District Where Filed Page1

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[CCH Dec. 55,381(M)]
Louis Fusaro v. Commissioner.

Docket No. 13282-01L , TC Memo. 2003-345, 86 TCM 731, Filed December 29, 2003 . [Appealable, barring stipulation to the contrary, to CA-9. --CCH.]


[Code Secs 6323 and 6330]

Collection: Tax liens: Validity of lien: State of residence: Place of filing: Collection due process: Issues raised at hearing. --

The IRS was entitled to levy on an individual's pension in order to collect a tax liability for five tax years. Based on the evidence, the Tax Court concluded that the taxpayer was a Florida resident at the time the IRS filed its liens. The IRS properly filed its liens in the circuit court in the county where the taxpayer resided. The pension plan was the only asset identified as exempt from his bankruptcy proceedings and as personal property with a situs at the taxpayer's residence. The taxpayer was not entitled to a determination as to the amount of his pension subject to the liens and, implicitly, a determination that no other assets of the taxpayer were subject to the IRS liens. The taxpayer failed to make such argument before the IRS Appeals officer at his collection due process hearing because he raised no alternatives to collection. The Tax Court noted that it would be inappropriate to anticipate, determine and limit the scope of the liens on the record in the case. The amount of liability was not disputed; the taxpayer's arguments only addressed collectibility. --CCH.

Willard D. Horwich, for the petitioner. Irene S. Carroll, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

 

COHEN, Judge: The petition in this case was filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination). The issue for decision is whether respondent may levy on petitioner's pension to collect a tax liability owed by petitioner for 1990 through 1994.

 

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.

FINDINGS OF FACT

 

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. At the time the petition in this case was filed, petitioner resided in Los Angeles , California .

Petitioner's Residence(s)

 

On January 12, 1995 , petitioner was divorced from his former wife, Kathleen Fusaro. During all of 1996, petitioner maintained a residential address in Hallandale ( Hallandale ), Broward County , Florida . While residing in Hallandale , he lived with Kelli Jo Tackett (Tackett) and their child. Petitioner and Tackett shared the expenses of the residence, but he paid the majority of the expenses. Throughout 1996 and through the time of trial in January 2003, petitioner continued to use his Florida driver's license with a Florida address. At the time of trial, petitioner did not have a permanent California driver's license.

 

From April 12 through July 23, 1996 , and from August 22 through December 20, 1996 , petitioner's statements from his personal checking account with First Union Bank showed petitioner's address in Hallandale . The statements showed purchases and withdrawals in both California and Florida throughout the period covered by the statements, including many in Florida throughout October, November, and December 1996. From May 15 through September 30, 1996 , petitioner had a personal savings account with First Union Bank. The savings account statements showed petitioner's address in Hallandale . Petitioner conducted banking transactions in his savings account in both Florida and California throughout the months covered by the statements, with the last transaction in Florida occurring on August 5, 1996 . At the time of trial, petitioner continued to use a Florida address on his checks.

Employment with Warner Bros. Television Productions

 

In 1995 and early 1996, petitioner was employed by Warner Bros. Television Productions (Warner Bros.) filming a pilot television program in Seattle , Washington . A Warner Bros. employee suggested to petitioner that he move from Florida to California to facilitate his hiring by Warner Bros. in California because production companies are required to pay higher "distant location" rates for an out-of-State director under the Director's Guild of America contract. On July 10, 1996 , petitioner executed documents with Warner Bros. concerning his work for the television program "The Drew Carey Show". A "Film DGA Deal Memo" (deal memo) listed petitioner's weekly salary with a guaranty of work for 1 week as a unit production manager. Petitioner also did business with Warner Bros. under the name Jigsaw Productions, Inc. (Jigsaw). Petitioner's and Jigsaw's address as listed in the deal memo was in Marina Del Ray , California . An "On-Production Loan-Out" was also signed, showing Jigsaw of Hallandale, Florida, as the lender and petitioner as the debtor, with an address in Marina Del Ray. The "loan-out" corporation (i.e., Jigsaw) was used by petitioner, in his own words, as "a device for getting payroll, so that the money comes, flows into the corporation, and then it flows back to me as pay, as salary, and it was just a device for tax planning." Jigsaw did not register as a corporation with the State of California .

 

In June 1996, petitioner was living on a friend's boat in Marina Del Ray. He then moved into a friend's mother's apartment in California . In October 1997, he moved to Hillcrest Road in Los Angeles .

Notice of Federal Tax Lien

 

Assessments were made against petitioner for Federal income tax for 1990, 1991, 1992, 1993, and 1994. The validity of the original assessment of tax for those years is not an issue in this case. On July 25, 1996 , the Internal Revenue Service (IRS) filed two Forms 668, Notice of Federal Tax Lien, relating to petitioner's unpaid tax liability for 1990 in the amount of $61,864.24 and for 1992, 1993, and 1994 in the amounts of $4,493.53, $25,115.01, and $22,374.19, respectively. On September 25, 1996 , the IRS filed Form 668 relating to petitioner's liability for 1991 in the amount of $62,039.42. All of the tax liens were filed with the Broward County Circuit Court in Fort Lauderdale , Florida ( Broward County ).

Federal Tax Returns

 

Petitioner's business affairs and his tax returns were handled by David Simon (Simon), a certified public accountant, in Florida . Simon was petitioner's business manager beginning in the early 1990's.

 

Simon prepared Forms 4868, Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return, for 1995 and 1996 showing petitioner's address in Hallandale . On September 19, 1997 , petitioner filed his Form 1040, U.S. Individual Income Tax Return, for 1995. Petitioner attached two Forms W-2, Wage and Tax Statement, to the Form 1040. The Form 1040 and the two Forms W-2 showed petitioner's address in Hallandale . On November 3, 1997 , petitioner filed his Form 1040 for 1996, with attached Forms W-2. The Form 1040 and the Forms W-2 all listed the same Hallandale address.

 

Petitioner did not file a California Resident Income Tax Return for any year prior to 1999.

Pension Plan

 

At the time of trial, petitioner was a production manager in California . He had been employed in the film and television business for 30 years. For all years relevant to this proceeding, petitioner participated in a basic and a supplemental pension plan provided by the Director's Guild of America - Producer Pension Plan (pension plan). The basic plan was a defined benefit plan, and the supplemental plan was a defined contribution plan.

 

On July 19, 2000 , petitioner was fully vested in both the supplemental plan and the basic plan. On June 30, 2000 , his account balance in the supplemental plan was $249,053.10. As of July 19, 2000 , under the basic plan, petitioner's payment that he would receive at age 65 was $3,811.29 per month, payable as a single-life annuity. As of July 19, 2000 , petitioner's early retirement benefit under the basic plan includes the payment that he would receive at age 55. Petitioner's payment would be $2,667.90 per month, payable as a single-life annuity.

Bankruptcy Proceeding

 

On July 19, 2000 , petitioner filed a voluntary petition under chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Central District of California in Los Angeles , California . Petitioner's address on the bankruptcy petition was in Hollywood , California . At the time he filed the bankruptcy petition, petitioner represented that the market value of the pension plan was $241,928.69, of which $64,068.58 was claimed by his former spouse. Petitioner claimed his pension plan as exempt property in the bankruptcy proceedings. No objection was made to petitioner's claim that the pension plan was exempt property, and petitioner's interest in the pension plan was not treated as an asset in the bankruptcy case. On October 30, 2000 , petitioner received a discharge in bankruptcy.

Appeals Office Hearing

 

On November 30, 2000, the Commissioner mailed to petitioner a Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of levy). The notice of levy was mailed to petitioner at an address in Los Angeles , California . Petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing (hearing). In the request, petitioner challenged the notice of levy stating:

 

The taxpayer filed a chapter 7 bankruptcy petition on July 19, 2000 * * * taxpayer received a discharge on October 30, 2000 . The federal tax lien recorded in Florida in 1996 may not now be used to levy on Mr. Fusaro's property. * * *

 

Petitioner's request for hearing was assigned to Appeals Officer William Hsieh (Hsieh). Prior to the hearing, on February 16, 2001 , petitioner's representative, who was also his bankruptcy attorney, Wesley H. Avery (Avery), mailed a letter to Hsieh describing petitioner's position as follows:

 

In order to have a perfected security interest in the Pension Plan, prepetition the IRS would have had to file a Notice of Tax Lien in the one office within the state, as designated by the laws of such state, in which the property subject to the lien is situated. * * * Under California law, which is the situs of the Pension Plan, it was necessary for the IRS to file prepetition a Notice of Federal Tax Lien with the California Secretary of State. * * * However, the IRS failed to file prepetition a federal tax lien against Mr. Fusaro with the Secretary of State in California, or indeed anywhere in California.

 

Attached to the letter was a copy of the bankruptcy petition and a printout of the liens that Avery obtained from either Westlaw or Lexis.

 

Around February 28, 2001 , Hsieh met with Avery. Hsieh understood that there was an issue regarding the validity of the tax liens. Hsieh examined the tax liens that had been filed in Florida and did not ask any questions about them. Hsieh also reviewed the cases that Avery provided regarding petitioner's position and conducted his own independent research. To verify assessments, Hsieh reviewed petitioner's case file; the Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters; and the internal IRS transcripts. During the hearing, Avery did not raise the issue of petitioner's residence in 1996.

 

At the conclusion of the hearing, Hsieh sustained the IRS's right to proceed to levy on exempt assets that petitioner owned prior to his bankruptcy discharge, and the Commissioner issued the notice of determination. Hsieh found in pertinent part as follows:

 

In this case the Collection employee has provided verification that all statutory, regulatory and admin istrative requirements have been met before the levy action was proposed. * * * The taxpayer's attorney claimed that the chapter 7 personal bankruptcy discharged all tax liabilities of the taxpayer on October 30, 2000, and the Service did not perfect the NFTL [Notice of Federal Tax Lien] in California. The Service's position is that the NFTL filed prior to the bankruptcy is still enforceable against exempt assets in a chapter 7 bankruptcy. * * * The taxpayer's attorney's primary position is that the NFTL's filed by the Service have not been perfected to be enforceable against the interest in the Pension Plan located in California . His understanding is that under California law, which is where the pension plan is located, it was necessary for the service to file prepetition a Notice of Federal Tax Lien with the California [Secretary] of State.

 

Hsieh also noted that there were unpaid assessments of tax liabilities, that the assessments were made within the period of limitations, and that notice and demand for payment were made and there was a neglect or refusal to pay.

 

In the petition in this case, filed November 9, 2001 , petitioner alleged that he was a resident of Florida during 1991, 1992, 1993, 1994, and at the time petitioner's income tax returns were filed for those years. The petition alleged that petitioner resided in California at the time that the petition was filed, but was silent as to other time periods. In support of the allegations that respondent's liens were not valid because they had not been filed in California , the petition alleged:

 

(f) At all times material herein, Petitioner has been, and now is, a member of a pension plan set up by the Director's Guild of America - Producer. From prior to 1996, to the present time, the admin istrative offices of said plan have been, and now are, located in Los Angeles , California . The plan is admin istered in Los Angeles , California . All of the activities of said plan are carried on in the City of Los Angeles , except to the extent that any members of the plan may be a resident outside of the City of Los Angeles .

 

On March 13, 2002 , the Court received from respondent a Motion for Judgment on the Pleadings, which was recharacterized as a Motion for Summary Judgement and filed on that date. In that motion, respondent pointed out that the pension plan was personal property of the taxpayer and:

 

11. The situs of personal property is where the person resides not where the bank account, stock account or certificate, paintings or admin istrator of a pension fund is located. 26 U.S.C. sec. 6323(f)(2)(B) provides that personal property, whether tangible or intangible, is situated at the residence of the taxpayer at the time the notice of lien is filed.

 

In opposition to respondent's motion, petitioner asserted:

 

Section 6323(f)(2) provides that in the case of personal property, the residence of the taxpayer at the time the notice is filed is deemed to be the location of the personal property.

 

These statutes raise the issue of whether the Petitioner was a resident of Broward County on July 25, 1996 .

 

Thus, there are two significant issues which need to be determined before summary judgment can be granted to Respondent. The first is whether the filing in Broward County Court was a proper filing and the second is whether the Petitioner was a resident of that county on July 25, 1996 .

 

There is, of course, the issue as to what property would a properly filed Notice of Federal Tax Lien attach. What would be the dollar amount of the Pension Plan to which a lien would attach? For this, recourse must be had to appropriate law, whether federal or state, which is non-bankruptcy law.

 

Attached to petitioner's objection to respondent's motion was an affidavit of petitioner dated April 10, 2002, in which he stated that he first rented an apartment in California in August 1995, that he intended to become a permanent resident in California when he was hired for a television show to be produced in California, and that his permanent relationship commenced with a contract dated July 10, 1996. He then asserted: "On July 25, 1996 I was a resident of the state of California , and not a resident in any location whatsoever in the state of Florida ." Respondent's Motion for Summary Judgment was withdrawn without a ruling by the Court.

OPINION

 

Section 6321 provides:

 

SEC. 6321. LIEN FOR TAXES.

 

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

 

The lien generally arises at the time the assessment is made. Sec. 6322. Under section 6323, the lien is not valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until a notice of Federal tax lien meeting the requirements of section 6323(f) has been filed.

 

Section 6323(f)(1) specifies that a notice of Federal tax lien shall be filed as follows:

 

SEC. 6823(f).

 

(1) Place for filing. --The notice referred to in subsection (a) shall be filed --

 

(A) Under state laws. --

 

* * * * * * *

 

(ii) Personal property. --In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated, except that State law merely conforming to or reenacting Federal law establishing a national filing system does not constitute a second office for filing as designated by the laws of such State;

 

(B) With clerk of district court. --In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A); * * *

 

The situs of personal property held by the taxpayer, whether tangible or intangible, is the residence of the taxpayer at the time the notice of Federal tax lien is filed. Sec. 6323(f)(2)(B). In this case, the pension plan is personal property. Therefore, the situs of the pension plan is the State where the taxpayer resides and not the State where the pension plan is admin istered.

 

Under the Bankruptcy Code, 11 U.S.C. sec. 522(c)(2)(B) (2000), any property exempt from admin istration as part of the bankruptcy's estate is unavailable to the creditors of the debtor, including the IRS, after a bankruptcy discharge, unless the creditor filed a valid lien prior to the commencement of the bankruptcy case.

 

Respondent acknowledges:

 

The validity of the lien filings depends upon whether Florida was petitioner's "residence" within the meaning of 26 U.S.C. sec. 6323(f)(2) on the date the liens were filed. While a person can have more than one residence, the question is where creditors would believe he resided. Urban Industries, Inc. of Kentucky v. Thevis [82-1 USTC ¶9268], 670 F.2d 981, 986 (11th Cir. 1982). * * *

 

The determination of petitioner's residence for this purpose is a question of fact. If we find as a fact that petitioner was not a resident of Florida on July 25, 1996 , we need not deal with additional issues.

 

For reasons discussed below, we conclude that petitioner was a resident of Florida at the time that the liens were filed. As a result, we address the legal arguments concerning whether the liens were filed at the appropriate place in Florida and whether we should determine the amount of petitioner's pension that is subject to levy.

Petitioner's Residence in 1996

 

Petitioner argues that the burden of proof has shifted to respondent under section 7491 because petitioner produced credible evidence that he was a resident of California in 1996. Respondent argues that petitioner bears the burden of proof and that section 7491 refers only to "any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B" and does not apply to this proceeding, which is established under subtitle F of the Internal Revenue Code. Our decision in this case does not depend on which party has the burden of proof. We resolve the factual issue on the preponderance of the evidence in the record.

 

In Corwin Consultants, Inc. v. Interpublic Group of Cos. [75-1 USTC ¶9299], 512 F.2d 605 (2d Cir. 1975), the Court of Appeals reviewed the legislative history of section 6323(f), which establishes the place of filing for Federal tax liens such as those in dispute here. Noting that "residence" can have many different meanings depending on the context in which it is used, the Court of Appeals emphasized that the purpose of the statutory provisions for filing in the State of a taxpayer's residence was "to ease the burden for creditors in searching for federal tax liens and for the IRS in filing notices of such liens." Id. at 610. The Court stated:

 

In light of this purpose, the residence of a delinquent taxpayer is a question of fact to be determined by various criteria: Among them are the taxpayer's physical presence as an inhabitant and not a mere transient, Myers v. Commissioner [50-1 USTC ¶9253], 180 F.2d 969, 971 (4th Cir. 1950); the permanence of that presence, In re Watson, 99 F. Supp. 49, 54 (W.D. Ark. 1951); the reason for his presence; and the existence of other residences. In general, for this statute, where a taxpayer resides is where he dwells for a significant amount of time and where creditors would be most likely to look for him. What proportion of time is "significant" is not capable of exact definition and must be determined on a case by case basis, at all times keeping the purpose of the filing requirement in mind. [ Id. ]

 

See also Urban Indus., Inc. of Ky. v. Thevis [82-1 USTC ¶9268], 670 F.2d 981, 986 (11th Cir. 1982); In re Saunders, 240 Bankr. 636, 641 (S.D. Fla. 1999).

 

In assessing the credibility of petitioner's claim that he was strictly a resident of California and not a resident of Florida on July 25, 1996 , we also observe that his claim was raised belatedly. During the Appeals hearing, petitioner's representative argued that the Florida liens were invalid because the situs of the pension plan was in California . In the petition in this case, the same argument was made based on the admin istration and activities of the plan in California . Neither at the hearing nor in the petition did petitioner assert his current position, which is that he became a resident of California before the liens were filed. This argument was first raised in an affidavit dated April 10, 2002 , in opposition to respondent's Motion for Summary Judgment.

 

Most significantly, however, petitioner's contemporaneous conduct and the objective evidence in the record contradict his belated claim that he was not a resident of Florida in 1996. He claims that, when he began employment on "The Drew Carey Show" on July 10, 1996 , he permanently moved to California , first living on a friend's boat. He relies on his employment with Warner Bros. as his evidence of California residence. His July 10, 1996 , employment contract, however, guaranteed only 1 week of work. Explaining his necessity of living in California , petitioner testified: "In other words, if I lived in New York or Miami , they wouldn't want to go to the additional expense to hire me, because the contracts provide for additional compensation if you're working from out of your residence." He did nothing, however, that would indicate to other persons, particularly his creditors and the IRS, that he had moved. To the contrary, the addresses used by petitioner were all indicative of the residence in Florida .

 

Petitioner used Florida addresses on his Federal tax returns, Forms W-2, and bank accounts. He continued to use a Florida address on his checks and other banking records and on his Florida driver's license at least into 2003. His "loan-out" corporation, through which he was paid his salary, was a Florida entity with a Florida address. He did not file California income tax returns prior to the due date of his 1999 return. We conclude, therefore, that petitioner resided in Florida at the time that the liens were filed.

Place of Filing Within Florida

 

The liens in question in this case were filed with the Broward County Circuit Court in Fort Lauderdale , Florida . Hallandale , Florida , the address at which petitioner resided at the time the liens were filed, is in Broward County .

 

Petitioner argues that Florida statutes provide two places for notices of Federal tax liens to be filed, to wit, with the secretary of state, "by analogy to a Uniform Commercial Code filing", and in the Circuit Court for the county in which the taxpayer resides, pursuant to the Uniform Federal Lien Registration Act (Registration Act). Because, petitioner contends, there are two places in which the notices of Federal tax lien could have been filed, "the only proper place was in the clerk's office of the United States District Court."

 

Under Florida 's version of the Uniform Commercial Code (UCC), the office designated for filing is the Office of the Secretary of State. See Fla. Stat. ch. 679.401 (1996) (repealed effective Jan. 1, 2002 , Fla. Stat. Ann. ch. 679.401 (West 2003)). Under the Registration Act, the proper place for filing is in the office of the clerk of the circuit court of the county where the person resides. See Fla. Stat. ch. 713.901 (1996); see also In re Wesche, 193 Bankr. 76, 77 (Bankr. M.D. Fla. 1996). Petitioner argues that the two statutes together provide for two separate places for the filing of a Federal tax lien. However, petitioner's argument fails because the Florida UCC does not apply to Federal tax liens. The policy and the subject matter of Florida 's version of the UCC cover consensual security interests created by contract or agreement. See Fla. Stat. ch. 679.102 (1996) (repealed effective Jan. 1, 2002 , Fla. Stat. Ann. ch. 679.102 (West 2003)); In re Bertelt, 206 Bankr. 579, 585 (Bankr. M.D. Fla. 1996). This statute does not affect the filing of Federal tax liens within the State of Florida , which are instead governed by the Registration Act. See In re Bertelt, supra at 584-585. Under the Registration Act, the proper place for filing is the circuit court in the county where the taxpayer resides. Thus, there is one office within Florida where the Federal tax lien should be filed, and the liens in issue were filed in that place.

Value of Pension Plan Subject to Lien

 

Petitioner argues that, if the Court sustains the liens, which we have, we should further determine the value of petitioner's interest in the pension plan that is subject to the lien. Petitioner argues that the value of the pension plan is limited to the value at the time the lien was filed and, further, that the lien, and any levy that might occur to enforce it, is subordinate to a claim by petitioner's former wife for 50 percent of the value.

 

Respondent contends that the Court does not have jurisdiction under section 6330 to determine the value of petitioner's asset at the time the bankruptcy proceeding was commenced. Even if the Court concludes that it does have jurisdiction, respondent contends, the Court should not address the issue in this case because it was not raised before the Appeals office. Additionally, respondent contends that, because the value of the pension plan does not affect the question of the validity of the lien, discussed above, but could only affect collection alternatives, we should review the Appeals officer's determination that collection should proceed only for abuse of discretion. Finally, respondent argues that the Court should not address the issue because the liens could potentially affect other assets owned by petitioner at the time the bankruptcy proceeding was commenced, that the value may be changed by the time of a levy that has not yet occurred, and that petitioner's former wife is not a party to this proceeding.

 

Petitioner is seeking a determination as to the amount of petitioner's pension subject to the liens filed in 1996 and, implicitly, a determination that no other assets of petitioner are subject to those liens. This argument was not made before the Appeals officer during the hearing because no alternatives to collection were raised. We agree with respondent that it would be inappropriate to anticipate, determine, and limit the scope of the liens on the record in this case. There may be circumstances under which the amount that is subject to the lien is necessarily a part of our determination of whether there was an abuse of discretion in rejecting collection alternatives. This is not such a case. Petitioner suggests that we should determine the value because: "The amount of the tax may be determined under the authority of IRC sec. 6330." The amount of the liability, however, is not disputed in this case. Petitioner's arguments go only to "collectibility".

 

Petitioner also seeks a determination of the value of the pension plan subject to respondent's liens as an advisory opinion for the plan admin istrator. Nothing in section 6330 would extend our reach that far.

Conclusion

 

We have considered the other arguments made by the parties, including their dispute with respect to the standard of review of the issues in this case. We have concluded that petitioner was a resident of Florida at the time that the notices of lien were filed and that, therefore, those liens were valid with respect to his pension plan, the only asset identified as exempt from the bankruptcy proceedings and as personal property with a situs at petitioner's residence. These conclusions would be unaffected by resolution of the other disputes between the parties, and we therefore decline to address them. We sustain the determination of the Appeals office that it is appropriate for the IRS to pursue collection by issuing a notice of levy pursuant to the liens recorded in Florida in 1996.

 

To reflect the foregoing,

 

Decision will be entered for respondent.

 

 

[97-2 USTC ¶50,958] Legacy Realty, Inc., Plaintiff v. Jerry T. Wilkie, Domestic Mortgage, Inc., and the Internal Revenue Service, Defendants

U.S. District Court, No. Dist. Ga., Atlanta Div., CIV. 96-CV-1461-RLV, 10/22/97

[Code Sec. 6323 ]

Lien for taxes: Priority of lien: Recording of lien: Taxpayer's residence.--Issues of fact remained regarding the location of an individual's residence and precluded summary judgment that a tax lien had priority over a subsequently filed judgment lien. To be effective against personal property, a tax lien must be filed in the county of the taxpayer's residence. The holder of the judgment lien presented real estate and telephone records to support its claim that the taxpayer lived in the county where it recorded its judgment lien, rather than in the county where the IRS recorded its tax lien.
ORDER

VINING, JR., Senior District Judge:

In this interpleader action, the Internal Revenue Service ("IRS") has moved for summary judgment [Doc. No. 21], asking this court to rule that its federal tax lien on the property of Jerry T. Wilkie has priority over the subsequent judgment lien obtained by Domestic Mortgage, Inc. ["Domestic"]

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

On August 22, 1994 , the IRS served a Notice of Levy on Wages, Salary, and Other Income upon Legacy Realty to collect Jerry and Joyce Wilkie's unpaid federal income taxes for the years 1985 through 1990. On December 21, 1994 , the IRS filed a notice of federal tax lien, listing the federal income tax liabilities of Jerry and Joyce Wilkie for the years 1980 through 1990, with the Clerk of the Superior Court of Cherokee County, Georgia.

During October 1995, Domestic filed a Complaint on Note against Jerry Wilkie in the State Court of Forsyth County, Georgia seeking judgment against Mr. Wilkie on a note in the amount of $33,000.00 plus attorneys fees. Domestic filed an affidavit stating that Mr. Wilkie's last known address was 2765 Bettis-Tribble Road , Cumming , Georgia and that the Sheriff of Forysth County had been unable to serve Mr. Wilkie at that address. On February 13, 1996 Domestic filed a Certificate of Service by Publication in State Court of Forsyth County , and on March 25, 1996 , the State Court of Forsyth County entered default judgment against Mr. Wilkie in favor of Domestic in the amount of $47,506.98. On April 24, 1996, Domestic filed a continuing garnishment proceeding in the State Court of Fulton County, Georgia against Legacy Realty, Inc., seeking to collect the judgment against Mr. Wilkie obtained in the State Court of Forsyth County. Legacy Realty, Inc. then filed the instant interpleader action.

II. LEGAL DISCUSSION

A. The Legal Standard

Rule 56(c) of the Federal Rules of Civil Procedure authorizes summary judgment when all "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." The party seeking summary judgment bears the burden of demonstrating that no dispute as to any material fact exists. Adickes v. S.H. Kress & Co., 398 U.S. 144, 156, 90 S.Ct. 1598, 1608 (1970); Johnson v. Clifton , 74 F.3d 1087, 1090 (11th Cir. 1996). The moving party's burden is discharged merely by " 'showing'--that is, pointing out to the District Court--that there is an absence of evidence to support [an essential element of] the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554 (1986). In determining whether the moving party has met this burden, the district court must view the evidence and all factual inferences in the light most favorable to the party opposing the motion. Clifton , 74 F.3d at 1090. Once the moving party has adequately supported its motion, the nonmovant then has the burden of showing that summary judgment is improper by coming forward with specific facts showing a genuine dispute. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986). ¹

In deciding a motion for summary judgment, it is not the court's function to decide genuine issues of material fact but to decide only whether there is such an issue to be tried. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251, 106 S.Ct. 2505, 2511 (1986). The applicable substantive law will identify those facts that are material. Anderson, 477 U.S. at 247, 106 S.Ct. at 2510. Facts that in good faith are disputed, but which do not resolve or affect the outcome of the case, will not preclude the entry of summary judgment as those facts are not material. Id.

Genuine disputes are those by which the evidence is such that a reasonable jury could return a verdict for the non-movant. Id. In order for factual issues to be "genuine" they must have a real basis in the record. Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356. When the record as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no "genuine issue for trial." Id. (citations omitted).

B. The IRS's Claim

In determing priorty of competing liens, "the first in time is the first in right," and a non-federal lien must be perfected at the time the federal tax lien arises in order to have priority. United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528 (1993). For the purpose of determing competing rights, "the federal lien shall 'not be valid . . . until notice thereof . . . has been filed.' " Id. , quoting United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84, 74 S.Ct. 367, 369 (1954).

26 U.S.C. §6323(f) governs perfection of a tax lien and states that for a tax lien to be effective with respect to personal property, it must be filed at the taxpayer's place of residence. Urban Industries, Inc. of KY v. Thevis [82-1 USTC ¶9268], 670 F.2d 981 (11th Cir. 1982). Thus, a federal tax lien filed in the wrong place at the time a subsequent non-federal lien attaches to the property will not have prority. Id.

Domestic alleges that at the time the IRS filed its Notice of Lien in Cherokee County Mr. Wilkie did not reside in such county. The IRS contends that fifteen to eighteen months prior to November of 1996 Mr. Wilkie resided at 1255 Holbrook Campground Road , in Cumming , Georgia , which is in Cherokee County. The IRS contends that prior to that date Mr. Wilkie resided at 17050 Hopewell Road , Alpharetta , Georgia , which is Cherokee County . The IRS also contends that Mr. Wilkie has never resided in Forsyth County . Domestic cites the affidavit of Charles Clark, Real Estate Commissioner at the Georgia Real Estate Commission, BellSouth Telephone Records, and the real estate records of Legacy Reality, Inc. in support of its contention that Mr. Wilkie's residence was in Forsyth County at 2765 Bettis-Tribble Road , Cumming , Georgia when the IRS filed its Notice of Lien.

Because there is a genuine issue of material fact as to whether Mr. Wilkie resided in Cherokee County or Forsyth County at the time the IRS filed it Notice of Lien, it is unclear whether the IRS's tax lien was perfected before Domestic obtained its judgment lien and thus would have priority over Domestic's judgment lien. Therefore, this court hereby DENIES the IRS's motion for summary judgment. [Doc. No. 21]

SO ORDERED.

¹ The Eleventh Circuit has held that the nonmoving party need not necessarily " 'produce evidence in a form that would be admissible at trial . . . to avoid summary judgment' "; instead, its evidence must be " 'reduc[ible] to admissible evidence.' " United States v. Four Parcels of Real Property, 941 F.2d 1428, 1444 (11th Cir. 1991) (quoting Celotex, 477 U.S. at 324-27, 106 S.Ct. 2553-55). When a party has given clear answers to unambiguous deposition questions which negate the existence of any genuine issue of material fact, however, that party cannot thereafter create such issue and thereby defeat summary judgment with an affidavit that merely contradicts, without explanation, the deposition testimony. Van T. Junkins and Associates, Inc. v. U.S. Industries, Inc., 736 F.2d 656, 658 (11th Cir. 1984). Moreover, the mere verification by affidavit of one's own conclusory allegations is insufficient to oppose a motion for summary judgment. Fullman v. Graddick, 739 F.2d 553, 557 (11th Cir. 1984).

 

 

[93-1 USTC ¶50,353] SSG, Inc., Plaintiff v. Omni Medical Health & Welfare Trust, et al., Defendants. Fleet Bank of Massachusetts , N.A. Trustee

U.S. District Court, Dist. of Mass., 90-12397WF, 4/13/93

[Code Sec. 6323 ]

Federal liens: Priority: Notice: Electronic filing.--An insured corporation could not claim priority over an IRS lien for its claims against the insurer because the IRS obtained a valid federal tax lien when it filed notice electronically with the Clerk of the appropriate U.S. District Court. Because state law ( Massachusetts ) made no specific provisions for filing federal liens, the District Court was the proper filing place. Also, because state law did not address, let alone prohibit, electronic filing and because electronic filing provides equally accessible notice to creditors, the method was appropriate for filing federal liens.

MEMORANDUM AND ORDER

WOLF, District Judge:

Plaintiff has moved for a declaratory judgment, seeking to establish its right to certain assets held by Fleet Bank of Massachusetts , N.A. ("Fleet"), as trustee to defendants Omni Medical Health and Welfare Trust ("Omni Medical"), and Harbor Medical Administrators, Inc. ("Harbor Medical"). Specifically, plaintiff's motion for a declaratory judgment relates to approximately $57,000 held by Fleet ¹ in an account in the name of Harbor Medical. Plaintiff's motion is opposed by the United States of America , which claims to hold a federal tax lien on the assets at issue as a result of assessments made against Harbor Medical by the Secretary of the Treasury (the "Secretary") for unpaid taxes.

The question to be resolved is whether the United States properly obtained a federal tax lien on the Harbor Medical assets, in accordance with 26 U.S.C. §6323 . Because the court finds that the United States did obtain a valid federal tax lien on the assets, placing all subsequent creditors on constructive notice of the lien, plaintiff's motion for a declaratory judgment must be denied.

I. PROCEDURAL AND FACTUAL BACKGROUND

For purposes of this motion, the relevant facts are not in dispute. Plaintiff SSG, Inc. ("SSG") filed a breach of contract action on April 9, 1990 in Middlesex Superior Court against defendants Omni Medical and Harbor Medical. The complaint alleges that on July 1, 1988 , plaintiff purchased medical and life insurance from defendant Omni Medical, as part of an employee benefits package. Verified Complaint ("Complaint") ¶6. In late 1989 Omni Medical began to default on its obligations to make proper reimbursements for medical claims submitted by plaintiff's employees. Id. ¶8, 11. Plaintiff claims that defendants owe to plaintiff and its employees approximately $125,000 in medical claims. Id.

On the date it filed its complaint in state court, plaintiff obtained an attachment of assets belonging to Omni Medical and Harbor Medical, in two separate bank accounts now held by Fleet. On August 28, 1990 plaintiff was awarded a default judgment in Middlesex Superior Court, with an assessment of damages in the amount of $117,888.34 and interest in the amount of $5,465.30.

The Internal Revenue Service ("IRS") was made a party to this action in October 1990, and subsequently removed the case to this United States District Court. The IRS contends that it holds four federal tax liens against Harbor Medical, which it obtained on December 14, 1989 pursuant to 26 U.S.C. §§6321 -6323. Notice of these federal tax liens was filed electronically with the Clerk of this court.

II. ANALYSIS

Under 26 U.S.C. §6321 , any time a person fails to pay outstanding federal taxes, a lien is created in favor of the United States, for the amount owed, upon all property belonging to that person. ² However, to protect certain classes of creditors and purchasers, Congress enacted §6323 which provides that federal tax liens shall not be valid against those interests, unless notice of the lien is filed in the statutorily-designated place and manner. Plaintiff claims to be a "judgment lien creditor," one of the classes of creditors against whom a federal tax lien will not take effect unless proper notice is filed by the Secretary. 26 U.S.C. §6323(a) . Proper notice will, however, establish the federal tax lien's priority over all subsequent judgment lien creditors. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47 (1950). Since the Secretary in this case filed notice of federal tax liens on Harbor Medical's assets prior to the time plaintiff even filed suit, there can be no question that the United States ' lien takes priority, so long as notice was filed in accordance with applicable law.

Notice of a federal tax lien must be filed with the Clerk of the United States District Court for the judicial district in which the property subject to the lien is situated, whenever state law does not designate one office for such filings to be made. 26 U.S.C. §6323(f)(1)(B) . The Commonwealth of Massachusetts has not designated one office for the filing of federal tax liens. The laws of Massachusetts do not establish provisions for federal tax lien filings, and the analogous regulations dealing with state tax liens designate two places for such notices to be filed. See Mass. Dept. of Revenue Reg. ch. 830 §62C.50.1(3)(a)(2). Therefore, it was proper for the Secretary to file its tax liens on Harbor Medical's assets with the Clerk of the United States District Court for the District of Massachusetts.

Plaintiff argues, however, that the Secretary's tax lien filing was improper, and consequently ineffective, because it was filed electronically, instead of by paper filing. Plaintiff's argument is grounded in the plain language of the statute and Internal Revenue Service Regulations governing the form of federal tax lien notices. 26 U.S.C. 6323(f)(3) states that the form and content of the notice "shall be prescribed by the Secretary." The pertinent regulation promulgated by the Secretary provides that the notice of a federal tax lien "shall be filed on Form 668." 26 C.F.R. §301.6323(f)-1 . In defining "Form 668," the regulations provide that "[t]he term 'Form 668' generally means a paper form. However, if a state in which a notice ... is filed permits a notice of Federal tax lien to be filed by the use of electronic or magnetic medium, the term 'Form 668' includes a Form 668 filed by the use of any electronic or magnetic medium permitted by that state." Plaintiff contends that Massachusetts does not permit tax liens to be filed electronically. In support of this argument, plaintiff cites Massachusetts law on the filing of state tax liens, which neither expressly allows, nor expressly prohibits the use of electronic means of filing. See Mass. Gen. L. ch. 62C §50 ; Mass. Dept. of Revenue Reg. ch. 830 §62C.50.1.

The United States avers that Massachusetts law is irrelevant to the question of whether an electronic filing was permissible in this case, since the filing was made, pursuant to 26 U.S.C. §6323(f) , in the United States District Court. Defendant argues that since state law did not provide "one place" for filing notice of the tax lien, the pertinent rules are those established by the Clerk's office of the District Court. The United States contends that the Clerk of the District Court for the District of Massachusetts permits notice to be filed electronically, and indeed, that over the last several years the Secretary has filed all notices of federal tax liens in Massachusetts by electronic means. The United States insists that it would be illogical for the rules governing federal tax liens to provide that notice should be filed in the United States District Court, yet require the IRS to advert to state law to determine whether electronic filing is permissible.

While the position taken by the United States has some logical appeal, it does not comport with the structure of the regulations promulgated by the Secretary. The regulation governing notice, 26 C.F.R. §301.6323(f)-1 , at subsection (a) provides two alternative places of filing: (1) "Under State laws" and (2) "With the Clerk of the United States district court." The subsection describing the proper form of filing, subsection (c), applies to "the notice referred to in §301.6323(a)-1 " and mandates that all such notices be filed on Form 668, which is defined generally as a "paper form" unless the laws of the state in which a notice is filed permit electronic filings. The provision which allows notice to be filed electronically to the extent permitted by state law does not distinguish between notice filed under subsection (a)(1) (in the place designated by state law), and (a)(2) (in the federal district court). Therefore, under the Secretary's own regulations, state law regarding electronic filings controls even if the filing is made with the clerk of the federal district court. C.f., F.P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726 ], 297 F.2d 692 (9th Cir. 1961), cert. denied, 370 U.S. 909 (1962) ("To require the Commissioner to abide by the rules which he obviously felt were required . . . is nothing more than good common sense").

Finding that state law on electronic filings controls does not end the inquiry, however. Because Massachusetts law does not in any way prohibit notice of federal tax liens from being filed electronically, and since the electronic filings to the federal District Court for the District of Massachusetts provide the same notice to creditors conducting reasonable inquiries as would paper filings, the court concludes that the Secretary's filing was adequate under 26 U.S.C. §6323 . First, as mentioned above, Massachusetts law does not attempt to prescribe the manner or place in which federal tax lien notices should be filed. Furthermore, the law of the Commonwealth regarding state tax liens makes no mention of whether filing by electronic transmission may be pursued by state tax authorities. See Mass. Gen. L. ch. 62C §50 ; Massachusetts Department of Revenue Reg. ch. 830 §62C.50.1. Under these circumstances the court does not find that the Commonwealth of Massachusetts does not "permit" a notice of federal tax lien to be filed electronically, pursuant to 26 C.F.R. §301.6323(f)-1(c) .

As a practical matter, that notice is filed electronically has no adverse impact on the way in which an interested person would search the relevant records for liens. A party wishing to search the records simply accesses the information at a computer terminal instead of searching through paper files and microfiche. A paper copy of a federal tax lien notice can be obtained by printing the form from the computer terminal. Plaintiff has not suggested, and the court cannot surmise, any way in which electronic filing poses an obstacle to searching for the existence of a federal tax lien. Therefore, in the absence of any Massachusetts law suggesting that electronic filings are unacceptable, this court will not hold that the system developed by the Secretary and the Clerk of the federal district court for the District of Massachusetts is impermissible.

Other courts have held that where notice of a federal tax lien fails to comply with all of the technical requirements of filing, such failures will not vitiate the lien's validity, so long as a reasonable search would reveal its existence. See, e.g., United States v. Jane B. Corp. [58-2 USTC ¶9924 ], 167 F.Supp. 352 (D. Mass 1958) (holding that minor misspelling of taxpayer's name would not render federal tax lien filing ineffective, where any prudent person searching the record would have discovered the actual notice). As other courts have stated:

The essential purpose of the filing of the lien is to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim.

United States v. Sirico [66-1 USTC ¶9209 ], 247 F.Supp. 421, 422 (S.D.N.Y. 1965). See also In re Hudgins [92-2 USTC ¶50,341 ], 967 F.2d 973, 976 (4th Cir. 1992); Tony Thornton Auction Service, Inc. v. United States [86-1 USTC ¶9434 ], 791 F.2d 635, 639 (8th Cir. 1986); Goldstein v. Bankers Commercial Corp., 152 F.Supp. 856 (S.D.N.Y. 1957); but c.f. F.P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726 ], 297 F.2d at 695-696 (finding invalid federal tax lien on personal property of partners where notice named only one individual partner followed by the designation, "et al." even though district court found that competing creditor had actual knowledge of partnership's outstanding federal tax liability).

Here it is beyond speculation that a reasonable and diligent search would have revealed the existence of the electronically-filed notice of the federal tax liens. Notices filed electronically can be searched in the federal district court at least as readily as those filed in paper form. Therefore, the court finds that the notices filed were valid. No statutory purpose would be served by holding otherwise. Since plaintiff does not challenge as inadequate any other aspect of the notice, the United States ' federal tax lien must be regarded as valid against plaintiff, whose status as a judgment lien creditor arose several months after the federal tax lien was filed.

III. ORDER

In view of the foregoing, the court concludes that the lien on the assets of Harbor Medical held by the United States bears priority over the lien held by plaintiff.

Accordingly, it is hereby ORDERED that:

1. Plaintiff's motion for declaratory judgment is hereby DENIED.

2. By May 14, 1993 the parties shall meet to attempt to resolve any issues that remain outstanding. The parties shall by May 20, 1993 file with the court a joint report describing (a) the status of settlement discussions; (b) the parties' positions on the remaining issues; and (c) a proposed schedule for the completion of this case.

3. A scheduling conference shall be held on May 26, 1993 , at 2:30 p.m.

¹ An Answer by the alleged trustee and related documents were initially filed by Bank of New England, N.A. On February 12, 1992 this court allowed a motion to substitute Fleet for the Bank of New England. Fleet has filed no additional memoranda with this court. For purposes of deciding this motion the court will assume that all filings made by Bank of New England have been adopted by Fleet.

² "Sec. 6321 . Lien for taxes.

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

 

 

[59-2 USTC ¶9611]Rodac Distributing Corp. v. Crafcon Corp.

N. Y. Supreme Court, Nassau County, Docket No. 10000-1958, 10/7/58

[1954 Code Sec. 6323]

Priority of tax liens: Filing of notice: State law: Burden of proof.--A judgment creditor's lien had priority over the Federal government's tax lien as to the taxpayer's bank account where there was no allegation that notice of the government lien had been filed in accordance with applicable state law.
[1954 Code Sec. 6331]

Tax liens: Property subject to levy: Dealer's reserve account.--While the taxpayer's dealer's reserve account with a bank was subject to the judgment creditor's lien (and to the inferior tax lien), since it was presently impossible to determine the liability of the bank to the taxpayer, the bank was restrained from disposing of the fund in the account until its liability to the taxpayer matured.

Jerome M. Schwartz, 271 Church Street , New York 13, N. Y., for Rodac Distribution Corp.

WIDLITZ, Judge:

This is an application by the judgment creditor pursuant to section 794 of the Civil Practice Act for an order directing that a third party, The Franklin National Bank, turn over to the judgment creditor funds now on deposit with the third party in certain accounts in the name of the debtor corporation. The third-party bank opposes the application on the ground that a notice of levy has been served upon it by the Internal Revenue Service of the United States Treasury Department which notice, the bank contends, restricts the payment by it of any funds belonging to the debtor corporation. The lien in favor of the federal government, provided for in section 6321 of the Internal Revenue Code, is invalid as against judgment creditors of the taxpayer until notice thereof has been filed in the office designated by the laws of the state in which the property subject to the lien is situated (Internal Revenue Code of 1954, U. S. Code, tit. 26, section 6323). New York law requires that such notice be filed with the clerk of the town in which the taxpayer resides at the time the lien arises (Lien Law, section 240, subdiv. 2). The address of the taxpayer, Crafcon Corporation is set forth in the notice of levy as being in the Village of Great Neck which is within the Town of North Hempstead , all within this county. The papers submitted by the bank do not allege that a notice of lien has been filed pursuant to the above provisions. Consequently, this court cannot consider the lien of the federal government to be valid as against the judgment creditor who is entitled to payment by the bank out of the regular account in the name of the judgment debtor (Aquilino v. United States of America, 3 N. Y. (2d) 511 [58-1 USTC ¶9191]).

The judgment creditor also claims a lien as to the contingent liability of the third-party bank to pay over to the judgment debtor the balance in an auto dealer's reserve account. The purpose of that account is to secure the bank against possible loss on conditional sales contracts which previously had been purchased from the judgment debtor. The contract between the debtor and the third party provides that no moneys will be due the debtor until April, 1961, at which time all outstanding contracts will have been completed. In the event of default by any of the conditional vendees, the loss sustained by the bank will be deducted from the reserve account. The third party presently holds $1,149.66 to secure a total indebtedness of $29,600. That liability is unmatured, and it is impossible at present to ascertain the amount of indebtedness, if any, which will mature in April, 1961.

Section 794 of the Civil Practice Act provides for the issuance of an order directing a person indebted to a judgment debtor to pay the amount of that debt to the judgment creditor. It also provides that, should the indebtedness be unmatured at the time of the application, the court "shall direct that payment be made on the dare when the indebtedness shall mature" (Civil Practice Act, sec. 794). That provision is intended to apply to "presently existing unmatured indebtedness." (Italics supplied) [7 Judicial Counsel Annual Rept., 501, 502 (1941)]. The amount of that payment to be made in the future is not sufficiently definite or certain at this date to warrant the entry of an order providing for a specific future payment. [Matter of Liberti Contractors, Inc. v. Bermuda Building Corporation, County Court , Nassau County, dec'd February 28, 1958 , (not reported)].

The lien of the judgment creditor as to the reserve account is a valid lien, however, and is superior to that of the United States . The restraining provisions of section 781 of the Civil Practice Act, indorsed upon the subpoena, will expire two years after the service of the subpoena unless extended by order. The court believes that the circumstances warrant an extension of those stay provisions and the order to be entered hereon should provide for an extension to and including the 1st day of June, 1961.

Accordingly, this motion is granted to the extent only that an order be entered directing that the third party, The Franklin National Bank, turn over to the judgment creditor the sum presently in the judgment debtor's checking account, i. e., $271.32, and further directing that the restraining provisions of section 781 of the Civil Practice Act as to the judgment debtor's reserve account be extended until the 1st day of June, 1961. Submit order.

 

 

[97-2 USTC ¶50,938] In re Carousel International Corp., Debtor. Jeffrey C. Taylor, Trustee in Bankruptcy v. Quantum Chemical Corp., et al., Defendants

U.S. District Court, Cent. Dist. Ill., 97-2185, 11/5/97, Affirming an unreported Bankruptcy Court decision

[Code Sec. 6323 ]

Tax liens: District where filed: Priority of liens.--Since debtors were residents of Florida when the IRS filed a federal tax lien, the tax lien was a valid first lien against proceeds they received as consideration for executing a noncompetition agreement. The proceeds had been claimed by both an Illinois creditor and the IRS. The debtors had purchased a home in Florida , registered to vote, obtained a drivers license, and filed their income tax returns in Florida . Although they maintained business contacts in Illinois for the purposes of resolving their financial affairs, the debtors were residents of Florida .

ORDER ON APPEAL

BAKER, Senior District Judge:

This appeal from a final order of the bankruptcy court turns on the question whether, within the meaning of 26 U.S.C. §6323(f)(2)(B), the debtors were residents of Jupiter, Florida on March 23, 1992.

On June 24, 1992, B. Bryan Smith and Marilyn Smith filed for protection from their creditors under Chapter 11 of the Bankruptcy Code. The Smiths corporate holdings had suffered severe financial setbacks leaving the Smiths insolvent. The Smiths' creditors that are of interest in this appeal are Quantum Chemical Corp., a judgment creditor, and the Internal Revenue Service, with a federal tax lien for back taxes. Quantum obtained a judgment against the Smiths in the Illinois courts on February 24, 1992 in the amount of $172,128.42, and execution was issued on that judgment. The IRS filed a notice of federal tax lien with the Clerk of the Circuit Court in Palm Beach County , Florida on March 23, 1992. The IRS served a notice of levy on the Smiths' trustee in bankruptcy on March 29, 1993. The Fort Lauderdale office of the IRS issued a notice of levy on April 16, 1993 for taxes and penalties in the sum of $192,708.00.

Meanwhile the bankruptcy court proceeded with the admin istration of the Smiths' estate. Part of the Smiths' assets, their interest in Carousel International Corporation, was sold to Atlantis Group, Inc.. As part of the sale agreement, Atlantis insisted that the principals of Carousel execute non-competition agreements in consideration of payment to them of $250,000. The Smiths as principals of Carousel were entitled, the bankruptcy court ruled, to $114,000 of the proceeds from the non-competition agreement. Quantum and the IRS both claimed that they had preference in their claim on the $114,000. The bankruptcy judge rendered summary judgment that the IRS had a valid first lien on the $114,000 and Quantum appealed. The issue on review boils down to this: If the Smiths were residents of Florida on and prior to March 23, 1993 , when the IRS filed its notice of levy in Palm Beach County Florida, then the IRS is entitled to preference. However, if the Smiths were residents of Illinois at the time Quantum obtained its judgment and execution, February 24, 1992 , then Quantum is entitled to preference.

Quantum argues that a genuine issue of material fact existed in the case and the bankruptcy court should not have granted summary judgment to the IRS. Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 106 S. Ct. 2548, 2552 (1986); Covalt v. Carey Canada, Inc., 950 F.2d 481 (7th Cir. 1991). On review, the district court views "all evidence in the light most favorable to the party opposing summary judgment." Wilson v. Williams, 997 F.2d 348 (7th Cir. 1993). However, Rule 56(c) "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 106 S.Ct. at 2552. "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party there is no 'genuine' issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 106 S.Ct. 1348, 1356 (1986).

Quantum admitted in the pleadings it submitted in the bankruptcy court that there was but one unresolved issue of fact, i.e., When did B. Bryan Smith's daughter, Zella, remarry and move to Washington ? App. Brief, App. p. 74. That fact, Quantum argues, would show when Marilyn Smith took over the management of Marilyn's and Zella's joint venture flower shop in Illinois and, inferentially, that Marilyn was a resident of Illinois .

The uncontested facts show that in 1975 Bryan Smith suffered a heart attack and he then appointed Marilyn co-chairman of his business enterprises. The Smiths purchased condominiums in Florida in 1982 and 1984. In 1984 the Smiths registered to vote in Florida and have voted there ever since. In 1988 the Smiths purchased a residence for $800,000 in Jupiter, Florida and furnished it with $150,000 worth of furnishings. The Smiths kept their most valuable possessions and the things most important to them at the Jupiter residence. The Smiths had no bank accounts in Florida but paid for everything by credit cards that were invoiced to their Illinois ' businesses. In 1988 Bryan Smith also turned over 1/3 of his business assets to his wife and 1/3 to his son. The Smiths lived in Florida returning to Illinois only 2 or 3 days at a time for business reasons. They kept the Champaign , Illinois residence on Valley Brook Road as a place to stay when they were called back on business. The Champaign residence was also used by business visitors to the area at the discretion of the Smiths' son. The Jupiter Florida residence on the other hand was purely a family residence and was maintained year round with utilities, cable, telephone and yard and pool maintenance services and a twice weekly maid service. The Smiths claimed a Florida homestead exemption for the Jupiter residence. Bryan Smith had a Florida driver's license. Marilyn kept her Illinois license because she feared taking a driving test in Florida . The Smiths filed their federal income tax returns with the Internal Revenue Service Center , Atlanta , Georgia , showing the Jupiter Florida address as their residence. The mailing address on the Smiths' homeowners insurance policy was the Jupiter residence. The Smiths business ties were in Illinois and they kept in touch by telephone and fax. It is uncontested that but for the financial setbacks and the need for them to come to Illinois to deal with those setbacks, the Smiths would have spent 100% of their time in Florida . The Smiths sold their Jupiter, Florida residence in April 1994 in a "distress sale situation."

26 U.S.C. §6323 provides in pertinent part that:

(a) The lien imposed by section 6321 shall not be valid against any . . . judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary. (f) (1) The notice referred to in subsection (a) shall be filed--In the case of personal property, . . . in one office within the State . . . in which the property subject to the lien is situated.

(2) . . . property shall be deemed to be situated--(B) In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of the lien is filed. (emphasis added).

"When the drafters added section 6323(f)(2)(B), they deliberately avoided using domicile . . . and chose residence instead 'because of the difficulty in determining a person's domicile based as it is on (among other things) his state of mind." Corwin Consultants, Inc. v. Interpublic Group of Companies, 512 F.2d 605, 608 (2nd Cir. 1975). "[T]he residence of a delinquent taxpayer is a question of fact to be determined by various criteria: Among them are the taxpayer's physical presence as an inhabitant and not a mere transient, . . .; the permanence of that presence . . .; the reason for his presence . . .; and the existence of other residences." Id at 610.

Here the uncontested evidence is overwhelming that the Smiths were established residents in Jupiter, Florida on March 23, 1992 . The unresolved date (apparently sometime in 1993) when Zella remarried and moved to the State of Washington could not negate or render irrelevant all the other facts showing the Smiths were Florida residents. Taken as a whole the record could not lead a rational trier of fact to find that the Smiths were Illinois residents at the time the IRS filed its lien. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 106 S. Ct. 1348, 1356 (1986). Summary judgment was appropriate and the order appealed from is affirmed.

 

 

[97-1 USTC ¶50,206] In re Thomas H. Stringer, Jr. and Twyla Ann Stringer, Debtors. Thomas H. Stringer, Jr., Twyla Ann Stringer, and Ann Spears, Chapter 13 Trustee, Plaintiffs v. United States of America, ex rel. Internal Revenue Service, Defendant

U.S. Bankruptcy Court, West. Dist. Okla. , BK-95-15688-LN, ADV-96-1091-LN, 12/2/96

[Code Sec. 6323 ]

Federal tax liens: Notice of: Place of filing.--

Federal tax liens against a debtor's intangible personal property interest in his vested right to receive annuity payments were valid and enforceable. Pursuant to the law of the state ( Oklahoma ) where the debtor resided, the IRS filed notices of the liens in the office of the county clerk for the county of his residence. Even if the IRS was required to file its notices of tax liens in accordance with the laws of the state (Maryland) in which the funds used to make the payments were located, those laws provided that tax liens on intangible personal property had to be filed with the circuit court of the county where the taxpayer resided, not where the property was located.

[Code Sec. 6871 ]

Federal tax liens: Avoidance: Bankruptcy: Property: Protected categories.--

A bankruptcy trustee could not avoid valid and enforceable federal tax liens against a debtor's intangible personal property interest in his vested right to receive annuity payments under Code Sec. 6323(b) because the debtor's right to receive the payments did not fall within any of the statutorily protected categories of property.

James A. Conrady, James A. Conrady & Assocs., Inc., 100 W. 7th, Okmulgee, Okla. 74447, for Thomas H. Stringer, Jr. Ann Spears, 321 Dean A. McGee Ave., Oklahoma City, Okla. 73101, pro se. Patrick M. Ryan, United States Attorney, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

LINDSEY, Bankruptcy Judge:

On February 26, 1996, Thomas H. Stringer and Twyla A. Stringer, debtors in the underlying Chapter 13 bankruptcy case, and the standing Chapter 13 Trustee, Ann Spears, commenced this adversary proceeding pursuant to Rule 7001(2) FED.R.BANKR.P. requesting that this court determine the validity, priority, and enforceability of federal tax liens held by the United States of America ("IRS" herein) on annuity payments which debtor Thomas Stringer receives.

On August 7, 1996 , Plaintiffs and Defendant filed simultaneous motions for summary judgment.

On August 19 and August 20, 1996 , respectively, Plaintiffs and Defendant filed their responses to the motions for summary judgment, and the matter is now ripe for determination.

THE PERTINENT UNDISPUTED FACTS

1. That at all times material hereto, debtor Thomas Stringer was a resident of Okmulgee County , Oklahoma , and has never been a resident of the State of Maryland .

2. As payment for his professional services in connection with the settlement of a personal injury lawsuit, debtor Thomas Stringer, as beneficiary, receives deferred payments pursuant to an annuity contract dated July 2, 1987 , and owned by United States Fidelity and Guaranty Company ("USF&G").

3. USF&G is located in Baltimore , Maryland , which is the situs of the fund from which the annuity payments are drawn.

4. IRS filed notices of federal tax liens with the county clerk for Okmulgee County , Oklahoma , on March 16, 1991 , and on December 14, 1993 , attributable to debtors' tax obligations for the years 1989 and 1992.

5. No notices of federal tax liens were filed by IRS in the State of Marylard with respect to debtor Thomas Stringer's interests in the annuity payments.

THE ISSUES

1. Whether the federal tax liens filed in Okmulgee County , Oklahoma , by the IRS in accordance with applicable federal and state laws are valid against debtor Thomas Stringer's property interests in the annuity payments which are paid from funds located in Baltimore , Maryland ?

2. If it is determined that the federal tax liens are valid, whether 11 U.S.C. §545(2) permits the standing Chapter 13 trustee to avoid such liens?

THE CONTENTIONS

In their motion for summary judgment, Plaintiffs assert that in order for the subject federal tax liens to be valid and enforceable with respect to debtor's property interest in the annuity payments, the IRS was required to file its notice of lien in accordance with the laws of the State of Maryland since the funds from which the annuity payments are made is located in that state. Because the IRS has failed to file their notices of tax liens in the State of Maryland , Plaintiffs contend that the IRS' asserted tax liens on debtor Thomas Stringer's annuity payments are invalid. ¹

Plaintiffs alternatively argue that if in fact the subject tax liens are valid, 26 U.S.C. §6323(b) renders the subject liens unenforceable against bona fide purchasers of certain types of personal property. See 26 U.S.C. §6323(b). They contend that because said liens are unenforceable against bona fide purchasers, the standing Chapter 13 trustee may avoid such liens pursuant to 11 U.S.C. §545(2). ²

In its motion for summary judgement IRS asserts that its notice of tax liens were filed in accordance with the Uniform Federal Lien Registration Act, which has been enacted by the Oklahoma0 Legislature, and codified at Okla.Stat.tit. 68, §§3401 et seq. It argues that Okla.Stat.tit. 68, §3403(C)(4) requires that notices of federal liens upon personal property, whether tangible or intangible, be filed in the office of the county clerk of the county where the person against whose interest the lien applies resides at the time of filing of the notice of lien.

Having filed its notice of tax lien with the county clerk of Okmulgee County, the county wherein debtor Thomas Stringer resides, the IRS contends that its tax liens are valid and enforceable against debtor Thomas Stringer's interest in the annuity payments even if the funds are located in Baltimore, Maryland.

With respect to Plaintiffs' contention that the standing Chapter 13 trustee may avoid its valid liens, IRS asserts that because the definition of "purchaser" for purposes of 26 U.S.C. §6323(b) does not include "bona fide purchasers," a bankruptcy trustee standing in the shoes of a "bona fide purchaser" does not fall within the protection of §6323(b). IRS therefore contends that because its property filed tax liens are valid and enforceable, its liens may not be avoided by the trustee under 11 U.S.C. §545(2).

DISCUSSION

As is pointed out in Plaintiffs' motion, debtor Thomas Stringer is not the owner of the annuity contract or of the funds from which his annuity payments are drawn. He does, however, hold an interest in the annuity contract by virtue of his vested right to receive payments thereunder. In this court's view, his right to receive such payments constitutes intangible personal property.

In their motion, Plaintiffs argue that in order for the federal tax liens to be valid, the IRS is required to file its notice of lien in the appropriate county in the State of Maryland in which the funds are located. Plaintiffs have provided no statutory authority in support of their argument.

However, as is pointed out by IRS in its response dated August 20, 1996, even if the court were to adopt Plaintiffs' unsupported contention that the IRS was required to file its notice of tax lien in accordance with the laws of the State of Maryland, those laws provide that notice of federal tax liens on intangible personal property be filed with the circuit court of the county where the person resides at the time of filing of the notice of lein, not in the county in which the property subject to attachment is located. See Maryland Revised Uniform Federal Lien Registration Act, MD. REAL PROP.CODE ANN. §3-401(B)(2) (1996).

It is uncontroverted that debtor Thomas Stringer resides in Okmulgee County , Oklahoma . Because the IRS filed its notice of tax lien with the appropriate authority in Okmulgee County , it is this court's view that proper filing of the notice has been accomplished under either Oklahoma or Maryland statutory law. ³ This court therefore concludes that the subject federal tax liens are valid.

With respect to the second issue, whether the Chapter 13 trustee may avoid the underlying federal tax liens, Plaintiffs point out that 26 U.S.C. §6323(b) provides that a federal tax lien, even if properly filed, is invalid against a purchaser as to certain categories of personal property. They argue that because §545(2) confers on a bankruptcy trustee the status of a hypothetical bona fide purchaser on the date of the commencement of the case, that the protection afforded by 26 U.S.C. §6323(b) is applicable to bankruptcy trustees. They therefore contend that because 26 U.S.C. renders the federal tax liens unenforceable against the bankruptcy trustee, §545(2) empowers a bankruptcy trustee to avoid such statutory liens. As support for their argument, Plaintiffs cite In re CS Associates [93-2 USTC ¶50,664], 161 B.R. 144 (Bank.E.D.Pa.1993).

In its pleadings, IRS argues that while 26 U.S.C. §6323(b) protects a "purchaser" of certain categories of property from an otherwise valid tax lien, a "purchaser," as that term is defined under 26 U.S.C. §6323(h)(6), does not necessarily include a "bona fide purchase" for purposes of this provision. ⁴ As support for its argument, IRS cites United States of of America v. Hunter (In re Walter ) [95-1 USTC ¶50,072], 45 F.3d 1023 (6th Cir. 1995).

As is apparent from the pleadings, both parties agree that 26 U.S.C. §6323(b) protects "purchasers" of certain types of properties from properly filed federal tax liens. However, as a preliminary matter, it must be shown that the property to which §6123(b) is to be applied qualifies under its provisions.

In their pleadings filed in this matter, Plaintiffs make a general argument that properly filed federal tax liens are invalid against bona fide purchasers without specifically identifying the provision of 26 U.S.C. §6323(b) they contend to be applicable to the underlying property at issue herein, i.e. debtors' intangible property interest in payments under the annuity contract.

Review of 26 U.S.C. §6323(b) reveals that of the ten categories of property to which this provision may be applicable, only subsection (1), which concerns securities, and subsection (9), which concerns life insurance, endowment, or annuity contracts, might arguably apply to debtors' property interests at issue herein. ⁵

As is noted above, debtor's only interest in the subject annuity contract is his vested right to receive payments. In order for §6323(b)(1) to be applicable, it must be shown that debtor Thomas Stringer's right to receive the annuity payment is a "security as that term is defined under 6323(h)(4). ⁶ See 26 U.S.C. §6323(b)(1). This court is of the opinion, however, that a bare legal right to receive money under an annuity contract is not a "security" for purposes of §6323(b)(1). Accord Christison v. United States of America (In the Matter of Hearing of Illinois, Inc.) [92-1 USTC ¶50,188], 960 F.2d 613, 615 (7th Cir. 1992); Worley v. United States of America [65-1 USTC ¶9160], 340 F.2d 500, 502 (9th Cir. 1965); United States of America v. First National Bank of Memphis [72-1 USTC ¶9357], 458 F.2d 560, 563 (6th Cir. 1972). The court therefore concludes that §6323(b)(1) is inapplicable herein.

Finally, while §6323(b)(9) clearly encompasses annuity contracts, the protection afforded by that provision is available only to "the organization which is the insurer under such contract." 26 U.S.C. §6323(b)(9). In the instant matter, that organization is USF&G. This court therefore holds that §6323(b)(9) is inapplicable to Thomas Stringer.

DECISION

Based upon the foregoing discusssion, and without deciding the merits of IRS' argument as to the meaning of the term "purchaser" for purposes of §6323(b), this court is of the view that Plaintiffs have not shown, and would be unable to show, that the provisions of 26 U.S.C. §6323(b) would be both applicable to the property interest at issue herein, and available to the party seeking the protections afforded by this provision. Plaintiffs' motion for summary judgment will therefore be denied. Defendant's motion for summary judgment will be granted, and judgment will be entered accordingly.

IT IS SO ORDERED.

¹ In their motion for summary judgment, Plaintiffs also assert that the lien of American Exchange Bank of Henryetta , Oklahoma , is superior to the tax liens held by the IRS. In its response to Plaintiffs' motion, the IRS concedes that the lien of American Exchange Bank is prior to its tax lien.

² Section 545(2) provides as follows: The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien.... (2) is not perfected or enforceable at the time of the commencement of the case against a bona-fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists.

³ In their motion, Plaintiffs compare American Exchange Bank's actions to perfect its security interest by filing its lien both in Oklahoma and in Maryland , with the actions taken by the IRS in perfecting its security interest by filing its notice of lien only in Oklahoma . Plaintiffs ignore the fact that American Exchange Bank was not seeking to perfect its lien under the Uniform Federal Lien Registration Act, which governs federal liens such as that held by the IRS.

⁴ Title 26 U.S.C. §6323(b) defines the term "purchaser" in part as follows: The term "purchaser" means a person who, for adequate and full consideration n in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice."

⁵ Subsections (2), (3), (4), (5), (6), and (7) of 26 U.S.C. §6323(b) concern real or tangible personal property, while (8) concerns attorney liens and (10) concerns passbook loans.

⁶ Title 26 U.S.C. §6323(h) defines the term "security" as follows: The term "security" means any bond, debenture, note, or certificate of indebtedness, issued by a corporation or a government or a political subdivision thereof with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument; or money.

 

 

[96-2 USTC ¶50,423] In re Beverly A. Straight and Milton L. Straight, Debtors. Beverly A. Straight and Milton L. Straight, Plaintiffs v. First Interstate Bank of Commerce and Internal Revenue Service, Defendants

U.S. Bankruptcy Court, Dist. Wyo., 95-10007, 6/20/96, 200 BR 923

[Code Secs. 6323 and 6871 ]

Bankruptcy: IRS lien: Perfected: Avoidability: State law: Uniform Commercial Code.--

An IRS lien on the proceeds of a bankrupt individual's business account receivable was properly filed and could not be avoided as an unperfected lien. Under state ( Wyoming ) law, the IRS properly filed its notice of tax lien in the office of county clerk of the county where the property was located. The IRS did not have to comply with the Uniform Commercial Code (UCC) when filing a notice of tax lien since, by its terms, the UCC does not apply to statutory liens. Further, the tax lien did not arise out of a commercial transaction but rather occurred by operation of federal law. Also, the court rejected the taxpayer's contention that the Bankruptcy Code's hypothetical bona fide purchaser was effective under Code Sec. 6323 to avoid the tax lien on several specific items of property.

[Code Sec. 6323 ]

Bankruptcy: IRS lien: Priority of claim: Failure to perfect lien: Avoidable prepetition transfer.--

An IRS perfected tax lien on the proceeds of a bankrupt individual's business account receivable had priority over a bank's alleged security interest in the receivable. The bank based its priority over the tax lien on a security agreement filed before the IRS's notice of tax lien. However, the bank's security agreement did not take a security interest in any accounts receivable or contract rights except those arising out of a sale, lease, or other disposition of business equipment, mobile office or tools listed. The account receivable at issue was created from services performed by the taxpayer's business as a subcontractor on a road construction project, not by a sale, lease, or other disposition of equipment. Even if the bank had included the account receivable in its collateral, it failed to properly file a financing statement. Therefore, a payment made to the bank from the proceeds during the 90 days prior to the taxpayer's bankruptcy filing was a payment on an unsecured debt, which was an avoidable transfer.
[Code Sec. 6334 ]

Bankruptcy: IRS lien: Exempt assets.--

Property of a bankrupt individual was not exempt from a IRS lien under Code Sec. 6334 because it was not among the property specifically exempted from the process of levy by that section.

Stephen R. Winship, Donald R. Winship & Assocs., P.C., 100 N. Center St., Casper, Wyo. 82602, for debtor. Beverly A. Straight, Milton L. Straight, 1709 Meade, Clearmont, Wyo. 82835, pro se. Sharon A. Dunivent, P.O. Box 265, Cheyenne, Wyo. 82003, for trustee.

DECISION ON MOTIONS FOR SUMMARY JUDGMENT

MCNIFF, Bankruptcy Judge:

This case came before the court on the amended complaint of the plaintiffs/debtors, Milton L. and Beverly Ann Straight, and the motions for summary judgment filed by the Straights and both defendants, the Internal Revenue Service (IRS) and the First Interstate Bank of Commerce (FIB). On February 13, 1996 , the court held a hearing on the motions. After a review of the record and pleadings on file, and upon consideration of the arguments of the parties, the court finds and rules as set forth herein.

JURISDICTION

The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§157 and 1334. This is a core proceeding within the meaning of 28 U.S.C. §157(b)(2)(F) and (K). The motions are brought pursuant to Fed. R. Civ. P. 56(a) and (b), made applicable in adversary proceedings by Fed. R. Bankr. P. 7056.

The debtors' amended complaint states claims for a declaratory judgment under 28 U.S.C. §2201 and to avoid liens. The IRS argues that this court is without jurisdiction under the Declaratory Judgment Act to determine those issues on which the debtors seek a declaratory judgment. The court disagrees. Even if the remedy of a declaratory judgment were necessary to resolve this case, an actual controversy exists and the matters which the debtors seek to have resolved fall within the provisions of 11 U.S.C. §505 . As such, they are excluded from the restrictions of §2201(a). See In re Border, 116 B.R. 588, 590 (Bankr. S.D. Ohio 1990).

UNDISPUTED FACTS

The Straights are residents of Sheridan County , Wyoming . For the purposes of this case, the property of the Straights has at all times been located in Sheridan County , Wyoming .

Mrs. Straight is engaged in the road construction flagging business under the dba Centerline Traffic Control and Flagging. She borrowed funds from the First Interstate Bank of Commerce in Sheridan , Wyoming , to operate the business. On May 7, 1993 , she gave FIB a promissory note for $35,000. The note was secured by collateral identified in a Commercial Security Agreement signed the same date. The Security Agreement was filed by FIB, in lieu of a financing statement, on May 12, 1993 in the Office of the Sheridan County Clerk.

The Security Agreement granted FIB a security interest in items of collateral identified as equipment and inventory, which were listed in the attached Schedules A through D. The lists were of various tools, traffic signs and traffic control devices, and a mobile office. The equipment is valued in the debtors' schedules at $84,239.36 (office equipment and machinery).

In her business operations, Mrs. Straight entered into at least two subcontracts with general highway construction contractors. One of these was a March 23, 1993 contract with Nicholls & Lewis, Inc. On May 27, 1993 , Mrs. Straight entered into a Standard Sub-contract Agreement with another highway contractor, Lobo, Inc. and Carr Construction, Inc., A Joint Venture (Lobo/Carr). The parties do not dispute that Mrs. Straight assigned the subcontract payments to FIB, although the assignments were not provided to the court as FIB indicated.

Performance under both contracts was completed. Payments due under the Lobo/Carr contract are valued in the debtors' chapter 13 plan at $144,500. According to Mrs. Straight's affidavit however, Lobo/Carr owes Mrs. Straight $115,536.

FIB extended credit to Mrs. Straight under a number of promissory notes dated from June 8, 1993 to October 25, 1994 . The amount of the FIB claim as of the date the Straights filed their chapter 13 voluntary petition, January 13, 1995 , is $150,351.21.

On September 13, 1994 , the IRS filed a Notice of Federal Tax Lien in the Office of the Sheridan County Clerk for unpaid employment taxes totaling $79,134.23. The IRS claim as of the date of the bankruptcy filing is $119,990.62.

The IRS did not file its Notice of Federal Tax Lien in the office of the Secretary of State of Wyoming. FIB did not file an assignment of either subcontract in any location. FIB did not file its May 6, 1993 security agreement or a financing statement with the Secretary of State of Wyoming.

Straights own property other than the rights to contract payments and equipment, which is subject to the federal tax lien, including their home. There is a first lien on the residence of $15,113, but some equity exists.

On December 30, 1994 , FIB was paid $16,605.04 from the Lobo/Carr contract payments. The payment was made upon stipulation of the parties from funds held by the District Court for the Fourth Judicial District of Wyoming. On January 13, 1995 , the Straights filed their voluntary petition for relief under chapter 13. The payment was within 90 days of the filing of the bankruptcy petition.

DISCUSSION

The standards for entry of summary judgment are frequently stated. Summary judgment is appropriate when there are no issues of material fact in dispute and the moving party is entitled to judgment as a matter of law. In re Baum, 22 F.3d. 1014, 1016-1017 (10th Cir. 1994). A fact is material if it could affect the outcome of the claim. An issue is genuine if it presents sufficient disagreement to be submitted to the trier of fact, and the trier of fact could return a verdict for the nonmoving party. Farthing v. City of Shawnee , Kan. , 39 F.3d. 1131, 1135 (10th Cir. 1994). The court must review the record and make all reasonable inferences in favor of the party opposing the motion. Id.

Standing

The threshold issue is whether a chapter 13 debtor has standing and/or the requisite statutory authority to assert the avoiding powers of a trustee found in various provisions of the bankruptcy code. In their original complaint, the Straights sought a determination of the relative priorities of the FIB consensual lien and the IRS tax lien. The action was necessary for the debtors to value the secured claims in a chapter 13 plan. In this court's view, a chapter 13 debtor has standing to pursue claim valuation and to bring an action for a determination of the relative priorities of competing liens for plan payment purposes.

Subsequently, the debtors amended their complaint to include claims for lien avoidance under §§544 & 545 and the recovery of an alleged preferential transfer under §547 . Section 103(a) makes the avoiding powers of chapter 5 applicable in cases under chapter 13. Nonetheless, who will exercise these powers in chapter 13 is anything but clear. The power to avoid a lien or transfer under §§544 , 545 , or 547 is granted to the "trustee." In chapter 13, the trustee's specific duties do not include using the lien avoiding powers of chapter 5. Nor does the enumerated list of the debtor's powers which is set forth in §1303 .

The reported decisions, relying on statutory construction, reach different conclusions. Early decisions were split into at least two camps. Some courts held that only a chapter 13 trustee could use the avoiding powers. In re Walls, 17 B.R. 701 (Bankr. S.D.W. Va. 1982). Others held that the debtor could exercise these powers. In re Ware, 99 B.R. 103 (Bankr. M.D. Fla. 1989); In re Ottaviano, 68 B.R. 238 (Bankr. D. Conn. 1986); In re Hall, 26 B.R.10 (Bankr. M.D. Fla. 1982) (case receded from and position reversed by same author in In re Tillery, 124 B.R. 127 (Bankr. M.D. Fla. 1991)).

The present majority rule holds that debtors may use the avoiding powers for their own benefit only within the narrow limits of §522(h), i.e., if the property would have been exempt but for the transfer and the trustee does not act. Otherwise, the majority holds that the strong arm powers belong exclusively to the chapter 13 trustee. In re Hill, 152 B.R. 204, 206 (Bankr. S.D. Ohio 1993); In re Davis , 148 B.R. 165 (Bankr. E.D.N.Y. 1992), aff'd, 169 B.R. 285 (E.D.N.Y. 1994).

In addition to statutory construction, most of the decisions are also supported by policy considerations. For example, given the trustee's reluctance in most cases to pursue transfers, the debtor should be able to redress any alleged wrongs.

On the other hand, the strong arm powers are obviously intended to enhance the estate, not to increase the personal assets of the debtor. This policy supports a rule that only a trustee can use the avoiding powers outside of §522(h). Some courts have stated that if a debtor is authorized to exercise avoiding powers, the debtor must do so for the benefit of the estate. In re Jernigan, 130 B.R. 879 (Bankr. N.D. Okla. 1991).

A number of factors are important in this case. In some respects, the case is more similar to a chapter 11 case. The debtor has made no plan payments since the beginning of the case and, as the IRS points out, that alone could make these issues moot.

Also, the chapter 13 trustee has refused to pursue this litigation, having no apparent motivation to recover preferential transfers or to avoid liens. Obviously, if the court rules against the debtors on this question, they can convert their bankruptcy case to a chapter 11 or chapter 7 case. The adversary proceeding will likely go forward. And finally, the court believes it is inequitable for a creditor with an unperfected lien or as the recipient of a preferential transfer to retain an advantage over the other creditors.

Therefore, the court holds that the Straights may prosecute these claims so long as any recovery is deposited with the chapter 13 standing trustee for distribution to and for the benefit of the unsecured creditors. As to the claims brought pursuant to §522(h), the court holds that the statutory language of that section grants the debtors' standing to avoid liens which impair their exemptions.

Perfection and Priorities

The positions of the parties with regard to the lien priorities should first be summarized. FIB argues that its lien in the Lobo/Carr proceeds is perfected, is first in time, and is, therefore, prior to the IRS. The debtors argue that FIB did not properly file its financing statement and, therefore, does not have a perfected lien in the Lobo/Carr proceeds. The debtors also argue that the IRS lien is improperly filed, making it avoidable as to some items of property. The IRS contends that the FIB lien in the Lobo/Carr proceeds is not perfected and, therefore, the IRS lien has priority.

The IRS lien: The debtors allege that the IRS lien may be avoided under §545(2) which states that "the trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien ... is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser ..." First, Straights contend that the IRS lien is not perfected as to the debtors' vehicles and accounts receivable (Lobo/Carr contract payments) because the IRS did not comply with the filing requirements of the Uniform Commercial Code, found in Wyo. Stat. §§39.1-9-302 & 39.1-9-401 (1991).

The existence and priority of a federal tax lien are determined in accordance with federal law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960). A federal tax lien arises when a tax is unpaid after demand. 26 U.S.C. §6321 . Under §6323(a) of the Internal Revenue Code (IRC), a federal tax lien becomes valid against third parties when notice is filed in accordance with §6323(f) . To perfect a tax lien, the IRC defers to state law to designate the place and manner of filing. In re Henderson , 133 B.R. 813, 815 (Bankr. W.D. Tex. 1991). In this case, the parties agree that the applicable law is the law of Wyoming , the state in which the personal property at issue is situated. 26 U.S.C. §6323(f)(1)(A)(ii) .

Wyoming has enacted the Uniform Federal Lien Registration Act which requires that, excluding persons not deceased, corporations, partnerships or trusts, a federal tax lien is filed in the office of the county clerk of the county where the person against whose interest the lien applies resides at the time of filing of the notice of lien. Wyo. Stat. §29 -6-201 et seq. (Supp. 1994). One determines whether or not the IRS has properly filed its notice of tax lien in accordance with this statute.

The court disagrees with the debtors' position. The IRS is not required to comply with the Uniform Commercial Code when filing its notice of federal tax lien. By its terms, the UCC does not apply to statutory liens. Wyo. Stat. §§34.1-9-102(b) & 34.1-9-104(a)(I) (even assuming that a federal tax lien is a consensual "security interest" under the UCC). Frontier Federal Sav. & Loan Ass'n v. Commercial Bank, 806 P.2d. 1140, 1142 ( Okla. App. 1990).

The debtors' policy arguments are not convincing. The IRC protects the very vehicle purchasers about whom the debtors express concern. A federal tax lien does not arise out of a commercial transaction as implied by the debtors, but rather occurs by operation of federal law. Finally, the case law cited by the debtors, even if correct, is applying the law of other states and as such, is inapposite.

In this case, the IRS properly filed its notice of federal tax lien in the Office of the County Clerk of Sheridan County , the residence of the Straights at the time the notice was filed. Wyo. Stat. §29 -6-204(c)(iv). The IRS tax lien was properly filed and cannot be avoided under §545(2) as an unperfected lien.

Second, Straights allege that the status of a §545 hypothetical bona fide purchaser is effective under 26 U.S.C. §6323(b) to avoid the lien on some specific items of property. That section of the IRC provides exceptions to the validity of the tax lien by protecting a "person who, for adequate and full consideration in money or money's worth" and without knowledge of the lien, purchases property from the taxpayer. 26 U.S.C. §6323(h)(6) . In response, the IRS did not confront this issue head on, but argued only the standing issue.

In the case of In re Walter [95-1 USTC ¶50,072 ], 45 F.3d 1023 (6th Cir. 1995), the court addressed this question in the context of motor vehicles. The IRC requires that the bona fide purchaser also have possession of the vehicles to be protected. The Walter court rejected the same cases cited by the debtors here and held that the hypothetical bona fide purchaser under §545(2) does not in all circumstances satisfy the stricter standard of a bona fide purchaser under §6323(b)(2) . Id. at 1034. That court also refused to impute the necessary element of hypothetical possession to a trustee under §545(2) as a hypothetical bona fide purchaser.

The court in In re Berg [95-2 USTC ¶50,634 ], 188 B.R. 615 (Bankr. 9th Cir. 1995) adopted and elaborated on the decision in In re Walter [95-1 USTC ¶50,072 ], Id. at 619-620. That court held that the IRC requires a higher standard for a bona fide purchaser than does §545 . Therefore, the status of a hypothetical bona fide purchaser under the bankruptcy code is never effective to avoid IRS liens through §6323(b) , whether or not possession is an issue. §6323(b)(1) ; See also United States v. Weissing [95-2 USTC ¶50,449 ], 1995 W.L. 579928 (M.D. Fla. 1995), reversing In re Southern Transfer & Storage Co., 157 B.R. 691 (Bankr. M.D. Fla. 1993) (cited by debtors here).

These decisions are not without their critics, however. In In re Guyana Development Corp. [96-1 USTC ¶50,061 ], 189 B.R. 393 (Bankr. S.D. Tex. 1995), the court rejected the reasoning in Walter. That court held that a trustee is deemed to have paid full and adequate consideration as a bona fide purchaser, thereby satisfying the definition of §6323(h)(6) . That court found no distinction between a purchaser for value and a purchaser for adequate consideration in money or money's worth.

This court finds the reasoning in United States v. Weissing persuasive. A trustee standing in the shoes of a bona fide purchaser is not the purchaser without knowledge that §6323 is intended to protect. The specific language of §6323 does set forth a stricter standard than §545 . And finally, with regard to motor vehicles, hypothetical possession is a legal fiction not addressed, contemplated or created by §545 . United States v. Weissing [95-2 USTC ¶50,449 ], 1995 W.L. 579928 at p. *4-5.

Additionally, avoidance of the tax lien on these grounds exceeds the scope of the standing to which this court has found a chapter 13 debtor is entitled; that is, to recover property for the benefit of the creditors. The decisions adopting In re Walter will be followed by this court.

The FIB lien: To resolve which lien has priority in the Lobo/Carr funds, the court must determine the status of the alleged FIB lien in the Lobo/Carr contract payments. A properly filed federal tax lien is valid and has priority over a prior security interest which is not protected under local law against a subsequent judgment lien creditor. 26 U.S.C. §6323(h) . The validity of a prior recorded security interest must be determined pursuant to state law. United States v. FDIC, 1987 W.L. 43096 at p. *2 (N.D. Tex. 1987).

The security interest asserted by FIB was created by a security agreement executed May 7, 1993 and filed on May 12, 1993 in the Office of the Sheridan County Clerk. To determine the intent of the parties to an unambiguous contract, the court must give effect to the plain meaning of its language. Killer v. Citicorp Mortg., Inc., 860 P.2d. 1165, 1167 ( Wyo. 1993). If the contract is ambiguous, the contract is construed against the drafter. Deepwater Investments, Ltd. v. Jackson Hole Ski Corp., 938 F.2d. 1105, 1111 n.9 (10th Cir. 1991). General terms, if conflicting, give way to the more specific. Flora Const. Co. v. Bridger Valley Elec. Ass'n, Inc., 355 P.2d. 884, 885 ( Wyo. 1960).

The UCC states that a description of the collateral in the security agreement is "sufficient whether or not it is specific if it reasonably identifies what is described." Wyo. Stat. §34.1-9-110. In this case the FIB asserts its security interest in the contract rights under the following language:

Collateral. The word "Collateral" means the following described property of Grantor:

All equipment and inventory on the attached Schedules "A", "B", "C", & "D".

In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising and wherever located: ...

(c) All accounts, contract rights, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (Emphasis provided).

The specific language is clear and unambiguous that the FIB did not take a security interest in any accounts or contract rights except those arising out of a sale, lease, or other disposition of the flagging equipment, mobile office and tools listed. The terms sale and lease have ordinarily understood meanings. Disposition is defined by Blacks Law Dictionary as transferring, alienating or giving up property. No sale, lease, or transfer of the flagging equipment has occurred, and no contracts or accounts related to a sale, lease, or other disposition exist.

The Lobo/Carr contract payments at issue were not created by a sale, lease, or other disposition of the equipment. The contract payments are from services performed by Mrs. Straight as a subcontractor on a road construction project. Consequently, by its terms, the security agreement does not grant FIB a security interest in the Lobo/Carr contract payments.

In a previous case, this court had occasion to determine the rights of the debtor in possession vis-a-vis the junior lien holder when the first priority lien was avoided. In re Double J Cattle Co., Double J Cattle Co. v. Geis et al., No. 95-2012, slip opinion at 11 (Bankr. D. Wyo. Nov. 2, 1995 ). The status of the lien to which the trustee succeeds is not enhanced by §551 . The trustee preserves only the rights to which he has succeeded. In re Kors, Inc., 819 F.d. 19, 23 (2nd Cir. 1987).

The court must turn to Wyoming law to determine the relative priority of competing liens. In re Van De Kamp's Dutch Bakeries, 908 F.2d. 517, 519 (9th Cir. 1990). Under Wyoming Statute §34.1-9-301(a) an unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected. In this case, the IRS, pursuant to both the IRC and the UCC, has priority over the nonexistent lien of the FIB. The IRS lien has first priority position on the property unencumbered by the FIB lien, and is prior to any interest of the debtors or the estate.

Because the court concludes that the FIB security interest does not encumber the the Lobo/Carr payments, the court does not need to determine whether the FIB filed in the proper location(s), nor whether the good faith filing provision of §39.1-9-401(b) is applicable to the IRS. Suffice it to say that in this court's opinion, the Lobo/Carr contract payments are accounts within the meaning of the UCC. They are contract payments for services performed, falling squarely into the definition of an account, i.e., a "right to payment for ... services rendered which is not evidenced by an instrument or chattel paper ..." Wyo. Stat. §39.1-9-106. The FIB argument that the written contract between Mrs. Straight and Lobo/Carr is an indispensable writing as described in the comments to the UCC is unconvincing. In the court's view, an indispensable writing includes promissory notes, certificates of deposit and the like.

A security interest in accounts must be perfected by filing a financing statement with the Secretary of State. Even if FIB had included the Lobo/Carr account in its collateral, the FIB failed to properly file the security agreement.

The court holds that the IRS tax lien has priority over the alleged security interest of the FIB in the Lobo/Carr contract.

Preferential Transfer to FIB

Straights seek to avoid, as a preferential transfer under §547 , the payment to FIB of $16,605.04. This payment was made on December 30, 1994 , pursuant to a stipulation and court order from the District Court for the Fourth Judicial District of Sheridan County, Wyoming . The funds from which the payment was made were part of the Lobo/Carr contract payments which this court has determined were not encumbered by a FIB lien.

Under §547 , the trustee may avoid any transfer of an interest of the debtor in property to or for the benefit of a creditor; for or on account of an antecedent debt owed by the debtor before the transfer was made; made while the debtor was insolvent within 90 days before the date of the filing of the petition; and that enables the creditor to receive more than the creditor would receive if the case were a chapter 7 case.

Section 547 provides a presumption of insolvency during the 90-day prepetition period. In this case, insolvency was not disputed and no evidence was presented to rebut that presumption or to raise a question of fact.

A transfer is defined by §101(54) as "every mode ... of disposing of or parting with property or with an interest in property." This broad definition encompasses the payment of money on an unsecured or undersecured debt. In this case, FIB is an unsecured creditor and was paid funds upon which it did not have a lien. FIB received more by that payment than it would have received in a chapter 7 liquidation. In re Alper-Richman Furs, Ltd., 147 B.R. 140 (Bankr. N.D. Ill. 1992).

All elements of a preferential transfer are satisfied. But FIB defends this claim by contending that the payment was made pursuant to stipulation with the debtor and by court order.

The court cannot agree that such circumstances somehow create a defense. A judicially ordered transfer within the preference period is still a transfer. If the other elements of a preference are met, such a transfer can be avoided just as a judicially created lien is avoidable. In re Waxman, 128 B.R. 49 (Bankr. E.D.N.Y. 1991).

The court concludes that the payment of Lobo/Carr contract funds to FIB during the 90 days prepetition was a payment on an undersecured debt which is an avoidable preferential transfer under §547 of the code.

Property Exempt under the IRC

Straights also contend that some specific items of property are exempt from the attachment of the IRS lien pursuant to the provisions of 26 U.S.C. §6334(a) . Section 6334 provides a specific list of property exempt from levy, including the furniture, clothing and tools listed by the Straights.

The Straights mistake the attachment of a tax lien with the process of levy, a distinction with a material difference. The federal tax lien attaches to all of a debtor's property, without exception. 26 U.S.C. §6321 . Under §6331(b) , a levy includes "the power of distraint and seizure by any means." Even if a debtor retains possession of property under §6334 , the lien continues. The debtor must still pay the amount of the secured tax claim. In re Sills [96-1 USTC ¶50,282 ], 82 F.3d 111, 114 (5th Cir. 1996); In re Voelker [95-1 USTC ¶50,028 ], 42 F.3d. 1050, 1053 (7th Cir. 1994). If the debtor voluntarily disposes of the property subject to the lien, the property is liable for the lien even though exempt from levy while in the debtor's possession. In re Jackson [88-1 USTC ¶9186 ], 80 B.R. 213, 215 (Bankr. D. Colo. 1987).

The Straights cite the case of In re Barbier, 84 B.R. 190 (D. Nev. 1988) in support of their argument. This decision was reversed by the Ninth Circuit Court of Appeals in United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.d. 377 (9th Cir. 1990). That court held that in a "Chapter 13 plan, the IRS's tax lien may be secured by property that is exempt from levy under section 6334(a) ." Id. at 380. Accordingly, the Straights may not exempt property from the lien by application of §6334 .

Nonpurchase money security interest under 522

The one remaining legal issue is whether, through §522(f), the debtors can avoid the FIB lien on tools which they have claimed exempt as tools of the trade. The debtors allege that the lien is a nonpossessory, nonpurchase-money security interest which impairs valid exemptions. The court is not advised as to the method or source of the values placed on the tools by the debtors. FIB responds that this claim presents genuine issues of material fact that cannot be determined on summary judgment, but did not present any opposing evidence.

As the court finds there may be a factual dispute as to the value of the tools and whether or not the lien is a nonpurchase-money lien, summary judgment on this issue is inappropriate. Regardless, a trial in this adversary proceeding is not necessary. The debtors may bring this matter before the court for resolution on motion in the underlying bankruptcy case. FIB will have ample opportunity to contest the motion and the asserted values. Fed. R. Bank. P. 4003(d).

Valuation

Finally, the debtors seek a determination of the secured claims of the FIB and the IRS under §506(a). Valuation is not a proper summary judgment issue. Further, the debtors' own sworn pleadings create discrepancies over the value of their residence. Last but not least, until a chapter 13 plan is proposed, this issue is certainly premature. The value of the collateral securing the claims will be presented and determined in a valuation hearing held immediately prior to the confirmation hearing on any proposed chapter 13 plan.

CONCLUSION

The court's rulings herein have resolved all of the legal issues which must be determined in this adversary proceeding. The remaining disputes between the parties, valuation and the §522(f) claim against the First Interstate Bank, will be decided in the underlying bankruptcy case. This case is fully adjudicated by the Summary Judgment which the court enters simultaneously with this Decision.

SUMMARY JUDGMENT

THIS MATTER came before the court on the motions of the plaintiffs, Milton L. and Beverly Ann Straight, for summary judgment, and the separate motions for summary judgment of the defendants, the United States of America on behalf of its agency the Internal Revenue Service and the First Interstate Bank of Commerce, Sheridan , Wyoming . The court held a hearing on the motions on February 13, 1996 , at which all parties were represented by counsel. Now the court, having considered the affidavits and other documents filed by the parties, the elements of all the claims in the complaint, the pleadings of record, the applicable law and the arguments of counsel, and in accordance with the Decision on Motions for Summary Judgment entered this day, the court finds that there are no genuine issues of material fact that must be resolved for disposition of this case. Therefore, summary judgment is proper as a matter of law on all but two matters which are more properly reserved for resolution in the underlying bankruptcy case. It is, therefore,

ORDERED that the debtors/plaintiffs, Milton and Beverly Straight, are entitled to judgment against the First Interstate Bank on Count I of the amended complaint: any alleged lien of the First Interstate Bank on the Lobo/Carr contract payments is void pursuant to 11 U.S.C. §544 ; and, further

ORDERED that the plaintiffs' motion for summary judgment on the claim to avoid the transfer of $16,605.04 to First Interstate Bank as a preferential transfer pursuant to 11 U.S.C. §547 is granted and the estate shall have judgment against the First Interstate Bank in the amount of $16,605.04, any recovery to be immediately deposited with the chapter 13 standing trustee; and, further

ORDERED that the Internal Revenue Service's motion for summary judgment is granted in all respects and the motion of the plaintiffs for summary judgment is denied on the claims against the Internal Revenue Service stated in Count III, Count IV, and Count V of the amended complaint; and, further

ORDERED that the First Interstate Bank's motion for summary judgment is denied, except as to Count IV of the amended complaint, which matter is reserved for ruling in the underlying bankruptcy case should the debtors choose to pursue it.

 

 

[73-1 USTC ¶9438]John Kirkpatrick, Plaintiff v. E. Richard Schelin et al., Defendants

Calif. Superior Court, County of Amador , No. 8146, 2/16/73

[Code Sec. 6323]

Lien for taxes: Priority: Federal v. State claims: Residence of taxpayer: California.--A Federal tax lien was superior to a State claim where the Federal Government filed notice of its lien first in the county of the taxpayer's residence.

Richard A. Rob yn, 7 N. Main St., San Andreas , Calif. , for plaintiff. Richard W. Nichols, Assistant United States Attorney, Sacramento , Calif. , for defendants.

Memorandum Opinion

MCGEE, District Judge:

This case involves a dispute between the United States and the State of California , both of whom seek to secure money presently held by John Kirkpatrick, the County Clerk and Auditor of Amador County.

Kirkpatrick, who is the plaintiff in the action, has interpleaded the United States and the State of California . He holds $2,502.40 which belongs to E. Richard Schelin.

The Government of the United States claims this money for unpaid Federal taxes due from Schelin and relies upon its notice of Federal Tax lien filed in the office of the County Recorder of Tuolumne County , California on March 30, 1971 .

The State of California claims the money under a judgment against Schelin following which on January 21, 1972 it filed its notice of garnishment and writ of execution with the plaintiff.

The United States contends it should be preferred because its notice of lien was filed first and in the proper county.

The State of California argues that the language contained in Title 26, United States Code Section 6323(f) should be construed as applying to personal property in its more restricted sense, namely goods and chattels only, and should not apply to personal property such as money in the possession of the plaintiff herein.

I do not believe this argument is valid. In any event, Section 7200 of the Government Code of California as added in 1967 explicitly directs that notices of liens upon personal property, whether tangible or intangible, for taxes payable to the United States shall be filed for record in the office of the Recorder of the County where the taxpayer resides at the time of filing the notice of lien.

Since this is so, the only question before this court is whether Schelin resided in Tuolumne County on March 30, 1971 . In my opinion, the evidence received at the trial is sufficient to support a finding that the legal residence of Schelin on that date was Twain Harte. Under this view, the United States should prevail in this action.

The plaintiff should recover his actual costs of suit and, in addition, $150.00 as attorneys fee.

Counsel for the United States shall prepare, serve and submit a proposed judgment in accordance with the views expressed herein.

 

 

[67-2 USTC ¶9582]Bankers Trust Company, Respondent v. Equitable Life Assurance Society of the United States, Defendant United States of America, Plaintiff-in-Intervention, Appellant v. Bankers Trust Company, Defendant-in-Intervention, Respondent, et al

State of N. Y. Court of Appeal, 5/23/67 , Rev'g N. Y. Sup. Ct., Appellate Div., 65-1 USTC ¶9311, 257 N. Y. S. (2d) 502

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323, prior to amendment by P. L. 89-719]

Lien for taxes: New York: Filing notice: Situs of property: Insurance policies.--Under New York law (prior to amendment to conform with Code Sec. 6323(f), added by P. L. 89-719) the situs of the delinquent taxpayer's "property" in the cash surrender value of insurance policies pledged as collateral on loans is the county where the taxpayer resides rather than the place where the policies are physically located. Accordingly, the Government's lien for taxes was valid against the pledgee of the policies since notice of the lien was filed in the county where the taxpayer resided.

Arnold A. Jaffe, Joseph L. Fishman, 51 W. 51st St., New York, N. Y., for respondent. Thomas J. Craig, Jr., Stuart McCarthy, Charles W. Muller, Equitable Assurance Society of the U. S., New York, N. Y., amicus curiae. Rob ert M. Morgenthau, United States Attorney, Laurence Vogel, Grant B. Hering, Assistant United States Attorneys, New York, N. Y., Joseph Kovner, Department of Justice, Washington, D. C. 20530, for plaintiff-in-intervention, appellant.

BURKE, Judge:

The question presented on this appeal is one of priority between a United States Government tax lien and the lien of a pledgee of various life insurance policies. At issue is the question of whether the Government's filing its notice of lien in the county of residence of the taxpayer sufficed under section 240 of New York's Lien Law to obtain for it priority over the pledgee's liens against the policies for repayment of advances made subsequent to the filing of notice of the Government's lien. The parties are agreed that section 240 is controlling ¹ and that if the Government's notice of lien was filed in accordance with section 240, it takes priority.

The background of this controversy is rather complex, but the essential facts are as follows: On November 13, 1953, the Government filed a notice of lien with respect to income taxes previously assessed against one Fynke (the taxpayer) in the office of the Clerk of Nassau County, Fynke's place of residence. There is presently due the Government from Fynke over $93,000 in back taxes. Prior to the date the Government filed its notice of lien Fynke had assigned to the Bankers Trust Company (or its predecessor) life insurance policies having a cash surrender value of $36,000 and the bank had in turn advanced to Fynke (individually or on his guarantee) various amounts resulting in an unpaid balance of $13,000 at the date the lien was filed. (The Government does not dispute the bank's right to priority as to the $13,000 owed it before the filing of the Government's lien.) Subsequent to November 13, 1953 , three additional policies, having a cash surrender value of $7,600, were assigned by Fynke to the bank and Bankers Trust made additional advances to Fynke resulting in a further unpaid balance of $29,000. In the Fall of 1960 the Government gave actual notice of its lien to the several insurance companies involved. Thereafter Bankers Trust in July, 1961 refused to renew Fynke's notes and proceeded to cancel and collect upon the policies that had been pledged with it. The Equitable Life Assurance Society had some question about whether to pay the bank or the Government and it resisted payment. Bankers Trust brought suit against Equitable, which was allowed to pay the cash surrender value of the policies into court, and the Government intervened.

On these facts the majority in the Appellate Division held that the bank's lien was superior to that of the Government for the reason that the Government had failed to file its notice of lien in New York City where a number, though not all, apparently, of the policies were physically located on November 12, 1953 (in the possession of the pledgee bank). The basis for this holding was the then requirement of subdivision 2 of section 240 that the Government file its notice of lien in the county where the property is located, if it is located within New York City, as well as in the county of the taxpayer's residence. (The statute as amended effective July 3, 1966 , now has no such requirement. Place of filing follows simply residence.)

Reasoning by analogy to cases in which jurisdiction was at issue or in which "commercial specialties" such as bills of exchange or promissory notes were involved, the majority below was of the opinion that the situs of a taxpayer's "property" in the cash surrender value of his insurance policies should be determined by the physical location of the instruments themselves. We, however, are not inclined to follow this approach, preferring, rather, the analysis of Justices STEUER and BOTEIN in their dissent.

The dissenters below recognized, as Chief Judge CARDOZO observed in Severnoe Securities Corp. v. London & Lancashire Ins. Co. (255 N. Y. 120), that the situs of intangibles is in truth a legal fiction and that while there are times when justice or convenience requires that a legal situs be ascribed to them, at the root of the selection process there is "generally a common sense appraisal of the requirements of justice and convenience in particular conditions" (supra, p. 123). (255 N. Y. 123.) In addition, as Judge CARDOZO observed, determination of situs for one purpose has no necessary bearing on its determination for another purpose (see 255 N. Y., p. 124) which, of course, follows if determination of situs is to be made upon the basis of considerations of "justice and convenience in particular conditions". Stated another way, the problem is "fundamentally a question of ease of admin istration and of equity." (See Texas v. New Jersey , 379 U. S. 674, 683, concerned with determination of situs of intangible personal property for escheat purposes.)

Upon examining the presumed legislative purpose behind section 240, to wit, provision of notice to persons intending to deal with one seeking credit that the Government has a claim against him for unpaid Federal taxes, warning the prospective creditor, should he inquire, that his claim will be subordinate to that of the Government, it seems clear that the lender's interest can be fully served by requiring only that the lien notice be filed in the taxpayer's county of residence and that there is no need for inconveniencing the Government by requiring it to track down whatever of the taxpayer's intangible assets might have found their way into New York City. This rule has the virtues of simplicity and certainty and its wisdom is further testified to by the subsequent amendment of section 240 to eliminate any requirement of filing at the place of location of the taxpayer's property. For purposes of determining the situs of these insurance policies under section 240, then, we hold that their situs follows that of the insured's residence. ²

Accordingly, the order of the Appellate Division should be reversed and the case remanded to Special Term for entry of judgment in the Government's favor for all sums realizable out of the cancellation of these policies over and above the unpaid $13,000 advanced by Bankers Trust prior to the filing of the Government's notice of lien.

Chief Judge FULD and Judges VAN VOORHIS, SCILEPPI, BERGAN and KEATING concur; Judge BREITEL taking no part. Order reversed, without costs, and case remitted to Special Term for further proceedings in accordance with the opinion herein.

¹ State law is controlling here by virtue of section 3672 (subd. [a]) of the 1939 Internal Revenue Code (now §6323, subd. [a] under the 1954 Code), constituting a permissive grant of authority to the States to legislate on this subject.

² It ought to be noted that the result we reach here is consistent with that which will in the future obtain under Federal law as a result of the 1966 amendments to the Internal Revenue Code. (See Pub. L. 89-719, 80 U. S. Stat. 1125, Nov. 2, 1966 , amdg., inter alia, §6323 of the 1954 Code.)

 

 

[63-2 USTC ¶9740]Sidney W. Mintz, Judgment Creditor-Respondent v. Irving L. Fischer, Judgment Debtor and United States of America , Claimant-Appellant

N. Y. Supreme Court, Appellate Div., First Department, 5998, 8/7/63

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Filing of notice: Situs of property v. situs of taxpayer: Priority of creditors.--Federal tax liens, filed in the county in which the taxpayer-creditor resided, had priority over a judgment against the taxpayer's debtor subsequently docketed in the county in which the debtor resided. The debt was after-acquired property and, as such, was subject to the lien.

Rob ert M. Morgenthau, United States Attorney, John Paul Reiner, Arthur S. Olick, Assistant United States Attorneys, New York, N. Y., for appellant. Sidney W. Mintz, 86-15 Broadway Elm, Queens , N. Y., pro se.

MCNALLY, Justice:

The question presented is one of priority between a United States tax lien and a judgment lien.

[Facts]

The judgment-debtor Irving L. Fischer is the taxpayer and at all relevant times was a resident of Queens County . He owes Federal income tax for the years 1957 to 1959 in the sum of $4,099, and $5,960.77 for the year 1960. Assessments therefor were made during 1961 and liens thereon filed on October 17, 1961 and November 1, 1961 , in the office of the Register of Queens County. The United States asserts the priority of its liens from the filing aforesaid.

Sidney W. Mintz is the judgment-creditor of Fischer. His judgment for $2,469 was docketed in the office of the Clerk of Bronx County on March 2, 1960 and in the office of the Clerk of the County of New York on January 25, 1962 . It is unsatisfied to the extent of $1,319. On January 30, 1962 a third-party subpoena in aid of Mintz's judgment was served on Rob ert P. Sheldon, Inc., engaged in the real estate brokerage business in New York County . This subpoena contained the statutory injunction provided for in section 781 of the Civil Practice Act. Rob ert P. Sheldon, Inc., is presently indebted to Fischer in the sum of $1,424.50. On February 13, 1962 the Director of Internal Revenue served a notice of levy upon Rob ert P. Sheldon, Inc.

[Scope of Federal Tax Lien]

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." (U. S. Code, tit. 26, §6321.) The lien applies to all property of the taxpayer at the time it arises and at any time thereafter. (Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, 268.) It arises at the time the assessment is made and continues until the tax liability is satisfied or outlawed by reason of lapse of time. (U. S. Code, tit. 26, §6322.)

The lien is valid upon assessment of the tax as to all except a "mortgagee, pledgee, purchaser, or judgment creditor." As to these the lien is not perfected until notice of the lien is filed "in the office designated by the law of the State * * * in which the property subject to the lien is situated"; if not so designated, then not until filed "in the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated." (U. S. Code, tit. 26, §6323.)

[Priority of Creditors]

The tax assessments and the filing of the notice of lien thereof in Queens County , the place of residence of the taxpayer, antedated the docketing of the judgment and the service of the third-party subpoena on the debtor of the taxpayer in New York County . Mintz, the judgment-creditor, claims priority of his judgment lien contending that the United States was required to file notice of its lien in New York County , the place of residence of Rob ert P. Sheldon, Inc., the debtor of the taxpayer-judgment-debtor Fischer. We hold the filing of the notice of tax lien in Queens County gives priority to the claim of the United States .

New York has designated the office of the City Register as the place to file notices of Federal tax liens affecting personal property and requires the notices to be filed in the county of residence of the owner and "in the county where the property is situated". (Lien Law, §240, subd. 2.)

The nature, scope and operation of the Federal tax lien is a matter of Federal law. Unless expressly excluded all the property of the taxpayer is within its scope. (United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47.) Of course, property rights are a matter of state law. (United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56-57.)

Filing of the notice of lien is a Federal requirement as to property "situated". (U. S. Code, tit. 26, §6323.) A debt has no independent situs. (84 C. J. S. §116a; Restatement, Conflict of Laws, §51, comment a.) Generally, the domicile of the creditor is considered the situs of the debt. (United States v. Webster Record Corp. [62-2 USTC ¶9670], 208 F. Supp. 412, 415, and cases cited.)

Uniformity is essential in the application and enforcement of Federal tax laws. (United States v. Gilbert Associates [53-1 USTC ¶9591], 345 U. S. 361, 364.) Taxation is a practical matter and it is not to be assumed that its enforcement depends on the accident of the residence of an unknown debtor of the taxpayer. If resort to legal fiction is necessary, then the necessities of tax uniformity and requirements dictate the selection of the domicile of the owner of the intangible. "At the root of the selection is generally a common sense appraisal of the requirements of justice and convenience in particular conditions." (Severnoe Securities Corp. v. London & Lancashire Ins. Co., 255 N. Y. 120, 123 [ Cardozo , Ch. J.].)

In Matter of Oxford Distributing Co. v. Famous Rob ert's Inc. [58-2 USTC ¶9538] (5 A D 2d 507) the notice of lien was filed in New York County, the place of residence of the corporate taxpayer, and although not filed in Albany the tax lien was held prior to a judgment-creditor's third-party subpoena served on the State Comptroller in Albany in respect of a refund incident to the surrender of the taxpayer's liquor license. The omission to file the notice of lien in Albany was not urged; it was assumed that the filing requirement had been met by the filing in New York County (See, also, Spade v. Salvatorian Fathers, Superior Court, N. J., Law Division, Camden County, decided April 2, 1963, 1963 CCH Rep. ¶9450.) The Federal cases treating with the question are to the effect that no filing is required other than at the place of residence of the owner of intangible property. (United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, 122; United States v. Kings County Iron Works, Inc. [55-2 USTC ¶9536], 224 F. 2d 232; Matter of Cle-Land Co. [58-1 USTC ¶9185], 157 F. Supp. 859; Weir v. Corbett [58-1 USTC ¶9208], 158 F. Supp. 198.)

Moreover, in this instance, the debt is after-acquired property, it having come into existence after the filing of the tax lien. Such property is subject to the lien. (Glass City Bank v. United States, supra.) If it be assumed the debt is located in New York County by reason of the residence there of the taxpayer's debtor, it does not appear the debt was so situated at the time the notice of lien was filed in Queens County. Subdivision 2 of section 240 of the Lien Law requires a filing in the county where the property is located only in the event the property is in existence at the time the tax lien arises. As the then situs in New York County of the debt does not appear, the prior filing in Queens County , the county of the debtor's residence, satisfies the New York statute.

[Judgment of the Court]

The order should be reversed, on the law, and Rob ert P. Sheldon, Inc., the debtor of the taxpayer-judgment-debtor Irving L. Fischer, directed to pay the balance of the indebtedness, to wit, $1,424.50, to claimant-appellant United States of America , without costs.

All concur.

 

 

[63-1 USTC ¶9450]Albert Spade, individually and t/a Spade Iron Works, Plaintiff v. The Salvatorian Fathers, Mother of Savior Seminary, a religious corporation, and Pagano Construction Co., Inc., a corporation, Defendants

Superior Court, N. J., Law Division, Camden County , Docket No. L-13261-59, 4/2/63

[1954 Code Secs. 6321 and 6323]

Federal tax lien: Priority against judgment creditor: Chose in action.--A federal tax lien filed against a delinquent taxpayer in Camden , New Jersey on April 20, 1960 was entitled to priority over the subsequent lien of a judgment creditor in funds of the taxpayer deposited in Trenton , New Jersey . The federal lien was filed in the taxpayer's domicile and attached to the taxpayer's inchoate chose in action and subsequently to the funds when the chose in action became choate. It was not necessary for the federal lien to be filed in Trenton , the situs of the funds.

William C. Gotshalk, 431 Market Street , Camden , N. J., for plaintiff. Rob ert E. Gladden, Ross & Gladden, 509 Cooper Street, Camden, N. J., for Interstate Iron & Supply Co., defendants. David M. Satz, Jr., United States Attorney, Federal Bldg., Newark , Herbert S. Jacobs, Assistant United States Attorney, Schwehm Bldg., Atlantic City , N. J., for the United States .

Opinion

PASCOE, District Judge:

This is a supplementary proceeding by two creditors seeking priority to a fund now deposited in court.

The Federal Government filed a tax lien in Camden County against Albert Spade, individually and t/a Spade Iron Works, hereinafter referred to as Spade, on April 20, 1960 . Interestate Iron and Supply Company, hereinafter referred to as Interstate, recovered a judgment against Spade on May 1, 1960 ; subsequently, Spade brought an action against The Salvatorian Fathers in its capacity as subcontractor for the construction of the seminary. The Salvatorian Fathers filed an interpleader naming Spade and Pagano Construction Co., Inc., the contract on July 26, 1961 .

Funds were deposited with the Clerk of the Superior Court on August 8, 1961 in Trenton , New Jersey . On December 1, 1961 , settlement and judgment were entered in favor of Spade in the amount of $2,000.00. Interstate executed and levied on the fund deposited with the Clerk of the Superior Court on September 27, 1961 . The Federal Government claims priority in the same fund to the extent of its lien filed April 20, 1960 . It is to be noted that Spade is domiciled in Camden County as well as the defendant, The Salvatorian Fathers, and the contract for the construction of the seminary was to be performed in Camden County .

The issue before this court is: Does the filing of a tax lien by the Federal Government in Camden County place a lien upon the funds belonging to the delinquent taxpayer and deposited in Trenton with the Clerk of the Superior Court so as to perfect this lien against a subsequent judgment creditor.

The Federal Government's lien is a creature of the following legislature:

26 U. S. C. A. §6321 provides:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property whether real or personal belonging to such person."

26 U. S. C. A. §6323 provides:

"The lien imposed by §6321 shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed by the secretary or his delegate * * * in the office designated by the law of the state or territory in which the property subject to the lien is situated, whenever the state or territory has by law designated an office within the state or territory for the filing of such notice."

New Jersey has provided for the filing of such liens in N. J. S. A. 46:16-13:

"Notices of Federal tax liens * * * which * * * are made a lien upon all the property * * * belonging to the persons against whom Federal taxes are or may be assessed may be filed taxes are or of the county recording officer of the county or counties wherein the property subject to such liens is situate.

* * * No Federal tax lien shall be a valid lien as against a mortgagee, purchaser or judgment creditor until the notice thereof shall be filed as provided by this section."

On April 20, 1960 , the Federal Government by filing a lien in Camden County , the domicile of the delinquent taxpayer, had perfected its lien as against a subsequent judgment creditor. This lien covers all the real and personal property, tangibles and intangibles, rights to property or choses in action, as well as after acquired property of the delinquent taxpayer. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945); Edison Bank v. Mayer [62-1 USTC ¶9348], 202 F. Supp. 620 (D. C. N. H. 1962); Beeghly v. Wilson [57-2 USTC ¶9808], 152 F. Supp. 726 (D. C. Iowa 1957).

Of course the rights of the Federal Government can rise no higher than the rights of the delinquent taxpayer and state law determines whether the taxpayer has any property or right to property to which the lien can attach. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237 (1960); Bankers Title and Abstract Co. v. Ferber Co., 15 N. J. 433 (1954); Spagnulo v. Bonnet, 16 N. J. 546 (1954). The determination of property of competing liens on the same property is however a Federal question. Acri v. United States [55-1 USTC ¶9138], 348 U. S. 211 (1954).

When Spade filed suit against The Salvatorian Fathers he was possessed of a chose in action to which the lien of the Federal Government attached. It has been held that a property right of a delinquent taxpayer may be born with a Federal tax lien on it and when the lien attaches the Federal Government becomes in a sense co-owner with the taxpayer of the property to the extent of the lien, and the taxpayer ceases to have an unconditional right to obtain or retain possession of the property. Simpson v. Thomas [59-2 USTC ¶9760], 271 F. 2d 450 (C. A. Va. 1959); Keystone Mercantile Corporation v. Graham [61-1 USTC ¶9202], 192 F. Supp. 96 (D. C. Pa. 1961); Wolverine Ins. Co. v. Phillips [58-2 USTC ¶9765], 165 F. Supp. 335 (D. C. Ia. 1958).

Thus it is obvious that the Federal Government had a perfected lien which attached to the chose in action of the delinquent taxpayer. This lien would be prior to the lien of the judgment creditor because it was filed in Camden County , the location of the chose itself, the domicile of the owner thereof and would be notice to the judgment creditor. Investment Securities v. United States [44-1 USTC ¶9210], 140 F. 2d 894 (C. C. A. 9th Wash.). It is the contention of Interstate that prior to December 1, 1961 , Spade was possessed of an inchoate right to the final fund in court to which the Federal lien did not attach. Reliance for this statement is placed on Spagnulo v. Bonnet, supra. In Spagnulo, money was seized by the County of Essex as part of a gambling raid pursuant to statutory authority. The government filed its lien subsequent to the seizure. In a supplementary proceeding in which a third party claimed title to the money, the defendant Spagnulo defaulted and the third party did not sustain its burden of proof. In this posture, it was held that the lien of the Federal Government was invalid as against the title of the County Government . In view of the fact of the default of Spagnulo the delinquent taxpayer and the seizure by the county before the government filed its assessment list, the opinion seems sound but not applicable in the instant case. It should be pointed out that the court did say that "At most the Federal lien could only attach to Spagnulo's inchoate right to sue for the return of the funds in the event of his acquittal, and not to the confiscated funds themselves." Following the reasoning of Interstate that the lien of the Government did not attach to the fund in court before December 1, 1961, when the delinquent taxpayer's right to the fund became choate, it must also be true that the levy on the fund by Interstate on September 27, 1961 was fatally defective. Now it so happens that with the filing of an interpleader by The Salvatorian Fathers the funds owing to the delinquent taxpayer were deposited with the Clerk of the Superior Court in Trenton where no Federal lien had been filed. Realizing that requirements of Federal and State law that must be met in order for the lien to be effective against a judgment creditor, a question arises as to the situs of the property of the delinquent taxpayer. Two approaches are available to answer this question.

First there is the traditional approach that the situs of personal property and intangibles is the domicile of the owner thereof. If we use this approach, obviously there is no problem in concluding that the Federal lien was properly filed and effective against the judgment creditor.

Secondly, if we say that the property acquired a situs in Trenton , it is submitted that the same conclusion is mandatory. It is already established that a lien attached to the delinquent taxpayer's right to the property, and the Government became in a sense co-owner of the right. When there is a transfer of property to which a lien has attached, the property passes cum onere. United States v. Bess [58-2 USTC ¶9592], 357 U. S. 57 (1958). Solomon v. Gross [59-2 USTC ¶9758], 176 F. Supp. 837 (D. C. N. H. 1959).

A very similar factual situation to the one present in the instant case is found in Board of Education of the City of Pleasantville v. Aiken, 69 N. J. Super. 70 (1961). The facts are as follows:

A Federal tax lien was filed against Aiken on March 21, 1958 with the Clerk of Atlantic County. On June 21, 1958 Aiken contracted with the Board of Education. Rhinehart, a material man, was assignee of Aiken. Hartford, Inc., was a surety on the contract. The job was completed and accepted on September 2, 1958 . In the meantime five judgment creditors of Aiken unconnected with the present contract sought execution against the funds held by the School Board filed an interpleader, and the money was deposited with the Clerk of the Superior Court. The United States , Rhinehart and the five judgment creditors all claimed priority to the funds. The court held as follows:

"The United States must also be given priority over the various judgment creditors of Aiken who attempted to levy on these funds. There was no judgment lien on these funds until delivery of a Writ of Execution to the Sheriff or his legally appointed assistants. N. J. S. A. 2A:17-10. Prior to that the United States had made the delinquent tax assessment against Aiken and filed its lien with the Clerk of Atlantic County. Therefore, the claim of the United States being prior in time is entitled to priority over the claim of these judgment creditors."

It is to be noted that this decision is silent as to whether or not the funds deposited with the Clerk of the Superior Court acquired a separate situs.

Bartzel v. Przybylo [58-1 USTC ¶9439], 169 N. Y. Supp. 2d 407, a decision of the New York Albany County Court is also enlightening. The Government filed a lien against the delinquent taxpayer with the Clerk of Montgomery County on October 24, 1955 . On January 21, 1957 delinquent taxpayer surrendered his liquor license and on March 7, 1957 he became entitled to a license refund of money which was held by the comptroller of the State of New York . On February 27, 1957 a judgment was entered against the delinquent taxpayer, and on February 28, 1957 the judgment creditor sought to levy on the funds in the hands of the comptroller. The issue was whether or not the judgment creditor is entitled to priority over the United States with respect to the funds held by the comptroller. The court held as follows:

"The inescapable conclusion from an analysis of the foregoing statutes (previously alluded to in this opinion) is that the Federal Government's lien was perfected when it was filed in Montgomery County and thereafter was valid and binding for all purposes regardless of when a notice of levy was served upon the comptroller. * * * It is a well established principle that a Federal tax lien attaches to each item of a taxpayer's property, even though it be stated to be a general lien against all of his property rather than a specific item. United States v. City of New Britain, Conn. [54-1 USTC ¶9191], 347 U. S. 81. * * * It is well established that such Federal tax lien is not limited to property owned by the taxpayer at the time the lien arises. It attaches to after acquired property. Glass City Bank v. United States, surpa."

An examination into the history and purpose of the Federal legislation requiring the Government to file its lien where property of the delinquent taxpayer is situate is in order. Prior to the passage of this legislation pledgees, bona fide purchasers, mortgagees and judgment creditors were the victims of what amounted to secret Government liens. The passage of this statute (26 U. S. C. A. §6323) was designed to remedy an obviously unfair situation. Decisions which have been handed down describe the purpose of this statute as being "to furnish constructive notice" to those previously mentioned. Continental Investment v. United States [53-2 USTC ¶9625], 142 F. Supp. 542 (D. C. Tenn. 1953); Pipola v. Chico [59-1 USTC ¶15,207], 169 F. Supp. 229 (D. C. N. Y. 1959).

It must be remembered that the Government's lien attaches to all of the property and rights to property of the delinquent taxpayer wherever it is located and the additional protection given by the above statute is to prevent unfair situations caused by secret liens. United States v. Snylder, 149 U. S. 210 (1893).

The problems presented by the statutory requirements of filing the tax lien when personal property is involved receives exhaustive treatment in the case of Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. Supp. 2d 217 at p. 219 (5 Cir. 1953) where the court stated as follows:

"It is argued that because of the transitory nature of the property in question, (rings) and of personal property in general, the notices of tax liens recorded in Tarrant County are ineffective to give constructive notice to a mortgagee or pledgee that acquired its claim against the property after it was removed from that county. Appellant recognizes the general principle that the situs of personal property is regarded as being the same as the domicile of its owner, but urges that when the property was reduced to its possession in Dallas County it acquired a situs in that county, and the failure of the United States to have its liens recorded there defeats its claim. The statute, however, does not require a tax lien to be filed in every county to which personal property may be carried in order to be enforceable against a subsequent mortgagee or pledgee. The requirement that notice of lien be filed in the office in which the filing of such notice is authorized by the law of the state in which the property subject to the lien is situated is satisfied, so far as is pertinent here, when such notice is filed in the county of the taxpayer's domicile. (Citing cases.) It is the transitory nature of personal property which requires the application of this rule. To hold otherwise would be to overlook the practical necessities of the situation and would require the collector to file tax liens in every jurisdiction to which the taxpayers may at any time remove the property. We do not think this result was intended by the statute, nor do the laws of Texas relating to the recording of liens against personal property require a different result."

Judge Madden adopts this very philosophy in Solomon v. Gross, supra. In Solomon, the Government filed a tax lien in Camden County against the delinquent taxpayer, a resident of Camden County . Three days after the lien was filed, taxpayer sold trailers which he owned to a bona fide purchaser in the City of Philadelphia . The court ruled that the United States Government was entitled to the proceeds of this sale to the extent of its lien. The court reasoned as follows:

"(2) There can be no doubt but that the seven Fruehauf trailers are personal property. They are extremely mobile and can pass from county to county or state to state in a relatively short period of time. The generally accepted principle of law regarding the situs of personal property is that the situs of personal property is determined to be that of the domicile of the owner. For the application of this principle in other Federal tax lien cases see: Investment & Securities Co. v. United States, supra; Grand Prairie State Bank v. United States, supra.; Marteney v. United States [57-1 USTC ¶9670], 245 F. 2d 135 (10 Cir. 1957); United States v. Spreckles [43-2 USTC ¶9572], 50 F. Supp. 789 (D. C. Cal. 1943), and United States v. Royce Shoe Company [55-2 USTC ¶9770], 137 F. Supp. 786 (D. C. N. H. 1956). The domicile of the taxpayers was Camden County , New Jersey , hence, applying the above stated principle it may be said that the trailers in question were situated in Camden County , New Jersey .