is a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed . . ." (Civ. Code, §1912.)

The court in Peoples Nat. Bank v. Southern Surety Co., 105 Cal. App. 731 [288 P. 827], considered the question whether there is a loan for use when the lender is informed of the use to be made of the loan proceeds and a loan in which the lender is not so informed. "While there is considerable refinement in the arguments of counsel concerning the nature of this transaction, we think there is no escape from the conclusion that the money advanced to the contractor, irrespective of the purpose for which it was advanced, constituted essentially a loan, to the amount of the money advanced, and that the relationship of cerditor and debtor between the bank and the contractor was thereby created. The fact that the money was advanced for a particular purpose, as alleged in the amended complaint, does not change the legal character of the act, or affect in any particular, the legal relation between the bank and the contractor effected thereby. A loan does not become any less a loan because the borrower names the purpose for which he desires the money, or the loaning party advances the money to be used by the borrower, for a specified purpose. It is a loan, and simply a loan, and takes on no additional character nor is the loan clothed with any additional sanctity simply because the parties thereto are agreed as to the purpose for which the money loaned is to be used." (At pp. 732-733.)

It is recognized that Slavin could have obtained the release of the attachment by the posting of a surety bond or by the qualification of personal sureties. The surety bond or the sureties would not have created a property right in Slavin which would be subject to the United States tax lien. A surety bond and the obligation of sureties differ in that the obligation there is contractual and conditioned upon the plaintiff or obligee obtaining a final court judgment. Here the transaction was merely a loan of money to Slavin which, upon coming into his possession or posted by him as a bond, became subject to the United States tax lien.

It is concluded the claim which formed the basis for Calvin & Company's attachment of Slavin's property had not been reduced to judgment, was an inchoate unliquidated claim, and was subject to and inferior to the United States tax lien. (See Glagau v. Hagan, 103 Cal. App. 2d 828 [230 P. 2d 392].)

Respondent, the United States , requests that this court modify the judgment of the trial court to conform to the trial court's ruling, which, while omitting to mention specifically that the summary judgment referred to the cash bond of $7,575, unquestionably intended to do so. It is clear that the question presented to the trial court for decision was whether the $7,575 cash bond posted to release the attachment was the property of Joseph Slavin. Respondent's request for modification is therefore granted.

The trial court is directed to modify the judgment to provide that the right and claim of Calvin & Company to the $7,575 cash placed as a bond to release the attachment is subject to and inferior to the tax liens of the intervener, United States of America .

The judgment as so modified is affirmed.

DRAPER, P. J., and SALSMAN, Judges, concurred.

 

 

 

In the matter of William E. Moody, individually and trading as Edward S. Moody & Son, Bankrupt

In the United States District Court for the Eastern District of Pennsylvania, In Bankruptcy. Cause No. 24017, July 1, 1955

[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]

Liens for unpaid tax: Priority over chattel mortgage.--Taxpayer William E. Moody, individually and trading as Edward S. Moody & Son was adjudicated bankrupt on February 23, 1954 . After the sale of his personal property, the sum of $2,078.85 was available for distribution. The referee allowed the claim of J. G. Braun, a creditor, in full, and ordered that the balance be paid to the United States on tax liens for which notices had been properly filed. Two creditors of taxpayer filed a petition for review, claiming priority over the United States ' claim for taxes. The holder of a chattel mortgage was denied priority since under the Pennsylvania Chattel Mortgage Act, his chattel mortgage lien was good for only five years from date of filing, unless extended. Accordingly, his lien, which was filed on September 27, 1948 , expired on September 27, 1953 and was no longer valid.

[1939 Code Secs. 3670 and 3672--substantially unchanged in 1954 Code Secs. 6321 and 6323, respectively]The landlord's claim for rent for property occupied by the taxpayer was based on a distraint issued on taxpayer's personal property on February 1, 1954, whereas, the notice of tax liens had been filed on three dates in 1952. The Court denied the landlord's claim for priority based on the contention that because taxpayer was a bailee under a bailment lease, his interest was of a nature which could not be reached by a tax lien. The Court was of the opinion that a bailee under a bailment lease has a property interest which can be subjected to a lien for federal taxes, under 1939 Code Sec. 3670, and held that the United States ' lien did attach and was superior to the lien created by the landlord when he made a distraint for rent.

Samuel Marx, Philadelphia , Pa. , for trustee. Holl, Taylor & Holl, Media , Pa. , for landlords. Butler , Beatty, Greer & Johnson, Media , Pa. , for chattel mortgagee. Thomas J. Curtin, Philadelphia , Pa. , is the referee in bankruptcy.

Opinion

[Facts]

GRIM, District Judge:

William E. Moody, individually and trading as Edward S. Moody & Son, was adjudicated a bankrupt by this court on February 23, 1954. The Referee permitted the trustee to sell the bankrupt's personal property, the various lien claimants being relegated to the fund realized from the sale.

At the time of the adjudication, Moody had creditors who had claims against his personal property as follows:

1. J. G. Braun, who was the holder of a valid bailment lease on which a balance of $295.13 was due.

2. United States Government, which filed a claim for taxes totalling $5,077.44. Notice of its tax liens had been filed in the office of the Prothonotary of Delaware County, Pennsylvania, by the United States as follows:

June 5, 1952, #2674 in sum of .....          $ 865.72

July 18, 1952, #2707 in sum of ....            518.52

Oct. 31, 1952, #2801 in sum of ....            696.70

                                            $2,080.94

 

3. J. Earle Suter and Ada W. Suter, who had claims for rent for the property in Media, Delaware County, Pennsylvania, which had been occupied by the bankrupt. The rent covered the period from May 1, 1952, to February 1, 1954, and totalled $700. A distraint was issued on Moody's personal property on February 1, 1954.

4. First National Bank of Delaware County , which held a chattel mortgage against Moody's personal property which had been recorded in Delaware County , Pennsylvania , on September 27, 1948.

[Priority of Liens]

The sum of $2,078.85 is available for distribution as a result of the sale of the personal property after the payment of administration expenses. The Referee has entered an order of distribution allowing J. G. Braun's claim on the bailment lease in full. No one contests this. He has ordered that the balance of the fund available for distribution, after payment to the bailment lessor, be paid to the United States on its tax liens as to which notices had been filed with the Prothonotary of Delaware County. The holder of the chattel mortgage and the landlord have filed petitions for review.

The holder of the chattel mortgage contends that its claim should be given priority over the claim of the United States for taxes, and the landlord contends that its claim for rent should be given priority over the claim of the United States .

[ Pennsylvania Law]

The Pennsylvania Chattel Mortgage Act of June 1, 1945, P. L. 1358, 21 P. S. Sec. 940.1 provides:

"Any chattel mortgage executed pursuant to this act shall be a lien upon the property therein described, which lien shall be good and valid against and superior to all rights of subsequent purchasers . . . other lienors and encumbrances, and all persons dealing with the mortgaged property or subsequently acquiring an interest therein from the time of filing of the mortgage . . ."

It also provides that:

". . . as to third parties [it] shall not remain a lien for a longer period than five (5) years, unless the lien thereof is extended by filing, prior to the expiration of the said lien, with the prothonotary an affidavit of the mortgagee or his assignee stating the amount then secured by the mortgage in which case the said mortgage shall remain a lien for an additional period of five (5) years from the date of the filing of such affidavit . . ."

[Chattel Mortgagee's Lien]

The chattel mortgage against Moody's property was filed on September 27, 1948 . At no time within five years thereafter and indeed never has anything been done by the mortgagee to extend the lien of the mortgage beyond September 27, 1953 . The Referee was correct in deciding that the lien of the chattel mortgage expired on September 27, 1953 . The First National Bank of Delaware County had no lien against the personal property at the time of the adjudication or the sale and is not entitled to participate in the distribution of the fund.

[Landlord's Lien]

The landlord admits that if Moody had been the owner rather than the bailee of the personal property in his possession the claim of the United States for taxes would be given a preference over the landlord's claim under United States v. Scovil, 348 U. S. 218 (1955) [55-1 USTC ¶9137] and In Re Litt, 128 Fed. Supp. 34 (E. D. Pa. 1955) [55-1 USTC ¶9187]. But the landlord contends that because Moody was a bailee under a bailment lease rather than an owner the lien for taxes could not attach to his personal property.

[Referee Sustained]

The Act of Congress provides (26 U. S. C. Sec. 3670) that tax liens shall attach "upon all property and rights to property, whether real or personal" belonging to the taxpayer. The bailee in a bailment lease has a property interest which can be levied upon. Packard Motor Car Co. v. Mazer, 77 Pa. Sup. Ct. 348. In my opinion a bailee under a bailment lease has a property interest which also can be subjected to a lien for federal taxes. The Referee was correct in deciding that the liens of the United States could and did attach to the interest of the bailment lessee in the personal property and that these liens were superior to the lien created by the landlord when he made a distraint for rent.

The balance due on the bailment lease and the claim of the United States for taxes took all the proceeds of the sale. The Referee was correct in denying the claim of the holder of the chattel mortgage and the claim of the landlord.

The order of the Referee will be affirmed.