Legal Obligations

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[2000-1 USTC ¶50,342] Whiting-Turner/A.L. Johnson, a Joint Venture, Plaintiff v. P.D.H. Development, Inc., United States of America, and Athens First Bank & Trust Company, Defendants

U.S. District Court, Mid. Dist. Ga., Athens Div., 3:98-CV-107(DF), 3/21/2000


Tax liens: Security interest: Priority: Accounts receivable: Existence of property.--A bank's security interest in a delinquent subcontractor's accounts receivable from a construction contract had priority over a subsequently filed federal tax lien. The taxpayer had performed part of its contract duties before the tax lien was filed and, thus, had rights to at least a portion of the receivables to which the bank's security interest could attach. Accordingly, the receivables were "in existence" when the tax lien was filed, regardless of whether state (Georgia) law gave the taxpayer an interest in the accounts as soon as the contract arose, or federal law gave the taxpayer an interest in the accounts only after it performed its contract duties.

Tax liens: Security interest: Accounts receivable: Existence of property: 45-day safe harbor provision.--A bank's security interest in a delinquent subcontractor's accounts receivable was superior to a subsequently-filed federal tax lien. Moreover, because the security interest arose from a commercial transaction financing agreement, the bank was also entitled to the payments that the subcontractor was owed within 45 days after the tax lien filing. However, a question of fact as to the amount of the receivables that were subject to the tax lien precluded summary judgment. BACK


Tax liens: Notice of: Wrong name: Substantial compliance.--A federal tax lien sufficiently identified the delinquent taxpayer. Although the name listed on the lien differed from the taxpayer's incorporated name, under the substantial compliance standard of Code Sec. 6323 , it was sufficiently similar so that a reasonable inspection of the county lien index would have revealed the lien's existence.


Tax liens: Security interest: Priority: Evidence: IRS employees: Unsworn declarations: Hearsay: Best evidence.--In an action to determine the priority of competing security interests, unsworn declarations from IRS employees were admitted into evidence because they were made under penalty of perjury and verified as true and correct. However, their statements regarding the taxpayer's employer identification number were stricken as hearsay, and statements regarding the taxpayer's total tax liabilities were accepted only as proving that the taxpayer had a federal tax deficiency.

ORDER

FITZPATRICK, District Judge:

Whiting-Turner/A.L. Johnson ("Whiting-Turner")initiated this lawsuit in the Superior Court of Clarke County by filing a complaint in interpleader, as amended, in which it seeks to determine entitlement to $26,330.14 that it is obligated to pay P.D.H. Development, Inc. ("PDH") as compensation for work performed on the University of Georgia Animal Science Complex . Whiting Turner named three defendants to the action: (1) PDH; (2) Athens First Bank & Trust Company ("Athens First"); and (3) the United States of America . The complaint for interpleader was filed pursuant to 28 U.S.C. §2410, in which the United States waived its sovereign immunity for interpleader actions involving tax liens. The United States subsequently removed the case to federal court pursuant to 28 U.S.C. §1444, which allows the United States to remove any action brought in state court against the United States under §2410 to the district court. This matter is now before the Court on cross-motions for summary judgment filed by the United States and Athens First.

I. STATEMENT OF FACTS

On August 9, 1996, Whiting-Turner entered into a subcontract (the "Subcontract") with PDH to perform all of the grading and site utilities work on a project known as the University of Georgia Animal Science Complex (the "Project"). In subsection (b) of Article 5 of the Subcontract, PDH agreed to submit to Whiting-Turner applications for payment by the fifteenth of each month, or as otherwise provided in the contract documents, so as to enable Whiting-Turner to apply for payment from the Project owner. Subsection (a) of Article 5 of the Subcontract provides for payment of the contract amount as follows: Whiting-Turner was obligated to pay PDH an amount equal to ninety percent (90%) of the value of the work performed as determined by the architect and approved by the construction manager during any calendar month within fifteen (15) days after payment therefore was received by the construction manager from the owner of the project or within such time as specified by law. Additionally, the contract provides that

Retainage and any other balance of the Contract Amount shall be payable within fifteen (15) days . . . after the work under this Agreement has been completed and accepted by Owner, Architect, and [Whiting-Turner] and following approval by the Architect of the final application for payment and settlement of all claims, if any under this Agreement, provided that Trade Contractor has fully performed all of its obligations hereunder.

Article 5(a) of the Subcontract.

On July 18, 1997, Whiting-Turner declared PDH to be in default under the Subcontract. Whiting-Turner terminated the Subcontract and PDH ceased all work on the Project as of July 18, 1997. The amount due and owning PDH for the services it performed on the Project is $26,330.14.

Two independent parties, Athens First and the United States , claim an interest in the money owed to PDH under the Subcontract. PDH has not claimed an independent entitlement to any portion of the fund involved in this case or indicated its support for either of the two claims of entitlement.

Athens First's claim is premised on its security interest in all of PDH's accounts receivable. Over a period of several years, Athens First advanced loans and funds to PDH. PDH executed numerous promissory notes, security agreements, and UCC-1 financing statements granting a security interest in all of PDH's accounts receivable to Athens First (Aff. of A. Middleton Ramsey (tab #22), paras. 3 & 4; Exhibits D, E, F, I, J, K, O, and Q). On February 10, 1994, Athens First filed a UCC-1 financing statement to perfect its interest in "All Furniture, Fixtures, Equipment, Accounts Receivable and General Intangibles now or hereafter existing or created" (Aff. of A. Middleton Ramsey (tab #22), Exhibit O). Athens First filed a second UCC-1 financing statement, covering "All Furniture, Fixtures, Equipment, Inventory, Accounts Receivable and proceeds thereof, all General Intangible instruments, chattel paper and cash of P.D.H. Development, Inc. now owned or hereinafter acquired or created," on June 8, 1995 (Aff. of A. Middleton Ramsey (tab #22), Exhibit Q). Athens First has not advanced any loans or funds to P.D.H. since August 4, 1995 (Aff. of A. Middleton Ramsey (tab #22), para. 5). As of January 31, 1997, the balance owed by PDH to Athens First was $345,678.90 principal and $41,338.45 interest (Aff. Of A. Middleton Ramsey (tab #22), para. 6).

The United States' interest is premised on assessments made by the Internal Revenue Service ("IRS") against P.D. Hill Development, Inc. ¹ On July 15, 1996, the IRS made assessments against P.D. Hill Development, Inc. for $12,873.12 in unpaid Form 941 liabilities for the fourth quarter of 1995 (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). On January 31, 1997, the IRS fried a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office (Athens First's Mot. for Summ. J. (tab #19), Exhibit BB). Samuel Elliot, a revenue officer with the IRS in Athens, Georgia, asserts that the "balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999, is $23,592.51" (Decl. Of Samuel W. Elliot, para. 5, attached as Exhibit 3 to the United States ' Statement Of Material Facts Not In Dispute (tab #27)).

II. MOTIONS TO STRIKE

Athens First has objected to, and moved to strike, the affidavits of Paul Dennis Hill and Samuel W. Elliot, which the United States presented in support of its motion for summary judgment (Mot. to Strike Unsworn Decl. of Paul Dennis Hill (tab #31); Mot. to Strike Unsworn Decl. of Samuel W. Elliot (tab #33); Mot. to Strike Supplemental Decl. of Paul Dennis Hill and Renewed Mot. to Strike Decl. of Paul Dennis Hill (tab #42); Mot. to Strike Supplemental Decl. of Samuel W. Elliot and Renewed Mot. to Strike Decl. of Samuel W. Elliot (tab #44)). In an effort to cure the objectionable portions of the declarations, the United States filed a Supplemental Declaration of Paul Dennis Hill (tab #41) and a Supplemental Declaration of Samuel W. Elliot (tab #37) following Athens First's initial motions to strike. Given that the United States was able to address many of Athens First's concerns through the supplemental declarations, the Court considers the first motions to strike to be moot and will now address the issues raised in Athens First's motions to strike the supplemental declarations.

In order for the supplemental declarations to be used as summary judgment proof, they must be sworn and meet the requirements of Federal Rule of Civil Procedure 56(e). The unsworn declarations submitted by the United States are of the same force and effect as sworn affidavits because both were made under penalty of perjury and verified as true and correct. 28 U.S.C. §1746. Rule 56(e) also requires that

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith.

Fed.R.Civ.P. 56(e).

With respect to the Supplemental Declaration of Paul Dennis Hill, Athens First objects to paragraph 5, in which Mr. Hill states that "[i]t is well known in the community of Clarke County that 'P.D. Hill Development, Inc.' and 'P.D.H. Development, Inc.' are the same corporation. It is known by all banks, suppliers and construction contractors in the community." In his declaration, Mr. Hill states that, as the president of "P.D. Hill Development, Inc. a/k/a P.D.H. Development, Inc." (para. 2), he has operated his construction business in Clarke County under these names since 1989 (para. 3). Mr. Hill also states that, as an agent for his construction business, he has dealt with every major bank, supplier of materials, and contractor in Clarke County (para. 4). Based on Mr. Hills extensive business dealings in Clarke County , perhaps the Court, or a jury at trial, could reasonably infer that the banks, suppliers and construction contractors in the community do know that "P.D. Hill Development, Inc." and "P.D.H. Development, Inc." are the same corporation. However, a reasonable inference based on specific admissible facts is different from Mr. Hills affirmative statement as to what he believes is known in the community. As Mr. Hills statements as to what is known in the community would not be admissible in evidence, the Court hereby strikes paragraph 5 of the Supplemental Declaration of Paul Dennis Hill pursuant to Rule 56(e).

Athens First also objects to parts of the Supplemental Declaration of Samuel W. Elliot. First, Athens First objects to Mr. Elliot's statements regarding the application for employer identification number filed in the name of "P.D. Hill Development, Inc." (para. 3). Athens First argues that these statements are hearsay and thus would not be admissible at trial. Specifically, Athens First objects to the second Sentence of paragraph 3, which provides that "[t]he name 'P.D. Hill Development, Inc.,' used by the Internal Revenue Service, is derived from the application for employer identification number filed by the taxpayer." The application for employer identification number, rather than Mr. Elliot's testimony about the contents of the application, would be the best evidence of the application's contents at trial. See Fed.R.Evid. 1002. As Mr. Elliot's testimony about the contents of the application would not be admissible at trial and a sworn or certified copy of the application is not attached to Mr. Elliot's declaration, the Court will strike the second sentence of paragraph 3 concerning the application for employer identification number.

Athens First also objects to the second sentence of paragraph 6, which states that "[t]he balance of P.D. Hill Development's Form 941 liabilities for the fourth quarter of 1995 as of May 3, 1999, is $23,592.51." As he is the revenue officer assigned to collect PDH's tax liabilities, Mr. Elliot is certainly competent to testify about the tax liabilities of PDH as a matter within his personal knowledge. The Court agrees, however, that a proper foundation would have to be laid for this testimony to be admissible at trial. However, the Court does not deem it necessary to strike this portion of Mr. Elliot's declaration any more than it deems it necessary to strike the portion of A. Middleton Ramsey's affidavit stating that the amount PDH was indebted to Athens First on January 31, 1997 is $345,678.90 principal and $41,338.45 interest. Thus, for purposes of the United States ' motion for summary judgment, the Court will accept that PDH owes the United States a sum of money for its Form 941 liabilities for the fourth quarter of 1995. If necessary, the precise amount of money owed for PDH's Form 941 liabilities can be determined after the Court determines which of the parties is entitled to the $26,330.14 that Whiting-Turner is obligated to pay PDH.

III. CROSS-MOTIONS FOR SUMMARY JUDGMENT

A. Summary Judgment Standard

Summary judgment is appropriate when "there is no genuine issue as to any material fact . . . and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Proc. 56(c); Edwards v. Shalala, 64 F.3d 601, 603 (11th Cir. 1995). If the moving party demonstrates that there is "an absence of evidence to support the non-moving party's case," the burden shifts to the non-moving party to go beyond the pleadings and present specific evidence giving rise to a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

In reviewing a motion for summary judgment, the court must construe the evidence and all inferences drawn from the evidence in the light most favorable to the non-moving party. See Maynard v. Williams, 72 F.3d 848, 851 (11th Cir. 1996). Even if there exists some alleged factual dispute between the parties, summary judgment is not necessarily improper; there must be a genuine issue of material fact to render summary judgment improper. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

B. Priority of Athens First's Security Interest to the Federal Tax Lien

Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. §6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer, 26 U.S.C. §6321. The lien also attaches to property acquired by the delinquent taxpayer after the initial imposition of the lien. See, e.g., Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945). A tax lien is not valid as against any holder of a security interest under the Federal Tax Lien Act "until notice thereof which meets the requirements of subsection (f) has been filed." 26 U.S.C. §6323(a); see also United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88, 83 S.Ct. 1651, 1655 (1963). The United States ' lien commenced no sooner than January 31, 1997, the date on which the IRS filed a Notice of Federal Tax Lien against "PD Hill Development Inc., a corporation DBA Phoenix Pipe & Dirt" in the Clarke County, Georgia Superior Court Clerk's Office. See United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128(1993).

Athens First argues that its security interest is senior to the federal tax lien under §6323(a) because it possessed a perfected security interest in PDH's accounts receivable prior to the Internal Revenue Service's filing of notice of the tax lien. In order to come within the protections of §6323(a) as a holder of a security interest, both parties agree that Athens First must establish the four conditions set out by the Court of Appeals in Atlantic States Constr., Inc. v. Hand, Arendall, Bedsole, Greaves & Johnston [90-1 USTC ¶50,065], 892 F.2d 1530 (11th Cir. 1990). The four conditions are:

(1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth.

Id. at 1535 (citing 26 U.S.C.A. §6323(h)(1)).

Athens First maintains that the four conditions are met in this case. First, Athens First's security interest was acquired through the security agreements executed by PDH for the purpose of securing payment for the substantial funds it advanced to PDH. Second, Athens First contends that the property to which the security interest was to attach, the accounts receivable, were in existence at the time the tax lien was filed. Third, Athens First's security interest was protected under Georgia law by virtue of O.C.G.A. §11-9-310(a) against a judgment lien arising out of an unsecured obligation. Finally, Athens First satisfies the fourth condition because, by advancing substantial funds to PDH, Athens First "parted with money or money's worth."

In response, the United States recognizes that Athens First "has met conditions (1), (3), and (4), of the requirements of a security interest." (Mem. of Law of United States of America (tab #26), p. 6). The United States argues, however, that Athens First has not met the second condition. In support of this argument, the United States argues that federal law, rather than the state law relied on by Athens First, determines when an account receivable comes into existence. Although state law determines the nature of the legal or property interest of the entity With the competing lien, the United States asserts that, in the case of a federal tax lien, the priority of competing liens is a province of federal law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). The difficulty faced by the Court when applying this principle to the facts of this case, however, is that the characterization of when an account receivable is in existence differs significantly under Georgia law and the Treasury Regulations. Moreover, the Treasury Regulations appear to require that the federal definition control over an inconsistent state definition when the case involves a federal tax lien.

Under the Uniform Commercial Code, as adopted by the Georgia legislature, an "account" in the sense if collateral is defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." O.C.G.A. §11-9-106. A security interest does not attach unless: (1) the debtor has signed a security agreement which contains a description of the collateral; (2) value has been given; and (3) the debtor has rights in the collateral. O.C.G.A. §11-9-203(1). A security in accounts may be perfected by filing a financing statement. O.C.G.A. §11-9-302(1). If steps are taken to perfect the security interest before the security interest attaches, the security interest is perfected at the time when it attaches. O.C.G.A. §11-9-303(1).

Applying these principles to this case, the debtor, PDH, signed several security agreements which granted the secured party, Athens First, a security interest in the collateral described, in part, as "All Accounts Receivable, . . . now owned or hereinafter existing" (Aff. of A. Middleton Ramsey (tab #22), Exhibits D, E, F, I, J, & K). In addition, Athens First gave value for the security interest when it advanced loans and funds to PDH. Even though Athens First took steps to perfect its security interest by filing financing statements, Athens First's security interest did not attach until PDH had rights in the collateral.

Athens First argues that, under Georgia law, the account at issue arose upon the signing of the Subcontract on August 9, 1996, when PDH acquired a right to payment under the Subcontract, even though that right to payment had not yet been earned by performance. Following this analysis, Athens First security interest attached to PDH's right to payment for services rendered on August 9, 1996, and, because it previously took steps to perfect its security interest by filing financing statements on February 10, 1994 and June 8, 1995, Athens First's security interest was perfected as of August 9, 1996. Because the account receivable to which the security interest was to attach was in existence at the time the tax lien was filed, the second condition of Atlantic States is satisfied. As a result, if the Court applies the law as suggested by Athens First, Athens First's security interest has priority over the federal tax lien.

The United States argues that, although state law characterizes the property at issue, federal law applies to determine when that property interest, i.e., the account receivable, came into existence. Under the applicable Treasury Regulations, an account receivable, defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper" (Treas. Reg. §301.6323(c)-1(c)(2)(ii)), "is in existence when, and to the extent, a right to payment is earned by performance." Treas. Reg. §301.6323(h)-1(a)(1). Furthermore, the regulations require that

A security interest must be in existence within the meaning of this paragraph, at the time as of which its priority against a tax lien is determined. For example, to be afforded priority under the provisions of paragraph (a) of §301.6323(a)-1 a security interest must be in existence within the meaning of this paragraph before a notice of lien is filed. Treas. Reg. §301.6323(h)-1(a)(1). The language of this Treasury Regulation supports the Government's contention that, despite any provision of Georgia law to the contrary, Athens First's security interest must have been in existence in the federal sense for Athens First to benefit from the protections of §6323(a). Thus, PDH's accounts receivable did not come into existence until PDH earned the right to payment under the Subcontract by performance.

Without conceding that federal law determines when PDH's accounts receivable came into existence under the Subcontract, Athens First argues that the account receivable existed for purposes of federal law prior to the filing of the federal tax lien because PDH earned the right to payment of substantial funds by performance prior to January 31, 1997. Apparently, Athens First bases this argument, in part, on the portions of the Subcontract which provide for the withholding of retainage.

As part of its summary judgment proof, Athens First submits the Supplemental Declaration of Scott Saarlas, who was employed as the project engineer or project manager by Whiting-Turner at the times relevant to this cause of action (Supplemental Aff. of Scott Saarlas (tab #30), para. 2). The United States objects to this affidavit on the grounds that (1) the affidavit contains blanks in paragraph 5 which makes the remaining statements in the affidavit nonsensical; (2) there is no evidentiary foundation for the documents attached as exhibits; and (3) the exhibits do not appear to be what the affidavit asserts them to be (Reply of the United States to Athens First's Opp'n to Mot. for Summ. J. (tab #40), p. 4). Although the Court agrees that paragraph 5, which is incomplete, lacks evidentiary value, the Court disagrees that the deficiencies of this paragraph make the remaining statements in the affidavit nonsensical. Similarly, the Court disagrees with the United States ' contentions that there is no evidentiary foundation for the attached exhibits and that the documents do not appear to be what the affidavit asserts them to be. In paragraph 4 of the affidavit, Mr. Saarlas states that the exhibits attached to his affidavit are "true and correct copies" of the pay requests that Whiting-Turner received from PDH for work performed on the Project. The Court has examined the documents and, although documents other than the pay requests are included, the exhibits certainly appear to be what Mr. Saarlas asserts them to be. Thus, although the Court may decline to consider certain portions of the supplemental affidavit, the Court will disregard the assertion by the United States that the entire supplemental affidavit should not be considered for purposes of determining the motions for summary judgment.

Based on the exhibits attached to the Supplemental Affidavit of Scott Saarlas, Athens First argues that, at the time of the filing of the federal tax lien on January 31, 1997, Whiting-Turner owed PDH money for its performance under the Subcontract. PDH began performing its duties under the Subcontract on August 14, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), para. 3). Undoubtedly, as the Subcontract specifically provided that Whiting-Turner would withhold retainage from its payments to PDH, some amount of money for work performed prior to January 31, 1997, was due and owing PDH at the time of the federal tax lien filing. The evidence that Athens First provided the Court with respect to the amount of payment earned by performance, but retained by Whiting-Turner, during the period from August 14, 1996 and January 31, 1997 shows that Whiting-Turner owed PDH $11,115.00 as of October 20, 1996 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit C). Thus, an account existed as of October 20, 1996 because PDH had earned by performance a right to payment of $11,115.00 for services rendered as of this date.

Athens First also asserts an interest in the $19,801.73 in retainage owed to PDH as of March 12, 1997 (Supplemental Aff. of Scott Saarlas (tab #30), Exhibit D; Brief of Athens First filed June 29, 1999 (tab #36), p. 3). Given that Athens First refers to payments made within forty-five days of the filing of the tax lien, the Court assumes that Athens First is attempting to utilize the provisions of §6323(c). 26 U.S.C. §6323(c) provides as follows:

(c) Protection for certain commercial transactions financing agreements, etc.--

(1) In general.--To the extent provided in this subsection, even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--

(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--

(i) a commercial transactions financing agreement, . . . and

(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

(2) Commercial transactions financing agreement.--For purposes of this subsection--

(A) Definition.--The term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business)--

(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, . . . but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

(B) Limitation on qualified property.--The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

(C) Commercial financing security defined.--The term "commercial financing security means . . . (ii) accounts receivable, . . . .

Pursuant to §6323(c), Athens First's security interest prevails as to any account for construction services rendered which became due and owing within 45 days after the tax lien filing. Prior to the tax lien filing, Athens First and PDH entered into several commercial transaction financing agreements. In these agreements, Athens First, in the ordinary course of its business as a bank, agreed to make loans to PDH to be secured by commercial financing security, which includes the accounts receivable acquired by PDH in the ordinary course of its business. Given that no loans or funds have been advanced to PDH since August 4, 1995, Athens First made its loans before the 46th day after the date of tax lien filing. In addition, because PDH acquired the accounts receivable before the 46th day after the date of tax lien filing, the accounts receivable come under the statute's definition of qualified property. The retainage of $19,801.73 represents the amount of accounts receivable generated by the services performed by PDH within the forty-five days following the filing of the tax lien on January 31, 1997. Thus, Athens First's security interest in the accounts receivable takes priority over the federal tax lien on those accounts at least to the extent of $19,801.73.

With respect to the $19,801.73 owed to PDH as retainage, the parties do not address the effect, if any, of the conditional nature of this right to payment under the Subcontract. PDH was entitled to receive payment of the retainage amount only after completion and acceptance of the agreed upon work and following approval by the architect of the final application for payment provided that PDH fully performed all of its obligations under the Subcontract. The Court previously concluded that Athens First's security interest in the accounts receivable existed for purposes of the Federal Tax Lien Act when PDH performed the services giving rise to the accounts receivable. The Court now concludes that, even though the property subject to Athens First's security interest--the amount owing to PDH as of March 12, 1997--was subject to final calculation or computation, the property was still in existence within the meaning of the FTLA at that time. Thus, although the amount of money subject to Athens First's security interest could have been reduced or eliminated in the future, the fact that the amount payable had not been finally ascertained does not affect the existence of the right to payment.

This conclusion is in accord with the case law concerning the doctrine of choateness. Generally, in order for a competing lien to take priority over a federal tax lien, the competing lien must be established, or "choate," prior to the attachment of the federal lien. A lien is "choate" under the federal rule when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). Athens First's security interest in PDH's accounts receivable satisfies these three requirements. First, the identity of the holder of the security interest (Athens First) was sufficiently established at the time of the tax lien filing. Second, the property subject to the security interest (PDH's right to the account receivable, or retainage, under the Subcontract) was established, even though the exact amount of the property itself--the precise value of the account receivable--had yet to be determined with complete accuracy. See, e.g., Corigliano v. Catla Constr. Co. [64-2 USTC ¶9657], 231 F.Supp. 245, 248-49 (S.D.N.Y. 1964) (concluding that "[a] state-created lien is not inchoate merely because the amount or value of the liened property has not been finally determined") (citing Brief for the Government at 6, Crest Fin. Co. v. United States [62-1 USTC ¶9105], 368 U.S. 347, 82 S.Ct. 384, 7 LEd.2d 342 (1961) (No. 325), rev'g United States v. Crest Finance Co. [61-1 USTC ¶9460], 291 F.2d 1 (7th Cir. 1961). Third, the amount of Athens First's interest (the amount of its loans to PDH) was fixed and specific. Thus, Athens First satisfied the three-part test for choateness with respect to its security interest at the time the IRS filed its notice of tax lien and within forty-five days thereafter.

However, a genuine issue of material fact, precluding summary judgment, remains as to the precise amount of the accounts receivable generated by the services performed before and within the forty-five days following the filing of the first tax lien. The United States offers the declaration of Paul Dennis Hill, the president of PDH, in which he states that "[a]ll of the work performed by [PDH] for Whiting-Turner . . . for which outstanding balances are due was performed after March 17, 1997, and before July 17, 1997" (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 6). However, the exhibits attached to the affidavit of Scott Saarlas clearly show that, as of March 12, 1997, Whiting-Turner owed PDH $19,801.73 in retainage. The Court is unable to determine from the evidence before the Court what amount, if any, of this $19,801.73 remains following the backcharges assessed by Whiting-Turner due to PDH's failure to complete and perform properly its obligations under the Subcontract. Accordingly, the cross-motions for summary judgment are hereby DENIED.

At this time, the Court does not consider a trial on this issue to be necessary. The total amount of funds deposited with the Court's registry is $26,330.14. The Court has determined in this order that Athens First may entitled to some amount of these funds less than or equal to $19,801.73. The United States is entitled to the remaining $6,528.41 of these funds in addition to any amounts that Athens First is not entitled to receive. If Athens First and the United States are able to reach an agreement as to the correct amount that each party should receive consistent with this decision, the Court will direct the disbursement of the funds in the agreed upon manner. If the parties are unable to agree within fifteen (15) days of the date of this order, the Court will consider motions for summary judgment on this issue. Athens First is directed to submit its motion and supporting evidence within fifteen (15) days of the termination of first fifteen (15) day period. The United States will then have fifteen (15) days from the date appearing on the certificate of service attached to Athens First's motion in which to respond.

C. Validity of the Federal Tax Lien

Section 6323(f) governs the place of filing for tax lien notices and gives the Secretary of the Treasury the authority to prescribe the form and content of the notice, 26 U.S.C. §6323(f)(3). Although the parties do not dispute that the notice was filed in the correct place and on the correct form, Athens First disputes whether the notice sufficiently identifies the taxpaying entity. The Treasury Regulation promulgated by the Secretary requires only that the notice of lien "must identify the taxpayer." Treas. Reg. §301.6323(f)-1(c)(2). The notice of federal tax lien filed on January 31, 1997 identifies the taxpayer as "PD Hill Development Inc., a corporation DBA Phoenix Pipe. & Dirt." Relying on the undisputed evidence that PDH is incorporated under the name of "P.D.H. Development, Inc." ( Athens First's Mot. for Summ. J. (tab #19), Exhibit AA), Athens First maintains that the tax lien is not valid because it was not filed against the proper corporate entity. The United States argues in response that the notice filed adequately identified the taxpayer.

In support of its argument, the United States relies on Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464, 1471 (S.D. Ind. 1992), in which the district court stated that "lien notices . . . need to comply only substantially, rather than perfectly, to convey adequate notice of a lien." Several courts have applied, with different results, this substantial compliance standard when considering whether a lien notice adequately identifies the taxpayer. Many courts have enforced liens after finding that there is an error in the taxpayer's name. See, e.g., Kivel v. United States [89-2 USTC ¶9415], 878 F.2d 301 (9th Cir. 1989) ("Bobbie Morgan" rather than "Bobbie Morgan Lane"); United States v. Polk [87-2 USTC ¶9432], 822 F.2d 871 (9th Cir. 1987) ("Roy Bruce Polk" rather than "Bruce Polk"); Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F.2d 753 (5th Cir. 1956) ("Freidlander" rather than "Friedlander"); Brightwell v. United States [93-1 USTC ¶50,223], 805 F.Supp. 1464 (S.D. Ind. 1992) ("William S. Van Horn" rather than "William B. Van Horn"); and United States v. Sirico [66-1 USTC ¶9209], 247 F.Supp. 421 (S.D.N.Y. 1965) ("Sirico, George" and "Sirico, A." rather than "Assunta Sirico"). Conversely, other courts have invalidated a federal tax lien where the IRS misspells or otherwise materially alters a taxpayer's name. See, e.g., Fritschler, Pellino, Schrank & Rosen, S.C. v. United States [89-1 USTC ¶9111], 716 F.Supp. 1157 (E.D. Wis. 1988) ("Allen G. Casey" rather than "Allen J. Casey"); Haye v. United States [79-1 USTC ¶9192], 461 F.Supp. 1168 (C.D. Cal. 1978) ("Castello" rather than "Castillo"); United States v. Ruby Luggage Corp. [54-2 USTC ¶9512], 142 F.Supp. 701 (S.D.N.Y. 1954) ("Ruby Luggage Corp." rather than "S. Ruby Luggage Corp."); and Continental Invs. [53-2 USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953) ("W.R. Clark, Sr." rather than "W.B. Clark, Sr.").

Many of the above listed cases rely on the language of §6323(f)(4) which requires that, in the case of real property, the notice must be filed in such a manner that a reasonable inspection of the index will reveal the existence of the lien. In this case, a reasonable inspection of the Clarke County lien index would have revealed the existence of the federal tax lien. A certified copy of page 773 from the Clarke County Lien Index is attached to the Supplemental Declaration of Samuel W. Elliot as Exhibit C. The federal tax lien in the name of "PD HILL DEVELOPMENT INC." appears directly above a GED lien for "PDH DEVELOPMENT INC." on the same page. As these are the only two entries on the Lien Index under the name of "PD Hill" or "PDH," someone searching diligently under "PD Hill Development Inc." would be likely to notice an entry under "PDH Development Inc." In addition, even if there were multiple entries, the two names are sufficiently similar such that they would appear in close proximity on the Lien Index, which is arranged alphabetically. Because these two names are substantially identical, a reasonable searcher, noticing this similarity, would have looked at the lien notice and taken steps to discover the identity of the taxpayer. Thus, under the substantial compliance standard, the lien notice adequately identifies the taxpayer.

CONCLUSION

Athens First's motions to strike the supplemental declarations are hereby GRANTED in part and DENIED in part. Athens First's motion for summary judgment is hereby DENIED. The United States motion for summary judgment is hereby DENIED.

¹ P.D.H. Development, Inc. and P.D. Hill Development, Inc. are the same entity (Supplemental Decl. of Paul Dennis Hill (tab #41), para. 2).

 

 

[99-2 USTC ¶50,807] Plymouth Savings Bank, Plaintiff, Appellant v. United States Internal Revenue Service and Massachusetts Department of Revenue, Defendants, Appellees

(CA-1), U.S. Court of Appeals, 1st Circuit, 98-1930, 8/12/99, 187 F3d 203, 187 F3d 203. Reversing a District Court decision, 98-2 USTC ¶50,575

[Code Secs. 6321 and 6323 ]

Liens and levies: Lien for taxes: Security interest: Priority: 45-day safe harbor provision.--A bank's security interest in contract payments arising from a delinquent taxpayer's performance of services to a hospital had priority over the IRS's competing tax lien. The contract between the taxpayer and the hospital qualified as a commercial financial security agreement and the agreement between the bank and the taxpayer was a commercial transactions financing agreement. The bank acquired the hospital contract rights within 45 days of the tax lien filing. Therefore, contract rights were qualified property covered by the bank's security interest and protected by the safe harbor provision regarding after-acquired property.

Howard M. Brown, with whom Bartlett, Hackett, Feinberg, Gentilli, Liston, Brown & Phalen, P.C., was on brief, for appellant.

William S. Estabrook, Attorney, Tax Division, Department of Justice, with whom Loretta C. Argrett, Assistant Attorney General, Donald K. Stern, United States Attorney, and Annette M. Wietecha, Attorney, Tax Division, Department of Justice, were on brief, for appellees.

Before: SELYA, Circuit Judge, CUDAHY, ^* Senior Circuit Judge, and STAHL, Circuit Judge.

CUDAHY , Senior Circuit Judge:

Jordan Hospital ("Hospital") owed Shirley Dionne ("Dionne") $75,000. Dionne, in turn, was indebted to the Plymouth Savings Bank ("Bank") and the Internal Revenue Service ("IRS"), both of which held valid liens on the money the Hospital owed Dionne. The Hospital deposited the money with the district court, and we must now decide who is entitled to it. The problem is simply to determine which of the two liens has priority. We hold that the Bank's lien may trump the IRS's and therefore reverse the district court's grant of summary judgment in favor of the IRS.

Most of the facts are not in dispute. Dionne owned and operated the Greenlawn Nursing Home, a 47-bed state-licensed facility. On September 22, 1993 and apparently before extending credit, the Bank filed a financing statement with the state of Massachusetts describing and giving notice of its security interest in Greenlawn and other assets of Dionne. On April 13, 1994, Dionne executed an $85,000 promissory note in favor of the Bank. As security for the loan, Dionne granted the Bank a security interest in all of her tangible and intangible personal property individually, as well as in her capacity as a sole proprietor doing business as Greenlawn. Paragraph 2 of the agreement specifically granted the Bank: all cash and non-cash proceeds resulting or arising from the rendering of services by Dionne; all general intangibles including proceeds of other collateral; and all inventory, receivables, contract rights or other personal property of Dionne. On or about December 1, 1994, Dionne defaulted on her $85,000 obligation to the Bank, leaving some $65,465 unpaid.

Dionne's financial troubles did not end there. She failed to make Federal Insurance Contribution Act, 26 U.S.C. §3101, et seq. (FICA), payments of $19,639 for the second quarter of 1994. The IRS assessed liability on September 19, 1994 and filed a federal tax lien in the district court on December 19. Dionne again failed to make FICA payments of $62,767 for the fourth quarter of 1994. Liability was assessed on February 2, 1995 and a lien was filed on February 14.

On March 31, 1995, Dionne signed a contract in which she agreed to help the Hospital obtain a license to operate a skilled nursing facility in exchange for $300,000, payable in three installments. Dionne would receive $25,000 when she signed a letter of intent, $200,000 when Massachusetts approved a license and the final $75,000 two years after the license-approval date. With Dionne's assistance, by mid-May 1995 the Hospital had received approval for its license and had paid Dionne the first two installments, totaling $225,000. (In practical effect, it appears that Dionne transferred her Greenlawn license to the Hospital.) The Hospital never paid Dionne the $75,000 balance.

The Bank sued the Hospital in Massachusetts state court to recover the unpaid balance of its loan to Dionne. Considering cross-motions for summary judgment, the state court ruled for the Bank. It found that, pursuant to the contract between Dionne and the Hospital, the $75,000 constituted cash proceeds arising from the rendering of personal services by Dionne. Because the security agreement between the Bank and Dionne expressly covered "proceeds" of services, the court held that the Bank had a secured interest in the money. The court rejected the Bank's argument that the security interest attached to the nursing home license or to proceeds of the transfer of that license. Instead of awarding the $75,000 to the Bank, however, the court directed the Bank to bring a declaratory judgment action to determine whether its interest in the money had priority over that of other lien-holders.

Ever diligent, the Bank brought such an action--this one--which the IRS subsequently removed to the district court. The Hospital, content to let the Bank and the IRS do battle, deposited the $75,000 with the district court and exited from the action. The Bank and the IRS filed cross-motions for summary judgment, each asserting that its lien trumped the other's. The court sided with the IRS. The Bank's right to recover as against the government depended on when Dionne had performed the services required by the contract, the district court stated. And, although the record on the timing of Dionne's performance was sparse, the court determined that it was undisputed that she had not helped the Hospital secure approval of a nursing home license within the 45 days following the tax lien filing as required by the Federal Tax Lien Act, 26 U.S.C. §§6321, 6323(c) (FTLA). See Dis. Ct. Mem. Op. & Order at 18-19. Accordingly, the district court held that the IRS's two liens were superior to the Bank's lien. The Bank appeals this decision, and we review de novo the district court's grant of summary judgment in favor of the government. See, e.g., Trafalgar Capital Assoc., Inc. v. Cuomo, 159 F.3d 21, 26 (1st Cir. 1998).

When an individual fails to pay her taxes after a demand has been made, the FTLA grants the United States a lien "upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. §6321. The lien also attaches to property acquired by the delinquent taxpayer after the initial imposition of the lien. See, e.g., Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945). Section 6323 of the FTLA, however, gives certain commercial liens priority over federal tax liens. Pursuant to §6323(a) and as defined in §6323(h), for example, tax liens are subordinate to security interests in a taxpayer's property that is "in existence" before the government files notice of the tax lien. (Subsection 6323(f) details the filing requirements.). And §6323(c) extends the priority of these prior security interests to certain "qualified property" that the taxpayer acquires even after the government has filed a notice of the tax lien. The scope of this safe harbor for after-acquired property under §6323(c) is at issue here. Mindful that we are entering "the tortured meanderings of federal tax lien law, intersected now by the somewhat smoother byway of the Uniform Commercial Code [UCC]," Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466 F.2d 1040, 1043 (5th Cir. 1972), we lay out the pertinent provisions with as much specificity as we can apply.

To fall within §6323(c)'s safe harbor for after-acquired property, a security interest must be in "qualified property covered by the terms of a written agreement entered into before tax lien filing," including "commercial transactions financing agreement[s]." 26 U.S.C. §6323(c)(1)(A)(i). The security interest must also be superior, under local law, to a judgment lien arising out of an unsecured obligation. See id. at §6323(c)(1)(B). A "commercial transactions financing agreement" is defined as "an agreement (entered into by a person in the course of his trade or business) . . . to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business," id. at §6323(c)(2)(A)(i), and must be entered into within 45 days of the date of the tax lien filing. See id. at §6323(c)(2)(A). "Commercial financing security" can include, among other things, "paper of a kind ordinarily arising in commercial transactions" and "accounts receivable," id. at §6323(c)(2)(C), and it must be "acquired by the taxpayer before the 46th day after the date of tax lien filing." Id. at §6323(c)(2)(B).

The relevant Treasury regulations include still more definitions. "Paper of a kind ordinarily arising in commercial transactions" means "any written document customarily used in commercial transactions," and includes "paper giving contract rights." 26 C.F.R. §301.6323(c)-1(c)(1). For purposes of the FTLA, a "contract right" is "any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper." Id. at §301-6323(c)-1(c)(2)(i). "An account receivable is any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper." Id. at §301.6323(c)-1(c)(2)(ii).

Because Dionne signed the personal service contract with the Hospital exactly 45 days after the IRS filed notice of the second tax lien (February 14--March 31), ¹ the fighting issue is whether by so doing she "acquired" rights to the $75,000, the money the Hospital owed Dionne and deposited with the district court. See 26 U.S.C. §6323(c)(2)(B). If, by signing the contract, Dionne acquired rights to the money, then the Bank's lien trumps the IRS's. For, if that is the case, it is undisputed that the Dionne-Hospital contract is commercial financing security within §6323(c)(2)(C) and that the Dionne-Bank agreement is a commercial transactions financing agreement within §§6323(c)(1)(A)(i) & (c)(2). ² In this scenario, the Bank's security interest is in qualified property, and the $75,000 would fall within the safe harbor for after-acquired property. On the other hand, if Dionne did not acquire the rights to the money when she signed the contract, the IRS's lien takes priority.

The Treasury Department (of which the IRS is a part) has provided an answer. Recall that the potential qualified property here is the contract between Dionne and the Hospital, which granted Dionne certain rights to payments when she performed certain services. Before the 46th day after the tax lien was filed (that is, before April 1, 1995), if Dionne had acquired anything, she could only have acquired a contract right, not an account receivable, because she had yet to perform any services. See 26 C.F.R. §§301.6323(c)-1(c)(2)(i) & (ii). The regulations provide that a "contract right . . . is acquired by a taxpayer when the contract is made." Id. at §301.6323(c)-1(d). So, Dionne acquired the right to be paid for services to be rendered in the future at the time she entered into that contract. In statutory terms, the commercial transactions financing agreement (the Dionne-Bank agreement), which was entered into well before the tax lien filing, covers the Bank's loan (the $85,000) to the taxpayer (Dionne). The loan in turn was secured by commercial financing security (the Dionne-Hospital contract). The Dionne-Hospital contract conferred contract rights (the right to be paid $75,000 two years after Massachusetts approved a nursing home license for the Hospital) and was acquired by the taxpayer within 45 days of the tax lien filing. See 26 U.S.C. §§6323(c)(2)(A) & (B). The contract, and the rights (even if conditional) under it, are therefore qualified property covered by the Bank's security interest and protected by §6323(c)'s safe harbor.

Of course, the Bank is interested in the money, not the contract right. The regulations again point the way. "Proceeds" are "whatever is received when collateral is sold, exchanged, or collected." 26 C.F.R. §301.6323(c)-1(d).The regulations further provide: "Identifiable proceeds, which arise from the collection or disposition of qualified property by the taxpayer, are considered to be acquired at the time such qualified property is acquired if the secured party has a continuously perfected security interest in the proceeds under local law." Id. Recall that the commercial financing security (the Dionne-Hospital contract and the rights under it) is simply collateral for the loan (the Bank's $85,000 loan to Dionne). So, where the collateral is a contract giving contract rights, the proceeds of those rights, like the rights themselves, are considered to have been acquired at the time the contract was made. This is so even though the right to proceeds under the contract does not become unconditional until the contract is performed. Pursuant to the Treasury regulations, the conditional right to the proceeds relates back to the time the contract was formed and executed. Therefore, Dionne acquired the rights to the proceeds of the contract right on March 31, 1995, exactly 45 days from the date of the tax lien filing.

In this case, however, the proceeds of the contract right are simply an account receivable, the right to payment of $75,000 for services rendered by Dionne. See 26 C.F.R. §301.6323(c)-1(c)(2)(ii). And herein lies the rub. The IRS argues that, pursuant to the regulations, a taxpayer acquires an account receivable "at the time, and to the extent, a right to payment is earned by performance." Echoing the district court, the IRS correctly points out that Dionne did not earn a right to payment before the 45 days. See Appellee's Br. at 18. But the contract and the rights under it, rather than the account receivable, are the qualified property at issue here, and the regulations provide that the proceeds of qualified property are deemed to be acquired at the time the qualified property is acquired. The regulations do not distinguish between forms of proceeds. Well then, the IRS parries, the account receivable cannot be "proceeds" because the contract was not "sold, exchanged, or collected." See 26 C.F.R. §301.6323(c)-1(d). Had Dionne sold the contract, the IRS says, the Bank's lien would reach the proceeds of that sale; but performance (rendering the services) does not amount to a sale. See Appellee's Br. at 18. This ingenious quibble is unconvincing. Dionne's rendering of the contracted-for services effectively "exchanged" her contract right, converting it into an account receivable. See 26 C.F.R. §301.6323(c)-1(d). The IRS has given us no good reason, nor can we find any basis in commercial reality, to distinguish between a "sale" or an "exchange" and a conversion by performance for this purpose. In fact, performance would seem to be necessary for the production of proceeds even if there were a sale or exchange of the contract. We therefore conclude that the account receivable, the right to the $75,000, is the proceeds of the contract right.

To this, the IRS responds by complaining that we have expanded too far §6323(c)'s safe harbor for after-acquired property. It cites legislative history which it claims suggests that Congress intended §6323(c)'s protections to extend only to property that was collected within 45 days of the tax lien filing. See Appellee's Br. at 17 (citing S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), at 2, 8). We find this argument unpersuasive. As an initial matter, this Senate Report does not directly address commercial financing secured by contract rights, the precise issue here. The Report does indicate, however, that the FTLA was "an attempt to conform the lien provisions of the internal revenue laws to the concepts developed in [the UCC]." S. Rep. No. 1708, 89th Cong., 2d Sess., at 2. The Treasury regulations reflect this intent by providing definitions for FTLA terms that closely track UCC definitions of like terms. For example, the FTLA definitions of "contract right" and "account receivable" match the pre-1972 revision definitions of "contract" and "account," compare, e.g., 26 C.F.R. §§301.6323(c)-1(c)(i) & (ii) with Mass. Gen. Laws Ann. ch. 106, §9-106 (West 1998) (Official Reasons for 1972 Changes), ³ and the two definitions of the term "proceeds" are almost identical, compare 26 C.F.R. §301.6323(c)-1(d) with Mass. Gen. Laws Ann. ch. 106, §9-306(a) (West 1988) (defining "proceeds" as "whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds"). Our conclusion that the Bank's security interest in the contract rights covers the proceeds of those rights--even if the proceeds are accounts receivable--is compatible with still other provisions of the UCC. See, e.g., Mass. Gen. Laws Ann. ch. 106, §9-306(2) (West 1980) (providing that security interests extend to the proceeds of all secured property). In all events, whatever Congress intended, the regulations make it clear that, so long as the contract was entered into within 45 days of the tax lien filing, the rights under that contract and all of the proceeds of those rights fall within §6323(c)'s protective bounds.

This conclusion can hardly come as a surprise to the IRS. The IRS has advanced the same arguments which it uses here in cases analogous to this one, and has lost each time (except, of course, below). See Bremen Bank & Trust Co. v. United States [98-1 USTC ¶50,116], 131 F.3d 1259 (8th Cir. 1997); State Bank of Fraser v. United States [88-2 USTC ¶9592], 861 F.2d 954 (6th Cir. 1988); In re National Fin. Alternatives, Inc. [89-1 USTC ¶9352], 96 B.R. 844 (N.D. Ill. 1989). ⁴ Each of these cases, like this one, turned neither on a clever interpretation of the FTLA nor on a thorough scouring of the Congressional records in an attempt to divine intent, but instead on a plain reading of the regulations. It is that simple: the regulations governing §6323(c) say that contract rights and the proceeds thereof are acquired at the time the parties enter into the contract. It matters not that the proceeds of that contract right might be accounts receivable because the regulations do not distinguish among different kinds of proceeds. The IRS, which promulgates these regulations, has had ample opportunity to rewrite them to better suit its desired interpretation of the statute. (Congress, of course, might yet disagree.) To our knowledge, it has made no such effort.

One issue remains. The IRS, reminding us that we "can affirm a correct judgment on any ground," Appellee's Br. at 20 (citing Levy v. FDIC, 7 F.3d 1054, 1056 (1st Cir. 1993)), argues that Dionne did not enter into the contract with the Hospital "in the ordinary course of [her] trade or business" as required by §6323(c)(2)(A)(i). Normally, we will consider only those issues that the district court considered below, see, e.g., St. Paul Fire and Marine Ins. Co. v. Warwick Dyeing Corp., 26 F.3d 1195, 1205 (1st Cir. 1994), and can "affirm a correct district court's ruling on any ground supported in the record . . .," Levy, 7 F.3d at 1056 (emphasis added) (internal quotation and citation omitted). In this case, not only did the district court fail to address the "ordinary course of business" element, both parties also acknowledge ⁵ that the record is undeveloped on this point. ⁶ Because the record is so undeveloped, and because trade-or-business determinations are highly fact-intensive, see, e.g., Higgins v. Commissioner [41-1 USTC ¶9233], 312 U.S. 212, 217 (1941); Deputy v. DuPont [40-1 USTC ¶9161], 308 U.S. 488, 496 (1940), we decline the IRS's invitation to affirm the district court on this ground. However, the parties are free to develop the factual record on remand to the district court.

Because we find that the Bank's lien may trump the IRS's, we REVERSE the district court's grant of summary judgment in favor of the IRS. The case is REMANDED to the district court for proceedings consistent with this opinion.

JUDGMENT

Entered: August 12, 1999

This cause came on to be heard on appeal from the United States District Court for the District of Massachusetts, and was argued by counsel.

Upon consideration whereof, it is now here ordered, adjudged and decreed as follows: The district court's grant of summary judgment in favor of the IRS is reversed and the case is remanded to the district court for further proceedings consistent with the opinion filed this day.

^* Of the Seventh Circuit, sitting by designation.

¹ The Bank does not claim that its lien should take priority over the first tax lien, filed on December 19, 1994. The duel here is between only the second tax lien (filed on February 14, 1995 and covering FICA payments of $ 62,767 for the fourth quarter of 1994) and the Bank's lien.

² For purposes of the following discussion, we assume that if Dionne acquired the rights to the $75,000 within 45 days of the tax lien filing, she did so in the ordinary course of her trade or business as required by §6323(c)(2)(B). The IRS challenges this assumption, and we discuss the issue later. See infra at 14-16.

³ Massachusetts has adopted the 1972 version of article 9 of the UCC. That version eliminated the term "contract right" as unnecessary. The FTLA, enacted in 1966, retains the pre-revision "contract right"-"account receivable" dichotomy.

⁴ Cf. Centex Constr. Co. v. Kennedy [72-1 USTC ¶9289], 332 F. Supp. 1213, 1215 (S.D. Tex. 1971) ("it seems plausible that the [FTLA] would recognize as being property in existence, any binding contract which may involve future payments yet 'unearned by performance' "); Pine Builders, Inc. v. United States [76-1 USTC ¶9402], 413 F. Supp. 77, 82 (E.D. Va. 1976) ("The right to payment for services rendered, whether or not earned by performance, is property in existence under the FTLA. An existing right to property (in this case a contractual right to receive money for services to be rendered) is itself property in existence under the Act. It matters not that fruition of the right is in futuro or conditioned upon a corresponding duty on the part of the holder of the right. The subject of the right, that is, the money to be received for services to be rendered is part and parcel of that right at the time the right is created (in this case when the contracts were entered into) regardless of when the money is actually to be paid or when the right thereto becomes absolute.").

⁵ The Bank claims that the factual record on this point is "scanty." Appellant's Reply Br. at 7. The IRS, for its part, can only speculate as to the ordinary course of Dionne's business. See Appellee's Br. at 19 ("taxpayer appears to have been in the business . . .") (emphasis added).

⁶ The parties nonetheless attempt to construct arguments from this sparse factual record. The IRS says that there is no evidence that Dionne's contract with the Hospital was in the ordinary course of her business. See Appellee's Br. at 19. The Bank says there is no evidence that the contract was "outside the scope of Dionne's ordinary trade or business. . . ." Appellant's Reply Br. at 7. Again, on this record it is impossible to evaluate these contentions; as the parties say, there is simply insufficient evidence.

These arguments foreshadow the ultimate question in a trade-or-business determination: what constitutes ordinariness? The IRS is arguing, in essence, that the Dionne-Hospital contract, because it resulted in the transfer of Dionne's Greenlawn license, cannot be considered ordinary. The Bank appears to have conceded as much; in its original complaint against the Hospital in Massachusetts state court, it claimed that the "transfer of the license was not in the ordinary course of Shirley Dionne's business." See App. at 24, ¶21. The state court, however, determined that the contract was for personal services, rather than for the sale or transfer of the Greenlawn license. The Bank echoes this characterization--the Dionne-Hospital contract as a personal services contract--and appears to focus its brief arguments on the normality of such contracts in Dionne's business. (And, in response to the IRS's argument, if the $75,000 represented proceeds of a sale or transfer of the license, there is no question that the Bank would have held a prior secured interest; entitling it to the money without having to navigate §6323(c)'s maze of definitions.). Prudence compels us to allow the district court to weigh these fact-specific considerations in the first instance.

 

 

[91-2 USTC ¶50,474] Don King Productions, Inc. and Don King, Plaintiffs v. Pinklon Thomas, Jr., Richard Gidron, Roland Jankelson, Althea Jones, and The United States , Defendants. Althea Jones and Richard Gidron, Defendants-Appellees. Richard Gidron and The United States , Defendants-Appellants

(CA-2), U.S. Court of Appeals, 2nd Circuit, 91-6067, 91-6083, 9/23/91, Affirming and reversing a District Court decision, 90-2 USTC ¶50,524 , 749 F.Supp. 79

[Code Secs. 6321 and 6323 ]

Tax lien: Assignment: Priority.--Federal tax liens on a boxer's anticipated prize money were superior to the claim of the boxer's former manager that was based on a stipulation of settlement which predated the liens. Through the settlement agreement, the former manager was entitled to a portion of the purse of an upcoming fight; however, the stipulation was never reduced to a judgment under state ( New York ) law, so the manager did not attain the priority status of a judgment lien creditor. Furthermore, since the assignment was for prize money to be earned from a future fight, the manager's claim was inchoate and the federal liens had priority by being first in time. The subordination of the federal tax liens to the child support claims was affirmed.

Robert M. Sosin, Alspector, Sosin, Mittenthal & Barson, P.C., 30100 Telegraph Rd., Birmingham, Mich., for Althea Jones. Steven K. Meier, Shatz, Meier & Scher, 18 E. 48th St. , New York , N.Y. , for Richard Gidron. Otto G. Obermaier, United States Attorney, Kathleen A. Zebrowski, Edward T. Ferguson III, Assistant United States Attorneys, New York, N.Y. 10007 for defendant-appellant.

Before: CARDAMONE, MINER and MAHONEY, Circuit Judges.

MINER, Circuit Judge:

Defendant-appellant the United States (the "government") and defendant-appellant-appellee Richard Gidron appeal from a judgment entered in the United States District Court for the Southern District of New York (Haight, J.) establishing that the claim of defendant-appellee Althea Jones to interpleader funds had priority over the claim of Richard Gidron, which had priority over tax liens of the government. Don King Prods. v. Thomas [90-2 USTC ¶50,524 ], 749 F.Supp. 79, 85 (S.D.N.Y. 1990).

The government contends that the district court erred in determining that Gidron's claim had priority over its tax liens. First, it argues that since the stipulation of settlement dated December 11, 1985 upon which the claim is based, never was reduced to judgment, Gidron cannot avail himself of the statutory exception which protects certain persons, including "judgment lien creditors," against unrecorded federal tax liens. Second, the government maintains that the stipulation of settlement cannot be found to be prior to the government's tax liens because it represents an inchoate claim. In the stipulation of settlement, Thomas purported to assign to Gidron proceeds from purses of three prizefights to occur at some unspecified time in the future.

Gidron argues that the district court erred in finding that Althea Jones' claim of child support has priority over his claim, since his claim accrued on December 11, 1985 and Jones' judgment of filiation and order for support is dated January 6, 1988.

We agree with the government that the district court erred in finding that Gidron's claim had priority over the federal tax liens. Because Gidron's stipulation of settlement was not reduced to judgment, Gidron was required to establish that his lien was "first in time" and choate. However, the right to the proceeds of future unspecified prizefight purses arising from the assignment by Thomas, evidenced by the stipulation of settlement, was inchoate.

Regarding the order of priority between Gidron and Jones, we hold that the district court correctly found that a judgment of filiation and order for support has priority over a stipulation of settlement never reduced to judgment, even though the support judgment was filed after the stipulation of settlement was entered into.

BACKGROUND

One-time holder of the World Boxing Council Heavyweight title, Pinklon Thomas, Jr. contracted with Don King and Don King Productions (collectively, "DKP") to receive a purse of $150 thousand for participating in a boxing match with Evander Holyfield. The event was scheduled to be held on December 9, 1988 in Atlantic City , New Jersey . In accordance with the terms of the contract, DKP disbursed $117,090.67 as advances and payments to Thomas, his manager, and his trainer, Angelo Dundee. Faced with conflicting claims to the balance of the purse, $32,909.33, DKP commenced an interpleader action, pursuant to 28 U.S.C. §1335(a), placing the $32,909.33 in the registry of the district court and naming five interpleader defendants. Only three of the named defendants--the government, Richard Gidron and Althea Jones--litigated their claims to the interpleaded fund.

Althea Jones ("Jones") claimed priority to the funds by reason of a January 6, 1988 judgment of filiation and order for support entered by a Michigan state court. Apparently, Thomas had acknowledged that he was the father of Paquana Shareces Jones in a paternity action commenced by Althea Jones in 1986. Under the judgment of filiation and order for support, Thomas was required to pay $7,500 in support and maintenance obligations that had accrued from the time of Paquana Shareces Jones' birth until November 9, 1987 and to pay $100 per week for support and maintenance from November 9, 1987 until Paquana reached the age of majority. Additionally, Thomas was ordered to notify Jones about any professional boxing matches in which he was to participate. However, Jones learned about the Thomas/Holyfield bout not from Thomas but through a newspaper advertisement. On December 6, 1988, at Jones' request, the Michigan court issued a Writ of Garnishment, which was served on DKP, ordering DKP to disclose its indebtedness to Thomas. At that time, $14,025 in unpaid child support allegedly was owed to Jones.

Richard Gidron claimed priority by reason of a stipulation of settlement, dated December 11, 1985, allegedly entered in the New York Supreme Court, Bronx County. At that time, Gidron had initiated an action against Thomas and DKP for money owed under a management contract between Thomas and Gidron, which Thomas had breached when he entered into a management contract with DKP. Under the settlement agreement, Thomas agreed, among other things, to pay to Gidron $50 thousand from each of his next three prizefight purses. DKP agreed that in the event it promoted any of the next three fights, it would withhold $50 thousand per fight and pay that amount to Gidron. The stipulation of settlement never was docketed as a judgment.

The government claims priority on account of federal tax liens. Thomas owes the government income taxes for the years 1986 and 1987 in the amounts of $149,905.90 and $120,361.53, respectively, plus interest and penalties. The IRS made a deficiency assessment against Thomas for the unpaid 1986 taxes on November 9, 1987 and for the unpaid 1987 taxes on June 6, 1988. Federal tax lien notices were filed on December 5, 1988 in Atlantic City, the place of the Holyfield-Thomas fight, and on December 8, 1988, in Oakland County, Michigan, the place where Thomas resides. On December 9, 1988, DKP was served with the government's notice of levy, in which DKP was directed to pay to the government any wages or other income that was to be paid to Thomas.

In 1986, Thomas lost his World Boxing Council heavyweight title to Trevor Berbik; in accordance with the terms of the stipulation of settlement, $50 thousand was paid to Gidron from the purse for that fight. Thereafter, in May 1987, Thomas suffered a devastating knockout loss to Michael Tyson. After defeating Thomas, Tyson went on to defeat Tony Tucker, the then-International Boxing Federation heavyweight titleholder, resulting in the unification of the heavyweight championship titles--World Boxing Council, World Boxing Association and International Boxing Federation--in one professional boxer. After further litigation, Gidron was able to recover $50 thousand from the proceeds of the Tyson match.

Gidron learned about the upcoming Thomas/Holyfield match from an advertisement in the New York Post. Fearing that DKP would not pay the final $50 thousand from the last of the three fights, Gidron obtained in the Bronx County court an order directing Thomas to show cause by December 16, 1988 why $50 thousand should not be paid to Gidron from the proceeds of the fight scheduled for December 9, 1988. It was in response to that order that DKP filed an interpleader action in federal district court on December 12, 1988. The district court enjoined the state court proceedings. [90-2 USTC ¶50,524 ], 749 F. Supp. at 82.

On October 2, 1990, the district court in a Memorandum Opinion and Order held that Jones had priority over Gidron and the government, and that Gidron had priority over the government. Id. at 85. After further litigation to determine whether additional funds were to be added to the amount held in the registry of the district court, the government moved pursuant to Fed. R. Civ. P. 54(b) for entry of a final judgment on the interpleader priority question. Finding no just cause to delay the entry of a partial judgment, the district court granted the government's motion, and a judgment was entered on January 3, 1991. Remaining for disposition are cross-claims interposed against DKP to recover a money judgment. The government appeals from the portion of the judgment in which the court determined that Gidron's claim had priority over its federal tax liens. Gidron appeals from the portion of the judgment in which the court determined that Jones' support claim had priority over his claim.

DISCUSSION

The government contends that the district court's rationale in finding that Gidron's claim has priority over federal tax liens is flawed. The district court reasoned that Thomas, having made an assignment of funds to Gidron in 1985, prior to the assessment of taxes and the consequent attachment of the tax liens, see 26 U.S.C. §6322 , had no further interest in the assigned funds when the tax liens attached. The court concluded the tax liens could not "attach under §6321 in the first place." 749 F. Supp. at 85. The flaw in this, the government asserts, is that Gidron's claim to proceeds from the Thomas/Holyfield prizefight purse as assignee was inchoate and, as such, subordinate to federal tax liens. We agree with the government's position.

Section 6321 of the Internal Revenue Code provides that

[i]f any person liable to pay 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.

26 U.S.C. §6321 (1988). The language of section 6321 is broad, revealing a congressional intent to reach "every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720 (1985).

A federal tax lien, described as a "secret lien," see United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 53 (1950) (Jackson, J., concurring) (citation omitted), is effective upon assessment against all persons, even in the absence of recordation of the lien. See Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 568 (5th Cir. 1980). However, under 26 U.S.C. §6323(a) , certain persons are protected against unrecorded federal tax liens. Section 6323(a) provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirement of subsection (f) has been filed by the Secretary.

Only those persons specifically listed in the statute are entitled to priority over unrecorded federal tax liens. See 14 Mertens, Law of Federal Income Taxation §15A.03, at 15-16 (1991).

During oral argument, Gidron contended that he is a "judgment lien creditor" by virtue of the stipulation of settlement dated December 11, 1985, which he argues was a judgment entered in the Bronx County court. If Gidron were a "judgment lien creditor," and his status as such was acquired prior to December 5 and 8, 1988, when the government recorded its federal tax liens, Gidron would be entitled to priority over the government.

A "judgment lien creditor," undefined by statute, is described in treasury regulations as

a person who has obtained a valid judgment . . . for the recovery of . . . a certain sum of money. . . . [and as] a person who has perfected a lien under the judgment on the property involved.

26 C.F.R. §301.6323(h)-1(g) . "In determining . . . whether a judgment creditor's lien is perfected . . . , we look first to the local law setting forth the lien procedure and its legal consequences." Hartford Provision Co. v. United States [78-1 USTC ¶9392 ], 579 F.2d 7, 9 (2d Cir. 1978).

Under New York law, a judgment creditor becomes a "judgment lien creditor" as to personal property only after execution is delivered to the sheriff. See N.Y. Civ. Prac. L. & R. §5202(a) (McKinney 1978); see also Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc. [75-1 USTC ¶9299 ], 512 F.2d 605, 607 n.2 (2d Cir. 1975). Since there is no evidence that the stipulation of settlement was reduced to and docketed as a judgment, see 749 F. Supp. at 81 n.1, and there is no evidence of the delivery of a judgment execution to the sheriff, clearly, under the New York requirements, Gidron cannot be a judgment lien creditor. See Lerner v. United States [87-1 USTC ¶9339 ], 637 F. Supp. 679, 680 (S.D.N.Y. 1986); In re Estate of Robbins, 74 Misc. 2d 793, 795, 346 N.Y.S.2d 86, 90 (Sur. Ct. 1973) ("As to personal property, docketing of a judgment [alone] does not create a lien; such a lien upon personal property comes into being only when execution is issued to the proper officer.").

For all persons who are not specifically listed in section 6323 , priority as a lienor is determined by the common law rule of "first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 87-88 (1954). Under that rule, a federal tax lien takes priority over competing liens unless the competing lien was choate, or fully established, prior to the attachment of the federal lien. See id. at 86. Not only does a lienor's interest have to be first chronologically, but the interest must be choate to defeat the federal tax lien. A choate lien is one in which the identity of the lienor, the property subject to the lien and the amount of the lien are established. Id. at 84. A lien that is "choate" has been described as a lien that is "specific and perfected" and for which "nothing more [need] be done." United States v. Equitable Life Assurance Society [66-1 USTC ¶9444 ], 384 U.S. 323, 327-28 (1966) (citation omitted).

Under the federal revenue statute, federal law determines the rights of priority among competing lienors; however, state law controls in determining the nature of a taxpayer's interest in property. SEC v. Levine, 881 F.2d 1165, 1175 (2d Cir. 1989); see also National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722; Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960). "[W]hether the [federal] tax lien has attached depends on the state law question of ownership, since the lien can only attach to property that the taxpayer owns." United States v. Fontana [82-1 USTC ¶9237 ], 528 F.Supp. 137, 143 (S.D.N.Y. 1981). "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.' " National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722 (quoting United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958)). Thus, we must look initially to the nature of Thomas' interest in the property under New York law.

Thomas purported to assign to Gidron a portion of his interest in income to be earned some time in the future. Under New York law, income to be earned in the future may be assigned. "[T]he right to receive [such income], though liable to be defeated, is vested, and, in the absence of [a statutory restriction], . . . is assignable." 6 N.Y. Jur. 2d Assignments §23 , at 260 (1980). However, like the assignment of accounts receivable where the assignor has no existing contract under which such accounts are to arise, the assignment of a right to receive income contingent upon the occurrence of a future event, does not convey a present interest to the assignee. See Central State Bank v. New York, 73 Misc. 2d 128, 129, 341 N.Y.S.2d 322, 324 (Ct. Cl. 1973); see also Stathos v. Murphy, 26 A.D.2d 500, 503, 276 N.Y.S.2d 727, 730 (1st Dep't 1966) ("There is no doubt that the assignment of a truly future . . . interest does not work a present transfer of property. It does not because it cannot; no property yet exists."), aff'd, 19 N.Y.2d 883, 227 N.E.2d 880, 281 N.Y.S.2d 81 (1967). Rather, the rights that Gidron acquired, contingent upon the occurrence of a prizefight at some unspecified time in the future, were "truly future interests." See In re Estate of Rosenberg, 62 Misc. 2d 12, 17, 308 N.Y.S.2d 51, 58 (Sur. Ct. 1970) ("An assignment of a future 'contingent' interest . . . is an assignment of a truly future interest, not an assignment of present rights."); see also In re Holt, 28 A.D.2d 201, 205, 284 N.Y.S.2d 208, 212 (3d Dep't 1967) (" 'future rights' . . . are those rights which arise in the future; or, more aptly stated in its most precise definition, a right which the assignor does not have at the time of the assignment but which he expects to have under some arrangements he is about to enter." (emphasis in original)). These rights could not ripen into present rights or interests until the occurrence of the third fight. See Central State Bank, 73 Misc. 2d at 129, 341 N.Y.S.2d at 324; City of Utica v. Gold Metal Packing Corp., 54 Misc. 2d 708, 710, 283 N.Y.S.2d 611, 613 (Sup. Ct. 1967) ("The courts recognize equitable assignments of future interests which will create a lien between the parties at the time the property comes into existence"); 6 N.Y. Jur. 2d Assignments §20, at 256 ("the assignment of contingent interests . . . , although resting in a mere possibility, is recognized and takes effect when the thing . . . assigned comes into existence.").

The government's liens attached when the assessments were made in 1987 and 1988, but Gidron only acquired a future interest in the prizefight purses on December 11, 1985 by virtue of his assignment. Cf. United States v. Colby Academy [82-2 USTC ¶9450 ], 524 F.Supp. 931, 934 (E.D.N.Y. 1981). At that time, Gidron's interest was inchoate. Although the identity of the lienor was known and the amount of the lien was established, the property subject to the lien was not in existence at the time the government's lien arose. See Lerner [87-1 USTC ¶9339 ], 637 F.Supp. at 681 (court held that "lien remains inchoate until the underlying debt becomes due." (citation omitted)); MDC Leasing Corp. v. New York Property Ins. Underwriting Ass'n [79-1 USTC ¶9122 ], 450 F.Supp. 179, 181 (S.D.N.Y. 1978), aff'd mem., 603 F.2d 213 (1979). Therefore, under applicable federal law, the government had priority over Gidron. See United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963).

Gidron contends that the district court erred in determining that Jones' claim to interpleader funds had priority over his claim because his stipulation of settlement, dated December 11, 1985, was prior in time to Jones' judgment of filiation and order for support. Noting that "[u]nder New York law, the legislature has given priority to child support orders over wage assignments and garnishments," the district court found Jones' claim to have priority over Gidron's claim. 749 F.Supp. at 85.

Gidron argues that Thomas' assignment to him is not a wage assignment or garnishment and, therefore, the district court erred in subordinating his claim to Jones' claim. He contends that the transaction constituted a valid present transfer of property rights from Thomas to King to be paid to Gidron, thereby divesting Thomas of any rights in the specified prizefight purses. Gidron's defeat in his fight against the government, however, precludes him from arguing (successfully) in his fight against Jones that he was assigned a present interest in 1985.

There is another reason why Gidron's argument must fail. Section 5241 of the New York Civil Practice Laws and Rules, entitled "Income execution for support enforcement," provides that a "levy pursuant to this section or an income deduction order pursuant to section 5242 of this chapter shall take priority over any other assignment, levy or proccess." N.Y. Civ. Prac. L. & R. §5241(h) (McKinney Supp. 1991) (emphasis added); see also id. §5242(c) McKinney Supp. 1991). "[T]he intent and purpose of the[se] enforcement statutes is to enable a former spouse to enforce a support judgment against 'income,' in a priority basis over the income execution of a normal judgment creditor." Dawson v. Krolikowski, 140 Misc. 2d 343, 346, 530 N.Y.S.2d 931, 934 (Sup. Ct. 1988); see also Long Island Trust Co. v. United States Postal Serv., 647 F.2d 336, 339 (2d Cir. 1981). Under the statute, "income" includes "any earned, unearned, taxable or non-taxable income." N.Y. Civ. Prac. L. & R. §5241(a)(6) .

Clearly, the monies to be paid to Thomas by DKP for Thomas' participation in the boxing match fall within the meaning of "income" under section 5241 . Therefore, it is immaterial whether the assignment embodied in the stipulation of settlement is called a wage assignment or any other kind of assignment. The statute gives priority to orders for support over "any other assignment." Id. §5241(h) . It subordinates all normal judgment creditors to the former spouse who has a support judgment. See id. Thus, even if Gidron were considered to be a judgment creditor, his claim must be found to be subordinate to Jones' judgment of filiation and order for child support.

CONCLUSION

The judgment of the district court is reversed insofar as it establishes the priority between Gidron's claim over the government's federal tax liens. The portion of the judgment establishing the priority of the claim of Althea Jones over the claims of both the government and Gidron is affirmed. The order of priority of claims to the interpleaded funds is fixed as follows: 1) child support (Jones); 2) federal tax liens (government); and 3) claim based on stipulation (Gidron).

 

 

[86-2 USTC ¶9846] In the Matter of the Estate of Vincent M. Igoe, Respondent v. United States Internal Revenue Service, Appellant

Supreme Court of Mo., No. 68315, 10/14/86

[Code Secs. 6321 and 6323 ]

Lien for taxes: Priority: State law.--Homestead and family allowances allowed under a Missouri state statute took priority over assessed federal tax liens in an insolvent estate. Homestead and family allowances were debts of the estate and not debts of the tax- delinquent decedent. The IRS did not object to the payment of funeral expenses or attorneys' fees incurred in administering the estate (expenses that the court stated were similar to homestead and family allowances) and the state statute gave priority to homestead and family allowances over funeral expenses.

Per Curiam

EC: This appeal was first heard in the Missouri Court of Appeals, Eastern District, and decided by an opinion authored by the Honorable Robert O. Snyder. The appeal was then transferred to this Court pursuant to Rule 83.02.

The appeal has now been heard in this Court and the Court adopts the opinion of Judge Snyder as its decision.

The United States Internal Revenue Service appeals from a judgment of the Probate Division of the Circuit Court of the City of St. Louis, which gave priority to homestead and family allowances over a federal tax lien in an insolvent estate. The judgment is affirmed.

Vincent M. Igoe died on June 28, 1983. The decedent had filed a delinquent 1980 federal income tax return in 1981. In 1982, the IRS filed notice of a federal tax lien with respect to the unpaid 1980 tax liability. On January 7, 1983, the decedent paid $43,989.94 of his delinquent taxes to the IRS. No other payments to the IRS were made prior to decedent's death. After decedent's death, the IRS filed a proof of claim against the estate in the amount of $81,607.40 for the unpaid tax balance, interest and penalties.

Cheryl I. Igoe, the surviving spouse and administratrix of the estate filed a petition seeking her homestead allowance of $7,500.00 pursuant to section 474.290, RSMo 1978. In addition, the guardian of the decedent's six minor children from a previous marriage claimed the right to the family allowance authorized by section 474.260. RSMo 1978.

The United States objected to the claims of the surviving spouse and minor children, contending that under section 6321 of the Internal Revenue Code of 1954, the IRS tax lien had priority because it was effective before decedent's death.

On December 6, 1984, the trial court ruled that the IRS tax lien "does not take priority over costs, expenses of administration, exempt property, family and homestead allowances, and funeral expenses under section 473.397 RSMo." The court awarded $7,500.00 to Cheryl A. Igoe, the surviving spouse, less $1,485.00 for business furniture she elected to keep. The court awarded $28,888.00 as a reasonable family allowance for the six surviving minor children. The decedent's estate was insufficient to satisfy both the tax lien and the homestead and family allowances.

The IRS appealed, alleging that as a matter of law the trial court erred by ruling that homestead and family allowances "primed," that is, had priority over, assessed federal tax liens. The point is denied and the trial court's judgment allowing the homestead and family allowances is affirmed.

The trial court based its judgment on section 473.397, RSMo 1978, which classifies and sets forth the priority of claims against a decedent's estate.

Sec. 473.397 CLASSIFICATION OF CLAIMS AND STATUTORY ALLOWANCES

All claims and statutory allowances against the estate of a decedent shall be divided into the following classes:

(1) Costs;

(2) Expenses of administration;

(3) Exempt property, family and homestead allowances;

(4) Funeral expenses;

(5) Debts and taxes due to the United States of America;

(6) Expenses of the last sickness, wages of servants, claims for medicine and medical attendance during the last sickness, and the reasonable cost of a tombstone;

(7) Debts and taxes due the state of Missouri, any county, or any political subdivision of the state of Missouri;

(8) Judgments rendered against the decedent in his lifetime and judgments rendered upon attachments levied upon property of decedent during his lifetime;

(9) All other claims not barred by section 473.360.

The trial court applied the Missouri statute and ruled that the family and homestead allowances claimed against the decedent's estate had priority over the IRS tax lien.

The priority of a federal tax lien over other claims is a question of federal law. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 56-57 (1958). The case under review, then, requires an interpretation of federal statutes.

Section 6321 of the Internal Revenue Code (26 U.S.C. sec. 6321 (1982)) establishes a lien against the property of a person liable for taxes. It reads:

Sec. 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 a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The parties agree that state law determines who owns property. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512[1] (1960). United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55[6] (1958).

The decedent did not own property after his death according to Missouri law. His property passed to his heirs at law inasmuch as he died intestate. §473.260, RSMo 1978. But before it reaches the heirs at law it flows through the estate where the administratrix in this case is chargeable with expenses of administration, claims, and allowances to the family. South St. Joseph Live Stock Exchange v. St. Joseph Stock Yards Bank, 223 Mo. App. 623, 16 S.W.2d 722, 727 (1929). Because this estate was insolvent, no property ever reached the heirs at law.

Appellant argues that the federal tax lien arose prior to, and was not extinguished by, decedent's death. Therefore, any party who takes possession of the decedent's property takes subject to the pre-existing tax lien. Appellant also supports its argument by relying on I.R.C. sections 6321 and 6323 which create the federal lien for taxes and establish its priority. Section 6323 specifically lists those claims having superiority over the federal tax lien. Because homestead and family allowances are not listed, the IRS argues that they are not to be given priority.

It is doubtful if a lien under I.R.C. section 6321 automatically attaches to property in the estate of a delinquent taxpayer. The IRS lien attaches to the property of the taxpayer only by the plain terms of section 6321 . Because the estate assets are no longer the property of the taxpayer, it is difficult to see how the lien could be effective.

The IRS cites United States v. Bess, supra, for authority that a lien for tax liability attached to the cash surrender value of a life insurance policy after the death of the taxpayer. The case is distinguishable, however, because no probate estate was involved as there is in the case under review.

Weitzner v. United States [62-2 USTC ¶9773 ], 309 F.2d 45, 46-48 (5th Cir. 1962), cert. denied, 372 U.S. 913 (1963), also cited by the IRS, dealt with a homestead provision of the state constitution, a set of facts not similar to those before this court.

The authorities relating to the issue of the priority of federal tax liens are not consistent. Some courts have ruled that claims to homestead rights are superior to federal tax liens while others have held to the contrary. Comparison of cases in this area is made even more difficult because both state statutes and fact patterns differ from case to case.

In Chandler v. Pilley, 5 A.F.T.R.2d 437 (Probate Ct. Tenn, 1959), the court examined the priority of a federal tax lien on a decedent's estate. The decedent's wife filed a petition for a year's support, homestead and dower. The United States filed a claim for unpaid taxes for which a lien was filed prior to decedent's death. The amount of taxes owed exceeded the assets of the estate. Id. at 438.

The widow's petition for a year's support was denied because she failed to comply with the state statute which required her to dissent from her husband's will in open court within nine months after probate of the will. Id. at 430. The widow was granted her homestead right because the court ruled it had vested prior to the liens on her deceased husband's estate. Id. at 441. But see U.S. v. Heasly, 170 F.Supp. 738 (D.C.N.D. 1959). In addition, the Chandler case does not answer the question of whether the court would have granted the year's support had the widow timely filed her petition.

Respondent argues that the government should have proceeded under 31 U.S.C. section 3713 (1982) which provides as follows:

Priority of Government Claims

(a)(1) A claim of the United States Government shall be paid first when--

(A) a person indebted to the Government is insolvent and--

(i) The debtor without enough property to pay all debts makes a voluntary assignment of property;

(ii) Property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under title 11.

(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government. [Emphasis supplied].

Respondent argues that this section of the United States Code is applicable because the decedent's estate was insolvent.

A case decided under section 191 and section 192 , forerunners of the current section 3713, held that a claim for one year's support and an exemption for a minor child was not a debt of the decedent and thus took priority over the tax claims of the federal government. In re Carl's Estate, 94 N.E.2d 239, 243 (Ohio Probate Ct. 1950). This case involved the priority given the federal government's claim for income and social security taxes owed by the decedent. The court reasoned that the exemption and year's support were not debts of the decedent but charges on the estate. Id. at 243.

In Martin v. Dennett, 626 P.2d 473 (Utah 1981), the court held that the state statute granting priority to funeral and administrative expenses of an estate over the debts of the deceased is controlling as to claims against the estate. Id. at 475. In Martin, the federal government filed a tax lien prior to decedent's death. The lien was created under I.R.C. section 6321 . The priority of the lien was determined by 31 U.S.C. section 191 (now section 3713). The court ruled that section 191 accords federal priority over only those debts "due from the deceased," and not debts of the estate. The court held that the funeral and administrative expenses of an estate have priority over a federal tax lien filed prior to decedent's death. Id. at 475-76[3].

This case is decided by using the Martin rationale that homestead and family allowances are debts of the estate and not debts of the decedent. Homestead and family allowances are similar to funeral expenses and costs of estate administration. Section 473.397 gives priority to homestead and family allowances over funeral expenses.

The government did not object to the payment from Mr. Igoe's estate of his funeral expenses nor the attorney's fees incurred in administering the estate. These estate debts are not listed in I.R.C. section 6323 . Yet they were allowed without appellant's protest suggestion that section 6323 is not as all inclusive a list as the United States would have this court believe.

The United States sought relief in a Missouri state court and is therefore bound by the same rules which bind and govern other litigants. Pollyea v. Grodsky, 315 S.W.2d 460, 461[1] (Mo. App. 1958).

The judgment is affirmed.

All concur.

 

 

[56-1 USTC ¶9278]United States of America, Plaintiff v. Charles Richard Aley, Lyndon, Jefferson County, Kentucky, Alfred L. Kuehn, Trustee, Oak Park, Cook County, Illinois, The First National Bank of Chicago, Trustee, a corporation, Chicago, Illinois, Charles Richard Aley, Trustee, Lyndon, Jefferson County, Kentucky, J. Matt Chilton, Trustee, Louisville, Jefferson County, Kentucky, William R. Cobb, Trustee, Louisville, Jefferson County, Kentucky, Charles I. Dawson, Trustee, Louisville, Jefferson County, Kentucky, Defendants

In the United States District Court for the Northern District of Illinois, Eastern Division, No. 53 C 2389

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

Lien for taxes: Trusts: Beneficiary's distributive share of income: Spendthrift clause: Stipulated terms for payment of tax.--Taxpayer, beneficiary of certain trusts, was liable for payment of income taxes for prior years. Proceedings were instituted to enforce the liens for such taxes against the income of the trusts credited to the beneficiary account of taxpayer. The trustees interposed the defense that such credited amounts were not subject to payment of the taxes by reason of spendthrift clauses in the trust agreements. The Court approved an agreement whereby a certain sum was properly payable to taxpayer out of each year's income of the trusts, with the balance to be applied to payment of taxpayer's past due and future accrual of taxes, subject to payment of trustees' and attorneys' fees in connection with the proceeding. Adjudication of the legal efficacy of the spendthrift clauses as a bar to the collection of the taxes was reserved for future determination.

Robert Tieken, United States Attorney, for plaintiff. Arthur W. Grafton, for Charles R. Aley, Individually. Charles I. Dawson, Frank H. Towner, Neil McKay, for trustees of June 8, 1944 Trust. Frank Towner, Neil McKay, for August 8, 1935 Trust.

Final Judgment

LABUY, District Judge:

Now come plaintiff United States of America, by Robert Tieken, United States Attorney for the Northern District of Illinois, defendant Charles Richard Aley, individually (hereinafter sometimes referred to in his individual capacity as "defendant taxpayer"), by Arthur W. Grafton, his attorney, defendants Charles Richard Aley, Alfred L. Kuehn, The First National Bank of Chicago, a national banking association, J. Matt Chilton, William R. Cobb, and Charles I. Dawson, as Trustees of the trust created by Sallie A. Hert under date of June 8, 1944 (hereinafter sometimes referred to collectively as "defendant trustees of said June 8, 1944 trust") by Charles I. Dawson, Frank H. Towner and Neil McKay, their attorneys, and defendant Alfred L. Kuehn, as trustee of the trust created by Sallie A. Hert under date of August 8, 1935 (hereinafter sometimes referred to as "defendant trustee of said August 8, 1935 trust") by Frank H. Towner and Neil McKay, his attorneys; and

[The Facts]

This cause coming on to be heard upon the complaint of plaintiff and the several answers of defendant trustees, and defendant taxpayer having filed his appearance but having failed to file an answer to the complaint, and all parties hereto having consented to the entry of this Final Judgment without trial, the Court having heard the statements of counsel for the respective parties, and being in all respects fully advised in the premises, doth find and adjudge as follows:

1. Defendant taxpayer is indebted to plaintiff in the sum of $69,402.65 plus interest thereon as provided by law for unpaid United States income taxes on income received by him during the years 1950, 1951, 1952, 1953 and 1954.

2. By a trust agreement dated August 8, 1935, Sallie A. Hert created a trust, of which defendant Alfred L. Kuehn is the sole trustee and under the terms of which defendant taxpayer is entitled to receive a part of the income from the trust estate. At the present time said trustee has in his possession and control the sum of $13,520, which sum said trustee has credited to the account of defendant taxpayer as his share of the income from the trust estate since the service upon said trustee by plaintiff of a notice of tax lien with respect to defendant taxpayer, $10,140 of said sum having been so credited as of May 3, 1955, and $3,380 thereof having been so credited since that date. Said trust agreement provides, among other things, that:

"(j) The interest of a beneficiary in either the principal or income of the trust estates shall not in any case be subject to any form of anticipation or assignment by such beneficiary; neither shall it be subject to the obligations of such beneficiary, whether legal or equitable."

3. By a trust agreement dated June 8, 1944, Sallie A. Hert created a trust, of which defendants Charles Richard Aley, Alfred L. Kuehn, The First National Bank of Chicago, J. Matt Chilton, William R. Cobb and Charles I. Dawson are the trustees and under the terms of which defendant taxpayer is entitled to receive a share of the income from the trust estate. At the present time said trustees have in their possession and control the sum of $33,588.67, which sum said trustees have credited to the account of defendant taxpayer as his share of the income from the trust estate since the service upon them by plaintiff of a notice of tax lien with respect to defendant taxpayer, $25,384.31 of said sum having been so credited as of May 3, 1955, and $8,204.36 thereof having been so credited since that date. Said trust agreement provides, among other things, that:

"Section Eight: * * * The interest of any beneficiary in the principal or income of the trust estate shall not in any case be subject to any form of anticipation or assignment by such beneficiary nor shall it be subject to the obligations of such beneficiary, either legal or equitable."

4. By its complaint herein plaintiff sought to enforce its lien for defendant taxpayer's unpaid United States income taxes for the years 1950, 1951 and 1952 upon the income of said trusts which had become distributable to defendant taxpayer or which might in the future become so distributable to the extent of defendant taxpayer's indebtedness to plaintiff for said income taxes. Defendant trustee of said August 8, 1935 trust by his answer to plaintiff's complaint raised the defense that under the spendthrift provisions of the trust agreement creating said trust, defendant taxpayer's interest in said trust could not be subjected to said asserted tax lien. Defendant trustees of said June 8, 1944 trust by their answer to plaintiff's complaint raised the defense that under the spendthrift provisions of the trust agreement creating said trust, defendant taxpayer's interest in said trust could not be subjected to said asserted tax lien.

5. During the pendency of the above-entitled cause certain further notices of levy and notices of the issuance of a warrant for distraint with respect to defendant taxpayer's deficiencies in the payment of his United States income taxes for the years 1953 and 1954 have been served by plaintiff upon defendant trustee of said August 8, 1935 trust and upon defendant trustees of said June 8, 1944 trust.

[Terms of Agreement]

6. Plaintiff and defendant taxpayer have entered into an agreement providing, among other things, for the payment of the tax liability whcih is the subject matter of this suit, a copy of said agreement consisting of a letter dated May 3, 1955 from Arthur W. Grafton, attorney for defendant taxpayer, to Leon Cooper, Department of Justice, and a letter dated July 29, 1955, from Abbott M. Sellers, Chief Compromise Section, Tax Division Department of Justice, to said Arthur W. Grafton, being attached hereto as Exhibits A and B and being expressly incorporated in this judgment by reference thereto.

7. In furtherance of said agreement defendant taxpayer has filed with defendant trustee of said August 8, 1935 trust a written document designating William M. Gray, District Director of Internal Revenue at Louisville, Kentucky, and his successors in office, as defendant taxpayer's agent to receive all of the income from said August 8, 1935 trust which was accumulated and credited to his account as of May 3, 1955, after deducting therefrom the reasonable fees, costs and expenses, including attorney's fees, reasonably charged by defendant trustee of said August 8, 1935 trust or incurred by him in defending the above-entitled cause, and as defendant taxpayer's agent to receive the balance of the income from said August 8, 1935 trust becoming distributable to defendant taxpayer each year after May 3, 1935 after said defendant trustee has paid to defendant taxpayer each year the first $5,000 of such income; and defendant taxpayer has requested said defendant trustee to pay such income in accordance with said designation, but said defendant trustee is unwilling to do so unless so authorized and directed by this Court.

8. In furtherance of said agreement defendant taxpayer has filed with defendant trustees of said June 8, 1944 trust a written document designating William M. Gray, District Director of Internal Revenue at Louisville, Kentucky, and his successors in office, as defendant taxpayer's agent to receive all of the income from said June 8, 1944 trust which was credited to defendant taxpayer's account as of May 3, 1955, after deducting therefrom the reasonable fees, costs and expenses, including attorney's fees, reasonably charged by defendant trustees of said June 8, 1944 trust or incurred by them in defending this action, and after said defendant trustees have paid $5,000 from such income to defendant taxpayer, and as defendant taxpayer's agent to receive all the income of said trust becoming distributable to defendant taxpayer after May 3, 1955, except that in any year after May 3, 1955 when the income of said August 8, 1935 trust becoming distributable to defendant taxpayer shall be less than $5,000, an amount equal to the difference between such income of said August 8, 1935 trust and $5,000 shall be deducted from such income of the June 8, 1944 trust and paid to defendant taxpayer rather than to his said agent; and defendant taxpayer has requested said defendant trustees to pay out such income in accordance with said designation, but said defendant trustees are unwilling to do so unless so authorized and directed by this Court.

[Payment of Fees]

9. The fair and reasonable value of the services performed by the attorneys of record herein for defendant trustee of said August 8, 1935 trust for which said attorneys are now entitled to be paid by said defendant trustee, and the usual, reasonable and customary fees for such services, is $1,000, and said defendant trustee has become liable to his said attorneys for said services in said amount and is entitled to be reimbursed in said amount for said expenses. Said costs and expenses, including attorney's fees, so incurred by said defendant trustee, were caused by defendant taxpayer and should be charged against the income accumulated and credited to his account by said defendant trustee as of May 3, 1955, rather than being charged generally against the trust estate of said August 8, 1935 trust.

10. The fair and reasonable value of the unusual and extraordinary services performed by defendant trustees of said June 8, 1944 trust in defending this action is $250 and said defendant trustees are entitled to be paid in said amount for said services; the fair and reasonable value of the services performed by the attorneys of record herein for said defendant trustees for which said attorneys are now entitled to be paid by said defendant trustees, and the usual, reasonable and customary fees for such services, is $2,500, and said defendant trustees have become liable to their said attorneys for said services in said amount and are entitled to be reimbursed in said amount for said expenses. Said costs and expenses, including attorney's fees, so incurred by defendant trustees, were caused by defendant taxpayer and should be charged against the income accumulated and credited to his account by said defendant trustees as of May 3, 1955, rather than being charged generally against the trust estate of said June 8, 1944 trust.

[Decree]

NOW, THEREFORE, in consideration of the premises, it is hereby ORDERED, DECREED and ADJUDGED as follows:

A. Defendant taxpayer is indebted to plaintiff in the sum of $69,402.65, plus interest thereon as provided by law, for unpaid United States income taxes on income received by defendant taxpayer during the years 1950, 1951, 1952, 1953 and 1954, and judgment is hereby entered against defendant taxpayer and in favor of plaintiff in said amount.

B. The liens of the plaintiff arising out of the assessment of taxes as set forth in plaintiff's complaint herein are prior, valid and subsisting liens against any property of the defendant taxpayer but the question as to whether the interest in the trusts referred to herein are "property" of defendant taxpayer and subject to such liens is not now determined.

C. The validity of the defenses raised by the answers of defendant trustee of said August 8, 1935 trust and of defendant trustees of said June 8, 1944 trust that because of the spendthrift provision of each of said trust agreements the interest of defendant taxpayer in and to said trusts cannot be subjected to plaintiff's lien remains undetermined by this Judgment and is specifically reserved for later adjudication if in the judgment of such trustees such adjudication is desirable by reason of legal proceedings hereafter brought against such trustees in this or any other jurisdiction by anyone, including the United States.

D. Defendant trustee of said August 8, 1935 trust shall charge against the income of said trust which was accumulated and credited to the account of defendant taxpayer as of May 3, 1955 the amount heretofore in this Judgment found to be the fair and reasonable value of the services performed by its said attorneys of record; and no charge for such amount shall be made against the trust estate generally.

E. Without prejudice to the defense raised by the Answer of defendant trustee of said August 8, 1935 trust and referred to in paragraph C above, said defendant trustee is authorized and directed to pay all of the income from said trust which was accumulated and credited to the account of defendant taxpayer as of May 3, 1955 (after charging against said income the amounts referred to in paragraph D above) to said William M. Gray, District Director of Internal Revenue at Louisville, Kentucky, and his successors in office as the designated agent of defendant taxpayer in accordance with defendant taxpayer's said designation in writing.

F. Notwithstanding the service by plaintiff upon defendant trustee of said August 8, 1935 trust of any notices of tax lien, notices of levy or notices of the issuance of a warrant for distraint with respect to defendant taxpayer's indebtedness for United States income taxes for the years 1953, 1954 or other years, and without prejudice to the defense raised by the Answer of defendant trustee of said August 8, 1935 trust and referred to in paragraph C above, and pending any application to adjudicate the validity of such defense, said defendant trustee is authorized to pay out the income of said trust of August 8, 1935 becoming distributable to defendant taxpayer after May 3, 1935 [1955] in accordance with his said designation in writing.

G. Defendant trustees of said June 8, 1944 trust shall charge against the income of said trust which was accumulated and credited to the account of defendant taxpayer as of May 3, 1955 the amount heretofore in this Judgment found to be the fair and reasonable value of the services performed by said defendant trustees in defending this action and the amount heretofore in this Judgment found to be the fair and reasonable value of the services performed by their said attorneys of record; and no charge for said amounts shall be made against the trust estate generally.

H. Without prejudice to the defense raised by the answer of defendant trustees of said June 8, 1944 trust and referred to in paragraph C above, said defendant trustees are authorized and directed to pay said William M. Gray, District Director of Internal Revenue at Louisville, Kentucky, or his successors in office, as the designated agent of defendant taxpayer in accordance with defendant taxpayer's said designation in writing, all of the income accumulated and credited to his account as of May 3, 1955 (after charging against said income the amounts referred to in paragraph G above), except for the sum of $5,000.

I. Notwithstanding the service by plaintiff upon defendant trustees of said June 8, 1944 trust of any notices of tax lien, notices of levy or notices of the issuance of a warrant for distraint with respect to defendant taxpayer's indebtedness for United States income taxes for the years 1953, 1954 or other years, said defendant trustees are authorized and directed to pay defendant taxpayer the sum of $5,000 from the income of said trust of June 8, 1944 accumulated and credited to his account as of May 3, 1955.

J. Without prejudice to the defense raised by the answer of defendant trustees of said June 8, 1944 trust, and referred to in paragraph C above, and pending any application to adjudicate (contemplated in said paragraph C) the validity of such defense, and notwithstanding the service by plaintiff upon defendant trustees of said June 8, 1944 trust of any notices of tax lien, notices of levy, or notices of the issuance of a warrant for distraint with respect to defendant taxpayer's indebtedness for United States income taxes for the years 1953, 1954 or other years, said defendant trustees are authorized and directed to pay out the income of said June 8, 1944 trust becoming distributable to defendant taxpayer after May 3, 1955 in accordance with defendant taxpayer's said designation in writing.

[Amounts Taxable to Beneficiary]

K. The receipts of said William M. Gray, District Director of Internal Revenue at Louisville, Kentucky, or his successor in office, to defendant trustee of said August 8, 1935 trust or to defendant trustees of said June 8, 1944 trust for any payments made pursuant to the above-described designations in writing of defendant taxpayer shall constitute and are hereby adjudged to be the receipts of defendant taxpayer.

L. Defendant taxpayer's interest in all income, whether presently accumulated in the aforementioned trusts or realized in the future from said trusts, is to be taxable to defendant taxpayer as income for the year in which it would normally have been paid to him but for this action, notwithstanding that a portion of it may be paid to his said agent to receive under the provisions hereof for application to the tax liability of defendant taxpayer, including the sums adjudged by paragraph A hereof.

M. All payments received pursuant to this judgment by said William M. Gray, District Director of Internal Revenue at Louisville, Kentucky, or his successors in office, as the designated agent of defendant taxpayer in accordance with defendant taxpayer's said designation in writing shall be applied by said agent to the payment of the tax liabilities of defendant taxpayer to plaintiff in the following order:

(a) To the payment of the current income taxes for the year in which the income so received is adjudged taxable by the provisions of paragraph L hereof.

(b) To the payment of the past due income taxes of the defendant taxpayer as adjudged herein in paragraph A hereof.

(c) To the payment of any other past income tax liability of the defendant taxpayer to plaintiff.

(d) To interest which may have heretofore accrued or may hereafter accrue upon such taxes to the dates of payment.

(e) To any penalties provided by law in connection with any income taxes payable hereunder save that no penalties shall be imposed on the taxpayer for any delay in payment occasioned by this action.

N. Said William M. Gray, District Director of Internal Revenue, Louisville, Kentucky, or his successors in office, shall furnish to the defendant taxpayer from time to time but not less often than once each year, statements showing the sums received by him hereunder, the application thereof and the balances then remaining due.

O. This Court retains jurisdiction of this cause and of the parties hereto for the purpose of adjudicating the validity of the defenses raised by the answers of defendant trustee of said August 8, 1935 trust and of defendant trustees of said June 8, 1944 trust, referred to in Paragraph C above, if such adjudication should become necessary.

 

 

[58-2 USTC ¶9729]Jack H. Pollyea and Anne Pollyea, (Plaintiffs) Respondents v. Sam E. Grodsky and Flora G. Grodsky, his wife; Maurice J. Ross; Maury Grodsky; Bess Grodsky; Joseph B. Bronstein and Ida Bronstein, his wife, Defendants, United States of America, Intervenor, (Defendant) Appellant

St. Louis Court of Appeals, April Session, 1958, No. 29,975, 315 SW2d 460, 7/8/58

[1939 Code Sec. 3670--same as 1954 Code Sec. 6321]

Federal tax liens: Partition sale of real estate: Whether lien attaches to gross or net proceeds.--The Government had perfected income tax liens against three of the six owners of an undivided piece of real property. One of those three brought the present action in partition. The Government, originally a party defendant, was, on its own motion, dismissed and allowed to become an intervenor. The real property was sold and the order of distribution called for payment of the special commissioner's fees and the taxpayer's attorney fees before the distribution of the proceeds to the other claimants. The Government contends that its liens should have been satisfied first from the gross proceeds of the sale. Held, the Government's lien can only be satisfied from the net proceeds of the sale, that is, the gross proceeds minus "costs and expenses." The Government chose to become an intervenor in the partition proceeding rather than to pursue its own remedies. Therefore, it "stood in the shoes" of the taxpayers, whose only rights were to the net proceeds of the sale.

Dubinsky & Duggan, Edward A. Dubinsky, Sidney W. Horwith, 705 Chestnut Street, St. Louis 1, Mo., for respondents. John J. Bantle, 4 North Eighth Street, St. Louis 1, Mr., for special commissioner. Morris A. Shenker, Owen Jackson, 408 Olive Street, St. Louis 2, Mo., for defendants Sam Grodsky, et al. Julius A. Razovsky, 705 Chestnut Street, General, James P. Garland, Robert J. Ross, et al. Charles K. Rice, Assistant Attorney General, James P. Garland, Robert Coe, Frederick G. Rita, Department of Justice, Washington, D. C., Harry Richards, United States Attorney, John A. Newton, Assistant United States Attorney, Room 402, United States Court House, Twelfth and Market Streets, St. Louis 1, Mo., for United States, intervenor-appellant.

HOUSER, Commissioner:

This is an action for partition of real estate, filed in the Circuit Court of the City of St. Louis under the provisions of §§ 528.030, et seq. This appeal was taken by Intervenor United States of America from an order allowing $2,300 attorney's fees and the taxing of the same as costs.

In March, 1953 federal income taxes in amounts in excess of $2,300 each were assessed against Jack, Sam and Maury and recorded. Jack, Sam and Maury and three other individuals each owned an undivided 1/6 interest in the real estate in question. After accrual and perfection of the federal tax liens Jack and wife brought this action in partition, naming Sam, Maury, the owners of the other three interest, their spouses, and the United States of America, as defendants. The prayer of the petition was for partition, admeasurement of dower interests, and

"that the interests of the defendant United States be determined and set off, and that if partition cannot be made in kind, that said land may be sold and the proceeds, after satisfaction of Liens, if any, and the Claims or Liens of the defendant United States of America, be ordered paid, and that the division of the proceeds be made between the plaintiffs and the defendants according to the respective rights, claims or liens of the parties * * *."

On its motion the Government was dismissed as a party defendant and permitted to file a petition and claim as an intervenor. In its intervening petition the Government prayed for a determination by the court that it had valid liens on the property; that Jack, Sam and Maury were indebted to it in the amount of those liens plus interest, and for an order that the proceeds of the sale representing the interests of Jack, Sam and Maury be applied in payment of their several debts to the Government. The interlocutory decree in partition found and declared the 1/6 interests of the six owners of the real estate, including Jack, Sam and Maury, found that the Government had perfected tax liens against those three, and that the Government was entitled from the sale and partition of the real estate "to apply the proceeds from the interest of * * * (Jack, Sam and Maury) to the payment * * * of the indebtednesses" of the three owing to the Government, and ordered the land sold. The special commissioner appointed by the court sold the property. The report of sale was filed and approved. Over the Government's objection the court sustained the application of the special commissioner for an order of distribution allowing a fee of $2,300 to plaintiffs' attorney and a fee of $1,575 to the special commissioner, to be paid from the amount derived from the sale, as "costs and expenses". After ordering payment of all costs and expenses the balance of $27,321.66 was ordered distributed six ways. The sums due Jack, Sam and Maury were ordered paid to the Government to the credit of their respective accounts.

[Question Presented]

On this appeal the amount of the award to the attorney is not challenged and the propriety of the award to the commissioner is not contested. The sole question is whether the court erred in allowing an attorney's fee payable out of the gross proceeds of the partition sale, in view of the fact that three of the six interests sold were impressed with a federal tax lien. In short, is a specific, perfected federal tax lien to be enforced against the gross or the net proceeds of a sale in partition?

The Government had a specific, perfected lien upon the interests of Jack, Sam and Maury in the real estate by virtue of 26 U. S. C. A., §3670; 6A F. C. A., Title 26, §3670, which imposes a lien in favor of the United States upon "all property and rights to property, whether real or personal, belonging to such person" liable to pay the tax. The Government had several available remedies for the enforcement of its lien: by executive distraint and sale, I. R. C., 1954, §§ 6331, et seq.; 26 U. S. C. A., §§ 6331, et seq.; Regs., §§ 301.6331, et seq.; by civil action in a district court of the United States to enforce the lien, I. R. C., 1954, §7403(a); 26 U. S. C. A., §7403(a); or by resorting to the courts of a state in which the property sought to be subjected to the lien is located. 30 Am. Jur., Internal Revenue, §243. The Government chose to secure an adjudication and enforcement of its lien rights in the state court partition proceeding. Not content with its status as a defendant in that case, the Government, on its own motion, was permitted to file an intervening petition. Thus the Government, a party to the proceeding, submitted itself to the jurisdiction of the court and prayed for certain relief in the partition proceeding. When the sovereign invokes the aid of a court it must submit to the application of the same principles, The Paquete Habana, 189 U. S. 453, 23 S. Ct. 593, 47 L. Ed. 900; The Nuestra Senora de Regla, 108 U. S. 92, 2 S. Ct. 287, 27 L. Ed. 662, and abide by the same rules, American Alliance Ins. Co. v. Mitchell, Mo. App., 299 S. W. 2d 536 [57-1 USTC ¶9506], which bind and govern other litigats.

[What "Property" Is Subject to the Lien]

Granting that the Government's lien upon the real estate arose prior to the filing of the partition action, the ultimate question is what "property or right to property" the Government's lien attached to after the conversion of the real estate into a sum of money. It is not a question of priorities as between the federal tax lien and an attorney's lien, but what constitutes "property or right to property" within the meaning of the federal tax lien statute. While questions of relative priorities between federal tax liens and other liens and claims are questions to be decided by federal law, United States v. Waddill, Holland & Flinn, 323 U. S. 353, 65 S. Ct. 304, 89 L. Ed. 294 [45-1 USTC ¶9126], the determination of what constitutes property or rights to property is primarily a matter of state law. "State law creates legal interests and rights." Morgan v. Commissioner of Internal Revenue, 309 U. S. 78, 626, 60 S. Ct. 424, 426, 84 L. Ed. 585, 1035 [40-1 USTC ¶9210]; United States v. Dallas Nat. Bank, C. C. A. 5, 152 Fed. (2d) 582 [46-1 USTC ¶9117]; United States v. Winnett, C. C. A. 9, 165 Fed. (2d) 149 [48-1 USTC ¶9115].

Section 528.460, R. S. Mo., 1949, V. A. M. S., relating to the proceeds of a partition sale, provides that the court shall direct the payment

"of all the costs and expenses of the proceedings, * * * to the parties entitled thereto, and the remainder to the parties in interest * * * according to their respective rights, as ascertained by the judgment of the court."

Section 514.220, R. S. Mo., 1949, V. A. M. S., relating to the adjudication of costs in partition cases, provides that in such cases the costs shall be paid by the parties plaintiff and defendant,

"according to their respective interests in the lands which may be the subject of the proceedings; and the court shall render judgment against each party for his or her share of such costs. If the lands * * * be sold in partition, then the costs adjudged against the party or parties whose interests shall be sold shall be paid out of the proceeds of such sale * * *."

Section 528.530, R. S. Mo., 1949, V. A. M. S., relating to the allowance of an attorney's fee in partition cases, provides that the judge

"shall allow a reasonable fee to the attorney * * * bringing the suit, * * * which fee * * * shall be taxed and paid as other costs in the case."

Section 528.530, supra, places the taxing and payment of attorney's fees in the same category as costs, which are to be "paid first out of the proceeds of the sale." Jennings v. Jennings, 225 Mo. App. 1010, 33 S. W. 2d 165, loc. cit. 167. The costs and expenses of a partition proceeding, including attorney's fees, constitute a first charge on the proceeds of the sale. The "proceeds" of the sale are not the gross proceeds received by the sheriff from the sale of the lands, but are the net proceeds after payment of the costs and expenses incurred in the partition proceeding. Young v. Young, Mo. Sup., 175 S. W. 585; Foeste v. Keesee, 235 Mo. App. 521, 138 S. W. 2d 700.

In Jennings, appellant-mortgagee, holder of a mortgage lien for an amount greater than the sum realized at the partition sale (just as in the instant situation the federal tax lien exceeded the amount realized at the sale) contended that the mortgagee must be paid before deducting the costs, including attorney's fees, and further contended that to award attorney's fees out of the proceeds of the sale would be to require the mortgagee to pay them, since the proceeds of the sale were less than the mortgage. The court rejected this contention, holding that the object of an allowance to attorneys bringing the suit is to charge the whole estate with the costs, and that no statutory exception is made in cases where a mortgage holder is a party to the suit. And see Ernst v. Ernst, 192 Mo. App. 256, 182 S. W. 103.

[Government "Stands in Shoes" of the Taxpayers]

Absent a lien, the taxpayers each had a right to his proportionate share of the net proceeds of the sale after payment of costs and expenses, including attorney's fees. That is the extent, and the limit, of the right of the Government, as the holder of a lien. The rights of the Government are no greater and can rise no higher than the rights of the taxpayers Jack, Sam and Maury. United States v. Warrent R. Co., 2 Cir., 1942, 127 Fed. (2d) 134 [42-1 USTC ¶9391]; Karno-Smith Company v. Maloney, 3 Cir., 1940, 112 Fed. (2d) 690 [40-2 USTC ¶9533]; United States v. Winnett, supra; McGraw & Company v. Sherman Plastering Co., D. C. Conn., 1943, 60 Fed. Supp. 504, affirmed 2 Cir., 1945, 149 Fed. (2d) 301; Board of Sup'rs of La. State University v. Hart, 210 La. 78, 26 So. (2d) 361 [46-1 USTC ¶9245]; United States v. Yates, Tex Civ. App. 1947, 204 S. W. 2d 399; Spagnuolo v. Bonnet, N. J. Sup., 1954, 109 A. 2d 623 [55-1 USTC ¶9192]; Highsmith v. Lair, Cal. Sup., 1955, 281 P. 2d 865 [55-2 USTC ¶9667]; United States v. Graham, S. D. Cal. C. D., 1951, 96 Fed. Supp. 318 [51-1 USTC ¶9218]; United States v. Bank of United States, D. C. N. Y., 1934, 5 Fed. Supp. 942 [1934 CCH ¶9099]; 47 C. J. S., Internal Revenue, §762, p. 994. The tax collector "stands in the shoes of the taxpayer when reaching the taxpayer's property." ¹ The burdens of the Government as a party in a partition action are no less than those of the taxpayer-parties. Each taxpayer, as the owner of an undivided interest in realty, is at all times exposed to the possibility of an action in partition by any one of the co-tenants. The burden of paying his proportionate share of the costs of such a proceeding, including attorney's fees, is one of the incidents of such co-tenancy. That burden falls upon the Government when it stands in the shoes of the taxpayer. No statutory exception is made in the matter of the allowance of attorney's fees when the Government, as the holder of a federal tax lien, is a party to the proceeding and we have no authority to engraft any exception in favor of the sovereign.

The Government says, however, that it derived no benefit from the partition sale, inasmuch as it could have foreclosed the liens and conducted its own sale of the interests in this land. The Government, a party, is bound by the applicable rules. As a party interested in the land the Government was "materially benefited by the legal services of a competent attorney who sees that the proceedings are properly brought to a conclusion. * * * in a legal sense, appellant was benefited by these proceedings." Jennings v. Jennings, supra, 33 S. W. 2d loc. cit. 167.

The Government places its principal reliance upon United States v. Liverpool & L. & G. Ins. Co., 348 U. S. 215, 75 S. Ct. 247, 99 L. Ed. 268 [55-1 USTC ¶9136]; United States v. R. F. Ball Construction Co., C. A. 5, 355 U. S. 587 [58-1 USTC ¶9327]; Ford Motor Co. v. Hackart Const. Co., D. C. N. J., 143 Fed. Supp. 216 [56-2 USTC ¶9831], and Boston Insurance Co. v. Stubbs (W. D. Wash.), 1956 [56-2 USTC ¶9695]. In these cases an innocent stakeholder of an existing, fund, confronted with rival claims of creditors of the owner of the fund and lien claims of the United States for taxes, brought an interpleader suit to secure an adjudication of the priorities to the fund as between the several claimants. The question was whether property subject to a paramount federal lien could be invaded for the allowance of counsel fees to the stakeholder. We expressed our opinion on that question in American Alliance Inc. Co. v. Mitchell, supra, in favor of the allowance of attorney's fees, but we do not think the interpleader cases control in the instant situation. In interpleader the question is one of priorities as between federal tax liens and garnishment liens, attorneys' liens, etc. in an existing fund the amount of which is fixed and ascertained, but which was not produced or realized by the efforts of the attorneys. The "property" consists of a certain, definite fund. Contrariwise, in this partition proceeding the question is not one of priorities in an existing fund. There is no fund. There is land. Before any question of priorities in a fund can arise there must be a fund over which to dispute. Before a fund can come into existence a certain prescribed procedure must be followed. A sum of money must be realized from a sale of the land. In the process of converting land into money by partition and sale certain costs necessarily must be incurred. One indispensable expense (without which a "fund" could not be realized) is the item of fees for attorneys' services, whereby the proceeding is conducted in an orderly and legal manner. By §528.530, supra, that item is regarded as an item of costs. That and all other statutory costs and allowances must be paid before there is any fixed and ascertained fund or "property" subject to priority claims. The amount of the "property" to which priorities may attach is not a known quantity until the statutory costs and allowances--the expense of realizing the fund--have been set aside. The only "property" to which a federal lien can attach in this partition proceeding is the net proceeds of the sale. In the instant case the claims of the Government and of plaintiff for attorney's fees never came into conflict as rival claims to the same fund, as they did in the interpleader cases, where the "property" to which preference was sought was the gross (not the net) amount of the stake.

[Government's Position Ill-Founded]

The Government's position is ill-founded and inconsistent. The Government objects in the instant case only to the allowance of the attorney's fee, but if its lien is paramount to that item of the costs it would, logically, be paramount to all items of costs. If that be true then the Government lien would supersede and override the clerk's costs, the sheriff's costs, the court reporter's fee, witness fees and the special commissioner's fee. Where the lien was larger than the sale price all such costs would be wiped out. In that event who would pay for the documentary stamps to be attached to the partition deed and who would pay the publisher's fees? The Government is a party to the proceeding. It invokes the processes of the court. It obtains the services of these court officials. By their efforts the land is converted into cash, to the benefit of the Government. Like any other litigant the Government must pay its share of costs and attorney's fees in partition cases in which it intervenes, and is not excused therefrom under the doctrine of superior power.

The order of the circuit court allowing plaintiffs' counsel a fee payable out of the gross proceeds of the partition sale should be affirmed, and the Commissioner so recommends.

PER CURIAM:

The foregoing opinion of HOUSER, Commissioner, is adopted as the opinion of the court.

The order of the circuit court allowing plaintiffs' counsel a fee payable out of the gross proceeds of the partition sale is, accordingly, affirmed.

E. M. RUDDY, Presiding Judge, concurs.

LYON ANDERSON, Judge, concurs.

JOHN J. WOLFE, Judge, concurs.

¹ Federal Tax Liens--Their Nature and Priority, Paul E. Anderson, California Law Review, Vol. 41, p. 241, loc. cit. 250.