Funds on Deposit page2

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Paul F. Bruning, Petitioner v. United States

Supreme Court of the United States, No. 423, 376 US 358, 84 SCt 906, 3/23/64, Affirming CA-9, 63-1 USTC ¶9464, 317 F. 2d 229

On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit.

[1954 Code Sec. 6601]

Interest on tax debt: Post-petition interest on tax claim not discharged in bankruptcy.--Where a debt for taxes is not discharged in bankruptcy proceedings, post-petition interest continues to run on the surviving debt and remains, after bankruptcy, a personal liability of the debtor. Thus, a bankrupt debtor could not recover interest paid on an undischarged tax debt out of after-acquired assets following bankruptcy. City of New York v. Saper, (Sup. Ct. ) 49-1 USTC ¶9198, 336 U. S. 328, was distinguished. In that case post-petition interest on a tax claim was not allowed against the bankruptcy estate.

Ernest R. Mortenson, 961 E. Green St. , Pasadena , Calif. , for petitioner. Archibald Cox, Solicitor General, Louis F. Oberdorfer, Assistant Attorney General, Philip B. Heymann, Assistant to the Solicitor General, I. Henry Kutz, Karl Schmeidler, Department of Justice, Washington 25, D. C., for respondent.

MR. CHIEF JUSTICE WARREN delivered the opinion of the Court:

The issue presented in this case is whether the United States is entitled to recover, out of assets acquired by a debtor after his adjudication of bankruptcy, post-petition interest on a tax assessment which (under §17 of the Federal Bankruptcy Act, 30 Stat. 544, 550, as amended, 11 U. S. C. §35) was not discharged in the bankruptcy proceedings. The essential facts are not in dispute. Petitioner incurred withholding and federal insurance contributions taxes during the fourth quarter of 1951 but failed to pay those taxes when due. In March 1952, an assessment of those taxes was made against petitioner. On July 6, 1953, petitioner filed a voluntary petition in bankruptcy and was adjudicated a bankrupt in the Federal District Court for the Western District of Louisiana. The District Director of Internal Revenue filed a claim in the bankruptcy proceedings for the assessed amount owed by petitioner, and the United States received a small distribution out of the assets of the bankruptcy estate. Petitioner was granted a discharge in bankruptcy in October 1953, and the case was closed in June 1954.

In 1957, petitioner filed claims for refund of income taxes paid for the years 1953 and 1954, which resulted in his being allowed a credit for income taxes and interest in respect of those years. On March 7, 1958, the Director of Internal Revenue applied the entire 1953 credit and part of the 1954 credit ¹ to the balance of the assessment of the withholding and F. I. C. A. taxes owed for 1951, plus interest to date--including interest which had accrued during the period between the filing of petitioner's petition in bankruptcy (July 6, 1953) and the date of payment (March 7, 1958). This post-petition interest, which totals about $795, is the subject of the present controversy. Petitioner did not question the Director's right to collect from assets acquired by petitioner after bankruptcy the unpaid principal of the tax debt and the pre-petition interest. However, contending that he was not liable for interest accruing on the assessment after his petition in bankruptcy was filed, petitioner brought suit in the Federal District Court for the Southern District of California for refund of that portion of the interest. The District Court held that petitioner's personal liability for post-petition interest on the unpaid taxes was not discharged by the bankruptcy proceedings, and the Court of Appeals for the Ninth Circuit affirmed. Due to an apparent conflict between circuits ² and the potentially recurring nature of the question involved, we granted certiorari, 375 U. S. 920. We affirm the decision below.

Section 17 of the Federal Bankruptcy Act, 11 U. S. C. §35, provides in relevant part:

"A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are due as a tax levied by the United States . . . ."

It is undisputed that, under §17, petitioner remained personally liable after his discharge for that part of the principal amount of the tax debt and pre-petition interest not satisfied out of the bankruptcy estate. The courts below held that, under §17, petitioner also remained personally liable for post-petition interest on the tax debt, and we find no substantial reason to reverse that holding. Initially, one would assume that Congress, in providing that a certain type of debt should survive bankruptcy proceedings as a personal liability of the debtor, intended personal liability to continue as to the interest on that debt as well as to its principal amount. Thus, it has never been seriously suggested that a creditor whose claim is not provable against the trustee in bankruptcy loses his right to interest in a post-bankruptcy action brought against the debtor personally. In most situations, interest is considered to be the cost of the use of the amounts owing a creditor and an incentive to prompt repayment and, thus, an integral part of a continuing debt. Interest on a tax debt would seem to fit that description. Thus, logic and reason indicate that post-petition interest on a tax claim excepted from discharge by §17 of the Act should be recoverable in a later action against the debtor personally, and there is no evidence of any congressional intent to the contrary.

Petitioner suggests that the Government might have ignored the bankruptcy proceeding entirely and later brought suit upon its undischarged claim against petitioner personally and collected both principal and interest. But petitioner asserts that once the Government filed a claim in the bankruptcy proceeding, its rights became limited to the recovery of unpaid sums allowed by the trustee, not including post-petition interest. This argument is based on §6873(a) of the Internal Revenue Code of 1954, which provides:

"Any portion of a claim for taxes allowed in . . . any proceeding under the Bankruptcy Act which is unpaid shall be paid by the taxpayer upon notice and demand from the Secretary or his delegate after the termination of such proceeding."

We find no indication in the wording or history of §6873(a) that the section was meant to limit the Government's right to continuing interest on an undischarged and unpaid tax liability. Nor is petitioner aided by the now-familiar principle that one main purpose of the Bankruptcy Act is to let the honest debtor begin his financial life anew. As the Court of Appeals noted, §17 is not a compassionate section for debtors. Rather, it demonstrates congressional judgment that certain problems--e.g., those of financing government--override the value of giving the debtor a wholly fresh start. ³ Congress clearly intended that personal liability for unpaid tax debts survive bankruptcy. The general humanitarian purpose of the Bankruptcy Act provides no reason to believe that Congress had a different intention with regard to personal liability for the interest on such debts.

Finally, petitioner urges that we consider the present case in light of the decision in New York v. Saper [49-1 USTC ¶9198], 336 U. S. 328. As to claims against the trustee in bankruptcy, the general rule for liquidation of the bankruptcy estate has long been that a creditor will be allowed interest only to the date of the petition in bankruptcy. Sexton v. Dreyfus, 219 U. S. 339. In New York v. Saper, supra, this Court held that the general rule applies to claims against the trustee for taxes as well as for other debts. But the instant case concerns the debtor's personal liability for post-petition interest on a debt for taxes which survives bankruptcy to the extent that it is not paid out of the estate. Petitioners asserts that the traditional rule which denies post-petition interest as a claim against the bankruptcy estate also applies to discharge the debtor from personal liability for such interest even if the underlying tax debt is not discharged by §17. We hold that it does not so apply.

The basic reasons for the rule denying post-petition interest as a claim against the bankruptcy estate are the avoidance of unfairness as between competing creditors and the avoidance of administrative inconvenience. ⁴ These reasons are inapplicable to an action brought against the debtor personally. In the instant case, collection of post-petition interest cannot inconvenience administration of the bankruptcy estate, cannot delay payment from the estate unduly, and cannot diminish the estate in favor of high interest creditors at the expense of other creditors. In New York v. Saper, supra, the Court found the reasons for the traditional rule applicable and held that post-petition interest on a claim for taxes was not to be allowed against the bankruptcy estate. Here, we find the reasons--and thus the rule--inapplicable, and we hold that post-petition interest on an unpaid tax debt not discharged by §17 remains, after bankruptcy, a personal liability of the debtor.

Affirmed.

¹ The remainder was distributed to petitioner.

² See United States v. Mighell [60-1 USTC ¶9202], 273 F. 2d 682 (C. A. 10th Cir. 1959).

³ One reason for refusing to make taxes dischargeable is the desire to prevent tax evasion. See 83 Cong. Rec. 9106 (1938).

⁴ See American Iron & Steel Mfg. Co. v. Seaboard Air Line R. Co., 233 U. S. 261, 266:

"And it is true, as held in Tredegar Co. v. Seaboard Ry., 183 Fed. Rep. 289, 290, that as a general rule, after property of an insolvent is in custodia legis interest thereafter accruing is not allowed on debts payable out of the fund realized by a sale of the property. But that is not because the claims had lost their interestbearing quality during that period, but is a necessary and enforced rule of distribution, due to the fact that in case of receiverships the assets are generally insufficient to pay debts in full. If all claims were of equal dignity and all bore the same rate of interest, from the date of the receivership to the date of final distribution, it would be immaterial whether the dividend was calculated on the basis of the principal alone or of principal and interest combined. But some of the debts might carry a high rate and some a low rate, and hence inequality would result in the payment of interest which accrued during the delay incident to collecting and distributing the funds. As this delay was the act of the law, no one should thereby gain an advantage or suffer a loss. For that and like reasons, in case funds are not sufficient to pay claims of equal dignity, the distribution is made only on the basis of the principal of the debt. But that rule did not prevent the running of interest during the Receivership; and if as a result of good fortune of good management, the estate proved sufficient to discharge the claims in full, interest as well as principal should be paid."

See also Vanston Bondholders Protective Committee v. Green, 329 U. S. 156, 164:

"Accrual of simple interest on unsecured claims in bankruptcy was prohibited in order that the administrative inconvenience of continuous recomputation of interest causing recomputation of claims could be avoided. Moreover, different creditors whose claims bore diverse interest rates or were paid by the bankruptcy court on different dates would suffer neither gain nor loss caused solely by delay."

Because the traditional rule rests upon such practical considerations, it has been suggested that:

"The principle that interest stops running from the date of the filing of the petition in bankruptcy should be understood as a rule of liquidation practice rather than as a rule of substantive law." 3 Collier, Bankruptcy (14th ed., 1961) 1858.

 

 

Centex-Landis Construction Co., Inc. v. United States of America, et al

U.S. District Court, East. Dist. La., CIV. 99-1968, 5/9/2000

[Code Secs. 6321 and 6323 ]

Lien for taxes: Priority: Attorneys' fees: Interpleader action: Funds on deposit: Failure to obtain judgment: Settlement agreement, validity of.--Federal tax liens filed against a bankrupt construction company seeking to recover delinquent employment taxes owed by a second company had priority over an attorney's claim for fees with respect to interpleaded funds deposited in a judicial registry. The attorney, who did not obtain a judgment against the taxpayer for the fees, failed to allege that his claim was perfected pursuant to state ( Louisiana ) law. Moreover, the filing of the petition that caused the taxpayer to bring the interpleader action and that generated the deposited funds was not tantamount to a settlement to which the attorney had a contractual claim with priority over the tax lien.

[Code Sec. 6323 ]

Lien for taxes: Priority: Attorneys' fees: Interpleader action: Funds on deposit: Failure to obtain judgment: Settlement agreement: Equitable award.--Federal tax liens filed against a bankrupt construction company seeking to recover delinquent employment taxes owed by a second company had priority over an attorney's equitable claim for fees with respect to interpleaded funds deposited in a judicial registry. The act of filing a petition was insufficient to mandate an equitable award of attorney's fees. The attorney did not obtain a judgment or settlement that resulted in the creation of the interpleader fund. The fact that the deposited funds benefited the government was irrelevant; there was neither a judgment nor an agreement with the government stating that the attorney was entitled to the fees.

ORDER AND REASONS

LEMMON, District Judge:

The United States of America filed a partial motion for summary judgment, asserting that it has priority over certain creditors who are making claims to the funds in the amount of $125,000, which have been placed in the registry of the court by Centex-Landis Construction Co., Inc. (Centex). ¹

I. STANDARD FOR SUMMARY JUDGMENT

Summary judgment is proper when, viewing the evidence in the light most favorable to the non-movant, "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Amburgey v. Corhart Refractories Corp., 936 F.2d 805, 809 (5th Cir. 1991); Fed.R.Civ.P. 56(c). If the moving party meets the initial burden of establishing that there is no genuine issue, the burden shifts to the non-moving party to produce evidence of the existence of a genuine issue for trial. Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2552 (1986). The nonmovant cannot satisfy his summary judgment burden with conclusory allegations, unsubstantiated assertions, or only a scintilla of evidence. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). A fact is "material" if its resolution in favor of one party might affect the outcome of the lawsuit. Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2510 (1986). An issue is "genuine" if the evidence is sufficient for a reasonable jury to return a verdict for the nonmoving party. Id. If the opposing party bears the burden of proof at trial, the moving party does not have to submit evidentiary documents to properly support its motion, but need only point out the absence of evidence supporting the essential elements of the opposing party's case. Saunders v. Michelin Tire Corp., 942 F.2d 299, 301 (5th Cir. 1991).

II. DISCUSSION

The United States contends that it filed its Notice of Federal Tax Lien prior to the defendants and that the "first in time" principle grants priority to the United States against all of the other creditors named in this motion. The United States argues that the competing creditors were not judgment lien creditors at the time the first federal tax lien was recorded; therefore, the United States has priority to the funds.

The United States supports the motion for summary judgment with uncontroverted documentary evidence that Imagine Construction, Inc. has outstanding payroll taxes (Form 941 FICA) for the first, second, third, and fourth quarters of 1995; outstanding payroll taxes (Form 940 FUTA) for 1993 and 1995; and outstanding Annual Return of Withheld Federal Income Tax (Form 945) for 1995.

The first Notice of Federal Tax Lien was filed on February 5, 1996 for the Form 941 taxes for the second quarter of 1995. The outstanding liability for this period, as of March 27, 2000, is $236,100.43. On November 5, 1996, the Internal Revenue Service served a Notice of Levy on Centex for the outstanding tax liabilities of Imagine and directed Centex to turn over to the Internal Revenue Service any property or rights to property that it was obligated to pay Imagine up to the total amount of $424,675.08. On August 21, 1997, the Internal Revenue Service served a Notice Of Levy on Centex for the outstanding tax liabilities of Imagine and directed Centex to turn over any property owed to Imagine up to the total amount of $560,549.68. On June 25, 1999, Centex filed a complaint for interpleader and deposited $125,000 in the registry of the court.

None of the defendants dispute that the United States filed its Notice of Federal Tax Lien prior to the other creditors or that the amount of the first Notice of Federal Tax Lien exceeds the $125,000 deposited in the registry of the court. The sole opposition to the motion was filed by counsel for Imagine, who argues that he is entitled to attorney's fees for his representation of Imagine and that the United States is not entitled to priority against his claims. He seeks $19,440.90 plus 15% of the amount deposited into the registry of the court.

The Internal Revenue Code establishes "a lien in favor of the United States upon all property and rights to property, whether real or personal" belonging to a taxpayer who does not pay taxes owed to the United States . 26 U.S.C. §6321. The federal tax lien arises at the time of the assessment and attaches to all property or property rights the taxpayer holds or subsequently acquires. See Texas Commerce Bank-Fort Worth, N.A. v. United States [90-1 USTC ¶50,155], 896 F.2d 152, 161 (5th Cir. 1990); 26 U.S.C. §6322. "State law controls in determining the nature of the legal interest . . ., but federal law controls the consequences attaching thereto." United States v. J.T. Hubbell [63-2 USTC ¶9724], 323 F.2d 197, 200 (5th Cir. 1963). "Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right.' " United States v. McDermott [93-1 USTC ¶50,164], 113 S.Ct. 1526, 1528 (1993).

"Federal law governs the relative priority of federal tax liens." Feiler v. United States [95-2 USTC ¶50,448], 62 F.3d 315, 316 (9th Cir. 1995). "The purpose of section 6323(b) is to assist, with a 'superiority,' certain interests whose lien is actually later in time than filing of the federal tax lien." Capuano v. United States [92-1 USTC ¶50,163], 955 F.2d 1427, 1433 (11th Cir. 1992). Section 6323(b)(8) accords a "superiority" to liens for attorney's fees under certain conditions:

(b) Protection for certain interests even though notice filed. Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid. . . .

(8) Attorneys' liens. With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforceable against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.

Counsel concedes that, Imagine has not obtained a judgment against Centex, and he does not allege that he has a perfected attorney's lien under Louisiana law, Counsel argues that Imagine's action in filing a petition against Centex caused Centex to file the interpleader action; therefore, the funds placed into the registry of the court are the equivalent of a settlement to which counsel has a contractual claim that outranks the United States tax lien. The court finds that section 6323(b)8) does not apply because the mere filing of a petition against Centex is not tantamount to a settlement and does not accord counsel a "superiority" lien.

Counsel also asserts that his action in generating the deposited funds benefitted the United States and that he should be awarded attorney's fees for providing that benefit. In support of his argument, counsel relies on United States v. Kamieniecki [67-1 USTC ¶9133], 261 F.Supp. 683 (D.N.H. 1966), in which the district court allowed an attorney's lien on the basis of equitable principles analogous to the doctrine of unjust enrichment. Steven Kamieniecki was hired to demolish a building owned by Gertrude Gladstone. During demolition, an outer wall caved in, and additional cleanup and repair work was required. Gladstone sued Kamieniecki in state court under a negligence theory, and Kamieniecki, through retained Attorney Richard Leonard, filed a cross-action to recover for the extra work required for cleanup and repair. On May 26, 1964, the Superior Court of Hillsborough County, New Hampshire entered a verdict in favor of Kamieniecki and against Gladstone in the amount of $4,368.62. The United States filed a civil action to enforce its tax liens against the amount due to Kamieniecki by Gladstone . Attorney Richard Leonard filed an attorney's lien to recover fees, costs, and 1/3 of the interest that accrued until the judgment was satisfied. The district court found as follows:

the successful efforts of Attorney Richard Leonard caused the creation of the fund on deposit in the Registry of this court. Were it not for his efforts the fund, against which the federal tax lien has been successfully asserted, would not exist. Although it is a rare situation in which a court should exercise its discretion in awarding an attorney's fee out of a fund such as this, I rule that this is one of those very rare cases where equitable considerations compel the awarding of compensation.

Id. at 691. The court relied on the Fifth Circuit's decision in Hubbell, an interpleader action in which the United States claimed the proceeds of a state court judgment in favor of the taxpayer. [63-2 USTC ¶9724], 323 F.2d at 198. In Hubbell, the government had made assurances to the court that the attorneys "would be taken care of" because the fund claimed by the United States was created by the efforts of and at the expense of the appellees and their attorneys. Id. at 201.

This case is not one of the rare cases in which equitable consideration mandates the award of attorney's fees. Unlike Kamieniecki, counsel for Imagine did not obtain a judgment or settlement that resulted in the creation of the fund on deposit in the registry of this court; and, unlike Hubbell, there is neither a judgment nor an agreement with the United States that counsel is entitled to the fees. The only litigation associated with the creation of the fund is the act of filing a petition against Centex.

Accordingly, there are no genuine issues of material fact concerning the priority lien and the amount of the tax lien and the United States is entitled to partial judgment as a matter of law as to the creditors addressed in this motion.

IT IS HEREBY ORDERED that the United States of America 's partial motion for summary judgment is GRANTED. (Document #97.)

¹ The United States moves for summary judgment against the following defendants: Pak Wrap Mail Center, Inc., Iron Workers Mid-South Pension Fund, Iron Workers Welfare Fund, Mid-South Workers Direct Contribution Fund, Iron Workers Local 58, Iron Workers Local 58 Apprenticeship Fund, Cement Masons Local 567 Pension, Welfare and Apprenticeship Funds, Cement Masons Local Union No. 567 and Vacation Fund, Louisiana and Mississippi Carpenters Regional Council Pension, Welfare and Apprenticeship Funds, Louisiana and Mississippi Carpenters Regional Council and Vacation Fund, Louisiana Laborers Health and Welfare Fund, Construction and General Laborers Local Union No. 689, Laborers Local 689 Training Fund, Laborers National Pension Fund, Worknet 2000, Inc., Concrete Accessories and Supply Co., Inc., Topp Knotch Personnel and Consulting, Inc., Imagine Construction, Inc., Carpenters District Council of New Orleans and Vicinity Pension Fund, Carpenters District Council New Orleans and Vicinity Health and Welfare Fund, Carpenters District Council of New Orleans and Vicinity Apprenticeship Fund, Louisiana Worker's Compensation Corporation, Joseph R. Panno, Jerry T. Webb, and Gats Masonry, Inc. The only defendant not subject to the motion for summary judgment is the State of Louisiana , Department of Labor, Office of Employment. Further, Bank One, Louisiana , N.A. (BankOne) has no claim to the money in the registry of the court, and Centex has been discharged from liability to BankOne for any monies due from Centex to Imagine in this action.

 

 

 

Blackberry Records, Plaintiff v. James Bennett, individually and d/b/a J&B Records, East Jackson Publishing, and JCT Publishing and United States of America, Defendants

U.S. District Court, So. Dist. Miss. , Jackson Div., 3:98-CV-303BN, 1/5/99

[Code Sec. 6321 ]

Tax liens: Priority of federal tax lien: Interpleaded funds: Delinquent taxpayer: Failure to respond to motion for summary judgment.--A federal tax lien attached to interpleaded funds owed to a delinquent taxpayer who failed to respond to the government's motion for summary judgment. Since the amount of the interpleaded funds was less than the tax debt at issue, the government was awarded that amount, plus accrued interest, in partial satisfaction of its claim against the taxpayer. The tax lien arose automatically when the tax liability was assessed, and it was accorded priority over all competing claims to such property, unless otherwise provided by federal law.

Before: BARBOUR, United States District Judge.

OPINION AND ORDER

BARBOUR, District Judge:

The Court has before it the Motion for Summary Judgment of Defendant United States of America . The Court has reviewed the Motion, memorandum and supporting materials submitted by the United States of America . Plaintiff Blackberry Records has been dismissed from this action and Defendant James Bennett did not submit a response to the Motion for Summary Judgment. The Court rules that the Motion for Summary Judgment is well taken and is hereby granted.

Defendant James Bennett (hereinafter "Taxpayer") is liable for the payment of federal income tax for the year 1989 in the amount of $138,938.46, plus interest and statutory additions. This liability was assessed against Taxpayer by a delegate of the Secretary of the Treasury on April 15, 1990, and is confirmed in the Declaration of Bobby L. Pendleton, Chief of Special Procedures Function for the Gulf Coast District of the Internal Revenue Service, dated November 5, 1998.

Plaintiff Blackberry Records initiated this action requesting that the Court determine the priority of claims to a fund of $92,271.40, which is the property of Taxpayer. According to an Order entered on October, 26, 1998, Plaintiff deposited the sum of $92,271.40 into the registry of the court. Plaintiff retained no claim to this money and was dismissed with prejudice as a party to this matter.

The United States of America now requests that the Court order that the amount of $92,271.40, plus accrued interest, be paid to the United States of America in partial satisfaction of the federal tax claim against Taxpayer. 26 U.S.C. Section 6321 provides that:

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

Section 6322 provides that a tax lien arises automatically at the time of assessment. As the government argues, a federal tax lien takes priority over all competing claims to such property, unless otherwise provided by federal law. See, e.g., United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954).

Accordingly, the Court finds that there is no genuine issue of material fact and the United States of America is entitled as a matter of law to the funds of Taxpayer currently held in the registry of the Court.

Based on the reasons set forth in this Opinion:

IT IS THEREFORE ORDERED that the Motion for Summary Judgment [10] is well taken and is hereby granted.

IT IS FURTHER ORDERED that the fund of $92,271.40, plus accrued interest, in issue be paid from the registry of the Court to the United States of America in partial satisfaction of its claim against James Bennett of $138,938.46, plus interest and statutory additions as provided by law.

IT IS FURTHER ORDERED that this action is dismissed with prejudice.

A Final Judgment consistent with this Opinion and Order shall be entered this day.

FINAL JUDGMENT

In accordance with the Opinion and Order entered this day granting the Motion for Summary Judgment filed by the United States of America, it is hereby ordered that the fund of $92,271.40, plus accrued interest, in issue be paid from the registry of the Court to the United States of America in partial satisfaction of its tax lien against James Bennett of $138,938.46, plus interest and statutory additions as provided by law.

It is further ordered that the above-styled and numbered cause of action is dismissed with prejudice.

 

 

 

Jack R. Turney, et al., Plaintiffs v. Russel Shafer, et al., Defendants

U. S. District Court, Dist. Md. , Civil Action No. R-82-1609, 7/13/84

[Code Secs. 6321 and 7401]

Lien for taxes: Defenses against lien: Suits by United States: Assessment prima facie correct.--Assessments for the taxpayer's unpaid taxes exceeded the amount of a fund of money which was before the court pursuant to a bill of interpleader and the government was entitled to the interpleaded fund. The taxpayer, also a claimant to the fund, failed to prove that the assessments were incorrect. The taxpayer's conclusory allegation that he owed a lesser amount was insufficient to prevent an entry of summary judgment and enforcement of the government's tax lien.

Memorandum and Order

RAMSEY, District Judge:

On or about May 3, 1982, Jack R. Turney and Daun R. Weirs, trustees in a cause styled as No. 6759 Equity, filed a bill of interpleader with the Circuit Court for Garrett County, Maryland, to determine competing claims to a fund in the amount of $49,520.29. Russel Shafer, Olaf Shafer, and the United States of America were named as claimant defendants therein. On June 14, 1982, the government timely removed this action to this forum pursuant to 28 U. S. C. §1446(b).

Presently before the Court is a motion by defendant United States of America for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Co-defendants Olaf and Russel Shafer have filed no responses thereto. The Court has thoroughly reviewed the government's memorandum and attached exhibits in support of its pending motion as well as the entire record of this proceeding. The Court finds that this matter fully meets the standards of Rule 56, Fed. R. Civ. P. Because the Court further finds that oral argument is unnecessary, the Court rules pursuant to Local Rule 6 (D. Md. 1982). For the following reasons, the Court grants the government's motion for summary judgment.

Preliminarily, the Court notes that a grant of a motion for summary judgment is appropriate only when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56; National Constructors Ass'n v. National Contractors Ass'n, Inc., 498 F. Supp. 510, 520 (D. Md. 1980), modified on other grounds, 678 F. 2d 942 (4th Cir. 1982). In addition, there should be "no disagreement as to the inferences which may be drawn from the undisputed facts." Steinberg v. Elkins, 470 F. Supp. 1024, 1030 (D. Md. 1979). The burden is on the moving party and any doubts as to the existence of a genuine issue of material fact will be resolved against the movant. See Adickes v. S. H. Kress & Co., 398 U. S. 144 (1970).

Viewing the record in the light most favorable to Russel Shafer and Olaf Shafer, as a federal court is required to do on a motion for summary judgment, the relevant facts not subject to genuine dispute are as follows.

The record establishes that there are three competing claimants to the fund of money which is before this Court pursuant to the bill of interpleader: Russel Shafer; Olaf Shafer; and the United States . As to claimant Olaf Shafer, the government represents that it and Olaf Shafer have settled their claims between themselves. These claimants agree that Olaf Shafer should receive twelve thousand dollars ($12,000.00) of the fund and that the government should receive the balance provided that this Court finds that Russel Shafer is not entitled to any distribution from the fund. As mentioned earlier, claimant Olaf Shafer has filed no response to the government's pending motion.

As to claimant Russel Shafer, the government contends that he has no right whatsoever to any distribution from the fund because the amount of his outstanding federal tax liabilities, based on allegedly lawfully assessed, but unpaid income taxes for his 1975 and 1976 tax years, exceeds the amount of the interpleaded fund.

The record clearly establishes that on October 23, 1978, the Internal Revenue Service made assessments for unpaid 1975 and 1976 personal federal income taxes against Russel Shafer. More specifically, for the tax year ending December 31, 1975, the government states that, as of the date of assessment, Russel Shafer owed a total of $35,263.00, allocable as follows: an assessed unpaid tax of $29,135.00, a negligence penalty of $1,456.75 pursuant to 29 U. S. C. §6653; plus statutory interest thereon of $4,657.00. For the tax year ending December 31, 1976, the government states that, as of the date of assessment, Russel Shafer owed a total of $6,400.08, allocable as follows: an assessed unpaid tax of $5,614.90; a negligence penalty of $280.74 pursuant to 29 U. S. C. §6653; plus statutory interest thereon of $504.44. The government further states that as of April 30, 1983, after taking into account payments on these liabilities by Russel Shafer as well as additional assessments for lien filing fees and costs, Russel Shafer currently owes a total of $62,195.29 in assessed but unpaid federal income taxes, $50,969.09 for the 1975 tax year and $11,226.20 for the 1976 tax year. In addition, the government claims it is entitled to statutory accrued interest on these unpaid tax liabilities subsequent to April 30, 1983.

The record establishes that the Internal Revenue Service made a timely assessment of federal income tax deficiency against Russel Shafer for the 1975 and 1976 tax years. Section 6501, Title 26, provides that assessments of deficiencies shall be made within three years after the return was filed. 26 U. S. C. §6501(a). The tax returns in question relate to the tax periods ending December 31, 1975, and December 31, 1976. The assessment of deficiency for both tax years was made on October 23, 1978, and was consequently within the three-year statutory period.

It is well established that in a deficiency suit by the government to collect unpaid federal income taxes, the government establishes a prima facie case when it shows that a timely assessment was made against the taxpayer. See, e.g., United States v. Besase [80-2 USTC ¶16,343], 623 F. 2d 463 (6th Cir. 1980); Higginbotham v. United States [77-2 USTC ¶16,265], 556 F. 2d 1173 (4th Cir. 1973); Foster v. Commissioner [68-1 USTC ¶9256], 391 F. 2d 727 (4th Cir. 1968); United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696 (2d Cir. 1965); Plisco v. United States [62-2 USTC ¶9572], 306 F. 2d 784 (D. C. Cir. 1962), cert. denied, 371 U. S. 948 (1963). It is also well-settled that the usual method for proving the assessment and its amount is by submitting a certification of the assessment to the court. See e.g., Adams v. United States , 358 F. 2d 986 (Ct. Cl. 1966); United States v. Haley [76-2 USTC ¶9683], 38 A. F. T. R. 2d 5897 (S. D. Ohio Sept. 14, 1976), aff'd, [78-2 USTC ¶9593], 582 F. 2d 1281 (6th Cir.), cert. denied, 440 U. S. 959 (1978). In addition, a presumption of correctness attaches to a deficiency assessment. See e.g., Welch v. Helvering [3 USTC ¶1164], 290 U. S. 111 (1933); Higginbotham, 556 F. 2d at 1175-76; Foster, 391 F. 2d at 735; United States v. Strebler [63-1 USTC ¶9278], 313 F. 2d 402 (8th Cir. 1963); Becker v. United States, 21 F. 2d 1003 (5th Cir. 1927). In this proceeding, the government has filed a proper certification of assessment.

Once the government establishes its prima facie case, as it has in this matter, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the assessment was erroneous. See e.g., Sinder v. United States [81-2 USTC ¶9612], 655 F. 2d 729 (6th Cir. 1981) and cases cited therein; Higginbotham [77-2 USTC ¶16,265], 556 F. 2d at 1175; Bar L Ranch, Inc. v. Phinney, 426 F. 2d 995 (5th Cir. 1970); United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696, 699 (2d Cir. 1965) and cases cited therein. Russel Shafer has not met his burden. While Shafer alleges in his answer to the bill of interpleader that the amount of his liability for unpaid federal income taxes is $12,000.00, as determined by himself and agents of the Internal Revenue Service, such conclusory allegation is insufficient both to raise a genuine dispute as to a material fact for purposes of Fed. R. Civ. P. 56, and to carry his evidentiary burden in proving the assessment erroneous. Defendant Shafer's allegation constitutes a mere general denial to the bill of interpleader. In an action by the government to foreclose tax liens, a taxpayer may not rest on general denials of tax liability in an answer so as to prevent an entry of summary judgment in favor of the government. See, e.g., United States v. Bottenfield [71-1 USTC ¶9371], 442 F. 2d 1007 (3d Cir. 1971).

The Internal Revenue Code provides that a lien in the amount of a federal tax arises in favor of the government when a taxpayer fails to pay such tax after notice and demand. See 26 U. S. C. §6321. Such lien arises as of the date of assessment and continues until satisfaction of the underlying tax or until lapse by reason of time. Id. Furthermore, such lien attaches to all property and rights to property belonging to the taxpayer during the life of the lien. 26 U. S. C. §6322. As applied to the instant proceeding, it is clear that the government holds a valid tax lien against all property rights Russel Shafter may have, including whatever rights he has in the fund presently before the Court. Since the amount of Russel Shafter's outstanding tax liabilities exceeds the amount of the fund, it is clear that Russel Shafer is not entitled to any distribution from the interpleaded fund.

For the reasons stated herein, it is this 13th day of July, 1983, by the United States District Court for the District of Maryland,

ORDERED:

1. That defendant United States ' motion for summary judgment is GRANTED;

2. That the United States shall submit a proposed judgment order in conformity with this Memorandum and Order.

 

 

 

United States of America v. George T. Nohra, et al.

U. S. District Court, Mid. Dist. La., Civil Action Number 79-310-B, 12/31/80

[Code Secs. 6321 and 7403]

Tax lines: Third party: Priority of liens: Judgment.--The lien of a judgment creditor was subordinate to a federal tax lien and the U. S. government was entitled to enforcement of its lien against a fund deposited in the Louisiana state court registry containing settlement proceeds from a tort action brought by the taxpayers. The government tax lien attached to the deposited funds on the respective dates of the government's assessment, which occurred before the judgment creditor acquired its lien. Further, the date on which the government perfected its lien also occurred prior to the date the judgment creditor acquired its lien. In addition, since the taxpayers failed to answer the complaint or appear, judgment was entered against them for the amount of their tax liability, including interest and penalties, which was not satisfied by the payment of the deposited funds.

James S. Lemelle, Assistant United States Attorney, Baton Rouge , La. 70801 , for plaintiff. Michael A. Patterson, P. O. Box 6644, Baton Rouge, La. 70876, for H. M. Cannon, Ralph Brewer, 200 Government St., Baton Rouge, La. 70802, for Olinde Hardware and Supply Co., Inc.

POLOZOLA, District Judge:

The United States of America has filed this suit to enforce a federal tax lien against a fund on deposit in the registry of the Clerk of Court for the Nineteenth Judicial District Court for the Parish of East Baton Rouge and to obtain a judgment against George T. Nohra and Peggy Nohra for the unpaid amount of their tax liability. Namel as defendants in this suit are George T. Nohra and Peggy Nohra (taxpayers), Olinde Hardware and Supply Company, Inc. and H. M. Cannon, Clerk of the Nineteenth Judicial District Court for the Parish of East Baton Rouge. This matter is now before the Court on cross motions for summary judgment.

Jurisdiction is conferred on the Court pursuant to 28 U. S. C. §§ 1340 and 1345 and 26 U. S. C. §§ 7402 and 7403.

The parties have filed a joint statement of facts which are not in dispute. In their stipulation the parties agreed to the following facts:

"1. On June 1, 1973 Olinde Hardware & Supply Company, Inc. (hereinafter called "Olinde") obtained a judgment in Civil Action 162,219 on the Docket of the Honorable 19th Judicial District Court against George T. Nohra (hereinafter called "Nohra") in the full sum of $5,826.01, together with the interest thereon at the rate of eight (8%) per cent per annum from December 7, 1972 until paid, plus twenty-five (25%) per cent of the unpaid balance as attorney's fees, and for all costs of court. No appeal was taken from that judgment.

2. On October 9, 1975 Nohra filed Civil Action 185,891 in the Honorable 19th Judicial District Court against defendants Sam L. Tuminello and Molly T. Buttry seeking the payment of tort damages totalling $70,000.00.

3. On October 23, 1975 Olinde requested the seizure by the sheriff of East Baton Rouge Parish of all Nohra's rights and claims against Tuminello and Buttry to pay and satisfy Olinde's judgment against Nohra and requested notices of seizure be served upon Nohra, Tuminello, Buttry and the Clerk of Court, as well as upon Nohra's lawyer.

4. Notices of seizure were served November 6, 1975 upon Nohra and also upon the Clerk of Court, on November 7, 1975 upon both Tuminello and Buttry and on November 12, 1975 upon Nohra's lawyer.

5. Nohra's tax liability for the period ending December 31, 1973 was assessed on May 12, 1975 and his tax liability for the period ending December 31, 1974 was assessed on August 4, 1975.

6. The government's notice of a federal tax lien for years 1973 and 1974 against Nohra and his wife were properly filed with the Clerk of Court of East Baton Rouge Parish on October 15, 1975.

7. On November 6, 1975 the government's notice of tax levy was served upon Nohra's lawyer. No such notice of levy was ever served upon either Tuminello, Buttry or the Clerk of Court for filing in the record of Civil Action 185,891.

8. During the year 1976 Nohra settled his tort action with Buttry and Tuminello. Out of the proceeds of the settlement Nohra's attorney was permitted by agreement to retain his professional fees and costs. It was further agreed that the balance of the settlement proceeds amounting to $1,559.32 would be deposited in the registry of the state court pending a decision on the priority of the claims of Olinde and the government.

9. The funds remain in the registry of the state court pending the outcome of this proceeding. Upon the finality of a decision of this court, such decision would be made executory in the state court and the funds will be withdrawn by state court order in due course."

Thus, the issues before the Court are whether the tax lien filed by the United States on October 15, 1975 primes the judgment obtained by Olinde Hardware against George T. Nohra on June 1, 1973 and whether the United States is entitled to a judgment against the taxpayers for the amount of the unpaid tax liability.

Although George T. Nohra and Peggy Nohra were properly served in this case, they have failed to file an answer to the complaint. On October 2, 1979 a preliminary entry of default was entered against Mr. and Mrs. Nohra. Since that time, the taxpayers have failed to file any responsive pleadings or make any other appearance in this suit. According to the affidavits filed in the record of this case, the taxpayers are indebted to the United States for unpaid federal income taxes, penalties and interest, including interest and penalties accrued through August 31, 1979 in the amount of $1,595.57, plus interest and penalties accrued thereafter as provided by law. It is clear that the Secretary of the Treasury or his delegate is authorized to make an assessment of unpaid federal income taxes which assessment shall be presumed to be correct. Welch v. Helvering [3 USTC ¶1164], 290 U. S. 111, 54 S. Ct. 8, 78 L. Ed. 212 (1933); Niles Bement Pond Co. v. United States [2 USTC ¶518], 281 U. S. 357, 50 S. Ct. 251, 74 L. Ed. 901 (1930).

The assessment of tax liability against the taxpayers has the presumption of correctness and the taxpayers, by failing to answer the complaint have failed to overcome this presumption of correctness. Therefore, the Court shall enter a judgment in favor of the United States and against the taxpayers for the amount of their tax liability, including accrued interest and penalties, which is not satisfied by payment from any funds which are at issue in this case.

The Court must next consider whether or not federal tax liens are entitled to priority over the judgment of Olinde Hardware and Supply Company, Inc.

In order for the Court to determine which of the parties is entitled to the proceeds deposited into the registry of the state court, the Court must determine the effective date each claimant acquired a lien on the proceeds. Olinde Hardware and Supply Company, Inc. obtained a judgment against George T. Nohra on June 1, 1973 in Civil Action 162,219 on the docket of the Nineteenth Judicial District Court for the Parish of East Baton Rouge. However, Olinde's did not obtain a lien on the funds deposited into the registry of the Court until October 23, 1975 when Olinde's requested a seizure of all of Nohra's rights and claims in Civil Action 185,891 on the docket of the Nineteenth Judicial District Court for the Parish of East Baton Rouge. Article 2292 of the Louisiana Civil Code.

The United States bases its claim to the proceeds on the tax lien filed against the Nohras. The federal tax lien attaches to all property and rights to property of the taxpayer, whether presently in the taxpayer's possession or acquired subsequent to the filing of the tax lien. 26 U. S. C. §6321. State law determines what constitutes the property of the taxpayer subject to the lien. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). However, federal law determines the validity of the federal tax lien. United States v. Equitable Life Assurance Society of the United States [66-1 USTC ¶9444], 384 U. S. 323, 86 S. Ct. 1561 (1966).

A tax lien become effective on the date of assessment. 26 U. S. C. §6322. The lien imposed by 26 U. S. C. §6321 will not be valid against a judicial lien creditor until notice of the tax lien meets the requirements of 26 U. S. C. §6323(f). This section requires that where personal property is involved, the notice of the tax lien shall be filed in an office designated by the laws of the state where the personal property subject to the lien is situated. Sub-section (f)(2)(A) provides that the location of personal property is the residence of the taxpayer at the time the notice of the lien is filed. The notice of the federal tax lien involved in this case was filed in the records of the Clerk of Court for the Nineteenth Judicial District Court for the Parish of East Baton Rouge on October 15, 1975. Thus, the Court finds that the effective dates of the liens filed by the parties to this suit on the proceeds filed in the registry of the Nineteenth Judicial District Court are as follows: (1) United States , October 15, 1975; (2) Olinde Hardware and Supply Company, Inc., October 23, 1975.

Since the Government's lien has, as a matter of fact and law, priority over the claim of Olinde's and since the amount of the Government's tax lien exceeds the proceeds which are filed in the registry of the state court, the United States is entitled to recover all of the $1,559.32 which was deposited into the registry of the Nineteenth Judicial District Court. The Government's tax lien attached to the funds deposited in the registry of the Court on the respective dates of the Government's assessment, May 15, 1975 and August 4, 1975, before Olinde's became a judgment lien creditor.

The final issue the Court must determine is whether or not the Court should issue an order requiring H. M. Cannon, the Clerk of the Nineteenth Judicial District Court to pay to the United States the funds it has on deposit in the registry of the clerk's office. In paragraph 9 of the stipulation filed with the Court, the parties have agreed as follows:

"The funds remain the registry of the state court pending the outcome of this proceeding. Upon the finality of a decision of this court, such decision would be made executory in the state court and the funds will be withdrawn by state court order in due course." Since the parties have agreed and stipulated that upon a final decision rendered by this Court, the judgment of this Court will be made executory in the state court, the Court believes that it would be in the interest of justice to allow the parties to enforce this judgment in the appropriate state court which would have jurisdiction over the clerk of court.

Therefore, in summary, the Court finds that the Government is entitled to a judgment against George T. Nohra and Peggy Nohra in the sum of $1,595.57, plus interest and penalties which have accrued since August 31, 1979 as provided by law. The Court further finds that the tax lien filed by the Government should be given priority over the lien filed by Olinde Hardware and Supply Company, Inc. Therefore, the Government is entitled to recover the proceeds in the sum of $1,559.32 which is on deposit in the registry of the Nineteenth Judicial District Court for the Parish of East Baton Rouge.

Therefore:

IT IS ORDERED that there be judgment in favor of the United States of America and against George T. Nohra and Peggy Nohra in the sum of $1,595.57, plus accrued interest and penalties from September 1, 1979 until paid, as provided by law.

IT IS FURTHER ORDERED that judgment shall be rendered in favor of the United States of America in the sum of $1,559.32, together with such interest as may have accrued thereon, which shall be paid from funds deposited in the registry of the Nineteenth Judicial District Court for the Parish of East Baton Rouge, Louisiana.

IT IS FURTHER ORDERED that judgment shall be rendered in favor of the United States of America granting to it priority of its federal tax lien over the judgment of Olinde Hardware and Supply Company, Inc. to the sum of $1,559.32 which is on deposit in the registry of the Nineteenth Judicial District Court for the Parish of East Baton Rouge.

Within 10 days, the Government shall file with the Court a proposed judgment which has been approved as to form by all parties in this suit.

Judgment shall be entered accordingly.

Judgment

For the written reasons assigned,

IT IS ORDERED AND ADJUDGED that judgment be entered in favor of the United States of America and against George T. Nohra and Peggy Nohra in the sum of $1,595.57, plus accrued interest and penalties from September 1, 1979 until paid, as provided by law;

IT IS FURTHER ORDERED AND ADJUDGED that judgment be entered in favor of the United States of America in the sum of $1,559.32, together with such interest as may have accrued thereon, less cost which is due and owing to the office of the Clerk of Court of the Nineteenth Judicial District Court for the Parish of East Baton Rouge, Louisiana which sum shall be paid from funds deposited in the registry of the Nineteenth Judicial District Court for the Parish of East Baton Rouge, Louisiana, Docket number 162,219, Olinde Hardware and Supply Company v. George T. Nohra;

IT IS FURTHER ORDERED AND ADJUDGED that judgment be entered in favor of the United States of America granting to it priority of its federal tax lien over the judgment of Olinde Hardware and Supply Company, Inc. to the sum of $1,559.32 which is on deposit in the registry of the Nineteenth Judicial District Court for the Parish of East Baton Rouge, Louisiana, Docket number 162,219, Olinde Hardware and Supply Company v. George T. Nohra;

IT IS FURTHER ORDERED AND ADJUDGED, that by stipulation of the parties, this judgment will be made executory in the Nineteenth Judicial District Court for the Parish of East Baton Rouge, Louisiana.

 

 

 

In re Cobb & Lawless Kitchens, Inc., Debtor. Fred Zimmerman, Trustee, Plaintiff v. CDM Properties, Inc., and John R. Arndt, Prothonotary of Berks County, Pennsylvania and United States of America, Defendants

U.S. Bankruptcy Court, East. Dist. Pa., Bankruptcy No. 81-04666G, 1/16/86, 56 BR 701

[Code Secs. 6321 and 6331 ]

Collection of tax: Lien for taxes: Levy and distraint: Bankruptcy: Debts owed to bankrupt taxpayer.--

An IRS levy against money held by a state court from a debt owed to a bankrupt subcontractor was effective, and the state court was ordered to disburse the funds to the IRS. At the time that the IRS filed its notice of levy in the state court against the subcontractor, he did not yet have title to the money held by the state court, which was later vested in the trustee in bankruptcy. However, the subcontractor did have an interest in the property that was subject to a federal tax lien and levy prior to the filing of his bankruptcy petition. The Pennsylvania state law doctrine of in custodia legis (precluding the attachment or seizure of property held in custody of the court) was not effective to bar attachment of the money, because the federal government was not bound by Pennsylvania's restriction once a recognized interest in the property existed to which a federal tax lien could attach.

Fred Zimmerman, 5691 Wisteria Ave., Pennsauken, New Jersey 08109, pro se. Donald M. Collins, David C. Coruyo, Stradley, Ronon, Stevens & Young, 1100 One Franklin Plaza, Philadelphia, Pa. 19102, for Fred Zimmerman. Kurt Althouse, Bingaman, Hess, Coblentz & Bell, 660 Penn Square Center, 601 Penn St., P.O. Box 61, Reading, Pa. 19603, for John R. Arndt. Virginia R. Powel, Assistant U.S. Attorney, Philadelphia , Pa. 19106 , for U.S.

Opinion

GOLDHABER, Chief Bankruptcy Judge:

The proposition advanced under the trustee's complaint, is whether the Internal Revenue Service ("the IRS") may levy, though not seize, the debtor's interest in property held in custodia legis by a clerk of a state court. On the basis of the reasons outlined below, we conclude that the levy was effective and we will direct the prothonotary of the state court to disburse the funds to the IRS.

The facts of this case are as follows: ¹ A contractor, CDM Properties, Inc. ("CDM"), contracted in 1980 with a subcontractor ("the debtor") for the repair and alteration of certain improvements to realty owned by CDM in Berks County, Pennsylvania. Tbe work was completed but the debtor was not paid the contract price. Hence, it filed a Notice of Mechanic's Lien in the Berks County Court. CDM later wished to sell the property at issue and had the lien released pursuant to an order of the Berks County Court on CDM's deposit into court of an amount equal to the sum in dispute which is now $10,230.61. The IRS later filed a notice of levy in the Berks County Court against the debtor for an amount in excess of the fund. Thereafter, the debtor filed a petition for relief under chapter 7 of the Bankruptcy Code ("the Code") and we appointed a trustee to administer the bankruptcy.

The trustee filed the instant action against CDM, the prothonotory (the clerk) of the Berks County Court and the United States claiming, its entitlement to the funds on deposit in the state court. The trustee asserts that the funds at issue are held by the state court in custodia legis and in that status the funds are not subject to attachment or levy, such as that asserted by the IRS. CDM failed to respond to the trustee's complaint and a judgment by default has been entered against it. The prothonotary duly responded to the complaint and stated he was merely a stakeholder seeking court direction for the disbursement of the funds.

The first pertinent statutory provision to our discussion is the automatic stay created by the Code, which arises on the filing of a petition in bankruptcy. 11 U.S.C. §362(a) . Section 362(a)(4) provides that the automatic stay bars "any act to create, perfect, or enforce any lien against property of the estate." Thus, while CDM's default under the complaint before us served to vest the trustee with title to the fund, this act occurred postpetition and therefore, under §362(a)(4), the IRS lien could not then attach to the trustee's interest in the property. The question is whether the IRS possessed a lien prior to the filing of the petition which could attach to the debtor's interest in the funds in custodia legis although the debtor's title to those funds was not then legally established.

The second relevant statutory pronouncement is 26 U.S.C. §6321 on which the IRS predicates its lien:

§6321 . Lien for taxes

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

26 U.S.C. §6321 . The Supreme Court has recently construed this provision:

The statutory language "all property and rights to property," appearing in §6321 (and, as well, in §§6331(a) and 6332(a) , see nn. 1 and 2, supra), is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. See 4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5k. 4, p. 111-100 (1981) (Bittker). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945).

United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 105 S. Ct. 2919, 2924 (1985). In applying a statute such as §6321 the Supreme Court has stated:

"[I]n the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513, (1960), quoting Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 U.S. 78, 82 (1940). See also Sterling National Bank, 494 F.2d, at 921. This follows from the fact that the federal statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958). And those consequences are "a matter left to federal law." United States v. Rodgers, 461 U.S. at 683, "[O]nce it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [the statute], state law is inoperative," and the tax consequences thenceforth are dictated by federal law. United States v. Bess, 357 U.S. , at 5657.

United States v. National Bank of Commerce, 105 S.Ct. at 2925-26 (some cites omitted). Thus, once it is determined that state law creates some interest in property, the focus shifts to federal law for a resolution of whether a federal tax lien will attach to that property. Although state law may bar the attachment of certain property interests arising under the law of that state, that determination is not preclusive of whether a federal tax lien will attach to that property interest. United States v. National Bank of Commerce, 105 S.Ct. at 2926-27 and 2926 n. 8.

As applied to the case before us, the language of §6321 and the Supreme Court's construction of the language in United States v. National Bank of Commerce suggests that the debtor's interest in the fund at issue was subject to levy prior to the filing of the petition for bankruptcy in the absence of countervailing authority. The trustee contends that the doctrine of custodia legis is such authority.

On the issue of property in custodia legis,--literally meaning property in the custody of court,--the Supreme Court has stated:

The general doctrine that property in the possession of a receiver appointed by a court is in custodia legis, and that unauthorized interference with such possession is punishable as a contempt, is conceded; but it is contended that this salutary rule has no application to the collection of taxes. Undoubtedly property so situated is not thereby rendered exempt from the imposition of taxes by the government within whose jurisdiction the property is, and the lien for taxes is superior to all other liens whatsoever, except judicial costs, when the property is rightfully in the custody of the law, but this does not justify a physical invasion of such custody and a wanton disregard of the orders of the court in respect of it. The maintenance of the system of checks and balances characteristic of republican institutions requires the coordinate departments of government, whether federal or state, to refrain from any infringement of the independence of each other, and the possession of property by the judicial department cannot be arbitrarily encroached upon, save in violation of this fundamental principle.

In Re Tyler, 149 U.S. 164, 182-83 (1893) (emphasis added). In Tyler the Supreme Court professed a dichotomy between the actual seizure of property in costodia legis and the attachment by a creditor of an interest in property held by a party in interest to the property held by the court. Tyler, 149 U.S. at 182-83; Maxwell v. California , 341 F.2d 235, 237-38 (9th Cir. 1965). Some courts, not sufficiently sensitive to this dichotomy, have used the terms "attachment" and "seizure" interchangeably, while nonetheless, holding that the IRS had priority on its tax claim over a taxpayer who possessed an interest in property held in custodia legis. In re Quakertown Shopping Center, Inc. [66-2 USTC ¶9655 ], 366 F.2d 95 (3d Cir. 1966). Without recognizing this concept some courts have predicated their just and proper decisions on what we perceive is a spurious distinction holding that "when authority for the law's custody [of property in custodia legis] and for the Internal Revenue's levy derive from the same source, with no potential clash between jurisdictions, the doctrine against attachment does not prevail." B & G Limited v. Levin (In Re Meter Maid Ind. ) [72-2 USTC ¶9574 ], 462 F.2d 436, 438 (5th Cir. 1972); In Re Quakertown Shopping Center, Inc. [66-2 USTC ¶9655 ], 366 F.2d 95 (3d Cir. 1966).

Under the bifurcation between seizure and attachment, state law may provide that property in custody of the court is neither subject to attachment nor seizure, and, as amply illuminated by the trustee's research, such is the law in Pennsylvania which is the situs of the fund. Nonetheless, we reiterate that the federal government is not bound by the state law restriction that bars attachment of a debtor's interest in property held in custodia legis.

We hold that the doctrine of in custodia legis did not preclude the attachment of the debtor interest in the court fund and in light of the breadth of 26 U.S.C. 6321 we conclude that the IRS tax lien attached at the time of the assessment which was proper to the filing of the petition. We will enter an order directing the prothonotary to deliver the fund of $10,230.61 to the Internal Revenue Service.

Order

AND NOW, to wit, this 16th day of January, 1986, it is

ORDERED that John R. Arndt, the prothonotary of the Court of Common Pleas of Berks County, Pennsylvania, shall pay over to the Internal Revenue Service the sum of $10,230.61, plus any additional accrued interest, from the court registry of that court.

¹ This opinion constitutes the findings of fact and conclusions of law required by Bankruptcy Rule 7052.

 

 

 

American Home Assurance Company, Plaintiff v. Jack DuBoff Associates, Inc., Pustay Agency, Inc., on Sale of Huntington, Inc., The United States of America, Norman Morett, Edmor Cleaners, Inc., and State of New York, Defendants United States of America, Plaintiff-in-Intervention v. American Home Assurance Company, Jack DuBoff Associates, Inc., Pustay Agency, Inc., on Sale of Huntington, Inc., Norman Morett, Edmor Cleaners, Inc. and State of New York, Defendants-in-Intervention

U. S. District Court, South Dist. N. Y., 61 Civ. 2721, 5/11/64

[1954 Code Sec. 6321]

Lien for taxes: Priority: Government as intervenor.--The Court found that the government was entitled to judgment on account of an assessment for unpaid federal taxes, including interest and penalties. Accordingly, the government would receive a distribution from a fund of money which had been deposited into the registry of the Court to the extent it had valid and subsisting liens on the fund and the distribution would be credited against the tax liability. The tax delinquent would remain liable for any deficiency plus interest.

Robert M. Morgenthau, United States Attorney, Arthur S. Olick, Assistant United States Attorney, New York, N. Y., for plaintiff-in-intervention. Greenhill & Speyer, 17 John St., for American Home Assurance Co.; Goldstein & Goldstein, 2 Lafayette St., for Jack DuBoff Associates, Inc.; Louis J. Lefkowitz, 370 7th Ave., for General of the State of New York, for State of New York, New York, Louis C. Bernst, 381 New York Ave., for Pustay Agency, Inc.; Herbert Stone, 330 New York Ave., for Norman Morett and on Sale of Huntington, Inc.; Jerome A. Gottlieb, 568 Walt Whitman Rd., for Edmor Cleaners, Inc., Huntington, N. Y., defendants.

Judgment

METZNER, District Judge:

The plaintiff having commenced this action to determine title to a fund of money in the sum of $1500.00 which fund has been deposited into the registry of this Court; and defendants Jack DuBoff Associates, Inc., Pustay Agency, Inc., On Sale of Huntington, Inc., Norman Morett, Edmor Cleaners, Inc. and State of New York each having appeared and filed answers to the complaint in which they claim entitlement to the said fund or a part thereof; and the complaint having been dismissed as against defendant United States of America and said defendant having been granted leave to intervene herein as a party plaintiff; and the United States of America having served its complaint-in-intervention upon the plaintiff and the respective defendants as defendants-in-intervention seeking to foreclose liens for federal taxes owing by defendant Edmor Cleaners, Inc. upon the said fund and a deficiency judgment against the delinquent taxpayer; and each of the defendants-in-intervention having appeared and filed answers to the complaint-in-intervention in which they claim entitlement to the said fund or a part thereof; and this action having come on to be heard before Part 1 of this Court for assignment and pre-trial conference pursuant to Calendar Rules 6 and 13 and defendants Norman Morett and On Sale of Huntington, Inc., having defaulted in appearing thereat; and the plaintiff-in-intervention and defendants-in-intervention American Home Assurance Company, Jack DuBoff Associates, Inc., Pustay Agency, Inc., Edmor Cleaners, Inc. and State of New York having resolved their differences and having affixed their consents hereto,

NOW, THEREFORE, on motion of Robert M. Morgenthau, United States Attorney for the Southern District of New York, it is hereby,

ORDERED, ADJUDGED and DECREED that the plaintiff-in-intervention, United States of America, have judgment against defendant Edmor Cleaners, Inc. on account of assessments for unpaid federal taxes, including interest and penalties, in the amount of $1,249.62; and it is further

ORDERED, ADJUDGED and DECREED that, except as otherwise herein provided, plaintiff-in-intervention, United States of America, has valid and subsisting liens, pursuant to Title 26 United States Code Sections 6321 and 6322, to the extent of the said tax assessments, upon all property and rights to property now or hereafter belonging to defendant Edmor Cleaners, Inc., unless and until said tax assessments are paid in full; and it is further

ORDERED, ADJUDGED AND DECREED that plaintiff-in-intervention, United States of America , has valid and subsisting liens, pursuant to Title 26 United States Code Sections 6321 and 6322, upon the fund of $1500 now on deposit in the registry of this Court to the extent of $849.73; and it is further

ORDERED, ADJUDGED and DECREED that the claim of defendant Jack DuBoff Associates, Inc. is allowed to the extent of $323.64, the claim of defendant Pustay Agency, Inc. is allowed to the extent of $173.27, and the claim of the State of New York is allowed to the extent of $153.36; and it is further

ORDERED, ADJUDGED AND DECREED that the claims of defendants On Sale of Huntington, Inc. and Norman Morett to the said fund on deposit in the registry of this Court be and the same hereby are dismissed; and it is further

ORDERED, ADJUDGED AND DECREED that the Clerk of this Court shall make distribution of the said fund now on deposit in the registry of this Court as follows:

To the 

United States of America

 ....         $ 849.73

To Jack DuBoff Associates, Inc. ....           323.64

To Pustay Agency, Inc. .............           173.27

To the State of 

New York

 ...........           153.36

                                             $1500.00

and it is further

ORDERED, ADJUDGED AND DECREED that upon distribution of the said fund as aforesaid, American Home. Assurance Company shall be discharged of any and all liability to the defendants and to plaintiff-in-intervention with respect to the said fund; and it is further

ORDERED, ADJUDGED AND DECREED that the payment to the United States of America of the sum of $849.73 as aforesaid, shall be credited by the plaintiff-in-intervention against the tax liability of defendant Edmor Cleaners, Inc. and defendant Edmor Cleaners, Inc. shall remain liable to the United States of America for the deficiency, together with interest as provided by law.

 

 

 

United States of America, Plaintiff v. Henry Naples, Julia Naples, Bank of America National Trust and Savings Association, a Banking Association; Eugene Biscailuz, both Individually and as Sheriff of Los Angeles County, California, and B. F. Goodrich Co., a corporation, Defendants

In the United States District Court for the Southern District of California, Central Division, No. 15,056-WM, November 25, 1953

Lien for taxes: Priorities.--It was held that the Government had a first, prior and paramount lien upon the taxpayers' funds deposited by the banking association with the Court. No findings were made as to the issues between the taxpayers and B. F. Goodrich Company in another action pending before the Court.

Walter S. Binns (later Laughlin E. Waters), United States Attorney, E. H. Mitchell, Edward R. McHale, Robert H. Wyshak, Assistant United States Attorneys, Eugene Harpole, Frank W. Mahoney, Special Attorneys, Internal Revenue Service, 600 Federal Building, Los Angeles 12, Calif., for plaintiff. Newlin, Holley, Tackabury & Johnston (Lyndol L. Young), 1020 Edison Building, Los Angeles 17, Calif., for defendant, B. F. Goodrich Co. Hugo A. Steinmeyer, Winfield Jones, 650 South Spring Street, Los Angeles 14, Calif., for defendant, Bank of America. Glenn A. Lane , 639 South Spring Street , Los Angeles 14, Calif. , for defendants, Henry Naples and Julia Naples.

Findings of Fact and Conclusions of Law

MATHES, District Judge:

The above-entitled cause came on regularly for hearing before the Court sitting without a jury, the Honorable William Mathes, Judge presiding, on November 9, 1953, at Los Angeles , California . The plaintiff United States of America, appeared by Laughlin E. Waters, United States Attorney for the Southern District of California, Edward R. McHale and Robert H. Wyshak, Assistant United States Attorneys for said District, and Eugene Harpole, Special Attorney, Internal Revenue Service; the defendants Henry Naples and Julia Naples, appeared by Glenn A. Lane, their attorney; the defendant B. F. Goodrich Company, appeared by Newlin, Holley, Tackabury and Johnston, by Robert H. Ingram, its attorneys; the defendant Bank of America National Trust and Savings Association, had previously deposited the funds held by it with the Clerk of the Court and been dismissed from the action; the defendant Eugene Biscailuz did not appear by answer or otherwise and his default was entered upon the motion of plaintiff made at the time of trial. Evidence in documentary form and certain stipulations of fact made between counsel for the plaintiff and the defendants Henry Naples and Julia Naples were received and the Court, having considered the evidence and the law, makes the following:

Findings of Fact

I. That the commencement of this action was authorized by the Commissioner of Internal Revenue and directed by the Attorney General of the United States.

II. That plaintiff is a corporate and sovereign body politic.

III. That the defendants Henry Naples and Julia Naples are husband and wife, residing in San Gabriel, Los Angeles County, California.

IV. That the defendant, B. F. Goodrich Co., is a New York corporation.

V. That on or about April 9, 1953, the defendant, Bank of America National Trust and Savings Association, with the leave of this Court, deposited the sum of $1,591.54 with the Court and was by the consent of all parties dismissed as a defendant in the action.

[Action Brought By Goodrich Co.]

VI. That subsequent to the commencement of this action, the action instituted by the defendant, B. F. Goodrich Company on September 13, 1951, in the Superior Court of the State of California , in and for the County of Los Angeles , against Henry Naples and others, said action being numbered 590,583, was dismissed, and the attachments issued therein dissolved. That upon the dismissal of said action and the dissolution of said attachments, a 1950 Oldsmobile Sedan, license number 9 N 71002, and a 1951 Plymouth Sedan, license number 3 N 69259, were released by the defendant Eugene Biscailuz, as Sheriff of Los Angeles County, California, to the defendant Henry Naples.

VII. That on January 30, 1953, the defendant, B. F. Goodrich Company, commenced an action in the United States District Court for the Southern District of California, numbered 15,119-Y, wherein Henry Naples, Julia Naples and others are named as parties defendant.

VIII. That in said action No. 15,119-Y, B. F. Goodrich Company as plaintiff claims that the sums of money received by the defendants, Henry Naples and Julia Naples during the years 1950 and 1951 upon which the Commissioner of Internal Revenue assessed the hereinafter described income taxes for said years against said Naples were actually funds which Henry Naples had embezzled from B. F. Goodrich Company. Henry Naples and Julia Naples deny in said action that any part of the income received and reported by them during the years 1950 and 1951 was embezzled funds. Henry and Julia Naples in their answer herein alleged in the alternative that if it should ultimately be determined that said funds did belong to B. F. Goodrich Company, then Henry Naples and Julia Naples overstated their income and overpaid their Federal income tax for the years 1950 and 1951.

IX. That said action No. 15,119-Y is still pending, awaits a trial setting, and the trial time thereof is estimated at from two to six weeks by counsel for the parties.

[Notice of Tax Liens Filed]

X. That the Commissioner of Internal Revenue assessed income taxes against Henry Naples and Julia Naples for the year 1950 in the sum of $5890.34 and interest thereon in the sum of $315.42 on the 11th day of March, 1953. The Commissioner's assessment list carrying said 1950 income taxes was received in the office of the Collector of Internal Revenue at Los Angeles , California , on March 17, 1952, and notice and demand for payment of the tax was given the taxpayers by the Collector of Internal Revenue on March 25, 1952. No part of said 1950 income tax or the interest thereon has been paid and the whole thereof remains assessed, outstanding and unpaid, together with interest thereon as provided by law. A notice of lien securing payment of said 1950 income tax was filed in the office of the Recorder of Los Angeles County, California, on June 12, 1952.

XI. That on the 28th day of March, 1952, the Commissioner of Internal Revenue assessed 1951 income taxes against Julia Naples in the sum of $997.97 and against Henry Naples in the sum of $1,159.97. The Commissioner's assessment lists carrying said assessments were received in the office of the Collector of Internal Revenue at Los Angeles , California , on April 2, 1952, and notices and demands for payments issued to the taxpayers on April 4, 1952. No part of said tax or the interest thereon has been paid and the whole thereof remains assessed, outstanding and unpaid. Notices of liens securing payment of said 1951 income taxes were filed in the office of the Recorder of Los Angeles County, California, on April 30, 1952.

XII. That the Court makes no finding as to the validity of the Assessment or the amount of the 1950 and 1951 income taxes of Henry Naples and Julia Naples, nor does it make any finding as to the issues between Henry Naples and Julia Naples and the B. F. Goodrich Company, but leaves those issues entirely free to be determined in action No. 15,119-Y now pending before United States District Judge Leon R. Yankwich.

XIII. That the United States of America does, by virtue of the provisions of Section 3670 of the Internal Revenue Code (26 U. S. C. A. 3670), possess a lien upon all of the property and rights to property whether real or personal belonging to Henry Naples and Julia Naples, including the said sum of $1,591.54 deposited with the Court by Bank of America National Trust and Savings Association.

From the foregoing Findings of Fact the Court draws the following:

Conclusions of Law

I. That the plaintiff United States of America, by virtue of the provisions of Section 3670 of the Internal Revenue Code, has a first, paramount and prior lien upon the sum of $1,591.54 paid into Court by said Bank of America National Trust and Savings Association and is entitled to have said sum paid over to it for application upon the Federal income taxes assessed against Henry Naples and Julia Naples for the years 1950 and 1951.

II. That this Court does not find as to any of the other issues pending between the defendants Henry Naples and Julia Naples and the defendant B. F. Goodrich Company, but should and does leave those issues entirely free for determination in action No. 15,119-Y now pending before United States District Judge Leon R. Yankwich.

III. That the plaintiff herein is entitled to a judgment against the defendants Henry Naples, Julia Naples and B. F. Goodrich Company for its costs to be taxed by the Clerk of this Court.

IV. That as to any relief prayed for by any of the parties to this action, other than the adjudication that plaintiff has a first, prior and paramount lien upon the said sum of $1,591.54 and is entitled to have that said sum paid over to it, the action should be dismissed without prejudice.

 

 

 

United States of America , Plaintiff v. Tillman J. Dean, Defendant United States of America , Plaintiff v. Otis C. Dean, Defendant

U. S. District Court, Mid. Dist., Ga., Thomasville Div., Civil Action No. 81-71-THOM, Civil Action No. 81-72-THOM, 11/10/82

[Code Sec. 6331]

Levy and distraint: Asserted against debt: Existence of obligation: Due date.--Individuals who were contractually obligated to make rental payments to a lessor who was liable to the U. S. for unpaid tax assessments had to make their payments to the U. S. in satisfaction of a lien asserted against the debt obligation. Although the payment was not required to be made until a date after the date upon which the notice of levy was served, the lessor had a clear and unconditional right to the payments at the time the levies were served. St. Louis Union Trust Co., 80-1 USTC ¶9282, 617 F2d 1293, followed. BACK REFERENCES: 82FED ¶5357.0745 and 82FED ¶5369.20.

Curtis L. Muncy, Department of Justice, Washington , D. C. 20530, for plaintiff. Bruce Kirbo, Kirbo & Bridges, 208 West Water Street, Bainbridge, Georgia 31717, Harold Lambert, Lambert & Floyd, 326 West Water Street, Bainbridge, Georgia 31717, for defendant.

Opinion

SMITH, District Judge:

The two cases above identified were consolidated for disposition and the parties have filed cross-motions for summary judgment and briefs in support thereof and, since it is clear that there is no controversy concerning the facts, the cases are properly before the Court for summary disposition.

The United States instituted these actions against the Defendants for their failure to honor levies served upon them. Specifically, the United States seeks to recover $6,800.00 plus interest from the Defendant Otis C. Dean, Jr., and $18,260.00 plus interest from the Defendant Tillman J. Dean for their failure to honor levies served upon them.

In February, 1978, the Defendant Tillman J. Dean entered into a lease contract with L. Mervin Barbree and, at the same time, the Defendant Otis C. Dean, Jr. entered into a lease contract with Barbree. Under the terms of these lease agreements the Deans became obligated to pay to Barbree annual rental payments in certain amounts and one of the rental installments was due to be paid on or before January 15, 1980.

On December 5, 1979, a Notice of Levy was served upon the Defendant Tillman J. Dean which notified him that there was due, owing and unpaid to the United States from Barbree the sum of $22,094.30 by virtue of tax assessments made against Barbree. The Notice of Levy further stated that all property and rights to property belonging to Barbree then in the Defendant's possession were to be levied upon and seized in satisfaction of said amount and that demand was made upon the Defendant for an amount necessary to satisfy such claim.

On September 25, 1979, a similar Notice of Levy was served upon Otis C. Dean, Jr. by which a demand was made upon him for an amount necessary to satisfy the tax lien.

On January 15, 1980, a final demand was made upon the Defendant Tillman J. Dean for the amount set forth in the Notice of Levy, but Dean refused and has continued to refuse to honor the levy and surrender to the United States the sum of $18,260.00.

On the same date, January 15, 1980, a final demand was made upon Defendant Otis C. Dean, Jr. for the amount set forth in the Notice of Levy but Dean refused and has continued to refuse to honor the levy and surrender to the United States the sum of $6,800.00.

Under the terms of his lease agreement with Barbree, the Defendant Tillman J. Dean was obligated to make a rental payment for the year 1980 on or before January 15, 1980 and on January 2, 1980, Dean made the rental payment to Barbree in the amount of $18,260.00.

Under the terms of his lease agreement with Barbree, the Defendant Otis C. Dean, Jr. was obligated to make a rental payment for the year 1980 on or before January 15, 1980 and he made the rental payment to Barbree in the amount of $6,800.00 on January 2, 1980.

The right of the taxpayer, Barbree, to receive the rental payments for the year 1980 from the respective Defendants was clear and unconditional and was in existence at the time the levies above referred to were served on them and was an adequate interest in, or right to, property to which the Internal Revenue Service's levies clearly attached; and §6332(a) of the Internal Revenue Code of 1954 provides that any person in possession of, or obligated with respect to property or rights to, property subject to levy must surrender such property or discharge such obligation to the Secretary upon service of the levy.

The Defendants contend that since the rental payments for the year 1980 were not required to be paid until January 15, 1980, they were not "due" on the dates when the levies were served upon them, placing their reliance upon United States v. Warren Railroad Company [42-1 USTC ¶9391], 127 F2d 134 (2 Cir. 1942). The Defendants do not contend that they were not contractually bound to pay rent in the amounts specified in their respective contracts "on or before January 15, 1980", but rather they contend that, since the payments were not yet "due", there was nothing to be levied upon. In other words, the Defendants raise a "timing" defense.

It is the Court's view that §301.6331-1(a) of the regulations adopted by the Secretary of the Treasury and the decisions in St. Louis Union Trust Company v. United States [80-1 USTC ¶9282], 617 F2d 1293 (8 Cir. 1980), and J. A. Wynne Co. v. R. D. Phillips Construction Co. [81-1 USTC ¶9305], 641 F2d 205 (8 Cir. 1981), and United States v. Citizens and Southern National Bank [76-2 USTC ¶9665], 538 F2d 1101 (5 Cir. 1976), make the defense here asserted by the Defendants unavailing. Consistent with the foregoing, the Court concludes that the Defendants' motions for summary judgment should be denied and the Plaintiff's motions for summary judgment in the respective cases should be and are hereby sustained and judgment will be entered accordingly.

Judgment

Pursuant to an Opinion and Order of Judge J. Robert Elliott, United States District Court Judge, signed on November 9, 1982 and Filed on November 10, 1982 and for the reasons contained therein;

IT IS ORDERED AND ADJUDGED THAT the Defendants' Motions for Summary Judgment should be Denied and the Plaintiff's Motions for Summary Judgment in the respective cases should be and are hereby SUSTAINED.

 

 

 

St. Louis Union Trust Co., a corporation, as Escrow Agent under Escrow Agreement dated July 24, 1970, between Andrew L. Stone, United States of America and St. Louis Union Trust Co., Andrew L. Stone, Appellant v. United States of America, acting by and through the Assistant Attorney General in charge of the Civil Division of the United States Department of Justice, R. C. Voskuil, District Director of Internal Revenue, and James M. Sanders, Revenue Officer, Both of St. Louis, Missouri, for the Secretary of Treasury, Barbara Allen Babcock, Appellees

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 79-1319, 617 F2d 1293, 3/11/80, Affirming District Court, 79-1 USTC ¶9345, 468 F. Supp. 941

[Code Sec. 6321]

Lien for taxes: Surrender of property: Bank escrow account: Prior attachment.--A trust company was required to pay to the Internal Revenue Service all accumulated and future income generated by a trust corpus held in escrow pursuant to an agreement between the government and the taxpayer, pending disposition of a civil action. The admission of parol evidence regarding the intent of the parties to the agreement was not improperly denied by the District Court, since the agreement was unambiguous as a matter of law. The escrow agreement was not a prior attachment of the income of the trust, since the taxpayer, with certain restrictions to prevent concealment and waste of assets, had a separate property right in the income. There were no errors in the levy procedure. The written notice of levy was properly served, and the property was properly seized. Since the contractual right to receive income is itself a property right, the release of the levy against the trust corpus did not work to release the levy against the right to receive income from the principal.

Michael I. Saltzman, One Rockefeller Plaza, New York, N. Y. 10020, Gerald F. Hempstead, Susman, Stern, Heifetz, Lurie, Sheehan, Popkin & Shervitz, 7733 Forsyth Blvd., St. Louis, Mo. 63105, for appellant. Robert D. Kingsland, United States Attorney, St. Louis, Mo. 63101, M. Carr Ferguson, Assistant Attorney General, Michael J. Roach, Gilbert E. Andrews, Crombie J. D. Garrett, Department of Justice, Washington, D. C. 20530, for appellees.

Before LAY, Chief Judge, ^* BRIGHT and MCMILLIAN, Circuit Judges.

MCMILLIAN, Circuit Judge:

This is an interpleader action commenced by St. Louis Union Trust Company (the Trust Company) for declaratory and other relief as a consequence of conflicting claims made by the Internal Revenue Service (IRS) and Andrew L. Stone to funds the Trust Company received under an escrow agreement (the Escrow Agreement) to which the Civil Division of the United States Department of Justice (the Civil Division), Stone and the Trust Company were parties. Stone appeals from a district court ¹ order granting summary judgment in favor of the United States and requiring the Trust Company to pay the accumulated income as well as all future income from the funds to the IRS. We affirm.

Beginning in about 1963, Stone and Francis N. Rosenblum, through their controlled corporation, Chromcraft Corporation and its successor, Alsco, Inc., perpetrated a multimillion dollar fraud on the United States in connection with certain contracts to supply rocket launchers to the Department of the Navy. In 1968, Stone was convicted on a plea of guilty to criminal charges stemming from his involvement in this fraud. In 1969, the Civil Division brought two separate civil actions arising out of the rocket launcher fraud, ² one in the United States District Court for the District of Columbia and the other in the Eastern District of Missouri against Stone and Harvard Industries, the corporate successor to Alsco, Inc., alleging violations of the False Claims Act, 31 U. S. C. §§ 231-235, and the Anti-Kickback Act, 41 U. S. C. §§ 51-54. In these actions the United States claimed single damages of over $6,000,000 and double that amount for violation of the False Claims Act.

To ensure payment of any judgment it might ultimately obtain against Stone in the Missouri action, in about February, 1970, the Civil Division, through its attorney Lawrence Lippe, and Stone's attorneys engaged in negotiations on an agreement in lieu of attachment of Stone's property. On July 24, 1970, the Escrow Agreement was entered into by Stone, the Civil Division and the Trust Company. Pursuant to the Escrow Agreement, Stone deposited $2,500,000 par value of short-term bonds and United States Treasury Bills and 21,600 shares of the stock of Concord Control, Inc., representing 100 percent of the outstanding stock of that company, into an escrow account at the Trust Company. Pending resolution of the civil action, the Trust Company agreed to hold the escrowed securities (the Principal) and to reinvest any proceeds collected. The Trust Company further agreed that it would deposit any dividends and interest (the Income) received on the Principal in Stone's account at the First National Bank in St. Louis .

Stone retained approximately $1,500,000 in property. As to the property not transferred to the escrow account and the Income, Stone was prohibited from making a "sale, transfer or any other disposition," with two exceptions. First, Stone was permitted to dispose of property for "reasonable living expenses" to maintain his standard of living with only the following limitations: he could spend no more than $100,000 per year for legal fees, and he was not permitted to make a gift or charitable contribution in excess of $25,000 to any single person or charity in any calendar year without giving prior notice and securing the consent of the Civil Division. Second, although Stone was permitted to sell, transfer or dispose of his property "for full and valuable consideration," he had to give prior written notice to the Civil Division and secure its prior consent. Stone was required to permit representatives of the Civil Division to inspect books, records and other documents that related to the unescrowed assets "at reasonable periods from time to time, as they may desire."

With respect to the Civil Division the Escrow Agreement provided:

7. The United States agrees that, so long as Stone shall not be in default under any of his agreements hereunder, the Civil Division of the United States Department of Justice will not institute attachment proceedings against the property and assets of Stone, and shall use its best internal efforts to dissuade any other agency of the United States from proceeding by way of attachment or other lien against the property and assets of Stone.

On February 7, 1972, after some newspaper criticisms of the Escrow Agreement, the IRS made assessments on the ground that the ultimate collection of tax was in jeopardy. On February 8, 1972, the IRS filed a notice of lien reflecting unpaid assessments of income taxes due from Stone for the years 1963 through 1967 in the amount of $7,108,861.73 and served a notice of levy on the Trust Company. The revenue officer who served this notice of levy did not demand immediate payment of either the Principal or the Income but instead instructed the Trust Company to retain the Principal and to withhold any further payments of Income to Stone. Since then, the Trust Company has accumulated the Income in a separate account.

In August of 1974, Stone filed a complaint against the IRS, in the United States District Court for the Southern District of New York (the New York Action), seeking to enjoin collection from him under the jeopardy assessment. During the pendency of the New York Action, the IRS made a second levy in the amount of $10,601,035.91 ³ against the Principal and Income. On July 30, 1975, a notice of levy was served on the Trust Company, and again oral instructions were given for the Trust Company to continue to hold the Principal and Income. On December 2, 1975, the New York Action was dismissed on the ground that, by virtue of the Anti-Injunction Act, 26 U. S. C. §7421, the district court lacked subject matter jurisdiction to enjoin the IRS from enforcing a jeopardy assessment. Stone v. United States [76-1 USTC ¶9111], 405 F. Supp. 642 (S. D. N. Y. 1975), aff'd without opinion, 538 F. 2d 314 (2d Cir.), cert. denied, 429 U. S. 921 (1976).

On March 9, 1976, the IRS served a third notice of levy in the amount of $11,535,357.40, ⁴ seizing the Principal and Income held by the Trust Company. A final demand was served on March 11, 1976. At this point, the Trust Company contacted Stone; and, on March 12, 1976, Stone's attorney demanded by telegram that the Trust Company refuse to honor the levy and threatened legal action against the Trust Company if any funds were turned over to the IRS.

Accordingly, on March 15, 1976, the Trust Company instituted this interpleader action in the Eastern District of Missouri, naming Stone and the United States (as represented by the Assistant Attorney General of the Civil Division, the District Director of the IRS, and the Revenue Officer who served the notice of levy). Before any answer or other pleading had been filed, the IRS released the Principal from the levy on April 22, 1976. In his answer, Stone contended that he was entitled to the Income on the basis of the Escrow Agreement. The United States moved to dismiss the interpleader action and Stone's cross-claim for breach of contract. On March 17, 1977, the district court granted the motion on the ground that it lacked subject matter jurisdiction because there was neither minimal diversity under the federal interpleader statute, 28 U. S. C. §1335, nor complete diversity or a federal question under Rule 22, Fed. R. Civ. P. St. Louis Union Trust Co. v. Stone, 428 F. Supp. 988 (E. D. Mo. 1977).

One month after that decision, by letter dated March 31, 1977, the IRS notified Stone that he and his wife owed additional income tax for the years 1973-75, which was due in substantial part as a result of the inclusion in the Stones' taxable income of the Income held by the Trust Company. They have filed a petition in the United States Tax Court contesting the deficiency, but no decision has yet been rendered.

Stone appealed the dismissal of the interpleader action, and this court reversed and remanded, holding that the district court did have jurisdiction under the interpleader statute. St. Louis Union Trust Co. v. Stone, 570 F. 2d 833 (8th Cir. 1978). On remand of the interpleader action, Stone repeatedly attempted to depose Lawrence Lippe, the attorney who represented the Civil Division in the negotiation and preparation of the Escrow Agreement, concerning the parties' intentions. The Civil Division opposed discovery and finally filed a Rule 56(a) motion for summary judgment against Stone. Stone requested relief under Rule 56(f), Fed. R. Civ. P., including a continuance of the motion for summary judgment to permit discovery. Stone's request notwithstanding, the district court granted the motion for summary judgment. St. Louis Union Trust Co. v. Stone [79-1 USTC ¶9345], 468 F. Supp. 941 (E. D. Mo. 1979).

Here on appeal, Stone urges that summary judgment was improper both because the court below failed to grant a continuance under Rule 56(f) and because the different interpretations of the Escrow Agreement precluded a finding that movant was entitled to judgment as a matter of law. Specifically, Stone had wanted to show that it was his understanding and the mutual intention of the parties that no other governmental agency be able to attach either the Principal or the Income and that the "property" which the Civil Division was to use its best efforts to prevent another agency from attaching was the unescrowed property which Stone retained.

The Civil Division, however, says that the district court--and by extension this court--are precluded by the doctrine of collateral estoppel from even considering the interpretation of the Escrow Agreement. ⁵ The Civil Division bases this contention on the following language from the New York Action:

The tax deficiency assessment is entirely independent of the government's claims in the civil actions against Stone, wherein the government seeks to recover in excess of $6,000,000. The covenant in the escrow agreement related solely to that action and was entered into by Stone to avoid attachment of his assets and property in that action. While the agreement provides that the dividend income of the escrowed properties is to be credited to plaintiff Andrew L. Stone and that the Civil Division of the United States Department of Justice will not institute attachment proceedings against his property and assets and will use its best efforts to dissuade any other agency of the United States from proceeding by way of attachment or other lien against his property, this, of course, did not immunize Stone from tax liability or foreclose the Internal Revenue Service from taking appropriate steps to assess a deficiency and to make a jeopardy assessment to reach his assets, including the income from the escrowed securities. The deficiency tax claims and the jeopardy remedies available to the Internal Revenue Service were entirely separate from the claims and remedies which the Justice Department was asserting under the False Claims and Anti-Kickback Acts.

Stone v. United States, supra, 405 F. Supp. at 647-48.

This is not an appropriate case for collateral estoppel, or issue preclusion. We note initially that there is no claim preclusion here, as these are not suits on the same cause of action. The New York Action was an injunction and breach of contract action by Stone against the IRS, while this is an interpleader action brought by the Trust Company against Stone and the IRS. Because they are different causes of action, preclusion applies only to those matters previously at issue and directly adjudicated. James & Hazard, Civil Procedure §§ 11.3, 11.16-11.19 (2d ed. 1977). At a glance, the above-quoted language from the New York Action appears to interpret the Escrow Agreement. But in fact the only issue adjudicated there was the propriety of the jeopardy assessment by the IRS, and the court was not required to interpret the Escrow Agreement for the purpose of resolving that issue. The court looked at the Escrow Agreement for the limited purpose of determining whether the jeopardy assessment, was imposed arbitrarily and capriciously and not to collect taxes due. The above-quoted language was relevant to the court's decision that, so long as there was a substantial foundation to support the claim for additional taxes, the IRS's motive in making the jeopardy assessment was not grounds for a injunction. The court held that it lacked jurisdiction to enjoin the IRS from enforcing a jeopardy assessment because of the spcific prohibition contained in the Anti-Injunction Act, 26 U. S. C. §7421(a), which manifests a strong congressional policy against judicial interference, then dismissed the injunction action without prejudice to Stone's breach of contract action. The New York action did not determine whether, having made a jeopardy assessment, the IRS could actually collect from a particular source of property. The rationale for applying res judicata narrowly where the causes of action are different is to prevent just such a situation where language taken out of context might appear to resolve a matter that was not at issue or adjudicated. The district court was not precluded by the doctrine of collateral estoppel from interpreting the Escrow Agreement.

We continue then with Stone's claims that summary judgment was improper because the court denied Rule 56(f) ⁶ relief and because there was an unresolved issue of law. Both these claims hinge on his desire to prove that the Escrow Agreement is ambiguous and the IRS interpretation does not comport with the intention of the parties. In short, Stone wants to introduce parol evidence.

Where a written contract is ambiguous or obscure, parol evidence is admissible to show the intention of the parties. Harrison Sheet Steel Co. v. Morgan, 268 F. 2d 538, 542 (8th Cir. 1959). Parol evidence is not admissible, however, for the purpose of showing that the parties intended to make an agreement which is inconsistent with the unambiguous words of their written contract. Sullivan v. United States [66-2 USTC ¶9580], 363 F. 2d 724, 727 (8th Cir. 1966), cert. denied, 387 U. S. 905, reh. denied, 388 U. S. 924 (1967). Applicability of the parol evidence rule is a question of law to be determined by the court upon examination of the written contract. Where the court holds that the written agreement is unambiguous so that no evidence is admissible to refute it, no purpose is served by allowing a party to conduct discovery aimed solely at proving the existence of an alleged parol agreement. See Sullivan v. United States , supra, 363 F. 2d 724.

Paragraph 7 of the Escrow Agreement states in relevant part: ". . . the Civil Division of the United States Department of Justice will not institute attachment proceedings against the property and assets of Stone, and shall use its best internal efforts to dissuade any other agency of the United States from proceeding by way of attachment . . .." On its face this clause shows that the parties carefully distinguished between a binding commitment that the Civil Division would refrain from attachment proceedings against Stone's property and a "best efforts" endeavor with respect to potential attachment proceedings by other agencies. ⁷ The district court concluded as a matter of law that, because the Escrow Agreement was unambiguous, the parol evidence rule precluded any evidence concerning the parties' intent to reach an agreement inconsistent with the written contract. Once the district court had concluded that no immunity from federal tax levies had been granted to Stone, no purpose would have been served in allowing Stone's discovery concerning an alleged parol agreement. Therefore, the case was ripe for summary judgment on the issue of contractual immunity from attachment, and the court properly denied Stone's Rule 56(f) request for a continuance.

Stone also raises several issues concerning the propriety of the tax levies in 1972, 1975 and 1976. His initial line of attack is that, under the terms of the Escrow Agreement, he did not have any "property or rights to property" for purposes of a tax lien and levy ⁸ because the Principal and Income were in the custody of the court.

In any case involving a federal tax lien, the question to be determined is whether and to what extent the taxpayer had "property or rights to property" to which the tax lien could attach. Aquilino v. United States, 363 U. S. 509 (1960), on remand, 10 N. Y. 2d 271, 219 N. Y. S. 2d 254, 176 N. E. 2d 826 (1961). The IRS acquires by its lien and levy no greater right to property than the taxpayer himself has at the time the tax lien arises. United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1958). Property does not belong to a taxpayer and thus is not subject to lien and levy if it has been transferred before the tax assessment. See, e.g., Wagner v. United States [78-1 USTC ¶9340], 573 F. 2d 447 (7th Cir. 1978); Sisk v. United States, 61-1 USTC [CCH] ¶9476 (N. D. Okla. 1961). If a taxpayer only has a right to property after the satisfaction of prior claims, only the residue constitutes "property" subject to lien and levy. United States v. Durham Lumber Co., supra, 363 U. S. at 525-26.

Stone asserts that he did not possess "property or rights to property" in the Principal or Income because the Escrow Agreement was in the nature of a prior attachment which precluded a tax levy; and, therefore, the Trust Company was not required to surrender the Income. ⁹ Assuming without deciding that the Escrow Agreement was a prior attachment, the simple fact is that it "attached" only the Principal. ¹⁰ The Escrow Agreement provided that the Income was to be payable to Stone and was expressly made available for the payment of his living expenses, including attorney's fees. It is true that Stone agreed to give written notice to the Civil Division before making certain kinds of transfers of his assets (other than living expenses and attorney's fees). By requiring Stone to give the Civil Division prior notice of transfers "except . . . for full or valuable consideration" and charitable contributions in excess of $25,000 the Escrow Agreement afforded the Civil Division an opportunity to prevent Stone from concealing or wasting his assets. Neither of these restrictions ¹¹ is inconsistent, however, with Stone's right to receive and enjoy the Income. Stone had "property or rights to property" in the Income. The Income had not been transferred to either the district court or the Civil Division, nor was it subject to the prior claims of the Civil Division so that only the residue was subject to lien and levy. ¹² The IRS acquired the same right to receive and spend the entire amount of the Income that Stone had at the time the tax lien arose.

Stone's final line of attack is on the procedures used in the 1972, 1975 and 1976 tax levies. First, he contends that oral instructions were not valid to seize his property. Neither party cites a case on this point. However, the levy statute defines levy to include the "power of distraint and seizure by any means." 26 U. S. C. §6331(b). The usual and recognized method of distraint and seizure of property is a notice of levy. Treas. Reg. §301.6331-1(a). It follows without elaboration that this is a false issue. Stone's property was not seized by the oral instructions. Rather, on each of the three occasions, a written notice of levy was served. The oral instructions, which concerned the treatment of the already-seized property, were within the revenue officer's authority and were binding on the Trust Company.

Second, Stone contends that the 1972 levy was legally ineffective to reach any Income earned after the date the notice of levy was served. The Internal Revenue Code provides that ". . . a levy shall extend only to property possessed and obligations existing thereof." 26 U. S. C. §6331(b). The unqualified contractual right to receive property is itself a property right subject to seizure by levy, even though the right to payment of the installments has not matured at the time of the levy. Compare Leuschner v. First Western Bank & Trust Company [58-2 USTC ¶9723], 261 F. 2d 705, 708 (9th Cir. 1958) (right to receive income of a trust is subject to tax levy), with Wagner v. United States [78-1 USTC ¶9340], 573 F. 2d 447, 454 (7th Cir. 1978), following United States v. Long Island Drug Co. [41-1 USTC ¶9140], 115 F. 2d 983, 986 (2d Cir. 1940) (future wages not subject to levy because contingent on future performance), and Treas. Reg. §301.6331-1(a)(1) (1954), amended by T. D. 7139 (1971) (levy has no effect on a subsequent bank deposit). In the present case the Trust Company had a fixed contractual obligation to pay the Income to Stone as it was earned. The IRS could and did seize that right to satisfy his unpaid tax liabilities.

Third, Stone contends that the 1976 release of the levy as to the Principal released as well the levy as to the Income. This contention depends upon the Income being inseparable from the underlying Principal. As discussed above, the unqualified contractual right to receive income is itself a property right. Section 6343(a) authorizes the IRS to release a levy upon all or a part of the property levied upon. 26 U. S. C. §6343(a). The IRS could release the levy on the Principal and retain the levy against the separate right to receive Income.

Accordingly, we affirm the district court judgment.

^* The Honorable Donald P. Lay became Chief Judge of the Eighth Circuit on January 1, 1980.

¹ The Honorable James H. Meredith, United States District Judge for the Eastern District of Missouri.

² See In Re Alsco-Harvard Fraud Litigation, 325 F. Supp. 315 (Jud. Pan. Mult. Lit. 1971) and 328 F. Supp. 1405 (Jud. Pan. Mult. Lit. 1971).

³ Unpaid balance of $6,859,159.36 plus $3,741,894.55 of penalties and interest.

⁴ Unpaid balance of $6,948,633.05 plus $4,586,724.35 of penalties and interest.

⁵ Further, the Civil Division claims that collateral estoppel was the basis for the district court's grant of summary judgment because, referring to the New York Action, it stated: "The Court considered and rejected Stone's claim that the escrow agreement barred an I. R. S. lien and levy on the trust or income." St. Louis Union Trust Co. v. Stone, supra, 468 F. Supp. at 942. Clearly, however, this statement is not the district court's holding but is a part of the prefatory summary of facts and procedure.

⁶

RULE 56.

SUMMARY JUDGMENT

. . .

(f) When Affidavits are Unavailable. Should it appear from the affidavits of a party opposing the motion that he cannot for reasons stated present by affidavit facts essential to justify his opposition, the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just. See p. 6 infra.

⁷ A Civil Division agreement concerning the right of the government to collect taxes by levy would have been unenforceable in any event. Authority for the Internal Revenue laws is conferred on the Secretary of the Treasury, 26 U. S. C. §7801(a); and, to the extent litigating authority has been vested in the Attorney General, it has been delegated to the Tax Division, not the Civil Division, 26 U. S. C. §7801(c). "An officer or agency of the United States to whom no administrative authority has been delegated cannot estop the United States even by an affirmative undertaking to waive or surrender a public right." United States v. Stewart [40-2 USTC ¶9759], 311 U. S. 60, 70, reh. denied, 311 U. S. 729 (1940). See Lynn and Gerson, Quasi-Estoppel and Abuse of Discretion as Applied Against the United States in Federal Tax Controversies, 19 TAX L. REV. 487, 493 (1963-64). Therefore, even if the Civil Division had entered into such an agreement, it would have been acting outside its delegated authority and the agreement would be void.

⁸ SEC. 6332. SURRENDER OF PROPERTY SUBJECT TO LEVY.

(a) Requirement--Except as otherwise provided . . . any person in possession of . . . 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 . . . 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.

26 U. S. C. §6332(a).

⁹ For the years 1972 through 1975, the Income varied from $123,776 to $205,356.

¹⁰ Stone's reliance on United States v. Swink [41-1 USTC ¶9794], 41 F. Supp. 98 (E. D. Va. 1941), for the proposition that the commencement of the contract actions was sufficient to put all his assets in the constructive possession of the court is misplaced. Swink involved an assignment for benefit of creditors, where the fund was held by the trustee, as custodian of the court, subject to distribution upon the order of the court. There, the insolvent taxpayer no longer had any rights in the fund. Here, Stone's assets are not in either actual or constructive custody of the court. On the contrary, Stone bargained for and received in the Escrow Agreement property rights in the Income.

¹¹ Once a court has determined that under state law the taxpayer has a sufficient interest in property to qualify as a property right, then restrictions or exemptions, whether or not enforceable under state law, cannot defeat the right of the United States to levy upon that property for collection of its taxes. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56-57 (1958); United States v. Rye, 550 F. 2d 682 (1st Cir. 1977). Congress explicitly provided that only "the property specifically made exempt by subsection (a)" is exempt from tax levies. 26 U. S. C. §6334(c). When a taxpayer whose property is the subject of a lien has not timely paid his assessment, all his rights to property held by any third person may be levied in satisfaction of his debt. 26 U. S. C. §6321. Stone had a "right to property" in the Income; therefore, the minor restrictions placed on its use by the Escrow Agreement cannot defeat the IRS levy. Clearly, the Income did not fall within any of the exemptions of §6321.

¹² There is no merit in Stone's contention that the Income should be exempt from a federal tax levy because some indeterminate amount of it, along with other assets, might eventually become available to satisfy the judgment in the civil fraud action. Under the Escrow Agreement, Stone was permitted to exhaust the Income on allowable expenses as quickly as he received it.

 

 

 

United States of America , Plaintiff v. Paddy Jordan 's Restaurant, Inc., State of New York , Department of Audit and Control and Arthur Levitt, State Comptroller, Defendants

U. S. District Court, So. Dist. N. Y., 69 Civ. 5394, 3/29/74

[Code Secs. 6321 and 6323]

Tax liens: Property subject to tax: License deposit held by state: Property rights: Priority of tax lien: Perfection: State v. Federal government.--A federal tax lien attached to a liquor license deposit held by state, because the taxpayer retained property rights in the deposit. Further, the United States tax lien had priority over the state tax lien because it was perfected first.

Paul J. Curran, United States Attorney, Susan Freiman, Assistant United States Attorney, New York, N. Y., for plaintiff. Louis J. Lefkowitz, Attorney General of the State of N. Y., Burton Herman, Assistant Attorney General, New York, N. Y., for defendants.

Memorandum Opinion

PIERCE, District Judge:

This case involves competing tax claims by the state and federal governments to a 1,500 dollar fund deposited by Paddy Jordan 's Restaurant, Inc., a defunct New York corporation, with the New York State Liquor Authority, upon applying for a restaurant liquor license. The United States has moved for summary judgment pursuant to Rule 56 of the Fed. R. Civ. P.

[Facts]

The material facts are not in dispute. On December 6, 1963 the District Director of Internal Revenue assessed and made demands on Paddy Jordan 's Restaurant for withholding and Social Security taxes due for the first, second and third quarters of 1963. The assessments aggregated $685.86 plus accruing interest. Pursuant to the Internal Revenue Code, 26 U. S. C. §§ 6321-22, the amount became a lien in favor of the United States "upon all property and rights to property, whether real or personal" belonging to the Restaurant Company. Notice of such a lien was filed by the IRS with the Register of New York County on March 4, 1964. Paddy Jordan 's application for a liquor license was denied by the New York State Liquor Authority on March 31, 1964. A refund in the sum of $1,500 returning the taxpayer's deposit for the disapproved license was received by the Comptroller's Office on April 6, 1964. It appears that Paddy Jordan had not paid the state franchise taxes due for the years 1955 and 1957-1964, inclusive. On April 16, 1964 and Corporation Tax Bureau asserted a franchise tax claim in an undetermined amount against the refund. On April 29, 1964 the IRS served a notice of levy on the Comptroller for the unpaid federal taxes assessed in 1963. On January 29, 1965 the Comptroller received a franchise tax determination against Paddy Jordan in the amount of $1,055.60. On February 2, 1965 the Comptroller, claiming a right of set-off, transmitted that sum to the Corporation Tax Bureau.

The United States claims that such action by the Comptroller was improper since its tax claim had priority over the state tax claims and, as indicated, has moved for summary judgment against the State of New York and the Comptroller.

Section 6321 of Title 26 of the United States Code provides: "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."

[Property Interest in License Deposit]

At the outset New York claims that, once the deposit for the license application was made, Paddy Jordan no longer had any property interest or rights in that deposit to which the federal tax lien could attach.

It is well settled that section 6321 creates no property rights and that this question is to be determined in accordance with the appropriate state law. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958); City of New York v. United States [60-2 USTC ¶9767], 283 F. 2d 829, 831 (2d Cir. 1960). Under New York law the fee deposited in connection with the application for a liquor license has been characterized as immediately becoming the property of the State. Brearton v. Morgan, 12 N. Y. S. 2d 99 (3rd Dep't 1939 ). On the other hand, a person who fails to obtain the license may get a refund of his deposit. Chemical Bank of New York Trust Co. v. State, 279 N. Y. S. 2d 813 (3rd Dep't 1967 ); also, prior to the grant of the license a debtor-creditor relation exists between the State and the depositor. Brearton, supra. Moreover, the fact that the money is forwarded to the State Liquor Authority does not serve to deprive the depositor of his property interest in the fund. Thus, in Capitol Distributors Corp. v. 2131 Eighth Ave., 139 N. Y. S. 2d 117, 119 (3rd Dep't 1955), aff'd, 153 N. Y. S. 2d 222 (1956) the court held that an assignment of a deposit made in connection with a liquor license application was an assignment of a "present interest".

In light of these cases the Court concludes that under New York law Paddy Jordan had property rights to the liquor license application deposit.

[Priority of Tax Liens]

The next question for consideration is the relative priority of the respective tax liens. As to this, the rule is that where federal liens are involved priority of liens is determined by federal law which generally follows the common law rule of "first in time, first in right." Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233, 236 (1963); United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85 (1954).

The state franchise tax became liens on the dates on which the reports were required to be filed by the taxpayer pursuant to sections 209(1), 211 and 213(2) of the New York Tax Law. In the context of this case, this would mean that most of the state liens arose prior to the federal tax assessment on December 6, 1963. The federal tax lien, however, was fully perfected when assessed on December 6, 1963. 26 U. S. C. §6322. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). In contrast, the franchise taxes were not assessed nor the amounts determined until some time subsequent to that. The issue, therefore, is whether the state liens were sufficiently perfected prior to the federal assessment to gain precedence over the tax claim of the United States .

[Conclusion]

Until such time as the franchise taxes were assessed and fixed they were merely inchoate liens upon the corporate property. New York v. McClay, 288 U. S. 290 (1933); Smith v. Meader Pen Corp., 8 N. Y. S. 2d 39 (1st Dept's 1938), aff'd, 280 N. Y. 554 (1939). Further, where the federal tax lien is choate or fully perfected and other liens inchoate the federal lien is first in time. United States v. Pioneer Amendment Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 88 (1963). It follows, therefore, that the State here merely obtained general or inchoate liens which were not sufficiently perfected to warrant priority over the federal tax claim. See Massachusetts Bonding & Ins. Co. v. New York [58-2 USTC ¶9704], 259 F. 2d 33, 39 (2d Cir. 1958). Accordingly, the motion for summary judgment is hereby granted.

SO ORDERED.