Unperfected interests Page5

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The Federal tax liens here involved arose under Sections 6321 and 6322 of the Internal Code of 1954, 26 U. S. C. A. §§ 6321, 6322. In pertinent part, Section 6321 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." (Italics supplied.) Although there has been extensive discussion, both in the briefs and at oral argument, concerning the priority of liens, it is clear beyond doubt that we must first consider whether or not Infante had any property or rights to property upon which a lien for Federal taxes could attach. As Justice Brennan indicated in determining whether a deceased had property rights in a life insurance policy to which a lien could attach:

"We must now decide whether Mr. Bess possessed in his lifetime, within the meaning of §3670 [now 26 U. S. C. §6321], any 'property' or 'rights to property' in the insurance policies to which the perfected lien * * * might attach. Since §3670 creates no property rights but merely attaches consequences, federally defined, to rights created under state law, Fidelity & Deposit Co. v. New York City Housing Authority, 241 F. 2d 142, 144 [57-1 USTC ¶9410], we must look first to Mr. Bess' right in the policies as defined by state law." United States v. Bess, 357 U. S. 51, 55 (1958) [58-2 USTC ¶9595].

The district court made no separate findings but rather incorporated them in its opinion. It concluded upon ample evidence, aside from Infante's admission, that there had been a default upon the contract. Our independent examination of the record compels the same conclusion.

[Taxpayer's Rights in Property]

By the terms and conditions of its contract with the Board, Infante became entitled to receive payments thereunder only if (a) the work had been completed to the satisfaction of the architect, (b) there were no outstanding claims against Infante filed with the Board, and (c) satisfactory evidence had been submitted to the Board that all obligations incurred by Infante and its subcontractors in carrying out the project had been satisfied. As of the date the Federal lien is alleged to have arisen, Infante was not entitled to receive any money from the Board under the terms of the contract, for Infante owed subcontractors and materialmen for services and materials furnished on the job amounts in excess of the sum retained by the Board; $118,316.91 had been withheld, and the outstanding obligations of Infante amounted to $211,000.

We must now determine under New Jersey law how Infante's interest in the contract was affected by this default. The common law of New Jersey is quite clear on this point. This court had occasion to consider it in Karno-Smith Co. v. Maloney, 112 F. 2d 690 (C. A. 3, 1940) [40-2 USTC ¶9533]. Citing Nutz v. Murray-Nutz, Inc., 109 N. J. Eq. 95, 156 Atl. 668 (1931), Judge Maris stated at page 692 that

"* * * an insolvent subcontractor cannot recover an amount ostensibly due him from the contractor when the latter is in fact obligated under his statutory bond for more than that amount to one of the materialmen of the subcontractor. * * * The right of set-off thus recognized by New Jersey law was available to the plaintiff [contractor] in this case and by reason of its existence the Supply Company [subcontractor] had no enforceable right to property in the plaintiff's hands which was subject to attachment or distraint at the instance of the Supply Company's creditor, the collector [of internal revenue]." (Italics supplied.)

In like vein in Damato v. Leone Construction Co., 41 N. J. Super. 366 (App. Div. 1956), 125 A. 2d 302 [56-2 USTC ¶9944], it was held that where a construction company had not substantially performed it had no property rights in the balance of the contract price to which the United States tax liens against it could attach. Citing R. Krevolin & Co. v. Brown, 20 N. J. Super. 85 (App. Div. 1952), 89 A. 2d 255, the court stated that in New Jersey partial performance of an entire and indivisible contract by one of the parties does not generally entitle it to performance of the contract by the other party nor warrant a partial recovery of the consideration unless the performance was substantial. ³

In the present case, where on a $1,367,460 contract $548,061.69 was expended to complete the contract following default, it is abundantly clear that there had not been a substantial performance of the contract. Infante, therefore, had no property or right to property in the fund in question. ⁴ Since the government's rights under Sections 6321 and 6322 can rise no higher than the rights of the taxpayer, there was nothing of Infante's to be levied upon.

The judgment will be affirmed.

¹ The district court found that Surety completed the contract with the facilities of Infante. One of the contentions of the government is that Infante completed the contract, merely obtaining financial aid from Surety. However, the record clearly supports the district court's finding. In effect, Infante in performing this work was a mere agent of Surety. Surety, following Infante's default, was at liberty to choose whomsoever it pleased to complete the contract.

² Pursuant to N. J. S. A. 2A:44-141 and the district court's order dated August 27, 1957, the Board paid into the registry of the district court on October 28, 1957, the sum of $185,572.58, constituting the balance owed by the Board under the contract. Subsequently, pursuant to a consent order of the court, dated November 7, 1957 , Surety was paid $86,455.39 out of the fund.

³ It should be noted that this principle is recognized generally, for in 3 Williston, Contracts (rev. ed.) §805, p. 2262, it is stated:

"Where the rule of substantial performance prevails it is essential that the plaintiff's default should not have been willful; and the defects must not be so serious as to deprive the property of its value for the intended use nor so pervade the whole work that a deduction in damages will not be fair compensation."

⁴ Even where there has not been a substantial default, the New Jersey statutes give public agencies the right to pay directly any unpaid materialmen, mechanics, or laborers without an order of court. Having done so, the agency is entitled to credit upon the contract for the amount so paid and is not obliged to pay the same to the contractor. N. J. S. A. 2A:44-136.

 

 

 

United States of America , Plaintiff-Appellee, v. The Warren Railroad Company, Defendant, and The Delaware, Lackawanna and Western Railroad Company, Defendant-Appellant United States of America, Plaintiff-Appellee, v. Syracuse, Binghamton & New York Railroad Company, Defendant, and The Delaware, Lackawanna and Western Railroad Company, Defendant-Appellant United States of America, Plaintiff-Appellee, v. The Passaic and Delaware Railroad Company, Defendant, and The Delaware , Lackawanna and Western Railroad Company, Defendant-Appellant

(CA-2), United States Circuit Court of Appeals for the Second Circuit, Nos. 138, 139, 140. October Term, 1941, 127 F2d 134, Argued January 13, 1942 . Decided April 2, 1942

Appeals from the United States District Court for the Southern District of New York.

Property subject to lien: Rentals of lessor taxpayer.--Where the covenants of the lessee to pay the taxes for the lessors were insufficient to cover the payment of income taxes, the United States can have no claim as a third party beneficiary and can have no lien on any right of the lessors to require the lessee to pay their income taxes. Therefore, where the lessors are indebted to the United States for taxes and where the rentals, under the leases, are payable directly to the stockholders of the lessors and yet are substantially the only source from which the indebtedness may be satisfied, the Court holds that the lessee should be enjoined from paying over to the stockholders any rentals accruing under the leases until the income taxes due from the lessors shall be paid and until the collector shall have an opportunity to levy on the rentals. Reversing District Court decision reported at 41-1 USTC ¶9466, 39 Fed. Supp. 135.

Austin J. McMahon and Douglas Swift, Attorneys for Delaware , Lackawanna and Western Railroad, Defendant-Appellant; Chauncey H. Hand, Jr., Counsel. Mathias F. Correa, U. S. Attorney, for U. S. of America , Plaintiff-Appellee; Myles J. Lane , Assistant U. S. Attorney, Counsel.

Before SWAN, AUGUSTUS N. HAND and FRANK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge:

The above three cases are before us on separate appeals by the defendant, The Delaware, Lackawanna and Western Railroad Company, which have been taken from separate judgments in favor of the United States of America and against both defendants in each case for the amount of certain income taxes due from The Warren Railroad Company for the years 1934 and 1935, from The Passaic and Delaware Railroad Company for the years 1934 and 1935, and from the Syracuse, Binghamton & New York Railroad Company for the years 1933, 1934 and 1935. The District Court granted judgments for the plaintiff against The Delaware, Lackawanna & Western Railroad in each case on the theory that it assumed the obligation of its lessors, namely, The Warren Railroad Company, Syracuse, Binghamton & New York Railroad Company and The Passaic and Delaware Railroad Company to pay the income taxes assessed upon those companies for the several years in question. Judgments against the lessors were granted by default.

[Interpretation of Covenants in Leases]

Perhaps the reasoning of the District Court might be a sufficient basis for upholding the judgments, if the interpretation of the clauses in the leases which provide for payment by the Delaware , Lackawanna and Western Railroad of the lessors' taxes were to be regarded as an entirely new and unsettled problem. But the decisions of the New York and of other courts preclude such an interpretation.

The contractual rights and obligations created by the leases are determined by the law of the place where the engagements were entered into which was the State of New York , Beale Conflict of Laws, Vol. II, §340.1; Restatement Conflict of Laws §341; In re Barnett, 12 F. (2d) 73 (C. C. A. 2). It has been universally held both by the courts of New York and other states that a covenant by a lessee to pay the income taxes of the lessor is not within the terms of the contracts unless the obligation is clearly and directly specified. The pertinent provisions and the tax covenants in the leases to the Delaware , Lackawanna and Western Railroad of the three railroads are set forth below in notes 1, 2 and 3. ^*

In the Warren lease, article "Fifth" only provides for payment of taxes "imposed upon the premises and property * * * or upon any part or parcel thereof." It does not cover taxes upon the income. In Brainard v. New York Central R. R. Co. , 242 N. Y. 125, the court said that: "Unless the lease expressly provides for the payment of taxes on the income from rentals received under the lease, the imposition of such a burden on the lessee is not justified." Accordingly the Court of Appeals of New York there held that income taxes were not covered by a clause providing that the lessee pay all taxes which might become chargeable on the lessor railroad on its "road or property by reason of its ownership thereof." The government contends that the provisions in Article "Tenth" that the lessee pay all claims against the lessor so that the stockholders shall receive the prescribed rate of interest upon their stock "without any abatement" necessarily covers income taxes but the clause in terms does no more than require payment to the stockholders of their net rentals after paying expenses and taxes on the leased property and does not include such taxes as may be imposed on them as recipients of income unless the imposition is indubitably clear or unless such income taxes are to be withheld by the lessee. Catawissa R. R. Co. v. Philadelphia & R. Ry. Co., 255 Pa. 269; Park Building Co. v. George P. Yost Fur Co., 208 Mich. 349; Young v. Illinois Athletic Club, 310 Ill. 75. The covenant in Article "Tenth" to pay all claims "for or on account of any matter or thing connected with or relating to the said railroad" fails to cover income taxes which would not relate to the railroad but to its earnings. Woodruff v. Oswego Starch Factory, 177 N. Y. 23; Boston & Maine R. R. v. Peterborough R. R., 86 N. H. 217.

The covenants in the Passaic and Syracuse leases likewise seem insufficient to cover income taxes. It is true that the covenants are somewhat broader than in the Warren lease. Taxes "on the business" are not on income of any sort and the railroad business referred to is not that of the lessor but of the lessee which is alone running the railroad business on its own account. Rensselaer & Saratoga R. R. Co. v. Delaware & Hudson Co., 168 App. Div. 699, aff'd 217 N. Y. 692; Boston & Providence R. R. v. Old Colony R. R. Co., 269 Mass. 190; Catawissa R. R. Co. v. Philadelphia & R. Ry., 255 Pa. 269. Taxes on the "income or profits of the business" on first impression may seem to come within the category of income taxes, but again, these taxes are not on the income of the business of the lessors who are not conducting the business, but on that of the lessee who runs the railroads. McCoach v. Minehill Ry. Co., 228 U. S. 295, 305.

The further clause of the Passaic and Syracuse leases in which the lessee covenants to pay all taxes on the lessors "as a corporation, or on any of its rights, privileges or franchises" also does not cover income taxes. Income taxes are not imposed upon the lessors because they are corporations. The clause was intended to cover "franchise taxes." Boston & Maine R. R. v. Wilton R. R. Co., 87 N. H. 46. In other words, it was inserted for the purpose of rendering the lessee liable to pay the lessors' excise tax to do business as a corporation and any special excise taxes. Flint v. Stone Tracy Co., 220 U. S. 107.

In our opinion an overwhelming weight of pertinent decisions precludes us from holding that the covenants in any of the three leases embrace the income taxes which the United States seeks to recover. A persuasive fact in support of this conclusion is that all the leases were drawn at a time when there were no income taxes and only in case of the Syracuse lease were such taxes even in prospect. Because there was no agreement between the primary parties to pay the income taxes the government can have no claim as a third party beneficiary and, for the same reason, can have no lien on any right of the lessors to require the lessee to pay their income taxes.

[Lien on Rentals]

Finally, the government seeks to sustain the judgments upon the theory that it has a lien on the rentals accruing under the leases. It can, however, have no right under any theory beyond that of the lessors themselves. In United States v. Western Union Telegraph, 50 F. (2d) 102 [2 USTC ¶754], we said rentals could not be reached because there could be no levy on intangible rights. But since that decision was rendered we have held that the indebtedness of a third party to a taxpayer is subject to distraint and upon demand must be surrendered to the collector by virtue of §3710, Title 26, U. S. Code. United States v. Long Island Drug Co., 115 F. (2d) 983 [41-1 USTC ¶9140]. The fact that by the terms of the leases the rentals are to be paid to the shareholders, rather than to the corporate lessors, can make no difference in the result. The rights of the shareholders are derivative and the income is that of the corporation and can only be paid to them by its authority. Here the income was at all times that of the lessor, though under its contract it was directly distributable to the latter's shareholders. Consequently the lessor was subject to liability for all income taxes upon rentals which had accrued. This is made clear in the recent opinion of the Supreme Court in United States v. Joliet & Chicago R. R. Co., decided January 19, 1942 [42-1 USTC ¶9222]. Our decision in Gold & Stock Telegraph Co. v. Commissioner, 83 F. (2d) 465 [36-1 USTC ¶9284], was to the same effect.

The difficulty with levying upon the rentals prior to their due date is because of the common law rule that a creditor cannot levy upon rent until it becomes payable. But diversion of this rent, which is the only asset from which the income taxes can readily be satisfied, is threatened. To divert it manifestly hinders and delays creditors of the lessors and is a wrong against which a court of equity may relieve them either through an original suit or by so amending the judgment in the present suit as to provide that the Delaware, Lackawanna and Western Railroad be enjoined from paying over to the shareholders any rentals accruing under the leases until the income taxes due from the various lessors shall be paid and the collector shall have an opportunity to make a levy on the rentals.

[Decision]

The amended complaints in the above actions set forth claims of two varieties, the first to recover on the covenants which we have discussed and determined to be insufficient to include income taxes, and the second to recover because of failure to respond to the notice and demand served by the collector of internal revenue upon the lessee railroad.

The sections of the Internal Revenue Code describing the property subject to lien, distraint and levy and also the liability for failure to surrender property levied upon are §§ 3670, 3690, 3692 and 3710 which are set forth below. ¹

The District Court entered judgments against the lessors and the lessee in all three actions, both on the theory that the government was a third party beneficiary and also on the theory that, having a lien (superior to the rights of stockholders) upon such property of the lessors as was levied on by the collector, the lessee failed to surrender the same after notice and demand. The former theory cannot be sustained for the reasons we have given, the latter is erroneous so far as it involves the direction of a personal judgment against the lessee for the amount of any taxes in excess of that for which a levy has been made, but is sound so far as it involves rentals payable and levied upon prior to entry of judgment. We cannot discover that at the time when the levies were attempted any rentals were due and payable, or that the lessee was in possession of any property of the lessors at the time the notices of lien and levy were served. Accordingly the judgments that the lessee, Delaware, Lackawanna & Western Railroad Company, pay the amount of income taxes, interest and costs as a personal obligation are improper and should be reversed and the cases remanded to the District Court in order that the United States may file a supplemental petition for a judgment in each action providing: (1) that the lessee be enjoined from making further payments to the stockholders of the lessors out of any rentals now or hereafter payable until the United States shall, from time to time, have an opportunity to levy thereon so that the income taxes and interest may be satisfied; (2) that the lessee pay to the collector the amount of rentals levied upon, from time to time, which may be necessary to satisfy the income tax obligations.

Notice of hearing upon the petition shall be given in each action to both the lessor and the lessee. While under Rule 54 it might be sufficient for us merely to direct amendment of the judgments as respects the lessee, it is perhaps better practice to afford lessors and lessee a hearing in the District Court as to the judgments and injunctions proposed. Notice is to be given to the lessors ex abundante cautela. Inasmuch as the rights of the stockholders of the lessors are for tax purposes purely derivative, notice of the hearing need not be given to them and, as the lessors have taken no appeal, the judgments against them should stand.

The above procedure is the counterpart of a judgment creditor's suit in which it is not required that execution be issued and returned unsatisfied. This is because the indebtedness of the judgment debtor is beyond question and the rentals are substantially the only source from which the taxes may be satisfied. Hatch v. Morosco Holding Co., 50 F. (2d) 138, 140 [2 USTC ¶739]. See also Federal Rule 18(b). The appointment of a receiver would only entail expense and delay. An injunction is sufficient to remove any barrier to a levy and to enable the collector to reach the rentals as they accrue.

The judgments against the defendant Delaware, Lackawanna & Western Railroad Company are reversed and the causes are remanded to the District Court with directions to proceed in accordance with this opinion.

^* 1. In the Warren Railroad lease under date of October 1, 1857, it was provided that the lessee, Delaware, Lackawanna and Western Railroad, should pay directly to the stockholders of the lessor as rent 51/4% of the par value of their shares and should also make the following payments:

"Fifth. That they will from time to time and at all times during the continuance of this indenture, pay and discharge all taxes, assessments and impositions which shall or may be legally taxed, assessed or imposed upon the premises and property hereinbefore leased, granted and demised, or upon any part or parcel thereof whenever the same shall become due and payable.

* * * * * * *

"Tenth. That they will * * * pay and discharge all legal claims and demands which now may exist or hereafter accrue against the said Warren Rail Road Company, for or on account of any matter or thing connected with or relating to the said railroad, and all costs, counsel fees, and expenses thereto legitimately appertaining; so that the stockholders shall, in accordance with what is intended to be the true intent and meaning of this indenture, receive upon their stock the rate of interest hereinbefore stipulated, without any abatement or deduction whatsoever."

2. The lease of the Passaic and Delaware Railroad dated November 1, 1882, contained a provision for payment of the rent directly to the shareholders at the rate of 5% per annum on the par value of the stock, and in addition there was the following tax covenant:

"And that the said party of the second part will, during the enjoyment of the demised property and estate under this lease, pay and discharge all taxes and assessments which are or may be imposed, levied or assessed on any of the property hereby granted, leased or demised, or intended so to be, or on the business, or any of the business done on or with said property, or on the income or profits of the said business, or on the said party of the first part as a corporation, or on any of its rights, privileges or franchises by the United States, or any state, county, township, municipal or other authority having legal authority to impose, assess, levy and collect taxes, imposts or duties."

3. The lease of the Syracuse , Binghamton & New York Railroad dated October 1, 1912, contained a provision for payment of rental directly to the stockholders at the rate of 12% per annum on the par value of the stock. It also contained the following tax covenant:

"And that the said party of the second part will, during the enjoyment of the demised property and estate under this lease, pay and discharge all taxes and assessments which are or may be imposed, levied or assessed on any of the property hereby granted, leased or demised, or intended so to be, or on the business, or any of the business done on or with said property, or on the income or profits of the said business, or on the said party of the first part as a corporation, or on any of its rights, privileges or franchises, by the United States, or any state, county, township, municipal or other authority, having legal authority to impose, assess, levy and collect taxes, imposts or duties."

¹ §3670. PROPERTY SUBJECT TO LIEN

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. (53 Stat. 448.)

§3690. AUTHORITY TO DISTRAIN

If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with such interest and other additional amounts as are required by law, by distraint and sale, in the manner provided in this subchapter, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid. (53 Stat. 451.)

§3692. LEVY

In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs and expenses of such levy. (53 Stat. 452.)

§3710. SURRENDER OF PROPERTY SUBJECT TO DISTRAINT

(a) REQUIREMENT. Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is at the time of such demand, subject to an attachment or execution under any judicial process.

(b) PENALTY FOR VIOLATION. Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy.

(c) PERSON DEFINED. The term "person" as used in this section includes an officer or employee of a corporation or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs. (53 Stat. 456.)

 

 

 

Harvey E. Crapper and Leila S. Crapper, Plaintiffs v. Berliner's Inc., George Stadelman and Wilbur Stadelman, Wasco County, Oregon Radio KACI, Inc., The United States of America through its Director of the Internal Revenue Service, Pacific Power and Light Co., State of Oregon through its State Industrial Accident Commission, Radio KCIV FM, Inc., Bailey, Clark & Byers, Vacationers Guide, Inc., and Ruth Lugene Parrish, Defendants

Circuit Court of the State of Ore., County of Wasco, No. 12692, 9/28/72

[Code Sec. 6323]

Tax liens: Property subject to: Interpleader suit: Effect of.--Priority to money owed the debtor was determined as of the date this interpleader suit was filed and the money paid into court, and four creditors were found entitled to priority over a tax lien filed subsequent to that date. Since the money was never in the debtor's possession or control, it was not subject to the lien.

Parker & Abraham, 205 3rd St. , Hood River , Ore. , for plaintiffs. Vinita Jo Neal, Assistant United States Attorney, Portland, Ore., Joseph Wetzel, Office of Regional Counsel, Internal Revenue Service, 810 Crown Plaza, 1500 S. W. First Ave., Portland, Ore., Dock & Dick, 5th & Washington St., The Dalles, Ore., Delbert Remington, 405 W. 4th St., The Dalles, Ore., Ronald M. Somers, 106 E. 4th St., The Dalles, Ore., for defendants.

Findings of Fact

WILKINSON, Judge:

1. In November, 1970, plaintiffs agreed to buy a beauty parlor in The Dalles , Oregon , known as "Lugene's House ofBeauty" from Ruth Lugene Parrish.

2. The purchase included goodwill, equipment, retail items, and business supplies.

3. The retail items comprised approximately 10% of the purchase price, supplies approximately 15%, and equipment approximately 75%. Name and goodwill were valued at $1.00.

4. Plaintiffs went into possession of the beauty shop on December 1, 1970 .

5. The purchase price was paid or tendered by the plaintiffs as follows:

a. $200.00 was paid to the seller on November 24, 1970 .

b. $1,294.61 was paid to Berliner's Inc. on approximately December 30, 1970 , to satisfy a security interest which they had in part of the equipment included in the sale.

c. $3,505.39 was paid into this Court at the commencement of this suit on February 24, 1971 .

6. The plaintiffs deposited the sum of $4,600.00 with their attorney, Vawter Parker, in Hood River , Oregon , on January 6, 1971 , and items b. and c. in paragraph 5 above were disbursed by their attorney.

7. The plaintiffs and the seller took some steps to comply with the Bulk Transfer Act but did not fully comply with the provisions of the act.

8. Defendant radio station KACI:

a. Filed suit against Ruth Lugene Parrish in the Wasco County District Court on January 28, 1971 , for the sum of $584.00 plus interest and costs.

b. On February 2, 1971, had a Writ of Attachment and Notice of Garnishee served on Vawter Parker who at the time was holding funds to be applied to the beauty shop purchase.

c. Obtained a default judgment against Ruth Lugene Parrish on February 17, 1971 in the sum of $584.00 plus interest from December 30, 1970, plus costs and disbursements of $35.80.

9. On February 5, 1971, attorney Vawter Parker answered the Writ of Attachment of KACI alleging that he held $3,505.39 which was to be paid to the general open account creditors of Ruth Parrish. He further alleged in the letter that the sale came within the Bulk Sales Act and that it had been determined that he did not hold sufficient funds to pay all of the creditors that had come to his attention.

10. On February 24 the plaintiffs filed this suit and paid into the Clerk of this Court the sum of $3,505.39, alleging that that was the amount due Ruth Lugene Parrish.

11. On May 3, 1971, the United States Government filed a notice of Federal Tax Lien in Wasco County against Ruth Lugene Parrish dba Lugene's House of Beauty in the amount of $3,441.02.

12. The defendants George Stadelman and Wilbur Stadelman obtained a judgment against the seller, Ruth Lugene Parrish, in the amount of $1,750.00 plus $28.80 costs entered May 6, 1971, in the Wasco County Circuit Court.

13. The defendant Bailey, Clark & Byers obtained judgment against Ruth Lugene Parrish in the amount of $247.50 plus $28.80 costs entered May 13, 1971 in the Wasco County Circuit Court.

Issues

1. Does the Bulk Transfer Act apply to the sale from Parrish to Crapper?

2. What are the relative rights of the claimant-defendants?

Decision

The first issue in this case is the applicability of the Bulk Transfer section of the Uniform Commercial Code. (ORS 76.1010 et seq.) Although not raised by counsel, the authorities are not in agreement as to who has the burden of proving the applicability or non-applicability of the Act. Assuming that the burden is on the plaintiff in this case, the Court finds that the Bulk Transfer Act was not applicable to the sale from Parrish to Crapper. The evidence was clear that the principal business of the enterprise was not the sale of merchandise from stock and therefore the act does not apply. This is in accord with the general rule that "the bulk sales laws do not generally apply to persons who, though selling goods primarily sell their services. In this category are beauty shop operators, and owners of repair shops." (37 Am Jur 2d Fraudulent Conveyances Section 256) The fact that the plaintiff originally thought that the act applied and made a faulty attempt to comply with the law is of no consequence.

Since the Bulk Transfer Act was not applicable the plaintiff incurred no personal liability to any of the defendants and the plaintiff will be treated as a mere stakeholder of the funds paid into court. All of the claimants derive their claims through Ruth Lugene Parrish. The plaintiff, holding money payable to Mrs. Parrish, knowing that the money was subject to multiple claims, was entitled to relief in equity by this suit in the nature of interpleader.

[Priorities]

The parties at trial proved their claims with the apparent assumption that their relative priorities were to be established as of the trial date. It is the opinion of the Court that the proper function of the Court in this suit is to determine the relative rights of the claimants as of the time the suit was filed and the money paid into court by the plaintiff. The thrust of the government's argument is that the money is to be treated at all times as the property of Mrs. Parrish and therefore their lien of May 3, 1971, must prevail since none of the other claimants had judgments from a court of record prior to the date of the federal lien. The money which had been paid into court was not property belonging to Mrs. Parrish at the time the federal lien was filed. Mrs. Parrish had not tendered the money into court and at no time did she have possession or control of the funds or any of the usual incidents of ownership. After the funds were paid into the court the only interest she had in the fund was as a claimant-litigant. Although she was not named as a defendant in the original complaint she was added as a defendant in the amended complaint filed March 11, 1971.

Since the money in the hands of the court was not property belonging to Mrs. Parrish at any time after February 24, 1971, the subsequent federal lien and circuit court judgments against Mrs. Parrish are not determinative of the rights of the parties. In effect, the court became a trustee of the funds for the claimants as their rights existed as of February 24, 1972. To hold otherwise would encourage a great deal of collateral litigation after the filing of an interpleader so the parties could attempt to improve their relative positions. This would be contrary to the intent of the interpleader suit which is to allow all claimants to resolve their rights to a particular fund held by a stakeholder in one lawsuit.

The defendants proved the following valid claims to the fund as of February 24, 1971:

Berliner's Inc.

(service charges are disallowed) .....         $ 393.13

George Stadelman and Wilbur

Stadelman ............................          1750.00

Radio KACI, Inc.

(prior judgment plus costs

and interest to 2/24/71) .............           661.64

The 

United States of America

(Taxes assessed prior to

2/24/71) .............................            94.78

Bailey, Clark & Byers

(The Court takes judicial

notice of the court file in

Wasco 

County
 
Case

 #12726

which clearly establishes

that the obligation proved

by defendant's exhibit E

(judgment) was incurred

prior to 2/24/71) ....................         $ 247.50

 

The above claims to the fund will be allowed and the plaintiff will be allowed actual costs and disbursements upon presentation of a proper cost bill, but the record does not support an award of attorneys' fees.

The balance of the fund is the property of Ruth Lugene Parrish. However, Mrs. Parrish did not appear in the case and since the federal lien attaches immediately to her funds, the balance will be paid to the United States of America to apply toward their lien.

IT IS THEREFORE ORDERED AND DECREED:

1. That the plaintiffs are discharged from liability to the defendants.

2. The Clerk of this Court is directed to make the following distribution of the $3,505.39 now being held in this case at the expiration of 30 days from the date of this decree:

a. Reimbursement to the plaintiffs

of their costs and disbursements.

b. Berliner's Inc. .....................         $ 393.13

c. George Stadelman and Wilbur

Stadelman ..............................          1750.00

d. Radio KACI, Inc. ....................           661.64

e. The 

United States of America

 ........            94.78

f. Bailey, Clark & Byers ...............           274.50

g. The balance of the fund is

to be distributed to The

United States of America

for the Credit of Ruth

Lugene Parrish.

 

 

 

United States of America , Plaintiff v. Cyrus J. Faircloth, Administrator of the Estate of the Deceased, Jack Allen, Henrietta Clark Allen, and Iowa State Travelers Mutual Assurance Company, Defendants

U. S. District Court, So. Dist. Iowa, Central Div., Civil No. 8-2376-C-1, 12/2/70

[Code Secs. 6321 and 6332--Result unchanged by '69 Tax Reform Act]

Surrender of property subject to levy: Life insurance policy: Deceased taxpayer: Cash surrender value.--The Government was granted summary judgment in an action to enforce its tax liens against the cash surrender value of a life insurance policy which the taxpayer owned on his life. There was evidence that the taxpayer's wife, the beneficiary of the policy, died simultaneously with her husband, although her body was never found. The Court also denied the Government's motion for the balance of the policy until February 6, 1973 , when she would be presumed dead under state law.

Allen Donielson, United States Attorney, Des Moines, Iowa, Kenneth A. Lazarus, Department of Justice, Washington, D. C. 20530, for plaintiff. Cyrus J. Faircloth, pro se, 103 Executive Building, 313 Union St., Fayetteville, N. C. Harold Newcomb, 321 Savings & Loan Building, Des Moines, Iowa, for Iowa State Travelers Mutual Assurance Co., for defendants.

Memorandum and Order

STEPHENSON, Chief Judge:

This matter is before the Court on a motion for summary judgment filed June 26, 1970 , on behalf of the United States . The Court, on September 24, 1970 , ordered that the parties file briefs in support of their various positions in regard to the Government's motion. The briefs are now on file and this matter is before the Court for final disposition.

[Facts]

The undisputed facts as are relevant for purposes of this motion are set forth in the following paragraphs of this memorandum. Such facts have been ascertained from the pleadings and papers, including affidavits, now on file with this Court.

On February 6, 1966 , Jack Allen drowned as a result of a boating accident in Bladden County , North Carolina . At the time of his death, there was in effect an insurance policy (No. B 398192) written by the Iowa State Travelers Mutual Assurance Company of Des Moines, Iowa , on the life of Mr. Allen in the amount of $6,000.00. Henrietta Clark Allen, wife of Jack Allen, was named as beneficiary of the policy. There was no alternate beneficiary. Henrietta Clark Allen, wife of Jack Allen, is reported to have been with Jack Allen when the boating accident took place, but this fact has never been confirmed. Although she has not been heard from since the date of the accident, her body has never been recovered.

[Income Tax Deficiencies]

On February 11, 1966 , Lester G. Garter, Jr., an attorney at Fayetteville , North Caroline, was appointed Administrator of the Estate of Jack Allen by the Superior Court, Cumberland County , North Carolina . Mr. Cyrus J. Faircloth was appointed attorney for the administrator. On April 10, 1967 , the United States filed its Proof of Claim in the probate proceeding for unpaid taxes due and owing from Jack Allen. The claim was based on income tax deficiencies which were assessed individually against Jack Allen and jointly and severally against Jack Allen and his wife, Henrietta Clark Allen, in accordance with the Internal Revenue laws, as set forth more particularly in the following schedule:

                                           Taxable           Amount of Tax and            Date of

Type of Tax                                 Period         Interest to 
6-17-69
         Assessment

Income tax--Jack Allen ............            1962            * $4,778.22 (T)            1-28-66

                                                                    828.31 (T)

Income tax--Jack and Henrietta ....            1965                3,176.93 (T)            
3-10-67

                                                                    406.19 (I)

Income tax--Jack and Henrietta

Clark Allen ......................            1966                  192.86 (T)

                                                                     24.20 (I)

                                                                     $9,406.71

* (T) Tax

(I) Interest

Mr. Allen is individually liable for $5,606.53 of this total based on the 1962 tax period. Mr. and Mrs. Allen are jointly and severally liable as to the balance of $3,800.18 based on the 1965 and 1966 tax periods. The daily accrual rate is $.79 on taxes due for the 1962 taxable period and $.55 for taxes due for the 1965 and 1966 taxable periods.

[Final Accounting of Estate]

A final account of the estate was submitted by the Administrator in August, 1967, and the same was thereafter approved and ordered to be recorded and filed by the Clerk of the Superior Court of Cumberland County on October 5, 1967 . Said final account indicated that the estate was insolvent. After paying funeral expenses, costs of administration and other debts, various claims were still outstanding against the estate, including the Government's tax claim previously referred to. The Administrator did not acquire the proceeds of the life insurance policy with the Iowa State Travelers Mutual Assurance Company on Allen's life (policy No. B 398192) for the purpose of distribution or for the purpose of paying the debts of the estate. He set forth following as his reason in his final report to the Court:

The decedent, Jack Allen, was the insured in an Insurance Policy #B398192 issued by Iowa State Traveler's Mutual Association, P. O. Box 1474 , Des Moines , Iowa 50306 , naming as primary beneficiary to Henrietta Clark Allen, the wife of the decedent and secondary beneficiary as the estate of the decedent in the purported sum of $6,000.00. It is believed by the Administrator that Henrietta Clark Allen was also aboard the ill-fated craft "Kork" and was drowned simultaneously with the decedent Jack Allen, deceased, however, the body of Henrietta Clark Allen has not been recovered from the Cape Fear River, the place of the drowning of the decedent and the said Henrietta Clark Allen has not been seen or heard from since the time of the accident in which the decedent, Jack Allen lost his life. Under the simultaneous and common disaster section of the General Statutes of North Carolina the Estate of Jack Allen, deceased, would be entitled to the proceeds of the aforesaid Insurance Policy, provided, however, the Estate could satisfactorily prove that Henrietta Clark Allen predeceased him or died in the same common disaster. To date of this accounting and this final account, the Administrator has been unable to locate any person who can satisfactorily prove that Henrietta Clark Allen was aboard said "Kork" or can prove that she is legally dead. Under the North Carolina Law, the place and situs of the death of the decedent, Jack Allen, a person is not presumed dead until the laspe (sic) of a period of seven years or the discovery of the body of such missing person, which ever event first occurs. Thereby, your Administrator is unable to secure the funds under and by virtue of the aforesaid Insurance Policy, for that and in that he cannot give a valid release to the company and the reasons hereinbefore set out.

[Notice of Levy]

On September 21, 1967, a notice of levy was served on Robert G. Tangeman, Assistant Vice President and counsel for Iowa State Travelers Mutual Assurance Company, requesting that the death benefits payable by reason of death of the insured be paid to the Internal Revenue Service in satisfaction of taxes assessed individually against Jack Allen for the 1962 taxable period and jointly and severally against Jack Allen and Henrietta Allen for the 1965 and 1966 taxable periods. The notice of levy was not honored by the company and on October 9, 1967 , a final notice and demand was served on Sidney L. Adams, Secretary for the insurance company. To date there has been no compliance with the directions of the levy. As a result, the United States filed this lawsuit seeking to foreclose its lien upon a portion of the proceeds of the life insurance policy drawn on the life of Jack Allen ($3,800.18 plus any statutory interest owing, i. e., that portion of the tax debt for which Jack Allen and his wife, Henrietta Clark Allen are jointly and severally liable) and seeking to impose a trust on the balance of the proceeds of the said life insurance policy; such proceeds to be held in trust by the Iowa State Travelers Mutual Assurance Company pending further order of this Court. Subsequently, the United States filed this motion for summary judgment asserting that it is entitled as a matter of law to foreclosure against the proceeds of the life insurance policy issued on the life of the deceased Jack Allen in the sum of $6,000, that sum being the total of said proceeds.

One fact question remains unresolved for purposes of this motion for summary judgment. It is not known whether Henrietta Clark Allen lives. It is probable that she is dead. But, the question remains unresolved. Nevertheless, the United States claims that it is entitled not only to the proceeds of the policy in question necessary to satisfy the tax liabilities of Henrietta Clark Allen, but also those proceeds not necessary to satisfy such tax liabilities. The balance is claimed for the purpose of satisfying the separate tax liability of the insured, Jack Allen (the 1962 taxes and interest).

[Joint Liability]

There can be no question concerning the right of the United States to judgment in this case in the amount of $4,082.88. As previously noted, the joint and several liability of Jack Allen and Henrietta Allen for the 1965 and 1966 taxable periods is $3,800.18. With interest computed to November 1, 1970 , this rises to $4,082.88 (daily accrual rate is $.55 as to this portion of the total tax liability). Both Henrietta and Jack Allen are liable for the amount referred to. Joint returns were filed for the years 1965 and 1966. Assuming that Jack Allen survived Henrietta Allen, the only beneficiary named on the policy, the proceeds, as a part of his estate, are subject to the Government's tax lien. Section 6321, Internal Revenue Code of 1954, 26 U. S. C. §6321. Assuming that Henrietta Allen survived Jack Allen, that portion of the tax liability involved herein which is joint and several would give rise to a lien which would attach to the proceeds of the life insurance policy due Henrietta Allen. The liability of a husband and wife on a joint return is joint and several and deficiencies in tax, civil penalties and interest can be collected from either spouse. Section 6013(b)(3), Internal Revenue Code of 1954. A federal tax lien attaches to all property and rights to property, whether real or personal, belonging to the person liable to pay the tax. Section 6321, Internal Revenue Code of 1954. Summary judgment will be granted in favor of the United States in the amount of $4,082.88, plus statutory interest from November 1, 1970 .

[Right to Balance Due]

As previously noted, the United States claims, in addition to its claim for $4,082.88, a present right to the balance due on the said insurance policy, i. e., $1,917.12. Two theories are advanced by plaintiff in support of this contention. First it is asserted that the North Carolina version of the Uniform Simultaneous Death Act would bar the beneficiaries of the estate of the absent Henrietta Allen and that such beneficiaries would have no claim to the proceeds of the subject insurance policy under the Uniform Simultaneous Death Act. Thus, it is argued that in view of the fact that the United States asserts substantial tax liabilities against the deceased Jack Allen individually, the balance due on the proceeds of the life insurance policy should be payable to the plaintiff in partial satisfaction thereof.

The State of North Carolina has adopted the Uniform Simultaneous Death Act which provides:

Insurance policies.--Where the insured and the beneficiary in a policy of life or accident insurance have died and there is no sufficient evidence that they have died otherwise than simultaneously the proceeds of the policy shall be distributed as if the insured had survived the beneficiary. (Section 28-161.4, General Statutes of North Carolina )

The answer to the Government's argument is short. The Uniform Simultaneous Death Act pertains to a situation where both the insured and the beneficiary of a life insurance policy have died. There is no positive proof in this case that Henrietta Clark Allen is dead. The possibility remains that she might yet present a claim to the policy proceeds in her own behalf.

[Recovery of Insurance Benefits]

But, as noted, the Government urges a second theory in support of its claim to the remainder of the insurance proceeds. The insurance contract here in question states that no court action or proceedings shall be commenced to recover any benefits unless the same shoud be commenced within twelve months after the cause of action accrues. The subject insurance contract states that proof of loss must be furnished within sixty days from date of death. Thus, it is asserted that since Jack Allen died on February 6, 1966 , the beneficiary named in the insurance contract or her heirs would be precluded from recovery of the insurance proceeds in any action instituted after April 7, 1969 .

Failure to bring suit within the time provided by a policy of insurance may be excused under certain fact circumstances. See 44 Am. Jur. 2d Insurance §1915 and cases cited thereunder. There may also be a waiver of, or an estoppel to insist upon, a limitation of time within which to bring suit on a contract of insurance under some circumstances. See 44 Am. Jur 2d Insurance §§ 1916, 1917 and cases cited thereunder.

The defendant insurance company here has indicated in its brief filed with the Court in support of its resistance to this motion for summary judgment that the argument of the Government in this regard is of ". . . no apparent significance in this case due to the unusual circumstances since due to those circumstances defendant has not advanced any of these contract provisions [the limitation provisions] in defense of liability nor is it anticipated that any court would accept such a technical defense in view of said circumstances."

The Court cannot assume, under the undisputed facts of this case, that Henrietta Clark Allen would, should she appear and claim the proceeds of the insurance policy here in question, be barred by limitations imposed by the contract of insurance. The Government's motion for summary judgment in regard to the $1,917.12 of remaining proceeds will now be denied. It has not been shown at the present time that these proceeds are property or property rights of Jack Allen subject to levy under Section 6332(a) of the Internal Revenue Code. In short, it has not been shown that this particular property in the hands of the Iowa State Travelers Assurance is property which is properly the subject of distraint at this time.

[Balance Due In Seven Years]

Although there is no positive proof at this time that Henrietta Clark Allen is dead, the circumstances indicate a strong possibility that she is and further that said death was simultaneous with that of her husband, Jack Allen, under the provisions of the Uniform Simultaneous Death Act adopted by the State of North Carolina . Under the applicable law she will be presumed dead after the lapse of seven years from the date of her disappearance on February 6, 1966 . The Court therefore finds, that in the absence of a claim to the contrary, Henrietta Clark Allen will be presumed dead on February 6, 1973; that said death was simultaneous with that of her husband, Jack Allen; that the balance of the sum due under the insurance policy in question (No. B 398192) will then be due and payable to the plaintiff, United States of America . It is desirable that the parties be spared the expense of further litigation in this matter. Judgment will therefore be entered in favor of the plaintiff for the balance of the proceeds of said policy to be paid to the plaintiff on February 6, 1973 , absent any claim filed herein to the contrary.

[Judgment]

IT IS ORDERED that the motion for summary judgment filed June 26, 1970 on behalf of the United States be and is hereby granted in the amount of $4,082.88 plus statutory interest from November 1, 1970, until the date of payment and the Clerk will enter judgment accordingly in favor of the plaintiff and against the Iowa State Travelers Mutual Assurance Company.

IT IS FURTHER ORDERED that said motion for summary judgment for the balance of $1,917.12 ($6,000-$4,082.88) be and is hereby denied, except as further ordered herein.

IT IS FURTHER ORDERED that judgment is entered in favor of plaintiff, United States of America , and against Iowa State Travelers Mutual Assurance Company for the balance of the proceeds of said insurance policy, No. B 398192, payable on February 6, 1973 .

IT IS FURTHER ORDERED that this cause is closed subject to reopening should a claim be filed herein in behalf of Henrietta Clark Allen.

 

 

 

Nomellini Construction Co., Plaintiff v. United States ofAmerica, Defendant United States ofAmerica, Third-Party Plaintiff v. Robert Simpson, H. L. Scarborough and Billy D. Machen, d/b/a Simpson & Scarborough, Third-Party Defendants

U. S. District Court, East. Dist. Calif., Civil No. 8784, 328 FSupp 1281, 6/3/71

[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]

Liens: Priorities: Purchaser "defined": State law: Fact finding.--A general contractor who seized construction equipment from a delinquent taxpayer for a debt due him was not entitled to priority over the Government's tax lien. The contractor was not a purchaser within the meaning of Code Sec. 6323 since the transaction resulting in the seizure of the property lacked the ingredients of a sale, and no attempt was made to perfect title to the property under state law.

[Code Sec. 6332--Result unchanged by '69 Tax Reform Act]

Liens: Conversion of property by third-party: Government's remedy: Common law action: After-acquired property.--A general contractor was personally liable for the conversion of the taxpayer's machinery and equipment which were subject to the Government's tax lien. Although the Government abandoned its conversion action under Code Sec. 6332 due to a technical deficiency in its notice, that was not its exclusive remedy. It could still pursue its common law remedy as a result of the contractor's tortious act in converting the property and rendering the Government's lien valueless. The contractor was also liable for seizing joint venture funds owing to the taxpayer under a construction contract. The Government's lien, which was timely filed, attached to all property and rights to property belonging to the taxpayer, including after-acquired property. Such funds were subject to the Government's tax lien as soon as the money was in the hands of the delinquent taxpayer. Similarly, the contractor was liable for seizing funds representing accrued earnings due the taxpayer under the construction contract. The contractor's use of such funds in order to satisfy a collateral obligation owed to him by the taxpayer was of no consequence. The Court declined to award pre-judgment interest on the ground that damages were unliquidated and not easily determined and because justice required its disallowance.

Mazzera, Snyder & DeMartini, Suite 300, Sutter Bldg., 115 N. Sutter St., Stockton, Calif., for plaintiff. Dwayne Keyes, United States Attorney, John M. Youngquist, Assistant United States Attorney, San Francisco, Calif., for defendant.

Memorandum and Order

MCBRIDE, District Judge:

Nomellini Construction Company originally commenced this case in the Superior Court of San Joaquin County to quiet title to certain personal property encumbered with government tax liens. The United States removed the action to this Court, however, and counterclaimed to foreclose its liens and to impress Nomellini with personal liability for converting the liened property. The conflict arose shortly after Nomellini had seized money and construction equipment from a partnership known as Simpson & Scarborough, which had incurred tax delinquencies in an amount exceeding $30,000. Essentially, the government contends that its tax liens had attached to the delinquent taxpayer's property prior to Nomellini's seizure and now provide a predicate for its counterclaims. Nomellini, on the other hand, claims a right to possess the equipment and money free of the government's interests. The facts appear below in more detail together with my conclusions.

The Tax-Liened Equipment: Nomellini's Claim to Priority

A general contractor, Nomellini Construction Company had undertaken a housing project in Stockton , California , subcontracting its cement work to the Simpson & Scarborough partnership. By the end of 1961, the partnership had become heavily indebted to Stockton Building Materials Company, which had supplied concrete for the Stockton job. Soon apparent that the partnership could not pay its debt, the president of Stockton Building Materials Company threatened Nomellini with a mechanic's lien. To resolve the impasse, Nomellini convened a meeting on January 12, 1962, with the partnership and its creditor. During the meeting, Nomellini agreed to assume the partnership's debt in return for the creditor's promise not to lien the job.

After the meeting, Nomellini told Simpson, the partnership's spokesman, that he wanted all of the partnership equipment. Simpson replied, "If that is the way it has to be, that is the way it will be." Nomellini assured Simpson that he could continue to use the equipment as needed. Simpson then agreed to deliver the equipment to Nomellini's construction yard, but never did so. Between February 6 and 16, however, Nomellini sent his own employees to seize the equipment at a construction lot in Stockton , where they retrieved most of it. Several months later Nomellini located and seized the remaining equipment.

A few days after the January 12 meeting, Simpson sent Nomellini a list of partnership equipment, but they did not reduce their agreement to writing. They did execute a bill of sale purportedly signed on January 15, 1962, but this was post-dated and not in fact executed until sometime after February 16, 1962. Furthermore, Nomellini did not apply for a transfer of title to his newly-acquired vehicles.

In the meantime, the federal government assessed employment and withholding taxes against the partnership, and these remain unpaid in the amount of $30,032.65. Under §6321 of the Internal Revenue Code, this amount became a lien upon all of the delinquent taxpayer's property on the assessment date, February 2, 1962. The United States filed notice of its lien on February 16, 1962, and two weeks later served a notice of levy upon Nomellini. With the exception of a 1960 F-600 Ford truck, Nomellini refused to relinquish any of the equipment and eventually brought the quiet title action which led to this lawsuit.

[Priority Determined]

On these facts, Nomellini seeks the protection of §6323 of the Internal Revenue Code of 1954:

Except as otherwise provided in subsections (c) and (d), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate. . . . ¹

It claims a "purchaser" priority by virtue of the January 12, 1962, transaction in which it assumed the partnership's indebtedness in return for the equipment. ² This question, of course, is to be resolved in light of federal law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 4 L. ed. 2d 1365 (1960).

Neither §6323 nor other provision of the 1954 Code defines the term "purchaser", and cases construing it do little to sharpen its meaning. The Supreme Court has said, for example, that a purchaser within the purview of §6323 "usually means one who acquires title for a valuable consideration in the manner of vendor and vendee." United States v. Scovil [55-1 USTC ¶218], 348 U. S. 218, 99 L. ed. 271 (1955). Citing Scovil, the Ninth Circuit has added that §6323 protects purchasers "in the ordinary sense." United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d 517 (9th Cir. 1955). Internal revenue regulations are consistent with both of these decisions. ³

Viewed in the "ordinary sense", the Nomellini-Simpson & Scarborough transaction hardly supports the plaintiff's claim to a purchaser priority. First, Nomellini's demand for the equipment and Simpson's reluctant assent--"If that is the way it has to be, that is the way it will be"--do not comprise a "sale", at least under traditional concepts of offer and acceptance. Nomellini did not offer to "buy" the equipment, and the partnership certainly did not agree to "sell" it. Indeed, the vagueness of the transaction convinces me that not even the parties themselves knew what they intended to be the ultimate result. Second, the transaction lacks another essential indicia of a sale, agreement on a purchase price. In return for his assumption of the indebtedness, Nomellini demanded all of the partnership equipment without knowing its quantity or value and without deciding whether to pay or retain $37,000 then owing to the partnership for work on the Stockton job. Finally, the fact that Nomellini did not transfer title to the vehicles or take immediate possession of them, almost automatic steps for true purchasers, illustrates its complete lack of intention to "purchase" the equipment. ⁴ See California Vehicle Code §5600 and former Civil Code §3440.

As these facts exhibit, not even the parties themselves had defined their transaction. Indeed, it appears to me that Nomellini purposefully left it open to permit him to confirm, modify, or revoke the arrangements, depending upon the partnership's future financial stability. To conclude that this arrangement constituted a true sale simply ignores the facts. The most to be said is that the form of the transaction was left in limbo and was not to be consummated until some future date.

Nomellini's failure to perfect the transfer supplies an additional reason for rejecting his bid for priority. ⁵ Under Caifornia law, as I have pointed out, Nomellini should have transferred title to the vehicles and taken immediate possession of the equipment to fully protect his rights. ⁶ While federal law determines rights to priority, the Supreme Court has recognized in an analogous situation that failure to perfect one's interest under local law is "practically conclusive" on the priority issue. United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 95 L. ed. 53 (1950). Accordingly, some opinions have denied priority to sales left unperfected under local law. Leipert v. R. C. Williams & Co. [57-2 USTC ¶10,044], 161 F. Supp. 355 (S. D. N. Y. 1957); see also Allan v. Diamond T Motor Car Co. [61-1 USTC ¶9484], 291 F. 2d 115 (10th Cir. 1961). Admittedly, other opinions have awarded priority in similar circumstances, but in these cases only minor technicalities prevented the purchasers from obtaining perfected title. See United States v. Boston & Berlin Transportation Co. [60-2 USTC ¶9782], 188 F. Supp. 304 (N. H. 1960); see also Gauvey v. United States [61-1 USTC ¶9478], 291 F. 2d 42 (8th Cir. 1961). This case, in contrast, displays fundamental omissions which persuade me to follow those opinions denying priority. ⁷

For these reasons, therefore, I conclude that the partnership property in Nomellini's hands is burdened with the government's tax liens. I shall now consider the remaining issues.

Government's Conversion Claim

Not content merely to impress its liens, the United States seeks to recover the value of the Simpson & Scarborough equipment in Nomellini's hands. Originally, it sued for such recovery under the common law of conversion and under §6332 of the Internal Revenue Code, which imposes liability upon persons who refuse to surrender levied property. It has now abandoned its statutory claim, however, and has rested entirely upon its conversion theory.

Section 6332 of the Internal Revenue Code ⁸ authorizes the Secretary to demand surrender of levied property and imposes personal liability to the extent of the value of the property on those who refuse to comply. Invoking this provision, the government served Nomellini with a notice of levy pursuant to §6331 of the Code and Regs §301.6331-1 and demanded surrender of the Simpson and Scarborough equipment. Nomellini refused, however, and eventually sold some of the equipment, intermingled it with his own equipment, and permitted the remainder to rust away to "junk", as Mr. Nomellini characterized it at trial.

Notwithstanding Nomellini's complete disregard of the levy, the government later chose to forego suit under §6332, apparently feeling that a technical deficiency in its notice prevented a valid levy. ⁹ Instead, it chose to rely entirely on a long-standing remedy, available to the government as well as to private litigants, which permits a conversion action against defendants who intentionally impair a lienor's security. United States v. Matthews, 244 F. 2d 626 (9th Cir. 1957), George Adams & Co. v. South Omaha National Bank, 123 F. 641 (8th Cir. 1903); United States v. Allen, 207 F. Supp. 545 (E. D. Wash. 1962); United States v. Webster-Robinson Machinery & Supply Co. [65-1 USTC ¶9255], 15 A. F. T. R. 2nd 453 (W. D. Wash. 1965). Nomellini contends, however, that §6332 provides the exclusive means of imposing liability and that the government's abandonment of the claim, therefore, bars its recovery. ¹⁰ For reasons to be explained, I reject the argument and find for the government on its conversion theory.

Although Nomellini cites no authority to support its argument, it apparently hopes to invoke the rule that a remedy in a statute creating a new right is the exclusive means of enforcement. See United States v. Babcock, 250 U. S. 332, 63 L. ed 1011 (1919). A close examination of the history and purpose §6332, however, will reveal that this is an inappropriate case in which to apply the rule.

At one time, the Internal Revenue Service was powerless to force the surrender of a delinquent taxpayer's property in the hands of third persons, who could thus refuse to relinquish the property and thereby frustrate a tax sale. United States v. Metropolitan Life Ins. Co. [42-2 USTC ¶9609], 130 F. 2d 149 (2nd Cir. 1942). To remedy this obvious oversight, Congress enacted the predecessor of §6332, requiring the surrender of levied property on demand and enforcing the newly-created right with a penalty equal to the value of the property. Since the statutory penalty enforced a new right, therefore, it was arguably intended to be the exclusive means of recoving damages for failure to surrender the equipment. In this case, however, the conversion action rests not upon Nomellini's refusal to relinquish the equipment after demand, but upon his subsequent conduct rendering the government's liens valueless. Under these circumstances, §6332 was certainly never intended to foreclose the government from its common law remedies.

[Common Law Remedy]

The statutory and common law remedies redress different evils. The manifest purpose of §6332 is to force the physical surrender of levied property to permit administrative sale, while the common law remedy casts a wider net to provide relief for any tortious act which impairs the lienor's interest in the converted property. With one exception, ¹¹ therefore, one remedy does not necessarily include the other. Under these circumstances, I cannot conclude that the creation of one narrow remedy was meant to eradicate all other established forms of relief.

The facts of this case do not invoke much sympathy for Nomellini's position. True, the government's deficient levy perhaps justified Nomellini's refusal to relinquish the equipment (see United States v. O'Dell [47-1 USTC ¶9190], 160 F. 2d 304 (6th Cir. 1947)) and may have even permitted it to use the equipment in a manner which would not imperil the tax liens. Having knowledge of the government's claims, however, it had no right to ignore them, dissipate the entire security, and thus render the claims valueless. ¹² A prudent property holder believing the levy to be unlawful would have preserved the security and applied for a release of the levy under §6343 of the Internal Revenue Code. Discovery of a minor technicality in the notice of levy should not permit one to dispose of taxliened property with impunity. In short, those like Nomellini who choose "to shoot first and ask questions later" must pay for their errors.

Left to be decided is the difficult question of valuation. The list below, compiled from all the evidence and from Joint Exhibit #5, represents (1) the items which I find Nomellini to have converted in disregard of the government's liens, and (2) their values at time of conversion.

1. 1947 Ford 2-ton dump truck ........           $ 250.00

2. 1946 White Water truck ............             250.00

3. 1948 Dodge pickup truck ...........             150.00

4. Large equipment trailer ...........           1,500.00

5. Small equipment trailer ...........             500.00

6. Aljoa Sportsman house .............             800.00

7. Gar-bro power buggy ...............             200.00

8. Flatbed tilt trailer ..............           1,500.00

9. 

Davis

 ditch digger ................           3,000.00

10. Two electric generators ..........             300.00

11. Five trowel machines .............             800.00

12. Three sidewalk machines ..........           1,500.00

13. Schramm air compressor ...........             400.00

14. Four cement vibrators ............             200.00

15. Two 2-wheel buggies ..............             100.00

16. Black & Decker hammer ............              85.00

17. 900 steel stakes .................             750.00

18. Steel curb and gutter forms ......           1,000.00

19. Plaster mixer on trailer .........             150.00

20. 200 steel panels for forms .......           2,000.00

21. 1956 Ford 1-ton pickup truck .....             100.00

TOTAL ................................         $15,535.00

Joint Venture Funds

In addition to the value of the equipment, the United States seeks to recover cash in the amount of $11,738.95. It rests its claim upon Nomellini's seizure of two distinct sums of money allegedly owing to the taxpayer, Simpson & Scarborough, under a construction contract. The facts and my conclusions follow.

Simpson & Scarborough, the defaulting taxpayer, had subcontracted the cement work on a joint venture project run by Nomellini Construction Company and Lathrop Construction Company. On March 1, 1962 , two weeks after the filing of the tax liens, the United States served its notice of levy upon the joint venture, intending to seize the taxpayer's right to payment under the construction contract. On March 26, 1962 , the joint venture issued a check for $10,000 drawn jointly to Nomellini and the taxpayer, who immediately endorsed it to Nomellini. Further, when the taxpayer had finished his cement work, the joint venture owed it $1,738.95, the amount of the contract price remaining after settlement of laborers and materialmen's claims. ¹³ Although it was owing to the partnership under its contract, Nomellini seized the $1,738.95, ostensibly to satisfy the partnership's obligation on a collateral debt.

On these facts, the government claims both the $10,000 and the $1,738.95 by virtue of its tax lien and its levy. For reasons which follow, I find for the government under its lien.

The government's lien arose on February 2, 1962 , and became fully protected against subsequent interests on its filing date, February 16, 1962 . Under §6321 of the Internal Revenue Code, it attached not only to "all property and rights to property" belonging to the taxpayer on February 2, but also to any after-acquired property. See cases cited in 174 A. L. R. 1380.

Despite the lien's broad applicability, Nomellini contends that Simpson & Scarborough had no property interest in the money to which the liens could attach. Claiming for its major premise that a tax lien will not attach to a right to receive future earnings, ¹⁴ it concludes that an actual advance of yet-to-be-earned funds is likewise immune. ¹⁵

[Lien on After-acquired Property]

Nomellini's argument is a non-sequitur. Whether or not the government's liens may attach to the ephemeral right to receive future earnings, they certainly may attach to an actual advance of the funds. A cash advance represents a valuable property right in the hands of its owner. Calling the money a "future advance" does not destroy its buying power or impair its value. Once in the hands of the taxpayer, therefore, the money became property enveloped with the government's liens. ¹⁶ Welsh v. United States [55-1 USTC ¶9238], 220 F. 2d 200 (D. C. Cir. 1955); Lapp v. United States [70-2 USTC ¶9685], 316 F. Supp. 386 (S. D. Fld. 1970). Under accepted principles, the tax lien then followed the $10,000 advance into the hands of the transferee, Nomellini, and provides a basis of recovery. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 2 L. ed. 2d 1135 (1958).

True, the government cannot now point to the precise encumbered money, but several considerations convince me that this is an unnecessary requirement. First, Nomellini knew of the government's asserted interest and deliberately chose to ignore it. Its influence in the joint venture, in fact, was instrumental in securing the so-called "future advance", which was little more than a scheme to circumvent the government's claims. Second, the task of tracing money is nearly impossible and imposing such a requirement would therefore severely impede the government's collection efforts. Similarly, permitting holders of tax-liened money to escape liability by the easy maneuver of commingling funds creates an unjustified loophole. Finally, I find to compelling reason to treat the impairment of lien rights in money any more leniently than the impairment of the same rights in equipment, which is not so easily hidden. ¹⁷ Consequently, I think the proper remedy is to impose personal liability for the value of the money, $10,000. See United States v. Matthews; George Adams & Fredrick Co. v. South Omaha National Bank; United States v. Allen; United States v. Webster-Robinson Machinery & Supply Co., supra.

As to the $1,738.95 remaining due to the partnership on the job's termination, the government's lien had also attached to this sum. This amount represents accrued earnings and is "property" belonging to the taxpayer, notwithstanding his indebtedness to Nomellini on a collateral obligation. See Sims v. United States , 359 U. S. 108, 3 L. ed. 2d 667 (1959). Nomellini's seizure of the money could not divest the liens, and for the reasons expressed above, Nomellini is likewise liable for this amount.

Conclusion

For the reasons discussed, I have concluded that Nomellini is liable for $15,535.00 on the equipment and $11,738.95 on the joint venture funds, for a total of $27,273.95. I decline the government's suggestion to award pre-judgment interest, however, because damages were unliquidated and not easily determined and, in my opinion, justice requires its disallowance. United States v. Campbell, 293 F. 2d 816 (9th Cir. 1961); see also Robert C. Herd & Co. v. Krawill Machinery Corp., 256 F. 2d 946 (4th Cir. 1958).

This Memorandum and Order shall constitute my findings of fact and conclusions of law under F. R. C. P. Rule 52.

IT IS THEREFORE ORDERED that the plaintiff take nothing by his action to quiet title and that judgment be entered for the defendant on its counterclaims in the amount of $27,273.95.

¹ The parties agree that this case is governed by the collection provisions of the code as they existed prior to their extensive 1966 amendments.

² Nomellini does not claim to be a mortgagee, pledgee, or judgment creditor and, consequently, I consider only its claim to purchaser status. Moreover, it has not argued that the taxpayer, by virtue of the January 12 agreement, had divested himself of any property to which the tax liens could attach. See Aquilino v. United States , supra.

³ Regs. §301.6323-1 provides that "The term 'purchaser' means a person who, for a valuable present consideration, acquires property or an interest in property."

⁴ The government eventually levied upon the title certificates in Simpson's hands. For over nine months after the alleged sale, Nomellini had not even bothered to get them from Simpson. Certainly, nine months is ample time within which to transfer ownership and is far beyond the allowed ten days. See Vehicle Code §5902.

Furthermore, former Civil Code §3440, effective at the time of these transactions, provided that a sale of personal property without immediate delivery was conclusively presumed fraudulent as against the transferor's creditors. In view of this provision, a true purchaser would obviously take immediate possession of the goods to preserve his interest.

⁵ My previous ruling does not bar me from discussing the effect of state law upon the priority issue. That opinion merely held that federal law determines the priority issue and the state law in itself is not necessarily dispositive.

⁶ Absent application for a new title certificate, no interest passes to the transferee (Vehicle Code §5600), and a sale without a transfer of actual possession is void vis-a-vis competing creditors. Former Civil Code §3440. The United States is entitled to invoke the protection of these statutes to the same extent as non-governmental creditors. See United States v. Creamer Industries [65-2 USTC ¶9527], 349 F. 2d 625 (5th Cir. 1965).

⁷ The 1966 amendments to §6323 deny priority to claimants who fail to perfect their interests under state law. While these amendments do not govern this case, they do represent Congressional satisfaction with that line of case denying priority to sales left unperfected under state law.

⁸ Section 6332. Surrender of property subject to levy.

(a) Requirement.

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

(b) Penalty for violation.

Any person who fails or refuses to surrender as required by subsection (a) any property or rights to property, subject to levy, upon demand by the Secretary or his delegate, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes for the collection of which such levy has been made, together with costs and interest on such sum at the rate of 6 percent per annum from the date of such levy.

⁹ The government abandoned its §6332 action as soon an Nomellini asserted in the Pre-trial Order that the notice of levy addressed jointly to Nomellini Construction Co. and Lathrop Construction Co. did not bind Nomellini in its individual capacity.

¹⁰ Nomellini thrusts its entire argument toward the exclusive remedy issue. It does not attack the general principle that a conversion action will lie against one who impairs a lienor's security. I must assume, therefore, that it acknowledges the propriety of a conversion action, assuming I find the §6332 remedy not to be exclusive.

¹¹ When the allegedly converting act is a single demand and refusal, the two remedies may overlap. In this case, and only in this case, does the difficult question arise of whether the statutory remedy is exclusive. As I have pointed out, the government here does not rest its claim upon demand and refusal.

¹² At common law, Nomellini's treatment of the liened property clearly constitutes conversion. See 53 Am. Jur., Trover & Conversion §55 (commingling goods), §51 (permitting the goods' destruction), and §35 (selling the goods to another).

¹³ The contract between Simpson & Scarborough and the Joint Venture required that 10% of the contract price be retained to protect the joint venture from claims asserted against it for acts of the partnership. After claims in the amount of $1,067.86 were asserted, the balance due Simpson & Scarborough was $1,738.95.

¹⁴ More precisely, Nomellini contends that a right to future earnings, in contrast to accrued but unpaid earnings, is insufficient to constitute "property" within the meaning of §6321. Under my view of the case, I need not decide this issue.

¹⁵ Nomellini's argument, I think, confuses the government's rights under a levy with its rights under a lien. Unlike a lien, which attaches to after-acquired property, a levy is only effective on property existing on the date of levy. United States v. Mitchell, 349 F. 2d 94 (5th Cir. 1965). On that date I might agree with Nomellini that the partnership had no "property right" subject to levy in its yet-to-be-earned contract price. On March 1, the date of levy, the partnership had no money due under the terms of the contract, and the government has not convinced me that on or before that date the contract price had been retroactively increased to reflect work already performed. Because I find for the government under its lien, however, I need not decide whether the partnership had a property interest in the joint venture contract on the date of levy.

¹⁶ The fact that the check was payable jointly to the taxpayer and Nomellini does not change this result. The money was advanced to the taxpayer to enable it to pay off a collateral debt owed to Nomellini, and it was to be earned by the taxpayer alone. The only reason Nomellini, in its capacity as a member of the joint venture, joined itself as payee was to insure repayment of the loan. Under these circumstances, Nomellini can hardly claim that money used to pay off an indebtedness to it did not constitute "property" in the hands of its debtor.

¹⁷ I recognize that the negotiability of money creates unique problems which may call for relaxed rules. Section 6323 of the Code, however, creates a priority even against filed tax liens for those who take encumbered money without knowledge of the lien. This section, therefore, provides adequate protection for those who innocently impair the government's lien rights. Since Nomellini knew of the government's asserted interest, it cannot invoke this protection.

 

 

 

General Motors Acceptance Corporation, Plaintiff v. J. B. Wall, District Director of Internal Revenue, Defendant

U. S. District Court, West. Dist. N. C., Asheville Div., Civil. No. 2176, 239 FSupp 433, 3/19/65

[1954 Code Sec. 6321]

Tax liens: Property rights: Conditional sales contract: Priority.--Under a conditional sales contract, title to an automobile purchased by the taxpayer was still vested in the seller. Accordingly, the Government, even though its lien was recorded, did not have a claim superior to that of the seller since the reservation of title in favor of the seller under the conditional sales contract gave priority to the seller both before and after the contract was entered into even though the conditional sales contract was never recorded.

Max O. Cogburn, Charles G. Lee, Jr., Lee, Lee & Cogburn, 161/2 Church St., P. O. Box 1166 , Asheville , N. C., for plaintiff. William Medford, United States Attorney, Asheville, N. C., Louis F. Oberdorfer, Assistant Attorney General, Fred B. Ugast, Norman E. Bayles, Irwin J. Borof, John O. Jones, Trial Attorney, Department of Justice, Washington, D. C. 20530, for defendant.

CRAVEN, Chief Judge:

This case arises on cross-motions for summary judgment. There are no genuine issues as to the material facts, which appear to be, from the stipulations, as follows:

On December 27, 1961 , Leo M. KuyKendall purchased a 1962 model automobile from Murphy Chevrolet, Inc., of Canton , North Carolina . As part of this sale, and on the same day, he executed and delivered to Murphy a conditional sale contract, which provided, in part: "For the purpose of securing payment of the obligation hereunder, seller reserves title, and shall have a security interest in said property until said obligation is fully paid in cash."

Shortly after December 27, 1961 , GMAC purchased the conditional sale contract, and KuyKendall thereafter made payments to GMAC reducing the balance under the agreement to $2,187.60, which amount is presently due and owing.

On August 26, 1963, the United States, through the District Director of Internal Revenue, levied upon and seized the automobile in KuyKendall's possession to satisfy unpaid taxes for the years 1956, 1958 and 1959 in the total amount of $2,487.25, plus interest and lien fees. The subsequent attempted sale of the automobile by the United States was restrained, on motion of GMAC, by this court.

Thereafter, pursuant to a stipulation of the parties, the automobile was advertised and sold at public auction for $1,675.00, the proceeds being paid into the registry of the United States District Court pending the outcome of this action.

The conditional sale contract has not been recorded in the county where KuyKendall resides. On January 11, 1962 , the North Carolina Department of Motor Vehicles issued to KuyKendall a certificate of title which indicated that a lien existed in favor of GMAC in the form of a conditional sale contract.

Notice of the federal tax lien for the year 1956 was filed in the Buncombe County Register of Deeds office on April 22, 1959; notice of the tax lien for 1958 was filed on November 2, 1959, and notice of the lien for 1959 was filed on August 2o, 1962. It does not matter that the last filing date was after the GMAC loan. The first two liens amount to more than the property produced at sale.

Section 6321 of the Internal Revenue Code of 1954 (Title 26 U. S. C. A. Section 6321) provides: "If any person liable to pay any tax neglects or refuses to pay . . . the amount (together with interest and penalties, if any) . . . 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 lien arises as of the date of assessment. 26 U. S. C. A. Section 6322. When it arises, the lien is good against any interest except that of a mortgagee, pledgee, purchaser, or judgment creditor of the taxpayer. It is not valid against those special interests until notice is filed in the office authorized by the law of the state in which the property subject to the lien is located. 26 U. S. C. A. Section 6323(a)(1).

Since 25 U. S. C. A. Section 6321 does not define property or property rights mentioned therein, this court must look to the law of North Carolina to determine whether there exists any property or property rights of the taxpayer under the conditional sale contract to which a federal tax lien may attach. Aquilino v. U. S. [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960); U. S. v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 S. Ct. 1054, 2 L. Ed 2d 1135 (1958). But federal law determines whether such property, if any, is subject to the lien. 5 Rabkin & Johnson, Federal Income Gift and Estate Taxation 7332, Section 73.06(1).

In Planter's National Bank & Trust Co. v. South Carolina Insurance Co., 263 N. C. 32, 138 S. E. 2d 812 (1964), a case factually identical to this one, the Supreme Court of North Carolina held that reservation of title in favor of the seller under a conditional sale contract is effective to give priority to the seller against federal tax liens filed against the purchaser both before and after the conditional sale contract is entered into, even though the conditional sale contract was never recorded. The court based its conclusion on the fact that the taxpayer-purchaser had no property right in the vehicle to which the tax lien of the Government could attach. The court said: "Since the liens of the Government were duly filed and the plaintiff's conditional sales agreement has never been recorded, the situation is analogous to that of a mortgagee who holds a duly recorded mortgage containing an after-acquired property clause." In such a situation the mortgagee who claims after-acquired property takes it in the same condition in which it comes into the hands of the mortgagor. The failure to register the lien is of no consequence because "the registration laws are intended for the protection of subsequent, not prior, purchasers and creditors." Id. at 815; Sec. 15 Am. Jur. 2d, Chattel Mortgages Section 163.

Community Credit Co. v. Norwood , 257 N. C. 87, 125 S. E 2d 369 (1962), relied upon by the Government is thought to be distinguishable. Planter's, moreover, is the later case and is controlling.

The Government, in effect a prior creditor, is unable to show a detrimental change in its position by reason of GMAC's failure to record the conditional sale contract. As stated in U. S. v. Anders Contracting Co. [53-1 USTC ¶9412], 111 F. Supp. 700 at 704 (D. C. S. C. 1952): "The Government has suffered no loss by reason of the failure to record the chattel mortgage, and to hold that the Government could take the property, which had been sold to the taxpayer, even though title had been retained by the seller, would result in an unjust enrichment of the Government at the expense of the Auto Company."

Title 28 U. S. C. A. Section 6321 provides for a tax lien in favor of the United States "upon all property and rights to property . . . belonging to such person." (Emphasis supplied.) The United States can acquire no better right to property than that of taxpayer. The Equitable Life Assurance Society of U. S. v. U. S. [64-1 USTC ¶9433], 331 F. 2d 29 (1st Cir. 1964); Karno-Smith Co. v. Maloney [40-2 USTC ¶9533], 112 F. 2d 690 (3rd Cir 1940). Therefore, where it is shown (as here) that the property sought to be attached is not the property of the taxpayer, the federal tax lien will be defeated. ¹ U. S. v. Kings County Iron Works, Inc. [55-2 USTC ¶9536], 224 F. 2d 232 (2d Cir. 1955).

It is adjudged that the Government is not entitled to the proceeds in question by reason of its tax liens. Summary judgment will be entered for GMAC.

¹ This is not to say that a tax lien may not attach to the taxpayer's equity, if any, in property subject to a conditional sale contract.

 

 

 

The Planters National Bank & Trust Company of Rocky Mount , N. C. v. South Carolina Insurance Company

N. C. Supreme Court, No. 249--Nash., 11/19/64

[1954 Code Sec. 6323]

Lien for taxes: Validity against mortgagees.--The assignee of a conditional sales contract covering an automobile purchased by a taxpayer against whom tax liens had been filed could not recover from an insurance company on a policy indemnifying the assignee for losses sustained solely because of its failure to record the contract. Since the taxpayer did not have a property interest in the automobile, the assignee should have asserted its lien when the Government possessed and sold the automobile to satisfy its tax liens.

W. S. Wilkinson, Planters Bank Bldg., Rocky Mount, N. C., James W. Keel, Jr., Peoples Bank and Trust Co. Bldg., Rocky Mount , N. C., for plaintiff. Jeff D. Batts, Cary Whitaker, 106 Tarboro St., Rocky Mount, N. C., for defendant.

DENNY, Chief Judge:

Appealed by defendant from Parker, J., March Civil Session 1964 of Nash.

This is an action instituted by the plaintiff to recover indemnity under a policy of insurance issued by the defendant to plaintiff, whereby the defendant contracted to indemnify the plaintiff from all losses sustained from failure solely of plaintiff to record an instrument it acquired in the usual course of business.

It was stipulated that the policy of insurance was in full force and effect from 1 November 1959 to 1 November 1960 .

On 23 April 1959 , "A Notice of Federal Tax Lien," in the amount of $1,923.08, against one A. E. Gurganus, a resident of Martin County, North Carolina, was recorded properly in the office of the Register of Deeds of Martin County. On 22 September 1960 a similar notice was recorded in the same office, in the amount of $1,879.46, against A. E. Gurganus. This second notice was not a renewal of the first lien but an additional one.

On or about 29 August 1960, Griffin Motor Company sold and delivered a 1960 Valiant station wagon to the said A. E. Gurganus, who executed a conditional sales contract and note for the deferred portion of the purchase price of the automobile in the sum of $2,525.00, to be paid in monthly installments. The conditional sales contract provided that "title to the property shall remain in seller or assigns until all amounts due hereunder or rearrangements thereof are fully paid in cash." This contract was sold for a valuable consideration to plaintiff on 1 September 1960 . The contract has never been recorded by the plaintiff.

[Tax Sale ]

The station wagon was seized by the United States on or about 23 September 1960 , advertised and sold on 21 October 1960 , to satisfy the aforesaid tax liens against the said A. E. Gurganus. Nothing appears in the record to indicate that the plaintiff sought to assert its lien on said station wagon against the United States .

It was stipulated that the 1960 Valiant station wagon, the property for which claim was made under the policy of insurance, was on 23 September 1960 valued at $2,000.00; that the balance due and unpaid on the conditional sales contract and note on 21 October 1960, the date the station wagon was sold for $1,500.00 was $2,210.19.

The court below, on the facts stipulated in accord with those hereinabove set out, held that the plaintiff was entitled to recover of the defendant the sum of $2,000.00, with interest at six per cent per annum from 21 October 1960 until paid, and the costs of the action. Judgment was signed in accord therewith.

Defendant appeals, assigning error.

[Opinion]

DENNY, C. J. It is provided in 26 U. S. C. A., §6321: "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."

It is further provided in 26 U. S. C. A., §6322: "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."

Likewise, ibid., §6323 reads as follows: "(a) Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgage, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate." Subsection (c)(1) in pertinent part provides as follows: "Even though notice of a lien provided in section 6321 has been filed in the manner prescribed in subsection (a) of this section, the lien shall not be valid * * * as against any mortgagee, pledgee, or purchaser of such security, for an adequate and full consideration in money or money's worth, if at the time of such mortgage, pledge, or purchase such mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of such lien."

[Local Recording Statute]

GS 44-65 provides: "Notices of liens for internal revenue taxes payable to the United States of America and certificates discharging such liens may be filed in the office of the register of deeds of the county or counties within which the property subject to such lien is situated."

Since the lien is only against the property of the taxpayer, it becomes necessary to determine what is property of the taxpayer.

The property or property rights to which the lien attaches must be determined by state law. United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 US 522, 4 L. ed. 2d 1371, 80 S. Ct. 1282.

"The existence of 'property' upon which the lien may attach must be determined under state law, but federal law determines whether that property is subject to the lien." 5 Rabkin & Johnson, Federal Income, Gift and Estate Taxation, §73.06.

In the case of United States v. Bess [58-2 USTC ¶9595], 357 US 51, 2 L. ed. 2d 1135, 78 S. Ct. 1054, the taxpayer, a resident of New Jersey , was assessed for deficiencies in income taxes for the years 1945-1949. The taxpayer died in 1950. The proceeds of certain insurance policies on his life, under which he had retained change-of-beneficiary and cash-surrender rights, were paid to his widow. The taxpayer's estate was insolvent. In an action instituted in the United States District Court in New Jersey , the Court held the taxpayer's widow liable for the total of the deficiencies notwithstanding that it exceeded the cash surrender value of the policies. On appeal, the Third Circuit Court reduced the District Court's judgment to the amount of the cash surrender value of the policies ([57-1 USTC ¶9528] 243 F 2d 675). The Supreme Court of the United States allowed certiorari and affirmed the judgment of the Circuit Court. The taxpayer, prior to his death, did have a property right in the cash surrender value of the policies.

In United States v. Anders Contracting Co. [53-1 USTC ¶9412], 111 F. Supp. 700, on 15 September 1950, the Government duly filed a tax lien against Anders Contracting Company for something over $8,000.00 in the proper recording office for Greenville County, South Carolina. On 6 April 1951, the Auto Sales Company sold a Ford truck to the Anders Contracting Company, and, contemporaneously therewith, took a conditional sales contract, securing a note for the balance of the purchase price, which contract provided, among other things, that title to and ownership of the truck should remain in the seller and its assigns until the balance due on the purchase price was paid in cash.

On 5 July 1951 , the Government filed another lien against Anders Contracting Company in the amount of $1,583.00.

The Auto Sales Company did not record its conditional sales agreement until 23 July 1951 .

The Anders Contracting Company defaulted in its payments, and on 21 January 1952 , the Auto Sales Company and the Deputy Collector of Internal Revenue agreed that the truck might be sold and the proceeds held in trust until title to the proceeds could be determined. The District Court held: "The position of the Government is not sustained by the rules of common law or those prescribed by the Recording Act of South Carolina, neither is it sustained by any equitable principle. The Government has suffered no loss by reason of the failure to record the chattel mortgage, and to hold that the Government could take the property, which had been sold to the taxpayer, even though title had been retained by the seller, would result in an unjust enrichment of the Government at the expense of the Auto Company."

In the case of Gauvey v. United States [61-1 USTC ¶9478], 291 F 2d 42 (U. S. C. C. 8th), the appellant on 1 May 1956 agreed to sell Basin Rig & Trucking, Inc. (hereinafter called Basin), certain personal property in accordance with the terms of a conditional sales contract, which, among other things, contained the provision that title to the property was reserved by the seller until the purchase price had been fully paid. The conditional sales agreement was not recorded until 17 April 1957 . Delinquent withholding and excise taxes were assessed against Basin in November and December 1956, and on 19 February 1957 , a tax lien for $8,368.25 was filed with the Register of Deeds of Williams County, North Dakota.

[Recording Requirement]

The United States District Court, under the above facts, gave a judgment in favor of the Government. See [60-2 USTC ¶9634] 185 F. Supp. 374. The District Court held the conditional sales agreement was not a mortgage within the meaning of §6323 of the Internal Revenue Code of 1954. On appeal to the Circuit Court the Court said: Being mindful that the Supreme Court has adhered to the principle that the statute is not to be extended to afford protection to holders of inchoate and unperfected liens, we are nevertheless satisfied that the conditional sale contract does not fall within that category. The lien provided therein came into existence upon execution of the contract * * *. While there appears to be a division in the courts on this question, we observe that the factor of recording is not mentioned in §6323 and, in our opinion, this element should not be read into the statute as a condition precedent to the protection afforded the enumerated classes.

"Irrespective of the nomenclature employed, realistically the conditional sale contract was a mortgage within §6323; appellant falls within the protected class and his lien is entitled to priority. Accordingly, the judgment is reversed with directions to enter a judgment in accordance with the views herein expressed."

Under the facts in the instant case, it is clear that A. E. Gurganus had no property right in the 1960 Valiant station wagon to which the tax lien of the Government could attach. United States v. Bank of United States, 5 F. Supp. 942; United States v. Bank of Shelby [4 USTC ¶1226], 68 F. 2d 538; United States v. Durham Lumber Co., supra.

Since the liens of the Government were duly filed and the plaintiff's conditional sales agreement has never been recorded, the situation is analogous to that of a mortgagee who holds a duly recorded mortgage containing an after-acquired property clause. Citizens Nat. Trust & S. Bank of Los Angeles v. United States [43-1 USTC ¶9426], 135 F. 2d 527.

In Dry-Kiln Co. v. Ellington, 172 NC 481, 90 SE 564, the plaintiff sold to the Ellington Building Supply Company, under a conditional sales agreement, the property in question. Prior thereto the Building Supply Company, a partnership, had executed a mortgage to the defendant, W. J. Ellington, securing certain indebtedness. (The mortgage covered supplies and property of all and every kind and description belonging to them or which they might thereafter acquire in connection with the business they were running.) The conditional sales agreement was never recorded.

The defendant denied the right plaintiff to recover under its unrecorded conditional sales agreement. On appeal from a verdict in favor of plaintiff, this Court discussed the generally recognized principle that a mortgage with an after-acquired clause operates to create a lien on the after-acquired property in favor of the mortgagee when the property comes into existence. The Court added: "The principle, however, is subject to the qualification that the mortgagee who claims after-acquired property takes it in the same condition in which it comes into the hands of the mortgagor, and if at that time it is subject to liens the general mortgage does not displace them, nor does the failure to register the lien, existing at the time of the acquisition of the property by the mortgagor, have this effect, as the registration laws are intended for the protection of subsequent, not prior, purchasers and creditors. Cox v. Lighting Co., 151 NC 69 (65 SE 648)" Motor Co. v. Jackson, 184 NC 328, 114 SE 478; Finance Co. v. Weaver, 199 NC 178, 153 SE 861; Silvertown Stores v. Caesar, 214 NC 85, 197 SE 698, 43 ALR 2d 815; Goodrich Silvertown, Inc. v. Rogers, 189 SC 101, 200 SE 91; United States v. New Orleans Railroad, 79 US 434, 20 L. ed. 434; 10 Am. Jur., Chattel Mortgages, §205, page 855; 15 Am. Jur. 2d, Chattel Mortgages, §163, page 332, et seq.

[Conclusion]

In light of the foregoing statutes and authorities cited herein, we have reached the conclusion that the plaintiff's loss as assignee of the conditional sales agreement involved herein was not occasioned solely as the result of plaintiff's failure to record the instrument but to its failure to assert its lien against the United States . Therefore, the judgment below is

REVERSED.

 

 

United States of America, Plaintiff v. Johnnie E. Palmore; Darlene Palmore; Louis G. McAfee; Dorothy McAfee; Lillian M. Brown; the State of Arkansas; Gus A. Eidson, dba Springdale Lumber Company; Webb Belting and Supply Company; Russell Belden Electric Company; and First National Bank, Fayetteville, Ark., Defendants

U. S. District Court, West. Dist. Ark. , Fayetteville Div., Civil Action No. 609, 4/9/68

[1954 Code Sec. 6321]

Tax liens: Validity: Property of another.--A Government lien for delinquent income taxes was not valid against real property in which the taxpayer had no interest or title. The taxpayer's title to the property was defective because the person from whom he had purchased the property never acquired title to the property. The predecessor had purchased the property under an escrow contract (under which title would not pass until payment of the full purchase price was made) and had defaulted in payment. .

[1954 Code Sec. 7426]

Damages action against United States: Wrongful levy: Failure to release tax lien.--The rightful owner of property against which the Government had assessed a lien for delinquent taxes owed by another person could not sue the United States for damages where the Government had not consented to such suit.

Charles M. Conway, United States Attorney, P. O. Box 1524, Fort Smith, Ark., for plaintiff. Luke Arnett, P. O. Box 2981, Little Rock, Ark., for State of Ark.; Charles W. Atkinson, Ozark Theater Bldg., Fayetteville, Ark., for L. Brown; Paul Jameson, P. O. Box 4277, Central Sq. Station, Fayetteville, Ark., for First Nat'l Bank, Fayetteville, Ark., for defendants.

[Facts]

WILLIAMS, District Judge:

The Court has considered the respective motions of the plaintiff and of the defendant Lillian M. Brown for summary judgment and the motion of the plaintiff to dismiss the counterclaim of defendant Lillian M. Brown, the stipulation of facts, and the briefs of the respective parties and has concluded that the motion of the defendant Lillian M. Brown for summary judgment as to the complaint of the plaintiff should be sustained; and that the motion of the plaintiff to dismiss the counterclaim of the defendant Lillian M. Brown should be sustained; and in this connection is writing this letter which will serve as an opinion.

Plaintiff, United States of America, filed this action seeking judgment against the defendant Johnnie E. Palmore for the amount of $15,559.80 for unpaid withholding taxes plus interest as provided by law and to foreclose its lien for such taxes on any property owned by Palmore, including

The North Half (N 1/2) of the North Half (N 1/2) of the Northwest Quarter (NW 1/4) of the Southeast Quarter (SE 1/4) of Section Thirteen (13), Township Seventeen (17) North, Range Thirty (30) West, containing 10 acres more or less, Washington County, Arkansas.

The other defendants were named for the purpose of having them assert any claim they had in the property described, and among those were Louis G. McAfee and Dorothy McAfee from whom it is alleged the defendant Johnnie E. Palmore purchased the property, and Lillian M. Brown from whom [and her husband Walter W. Brown] it was alleged the McAfees purchased the property. The defendants Johnnie E. Palmore and Darlene Palmore, Louis G. McAfee and Dorothy McAfee filed no answer nor did any of the other defendants except the State of Arkansas , First National Bank of Fayetteville and Lillian M. Brown.

The answer of the State of Arkansas alleges that Johnnie E. Palmore owed it a certain amount for unpaid taxes, to secure the payment of which it asserted a lien upon the property and asked for foreclosure thereof. The First National Bank of Fayetteville, Arkansas, in its answer asserted that it was an escrow agent in the sale of the property by Walter W. Brown and Lillian M. Brown to Louis G. McAfee and Dorothy McAfee and that it had delivered the abstract of title to said property and other documents, [deed] to the purchaser of said lands at a sale thereof pursuant to a decree of the Chancery Court of Washington County, Arkansas, dated October 27, 1966, wherein Walter W. Brown and Lillian M. Brown were plaintiffs and it was one of the defendants.

[Counterclaim]

The answer of Lillian M. Brown among other things denied that Johnnie E. Palmore had any title to or interest in the property, or that the plaintiff had any lien upon the property and asked that the title to the property be quieted and confirmed in her as against the plaintiff; and, by way of counterclaim, sought judgment against the plaintiff in the amount of $8,000.00 as damages for its failure to release the property from the asserted lien, thereby depriving her of a sale of the property. As to the counterclaim, plaintiff, filed a motion to dismiss on the ground that it was an action against the sovereign to which it had not consented. Subsequently the plaintiff and the defendant Lillian M. Brown filed a stipulation of facts. Thereafter Lillian M. Brown filed a motion for summary judgment with respect to the plaintiff's complaint, pursuant to Rule 56(b) of the Federal Rules of Civil Procedure; and pursuant to the same rule the plaintiff filed a motion for summary judgment.

[No Title in Taxpayer]

If the Court should sustain the plaintiff's motion for summary judgment, this will also be dispositive of its motion to dismiss the counterclaim of the defendant Lillian M. Brown. Therefore the Court will first determine the issue with respect to the motion of the respective parties for a summary judgment.

Decision of this issue depends upon whether Johnnie Palmore had any interest or title to the property here involved to which the lien of the plaintiff could attach. A recitation of all the facts stipulated is not necessary for the determination of this issue, and reference will be made only to those facts as the Court thinks are pertinent to the task at hand.

Palmore acquired the property here involved pursuant to his contract of April 4, 1960 with Louis McAfee and Dorothy McAfee (Stipulation Exhibit B). The Government's lien was filed on October 22, 1962 (Stipulation Par. 4). The McAfees acquired the property pursuant to their contract of August 31, 1959 with Walter W. Brown and Lillian M. Brown (Stipulation Exhibit A), who were the owners as tenants by the entirety (Stipulation Par. 1). In the contract of the McAfees with the Browns part payment was made, and the balance was payable monthly. The deed and abstract of title, as provided by the contract, was delivered to the First National Bank of Fayetteville , Arkansas , for delivery when the balance was "paid in full." There was a default in the payment of the balance.

The substantive law of Arkansas controls with reference to the issue of whether Johnnie E. Palmore acquired any interest or title to the property which he bought from the McAfees and which they bought from the Browns, and the following decisions of the Supreme Court of Arkansas are decisive of the proposition that under an escrow contract of the type here involved, no title passed to the McAfees until payment in full of the price of the property. Mansfield Lumber Co. v. Gravette, 177 Ark. 31; Bondurant v. Enis, 152 Ark. 372; Ober, Attwater & Co. v. Pendleton, 30 Ark. 61. See also "A Survey of Escrow" 8 Arkansas Law Review, 164-171.

Inasmuch as it is undisputed there was a default in the payment of the price of the property in connection with the sale of the property by the Browns to the McAfees, then in view of the decisions cited, supra, the McAfees acquired no title from the Browns, and therefore Johnnie E. Palmore acquired no title from the McAfees, and there was nothing to which the lien of the plaintiff could have attached.

[Counterclaim Dismissed]

Notwithstanding the decision of the Court granting defendant Lillian M. Brown's motion for summary judgment as to the complaint of the plaintiff, her counterclaim for damages for the failure of the plaintiff to release its lien upon the property here involved must be dismissed, for the reason that it amounts to a suit against the United States to which it has not consented. Nassau Smelting Works v. United States , 266 U. S. 101; United States v. Shaw, 309 U. S. 495.

A judgment will be entered in accordance with this opinion granting the motion of the defendant Lillian M. Brown for summary judgment and dismissing the complaint of the plaintiff, and quieting the title of the defendant Lillian M. Brown to the lands here involved as against the plaintiff in this action; and dismissing the counterclaim of the defendant Lillian M. Brown against the plaintiff.

 

 

 

United States of America v. Claude E. Ridley, Mrs. Dimple Gray Ridley, sometimes known as Mrs. Dimple G. Ridley and as Mrs. Dimple Ridley, L. B. Ridley and W. A. Ridley

In the United States District Court, Northern District of Georgia, Atlanta Division, Civil Action No. 4718, 120 FSupp 530, March 20, 1954

Accounting periods and methods: Net worth increase: Apportionment over several years.--In a suit by the United States alleging that the taxpayers, husband and wife, owed taxes, and that other defendants claimed liens against or interests in property belonging to the taxpayers, the United States asserted its liens against such property and asked for a receiver and injunction and that the claims of the taxpayers and other defendants be determined and the government's liens foreclosed. The taxpayers questioned the correctness of the tax assessment which had been based on the net worth and expenditures method for the years 1939 through 1951. Taxpayers had kept no records and filed no returns. The method used by the Commissioner for determining the time that income was received was based entirely upon the time of expenditure, and this resulted in a great difference in the taxes assessed in the various years. Because there was evidence that the taxpayers' earnings were about equal in each of the taxable years, 1942 through 1951, the Court, after making some adjustment of estimated expenditures in favor of the taxpayers, distributed the income evenly over 1939-1951, so that the opening net worth as of December 31, 1941, was increased by at least $42,414.44.

Lien for taxes: Property subject to lien: Another's interest in property.--Pursuant to an oral contract, relatives of the husband (the other defendants) did some work on the husband's farm on the understanding that they would receive a half-interest if they would go in there and "clean up". It was held that the defendants had acquired no interest in the land, equitable or oterwise, since the contract was too vague and uncertain to be capable of enforcement.

Priority of liens: Materialmen's and laborers' liens.--The relatives also agreed with the husband that they would furnish material and labor in erecting two houses on other property of the husband and that they would receive payment on sale. The Court held that there was no evidence that laborers' or materialmen's liens had been obtained and ordered that the goverment's liens be foreclosed. The Court saw no necessity for a receiver or injunction

Lien for taxes: Property subject to lien: Joint ownership.--The interest of the husband in joint ownership bonds was subject to the government's claim for taxes owed.

Additions to tax in case of nonpayment: Failure to file declaration of estimated tax: Double penalties.--An addition of 10% to the tax was made for failure to file a declaration or to pay the installment of the estimated tax. However, the Court refused to apply the 6% addition for substantial underestimation for the reason that the taxpayer had made no underestimation (having filed no returns) and that he had suffered "the greater sanction of 10%."

Jas. W. Dorsey, United Attorney, Post Office Box 912, Atlanta 1, Ga., for plaintiff. Hal Lindsay, M. Neil Andrews, 924 Healy Building, Atlanta , Ga. , for defendants.

SLOAN, District Judge:

The United States brings this complaint in equity alleging that the Commissioner of Internal Revenue has made tax assessments against the defendant, Claude Ridley, for the years 1942 through 1951, inclusive, which taxes, penalties and interest amount to $106,674.37.

Asserting its lien for taxes on described property, the United States alleges that the other named defendants claim liens against or interests in the described property.

Alleging further that the defendant, Claude Ridley, was likely to encumber or transfer the property, the plaintiff prays for a receiver and injunction and that the claims of the defendants be determined and the plaintiff's liens foreclosed.

The defendants make answer. The defendant, Claude Ridley, denies the correctness of the tax assessments; denies fraud or intent to evade the payment of tax and prays that this Court determine the amount of taxes due. The other defendants each assert some claim upon or interest in some of the described properties and seek a determination thereof.

Findings of Fact

The defendants, Claude Ridley and Mrs. Dimple Ridley are husband and wife. They are about forty years of age and were married about twenty years ago and have no children. Neither has any education and can neither read or write. They have lived on a farm all of their lives and have raised some cotton and corn, hay, produced a few chickens and eggs, and sold some milk and butter. So far as can be determined, they never raised in excess of three to four bales of cotton or two to three hundred bushels of corn in any one year. Their marriage apparently took place about 1934, and in 1937 Claude Ridley, together with Nathan Ridley, entered a plea of guilty in the District Court of the United States for the Northern District of Georgia to the offense of possession of 113 gallons of illicit liquor, the containers not having affixed thereto revenue stamps, and it appears that from this time on the defendant, Claude Ridley, was engaged in the illegal liquor traffic, both manufacturing and selling. Though this business may not have been continuous, the evidence not disclosing the facts in this respect, the circumstances indicate a fairly continuous illicit liquor business.

Both Claude Ridley and his wife were frugal to the point of miserliness; had no luxuries of life, and the barest necessities. From the evidence, and from their appearance, it is determined, with reasonable certainty, that they have lived frugually through the years and have spent little for living expenses, the Court being of the opinion, and here finds, that the expenditures of Claude Ridley and his wife, Dimple Ridley, for living expenses during the years 1937, 1938, 1939, 1940, 1941, 1942, 1943, 1944, 1945, 1946, 1947 and 1948 did not exceed the sum of $1,000.00 per year, and that during the years 1949, 1950 and 1951 that said expenditures did not exceed the sum of $1500.00 per year.

Claude Ridley and his wife saved their money and some years later purchased a small farm upon which there was situated a residence and a small store building, the same containing fifteen to twenty acres of land. This farm apparently was placed in the name of the wife, Dimple Ridley, and for many years they have lived on the farm and have operated the country store, selling groceries and gasoline. No records were kept of the amount of income or of the business transacted, and it is impossible to determine accurately the amount of income received by Claude Ridley, nor is it possible to determine accurately the years in which the income was received. It does appear, and the Court finds, that during the years 1942 through 1951, the defendant, Claude Ridley, and his wife, Dimple Ridley, purchased United States Savings Bonds in the sum of $98,550.00; real estate in the sum of $23,030.50; an automobile-truck $1425.00; spent for building materials and for the improvement of real estate, $2,199.83; deposited $1,308.00 in cash in the bank; expended $1,750.00 in the construction of a grist mill building; all of such purchases and expenditures were made from taxable income received by Claude Ridley during the years 1937 through 1951, inclusive.

[Construction of Income]

In 1952 a special agent of the Internal Revenue Service, United States Department of Internal Revenue, commenced an investigation of the tax liability of Claude Ridley, and finding that no records had been kept by Claude Ridley, and that it was impossible to determine his income with accuracy since no records were kept, said special agent began the investigation by talking with the taxpayer, examining the public records of Murray and Whitfield counties, examining the bank records and the bond purchases by the said Claude Ridley, and determined that the best method by which to compute the taxable income of Claude Ridley would be the net worth and nondeductible expenditures method and accordingly the investigator adopted that method of determining the income and computing the tax, and in so doing, the special agent determined the year that the purchases were made and the year that the other expenditures were made and charged said amounts as income in the year in which the purchases or expenditures were made. The special agent testifying that he was unable to find money or property belonging to Claude Ridley prior to 1942, fixed as the opening net worth as of December 31, 1941, nothing, and although he determined from investigation that the said Claude Ridley did in January, 1942, purchase United States Government Bonds in the sum of $7,500.00, he charged the said sum of $7,500.00 as having been earned and received by the said Claude Ridley in the year 1942, and taxable as such.

The method used by the special investigator for determining the time that income was received by Claude Ridley was based entirely upon the time of the purchase or expenditure, and this has resulted in a great difference in the taxes assessed in the various years. For instance, for 1942 a tax of $2,584.00, besides interest and penalties is assessed, while in the year 1943, a tax of $181.28 is assessed. In 1947 a tax of $15,277.54 is assessed, while in 1948 a tax of $483.00 is assessed, the amount of income allocated in each year being based entirely upon the amount of the purchases or expenditures in that year.

There is in evidence the positive testimony of Claude Ridley and his wife that their earnings were about equal in each of the years. There is no evidence of greater income in one year than in another (except the date of the expenditures).

From and including the year 1937, the first year that the evidence shows Claude Ridley to have been in the illicit liquor business, his sources of income were substantially the same from 1937 through 1951, inclusive, said sources of income being: (1) From the illicit liquor business; (2) the farming operations, and (3) the country store and filling station.

It appears without dispute that Claude Ridley did not deposit his money in banks but kept it in cash, all payments for bonds and real estate being made in cash. It appears that on one occasion that he carried from six thousand to six thousand five hundred dollars in coins to the bank for the purchase of bonds and that the coins had been buried for so long that they were in bad shape, rusted and corroded.

During the ten year period from 1942 through 1951, inclusive, Claude Ridley made expenditures for investment of approximately one hundred twenty thousand dollars, while during the same period only thirteen hundred and eight dollars was deposited in any bank.

These circumstances corroborating the testimony of the taxpayer as to receipt of income, in the opinion of the Court, entitles the testimony of the taxpayer to credit. Furthermore, in the absence of proof to the the contrary, it is more logical and reasonable to believe that the income received was in substantially equal amounts in each of the years from 1937 through 1951 inclusive. The evidence preponderates to this theory. From the evidence it is not clear just how much money was expended in the purchase of United States Government Bonds. However, looking to the defendants' answer to the amended complaint, it appears from paragraphs 5 and 6 thereof that the defendants admit purchasing said bonds at a cost of $102,300.00, while it appears from the original complaint that of said sum $3,750.00 of said bonds were redeemed, so that the expenditures for the purchase of United States Government Bonds, for tax purposes, would be $98,550.00. The Court therefore finds that the total income of Claude Ridley for the years 1937 through 1951 was as follows:

Purchases, deposits and expenditures

1942 through 1951, inclusive:

Savings Bonds ...........................         $ 98,550.00

Realty Purchased ........................           23,030.50

Improvements on 

Rogers

 Subdivision

Property ................................            2,179.83

1/2 Cost of Grist Mill ..................            1,750.00

Automobile Truck ........................            1,425.00

Bank Deposits ...........................            1,308.00

Total Expenditures ......................         $128,243.33

 

This makes a total income, except for living expenses of $128,243.33, which income, under the findings here made, will be divided equally over the fifteen year period from 1937 through 1951, inclusive, which will give to Claude Ridley an opening net worth as of December 31, 1941 of $42,414.44, which is one-third of the total income shown by these expenditures.

[Living Expenses]

For the years 1942 through 1948, inclusive, there will be added the sum of $1,000.00 per year as income expended for living expenses, and for the years 1949 through 1951, inclusive, there will be added the sum of $1,500.00 as income expended for living expenses, in accordance with the findings here made. Thus, the Court finds that the taxable income of Claude Ridley for each of the years from 1942 through 1951, inclusive, is as follows:

1942 ....         $ 9,549.56

1943 ....           9,549.56

1944 ....           9,549.56

1945 ....           9,549.56

1946 ....           9,549.56

1947 ....           9,549.56

1948 ....           9,549.56

1949 ....          10,049.56

1950 ....          10,049.56

1951 ....          10,049.56

 

During the years 1937 through 1951, inclusive, the defendant, Claude Ridley, was engaged in the business of farming, operating a country store and filling station, and of manufacturing and selling illicit whiskey. In each of these endeavors he was aided and assisted by his wife, Dimple Ridley, and he derived income from each of these sources.

Claude Ridley made purchases with the aforesaid income of the following series "E," "F," and "G" Savings Bonds issued in the names of the respective payees and beneficiaries on the dates and in the face amounts, as follows:

Mr. Claude Ridley, P. O. D., Mrs.

Dimple Ridley Bought February,

1944 "E" Bonds ..........................         $ 5,000.00

Claude Ridley, P. O. D., to Mrs.

Dimple Gray Ridley Bought August,

1944 "F" Bonds ..........................         $10,000.00

To Mrs. Dimple Ridley or Claude Ridley

Bought January 4, 1945 "E"

Bonds .....................................         $ 5,000.00

To Claude Ridley or Mrs. Dimple G.

Ridley Bought January 4, 1945 "E"

Bonds .....................................         $ 5,000.00

Claude Ridley Bought May, 1945 "F"

Bonds .....................................         $10,000.00

To Claude Ridley or Mrs. Dimple Pidley

Bought January 14, 1946 "E"

Bonds .....................................         $ 5,000.00

To Mrs. Dimple Ridley or Claude

Ridley Bought January 14, 1946 "E"

Bonds .....................................         $ 5,000.00

Mrs. Dimple Ridley or Mrs. Claude

Ridley Bought April, 1946 "G"

Bonds .....................................         $ 5,000.00

Mr. Claude Ridley or Mrs. Dimple

Ridley Bought April, 1946 "G"

Bonds .....................................         $ 5,000.00

Mrs. Dimple Gray Ridley or Mr.

Claude Ridley January 2, 1947 "E"

Bonds .....................................         $ 5,000.00

Mr. Claude Ridley or Mrs. Dimple

Gray Ridley January 2, 1947 "E"

Bonds .....................................         $ 5,000.00

Mrs. Dimple Gray Ridley or Claude

Ridley Bought February, 1947 "G"

Bonds .....................................         $ 5,000.00

Claude Ridley or Mrs. Dimple Gray

Ridley Bought 1947 "G" Bonds ............         $ 5,000.00

To Claude Ridley or Mrs. Dimple G.

Ridley Bought September, 1947 "G"

Bonds .....................................         $ 5,000.00

Mrs. Dimple G. Ridley or Claude Ridley

Bought September, 1947 "G"

Bonds .....................................         $ 5,000.00

Claude Ridley or Mrs. Dimple G. Ridley

Bought April, 1949 "G" Bonds ............         $10,000.00

Claude E. Ridley or Mrs. Dimple G.

Ridley Bought February, 1950 "G"

Bonds .....................................         $10,000.00

[Contract Vague]

On the 6th day of April, 1951, Claude Ridley purchased from Waco Byers, Hattie Byers and John Byers 199 acres of land in Murray County, Georgia, paying therefor the sum of $10,557.00, and shortly thereafter, Claude Ridley agreed with his brother, W. A. Ridley, and his nephew, L. B. Ridley, that if the said W. A. Ridley and L. B. Ridley would go in there and "clean up" the farm that he would give them a half interest in the same. W. A. Ridley and L. B. Ridley agreed to this but didn't do much on it during the year 1951, but during the years 1952 and 1953 they spent some two to three hundred man hours working on the farm and cleaning it up; they have a bulldozer there that would normally rent for about $14.00 an hour and have used the bulldozer to clear up about fifty acres of land and to clean up around the edges of fields already cleared; they have not completed their cleaning up but intend to do so in the future. The agreement between Claude Ridley and W. A. Ridley and L. B. Ridley with respect to this was an oral agreement; there was no definite agreement as to just what the cleaning up would consist of; how much work was to be done, or when it was to be done, nor does it appear how much has been completed or how much remains to be completed in the future. The Government's claim of lien was recorded in Murray County on November 24, 1952.

On the 2nd day of October, 1950, Claude Ridley purchased 46 lots of land in what is known as the Albert Rogers Subdivision in Whitfield County, Georgia for $4,963.50 and thereafter L. B. Ridley and W. A. Ridley furnished materials and performed labor in erecting two houses on said lots under an agreement with Claude Ridley that they were to be paid when the houses were sold; the said Claude Ridley now owes L. B. Ridley and W. A. Ridley approximately $700.00 for such labor and materials. The contract of employment for the building of the houses was not in writing, nor does the evidence show when the buildings were completed. Claude Ridley received during the period from January 1, 1942 through and including the year 1951, taxable income in the amount of $98,550.00; never filed any tax returns; kept no records of income; refused to cooperate with the agents of the Internal Revenue Department when they undertook to investigate his income.

The taxpayer offers no reasonable explanation of his failure to file returns, and the Court finds as a matter of fact that the defendant is guilty of fraud with the intent to evade the payment of income taxes due. The Court further finds that the said Claude Ridley failed to file any declaration of estimated taxes and failed to pay the taxes due.

Conclusions of Law

The authority granted to the Commissioner of Internal Revenue, where records are not kept by the taxpayer to use such method of computing his taxable income as would clearly reflect his income (26 U. S. C. A. Sec. 41), is nothing more than the grant of authority to the Commissioner to use indirect or circumstantial evidence where direct evidence such as records can not be obtained. The net worth and expenditures method adopted by the Commissioner through the agent in this case is simply the exercise of the authority to use circumstantial evidence in computing the taxpayer's taxable income.

The determination of the Commissioner, as evidenced by the assessment of the tax, is not conclusive but only furnishes prima facie evidence of its correctness, ¹ and where, as here, the United States files its complaint in equity seeking to foreclose its lien for taxes, and asking this Court to direct all persons having liens or claiming interests in the property be brought into Court, and that the merits of their claims be determined, seeking a receiver and injunctive relief, and where the defendant taxpayer denies that he owes the taxes so assessed and avers that the tax assessments are erroneous, and introduces evidence both direct and circumstantial, which if fully credited would require the Court to determine that the deficiency tax assessments made by the Commissioner of Internal Revenue are incorrect, and to determine anew the taxpayer's tax liability, the Court is free to determine for itself from all of the evidence in the case just what the taxpayer's liability is, and where, as here, the only circumstantial evidence before the Commissioner was the fact that the taxpayer made certain expenditures, mostly in the nature of investments, and where those facts are likewise before the Court, with other evidence in addition thereto, this Court is free to weigh all of the evidence and to reach a conclusion different from that of the Commissioner.

In this case the taxpayer, Claude Ridley, failed to keep records as required by law, ² and the Commissioner of Internal Revenue had the right to use such method of computing his taxable income as in his opinion would clearly reflect the income, ³ and the Commissioner chose the net worth method of computing income. This method at best is subject to the criticism that when heedlessly resorted to and loosely applied, it is dangerous and inexorable. In all cases, civil and criminal, it should be used with the utmost caution to avoid injustice to honest taxpayers which might otherwise result. This, however, does not incapacitate it as an instrument of evidential value in cases where it may be properly applied. When a taxpayer violates the mandate of the statute which requires him to keep proper records of his income, and conditions are otherwise such that his taxable income may be determined in retrospect only by resort to circumstantial evidence of this character, he will not be permitted to rely upon his ability to conceal the distorted facts of income and his fraudulent conduct to avoid the imposition of taxes which the collection authorities may show to be lawfully due. ⁴

[Use of Net Worth Method Justified]

This Court is of the opinion that under the facts of this case that the use of the net worth and expenditures method of determining the income is justified. However, the Court is of the further opinion that this method has been "too loosely applied" in the following particulars:

1. The circumstances show that the opening net worth as of December 31, 1941 should have been at least $42,414.44, the amount of that portion of the total income received prior to January 1, 1942.

2. That the higher estimate of the agent as to the amount of expenditures for living expenses must yield to the evidence and strong corroborating circumstances, and such expenditures should be fixed as set forth in the Court's findings.

3. That the allocation of income by the agent as being in the years that the investment expenditures took place is a loose application of the net worth-expenditures method of determining income and is not supported by any other fact or circumstance, while the oral testimony, as well as other circumstances, indicate that such investment purchases were made from accumulated savings rather than from current income, and there is no other evidence to indicate great income in one year and little income in another. The income should be distributed evenly over the years 1937 through 1951, inclusive, in accordance with the foregoing findings of fact.

W. A. Ridley and L. B. Ridley claim an interest in the 199-acre farm bought by Claude Ridley from the Byers. The basis of this claim is an oral contract that they were to have a one-half interest in the farm if they would "clean it up." They claim that they have done much work on it during 1952 and 1953, but that the work has not been completed. In order for this promise, for the sale of an interest in lands, to be binding upon the obligor, it must be in writing. ⁵ Although the Georgia Code provides that this requirement shall not extend to cases where there has been such part performance of the contract as would render it a fraud of the party refusing to comply if the Court did not compel a performance, ⁶ the contract here is too vague and uncertain to be capable of enforcement. ⁷ The contract has not yet been completed, and though W. A. Ridley and L. B. Ridley may have a valid claim against Claude Ridley for the value of the work done, they have not acquired any interest in the land, equitable or otherwise.

W. A. Ridley and L. B. Ridley also claim an interest in two certain houses and lots in the Albert Rogers Subdivision, the basis of this claim being an alleged oral agreement with Claude Ridley that they would furnish the labor and material and construct upon the described two lots two houses, Claude Ridley agreeing to reimburse them when the property was sold. A balance of approximately $700.00 is now due them.

[No Lien or Interest]

Under the facts as contended for by said claimants, they have neither a lien upon nor an interest in the described property.

While the Georgia law provides that a laborer, ⁸ or a materialman,/9/ may acquire a lien where labor is performed and material is furnished in improving real estate, by complying with the requirements of the statutes as to the filing and recording of the notices of claim of lien within the time prescribed, there is no evidence here that such liens have been obtained. The claim of lien or interest in the property of W. A. Ridley and L. B. Ridley for the construction of the two houses is denied.

The defendants contend that to subject the interest of Claude Ridley in the joint ownership bonds would affect the right of survivorship. This has been decided contrary to the contentions of the defendants.

"The incidence of the bonds here in question as governed by the regulations in respect to their issue is that while there is preserved the right of survivorship, that right is preserved only when co-ownership is not otherwise terminated under the circumstances recognized by the regulations. The present bonds within certain limitations may be reached by creditors for the debts of a co-owner. . . . When subjected to process by creditors there is recognition of the extent of interest therein of each of the respective co-owners." Guldager v. United States , 204 Fed. (2d) 487, 489.

The Court finds that the bonds, as detailed in the findings of fact, purchased in May, 1945 and registered in the name of Claude Ridley only, as prescribed by Title 31, Code of Federal Regulations, Sec. 315.4, are the sole property of Claude Ridley in accordance with section 315.2 of said regulations.

In the list of bonds as set out in the findings of fact, the Court finds that where the bonds were registered in co-ownership as prescribed by Title 31 of the Code of Federal Regulations, Section 315.4 (2), the Court finds that pursuant to Section 315.13(c), that Mrs. Dimple Ridley is the owner of a one-half interest in such bonds and the taxpayer, Claude Ridley, owns a one-half interest in such bonds.

In the list of bonds as set out in the findings of fact, where the bonds are registered in the beneficiary form--Claude Ridley, P. O. D., Mrs. Dimple Ridley, or, Claude Ridley, P. O. D., Mrs. Dimple Gray Ridley, the Court finds in accordance with Title 31, of the Code of Federal Regulations, Sec. 315.13(c), that Claude Ridley is the owner of such bonds as set forth in sections 315.4(3) and 315.46 of said regulations.

Among the penalties or additions to the tax made by the Commissioner, are the following:

10% of the tax for failure to file a declaration or pay the installment of estimated tax as provided by section 294(d)(1) of Title 26, U. S. C. A.

6% of the amount by which the tax exceeds estimate (total tax here) for substantial understimate of estimated tax as provided by Sec. 294(d)(2) of Title 26, U. S. C. A.

The addition of 10% of the tax for failure to file the declaration or to pay the installment of the estimated tax is proper to be added in the applicable years. However, the addition of 6% for substantial underestimate of estimated tax is improper for the very obvious reason that the tax was not underestimated, indeed, the taxpayer filed no declaration of estimated tax at all the suffers the greater sanction of 10% addition to the tax for the failure, and the failure to pay the tax.

The argument of the Government that the failure to file the declaration of estimated tax is in effect a declaration of no tax, thus subjecting the taxpayer to this penalty, is rejected as contrary to a proper construction of the statutes.

The tax will be computed in accordance with the findings here made. Interest and additions to tax as computed will be made in the manner applied by the agent, except the addition of 6% for substantial underestimate shall not be added.

No evidence showing the necessity for a receiver or injunction was offered, and no necessity therefor appears.

The lien of the United States for taxes here found to be due attaches to all of the property of Claude Ridley and the prayer of the United States for foreclosure is granted.

A judgment for the taxes, penalties and interest, computed in accordance with these findings and conclusions, may be prepared and presented.

¹ U. S. v. Anderson, 269 U. S. 422 [1 USTC ¶155]; McCarl v. U. S., 42 Fed. (2d) 346 (and cases cited).

² 26 U. S. C. A. Sec. 54(a).

³ 26 U. S. C. A. Sec. 41.

⁴ Bryan J. Baker v. C. I. R., No. 14385, decided by U. S. Court of Appeals for the Fifth Circuit, January 29, 1954.

⁵ Ga. Code, 20-401.

⁶ Ga. Code, 20-402.

⁷ Prior v. Hilton & Dodge Lumber Co., 141 Ga. 117, 119.

⁸ Ga. Code, 67-1801, et seq. (Laborer's Liens).

⁹ Ga. Code, 67-2002, et seq. (Materialmen's Liens).