Limitations Page2

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As of February 15, 1986, David Freeman's liability on these assessments amounted to $138,691.07. Interest has accrued since that date at a rate of ten percent, compounded daily. Internal Revenue Code Sections 6601 , 6621 .

3. David Freeman met defendant Barbara Freeman in 1969, in San Diego , California . During that year David and Barbara Freeman began living together and formed a common law marriage. Defendants David Freeman and Barbara Freeman moved to Brandywine , West Virginia , in 1970. For part of 1970 and 1971 they rented a house in Brandywine and paid rent of $75 per month.

4. Barbara Freeman has not had any paid employment, except for a few months while in college. Barbara Freeman has never received income as would require her to pay federal income taxes, has never paid such taxes or filed a federal income tax return. Since Barbara Freeman and David Freeman began living together, and continuing until at least September, 1978, David Freeman handled the financial transactions of both persons and has supported Barbara Freeman.

5. Mrs. Rolf Mueller is Barbara Freeman's mother. Other than claimed gifts of $42,000 in currency from Mrs. Rolf Mueller, Barbara Freeman has not received any gift or inheritance of more than $100, or gifts or inheritance of more than $1000 in the aggregate. Since the mid-1970s, Mrs. Mueller has suffered from a disease similar to Altzheimer's disease and is not mentally competent. (June 7, 1985 trial transcript at 18.)

6. Defendants financed the purchase of the first parcel by paying $12,963 at the time of purchase and by making a note for $37,737 to the sellers, T.J. Bowman, III and John Harman. The note was to be paid by three equal annual payments of $10,579. Shortly after the purchase, Mr. Bowman and Mr. Harman discounted the note to Pendleton County Bank.

The payment made at the time of purchase was made by five separate checks. One check, for $268, was drawn on Barbara Freeman's checking account and was signed by Barbara Freeman. The other four checks, for $9,237.50, were cashier's checks payable to David Freeman. The 1973 loan payment on the property was made by four separate checks, one on the Barbara Freeman account, for $5,300.59, and three cashier's or official checks payable to David Freeman, each for $2,500. The 1974 payment was made by a $10,000 cashier's check, on which David Freeman is named as payer, and $2,060.66 in cash.

7. In 1975 the defendants paid off this note by making a new note for the balance, payable to the bank. On October 15, 1975, David Freeman made a payment of $1,400 on the new note by a cashier's check. The second parcel of 18.5 acres was paid by a check for $2,127 on the Barbara Freeman account.

8. In 1971 the Barbara Freeman account was opened at the Pendleton County Bank. During that year $1,200 in cash, and a cashier's check payable to Barbara Freeman and drawn on the Colfax National Bank in Denver , Colorado , were deposited in the checking account. In 1972 a total of $16,583.80 was deposited in that account, of which $200 was in cash and $5,600 was a cashier's check payable to David Freeman and drawn on a California bank. Eighty-three dollars and eighty cents in deposits were accounted for by two checks from Rolf Mueller or R. Mueller. The name of Barbara Freeman's father is Rolf Mueller. The other $10,000 represents four cashier checks payable to Barbara Freeman, drawn on banks in Colorado , Ohio , California and Parkersburg , West Virginia .

In 1973 a total of $23,623.45 was deposited into the Barbara Freeman account, of which $11,088 was cash. A further $6,435.45 was from checks payable to or endorsed to David Freeman, of which $2,312.50 was derived from cashier's checks from California banks. Checks payable to Barbara Freeman were the source of the remaining $6,100.00. All but one hundred dollars of this amount is accounted for by two cashier's checks drawn on California banks.

In 1974, $4,493.72 was deposited into the account, of which $4,219.00 was currency. Two hundred dollars arose from a money order on a Colorado bank payable to David Freeman. A further $74.72 arose from checks to Barbara Freeman.

In 1975, $5,373.08 was deposited into the account, $2,840.00 of which was cash. Checks payable to David Freeman accounted for $2,377.78. Of the remaining $755.30, $420 is from a check from R. Mueller to Barbara Freeman.

David Freeman controlled this account, making all the deposits. The Court finds that substantially all of the funds in the account were funds of David Freeman, and that this was his account.

9. In August of 1973 T.J. Bowman and John Harman sold 101 acres in Highland County , Virginia to Barbara Freeman, Robert Wallace and George McKerrow for $20,000. David Freeman conducted the transaction for the purchasers, and paid at least $1,956.45 of the down payment.

On September 6, 1972 Mirkwood, Inc. purchased 380 acres in Pendleton County , West Virginia from Bowman and Harman. Barbara Freeman was and is one of three shareholders in Mirkwood, Inc., and owns at least 25% of the corporation. David Freeman arranged for her to have this interest. David Freeman arranged the purchase of land, paid a down payment of $12,500 and three annual payments totaling $36,394.

10. Don Aaron Freeman is the son of defendants Barbara and David Freeman. He was born on February 25, 1971. On January 11, 1972, a 1971 Mercedes Benz automobile was purchased in the name of Don Aaron Freeman. The signature of Don Aaron Freemen on the registration form was executed by David Freeman.

11. David Freeman was arrested on August 29, 1974 by the West Virginia State Police and was charged with the felonious possession with intent to manufacture a controlled substance. He was found guilty of this charge on June 10, 1975, and placed on probation.

12. On September 16, 1974, David W. Freeman executed a deed which purported to convey his one half interest in the title to the property at issue to Barbara M. Freeman for consideration of love and affection and $1.00. The deed also claimed that Barbara Freeman and her parents had paid for the property at issue. The deed was recorded on September 18, 1974.

13. On September 25, 1974 Carleton D. Temple filed a civil action in the Circuit Court of Pendleton County, West Virginia, alleging that David Freemen had shot him, committing the tort of battery. Temple also alleged that the September 16, 1974 conveyance, the conveyance here at issue, was fraudulent as to him.

14. On August 9, 1976, pursuant to Temple 's action, the Circuit Court of Pendleton County adjudged and ordered that the September 16, 1974 deed be set aside and held to be void and title was reinvested in David Freeman.

15. David Freeman pled guilty to a charge of failing to file an income tax return for 1972 and was sentenced to serve one year for that offense. Freeman was a fugitive from justice on that charge from 1978 until October 25, 1985, when he was arrested by agents of the Federal Bureau of Investigation and the United States Marshal Service in Austin , Texas . David Freeman was arrested by FBI Special Agent Tom McClenaghan. At trial in this matter, Special Agent McClenaghan was asked the charge on which David Freeman was arrested. Special Agent McClenaghan testified "I believe" Freeman was wanted for bond default and for a warrant for conspiracy to distribute narcotics. Freeman was formally charged solely on the fugitive charge.

16. Barbara Freeman was deposed by the United States on October 4, 1984. Barbara Freeman was represented by experienced counsel, and consulted counsel prior to the deposition. Barbara Freeman, in response to a question from her attorney, testified under oath that the last time she had contact with David Freeman was the Fall of 1978.

17. Trial in this matter was held on March 26, 1985. After the United States presented its case, Barbara Freeman's counsel moved to recess the case until he could locate his client and have her testify. Trial recommenced on June 6, 1985. Barbara Freeman discussed the case with her attorney after the deposition and before the June 6, 1985 hearing. At the June hearing Barbara Freeman testified, in response to a question from her counsel, that she had no contact with David Freeman since the Fall of 1978.

18. Barbara Freeman testified at deposition that she received three gifts of cash from her mother, $30,000 in 1970 and two in 1972 and 1973. The deposition transcript indicated that Barbara Freeman testified that when her mother visited her, "she gave me approximately right around six thousand dollars." Barbara Freeman reviewed that transcript and did not correct that quotation. At trial Barbara Freeman indicated that she meant that her mother gave her $6,000 in 1972 and a further $6,000 in 1973. She claimed that this was Mrs. Mueller's own money. Defendant Barbara Freeman testified that Mrs. Mueller obtained these funds by selling china after World War II. Barbara Freeman also testified that the family emigrated to the United States in 1954. Barbara Freeman testified that her father did not know of the supposed gift until he read her deposition in 1984. Barbara Freeman has testified that she gave this money to David Freeman to purchase land, and that David Freeman handled the money after that. Barbara Freeman testified that this money was used to purchase the property at issue, as well as the Highland County, Virginia, property and the Mirkwood property.

19. After the arrest of David Freeman in October of 1978, the United States moved to reopen the record in this matter. At reopened trial the United States adduced testimony from Mr. Jerry Morse that David and Barbara Freeman, under the names David and Janet Canterbury, had rented a house from him in Austin, Texas, in 1981 and occupied that house together until October of 1985. Mr. Morse also testified that during the later period of defendants' occupancy the rent was usually paid in cash or by cashier's checks payable to David Canterbury from California banks. Mr. Morse identified defendants as the Canterburys. At the hearing Special Agent Tom McClenaghan of the Federal Bureau of Investigation testified that, after arresting David Freeman, he went to the house and addressed the woman living there as "Mrs. Freeman", and she responded to that name. Special Agent McClenaghan also identified defendants.

20. Defendant Barbara Freeman and defendant David Freeman also testified at the January 15, 1986 hearing. Defendant Barbara Freeman admitted that her testimony, at deposition and trial, that she had no contact with David Freeman since 1978 to the time of trial, had been false.

21. Defendant David Freeman testified that the claimed gifts from Mrs. Mueller were the source of the funds used to buy the property at issue. David Freeman admitted that he had promised to appear to begin serving his sentence in 1978 but did not appear.

22. Defendants' testimony was not credible. David Freeman was the source for the funds used to buy the property. The Court does not believe defendants' testimony that Mrs. Mueller provided these funds.

Barbara Freeman gave false testimony in response to questions from her attorney and after a full opportunity to tell her counsel not to ask those questions. The Court must infer that Barbara Freeman intentionally misled her counsel so that she could gain the Court's sympathy by her false testimony. Further, David Freeman changed his testimony after Barbara Freeman's counsel indicated to him that documentary evidence contradicted his testimony. (January 15, 1986 transcript at 22-23, 26-27.)

After observing the demeanor of the witnesses in this matter, the Court gives credence to the testimony presented by the United States and does not give credence to defendants' testimony. The Court is satisfied that defendants, both in state court and in this Court, have attempted to manipulate the judicial process. (January 15, 1986 transcript at 48-49.) The Court cannot allow this to be done. The Court finds that funds used to purchase the property were derived from the activities of David Freeman, and not from any gift from Mrs. Mueller to Barbara Freeman.

CONCLUSIONS OF LAW

1. The United States has submitted a certified copy of a judgment of the Pendleton County Circuit Court setting aside the conveyance at issue in this case. Temple v. Freeman (No. 783, ( Aug. 9, 1976 ). The judgment was based upon a complaint alleging that the September 16, 1974 conveyance was fraudulent as to Temple , a creditor of David W. Freeman.

A judgment setting aside a conveyance as fraudulent to one creditor voids that conveyance as to all creditors. Lockhard v. Beckley , 10 W. Va. 87 (1877). West Virginia courts give preclusive effect to consent judgments. State ex. rel. Prince v. Dept. of Highways, 195 S.E. 2d 160, 162 (W. Va. 1972); State v. Sawyers, 133 S.E. 2d 257, 261 (W. Va. 1963); Ohio River R. Co. v. Johnson, 50 W. Va. 499, 40 S.E. 407, 409 (1901). As the order in Temple was by a court of competent jurisdiction, it must be given effect by this Court, regardless of defendant's arguments that it was erroneous. Kremer v. Chemical Construction Corp., 456 U.S. 461, 466 (1982); University of Illinois Foundation v. Blonder-Tongue Laboratories, Inc., 465 F.2d 380, 381 (7th Cir. 1972), cert. denied, 409 U.S. 1061. See Federated Department Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981); M.J. Former Adjudications, Section 10; M.J. Judgments, Section 146 .

Defendant Barbara Freeman has raised various objections to the Pendleton County judgment. This is not the proper forum for defendant's objections. It is the law in West Virginia that an order of a court acting within its subject matter jurisdiction is not open to collateral attack, except for want of jurisdiction. State ex rel. Massey v. Boles, 140 S.E. 2d 608, 610 (W. Va. 1965); Adkins, supra; Stewart v. Senter, 106 S.E. 443, 444 (W. Va. 1921) ("The law is so firmly settled that a judgment of a court of competent jurisdiction, so long as it stands in full force and unreserved, cannot be impeached in any collateral proceeding on account of errors not going to the jurisdiction * * *"). A collateral attack is an attempt to impeach a judgment in a proceeding not instituted for the express purpose of annulling, correcting or modifying that judgment. Lough v. Taylor, 124 S.E. 585 (W. Va. 1924). An attack on a judgment is direct if it involves a review or annulment of the judgment and is collateral if it involves a mere avoidance of its effect. McKnight v. Pettigrew, 141 W. Va. 506, 91 S.E. 2d 324, 328-329 (1956). Defendant is merely attempting to evade the preclusive effect of Temple . Such a collateral attack on a state court order should not be allowed. Silvious v. Helmick, 291 F. Supp. 716, 718 (N.D. W. Va. 1968).

As defendants have not acted to set aside the Circuit Court judgment, this Court must give full faith and credit to the state court judgment, and not hear collateral attacks on that judgment. However, even if this were not the case, the United States has shown, after a full trial of this matter, that it is entitled to judgment.

2. The burden was on defendants to show that the conveyance should be allowed to stand. As the conveyance at issue was from husband to wife, West Virginia law provides that the Court must presume the conveyance to be void as to creditors and the burden of proof as to the validity of the transfer is shifted to the party attempting to uphold the transaction. Hutchinson v. Walton, 119 W. Va. 709 (1938). The "burden is upon [defendant], not only to produce the evidence [to uphold the transaction], but to prove the facts clearly and fully." Bradley v. Kenova Trading Co., 115 S.E. 866, 868 (W. Va. 1923). See also Pickers v. Wood, 50 S.E. 818, 820-821 ( W. Va. 1905). This case is very similar to Pickers, supra. Barbara Freeman's claim is essentially that her husband's interest in the land was held in secret trust for her until the purported conveyance. Defendants must carry a heavy burden to establish the bona fides of this transaction.

3. The fraud necessary to set aside a conveyance may be inferred from the facts and circumstances of the case. Patterson v. Patterson, 277 S.E. 2d 709, 719 (W. Va. 1981). When the facts and circumstances of the case are such to make a prima facie case, they are taken as conclusive evidence, unless rebutted. To rebut this case, defendants must show by well established facts that the conveyance is not fraudulent. Hutchinson v. Walton, supra.

Certain facts suggesting fraud are sometimes designated "badges of fraud." M.J. Fraudulent Conveyances, Sec. 15 . Among the more common of these badges of fraud are a close relationship between the parties, want of consideration and the retention of the property by the grantor. Patterson v. Patterson, 277 S.E. 2d 709, 718 (W. Va. 1981). The United States has established the presence of several of these badges of fraud, and defendants have not rebutted this case.

4. The evidence is clear that David Freeman not only provided payment for his half interest in the property, but most, if not all, of the funds for the property as a whole. The statement in the 1974 deed that Barbara Freeman and her family had provided all of the funds for the original purchases of the property is not credible. It is thus clear that the 1974 conveyance of David Freeman's one-half interest in the property was made without consideration, which is a badge of fraud.

5. Other badges of fraud are present in this case, the retention of possession and control of the property by David Freeman, and was facing possible litigation. In April of 1975, after the purported conveyance, David Freeman signed a Deed of Trust Note secured by the property, which rolled over the original indebtedness for the property. David Freeman also continued to live on the property after the conveyance.

Further, David Freeman was facing litigation at the time of the purported conveyance. David Freeman had shot Carleton Temple in June of 1974 and was facing a lawsuit from Temple . David Freeman had been arrested on felony charges on August 29, 1974 and was facing the possibility of criminal fines. A transfer made with the intent to avoid future criminal fines is fraudulent. State v. Burkeholder, 30 W. Va. 593, 598-599 (1888).

6. David Freeman purchased several parcels of land and a Mercedes Benz automobile, but kept this property in others' names. He operated a bank account in another's name. David Freeman failed to file income tax returns for the years 1971, 1972 and 1973 or pay tax for those years. His practice of hiding his property interests gives rise to a compelling inference that he was acting with a fraudulent motive.

7. As a general rule, the title of a purchaser is not affected by the fraudulent intent of a grantor, unless the purchaser had notice of that fraudulent intent. However, this rule only protects a purchaser for valuable consideration. W. Va. Code Ann. Sec. 40 -1-1; Laidley v. Reynolds, 58 W. Va. 418, 52 S.E. 405 (1905). The recipient of a fraudulent gift, however free from fraudulent intent, becomes a fraudulent grantee the moment he claims the benefit of the grant. His acceptance amounts in law to an adoption of the fraudulent act of the grantor. Donehoo v. King, 83 W. Va. 485, 98 S.E. 520, 522 (1919). See also Graham Grocery Co. v. Chase, 75 W. Va. 775, 84 S.E. 785, 786 (1915). Here the deed shows on its face that the transaction was voluntary and thus void irregardless of Barbara Freeman's motives.

8. A conveyance made with the intent to defraud existing creditors vitiates the conveyance as to subsequent creditors. Donehoo, supra, 98 S.E. 520, 522; Graham Grocery Co., supra 84 S.E. 785, 786.

9. The United States did not need to show that David Freeman was insolvent at the time of the transfer. "The right of a creditor to subject to the payment of his debt the property of his debtor fraudulently conveyed does not depend on the question of the insolvency of the debtor." Halfpenny v. Tate, 65 W. Va. 296, 64 S.E. 28 (1909). Insolvency is just an indicata of fraud, not a prerequisite for a finding that a conveyance was fraudulent.

10. A transfer of property made without valuable consideration is void as to creditors whose debts existed at the time of the conveyance. W. Va. Code Ann. Sec. 40 -1-3. A voluntary transaction is void pursuant to this section whether or not the parties had a fraudulent intent. Kell v. Cumby, 125 W. Va. 802, 26 S.E. 2d 233 (1943); Tetrick v. McIntire, 110 W. Va. 529, 158 S.E. 788 (1931); McCaskey v. Potts, 65 W. Va. 641, 64 S.E. 908 (1909). A voluntary transfer is void as to pre-existing creditors even if the grantor was not insolvent at the time of the transaction. Bank v. Wilson , 25 W. Va. 242, 254-255 (1884); M.J. Fraudulent and Voluntary Conveyance, Sec. 65 . A voluntary transfer is void as against existing creditors because it is voluntary, regardless of the "amount of debts, the extent of the property so conveyed, the motives which prompted the settlement, or the conditions or circumstances of the party at the time." McCaskey v. Potts, supra; M.J. Fraudulent and Voluntary Conveyance, Sec. 65 .

Here the deed on its face shows it was made without valuable consideration. Even if Barbara Freeman's claim that she and her family had paid the full price for the original purchase of the property was believed, that would not save the transfer of David Freeman's interest to her, as the delivery of the joint interest to the property to David should be presumed to be a completed gift. Horner v. Huffman, 52 W. Va. 40, 43 S.E. 132 (1903); McGinnis v. Curry, 13 W. Va. 29, 64 (1878). See Patterson v. Patterson, 277 S.E. 2d 709, 715-716 (W. Va. 1981). In any event, the circumstances of the family finances and the purchases clearly makes Barbara Freeman's story incredible, and indicates that the source of the funds for the property was David Freeman.

11. The burden of proving that the transfer was bona fide and for a valuable consideration rests upon Barbara Freeman, not David Freeman's creditors. Horner, supra; Herog v. Weiler, 24 W. Va. 199 (1884).

12. The United States was a preexisting creditor of David Freeman. The tax claims for the United States for 1971, 1972 and 1973 all predate the transfer. Hence the transaction is void as to these tax claims of the United States .

13. Ordinarily, a claim that a transfer was void as to creditors as it was a voluntary conveyance could not be brought as more than five years passed from the date of the conveyance to the date the complaint was filed. West Virginia law sets a five-year statute of limitations for such claims. W. Va. Code Ann. Sec. 40 -1-4. However, such state statutes of limitations do not apply to the United States when it is acting in its sovereign capacity. United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 416 (1939); United States v. Morgan, 298 F.2d 255, 256 (4th Cir. 1962); United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612 (6th Cir. 1979); United States v. Polan Industries Inc. [61-2 USTC ¶9598 ], 196 F.Supp. 333, 335-339 (S.D. W. Va. 1961); United States v. West, 299 F.Supp. 661, 664 (Del. 1969) (fraudulent conveyance case). See Block v. North Dakota , 461 U.S. 273, 288-290 (1983). As the United States made its claim that the conveyance was voluntary within six years after the date of assessment, its claim was not time barred. 26 U.S.C. Section 6502 .

14. The United States has established that the conveyance at issue was both voluntary and fraudulent. Defendants' attempt to rebut that case has failed. The September, 1974 conveyance is thus void as to the United States , a creditor.

15. Pursuant to Internal Revenue Code Section 7403 (26 U.S.C.) and United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677 (1983), the United States is entitled to a sale of the property, with half of the sale proceeds, but not more than the amount of David Freeman's tax liabilities, to be paid to the United States. The rest of the funds shall be paid to Barbara Freeman.

Counsel shall submit an appropriate order of judgment and sale.

 

 

 

United States of America v. Robert Carpenter et al.

U. S. District Court, No. Dist. Ga., Atlanta Div., Civil Action No. 17,153, 11/14/72

[Code Sec. 6322--Result changed under Federal Tax Lien Act of 1966]

Tax lien: Limitation on enforcement: Period of lien: Lien reduced to judgment before 1966.--Although a tax lien reduced to a judgment before 1966 was subject to state-created limitations, the tax judgment itself was not subject to limitations and was enforceable at any time.

John W. Stokes, Jr., United States Attorney, Julian M. Longley, Jr., Assistant United States Attorney, Atlanta , Ga. , for plaintiff. Harold Karp, A. Tate Conyers, 1517 William Oliver Bldg., Atlanta , Ga. , for defendant.

Dorder

HENDERSON, JR., District Judge:

On February 1, 1955 , a judgment was entered in the United States District Court in Civil Action No. 5021 in favor of the plaintiff, United States of America , and against the defendant, Robert Carpenter. That suit was brought by the United States to reduce to judgment certain federal tax liabilities assessed against Robert Carpenter. The United States filed the present action to enforce that judgment.

The defendant, Robert Carpenter, subsequently filed a motion to dismiss, relying on Rule 69(a) of the Federal Rules of Civil Procedure. The defendant Carpenter claims that the 1955 judgment is now dormant and that under Rule 69(a) the only way the present judgment can be enforced is by a writ of execution. According to Carpenter, the procedure for such execution is set by state law and that procedure has not been followed by the plaintiff. Under Georgia law a judgment becomes dormant after seven years have elapsed between the rendition of the judgment and the execution.

The defendant's reasoning does not support his motion to dismiss. "Although a lien based on [a] judgment is subject to state-created limitations (28 U. S. C. §1962) (Fed. R. Civ. P. 69(a)), the [tax] judgment itself is not subject to limitations and is enforceable at any time." United States v. Overman, [70-1 USTC ¶9342] 424 F. 2d 1142, 1147 (9th Cir. 1970).

Accordingly, the defendant's motion to dismiss is denied.

 

 

 

Martin H. Moyer, Plaintiff v. Jess Mathas, Clerk of the Circuit Court of Volusia County , Florida , A. J. O'Donnell, Jr., District Director of Internal Revenue for the District of Florida, and United States of America , Defendants

U. S. District Court, Middle Dist, Fla., No. 69-736-Civ-J, 332 FSupp 357, 5/10/71

[Code Secs. 6323 and 6502--Result unchanged by '69 Tax Reform Act]

Collection: Validity of tax lien: Collection after assessment: Levy: Statute of limitations: Lien independent of levy: Personal judgment against taxpayer: Florida.--A notice of levy served on the clerk of a county court in Florida was void because it was filed more than six years after the date unpaid income taxes were assessed against the taxpayer. The clerk held surplus proceeds from the sale of property previously owned by the taxpayer and which she had conveyed to the plaintiff after the government had filed a tax lien against the property. The government was still entitled to the surplus held by the clerk, as opposed to the purchaser-plaintiff, by reason of its properly filed tax lien notices for the assessments made against the taxpayer. A personal judgment against the taxpayer extended the life of the tax liens beyond the initial six year period provided by Code Sec. 6502. The court further held that the liens were not merged into the judgment, but continued to exist independently of it, and that the tax liens were separately enforceable.

[Code Secs. 6213 and 7402--Result unchanged by '69 Tax Reform Act]

Deficiency restrictions: Assessment: Review of assessment requested by purchaser of property in collection suit.--The purchaser of the taxpayer's property could not dispute the validity of the income tax assessments against the taxpayer. The court held that the right to review a tax deficiency assessment is personal to the taxpayer.

William R. Frazier, 816 Atlantic Nat'l Bank Bldg., Jacksonville , Fla. , for plaintiff. John Briggs, United States Attorney, John R. Roberts, Assistant United States Attorney, Jacksonville, Fla., Park T. Zimmerman, Department of Justice, Washington, D. C. 20530, for defendants.

Findings of Fact and Conclusions of Law Findings of Fact

SCOTT, District Judge:

This Court having considered the pleadings, the stipulation of fact and the oral and written arguments of the parties and the exhibits hereby finds the following as fact:

1. The United States made assessments of federal income tax, penalties and interest against Maggie P. Tookes-transferee, on October 21, 1949 , as set out below:

                                       Date of

                                    Assessment

Period              Type of         and Notice               Amount            Payments                 Amount

of Tax                  Tax         and Demand             Assessed         and Credits            Outstanding

1942 ......       Income          10-12-49              $ 7,646.00T          $ 2,768.47

                                                          3,823.00P           17,500.00

                                                          3,015.87I            1,207.00             $14,484.87

1943 ......       Income          10-12-49               28,598.52T            2,900.00

                                                         14,299.26P            1,725.00

                                                          9,564.44I           16,402.71              52,462.22

                                                                               2,882.45

1944 ......       Income          10-12-49               16,917.98T

                                                          8,458.99P

                                                          4,642.94I                                  30,019.91

1945 ......       Income          10-12-49                5,073.40T

                                                          2,536.70P

                                                          1,087.93I                                   8,698.03

1946 ......       Income          10-12-49                2,023.01T

                                                          1,011.51P

                                                            312.43I                                   3,346.95

                  Total                                                      $45,385.63       [TEH] * $61,089.65

*--This figure does not reflect unassessed accrued interest.

T--Tax

P--Fraud Penalty, Section 3612 d(2) I. R. S. Code of 1939.

I--Interest

2. Subsequent to notice of and demand for payment as aforesaid, the taxpayer, Maggie P. Tookes neglected, failed and refused to pay the assessments and there remains due and owing on the assessments the sum of $61,089.65, plus interest according to law.

3. On October 11, 1955, suit was filed by the United States of America in the United States District Court for the Southern District of New York against Maggie P. Tookes and others to reduce the federal tax liability set out in Paragraph 1 above to judgment.

4. A default judgment was entered for the United States and against Maggie P. Tookes on February 23, 1962, in the amount of $106,242.51 representing the assessed tax liability and interest accrued to that date.

5. Notices of federal tax liens for the assessments were filed with the Clerk of the Circuit Court of Volusia County, Florida, on October 22, 1949, and were refiled on December 27, 1967.

6. On and after October 12, 1949, Maggie P. Tookes owned an interest in certain lands described as Lots 5 and 11 and the South 1/2 of Lot 6, except the Northeast 8 acres and the South 1/2 of Lot 10, Section 5, Township 18 South, Range 31 East, Volusia County , Florida .

7. On May 14, 1958, Maggie P. Tookes conveyed by warranty deed the property described in paragraph 6, above, to the plaintiff, Martin H. Moyer.

8. On December 1, 1969, the defendant, Jess Mathas, conducted a tax deed sale of the lands described in paragraph 6, above, in connection with Tax Certificate No. 894, Volusia County , Florida issued June 1, 1965, and covering said lands.

9. The base bid fixed in the sale described in paragraph 7, above, was in the amount of $6,907.42. As a result of the sale, there were surplus funds in the hands of the Clerk of the Circuit Court of Volusia County, Florida, at the time of the institution of this action in the amount of $28,792.58.

10. On December 2, 1969, the United States served a notice of levy upon the defendant, Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida, demanding payment of the entire amount of the surplus in the Registry of the Court, in the amount of $28,792.58.

11. The plaintiff contemporaneously with the levy described in paragraph 9, above, made demand upon the defendant, Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida, for payment to him of the surplus funds in the Registry of the Court as the owner of the land which had been sold at the tax deed sale.

12. On December 8, 1969, the plaintiff filed this action seeking to recover the sum of $28,792.58 and for certain other equitable relief.

Conclusions of Law

1. This Court has jurisdiction over the parties and the subject matter of this action.

2. The notice of levy served on the defendant, Jess Mathas, by the United States on December 2, 1969, is untimely and void. (26 U. S. C. 6502(a)).

3. Notices of federal tax liens for the assessments made against the taxpayer, Maggie P. Tookes, were properly filed with the Clerk of the Circuit Court of Volusia County, Florida, on October 22, 1949, and were properly refiled on December 27, 1967, and attach to the fund which is the subject of this action. (26 U. S. C. 6323(g)(4) and 6321).

4. The personal judgment against Maggie P. Tookes obtained by the United States on February 23, 1962, extended the life of the federal tax liens beyond the initial six year period as provided in 26 U. S. C. 6502(a). These liens were not merged into the judgment but continued to exist independently of it and the tax liens are separately enforceable. (26 U. S. C. 6322; United States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746 (C. A. 2, 1966), cert. dismissed, 386 U. S. 901 (1967); United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1147 (C. A. 9, 1970).

5. The plaintiff, not being the taxpayer in this case, may not attack the validity or merits of the tax assessments made against Maggie P. Tookes. (Falik v. United States [65-1 USTC ¶9295], 343 F. 2d 38, 41 (C. A. 2, 1965); Graham v. United States [57-1 USTC ¶9645], 243 F. 2d 919 (C. A. 9, 1957); United States v. Pearson [66-2 USTC ¶9726], 258 F. Supp. 686, 689 (DC SD N. Y., 1966); Quinn v. Hook [64-2 USTC ¶9609], 231 F. Supp. 718, affirmed [65-1 USTC ¶9273] 341 F. 2d 920 (DC Pa., 1964); and Commercial Credit Corp. v. Schwartz [55-1 USTC ¶9190], 126 F. Supp. 728 (DC Ark., 1955)).

6. The defendant, counterclaimant and cross-claimant, United States , is entitled to have its federal tax liens foreclosed on the fund of $28,792.58 on deposit with the Registry of the Circuit Court of Volusia County, Florida.

7. Plaintiff, Martin H. Moyer, is not entitled to be paid the funds on deposit in the Registry of the Circuit Court of Volusia County, Florida, nor is he entitled to the equitable relief that is prayed for in his complaint.

Judgment

This cause came before the Court on the stipulation of the parties and the Court having considered the pleadings, the exhibits, the pretrial stipulation, the written memorandum of law and the oral arguments previously presented; and it appearing to the Court that the plaintiff, Martin H. Moyer, is not entitled to judgment on his complaint, and that the defendant, United States of America is entitled to judgment on its counterclaim and cross-claim; it is;

ORDERED, ADJUDGED AND DECREED, that the defendant, United States of America, has valid and subsisting liens securing the tax liability of Maggie P. Tookes and that these liens attached to the fund of $28,792.58 in the possession of the defendant, Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida, it is further;

ORDERED, ADJUDGED AND DECREED, that the liens of the United States be foreclosed on the fund of $28,792.58 in the possession of Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida and that the said Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida is ordered to pay over the $28,792.58 to the United States of America and that said sum be applied to the payment of the tax liability of Maggie P. Tookes; it is further;

ORDERED, ADJUDGED AND DECREED, that the defendant, United States of America recover its costs expended herein.

 

 

 

Martin H. Moyer, Plaintiff v. A. J. O'Donnell, Jr., District Director of Internal Revenue for the District of Florida, and United States of America, Defendants

U. S. District Court, Middle Dist. Fla., Civil Action No. 70-90-CIV-J, 5/10/71

[Code Secs. 6322 and 6323(g)(4)--Result unchanged by '69 Tax Reform Act and Sec. 6502(a)--Prior to amendment by P. L. 89-719]

Tax liens: Priority: Filing and refiling of notice: Effectiveness as against purchaser of real property.--The Government was entitled to have its liens foreclosed on funds already in its possession where notices of federal tax liens for assessments made against the taxpayer were properly filed on October 22, 1949, and properly refiled on December 27, 1967. Its lien, therefore, had priority over that of a third party who purchased realty from the taxpayer in 1958. A personal judgment obtained by the Government against the taxpayer in 1962 extended the life of the liens beyond the six-year limitation period and did not cause the liens to be merged into the judgment. Instead, they continued to exist independently and were separately enforceable.

William R. Frazier, Jacksonville , Fla. , for plaintiff. John D. Roberts, Ass't U. S. Attorney, Jacksonville, Fla., Park T. Zimmerman, Dept. of Justice, Washington, D. C. 20530, for defendant.

Findings of Fact

SCOTT, District Judge:

The Court having considered the stipulation of parties, the pleadings, exhibits, and the written and oral arguments finds the following facts:

1. On the dates and in the amounts set forth below, federal taxes were assessed by a delegate of the Secretary of the Treasury against Maggie P. Tookes, transferee for income taxes, interest and penalties and contemporaneously, notice and demand for payment thereof was made upon the taxpayer, Maggie P. Tookes, transferee, as follows:

                                   Date of

                                Assessment

Period             Type         and Notice              Amount            Payments                 Amount

of Tax           of Tax         and Demand            Assessed         and Credits            Outstanding

1942             Income           
10-12-49
        $ 7,646.00 T          $ 2,768.47

                                                    3,823.00 P           17,500.00

                                                    3,015.87 I            1,207.00             $14,484.87

1943             Income           
10-12-49
         28,598.52 T            2,900.00

                                                   14,299.26 P            1,725.00

                                                    9,564.44 I           16,402.71              52,462.22

                                                                          2,882.45

1944             Income           
10-12-49
         16,917.98 T

                                                    8,458.99 P

                                                    4,642.94 I                                  30,019.91

1945             Income           
10-12-49
          5,073.40 T

                                                    2,536.70 P

                                                    1,087.93 I                                   8,698.03

1946             Income           
10-12-49
          2,023.01 T

                                                    1,011.51 P

                                                      312.43 I                                   3,346.95

Total                                                                   $45,385.62            * $61,089.65

*--This figure does not reflect unassessed accrued interest.

T--Tax.

P--Fraud Penalty, Section 3612 d(2) I. R. S. Code of 1939.

I--Interest.

2. Subsequent to notice and demand for payment the taxpayer, Maggie P. Tookes, transferee, neglected, failed and refused to pay the assessments described in Paragraph I above and there remains due and owing on said assessments the sum of $61,089.65, plus interest according to law.

3. Notice of federal tax liens for the assessments were filed with the Clerk of the Circuit Court of Volusia County, Florida, on October 22, 1949, and were refiled on December 27, 1967.

4. On October 11, 1955, suit was filed by the United States of America in the United States District Court for the Southern District of New York against Maggie P. Tookes and others to reduce the federal tax liabilities to judgment. A default judgment was entered for the United States and against Maggie P. Tookes on February 23, 1962, in the amount of $106,242.51 representing the assessed tax liability and interest to the date of judgment.

5. On and after October 12, 1949, Maggie P. Tookes owned an interest in certain real property located in Volusia County, Florida, more particularly described as Lot 4 and the North 1/4 of Lost 5, and the West 5 chains of the South 1/2 of the North 1/2 of Lot 5, Section 6, Township 18 South, Range 31 East, Volusia County, Florida.

6. On May 14, 1958, Maggie P. Tookes conveyed by warranty deed the property described in paragraph 5, above, to the plaintiff, Martin H. Moyer.

7. On July 7, 1969, Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida, conducted a tax deed sale of the land described in paragraph 5, above, in connection with tax Certificate No. 895, Volusia County , Florida . The base bid was fixed at the sum of $4,597.29. As a result of this sale, there was a surplus fund created in the amount of $16,402.71.

8. On July 8, 1969, the United States served a notice of levy on Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida, and on August 7, 1969, the Clerk paid over the surplus funds in his possession in the amount of $16,402.71 to the United States pursuant to the above-described notice of levy.

9. On February 19, 1970, the plaintiff filed this action seeking to recover judgment against the United States in the amount of $16,402.71.

10. The parties hereto have agreed and stipulated that in order for the United States to prevail in this action it will be necessary for it to foreclose the unpaid tax liens against the fund of $16,402.71 and that if the Court rules that the United States is entitled as a matter of law to foreclose its tax liens against this fund it will be unnecessary for the United States to redeposit any of the funds with the Registry of the Court and sue upon them but the United States shall be entitled to retain the funds previously levied in partial payment of the tax liability of Maggie P. Tookes.

Conclusions of Law

1. This Court has jurisdiction over the parties and subject matter of this action.

2. The notice of levy and final demand served by the United States on Jess Mathas, Clerk of the Circuit Court of Volusia County, Florida, on July 8, 1969 , are untimely and void. (26 U. S. C. 6502(a)).

3. Notices of federal tax liens for the assessments made against the taxpayer, Maggie P. Tookes, were properly filed with the Clerk of the Circuit Court of Volusia County, Florida, on October 22, 1949 , and were properly refiled on December 27, 1967 , and attached to the fund which is the subject matter of this action. (26 U. S. C. 6323(g)(4) and 6322).

4. The personal judgment obtained against Maggie P. Tookes by the United States on February 23, 1962, extended the life of the federal tax liens beyond the initial six-year period provided in 26 U. S. C. 6502(a) and these liens were not merged into the judgment but continued to exist independently of it and the tax liens are separately enforceable. (26 U. S. C. 6322; United States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746 (C. A. 2, 1966), cert. dismissed, 386 U. S. 901 (1967); United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1147 (C. A. 9, 1970)).

5. The plaintiff, not being the taxpayer in this case, may not attack the validity or merits of the tax assessments made against Maggie P. Tookes. (Falick v. United States, [65-1 USTC ¶9295], 343 F. 2d 38, 41 (C. A. 2, 1965); Graham v. United States [57-1 USTC ¶9645], 243 F. 2d 919 (C. A. 9, 1957); United States v. Pearson [66-1 USTC ¶9448], 258 F. Supp. 686, 689 (DC SD N. Y., 1966); Quinn v. Hook [64-2 USTC ¶9609], 231 F. Supp. 718, affirmed [65-1 USTC ¶9273] 341 F. 2d 920 (D. C. Pa., 1964); and Commercial Credit Corp. v. Schwartz, [55-1 USTC ¶9190], 126 F. Supp. 728 (DC Ark., 1955) and 26 U. S. C. 7426(c)).

6. Defendant , United States of America , is entitled to have its federal tax liens foreclosed on the fund of $16,402.71 presently in its possession and thus the United States is entitled to retain the fund and apply it against the tax liability of Maggie P. Tookes. (Pretrial stipulation, Par. 7(c), p. 11.)

7. The plaintiff, Martin H. Moyer, is not entitled to be paid the fund of $16,402.71 as demanded in his complaint and judgment should be entered in favor of the defendant, United States of America , and against the plaintiff, Martin H. Moyer.

 

 

 

United States of America, Plaintiff-Appellee v. James A. Overman, Marie T. Overman, Circle J. Inc., a corporation, Defendants-Appellants

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 23,866, 424 F2d 1142, 4/8/70, Aff'g District Court, 69-1 USTC ¶9251

[Code Secs. 6321 and 6322]

Lien for taxes: Community property: Washington: Premarital tax obligation.--The separate tax liabilities of the taxpayer husband were liens upon his undivided one-half interest in property of his marital community. The Government had a valid lien on the taxpayer's undivided one-half interest in the marital community, the lien was enforceable against the community assets as to which foreclosure was sought, and the Government was not precluded from enforcing its lien by limitations or laches.

[Code Sec. 7403]

Action to enforce lien: Community property: Premarital tax obligation: Foreclosure.--The taxpayer's undivided one-half interest in community property was subject to tax liens, and those liens could be enforced by foreclosure against assets of the community. From the proceeds of the sale, the Government received such share attributable to the taxpayer's interest, due regard being given to the compensation of those persons, including the taxpayer's wife, whose interests had been established in the property.

Karl Schmeidler, Johnnie M. Walters, Assistant Attorney General, Department of of Justice, Washington, D. C. 20530, Stan Pitkin, United States Attorney, Seattle, Wash., Gale D. Barbee, 1515 Norton Bldg., 801 Second Ave., Seattle Wash., Ralph Bremer, 4th Follor, Hoge Bldg., 705 Second Ave., Seattle Wash., for plaintiff-appellee. Loren D. Prescott, Reaugh, Hart, Allison, Prescott & Davis, 1100 IBM Bldg., 1200 Fifth Ave., Seattle, Wash., for defendants-appellants.

Before BARNES, ELY, and HUFSTEDLER, Circuit Judges.

HUFSTEDLER, Circuit Judge:

This interlocutory appeal raises novel questions about the creation and enforcement of federal tax liens on Washington community property to secure payment of a husband's premarital income tax liability.

[Facts]

In 1954 the Internal Revenue Service levied deficiency assessments against the taxpayer in respect of his income taxes for the years 1946 and 1947. The taxpayer married Marie Overman in 1948. When the taxpayer failed to meet the deficiency demand, a notice of federal tax liens was filed with the proper Washington state officials. The Government sued in 1960 to recover judgment against the taxpayer for the tax liabilities underlying the assessments, and a judgment for $109,709.56 in favor of the Government was rendered in 1961. The judgment recited that it was "individually only, and not against his marital community." The Government brought the present action on August 2, 1967, under section 7403 of the Internal Revenue Code (26 U. S. C. §7403), to enforce the liens, joining as defendants the taxpayer, his wife, and certain other persons claiming an interest in the property attached. ¹

In the order from which this appeal has been taken the district court decided that the Government had a valid lien on the taxpayer's undivided one-half interest in the marital community, that the lien was enforceable against the community assets as to which foreclosure was sought, and that the Government was not precluded from enforcing its lien by limitations or laches, or by the doctrines of res judicata, estoppel, or waiver. We affirm the order.

[Rights to Property]

I. Section 6321 of the Internal Revenue Code (26 U. S. C. §6321) provides that the amount of the delinquent taxpayer's liability "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 statute incorporates state law for the limited purpose of ascertaining whether or not the taxpayer's interest is "property" or "rights to property." (Aquilino v. United States (1960) [60-2 USTC ¶9538] 363 U. S. 509; United States v. Bess (1958) [58-2 USTC ¶9595] 357 U. S. 51.) If state law raises the taxpayer's interest to the status of property or rights to property, federal law will cause a lien to attach to that interest. We must thus turn to Washington law to determine whether the taxpayer's interest in the community property constitutes "property" or "rights to property" belonging to him. We believe that it is.

[ Washington Law]

Under Washington law the marital community, with certain stated exceptions, is composed of all property acquired by the spouses after marriage. (Rev. Code Wash. §§ 26.16.010, 26.16.020, 26.16.030.) The interest of each spouse in the community is an intangible asset, giving each spouse an equal, present, and vested right in the marital community with full rights of enjoyment. (In re Towey's Estate (1945) 22 Wash. 2d 212, 155 P. 2d 273; Marston v. Rue (1916) 92 Wash. 129, 159 P. 111.) The interest of each in the community is protected from certain acts of the other that would impair his interest. (E.g., Occidental Life Ins. Co. v. Powers (1937) 192 Wash. 475, 74 P. 2d 27; Bergman v. State (1936) 187 Wash. 622, 60 P. 2d 699; Rev. Code Wash. §§ 26.16.030, 26.16.040, 26.16.100.) Each spouse can sell or give his community to the other during the life of the community (Rev. Code Wash. §26.16.050), and each has the right of testamentary disposition of his moiety. (In re Towey's Estate, supra; Rev. Code Wash. §§ 11.04.050, 26.16.030.)

These incidents accorded to the taxpayer by virtue of his interest in the marital community make it appropriate to characterize that interest as "rights to property" for purposes of section 6321. The interest gives the taxpayer present, vested, and substantial rights to the property of the community, and that interest has been described by both the Supreme Court of Washington and the Supreme Court of the United States as a "vested property right." (In re Towey's Estate, supra; Poe v. Seaborn (1930) 282 U. S. 101, 111.) No more is needed to identify the interest as one to which a federal tax lien can attach. We disapprove the contrary conclusion reached in Stone v. United States (W. D. Wash. (1963) [64-1 USTC ¶9204] 225 F. Supp. 201).

[Entity Theory]

The taxpayer contends, however, that his interest in the community is made nonattachable by the Washington rule that the community is generally immune from liability for a husband's premarital debt. ² While admitting that a state rule of exemption is ineffective against a United States tax lien (United States v. Heffron (9th Cir.) [47-1 USTC ¶9194] 158 F. 2d 657, cert. denied (1947) 331 U. S. 831), the taxpayers argues that the Washington rule is more than that. He contends that the rule is one of property law, and creates a limitation on the extent and quality of his ownership rights under state law. Even assuming that this characterization of Washington law is correct, all that section 6321 requires is that the interest be "property" or "rights to property." It is of no statutory moment how extensive may be those rights under state law, or what restrictions exist on the enjoyment of those rights. Similarly, taxpayer's reliance on the "entity theory" of community property is misplaced. Early Washington cases suggest that neither spouse has title to the assets of the community, ³ but our concern here is with the taxpayer's interest in the community. Whatever may be said with regard to his interest in particular assets in the community, Washington law has never suggested that his interest in the community is nonexistent or valueless. ⁴ Thus, neither the rule of nonliability nor the entity theory negates our conclusion that the taxpayer's interest constitutes "rights to property."

The attachment of a tax lien under section 6321 and the enforcement of the lien under section 7403 of the Code present different questions. From the conclusion that a lien attaches, the further conclusion that these particular liens may be foreclosed or otherwise enforced in a particular manner does not automatically follow.

[Enforcement of the Lien]

We agree with the Government that the right of the United States to enforce its liens on Washington community property does not depend on Washington law regulating the rights of creditors generally. The result is sometimes reached by labeling as an "exemption" state law immunizing some kinds of property against the claims of some kinds of creditors and by concluding that such law does not bind the United States (E.g., United States v. Heffron, rupra.) Labels aside, state law regulating creditors' rights does not apply to the United States because the United States has not looked to state law to decide how to enforce federal tax liens (Aquilino v. United States, supra, 363 U. S. at 512-14), and nothing in section 7403, under which this action was brought, suggests that Congress intended to change that rule.

Section 7403 provides that the Government in an action to enforce its tax lien may "subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." It requires joinder of all parties having an interest in the property, and, if a claim of the United States is established, "the court may decree a sale of such property . . . and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and the United States ."

Once the lien has been established, the statute empowers the district court to subject the whole of the property in which the delinquent taxpayer has an interest to a forced sale. The power is not limited to the sale of only the delinquent taxpayer's interest. ( United States v. Trilling (7th Cir. 1964 [64-1 USTC ¶9292] 328 F. 2d 699, 703; accord, Washington v. United States (4th Cir. 1968) [68-2 USTC ¶15,864] 402 F. 2d 3, cert. filed (Dec. 13, 1968) 38 U. S. L. W. 3001 (no. 22); United States v. Mosolowitz (D. Conn. 1967) [67-1 USTC ¶9350] 269 F. Supp. 12. Contra, Folsom v. United States (5th Cir. 1962) [62-2 USTC ¶9648] 306 F. 2d 361, 367.) Thus, the statute contemplates that the district court may subject the interests of persons other than the taxpayer to an involuntary conversion during the course of enforcing the Government's lien on the delinquent taxpayer's interest in the same property. The owners other than the taxpayer, however, are entitled to just compensation from the proceeds of the sale for that "taking."

We emphasize that section 7403 is cast in mandatory terms only in respect to the establishment of the Government's lien, the joinder of all persons interested in the property involved, and the determination of their respective interests. The remainder of the section confers broad discretionary powers upon the court in shaping a decree designed to work substantial justice among all interested persons. "Congress [in enacting §7403] intended that the Court function with the full traditional flexibility of the Chancellor, United States v. Morrison, 5 Cir., [57-2 USTC ¶9801] 247 F. 2d 285." ( United States v. Boyd (5th Cir.) [57-2 USTC ¶9791] 246 F. 2d 477, cert. denied (1957) 355 U. S. 889.)

[Reliance on State Law]

In shaping its decree the court, however, must turn to state law to define the property interests involved. Under Washington law, as we have earlier stated, each spouse has an undivided one-half interest in the marital community. ⁵ The Government cannot claim from the proceeds of sale more than that share of the proceeds attributable to the taxpayer's half of the community interest in the asset. It cannot reach the proceeds attributable to the wife's interest. Her interest was not subject to attachment for her husband's premarital tax debt, and the Government's right to share in the proceeds of sale does not exceed the taxpayer's interest in the property subjected to the lien. (Cf. Stuart v. Willis (9th Cir. 1957) [57-1 USTC ¶9330] 244 F. 2d 925, 929; United States v. Winnett (9th Cir. 1947) [48-1 USTC ¶9115] 165 F. 2d 149, 151.)

We therefore conclude that the district court correctly held that the taxpayer's undivided one-half interest in the community was subject to the tax liens, and that those liens could be inforced by foreclosure against assets of the community. From the proceeds of the sale, the Government should receive such share attributable to the taxpayer's interest, due regard being given to the compensation of those persons, including the taxpayer's wife, whose interests have been established in the property.

The district court has not shaped a final decree. Nothing in the record before us on this interlocutory appeal suggests that the court has abused its discretion in causing a forced sale of the property or in allocating the proceeds of a sale to the persons having interests in such property.

[Lapse of Time]

II Enforcement of the Government's liens on the taxpayer's interest in the community is not barred by limitations, laches, or equitable estoppel.

The tax liens that the Government seeks to enforce in the present action arose in 1954, when taxpayer failed to respond to a notice of assessment issued by the District Director of Internal Revenue. (26 U. S. C. §6321.) Under section 6322 of the Code, those liens were to continue until the underlying liability was satisfied or became "unenforceable by reason of lapse of time." (26 U. S. C. §6322.) ⁶ The Government brought suit to recover judgment upon the liability underlying the assessments before the expiration of the six-year statute of limitations upon the collection of an assessment. (26 U. S. C. §6502(a).) The life of the liens was thereby extended beyond the initial six-year period. (Hector v. United States (5th Cir. 1958) [58-1 USTC ¶9372] 255 F. 2d 84; United States v. Ettelson (7th Cir. 1947) [47-1 USTC ¶9137] 159 F. 2d 193.) The 1961 judgment entered in the suit again extended the enforceability of the liability and thus the life of the liens. Although a lien based on that judgment is subject to state-created limitations (28 U. S. C. §1962; Fred R. Civ. Proc. 69(a)), the judgment itself is not subject to limitations and is enforceable at any time. (United States v. Ettelson, supra, 159 F. 2d at 196; Investment & Securities Co. v. United States (9th Cir. 1944) 140 F. 2d 894, 896; Plumb, "Federal Tax Collection and Lien Problems" (1958) 13 Tax L. Rev. 247, 250-51.) ⁷ The tax liens are merged neither into the judgment nor into the judgment liens; they continue to exist independently of either. (United States v. Hodes, (2d Cir. 1966) [66-1 USTC ¶9232] 355 F. 2d 746, cert. dismissed (1967) 386 U. S. 901.) The tax liens are enforceable at any time, because the underlying liability has been merged into the 1961 judgment and that liability cannot become "unenforceable by reason of lapse of time." (United States v. Ettelson, supra; Investment & Securities Co. v. United States, supra; Plumb, supra.)

[Laches]

The United States is not subject to the defense of laches in enforcing its rights. (United States v. Summerlin (1940) [40-2 USTC ¶9633] 310 U. S. 414, 416.) No case has been made out by the appellants for the application of the doctrine of equitable estoppel, even if the doctrine were otherwise applicable to the Government.

The appellants claim that the assertion of the Government's lien against taxpayer's interest in the community is foreclosed by the recitation in the 1961 judgment that it was "individually only, and not against his marital community."

[Conclusion]

Under Washington law a personal judgment against a married man is presumed to be against the community. (E.g., La Framboise v. Schmidt (1953) 42 Wash. 2d 198, 254 P. 2d 485.) The purpose of the recitation was to make clear that the judgment was against the taxpayer for a separate, not a community, debt. No greater significance can be attributed to the recitation.

The interlocutory is AFFIRMED, and the cause is REMANDED for further proceedings.

¹ Some of the property involved is community property, some is separate property, and the status of the remainder property is yet undetermined. Only three of the original defendants are appellants: the taxpayer, Marie Overman, and Circle J., Inc.

² The rule was modified to some extent in 1969. Laws of 1969, Ex. Sess., ch. 121, amending Rev. Code Wash. §26.16.200. But the new statute has been given solely prospective application. National Bank of Commerce v. Green (1969) -- Wash. App. --, 463 P. 2d 187. An established exception to the rule is that a divorced wife may collect alimony from personal property of the husband's second marital community. Fisch v. Marler (1939) 1 Wash. 2d 698, 97 P. 2d 147.

³ Stockland v. Bartlett (1892) 4 Wash. 730, 331 P. 24; Ryan v. Ferguson (1891) 3 Wash. 356, 28 P. 910; but of. Bortle v. Osborne (1930) 155 Wash. 585, 285 P. 425.

⁴ Compare United States v. Hutcherson (8th Cir. 1951) [51-1 USTC ¶9249] 188 F. 2d 326, discussing the Missouri estate by the entirety.

⁵ The undivided nature of that interest is not impermeable under state law, however. See Fisch v. Marler, supra note 2. We have no occasion, therefore, to decide the enforceability of a federal tax lien against property in which owners have an absolutely indivisible interest under state law. Compare Shaw v. United States (9th Cir. 1964) [64-1 USTC ¶9421] 331 F. 2d 493, 497, with Jones v. Kemp (10th Cir. 1944) [44-2 USTC ¶9410] 144 F. 2d 478, 480.

⁶ We are dealing with §6322 as it stood prior to amendment by the Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1146. Pursuant to §114 of the Act, reproduced in the Historical Note to 26 U. S. C. A. §6323, the Government in its brief offered to treat the appeal under either the old or the new §6322 at the appellants' election. Appellants did not respond. Because the new section appears to have removed any merit from appellants' argument (see J. Mertens, Federal Income Taxation (1969) §54.66.28), we are applying the earlier version to the issues on this appeal.

⁷ Appellants' brief states: "When Federal statutes do not provide otherwise, state law will prevail respecting periods of limitation and enforcement of judgments rendered by a Federal court." This overlooks the established rule that a state statute of limitation cannot run against the United States unless a federal statute permits. United States v. Summerlin (1940) [40-2 USTC ¶9633] 310 U. S. 414, 416; United States v. Rose (3d Cir. 1965) 346 F. 2d 985, 990, cert. denied sub nom. Aetna Ins. Co. & United States (1966) 382 U. S. 979.

 

 

 

United States of America , Plaintiff-Appellant v. Nelle A. Hoper, et al., Defendants-Appellees

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 11909, 242 F2d 468, 3/20/57, Aff'g in part and reversing and remanding in part the District Court decision, 56-2 USTC ¶9729, 144 F. Supp. 281

[1939 Code Sec. 3772(d)--similar to 1954 Code Sec. 7422(c)]

Taxpayer's income tax liability: Res judicata: Adjudication by state Probate Court.--A lien for taxes which the government sought to satisfy out of the proceeds of life insurance in the hands of the deceased taxpayer's beneficiaries arose out of a deficiency against the taxpayer based on a determination that income derived from a family partnership was attributable to the taxpayer. Except for allowance of the tax claim against taxpayer's estate by the Probate Court of Illinois--the claim was disputed and the estate was represented by the same counsel representing the defendant-beneficiaries in this suit--there had never been a determination of the legality of the deficiency. The District Court held that the allowance of the tax claim by the Probate Court was res judicata. On appeal, the Court pointed out that if defendants could prove that taxpayer had no tax liability, it would follow that the lien was without foundation. However, defendants did not attempt to disprove the correctness of the District Court's determination but attempted to argue the merits of the tax claim. In sustaining the District Court's determination on this point, this Court held that the Probate Court's determination was a final adjudication. Since defendants in their capacity as beneficiaries were in privity, the state court's adjudication was res judicata.

[1939 Code Sec. 3670--1954 Code Sec. 6321 similar; 1939 Code Sec. 3672(a)--1954 Code Sec. 6323(a) similar]

Lien for taxes: Proceeds of life insurance in hands of beneficiaries: Beneficiaries as "purchasers" entitled to notice.--The life insurance policies in question were purchased by the taxpayer who paid all the premiums, retained the rights to change beneficiaries, assign the policies, borrow on them, and the right to the cash surrender value. The government obtained its lien during lifetime of the taxpayer against his right to the cash surrender value of the policies which were not payable to him or to his estate. In reversing the District Court, this court held that the lien to the extent of the cash surrender value survived taxpayer's death. E. S. Behrens (CA-2) 56-1 USTC ¶9294, 230 F. 2d 504 followed. The court pointed out that solvency or insolvency of the taxpayer is immaterial to the issue in this type of case; that the beneficiaries were not "purchasers" for the purpose of notice of tax lien requirements; that exemption of insurance proceeds under state law is ineffective against statutory lien for federal taxes; and that the District Court's decision that the government's claim for taxes against taxpayer did not constitute a lien against the insurance proceeds was not a finding of fact but a conclusion of law whose correctness was a matter for consideration on appeal.

Robert Tieken, United States Attorney, John Peter Lulinski, Richard C. Bleloch, Donald S. Lowitz, Chicago, Ill., Charles K. Rice, Lee A. Jackson, Washington, D. C., for plaintiff-appellant. Jack Arnold Welfeld, Donald H. Sanborn, 231 South LaSalle, Chicago , Ill. , for defendants-appellees.

Before LINDLEY and SWAIM, Circuit Judges, and WHAM, District Judge.

SWAIM, Circuit Judge:

This is an action to enforce a lien of the United States for income tax upon the property of a delinquent taxpayer to the payment of such tax. The question presented is whether a government lien for delinquent income taxes obtained pursuant to Section 3670, 26 U. S. C. A. (I. R. C. 1939), in the lifetime of the taxpayer against the taxpayer's interest in life insurance policies on his life, i.e., their cash surrender values, the policies not being payable to the taxpayer or his estate, survives his death as against the designated beneficiaries. The policies in question were purchased by the taxpayer who paid all of the premiums on the policies and retained the right to change the beneficiary, the right to assign the policies, the right to borrow on the policies and the right to the cash surrender value of the policies.

[Government's Lien Survives Death of Taxpayer]

The District Court [56-2 USTC ¶9729] was of the opinion that, since the right to the cash surrender values came to an end with the taxpayer's death, the lien did not attach to the proceeds in the hands of the beneficiaries to the extent of the cash surrender values which were available to the taxpayer immediately prior to his death. This holding is contrary to the decision of the Court of Appeals for the Second Circuit in United States v. Behrens, 230 Fed. (2d) 504[56-1 USTC ¶9294], aff'g 130 Fed. Supp. 93 (E. D. N. Y.) [55-1 USTC ¶9259], certiorari denied 351 U. S. 919. The facts in that case for all relevant purposes are the same as those here and, with the exception of certain matters hereinafter discussed, the court considered the same contentions which the defendants advance here. We agree with the analysis and result in the Behrens case and no useful purpose would be served by any elaboration on the views expressed therein.

[Solvency or Insolvency Immaterial]

Defendants attempt to distinguish the Behrens case on the ground that the decedent-taxpayer there was insolvent prior to his death and his estate was insolvent after his death, whereas the decedent-taxpayer here was solvent prior to his death and his estate was solvent after his death. The simple answer to this is that, except as to questions of priority that might have arisen had the taxpayer or his estate been insolvent, R. S. §3466, 31 U. S. C. A. §191, the taxpayer's solvency or insolvency is not legally relevant where the government is enforcing a tax lien against property which has been transferred gratuitously after the lien has attached. Defendants have confused the present proceeding with the situation that would exist were the government trying to subject defendants to liability enforceable against them as transferees under Section 311, 26 U. S. C. A. (I. R. C. 1939). See 9 Mertens, Law of Federal Income Taxation §§ 53.10, 53.36 (1943). This difference results from the nature of the two remedies, although both afford the legal mechanics for the collection of delinquent taxes. Transferee liability is predicated upon the obligation of the transferee at law or in equity to discharge the liability of the taxpayer-transferor to the extent of the property received. 26 U. S. C. A. (I. R. C. 1939) §311(a)(1). Liability in equity exists where, for example, the taxpayer disposes of his assets without receiving adequate consideration and the transfer leaves the taxpayer insolvent and unable to meet his tax liability, or the taxpayer was insolvent at the time of the transfer. Since a solvent individual may dispose of his assets as he sees fit, recovery is conditioned upon a showing that the taxpayer was insolvent and that the transfer was therefore to the detriment of the rights of the transferor's creditors. See Tyson v. Commissioner of Internal Revenue, 6 Cir., 212 Fed. (2d) 16[54-1 USTC ¶9353]. But see United States v. Bess, D. C. N. J., 134 Fed. Supp. 467 [55-2 USTC ¶9673]. Liability at law exists where, for example, the transferee agrees to pay the obligations of the taxpayer-transferor. SeeShepard v. Commissioner of Internal Revenue, 7 Cir., 101 Fed. (2d) 595 [39-1 USTC ¶9248], certiorari denied 307 U. S. 639. In this latter situation, however, it is not necessary that there be a showing of the insolvency of the taxpayer-transferor. See Helvering v. Wheeling Mold & Foundry Co., 4 Cir., 71 Fed. (2d) 749 [4 USTC ¶1304]; American Equitable Assur. Co. of New York v. Helvering, 2 Cir., 68 Fed. (2d) 46 [1933 CCH ¶9613].

[Exhaustion of Remedies Immaterial]

But in the instant case the lien liability is based upon the government's legal claim upon the property of the delinquent taxpayer until the tax debt is discharged and the property therefore passes into the hands of a subsequent party subject to the lien regardless of the transferee's status as donee, mortgagee, creditor or purchaser. 26 U. S. C. A. (I. R. C. 1939) §§ 3670, 3671, 3672(a); Michigan v. United States , 317 U. S. 338. The only condition to the enforcement of this right is that the government have a valid lien. Defendants also insist that the government failed to exhaust its legal remedies against the taxpayer during his lifetime and is therefore precluded from recovering in this action. Again the defendants have confused and failed to distinguish the nature of this proceeding with the remedy afforded by Section 311. Since transferee liability in most instances is derivative, recovery against transferee is conditioned, in part, upon the exhaustion of remedies against the taxpayer-transferor whose liability is primary. See 9 Mertens, Law of Federal Income Taxation §53.29 (1943). But the exhaustion of remedies as with the taxpayer's solvency or insolvency is foreign to the issues presented by a proceeding to enforce a government tax lien.

Furthermore, the government did exhaust its remedies against the taxpayer while he lived. The taxes were assessed against him on March 14, 1947, and demand for payment was made on April 18, 1947. On May 11, 1947, the taxpayer died. Thereafter, on June 8, 1948, the government filed a claim against his estate. The government did not, however, exercise its authority to collect the taxes by distraint and sale of the taxpayer's property. 26 U. S. C. A. (I. R. C. 1939) §§ 3690, 3700. Assuming equitable considerations have some place in this proceeding, surely the sudden death of the taxpayer cannot be held against the government and inure to the benefit of defendants. Nor is there anything inequitable or arbitrary about the government's pursuing the defendants to collect the taxpayer's delinquent taxes. The Probate Court allowed the claim of the United States for the taxes against the taxpayer's estate. But after the payment of administration expenses in the amount of $30,573.86, only $3,560.72 was available to be applied to the discharge of the $43,091.98 tax liability. The only remaining assets were the surrender values of the taxpayer's insurance policies.

[Beneficiaries as Purchasers]

Defendants next insist that as against them the lien which attached to the taxpayer's assets during his lifetime was not perfected because notice thereof was filed on October 24, 1947, subsequent to the payment of the proceeds of the insurance policies to the beneficiaries by the respective insurers. They rely on Section 3672(a), 26 U. S. C. A. (I. R. C. 1939), which provides that liens shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed by the collector. They claim that beneficiaries receiving the proceeds of insurance policies take as purchasers under the law of Illinois . SeePeople v. Petrie, 191 Ill. 497, 61 N. E. 499. In the first place, the proceeds of certain of the policies were paid to defendants as beneficiaries on June 3, 1948, which was subsequent to the filing of the notice. Secondly, the determination of who is a purchaser within the meaning of Section 3672 is a federal question, and state decisions and statutes providing that certain acquisitions of property shall be deemed "purchases" are not controlling. United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137];United States v. Hawkins, 9 Cir., 228 Fed. (2d) 517[56-1 USTC ¶9143]. The Supreme Court stated inUnited States v. Scovil, 348 U. S. at 221, that a "purchaser within the meaning of §3672 usually means one who acquires title for a valuable consideration in the manner of vendor and vendee." And in United States v. Hawkins, 228 Fed. (2d) at 519, the court stated that: "Purchaser here[§3672] means buyer no matter who may be given the rights of a purchaser under state law." So defined, defendants are clearly without the scope of "purchaser" as used in Section 3672, for the taxpayer paid the premiums on the policies in question and there is no evidence or claim that defendants contributed anything thereto.

[Exemption of Proceeds Under State Law]

Along similar lines, defendants insist that their liability is wholly dependent upon state law and that Ill. Rev. Stat. (1955) c. 73, §850, exempts insurance proceeds from execution, attachment, garnishment or other process for collection of debts or liabilities of the insured. If the government were proceeding under Section 311, 26 U. S. C. A. (I. R. C. 1939), against defendants on the theory of transferee liability the exemption statute might well be entitled to consideration, see Rowen v. Commissioner of Internal Revenue, 2 Cir., 215 Fed. (2d) 641 [54-2 USTC ¶9581]; United States v. New, 7 Cir., 217 Fed. (2d) 166[54-2 USTC ¶9706], but exemptions provided by state law are ineffective against the statutory lien of the United States for federal taxes. Knox v. Great West Life Assur. Co. , 6 Cir., 212 Fed. (2d) 784 [54-1 USTC ¶9373]; United States v. Heffron, 9 Cir., 158 Fed. (2d) 657[47-1 USTC ¶9194], certiorari denied 331 U. S. 831. This distinction is clearly stated in United States v. Behrens, 2 Cir., 230 Fed. (2d) 504, 506 [56-1 USTC ¶9294], and by the District Court in the same case at 130 Fed. Supp. 93, 96 [55-1 USTC ¶9359].

[District Court's Decision a Conclusion of Law]

Defendants' next point seems to be that the District Court's decision that the government's claim for taxes against the taxpayer did not constitute a lien against the insurance proceeds or the cash surrender vlaue of such policies in the hands of the beneficiaries is a finding of fact and consequently cannot be set aside unless clearly erroneous. A simple reading of the District Court's memorandum opinion and conclusions of law reveals the fallaciousness of the premise on which the argument is based. In its memorandum opinion the court stated:

"As to the Government's contention that the lien has now attached to the proceeds of the insurance policies to the extent of their cash surrender value as of the date of the taxpayer's death, this Court, with due respect to eminent authority to the contrary [presumably the Behrens case], does not agree with the theory."

And Conclusion of Law No. 3 reads as follows:

"The lien of the United States for taxes assessed against Carl Hoper, which during his life attached to the cash surrender value of the insurance policies owned by him, did not survive his death."

It is hardly necessary that we point out that these are not findings of fact, but are conclusions of law whose correctness is a matter on which this court must exercise its independent judgment.

[Res Judicata]

The taxpayer's liability in this case is based upon the disallowance of a family partnership by the Commissioner. Income derived from the partnership's business activities, which otherwise would have been taxable to certain limited partners, was attributed to the taxpayer. Except for the allowance of the tax claim against the estate of the taxpayer by the Probate Court of Cook County, Illinois, there has never been a judicial determination of the legality of the Commissioner's action and the resulting tax liability. The defendants in the proceeding below sought to show the validity of the partnership for federal tax purposes, but the District Court upheld the government's contention that by reason of the allowance of the tax claim against the taxpayer's estate by the Probate Court the claim is res judicata. Defendants have not cross-appealed from this determination nor have they questioned its correctness or argued that it is erroneous, but have proceeded here to argue the merits of the tax claim. Needless to say, they have put the proverbial cart before the horse. The District Court, in view of its determination that the doctrine of res judicata precluded inquiry into the merits of the tax claim, never reached the merits, and obviously the merits never will be reached unless the District Court was in error. The government, evidently as confused as we are by the obliqueness of defendants' argument, has not tried to support the District Court's holding on this point. Thus this court does not have the benefit of respective counsel's argument and briefs on the question of the applicability of the doctrine of res judicata to the facts of the instant case.

The liability of defendants, although dependent upon the government's tax lien, is based fundamentally upon the existence of a tax liability on the part of the taxpayer. If the defendants can prove that the taxpayer had no tax liability, it would follow that the asserted lien is without foundation in fact or in law and that the government could not succeed in this action. However, we agree with the District Court that the determination by the Probate Court of the personal tax liability of the decedent-taxpayer precludes consideration anew of the merits of his liability. Cf. Maryland Casualty Co. v. United States , Ct. Cl., 32 Fed. Supp. 746 [40-1 USTC ¶9452].

As noted above, on June 8, 1948 , a proof of claim for the income taxes in question was filed in the taxpayer's estate. The claim was disputed and the estate was represented in the proceedings by the same counsel representing defendants in the instant case. The claim was allowed in full on January 24, 1952 , and the balance of assets in the amount of $3,560.72 remaining after the payment of administrative expenses was paid to the government in partial satisfaction of the $43,091.98 tax claim.

The allowance of a claim against a decedent's estate in the Probate Court is a judgment, and the adjudication of allowance is final and conclusive on the parties as to the matters in dispute unless the judgment is reversed or set aside on appeal or review. United States v. Paisley , N. D. Ill., 26 Fed. Supp. 237; Sinnickson v. Perkins, 137 Ill. App. 10, aff'd 231 Ill. 492, 83 N. E. 194. Since no appeal was taken and the time therefor has expired, the decree has become final and cannot be collaterally attacked. Moore v. Sievers, 336 Ill. 316, 168 N. E. 259; People for use of Stough v. Danforth, 293 Ill. App. 280, 12 N. E. 2d 227. Defendants in their capacity as beneficiaries of the life insurance policies are successors in interest of the taxpayer to the extent of the cash surrender values. There is therefore in this situation the requisite privity and defendants are consequently bound by the judgment of the Probate Court determining the taxpayer's liability and they took the cash surrender values subject to this liability. First National Bank v. Commissioner of Internal Revenue, 7 Cir., 112 Fed. (2d) 260 [40-1 USTC ¶9472], certiorari denied 311 U. S. 691.

For the reasons set forth above, that part of the judgment of the District Court holding that the decedent-taxpayer's tax liability is res judicata is affirmed, and that part of the judgment holding that the tax lien did not attach to the cash surrender value of the insurance policies in the hands of the beneficiaries is reversed and the cause remanded for further proceedings consistent with this opinion

AFFIRMED in part, REVERSED in part ANDREMANDED.

 

 

 

Allen F. Marshall, et ux., Marguerite Marshall, Plaintiffs v. United States of America , Defendant

U. S. District Court, East. Dist. Tex., Sherman Div., Civil Action No. 1249, 158 FSupp 793, 1/29/58

[1939 Code Sec. 3746--similar to 1954 Code Sec. 7405]

Action for recovery of erroneous refund: Bankruptcy: Debt to Government not due as tax.--In 1952, the United States secured judgments against the taxpayers for repayment of erroneous refunds for the tax year 1943. In 1954, the taxpayers were discharged in bankruptcy and released from all provable debts. There were no deficiency assessments against them for 1943. The Government's suit was for the repayment of moneys erroneously paid to the taxpayers by an officer of the United States . It was not a suit for taxes levied, and the judgments in favor of the United States did not create debts due as taxes. For this reason, the judgments were debts which were discharged by the subsequent bankruptcy of the taxpayers, leaving the Government with no valid judgment lien on the taxpayers' real property.

Allen Eades, Dallas , Tex. , Joe A. Keith, Sherman , Tex. , for plaintiffs. William M. Steger, United States Attorney, Tyler, Tex., John L. Burke, Jr., Assistant United States Attorney, Tyler, Tex., Charles K. Rice, Assistant Attorney General, Washington, D. C., Richard M. Roberts, Robert Coe, of the U. S. Department of Justice, Washington, D. C., for defendant.

Memorandum Decision

SHEEHY, District Judge:

The Plaintiffs, who are husband and wife, instituted this suit seeking to quiet title to three tracts of land situated in Grayson County, Texas, owned by the Plaintiffs, and which tracts of land are the same lands described in the Designation of Homestead dated October 15, 1954, and recorded in Volume 775, Page 114, Deed Records of Grayson County, Texas, on which the Defendant claims judgment liens by virtue of certain judgments previously entered in this Court in favor of the United States of America in Causes Nos. 576 and 577 on the docket of this Court. The Defendant admits that it is asserting said judgment liens against said lands and by way of counterclaims seeks a foreclosure of its alleged judgment liens against said lands.

The pertinent facts are without dispute and are as hereinafter stated.

[Government Won Judgment for Recovery of Refund]

On September 14, 1948, the Defendant paid Allen F. Marshall the sum of $4,276.13 as a refund of overpayment of his 1943 income tax, and on the same date paid to Marguerite Marshall the sum of $3,933.60 as a refund of overpayment of her 1943 income tax; on September 12, 1950, the Defendant herein instituted Civil Action No. 576 in this Court seeking to recover from Allen F. Marshall the sum of $4,276.13 refunded to him, as aforesaid, and on said date instituted Civil Action No. 577 in this Court seeking to recover from Marguerite Marshall the sum of $3,933.60 refunded to her, as aforesaid; on December 15, 1952, in Cause No. 576 judgment was rendered in favor of the United States of America and against Allen F. Marshall for the sum of $4,276.13 refunded to him plus interest and cost, and on the same date in Cause No. 577 judgment was rendered in favor of the United States of America and against Marguerite Marshall for the $3,933.60 refunded to her plus interest and cost; on October 21, 1954, Plaintiffs were adjudged bankrupt in Bankruptcy Proceedings No. 1460 in this Court; the Defendant herein was listed as a judgment creditor in the Schedule of Creditors filed by the bankrupts, Plaintiffs herein; the Defendant herein filed claim in said bankruptcy proceedings as judgment creditor of the bankrupts by virtue of the judgments in Civil Actions Nos. 576 and 577 for the amount of said judgments, accrued interest thereon and court costs, which claim was allowed as an unsecured claim without priority; a dividend was paid by the Trustee in Bankruptcy to the Defendant herein on its said claim; on July 22, 1955, an order of discharge was entered in said bankruptcy proceedings discharging the Plaintiffs herein "from all debts and claims which by the Act of Congress relating to Bankruptcy are made provable against his estate, except such debts as are, by said Act, excepted from the operation of a discharge in bankruptcy;" and thereafter the Defendant herein had the judgments, above referred to, abstracted and an abstract of each judgment was filed in the office of the County Clerk of Grayson County, Texas, on October 22, 1955, with the Abstract of Judgment in Cause No. 576 being recorded in Volume, 9, Page 146 of the Abstract of Judgment Records of Grayson County, Texas, and with the Abstract of Judgment in Cause No. 577 being recorded in Volume 9, Page 145 of the Abstract of Judgment Records of Grayson County, Texas.

The three tracts of land, above mentioned, constitute the homestead of Plaintiffs and at all times pertinent hereto constituted said homestead.

[Debt for Erroneous Refund Not Due as Tax]

The board question presented is whether the judgments in favor of the United States of America and against the Plaintiffs herein for Internal Revenue taxes erroneously refunded were discharged by the subsequent bankruptcy of the Plaintiffs so as to free the real property of the Plaintiffs described in their complaint of the judgment liens arising by virtue of said judgments. The Bankruptcy Act (11 U. S. C. A. 1952 ed., Sec. 35) provides, in effect, insofar as here pertinent, that a discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except as are due as a tax levied by the United States. If Plaintiffs' discharge in the bankruptcy proceedings released Plaintiffs from their debts to the Defendant herein by virtue of the judgments entered in Causes Nos. 576 and 577, the Defendant has no lien on Plaintiffs' real property here involved, but if said discharge in bankruptcy did not release Plaintiffs from said debts, the Defendant has valid judgment liens on said real property of Plaintiffs to the extent of the unpaid balance on said judgments and would be entitled to a foreclosure of said liens as prayed for in its counter-claims. The narrow question to be decided is whether Plaintiffs' debts to the Defendant created by the judgments in Causes Nos. 576 and 577 are debts "due as a tax levied by the United States " within the meaning of 11 U. S. C. A. 1952 ed., Sec. 35.

The tax year here involved is 1943. There is no indication that the Commissioner of Internal Revenue ever made or attempted to make a deficiency assessment against the Plaintiffs, or either of them, as to their 1943 income taxes. Absent evidence to the contrary it must be assumed that the Plaintiffs timely filed by not later than March 15, 1944, their respective income tax returns for the year 1943, and at the time such income tax returns were filed the full amounts of income taxes owed by Plaintiffs on their 1943 incomes as shown by their returns were paid. Even if there were additional liability on the part of the Plaintiffs, or either of them, for the 1943 income tax, the Government, under the provisions of Sec. 275 of the 1939 Internal Revenue Code, was barred from asserting any such additional liability against the Plaintiffs, and each of them, at the time the refunds were made to Plaintiffs in September, 1948.

[Debts Discharged by Bankruptcy]

Were the suits (Causes Nos. 576 and 577) instituted by the United States against the Plaintiffs herein, the Defendants therein, suits for taxes levied by the United States ? I think not. When the Plaintiffs paid their respective income taxes for the year 1943, such taxes as to the Plaintiffs were extinguished and the subsequent refunds to the Plaintiffs of a portion or all of the money paid by them as 1943 income taxes did not restore the taxes. ¹ Defendant's suits against the Plaintiffs (Causes Nos. 576 and 577) were no more than what they appeared to be, i.e., demands for the repayment to the Government of moneys which had been illegally and by mistake paid by an officer of the United States to the Plaintiffs herein, and, therefore, the sums found to be due the United States in those cases as set out in the judgments in those cases were not debts of the Plaintiffs due the United States as a tax levied by the United States, and this is so notwithstanding the provisions of Sec. 3746(b), Internal Revenue Code of 1939. It is well established that the Government by appropriate action can recover funds which its agents have wrongfully, erroneously or illegally paid to another, and no statute is necessary to authorize the United States to sue in such a case, the right to sue being independent of statutory authorization. ² Sec. 3746 of the Internal Revenue Code of 1939 did not grant the Government a new right with reference to recovering for an erroneous tax refund but only placed a limitation on the Government's long established right to sue for money wrongfully or erroneously paid from the public treasury. ³

Judgment will be entered decreeing that the judgments in said Causes Nos. 576 and 577, above referred to, were extinguished and discharged by the order of discharge in Bankruptcy Proceedings No. 1460 in this Court, above referred to, quieting Plaintiffs' title to the lands described in Plaintiffs' complaint and denying Defendant all relief sought by it herein.

This Memorandum Decision will constitute the Findings of Fact and Conclusions of Law herein as authorized by Rule 52, F. R. C. P.

¹ Talcott v. United States (9th Cir.) 23 Fed. (2d) 897, 901 [1 USTC ¶279], certiorari denied 277 U. S. 604; Kelley v. United States (9th Cir.) 30 Fed. (2d) 193 [1 USTC ¶357]; Woolner Distilling Co. v. United States (7th Cir.) 62 Fed. (2d) 228 [1933 CCH ¶9021]; United States v. Bartron (D. C., Northern District of S. D.) 35 Fed. (2d) 765, 767 [1930 CCH ¶9057].

² United States v. Wurts, 303 U. S. 414, 415 [38-1 USTC ¶9183].

³ United States v. Wurts, supra.

 

 

 

United States of America , Plaintiff v. Orlando P. Colamatteo, Norma N. Colamatteo, James V. Colamatteo, Oak Park Trust & Savings Bank, Elsie Whitley, Maywood Proviso State Bank, Eugene and Diane Serotini, Home State Bank of Crystal Lake , Defendants

U.S. District Court, No. Dist. Ill. , East. Div., 83-C-7439, 8/28/86

[Code Secs. 6322 and 6502 ]

Lien for taxes: Period of lien: State law limitation on enforcement of judgment.--The government's action to set aside allegedly fradulent conveyances made by the taxpayer in order to foreclose a tax assessment lien against him was not time-barred because the government had obtained a judgment within the six-year limitation period. Although the time period for enforcing the judgment had expired under state law, the tax lien was not unenforceable since it continued to exist independently of the suit which extended its existence. Also, the limitation period of Code Sec. 6501 did not prevent inclusion of the transferee of the conveyed properties because she was not sued personally as a transferee, but was named as a defendant to collect a judgment against the taxpayer.

Anton R. Valukas, United States Attorney, Joan Laser, Assistant United States Attorney, Chicago, Ill. 60604, Thomas R. Jones, Department of Justice, Washington, D.C. 20530, for plaintiff. Walter J. Binder, Jr., Abbamonto, Szura & Biner, 21 Northwest Highway, Cary, Ill. 60013, James M. Pauletto, Gregory Catrambone, 401 Madison St., Maywood, Ill. 60153, Ira M. Burman, Theodore A. Sinars, Harris, Burman, Sinars, and Jiganti, 135 S. LaSalle St. 60603, Vincent F. Lucchese, Lucchese, McNish, Wognum & Koeppel, 7 S. Dearborn St. 60603, for defendants.

MEMORANDUM OPINION

CHARLES P. KOCORAS, District Judge:

The United States brought this civil action to set aside allegedly fraudulent transfers of real property by defendant Orlando Colamatteo to defendant Elsie Whitley and to foreclose federal tax liens against the interest of Colamatteo and his wife, defendant Norma Colamatteo, in that property. Whitley and the Colamatteos have moved to dismiss the complaint on the ground that it is time-barred. For the following reasons, the motions are denied.

Unpaid income taxes for the years 1954 through 1964 were assessed against the Colamatteos in 1958 through 1964. The liens arising from these assessments have been renewed as required by 26 U.S.C. §6323(g)(3) . In November 1964, the United States obtained a default judgment against the Colamatteos in the amount of $282,771.51 based on the unpaid taxes. That judgment has not been paid, but the United States has failed to renew the judgment lien since 1976. The Colamatteos' liability for the unpaid taxes remains unsatisfied.

In October 1983, the government filed this action to set aside an allegedly fraudulent conveyance by Orlando Colamatteo to his mother-in-law, Whitley, of his interests in a parcel of real property referred to by the parties as "Parcel B." The United States also seeks to foreclose the tax liens against the Colamatteos' interest in Parcel B. Whitley and the Colamatteos contend that this action is time-barred.

A judgment rendered by a district court is a lien on property located in the state in which the district court sits in the same manner, to the same extent, and under the same conditions as a judgment of a court of general jurisdiction in that state and ceases to be a lien in the same manner and time. 28 U.S.C. §1962. The Illinois Revised Statutes provide that a judgment may not be a lien on real estate longer than seven years from the time it was rendered or revised. Ill. Rev. Stat. ch. 110, ¶12-101. Illinois statutes further provide that a judgment may not be enforced more than seven years after it is rendered, unless it is properly revised. Ill. Rev. Stat. ch. 110, ¶12-108. Thus, when this action was filed in 1983, the 1964 judgment gave the government neither a lien on the Colamatteos' real property nor the right to execute on that property. See United States v. Kellum, 523 F.2d 1284, 1287-88 (5th Cir. 1975).

Although the government concedes that the judgment lien is presently unenforceable, the government argues that the tax liens arising from the assessments are still valid and enforceable. Under 26 U.S.C. §6322 , a tax assessment lien continues until the liability for the amounts assessed is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 . The phrase "by reason of lapse of time," must be read in light of 26 U.S.C. §6502 which permits collection of the assessed tax "by a proceeding in court, but only if . . . the proceeding [is] begun within 6 years after the assessment of the tax. See Moyer v. Mathas [72-1 USTC ¶9342 ], 458 F.2d 431 (5th Cir. 1972); United States v. Mandel [75-1 USTC ¶9141 ], 377 F. Supp. 1274, 1276-77 (S.D. Fla. 1974). The suit commenced in this district in 1964 satisfied this requirement.

Tax assessment liens, unlike most liens which arise under state law, continue to exist independently of the suit which extended their existence. United States v. Hodes [66-1 USTC ¶9232 ], 355 F.2d 746, 749 (2d Cir. 1966); see also United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142, 1147 (9th Cir. 1970). Because the tax lien does not merge into the judgment, the tax lien remains enforceable even after the period for bringing the suit on the judgment has expired. Mandel, 377 F. Supp. at 1277. Therefore, the tax liens against the Colamatteos' property are valid and enforceable.

Elsie Whitley has moved to dismiss the complaint as to her on the ground that no collection proceeding was commenced against her within six years of assessment of the taxes as required by 26 U.S.C. §6502 , applied to transferees by 26 U.S.C. §6901 . Section 6901 governs assessments against and collection from transferees and does not apply to actions to set aside fraudulent conveyances, actions brought ancillary to collection actions against assessed taxpayers. Hall v. United States [68-2 USTC ¶9665 ], 403 F.2d 344, 345 (5th Cir. 1968). Whitley has not been sued personally as a transferee; rather, she is named as a defendant because the government seeks to set aside an allegedly fradulent conveyance of property to her and to satisfy the Colamatteos' tax liability from that property. Thus, neither section 6502 nor 6901 applies to bar the action against Whitley.

 

 

 

United States of America , Plaintiff v. Polan Industries, Inc., Defendant

U. S. District Court, So. Dist. W. Va., Huntington, Civil Action No. 1018, 196 FSupp 333, 7/25/61

[1954 Code Secs. 6321, 6322 and 6502]

Tax liens: Debt owed taxpayer by third party: State statute of limitations.--When the Government filed its notice of tax liens against a delinquent taxpayer, a state statute of limitations governing the collection by the taxpayer of a debt owed to it by a third party was tolled as to the Government. Thus, a notice of levy served upon the third party after the state statute of limitations would have barred collection of the debt by the delinquent taxpayer was valid. The statute had not run at the time that the Government acquired its right in the taxpayer's property, and it was not necessary for the Government to bring suit to enforce the right itself (the pre-existing indebtedness) before the state statute of limitations expired. The Government was entitled to judgment for the amount of its tax claim against the third party, the indebtedness to the taxpayer being in excess of the tax claim.

Duncan W. Daugherty, United States Attorney, Suite 300, First Huntington National Bank Bldg., Huntington, West Virginia (Louis F. Oberdorfer, Assistant Attorney General, 1625 Eye St., N. W., Richard M. Roberts, Norman E. Bayles, Department of Justice, Washington, D. C., on brief), for Plaintiff. E. Jackson Boggs (Fitzpatrick, Huddleston & Bolen, 900 First Huntington National Bank Bldg., Huntington, West Virginia, on brief), for Defendant.

WATKINS, District Judge:

The question to be decided in this case is whether a state statute of limitations is effectively tolled, in favor of the tax collecting authority of the United States and against a debtor of the taxpayer, when the United States makes its assessment against the taxpayer rather than when the United States sues the debtor.

On May 16, 1958, a delegate of the Secretary of the Treasury of the United States made an assessment against the Huntington Processing and Packaging Company, Huntington , West Virginia , for income taxes incurred by that company. The assessment was made for the fiscal year ending June 30, 1955, and in the total amount of $36,370.76. Notice of and demand for payment of the aforementioned tax liability were made upon the Huntington Processing and Packaging Company on May 16, 1958. Notice of the federal tax lien was filed with the Clerk of the Cabell County Court , Huntington , West Virginia , on June 2, 1958. No payments have been made against this indebtedness and there is now an outstanding balance due and owing by the Huntington Processing and Packaging Company upon said assessment of $36,370.76 together with interest and costs as provided by law.

[Third-Party Debtor]

Prior to the assessment and starting in 1954, loans had been made by the Huntington Processing and Packaging Company to the defendant, Polan Industries, Inc. These loans were reflected in the books of Polan Industries, Inc., and totalled $153,500.00. Apparently no other written evidence of the indebtedness was ever given. The books of Polan Industries, Inc., further show that two payments were made by Polan Industries, Inc., to the Huntington Processing and Packaging Company, thereby reducing the outstanding balance due to Huntington Processing and Packaging Company to $127,500.00.

On June 23, 1959, the Secretary of the Treasury caused a Notice of Levy to be served upon the defendant to satisfy the tax liability of Huntington Processing and Packaging Company. The notice demanded that the defendant turn over all property in its possession belonging to the taxpayer, Huntington Processing and Packaging Company, to the extent of the then outstanding tax liability, including accrued interest of $38,444.54. The defendant refused and has to this date refused to turn over this amount to the plaintiff or its representative. The present action was commenced by the filing of the complaint with this court on April 21, 1960.

Jurisdiction of this action is conferred upon this court by Section 1340 and 1345 of Title 28, United States Code, and Section 6332 of the Internal Revenue Code of 1954, in that this is a civil action arising under the Internal Revenue laws of the United States wherein the United States seeks to recover a judgment pursuant to Section 6332 of the Internal Revenue Code of 1954.

The defendant was permitted to amend its answer and, by so amending, now relies solely on the defense of the statute of limitations. The defendant asserts that the obligation it incurred by accepting loans from the Huntington Processing and Packaging Company is governed by the five year statute of limitations of West Virginia Code, ch., 55, art. 2, §6 (Michie 1955); that the commencement of a suit by Huntington Processing and Packaging Company would be necessary to stop the running of the statute of limitations; that since the United States has stepped into the shoes of the Huntington Processing and Packaging Company, it too had to file suit to stop the running of the statute of limitations; that at the time the United States commenced this action (April 21, 1960) the defendant was indebted to Huntington Processing and Packaging Company for only $13,500.00; that the balance of the debt was barred by the statute limitations; and that, therefore, the United States is likewise barred from recovery on that balance.

[Government's Defense to Statute]

The United States has met this defense with the assertion that a state statute of limitations does not run against the United States once it has acquired a right in the taxpayer's property; that the moment the tax assessment is made is the moment of such acquisition, according to applicable Internal Revenue statutes; and that, therefore, the state statute of limitations was tolled at the moment of tax assessment, notwithstanding the fact that the taxpayer's property is in the form of a debt owed by a third party against whom the United States is now proceeding.

The parties agree to the general rule that the United States is not subject to state statutes of limitation once the United States has acquired an interest in the taxpayer's property. The parties also agree that the applicable statute of limitations is one of five years under West Virginia Code, ch. 55, art. 2, §6 (Michie 1955). Thus, the one issue for decision is whether the act of tax assessment against the Huntington Processing and Packaging Company on May 16, 1958, effectively tolled the statute of limitations applicable to the debt owed to that company by the defendant, so that the United States may now satisfy the full tax indebtedness of Huntington Processing and Packaging Company by collecting that amount from the debt owed to that company by Polan Industries. Stated another way: Was the United States able to stop the running of the applicable statute of limitations only by starting a suit since it stepped into the shoes of the creditor-taxpayer against the debtor, Polan Industries, Inc.; and, therefore, is the United States limited to a recovery of $13,500.00 from the debtor of the taxpayer since the United States did not start its suit until April 21, 1960?

The parties have agreed that should the court decide the issue of the statute of limitations in favor of the defendant, then the court will enter judgment for the plaintiff and against the defendant in the amount of $13,500.00 with interest from June 23, 1959, and without costs. Conversely, should the question of the statute of limitations be decided in favor of the plaintiff and against the defendant, then judgment will be entered for the sum of $38,444.54 with interest thereon from June 23, 1959, and costs.

[Derivative Suit As to "Right" Only]

The main thrust of defendant's argument is that the United States is in exactly the same legal relationship to the defendant as that legal relationship which exists between Huntington Processing and Packaging Company and the defendant. This is so, says the defendant, because the United States is seeking to satisfy a tax liability of Huntington Processing and Packaging Company by recovering part of an amount owed to that company by one of its debtors. The right, therefore, upon which the United States proceeds is derivative. Thus, continues the defendant, if Huntington Processing and Packaging Company had to sue to stop the running of the statute of limitations, so also is the United States bound to sue in order to stop the running of the statute.

Defendant's position is only partially correct, and that portion which is incorrect is fatal to defendant's cause.

The general rule, undisputed in this case, is that a state statute of limitations does not run against the United States once the United States acquires its right. United States v. Summerlin [40-2 USTC ¶9633], 310 U. S. 414 (1939). The defendant claims an exception to this rule where, as here, the right upon which the United States is proceeding has been derived from a pre-existing creditor-debtor relationship between the taxpayer and defendant; that, therefore, the United States must not only acquire the right but also must sue on that right in order to stop the running of the statute of limitations. But the derivative nature of the right upon which the United States is proceeding is relevant only at the moment that right is acquired, and at no time thereafter. Further, the element of derivation goes only to the right and not to the remedy for the enforcement of that right. If, at the moment the United States acquired the right to proceed against defendant that right possessed an infirmity, then the United States would be subject to the infirmity because the United States takes the right exactly as it is in the hands of the one from whom it is derived. This is the point where the derivative nature of the right is pertinent; however, once the right has been acquired by the United States , no infirmity may attach to bar its enforcement unless, of course, the United States has consented to be bound by a subsequent infirmity. The fact that the statute of limitations on the debt would have continued to run as against Huntington Processing and Packaging Company and in favor of the defendant, does not aid the defendant against the United States . Once the rights in that debt have been acquired by the United States , then the United States is not subject to the same limitations on the remedy for that right which existed when the right was in the hands of the Huntington Processing and Packaging Company. These principles are well-illustrated by the cases of United States v. Nashville, C. & St. L. R. Co., 118 U. S. 120 (1886) and United States v. Summerlin, supra.

[Precedent Cases]

The Nashville case involved a suit by the United States for interest payable on negotiable bonds owned by the United States , which bonds had been purchased by the United States before maturity from third parties. The defense asserted was the state statute of limitations which had not run at the time of purchase by the United States , but which had run at the time of suit. The language of the Court is clear:

"It is settled beyond doubt or controversy--upon the foundation of the great principle of public policy, applicable to all governments alike, which forbids that the public interests should be prejudiced by the negligence of the officers or agents to whose ears they are confided--that the United States, asserting rights vested in them as a sovereign government, are not bound by any statute of limitations, unless Congress has clearly manifested its intention that they should be so bound. (citing cases)

"The nature and legal effect of any contract, indeed, are not changed by its transfer to the United States . When the United States , through their lawfully authorized agents, become the owners of negotiable paper, they are obliged to give the same notice to charge an endorser as would be required of a private holder. (citing cases) They take such paper subject to all the equities existing against the person from whom they purchase at the time when they acquire their title; and cannot therefore maintain an action upon it, if at that time all right of action of that person was extinguished, or was barred by the statute of limitations. (citing cases)

"But if the bar of the statute is not complete when the United States become the owners and holders of the paper, it appears to us * * * impossible to hold that the statute could afterwards run against the United States ." 118 U. S. at pp 125-126

In the Summerlin case the Federal Housing Administrator, acting on behalf of the United States , had become the assignee of a claim against the estate for which the defendant was ancillary administratrix. The United States filed its claim against the estate after the statute of limitations for filing ordinary claims against estates had passed, and the lower courts held that the United States was barred. The Supreme Court of the United States reversed, again using extremely clear language:

"When the United States becomes entitled to a claim, acting in its governmental capacity, and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement." 310 U. S. at p. 417.

The defendant, in its reply brief, has attempted to distinguish these cases from the one at bar by asserting that in both of these cases the government had become the actual owner of the choses-in-action, as opposed to proceeding, as in this case, as a third-party against a pre-existing creditor-debtor relationship; and by asserting, therefore, that in both of these cases the government was acting not in a derivative capacity but in its governmental capacity. This attempted distinction has no merit. The United States , when proceeding on a claim derived from a pre-existing creditor-debtor relationship in order to obtain tax revenues, is acting in a governmental capacity just as much as it is when the claim is not a derivative one. As pointed out above, the derivative element is relevant only as to infirmities existing in the claim at the moment of acquisition by the United States . It has no bearing on subsequent obstacles to the enforcement of that claim.

The issue in this case has been passed on only in one other case. The case of United States v. Jacobs [57-2 USTC ¶9918], 155 F. Supp. 182 (D. N. J. 1957) involved loans made by the taxpayer over a period of time. A notice of levy was served upon the debtor and the debtor defended on the ground that the applicable six year statute of limitations had expired, thereby barring the creditor taxpayer (hence barring the United States ) from bringing suit on the debt. The case is thus on all fours with the one at bar. The court held that the running of the statute of limitations on the debt was tolled at the moment the government's lien arose which, under the Internal Revenue Code of 1939, was at the time the Collector of Internal Revenue received the assessment list. The court in effect held, therefore, that the derivative nature of the government's claim was of no importance as to the remedy on that claim--i.e., the derivative element would not alter the rule suspending the statute of limitations at the moment of acquisition.

It is important to note that the Jacobs decision was based on Section 3670 and 3671 of the Internal Revenue Code of 1939. The counterparts of these sections in the Internal Revenue Code of 1954 are Sections 6321 and 6322. Section 6321 (and Section 3670 of the 1939 Code) create the lien for taxes and are substantially the same, Section 6321 being quoted here:

"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."

However, Section 6322 of the Internal Revenue Code of 1954 contains an important alteration from the language of its counterpart in the Code of 1939, Section 3671. Section 3671 of the 1939 Code provided that the lien created by Section 3670 should arise at the time the assessment list was received by the collector. This was the section with which the Jacobs decision was concerned. Its counterpart, Section 6322 of the 1954 Code, provides that the lien created by Section 6321 shall arise at the time the assessment is made. Neither section makes a distinction and exception, as defendant would have us do, where the lien is derived from a pre-existing creditor-debtor relationship between the taxpayer and the defendant. And the court in the Jacobs decision has not seen fit to read this distinction and exception into them.

[Third-party's Alleged Distinctions]

The defendant seeks to dilute the influence of the Jacobs decision: A. by referring to it as dictum; B. by arguing that such a holding is an unjust burden on the debtor of the taxpayer in that said debtor ought to be able to rely on the statute of limitations applicable to the relationship with his creditor as determinative of the length of his liability; C. by pointing out that the holding serves only to increase the already lopsided advantages the government possesses as far as the collection of taxes is concerned. Each of these contentions will be discussed in turn.

A. The charge of dictum has little effect outside of relieving the possible pressure provided by the principle of stare decisis. Granting, arguendo, that a particular discussion may be unnecessary to the decision in a case (and therefore becomes dictum) the discussion is of no less importance to the decision in later cases if the reasoning which supports it is sound. The Jacobs case saw no reason to judicially provide an exception to the rule, that the statute of limitations does not run against the government, where the government's claim was based upon a pre-existing creditor-debtor relationship between the taxpayer and the defendant. The statute provided (as Section 6321 now provides) that the tax lien of the United States was upon all property and rights to property, whether real or personal, belonging to the taxpayer. Int. Rev. Code of 1939, §3670. The statute did not contain, nor does it today contain, any indication of Congressional intent to subject the government, under the circumstances of this and the Jacobs case, to the exception which the defendant has suggested. The immunity of the sovereign from the defense of the statute of limitations is, unless expressly waived, implied in all Federal enactments. Jackson County v. United States , 308 U. S. 343, 351 (1939). Thus, the general rule as to tolling the statute of limitations at the moment of acquisition applies until "* * * Congress has clearly manifested its intention that they shall be so bound." United States v. Nashville C. & St. L. R. Co., supra.

B. To judge this point in defendant's critique of the Jacobs case it is necessary, first of all, to remember the nature of a statute of limitation. A statute of limitation is merely a legislative device to prevent unjust harassment of debtors and on the contrary to compel assertion of legal rights within reasonable time limits. It must also be remembered that the statute of limitations does nothing to a valid obligation outside of preventing its enforcement. The obligation still exists and may be reviewed for enforcement by certain well-recognized acts. In our society the proper assumption should be that people enter into contractual obligations with an eye toward honoring these obligations rather than, as defendant suggests, with an eye toward becoming entitled to a statutory defense to the obligation by reason of lapse of time. The atmosphere of distrust created by this latter approach would be far worse than the inconvenience provided by the extended time for liability under the Jacobs decision.

The defendant also points to the possibility of double payment by the debtor of the taxpayer. In this regard, there is ample protection afforded. The government acquires its lien by the assessment; however, in order to place the debtor under an obligation to pay only to the government, levy and demand must be made. Int. Rev. Code of 1954, §6332a. There is little doubt that, prior to this procedure, if the debtor had no actual notice of the government's lien he could discharge his debt, and escape liability to the government, by payment to the creditor. United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (4th Cir. 1955).

C. There is probably no other aspect of governmental activity that is more roundly criticized than the tax collecting activity. If lopsided advantages have accrued to the government in this area, perhaps these advantages are necessary in order that the sovereign may obtain the revenues which are vital to its existence and vital to its task of providing for the general welfare; nevertheless, some of these criticisms may be salient, but in cases where the law is clear the court must enforce it, salient criticism to the contrary notwithstanding. In these areas legislative correction, rather than judicial manipulation, is the proper course to be followed.

This court holds that a lien in favor of the United States attached to the bedt owed to the taxpayer, Huntington Processing and Packaging Company, by the defendant, Polan Industries, Inc., when the tax assessment was made against Huntington Processing and Packaging Company on May 16, 1958; that the creation of this lien tolled the statute of limitations on the debt as against the United States; and, therefore, that the United States is entitled to judgment of $38,444.54 with interest thereon from June 23, 1959, and costs against defendant Polan Industries, Inc.