Conflicts of Law Page2

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The result may differ, however, where the individual claiming procedural irregularities which render the lien invalid is not a taxpayer, but a third party. In its brief, FOA cites only one case from 1965 to support its contention that third parties may challenge the validity of IRS liens on procedural grounds. See Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965). That case, however, made only a passing reference to the issue. Furthermore, McEndree v. Wilson , 774 F.Supp. 1292 (D. Colo. 1991), cited by the Bank during oral argument, is inapposite. Although McEndree addressed third-party standing under §2410, that case did not involve a procedural challenge to the validity of an IRS lien as the plaintiff conceded the validity of the assessments. Id. at 1296. Rather, the plaintiff merely sought to assert the priority of its lien over the federal tax lien. In the present case, no one disputes that FOA may attempt to argue that its mortgage takes priority over the federal lien. There is no authority, however, which permits the Bank, as a third party, to argue that the lien is procedurally invalid. As the procedural provisions of the Internal Revenue Code appear to exist to protect the taxpayer only, not third parties, FOA lacks standing to challenge the procedural regularity of the lien. This challenge to the IRS' priority must fail.

b. Collection of Taxes

FOA claims that any interest that the government had in the property has expired, as the IRS had only six years from the date of assessment to collect the tax owed pursuant to 26 U.S.C. §6502(a)(1) . Because the first assessment issued on October 11, 1982 , the government's lien only attached until 1988, the Bank argues.

The government notes, however, that §6502(a)(1) was amended effective November 5, 1990 , to give the IRS a ten-year collections period. This ten-year period applies even to taxes assessed before the effective date, if the previous six-year period had not yet expired as of November 5, 1990 . Although counting from the 1982 assessment, the six-year time frame expired in 1988, the six-year period had not expired by November 1990, if we count from the June 13, 1986 assessment. The government would have ten years in which to act. Thus, if the 1986 assessment is the proper trigger for the collections period, then the IRS has until June of 1996 to collect the Alts' unpaid taxes.

Due to the conclusion of the preceding section that FOA does not have standing to challenge the validity of the assessment, the Court assumes that the 1986 assessment is valid. Accordingly, the period of time in which the IRS may collect on the deficiency has not expired. This challenge by FOA also fails.

c. Lien as Against Property of Harbor Lab

FOA next argues that the federal tax lien did not attach to the Cote La Mer property as that property was transferred to Harbor Lab by quitclaim deed on June 2, 1986 . Because the lien recorded in Ottawa County only referenced the property of the Alts, it did not attach to the condominium owned by Harbor Lab, the Bank contends. The IRS did not file a lien against Harbor Lab in Ottawa County until June of 1991, after FOA had perfected its interest.

The IRS claims that the transfer to Harbor Lab is ineffective to defeat the tax lien as the deed was recorded after the assessment of the tax liability. The Supreme Court has ruled that "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). Although the transfer occurred on June 2, 1986 , the deed was not recorded in Ottawa County until August 1st, well after the June 13th assessment. Furthermore, the IRS had made a previous assessment in October of 1982. In these circumstances, the Alts should not be given the power to defeat the federal tax lien through a quitclaim transfer. The lien did attach to the Cote La Mer property. The Bank's third challenge to the priority of the government's lien is without merit.

d. IRS' Notice of Prior Unrecorded Interest

FOA also contends that the federal tax lien should not take priority as the government was on notice of the prior unrecorded interest held by the Bank. Under Michigan law, a lienholder has priority if he or she recorded first and had no notice of a prior unrecorded interest. The IRS argues that notice of the mortgage is irrelevant, as priority determinations are controlled by federal, not state, law.

Section 6323 of the Internal Revenue Code dictates that a federal tax lien has priority if it has been properly recorded under state law. 26 U.S.C. §6326(a) , (f). The Code imposes no notice requirement. State law appears to matter only to the extent it directs the government where to file the tax lien. Moreover, any notice requirement would render litigation over competing liens highly complex. If federal tax liens were forced to yield every time a governmental department had notice of a prior unrecorded interest, the tax lien system would be hampered. The government does not elect to extend credit based upon the security available, but is an involuntary creditor. Accordingly, the Court finds that notice of a prior unrecorded interest is irrelevant to determining lien priority under the Internal Revenue Code.

As the preceding discussion indicates, the federal tax lien does take priority over the Bank's mortgage on the Cote La Mer property. Summary judgment on this question shall issue for the government.

II. Doctrines of Laches and Estoppel

The second issue raised in the briefs concerns the applicability of the equitable doctrines of laches and estoppel. In its brief, FOA contends that pursuant to the doctrine of laches, the Bank's interest in the Cote La Mer property should be given priority over the government's tax lien. FOA notes that the Alts owed their 1981 taxes for almost ten years before the IRS instituted any legal proceedings or made any effort to enforce the lien on the condominium. Had the Bank been on notice earlier of the IRS' interest, FOA argues, it would not have gone ahead with the initial loan in 1984 or the refinancing agreement in 1988. Further, the issue is only now before this Court because the Bank forced a sale of the disputed property and filed the present action. Given these circumstances, FOA contends, equity demands that the Bank's mortgage prevail over the federal tax lien.

As the government notes, however, the doctrine of laches may not be invoked against the United States when it seeks to enforce its rights. See United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 618 (6th Cir. 1979). This well-established principle is "based upon the important public policy of preserving public rights and revenues from the negligence of public officers." Id. During oral argument, the Bank conceded that the doctrine of laches does not apply in this case.

Alternatively, FOA argues that the IRS should be estopped from claiming an interest in the property. But again, estoppel may not be invoked against the government, unless it is based upon an allegation of affirmative misconduct. See Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 385, 68 S.Ct. 1, 3 (1947); Giles v. Carlin, 641 F.Supp. 629, 635 (E.D. Mich. 1986) (long-standing tradition that "estoppel may not be invoked against the government"); Tonkonogy v. United States [76-1 USTC ¶9447 ], 417 F.Supp. 78, 79 (S.D.N.Y. 1976) (estoppel may be invoked only where allegation of affirmative misconduct). The only "affirmative" action which the Bank alleges, however, occurred during the discovery phase of this litigation. Such conduct has no bearing on the real issue in this case: Whose interest in the property should prevail? Estoppel would only apply if FOA demonstrated that the government had taken an affirmative step which caused the Bank to loan money to the Alts in exchange for a mortgage in the Cote La Mer property or to refinance the loan later. No such allegation has been made. Discovery conduct is simply irrelevant to the estoppel question.

The equitable doctrines of laches and estoppel may not be invoked in these circumstances against the government. Accordingly, there is no dispute here meriting a trial. The IRS' motion for summary judgment shall be granted as to these issues.

III. Doctrine of Marshalling

FOA next contends in its brief that the IRS should be required to marshall the assets from previously seized property. Essentially, the Bank wants this Court to order the IRS to apply all previously seized assets to the 1981 tax liability, as that is the earliest tax deficiency. FOA argues that the government is refusing to do so, applying the assets to deficiencies in later years, in order to protect its interest in the Cote La Mer property.

Under §5374.2(d) of the Internal Revenue Manual, agents of the IRS are required to apply all proceeds from the sale of seized property toward the satisfaction of the earliest tax liability. The provision clearly requires the government to marshall assets. However, as the government notes, the Manual was developed solely to guide the internal admin istration of the IRS, and confers no legal rights on taxpayers or third parties. See United States v. Will [82-1 USTC ¶9216 ], 671 F.2d 963, 967 (6th Cir. 1982). Furthermore, there exists no "right of marshalling" against the United States . United States v. Eshelman [87-2 USTC ¶9419 ], 663 F.Supp. 285 (D. Del. 1987). A junior lienholder cannot compel the IRS to marshall its liens. In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970); United States v. Herman [63-1 USTC ¶9135 ], 310 F.2d 846, 848 (2d Cir. 1962).

During oral argument, FOA conceded that the doctrine of marshalling is not applicable. Rather, the Bank requested that the Court invoke its "equitable powers" to require the IRS to apply the seized assets to the earliest tax liability. FOA provided the Court with no reason why it should exercise its powers in this fashion, however. Accordingly, the Court finds that the government shall prevail on this issue.

IV. Discovery Sanctions

The fourth issue raised in the briefs focuses on whether FOA is entitled to a default or attorney fees as a sanction against the government. Under Fed. R. Civ. P. 37(b)(2)(C), the Court may render a default against a party who fails to obey an order to provide or permit discovery. Alternatively, the Court may require a party against whom a discovery order is issued to pay the reasonable expenses, including attorney fees, of the party who sought the order. Fed. R. Civ. P. 37(a)(4). FOA claims entitlement to these sanctions due to the various discovery battles it has had with the IRS.

FOA served its first set of interrogatories and document requests on the IRS in October of 1992. The IRS refused to respond to fifteen of the 21 interrogatories and seven of the eight document requests on grounds of relevance. Magistrate Judge Scoville issued an order on January 25, 1993 , compelling the government to furnish supplemental answers. In the first set of supplemental answers which followed, the IRS claimed that the Alts had underreported their income from 1981 by more than 25%, and that a notice of deficiency had issued in the spring of 1986. Because the Alts had misrepresented their income by more than 25%, the government had six years from April 16, 1992 , the date of the 1981 filing, to issue notice, and thus the notice was timely. On March 31, 1993 , Judge Scoville issued another discovery order, requiring the IRS to provide details on the 25% claim. In its second set of supplemental answers, produced in response to the March discovery order, the government stated that it did not contend that the Alts had underreported their 1981 income by more than 25%. Instead, the IRS contended that notice had issued before April 15, 1985 , pulling it within the normal three-year period of limitations. The government also mentioned for the first time the Alts 1985-86 Tax Court proceeding.

FOA contends that these responses by the IRS constitute dilatory and obstructionist conduct, entitling the Bank to default under Rule 37. Default is an extreme sanction, and appears wholly unwarranted in this case. The evidence indicates that the IRS has complied with the discovery orders. The government explains its contradictory responses to FOA's interrogatories by stating that the file on the Alts was temporarily misplaced, resulting in incorrect information for a period of time. This contention is supported by the affidavit of attorney Alexandra Nicholaides.

Attorney fees and costs incurred in seeking the two discovery orders from Judge Scoville, however, may be warranted in this case. It does appear that the government refused to answer several requests and provided FOA with information that it did not fully verify. The Bank requests fees and costs in the amount of $5,916.34. This matter shall be referred to Magistrate Judge Scoville for further resolution.

V. Reimbursement for Insurance Coverage

The final issue presented in this case concerns the fire insurance coverage obtained by FOA on the Cote La Mer property. After the Alts neglected to obtain coverage on the condominium in 1991 as requested by the Bank, FOA independently obtained an insurance policy. FOA now seeks to recover the $717.18 in premiums it paid from the proceeds now in escrow with the Court. The IRS refuses to permit the Bank to recover these costs, claiming that the insurance policy was for the benefit of FOA alone, and not all creditors.

Neither party cites any law in support of their respective positions. It appears the government should prevail on this issue, as the policy never became the property of the taxpayer, and thus the tax lien never attached. Accordingly, if the property had been destroyed, only the Bank would have been entitled to the insurance proceeds. Thus, FOA is not entitled to reimbursement for the insurance costs. Summary judgment shall attach for the government.

CONCLUSION

In sum, FOA's motion for summary judgment shall be denied while the government's motion shall be granted. FOA's request for attorney fees and costs incurred in seeking the January 25, 1993 , and March 31, 1993 , discovery orders shall be referred to Magistrate Judge Joseph G. Scoville for disposition.

IT IS SO ORDERED.

¹ Previously, the government contended that the notice of deficiency was issued in the spring of 1986.

² The government does note that a Tax Court proceeding was commenced by the Alts in April of 1985, suggesting that notice was received prior to that petition. "The notice of deficiency is . . . the 'ticket' into the Tax Court that allows a taxpayer to challenge the tax assessment before paying it." Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 735 (10th Cir. 1992). It thus seems likely that notice was received sometime in April of 1985 or before.

 

 

[88-1 USTC ¶9367] United States of America , Plaintiff-Appellee v. Lloyd Ferrell Wingfield, Defendant-Appellee, County of Boulder , Colorado , Appellant

(CA-10), U.S. Court of Appeals, 10th Circuit, 84-2197, 6/15/87, 822 F2d 1466, Affirming an unreported District Court decision

[Code Secs. 6321 , 6323 and 7426 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Property subject to lien: Property seized during arrest: Priority: Jurisdiction: Conflict of law: Suit by nontaxpayer.--A District Court properly exercised its ancillary jurisdiction in adjudicating the conflicting claims of the IRS and a county government to a large sum of money seized during a taxpayer's arrest on narcotics charges, and it did not err in finding that the IRS's federal tax lien attached prior to a State forfeiture provision. The funds, which were confiscated by the local law enforcement officials, were in the custody and control of the local federal District Court in the aftermath of the taxpayer's trial on federal criminal charges. The taxpayer who, under State law, could recover any of the money lawfully acquired possessed a sufficient, if limited, property interest in the seized funds for the federal tax lien to attach. Since the tax lien attached prior to a State court's determination that the money was forfeited to the State under its public nuisance laws, the IRS claim to the funds was entitled to priority. The subsequent State forfeiture decree could not supplant the previously filed federal tax lien.

Rob ert N. Miller, United States Attorney, Denver , Colo. 80294 . Francis M. Allegra, Michael L. Paup, Carleton D. Powell, Glenn L. Archer, Jr., Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. William D. Meyer, Hutchinson, Black, Hill, Buchanan & Cook, 1215 Spruce St., Boulder, Colo. 80306, for appellant.

Before HOLLOWAY, Chief Judge, and BARRETT and MCKAY, Circuit Judges.

HOLLOWAY, Chief Judge:

This case presents a series of tangled jurisdictional questions involving the district court's subject matter jurisdiction of this case and its jurisdiction as to the Government. The underlying merits involve the status of a federal tax lien on contents of property seized and forfeited pursuant to a Colorado statute as a public nuisance because of use for unlawful activities involving controlled substances. The Government says the contents passed to Boulder County after the tax lien attached. The County of Boulder disagrees and claims the property for itself, clear of the tax lien. The district court agreed with the Government. We affirm.

I

FACTUAL BACKGROUND

On November 5, 1982 , Lloyd Ferrell Wingfield was arrested at his home by FBI agents pursuant to a federal arrest warrant charging him with unlawful flight to avoid prosecution. The arresting FBI agents were accompanied by an officer of the Boulder Police Department. At the time of the arrest, the Boulder Police Officer observed marijuana in Wingfield's residence. The officer obtained a state warrant authorizing a search of the premises. Execution of the search warrant by federal and county agents and officers resulted in the seizure of the following items, inter alia: (1) eighteen grams of cocaine; (2) approximately $89,676.00 in United States currency; (3) a personal check in the amount of $688.00; and (4) various foreign currency, mint proof sets, and bars of Englehart silver, collectively valued at approximately $35,000.

On November 8, 1982 , the Government filed a complaint charging Wingfield with possession of a controlled substance with the intent to distribute. On the same date, the District Attorney for Boulder County filed a civil action against Wingfield in the District Court for Boulder County pursuant to the Colorado Abatement of Public Nuisance Statute, Colo. Rev. Stat. §16 -13-307. The following day local authorities released the seized items for use as evidence in the federal criminal case. It is that case against Wingfield which produces the appeal now before us.

On November 16, 1982 , the State court granted Boulder County 's temporary restraining order against the seized items, finding that the seized items had been used in conducting, maintaining, aiding and abetting a public nuisance. The State court further ordered pursuant to §16 -13-308 that no person take any action to encumber, transfer, or assert a right of immediate possession to the seized items.

On January 13, 1983 , the Internal Revenue Service (IRS) assessed income tax deficiencies against Wingfield for federal income taxes and on January 19 filed notices of federal tax liens with the Clerk and Recorder of Boulder County. After a trial to the court on written stipulation Wingfield was convicted on February 11, 1983 , on the federal criminal charge.

On May 17, 1983, the State court issued an order effective nunc pro tunc to the date of seizure of the property (November 5, 1982), finding that the items seized by federal and state agents in Wingfield's home on November 5, 1982, were seized from premises which constituted a class I public nuisance and thus were forfeited to the county. Furthermore, the court held that there was no evidence which would entitle Wingfield to redelivery of the seized items. Wingfield appealed the State court's decision.

On September 1, 1983 , after various conflicting claims to the seized items had been asserted, the federal district court ordered that the funds be deposited with the Clerk of that court. The court further ordered that notice be sent to the IRS, the United States Attorney's Office, and the County of Boulder "so that claims can be presented and disposition effectuated." I R. 32.

Thereafter Wingfield, the IRS, and the County of Boulder filed claims to the seized items. After a hearing the district court held that the State forfeiture decree could not supplant a previously filed federal tax lien, finding that a "State statute cannot subvert the primary authority of the federal government to collect its taxes under these circumstances." III R. 14. The court ordered the clerk of the court to satisfy the claim of the IRS and, if any proceeds remained, to satisfy the claim of Boulder County . The claimant Wingfield was held not entitled to any of the funds.

On February 28, 1985 , the Colorado Court of Appeals affirmed in part and reversed in part the forfeiture judgment of the Boulder County District Court. Colorado v. Lot 23, 707 P.2d 1001 (Colo. Ct. App. 1985). The court affirmed the State district court's judgment of forfeiture except as to the Englehart silver bars found in buckets, the Canadian mint sets found in buckets, and the Canadian currency found in a glass pitcher. Id. at 1004-05. As to these items Wingfield's rights to ownership were restored.

On May 8, 1987 , the Supreme Court of Colorado affirmed in part and reversed in part the Colorado Court of Appeals decision ordering the reinstatement of the district court's forfeiture order. Colorado v. Lot 23, 735 P.2d 184 ( Colo. 1987). The Colorado Supreme Court held that the Colorado Court of Appeals had misconstrued the proper burden of proof that the State must necessarily carry in abatement of public nuisance cases. The proper standard was whether the State has proved by a preponderance of the evidence that the items seized were used in the criminal activity. Id. at 12. The court answered in the affirmative, stating that all of the seized property was properly forfeited to the State. ¹

II

JURISDICTION

A.

Ancillary Jurisdiction

Initially we must confront the jurisdictional questions generated by the complex procedural posture of the case. The case began as a federal criminal prosecution for possession with intent to distribute a controlled substance. The defendant in the criminal case was Wingfield. In the instant appeal, the controversy centers on a dispute between the IRS and the County of Boulder concerning rights to items seized at Wingfield's residence. These items were held by the district court as possible evidence in the criminal trial. The court concluded that it had the authority to resolve conflicting claims to the seized items as a matter of ancillary jurisdiction. The County of Boulder contends that the district court could not properly exercise ancillary jurisdiction in the circumstances.

Ancillary jurisdiction rests on the premise that a federal court acquires jurisdiction of a case or controversy in its entirety. Jenkins v. Weinshienk, 670 F.2d 915, 918 (10th Cir. 1982). The district courts have jurisdiction to enter orders ancillary to a criminal proceeding concerning disposition of materials legally seized in connection with the criminal investigation of a case. See, e.g., United States v. Rangel, 608 F.2d 120, 121 (5th Cir. 1979) (and cases cited therein). The interests of judicial efficiency dictate that the conflicting claims to property seized as evidence should be resolved by the criminal court. United States v. LaFatch, 565 F.2d 81, 83 (6th Cir. 1977), cert. denied, 435 U.S. 971 (1978).

In Herzfeld v. United States District Court for the District of Colorado, 699 F.2d 503 (10th Cir.), cert. denied, 464 U.S. 815 (1983), we held proper the district court's exercise of ancillary jurisdiction to appoint a receiver in a criminal case to effectuate a disposition of property to accomplish restitution by the defendant. There the court observed:

A criminal proceeding in a United States district court is not in a separate compartment with the court exercising only a limited portion of its authority as the appellants argue. The federal courts obviously are of limited jurisdiction but the extent of the authority of the district courts in these circumstances is not limited or governed by whether the proceeding is criminal or civil.

Id. at 506.

Here the seized property was to be used as evidence in a federal criminal case. The property was in the custody and control of the federal district court. It is this court which must determine the proper distribution of funds currently in its possession. We conclude that the district court does have the jurisdiction to enter an order concerning disposition of seized property in its control. Although the defendant was convicted on his plea of guilty, the district court had before it the facts and circumstances of the case. Cf. United States v. Ortega, 450 F.Supp. 211, 212 (S.D.N.Y. 1978). It would result in a needless waste of judicial resources not to exercise ancillary jurisdiction here. Moreover, the existence of adequate civil remedies neither discharges the court's duties nor disturbs its jurisdiction. See United States v. Wilson , 540 F.2d 1100, 1104 (D.C. Cir. 1976).

Thus the court's ancillary jurisdiction was properly exercised to dispose of the claims to the property in the custody of the court.

B.

Appellate Jurisdiction

The Government argues that this court lacks appellate jurisdiction over this matter. It also says that the present action is barred by the doctrine of sovereign immunity. Moreover, the Government contends that the district court exercised in rem jurisdiction over the seized property and that such jurisdiction ceased to be valid on the distribution of the res to the Government. It further argues that it was incumbent upon Boulder County to obtain a stay of the district court's order if it desired to preserve jurisdiction for an appeal.

The Government's argument that the action is barred by the doctrine of sovereign immunity is without merit. In considering suits against the federal government, we must determine whether a valid waiver of soverign immunity exists. If not, the Government is immune from suit and we lack subject matter jurisdiction. United States v. Mitchell, 455 U.S. 535, 538 (1980); United States v. Sherwood, 312 U.S. 584, 586-88 (1941).

Internal Revenue Code §7426(a)(1) provides:

Wrongful Levy.--If a levy has been made on property . . ., any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

Section 7426 permits a third party to bring an action challenging the lawfulness of governmental levies made against property in which he claims an interest. Interfirst Bank Dallas, N.A. v. United States [85-2 USTC ¶9635 ], 769 F.2d 299, 304 (5th Cir. 1985), cert. denied, -- U.S. --, 106 S. Ct. 1458 (1986); see Crow v. Wyoming Timber Products Co. [70-2 USTC ¶9561 ], 424 F.2d 93, 96 (10th Cir. 1970) (dictum). Congress has specifically waived sovereign immunity for actions under §7426 through the enactment of 28 U.S.C. §1346(e). Thus to the extent that a party claiming an interest in property is aggrieved by the pendency of an existing lien, sovereign immunity is waived. See Three M Investments, Inc. v. United States [86-1 USTC ¶9185 ], 781 F.2d 352, 354 (10th Cir. 1986). This conclusion does not change merely because the district court exercised ancillary jurisdiction. Ancillary jurisdiction permits the district court to exercise the full range of its civil and criminal jurisdiction.

One of the essentials of in rem jurisdiction is that the property be within the court's jurisdiction at the time of suit. 4 C. Wright & A. Miller, Federal Practice & Procedure §1070, at 270 (1969). Release or removal of the res from the control of the court ends its jurisdiction. Generally, the only exceptions to the rule are when the res is released accidentally, fraudulently, or improperly. See United States v. $54,480.05 United States Currency and Other Coins, 722 F.2d 1457, 1458 (9th Cir. 1984).

The Government's analysis fails to consider the fact that in rem and in personam jurisdiction may co-exist. See Inland Credit Corp. v. M/T Bow Egret, 552 F.2d 1148, 1152 (5th Cir. 1977). Here both apply. The district court still has jurisdiction under I.R.C. §7426(b) to enter a judgment in personam against the Government. Section 7426(b) grants the district court the jurisdiction to order the Government to return the seized property or its equivalent, i.e., a money judgment. Moreover while the Government attorney could not waive any immunity of the United States , we note that our interpretation of §7426(b) is consistent with representations made to the district judge:

MR. GOOD (Counsel for the County): Judge, I am curious, is there any--if I can ask for a brief stay of the order until we see if we might be taking some kind of further action before this Court releases the funds to the I.R.S.

MR. SNOW (Counsel for Wingfield): Judge, excuse me, if I may speak to that. We're being assessed interest on a daily basis, Mr. Wingfield is, for that. We would suffer from the stay. We would ask that the order be immediately imposed.

MR. GUTHRIE (Counsel for the IRS): Besides that, Your Honor, we have a deep pocket. We'll have the money. If they bring a successful lawsuit, we'll have enough money to give it back.

THE COURT: Well, I'm not going to make any comments about political parties going into greater debt, but I'll accept that. Okay, the claim is denied. The assurance of the federal government is that you can collect from them if you are successful in that.

III R. 14-15 (emphasis added). It was upon this assurance by the Government that the district court denied the motion for a stay.

In sum, the case is not moot nor is jurisdiction destroyed because of distribution of the property to the Government. The power to order restitution by payment of an equivalent value remains.

C.

Comity

Boulder County further argues that the district court should have returned the property to the State district court under the general principles of comity because the State court was the first court to have possession of the seized funds and because the Government had actual notice of the State court proceedings and failed to intervene, citing United States v. Hunt [75-1 USTC ¶9327 ], 513 F.2d 129 (10th Cir. 1975).

Hunt is inapposite. There the IRS intentionally by-passed a State court proceeding following actual notice by initiating a unilateral action in federal district court when the funds in question were in the sole possession of the State district court. Here the State court did not have control or possession of the seized property, nor did the Government initiate the suit. Rather, the property was in the custody and control of the federal district court as possible evidence in a federal criminal case, and the Government, along with Boulder County and Wingfield, asserted claims to the property after Wingfield's conviction. Although we recognized the importance of "[t]he promotion of proper Federal-State relations in the interest of sound judicial admin istration and in further recognition of the principles of comity," id. at 138-39, we believe these interests would not have been promoted by the district court's refusal to adjudicate the claims to the seized property in its control.

We conclude that the district court did not err in exercising ancillary jurisdiction under Herzfeld and like principles to adjudicate the conflicting claims to the property in its custody or in deciding not to transfer the property to the State court.

III

CLAIMS OF OWNERSHIP

The controlling question is whether Wingfield had a property interest in the seized property sufficient for the federal tax lien to attach at the time the IRS assessed the tax lien and filed notices thereof. If Wingfield did have such a property interest in the seized property, then the federal tax liens attached and the IRS' claim has priority. If, on the other hand, the taxpayer-defendant had no such property interest in the seized property, then the federal tax lien could not attach.

A federal tax lien may attach only to the property of the person liable to pay the tax. I.R.C. §6321 ; see also 13 Mertens Law of Federal Income Taxation §54.52, at 208. Section 6321 provides that a federal tax lien shall be applicable to "all property and rights to the property, whether real or personal, belonging to such person." (Emphasis added). A federal tax lien is wholly a creature of federal law. Therefore the consequences of the lien that attach to property interests are matters of federal law. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983) (and cases cited therein); see also Hunt, 513 F.2d at 133. However the Internal Revenue Code "creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . . ." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958); see also 13 Mertens, supra §54.52, at 207. Property and rights to property exist under state law; priority of federal liens depends on federal law. See Rodgers, 461 U.S. at 683; Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14 (1960); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516 ], 790 F.2d 354, 356 (3d Cir. 1986) (under Pennsylvania law, state liquor license did not constitute property but it had sufficient indicia of property to be subjected to federal tax lien).

Federal law governs the priority of a tax lien against other claims to property. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444 ], 384 U.S. 323, 328 (1966). Where Congress has not prescribed a different priority rule, see I.R.C. §6323 , the basic rule is "first in time is first in right." See United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86, (1954). Therefore, a tax lien is junior to only those liens that not only attached to the asset, but also became sufficiently choate before the tax lien arose. See id. And choateness of a competing interest is also a matter of federal law. See United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88-89 (1963).

With respect to the property interest in question here, the Supreme Court of Colorado has responded to the following question certified to it by the federal district court:

What is the nature and extent of the property interest, if any, retained by a person subsequent to the seizure of his property pursuant to §16 -13-303, C.R.S. 1973, as effective on June 13, 1980, but prior to judicial determination pursuant to §16 -13-307 et seq., C.R.S. 1973?

United States v. Wilkinson [85-2 USTC ¶9825 ], 628 F.Supp. 29, 30 (D. Colo. 1985). The Colorado Court answered the question as follows:

We hold that a person is divested of all rights and interests in property upon its seizure under the Colorado Abatement of Public Nuisance statute (Public Nuisance statute), sections 16 -13-301 to -316, 8 C.R.S. (1978 & 1983 Supp.). Therefore, our answer to the certified question is that there is no property interest retained during the period in question.

United States v. Wilkinson (In re Interrogatories of the U.S. District Court), 686 P.2d 790, 790-91 ( Colo. 1984).

It is thus arguable that Wingfield ceased to have any interest in the seized property as of November 5, 1982, the date of the seizure, and well before January 19, 1983, the date the IRS filed notices of the federal tax liens. The tax lien would thus be unenforceable because it was a lien against nothing, as was reasoned in the Wilkinson case. See 628 F.Supp. at 31.

We are not convinced that we should apply the reasoning in the Wilkinson opinion, see [85-2 USTC ¶9825 ] 628 F.Supp 29, which supports the position of the County of Boulder . We adopt instead the analysis of the district court here and as explicated in Eggleston v. Colorado [86-2 USTC ¶9552 ], 636 F.Supp. 1312, 1322 (D. Colo. 1986), which upholds the Government's position.

Insofar as the Colorado Supreme Court's decision determines the nature of items forfeited pursuant to the abatement statute as property interests, it is binding on this court. However, it remains a question of federal law for us to decide whether the interest was subjected to a federal tax lien and the priority of the lien. 21 West Lancaster Corp., 790 F.2d at 358. Two cases have addressed situations analogous to the case before us. In Metropolitan Dade Co. v. United States [81-1 USTC ¶9173 ], 635 F.2d 512 (5th Cir. 1981), the Fifth Circuit was called upon to determine whether a delinquent taxpayer had a property interest in confiscated funds seized by the State of Florida under the authority of a specific gambling statute. Relying on language of the statute that "no one has any property rights subject to be protected by any constitutional provision in such contraband," ² the court held that it was the "unescapable intent of the Florida legislature . . . that all contraband, including money, escheats upon seizure." ³ Moreover, in rejecting the Government's argument that the taxpayer retained a property interest in the seized contraband, the court held that "[u]nder the statute, the 'owners' of seized contraband are not 'divested' of any property rights; the legislature expressly stated that 'no one has any property rights' in seized contraband." 635 F.2d at 515. Although the Florida law provided a means for a claimant to recover seized property if he could show that the property was lawfully acquired, the court nevertheless concluded that the confiscation was not analogous to an inchoate attachment lien. Id. ⁴

In Rodriguez v. Escambron Development Corp. [84-2 USTC ¶9355], 740 F.2d 92 (1st Cir. 1984), the First Circuit considered whether title to Puerto Rican land acquired by civil law "acquisitive prescription" was subject to a federal tax lien against the prior record owners of the land. The plaintiffs argued that when the thirty-year period for adverse possession in Puerto Rico ran in 1975, the doctrine of relation back made them owners of the land from the time when they first took possession in 1945. Id. at 94-95. Under the civil law concept in Puerto Rico , "[w]hen prescription is completed the possessor is deemed to be owner, not merely from the last day of the delay, but retroactively from the moment when the prescription began to run." Id. at 94 (quoting I M. Planiol & G. Ripert, Treatise on the Civil Law 599 n.2708 (La. State Law Inst. trans. 1959)). Thus the plaintiffs argued that the Government's tax lien which arose in 1963 was ineffective because through the application of the relation back doctrine they, not the delinquent taxpayers, were the owners of the land at the time.

The First Circuit rejected this argument concluding "that, under the federal tax laws, the government's tax lien passed along with ownership of the attached land." Id. at 100. Of particular import to the court was the fact that the right to ownership of the land was never extinguished; rather, the right passed from the taxpayers to the plaintiffs. Id. at 99. Thus the court distinguished those cases where the attached property right ceased to exist, leaving nothing against which the Government could assert its interests.

Our case more closely resembles Rodriguez than Metropolitan Dade. The Supreme Court of Colorado did state that "a person is divested of all rights and interests in property upon its seizure under the Colorado Abatement of Public Nuisance statute. . . ." Wilkinson, 686 P.2d at 790. Nevertheless examination of the Colorado procedure shows that mere seizure of property does not result in retroactive divestment of the owner's rights in that property. Under Wilkinson, a person is divested of rights in property at the time of seizure, but this is dependent on a final order being entered. 686 P.2d at 792, 794. Thus the "owner" of seized property under Colorado law retains some interest in the property, even though he may not have the right to possession. See Eggleston, 636 F.Supp. at 1322. As noted below, until entry of the final forfeiture order the owner still had a right to recover his property if it was not found to be subject to forfeiture.

We feel a further comparison to Rodriguez is persuasive. It is true that in the instant case the seizure of Wingfield's property was an act on which forfeiture and ultimate title for the County can be established. However, this is close, we feel, to the facts in Rodriguez. There the taking of possession at the start of the period by the adverse possessors also was an act on which their rights could be established on completion of the required possession. Nevertheless the intervening tax lien prevailed because the final completion of the prescription period had to occur before the adverse possessors' rights were established.

Thus at the instant tax lien attached to the seized property here, absent the use of the doctrine of relation back as it is explained in United States v. Stowell, 133 U.S. 1, 16-17 (1890), the taxpayer Wingfield had a cognizable interest in the seized property. This must be so because if the final judgment of forfeiture by the Colorado State court had not been entered, Wingfield would have been entitled to the return of the seized property. ⁵ Here we cannot agree that before the final judgment of forfeiture was entered, the taxpayer had no property interest sufficient for the federal tax lien to attach. Not until that final judgment was entered was he divested of that interest in favor of the County. Here Wingfield had an interest in the seized property sufficient for the tax lien to attach until the final judgment was entered. ⁶

Only through the use of the relation back doctrine can Boulder County argue that Wingfield had no property interest as of the date of seizure. ⁷ The district court reasoned that the doctrine of relation back under state law cannot be held to subvert the constitutional power to lay and collect taxes. Eggleston, 636 F.Supp. at 1323. We agree. Relation back cannot "operate to destroy the realities of the situation." United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 50 (1950). "The State's characterization of its liens, while good for all state purposes, does not necessarily bind this Court." United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955).

Here after seizure, but while Wingfield retained an interest in the property until a final forfeiture judgment, the tax lien attached. We therefore hold that as a matter of federal law governing priorities, the Government's tax lien had attached to the seized property of Wingfield before it passed to Boulder County and has priority over the County's claim.

IV

ESTOPPEL AND WAIVER

Boulder County further argues that the Government should be estopped from pressing its right to the funds because of governmental assurances that it would waive its claim. We disagree.

Estoppel is an equitable doctrine invoked to avoid injustice in particular cases. The Supreme Court has left open the question whether estoppel can never be applied against the Government. See Heckler v. Community Health Services, 467 U.S. 51, 60, 66 (1984). If estoppel were to be applied against the Government, we have specified these requirements: (1) the party to be estopped must know the facts; (2) he must intend that his conduct will be acted upon or must so act that the party asserting the estoppel has the right to believe that it was so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former's conduct to his injury. Lurch v. United States , 719 F.2d 333, 341 (10th Cir. 1983). We have also said that there is an additional consideration of public policy when a party seeks to estop the Government; if the Government is unable to enforce the law because of estoppel, the interest of the citizenry as a whole in obedience to the rule of law is undermined. Che-Li Shen v. Immigration and Naturalization Service, 749 F.2d 1469, 1473-74 (10th Cir. 1984).

Here we are not convinced that Boulder County reasonably relied to its detriment on any assurances by the IRS that it would waive its claims to the seized property. The County has not lost any rights, or changed its status, because of reliance on claimed assurances. See Heckler, 467 U.S. at 61-62. The conduct of the IRS did not cause Boulder County to take or fail to take action that the County could not correct at any time. See Schweiker v. Hansen, 450 U.S. 785, 789 (1981) (per curiam). Boulder County was able to present its argument forcefully and its counsel has provided able representation. Because of our conclusion that the County has failed to show that it reasonably relied to its detriment on assurances made by the IRS that it would waive its claim, we need not address the additional public policy considerations when a party seeks to estop the Government.

We hold that Boulder County is not entitled to prevail on the basis of the claimed estoppel. ⁸

V

CONCLUSION

We hold that the district court's exercise of ancillary jurisdiction was proper. Moreover, Wingfield had an interest in the seized property sufficient for the tax lien to attach before the final order of forfeiture. Finally, the court's order that the Clerk of the Court satisfy the claim of the IRS and, if any proceeds remained, to satisfy the claim of the County of Boulder was not in error. Accordingly the judgment is

AFFIRMED.

¹ The United States was never made a party to the state forfeiture proceedings. Moreover, the State forfeiture proceedings did not address the validity and priority of the federal tax lien, the issue before us; rather, the precise issue before the State courts was whether Wingfield's residence constituted a class I public nuisance, and, if so, whether all the seized property was subject to forfeiture.

² 635 F.2d at 514.

³ 635 F.2d at 515 (footnote omitted).

⁴ We express no opinion as to whether a tax lien could attach to the taxpayer-claimant's interest (his right to recover the property) under statutes similar to that of Florida . As noted, that claimant has a right to recover his property if he carries the burden of showing the property was lawfully acquired. For reasons expressed below, we find the instant case is distinguishable from Metropolitan Dade and the Florida procedure.

⁵ The Colorado Court of Appeals has recognized this fact in the direct appeal in Wingfield's state forfeiture proceeding. See Colorado v. Lot 23, 707 P.2d 1001 (Colo. Ct. App. 1985), aff'd in part and rev'd in part, 735 P.2d 184 ( Colo. 1987). There the court found that of the property seized from Wingfield, the silver bars, the Canadian mint sets, and the currency found in the glass pitcher were not sufficiently shown to be "connected in any way with the drugs [seized] or other criminal activity," id. at 1004, and were ordered returned to Wingfield.

⁶ Boulder County also argues that under Colo. Rev. Stat. §16 -13-303(3) Wingfield had no property interest in the seized property. Section 16 -13-303(3) provides that "no property rights shall exist" in the proceeds from the sale of drugs. Section 16 -13-303(3) is analogous to the Florida provision confronted by the court in Metropolitan Dade. Both the Colorado provision and the Florida provision characterize the proceeds from the sale of drugs as something in which no property rights may be held.

Here, however, the property was seized pursuant to §16 -13-303(1). Thus the funds were seized and forfeited because they were found to be contents of a building that was adjudged a class I public nuisance. There has never been a court finding that the property was proceeds from the sale of drugs. Moreover, this argument was not presented to the district court.

⁷ The opinion of the Supreme Court of Colorado in Wilkinson, 686 P.2d at 792, illustrates the reliance on relation back to establish the interest acquired by forfeiture "at the time of seizure."

The trial court's order concerning the forfeiture of the property at issue here was entered nunc pro tunc to the date of seizure. This order reflects its finding that personal property seized pursuant to sections 16 -13-303(2) and -308(1) is forfeit at the time of seizure.

⁸ We further note that the district court held that it is "very clear that where federal taxes are due, particularly where they are due as a result of obtaining monies or profits from a criminal enterprise, that the United States government is not free to waive its rights to funds . . . ." III R. 14. Section 7122(a) provides discretionary authority to the Secretary of the Treasury to compromise any civil or criminal case arising under the internal revenue laws before the case is referred to the Department of Justice for defense or prosecution. After the case has been referred to the Department of Justice, only the Attorney General or his delegate may compromise the case. See I.R.C. §7122(a) ; see also 3 Mertens (Code Commentary), supra §7122 :1, at 74-3 to 74-4.

Even assuming, arguendo, that IRS attorneys represented that the IRS would waive any claim to the seized property, the IRS attorneys were not shown to have authority to compromise or waive a claim of the United States in these circumstances. See I.R.C. §7122(a) ; 26 C.F.R. §301.7122(a) . Agents of the Government "who have no authority at all to dispose of Government property cannot by their conduct cause the Government to lose its valuable rights by their acquiesence, laches, or failure to act." United States v. California, 332 U.S. 19, 40 (1947); see also California ex rel. State Lands Comm'n v. United States, 457 U.S. 273, 276 n.4 (1982). Moreover, compromises are required to be in writing. See 26 C.F.R. §301.7122(d) ; see also 3 Mertens (Code Commentary) supra, §7122 :3, at 74-5 to 74-6. Here no written waiver is said to have been made; rather, Boulder County relies exclusively on alleged oral assurances by IRS attorneys. III R. 7.

 

 

[2001-1 USTC ¶50,312] In re South Independence, Inc., d/b/a Lake Wright Texaco, EIN #541373038, Debtor. South Independence, Inc., d/b/a Lake Wright Texaco, Plaintiff v. United States of America, Commonwealth of Virginia, and Selective Insurance of America, Inc., Defendants

U.S. Bankruptcy Court, East. Dist. Va. , Norfolk Div., 99-25384-S, Chapter 11, APN: 00-2090-S, 11/21/2000 , 256 BR 861, 2000 Bankr. LEXIS 1597

[Code Sec. 6321 ]

Liens: Creation of: Debtor in bankruptcy: Priority: State (Virginia) law: Federal tax lien v. state lien.--

The IRS's tax liens against the assets of an insolvent corporation's bankruptcy estate had priority over state (Virginia) liens for unpaid fuel taxes because the federal liens arose before the state liens became choate and, thus, were first in time and first in right. The federal liens were perfected when the IRS made its tax assessments, and the state liens were created on the later dates when the state's tax division filed two memoranda of liens indicating that taxes were past due.

[Code Sec. 6323 ]

Liens: Creation of: Debtor in bankruptcy: Priority: State ( Virginia ) law: Federal tax lien v. state lien: State as judgment lien creditor.--

A state ( Virginia ) did not qualify as a judgment lien creditor and its claim against an estate's assets did not have priority over federal tax liens that were first in time. The state unsuccessfully argued that its lien was perfected before the IRS filed a notice of federal tax lien. Despite the fact that Virginia law gave the state lien the "effect" of a judgment, the state did not satisfy the tax code criteria to be a judgment lien creditor because its lien was not obtained in a court of record or from any type of judicial authority. Monica Fuel, Inc. (CA-3), 95-2 USTC ¶50,477 , distinguished.

W. Greer McCreedy II, for debtor. Gregory D. Stefan, Richard G. Jacobus, for I.R.S. Eric K.G. Fiske, for Commonwealth of Va. Thomas Moore Lawson, Ann K. Crenshaw, for Selective Ins. Co. of America.

Memorandum Opinion and Order

ST. JOHN , Bankruptcy Judge:

This matter came upon the debtor's Complaint to Determine the Extent, Priority and Validity of Liens, and to Authorize Distribution. The parties involved have stipulated to most of the facts. With no major facts in contention, both parties filed summary judgment motions and memoranda in support thereof. After reviewing their briefs, the Court heard oral argument on the summary judgment motions and took the matter under advisement.

FINDINGS OF FACT

The facts are not in dispute. On August 18, 1999 , South Independence ("debtor") filed a voluntary petition for bankruptcy under Chapter 11. Following the debtor's bankruptcy filing, this Court authorized the debtor to sell property of the bankruptcy estate free and clear of liens pursuant to 11 U.S.C. §363(b). After executing the sale and making certain payments pursuant to the Court's sale order, the net proceeds of the sale totaled $67,500, exclusive of closing costs and a sales commission. The debtor is prepared to distribute the net proceeds but has filed this Complaint to resolve its concern as to which creditor has priority relative to the other creditors.

In the instant case, two creditors vie for priority--the Commonwealth of Virginia ("Commonwealth") and the Internal Revenue Service ("IRS"). The Commonwealth's claim relates to the debtor's fuel tax obligations. Pursuant to Virginia Code §58.1-2132.2, the Commonwealth filed two memoranda of liens--the first on November 17, 1998 and the second on July 26, 1999--in the Circuit Court for the City of Virginia Beach to secure the fuel tax obligations in the amounts of $52,834.31 and $10,610.59 respectively. ¹ The Commonwealth has accepted $25,707.06 from Selective Insurance Company of America, Inc. ("SIC"), as a compromise to the surety company's payment bond of $68,000, which previously secured the prepetition fuel tax obligation of the debtor. ²

The IRS claim is also for unpaid taxes. Between October 31, 1997 and October 26, 1998 , the IRS made numerous tax and penalty assessments for various periods against the debtor, totaling $30,289.26. ³ Since then, the amount of the IRS claim has fluctuated due to accrued interest, additional penalties, and payments credited against the claim. ⁴ In its motion for summary judgment, and consistent with its proof of claim, the IRS has requested that $32,299.87 be distributed to satisfy its claim. ⁵

With $67,500 in sale proceeds to distribute, the estate is unable to pay in full both the claims of the Commonwealth and the IRS. Accordingly, which creditor is entitled to distribution first will have a substantial effect on how much of each creditor's claim will be paid.

CONCLUSIONS OF LAW

The ultimate issue in this case is which claim has priority. Federal law controls when the issue turns on the priority to be given to a federal lien. See United States v. Sec. Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S. 47, 49, 95 L.Ed. 53, 71 S.Ct. 111 (1950); Monica Fuel, Inc. v. IRS [95-2 USTC ¶50,477], 56 F.3d 508, 511 n.7 (3d Cir. 1995); In re Lehigh Valley Mills, Inc., 341 F.2d 398, 400 (3d Cir. 1965). Under federal law, the priority of a claim is governed by the well-known principle that the "first in time is the first in right." United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 123 L.Ed.2d 128, 113 S.Ct. 1526 (1993); accord United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 87, 10 L.Ed.2d 770, 83 S.Ct. 1651 (1963); United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85, 98 L.Ed. 520, 74 S.Ct. 367 (1954); Air Power, Inc. v. United States [84-2 USTC ¶9732], 741 F.2d 53, 55 (4th Cir. 1984). ⁶ In the instant case, the priority between the claims of the IRS and the Commonwealth depends on which lien arose first. Furthermore, if the Commonwealth is within a certain class of protected creditors, the issue of notice may impact the priority dispute involved in this case. Both issues are examined below.

I. FIRST IN TIME IS FIRST IN RIGHT

A. When the Liens Arose

The relative priority of each lien in the instant case depends on which lien was first in time. See McDermott [93-1 USTC ¶50,164], 507 U.S. at 449; Pioneer Am. Ins. [63-2 USTC ¶9532], 374 U.S. at 87; New Britain [54-1 USTC ¶9191], 347 U.S. at 85; Air Power [84-2 USTC ¶9732], 741 F.2d at 54; Monica Fuel [95-2 USTC ¶50,477], 56 F.3d at 511. The liens of the IRS arose under §6321 of the Internal Revenue Code, which provides:

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.

26 U.S.C. §6321 (West 2000). Such a lien arises at the time the IRS conducts the tax assessment. See id. §6322 ("Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made. . . ."); Monica Fuel [54-1 USTC ¶9191], 56 F.3d at 511 ("Under 26 U.S.C. §§6321 and 6322, federal tax liens arise when the underlying taxes are assessed."). As noted earlier, the IRS conducted numerous tax assessments, with the latest occurring on October 26, 1998 . Applying §6322, it is clear that all of the IRS liens arose no later than October 26, 1998 .

As for the Commonwealth's liens, the Supreme Court stated in United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 123 L.Ed.2d 128, 113 S.Ct. 1526 (1993): "Our cases deem a competing state lien to be in existence for 'first in time' purposes only when it has been 'perfected'. . . ." Id. at 449. The point at which a state lien is perfected depends "on the time it attached to the property in question and became choate." New Britain [54-1 USTC ¶9191], 347 U.S. at 86, quoted in United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 354, 12 L.Ed.2d 370, 84 S.Ct. 1267 (1964); see Monica Fuel [95-2 USTC ¶50,477], 56 F.3d at 511. ⁷ A lien may be choate "when there is nothing more to be done . . . when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." New Britain [54-1 USTC ¶9191], 347 U.S. at 84, quoted in Vermont [64-2 USTC ¶9520], 377 U.S. at 355.

In the instant case, the Commonwealth's liens arose under §58.1-2132.2 of the Virginia Code, which provides:

If any taxes or fees, including penalties and interest, become delinquent or are past due, the Commissioner may file a memorandum of lien. . . . Such memorandum shall be recorded in the judgment docket book and shall have the effect of a judgment in favor of the Commonwealth. . . .

Va. Code Ann. §58.1-2132.2 (Michie 2000). At the time the memorandum of lien is filed, the lienor and the property subject to the lien presumably are identified. Moreover, the memorandum of lien should establish the amount of the lien. Consequently, the Commonwealth's liens became choate at the time it filed the two memoranda of liens-specifically, the Commonwealth's liens became choate on November 17, 1998 , and July 26, 1999 respectively. Therefore, the earliest lien that arose in favor of the Commonwealth occurred on November 17, 1998 .

B. The IRS Liens Are First in Time

The review as to when each lien arose in the present case reveals that all of the IRS liens arose prior to the Commonwealth's two liens. The latest IRS lien arose October 26, 1998 , whereas the first Commonwealth lien arose on November 17, 1998 -nearly a month after the last IRS lien. Applying the principle of first in time, first in right, it is clear that the IRS liens are first in time and thus first in right. The Commonwealth, however, asserts that its liens are first in time because the IRS did not file its notice of lien until December 28, 1998 . Even then, the Commonwealth argues, the notice was illegible and therefore ineffective. The relevance of the IRS notice of federal tax lien depends on whether the Commonwealth is a protected class under the Internal Revenue Code.

II. JUDGMENT LIEN CREDITOR

The Commonwealth argues that it is a judgment lien creditor and therefore must have notice of a federal tax lien before such lien may trump the Commonwealth's lien. As noted above, an IRS lien arises at the time the tax is assessed. See 26 U.S.C. §§6321, 6322 (West 2000). To be valid against certain types of creditors, however, the IRS must file a notice of federal tax lien. Congress saw fit to protect certain types of creditors by legislating that "the lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." Id. §6323(a); see also Air Power, Inc. v. United States [84-2 USTC ¶9732], 741 F.2d 53, 55 (4th Cir. 1984) ("Congress in the last fifty years has chosen to extend special protection to certain classes of creditors whose interests are perfected and specific before they have notice of outstanding federal tax liens.").

A judgment lien creditor is defined in the IRS regulations:

[A] person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved.

26 C.F.R. §§301.6323(h)-1(g) (2000). The IRS contends that the definition of a judgment lien creditor requires that the lienor have obtained the judgment through litigation in a court of law. Conversely, the Commonwealth argues that under state law, its lien is given the effect of a judgment in all respects and therefore makes the Commonwealth a judgment lien creditor for purposes of Internal Revenue Code §6323.

On its face, Virginia Code §58.1-2132.2 attempts to create a judgment lien once the lienor files a memorandum of lien. See Va. Code Ann. §58.1-2132.2 (Michie 2000). The state statute, however, is not determinative of whether it is a judgment, because "federal law governs the actual legal effect of the judgment for tax priority purposes." Air Power [84-2 USTC ¶9732], 741 F.2d at 55 n.2 (4th Cir. 1984) (citing Hartford Provision Co. v. United States [78-1 USTC ¶9392], 579 F.2d 7, 9 (2d Cir. 1978)). In Air Power, the Fourth Circuit Court of Appeals held that "whether a judgment issues from a 'court of record' for purposes of section 6323 priority under the Internal Revenue Code is a question of federal law. . . ." Id. at 54. The Air Power court based its holding on the need for uniformity in defining "judgment creditor" as expressed in United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U.S. 361, 97 L.Ed. 1071, 73 S.Ct. 701 (1953):

A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a "judgment creditor" should have the same application in all the states. In this instance, we think Congress used the words "judgment creditor" in §3672 [now §6323] in the usual conventional sense of a judgment of a court of record, since all states have such courts. We do not think Congress had in mind the action of taxing authorities who may be acting judicially as in New Hampshire and some other states, where the end result is something "in the nature of a judgment", while in other states the taxing authorities act quasi-judicially and are considered admin istrative bodies.

Id. at 364 (footnotes omitted), quoted in Air Power [84-2 USTC ¶9732], 741 F.2d at 56. Likewise, in the instant case, that a state statute declares that it "shall have the effect of a judgment," Va. Code Ann. §58.1-2132.2, is not enough to render the state a judgment lien creditor for the purpose of §6323 of the Internal Revenue Code. See, e.g., Brown v. Maryland [87-2 USTC ¶9639], 699 F.Supp. 1149, 1153 (D. Md. 1987) ("Although, under Maryland law the recording of a notice of a tax lien may be similar to or in the nature of a judgment, this is not sufficient under the Gilbert case. "). Rather, the creditor must meet the criteria enumerated under the Internal Revenue Code to qualify as a judgment lien creditor. In the instant case, the Commonwealth does not qualify as a judgment lien creditor.

The federal regulations note that a judgment lien creditor is one who has obtained a judgment in a "court of record." 26 CFR §§301.6323(h)-1(g) (2000). The regulations go on to state that "the term 'judgment' does not include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity. . . ." Id. These comments make it clear that anything less than a judgment in a court of record with judicial authority will not suffice. A state legislature cannot overcome this barrier by simply declaring its lien to be a judgment. The Commonwealth's lien in this matter was not born from a court of record or any sort of judicial authority. Consequently, the Commonwealth is not a judgment lien creditor and cannot enjoy such protection. Cf. Foust v. Foust [98-1 USTC ¶50,202], No. IP 96-0196-C-T/G, 1997 WL 1037872, at *7 (S.D. Ind. July 9, 1997) ("Therefore, even though the [Indiana Department of Revenue ("IDR")] has a judgment lien under Indiana law, this lien does not qualify the IDR as a 'judgment lien creditor' under federal law that is entitled to the additional protection of section 6323(a). The IDR does not have a judgment granted by a court of record, and would need such a judgment before the IRS filed its notice . . . in order to have priority over the federal tax lien."). Without the status of judgment lien creditor, the timing, as well as the illegibility of the notice of federal tax lien becomes irrelevant. The federal tax liens arose when they were assessed, and as noted above, were first in time relative to the Commonwealth's liens. Under the principle of first in time, first in right, the IRS liens take priority over the Commonwealth's liens.

III. MONICA FUEL, INC. V. INTERNAL REVENUE SERVICE

Finally, the Court must address the case that the Commonwealth argues should control the outcome. In Monica Fuel, Inc. v. Internal Revenue Service [95-2 USTC ¶50,477], 56 F.3d 508 (3d Cir. 1995), the Third Circuit Court of Appeals faced an issue similar to the one faced by this Court today--namely the relative priority of a §6321 lien versus a state fuels tax lien. See id. at 508-09. The state statute in Monica Fuel is substantially similar to the one at issue today. In Monica Fuel, the statute created a lien for fuel taxes owed to the state. See id. at 509. By issuing either a certificate of debt or a warrant of execution, the lien would be "given the same force and effect as any entry of a docketed judgment. . . ." Id. In holding that the state tax liens "were choate and, therefore, entitled to priority over the liens of the IRS," id. at 513, the court noted that the "liens were 'given the force of a judgment' upon assessment." Id. (quoting United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 359, 12 L.Ed.2d 370, 84 S.Ct. 1267 (1964)).

The holding in Monica Fuel is notable as much for its holding as for what it did not hold. The court noted that on reargument the district court "concluded that . . . the Division did not acquire judgment lien creditor status because a certificate of debt 'does not qualify as a "valid judgment, in a court of record and of competent jurisdiction" as specifically required by 26 C.F.R. §301.6323(h)-1(g).' " Id. at 510 n.5 (quoting Monica Fuel, Inc. v. IRS, No. 91-748, at 7 (D. N.J. May 10, 1994)). On appeal, the Division did not contest this ruling and therefore the Third Circuit in Monica Fuel did not have to address whether the Division was a judgment lien creditor.

Yet this is precisely the issue before this Court. In Monica Fuel, whether the Division was a judgment lien creditor was not outcome determinative because, as the court found, the Division was first in time with regard to when the liens arose. ⁸ In the instant case, the Commonwealth's first lien arose nearly a month after the IRS made its last tax assessment. Having lost this race, the Commonwealth had to pin its hopes on protection as a judgment lien creditor. As noted above, this attempt has been proven futile in that the Commonwealth is not a judgment lien creditor.

IV.

The sole issue in this case is which liens have priority: the Commonwealth's liens or the IRS liens. With "first in time, first in right" as the guiding principle, the dates that each lien arose are critical. Under state law, the Commonwealth's liens arose when the Commonwealth filed the two memoranda of liens. Conversely, under federal law, the IRS liens arose at the time the IRS assessed the fuel taxes. Applying this to the undisputed facts, it is clear that all of the IRS liens arose prior to the Commonwealth's liens.

To avoid the consequences of perfecting its lien subsequent to the IRS tax assessments, the Commonwealth seeks protection as a judgment lien creditor. A judgment lien creditor is not bound by the date of tax assessment for purposes of priority, but rather the date of when the notice of federal tax lien was filed controls. Who is a "judgment lien creditor," however, is governed under federal law. The Commonwealth does not fit into this definition despite the state statute giving the lien the effect of a judgment, because the lien was not obtained in a court of a record or from any type of judicial authority.

Without the status of a judgment lien creditor, the first lien in time must prevail. Accordingly, in light of the fact that the IRS liens preceded the Commonwealth's liens, the Court finds that the IRS liens have priority over the Commonwealth's liens. The Court, therefore, orders that the amount of $67,500 being held in trust be distributed first to the IRS in satisfaction of its claim for $32,299.87, with the remainder to be applied to the Commonwealth's liens.

IT IS SO ORDERED.

The Clerk shall mail a copy of this Memorandum Opinion and Order to Gregory D. Stefan, Esq., and Richard G. Jacobus, Esq., counsel for the IRS, Eric K.G. Fiske, Esq., counsel for the Commonwealth of Virginia, Thomas Moore Lawson, Esq., and Ann K. Crenshaw, Esq., counsel for Selective Insurance Company of America, and W. Greer McCreedy, II, Esq., counsel for the debtor.

¹ Between May 19, 1999 and July 28, 1999 , the Commonwealth also filed memoranda of liens for various sales tax and employer withholding tax assessments against the debtor for various periods, totaling $5289.18. The Commonwealth, however, does not contend that this amount is entitled to priority over the IRS claims, as these liens were recorded after the IRS filed its notice of federal tax lien.

² SIC is a party to this adversary proceeding. In its pleadings, SIC has adopted the position of the Commonwealth in all respects.

³

                        IRS Tax Assessments

For the tax period ending                          Assessment Date   Amount

September 30, 1997
                                
October 31, 1997
     572.89

February 2, 1998
                                                      6365.39

February 2, 1998
                                                       636.54

February 2, 1998
                                                       127.31

February 2, 1998
                                                       162.68

March 9, 1998
                                                          318.27

December 31, 1997
                                 
January 31, 1998
     486.86

April 13, 1998
                                                        5409.59

April 13, 1998
                                                         540.95

April 13, 1998
                                                          81.14

April 13, 1998
                                                         103.47

May 18, 1998
                                                           270.48

March 31, 1998
                                    
April 30, 1998
       259.54

June 29, 1998
                                                         5767.50

June 29, 1998
                                                          576.74

June 29, 1998
                                                           57.68

June 29, 1998
                                                           79.77

August 3, 1998
                                                         288.37

June 30, 1998
                                     
July 31, 1998
        302.62

September 21, 1998
                                                    6724.94

September 21, 1998
                                                     672.49

September 21, 1998
                                                      67.25

September 21, 1998
                                                      80.54

October 26,1998
                                                        336.25

                                                                    ---------

TOTAL                                                               30,289.26

 

⁴ At trial, the parties noted an apparent discrepancy in the amounts the IRS claimed in its notice of federal tax lien as compared with its proof of claim. In the notice of federal tax lien, the IRS stated that the amount secured was $30,353.48. In its proof of claim, however, the IRS stated that the amount secured was $32,299.87. To resolve the matter, the IRS submitted a supplemental affidavit in support of its motion for summary judgment. In the affidavit, Pamela Anderson, an "Advisor/Reviewer" for the IRS, explained that the differing amounts reflected activity since the dates the taxes were assessed, as well as since the notice of federal tax lien was filed. Specifically, in addition to the tax assessments previously noted, the proof of claim amount reflects one payment of $4215, a dishonored check penalty of $15, failure-to-pay penalties of $3233.94, and further accrued interest totaling $2976.67. When these amounts are added to the amount of the original tax assessments, which totaled $30,289.26, see supra note 3, the combined total matches the IRS proof of claim--$32,299.87.

⁵ On December 28, 1998 , in compliance with 26 U.S.C. §6323(f) and Virginia Code §55-142.1(C)(1), the IRS filed a notice of federal tax lien with the Virginia State Corporation Commission. The parties dispute the legibility, or lack thereof, of the notice of federal tax lien. The parties further dispute who should bear the responsibility for such alleged illegibility. The Court makes no finding on these issues as this opinion makes those issues moot. As discussed in greater detail below, the notice of federal tax lien ultimately has no bearing on the outcome of this proceeding.

⁶ This principle goes back to the days of Chief Justice Marshall, who stated:

The principle is believed to be universal, that a prior lien gives a prior claim, which is entitled to prior satisfaction out of the subject it binds, unless the lien be intrinsically defective, or be displaced by some act of the party holding it, which shall postpone him in a Court of law or equity to a subsequent claimant.

Rankin v. Scott, 25 U.S. (12 Wheat) 177, 179, 6 L.Ed. 592 (1827).

⁷ As the Supreme Court noted in Vermont, "the requirement that a competing lien must be choate in order to take priority over a later federal tax lien stems from the decision in United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U.S. 47, 71, 95 L.Ed. 53, 71 S.Ct. 111 [1950]." Vermont [64-2 USTC ¶9520], 377 U.S. at 355.

⁸ As in our case, the court in Monica Fuel faced several liens. In Monica Fuel, the IRS made seven tax assessments between September 18, 1989 and June 4, 1990 . The Monica Fuel court concluded that on August 30, 1989 --nearly three weeks prior to the first IRS assessments--the state tax liens became sufficiently choate under the New Britain test and therefore were first in time and first in right relative to the IRS liens. See id. at 512.

 

 

[87-1 USTC ¶9289] United States of America , Plaintiff v. State of New York , Defendant

U.S. District Court, West. Dist. N.Y. , CIV-80-1113E, 4/16/87

[Code Secs. 6323 and 7403 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Priority: State taxes.--The U.S. was granted summary judgment in a suit brought against New York for the wrongful conversion of a tax lien interest. The state was not immune from suit because federal judicial power extends to all cases brought by the U.S. The state's characterization of its tax warrant as a judgment was not binding because federal law controlled on the issue of priority. Since the state tax lien was quasi-judicial under federal law, the first in time-first in right rule applied and the federal lien, which arose first, was superior.

C. Donald O'Connor, Assistant United States Attorney, Buffalo, N.Y. 14202, Daniel F. Brown, Department of Justice, Washington, D.C. 20530, for U.S. Anthony R. Wannick, New York State Department of Law, Brooklyn, N.Y., John P. Balanis, New York State Department of Law, Albany, N.Y., Peter B. Sullivan, New York State Department of Law, Buffalo, N.Y., for State of New York.

MEMORANDUM and ORDER

ELFVIN, District Court: In this action, brought pursuant to 26 U.S.C. §§7401 & 7403, judgment is sought for an alleged wrongful conversion of a tax lien interest. The plaintiff has moved and the defendant has cross-moved for summary judgment.

An agent or delegate of the Secretary of the Treasury made an assessment May 5, 1977 against Delta Protective Service, Inc. ("Delta") for unpaid income tax withholding and Federal Insurance Contributions Act ("FICA") taxes. The assessment allegedly concerned taxes for the first quarter of 1977 in the amount of $20,735.56 and penalties in the amount of $2,060.10. Affidavit of T.F. O'Hare, sworn to July 16, 1986 . ¹ Notice of the federal tax lien was filed with New York 's Secretary of State in Albany July 1, 1977 and such notice was filed with the Erie County (N.Y.) Clerk July 5, 1977 . Id. at Schedule A; Affidavit of Daniel F. Brown, exhibit 1, dated August 6, 1986 .

The office of the Industrial Commissioner of the State of New York issued June 15, 1977 an industrial commission tax warrant against Delta for unpaid unemployment insurance contributions and interest thereon in the total amount of $14,068.82. Such warrant was filed June 17, 1977 in the Erie County Clerk's judgment docket.

A state tax compliance agent served October 4, 1977 a specification and levy upon Peter J. Schmitt Co., Inc. ("Schmitt"), which had been a debtor of Delta. The state thereby sought seizure of any funds owing by Schmitt to Delta for application to Delta's state tax liabilities. The United States, acting through the Internal Revenue Service ("the IRS"), served on Schmitt November 10, 1977 a Notice of Levy in the amount of $22,160.71 ("plus accruals") and thereby sought to seize any funds owing to Delta for application to Delta's federal tax liabilities.

Schmitt paid New York State December 2, 1977 the sum of $2,435.80. That sum represented the entire amount Schmitt owed Delta. Delta filed a bankruptcy petition March 13, 1978 .

A March 2, 1979 letter from the IRS to the Comptroller of the State of New York , Department of Audit and Control, requested that the amount of $2,435.80 be remitted to the IRS because of the federal government's alleged superior interest in the funds Schmitt had owed Delta. By a March 9, 1979 letter, New York declined to turn over the funds and indicated that any remedy the IRS might have would properly lie against Schmitt. This action for conversion was commenced December 5, 1980 .

The defendant raises in its memorandum of law in support of its cross-motion for summary judgment, for the first time in this litigation, the claim that venue is improper. No pre-answer motion was filed by the defendant and the defendant failed to raise the issue of venue in its Answer. The defense of improper venue has been waived pursuant to Fed.R.Civ.P. rule 12(h)(1) and the defendant cannot now, at this late date, be heard to complain of any impropriety of venue.

The defendant also argues that the federal government may not maintain this conversion action against it. It concedes that it may not invoke the protection of the Eleventh Amendment but then claims, however, that the plaintiff may not recover because the State's collection of taxes had been an act of sovereignty and immune from challenge. The argument, while not clearly stated, appears to be that the plaintiff may not recover here because the State has not waived its immunity to suit.

Contrary to the defendant's claim, it is well established that the United States Constitution extends federal judicial power to controversies to which the United States is a party--U.S. Const. Art. III, §2 , cl. 1--and that the United States Supreme Court has original jurisdiction over all cases in which a state is a party including suits by the United States against a state--U.S. Const. Art. III, §2 , cl. 2;United States v. Texas, 143 U.S. 621, 642 (1892);United States v. California, 328 F.2d 729, 732 (9th Cir.), cert. denied, 379 U.S. 817 (1964). Each state has thus impliedly consented to being so sued. It is equally well established that United States district courts have been granted concurrent jurisdiction over such suits. 28 U.S.C. §1345; United States v. Illinois, 454 F.2d 297, 301 (7th Cir.), cert. denied, 406 U.S. 918 (1972).

The jurisdiction of a federal district court extends to suits by the United States against a state "without regard to the subject matter of such controversies." United States v. Texas, supra, at 646. See United States v. California , supra, at 723. In addition, the United States may avail itself of any type of action or suit in equity available to creditors generally to collect debts. United States v. Harr, 27 F.2d 250 (5th Cir.), cert. denied, 278 U.S. 634 (1928). The defendant is not immune to this suit for conversion.

Under New York law, an action for conversion lies against any person, including attaching creditors, who wrongfully converts money or specific property. A conversion of property is any unauthorized exercise of dominion or control over the property by one who is not the owner thereof which interferes with another person's superior possessory rights therein. Meese v. Miller, 79 A.D.2d 237, 436 N.Y.S.2d 496, 500 (4th Dep't 1981 ); Bunge Corp. v. Manufacturers Hanover Trust Co., 37 A.D.2d 409, 325 N.Y.S.2d 983, 988 (1st Dep't 1971 ), aff'd., 31 N.Y.2d 223, 335 N.Y.S.2d 412 (1972). In order to succeed in a cause of action for conversion, the plaintiff must establish that its right to possession of the property was superior to the defendant's and that the defendant exercised unauthorized control over the property to the exclusion of the plaintiff's superior rights. Gold Medal Products, Inc. v. Interstate Computer Services, Inc., 80 A.D.2d 600, 436 N.Y.S.2d 312, 313 (2d Dep't 1981 ).

The defendant appears to argue that the plaintiff has failed to show that Delta's debt to the United States remains outstanding. ² However, the affidavit of T.F. O'Hare states that the IRS has received from Delta credits in the amount of $4,976.34 which left, as of August 1, 1986 , an outstanding balance of $44,364.62. In addition, a Bankruptcy Court order for a final meeting of creditors and notice of filing of final accounts, suggests that, after payment of the trustee and attorney, the trustee's account for Delta showed a balance on hand of $2,740.82. Such amount could not have satisfied the federal government's lien. It is clear to this Court that the plaintiff has proved the fact that Delta's debt to it has not been satisfied.

The State also implies that Schmitt's payment to it extinguished any lien the federal government may have had in the property. No authority is cited for this position. It is beyond debate that "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien, for 'it is the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere . . . .' "United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958) (quoting from Burton v. Smith, 38 U.S. (13 Peters) 464, 483 (1839)). The State, therefore, received the funds subject to any valid lien of the United States .

The defendant further claims that the plaintiff failed to demand payment from it and thus argues that the plaintiff may not pursue an action for conversion. See Agawam Trading Corp. v. Mayer Malbin Co., 37 A.D.2d 946, 325 N.Y.S.2d 757 (4th Dep't 1971); Apex Ribbon Co. v. Knitwear Supplies, Inc., 22 A.D.2d 766, 253 N.Y.S.2d 643, 644 (1st Dep't 1964).

A March 2, 1979 letter from the United States to the Comptroller of the State of New York , Department of Audit and Control, stated the basis for the United State 's claim and demanded that the State remit $2,435.80 to the IRS. Exhibit 4 to Affidavit of David F. Brown, dated August 6, 1986 . A March 9, 1979 letter reply from the Department of Audit and Control failed to remit any funds and indicated that any remedy the IRS might have would lie against Schmitt rather than versus the State. Id. at Exhibit 5. The exchange of those letters fulfilled the requirement that a demand for the property be made and that such demand be denied before a conversion action may be maintained.

The State argues, however, that the demand should have been made upon New York 's Department of Labor which had been aware of Delta's bankruptcy action. Again, the State cites no authority for its position. The text of the March 9th letter from the Department of Audit and Control indicates that that office was familiar with this controversy between the United States and the State. It also fails to suggest that the Department of Labor be contacted and in fact suggests that future correspondence should be directed to the Comptroller. This Court finds no cause to hold deficient the plaintiff's demand.

The State contends that, because the plaintiff has not brought legal action against Schmitt, it should not be permitted to sue the State. While the federal government may have a cause of action against Schmitt, a cause of action in conversion clearly lies against the defendant. The State has cited no authority, and this Court has found none, supporting the contention that seeking judgment against Schmitt is a prerequisite to seeking judgment against the State.

The core issue is priority. Both the State and the federal government claim that their lien has the upper hand. The question of priority is to be determined as a matter of federal law. Aquilino v. United States [60-2 USTC¶9538 ], 363 U.S. 509, 513-514 (1960); United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955).

Section 6321 of the Internal Revenue Code, 26 U.S.C. §6321 , provides that

"[i]f 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."

Such lien arises when the assessment is made and it continues until the amount is satisfied or it becomes unenforceable due to lapse of time. 26 U.S.C. §6322 . The federal government's lien, therefore, arose May 5, 1977 .

A state-created lien must be "choate" under federal law to compete with a federal tax lien. See United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84 (1954). A state's lien is choate if it sets forth the identity of the lienor, the property subject to the lien and the amount of the lien. Ibid. An imperfected or "inchoate" lien of a state is inferior to an unfiled federal tax lien which arises before or after the date of such state-created lien. U.S. v. Pioneer American Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963); United States v. Erlandson [70-2 USTC ¶9559 ], 311 F.Supp. 399, 400 (D.Minn. 1969).

As between a perfected, choate state-created lien and a federal tax lien, the rule of priority is that the "first in time is first in right." United States v. New Britain, supra, at 87. That general rule of priority, however, is modified by 26 U.S.C. §6323(a) . That section provides that, with respect to claimants who are purchasers, holders of security interests, mechanic's lienors and judgment creditors, notice of a federal tax lien must be filed first in time in accordance with the requirements of 26 U.S.C. §6323(f) in order to be "first in right."

The State claims that it is a judgment lien creditor within the meaning of 26 U.S.C. §6323(a) . Section 573, subd. 2, of New York 's Labor Law provides that a warrant for state unemployment taxes may be filed with a county clerk and that such clerk

"shall enter in the judgment docket the name of the employer mentioned in the warrant and the amount of the contribution, interest, and penalties for which the warrant is issued and the date when such copy is filed. Thereupon the amount of such warrant so docketed shall become a lien upon the title to and interest in real property and chattels real of the employer against whom the warrant is issued in the same manner as a judgment duly docketed in the office of such clerk."

However, the State's characterization of its tax warrants as a judgment is not binding upon this Court.United States v. Acri, supra, at 213 (1955); United States v. Gilbert Associates [53-1 USTC ¶9291 ], 345 U.S. 361, 363-365 (1953). Treasury Regulations define "judgment lien creditor" as

"a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. * * * The term 'judgment' does not include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity such as the action of State taxing authorities." 26 C.F.R. §301.6323(h)-1(g) .

Thus, despite the State having filed its tax warrant with the county clerk, which is deemed, under its law, to be a judgment just the same as any other judgment docketed with the clerk, the State's tax warrant is not the judgment of a court of record. Rather, it is simply a determination by an individual acting in a quasi-judicial capacity. As such, the defendant cannot properly be construed to qualify as a judgment creditor under federal law. The parties' competing claims of priority must, therefore, be determined under the general rule of "first in time--first in right."

The plaintiff's tax lien arose, pursuant to 26 U.S.C. §6321 , in "all property and rights to property, whether real or personal," of the taxpayer on May 5, 1977 --the date of the assessment. The date for the comparison is the date upon which the State's tax lien became "choate." As the plaintiff notes, section 573 of the Labor Law provides that the docketing of the state tax warrant creates a lien upon "the title to and interest in real property and chattels real of the employer." The State's docketing of the warrant on June 17, 1977 gave it a lien only upon Delta's real property and failed to give it a lien upon Delta' personal property, such as the payment due from Schmitt. The State's lien became choate as to the money owed to Delta only upon the October 4, 1977 levy. In re Reiber's Inn of Westchester, Inc., 1 B.R. 304, 307-308 (Bkrptcy S.D.N.Y. 1979), aff'd, 3 B.R. 706, 708 (S.D.N.Y. 1980). Thus, the State's lien came later in time than the plaintiff's lien. The latter having come first in time is first in right.

The State further argues that its lien arises from the fact that the unsatisfied warrant was in the possession of a tax compliance agent of New York 's Commission of Labor who, pursuant to section 573, was acting as a deputy sheriff on the behalf of a judgment creditor. The State suggests that it is a judgment creditor pursuant to section 5202 of New York 's Civil Practice Law and Rules. However, that section requires perfection by levy and fails to advance the defendant's position. Thriftway Auto Rental Corp. [72-1 USTC¶9311 ], 457 F.2d 409, 411 (2d Cir. 1972); In re Reiber's Inn of Westchester, Inc., supra, at 308.

Accordingly, it is hereby ORDERED that the defendant's motion for summary judgment is denied and that the plaintiff's motion for summary judgment is granted.

¹ The amount claimed to be owed as of August 1, 1986 was $44,364.62.

² The defendant's papers in support of its contentions are extraordinarily confusing.

 

 

[66-1 USTC ¶9389]United States of America, Plaintiff v. J. Francyl Howard, a/k/a J. F. Howard; Mary G. Howard, wife of J. Francyl Howard; James P. Howard; Elaine M. Howard, wife of James P. Howard; Mary Anice Howard Roe; George J. Roe, husband of Mary Anice Howard Roe; Tyba Manufacturing Co., an Oregon corporation; Tyba Pulp Corp., an Oregon corporation; Eli E. Bangs, Individually and as President of Tyba Manufacturing Co.; Sherman E. Shine, Dean A. McKean and Clara McKean, a copartnership d/b/a Lebanon Electric Co., and Dean A. McKean and Clara McKean, Individually, d/b/a Lebanon Electric Co.; County of Linn, State of Oregon; Oregon State Tax Commission; Department of Employment, State of Oregon; and Lou Scott, and City of Albany, an Oregon municipal corporation, Defendants

U. S. District Court, Dist. Ore., Civil No. 65-155, 254 FSupp 499, 4/22/66

[1954 Code Sec. 6323]

Tax liens: Priority.--Liens for federal taxes were superior to subsequent liens for local taxes. The relative priority of federal tax liens is a matter of federal law, not state law, and a municipality may not avoid the priority rules by characterizing local liens as expenses of sale.

Sidney I. Lezak, United States Attorney, Jack G. Collins, Roger G. Rose, Assistant United States Attorneys, U. S. Court House, Portland, Ore., for plaintiffs. Nels Peterson, Donald H. Londer, Mercedes F. Deiz, 300 S. W. Madison, Portland, Ore., Courtney R. Johns, P. O. Box 672, Albany, Ore., Merle A. Long, 425 W. Second Ave. , Albany , Ore. , for defendant.

Opinion

KILKENNY, District Judge:

For decision on the issues now before the Court, are the relative rights and priorities of the tax lien claims of the plaintiff, the title of defendant Linn County , acquired through county tax lien foreclosure proceedings culminating in a sheriff's deed, as to Tracts No. I and III, and the rights of defendant, City of Albany, under a later conveyance from Linn County to Lots 1 through 6 of Block 2, Lots 1 through 5 of Block 3, and all of Block 5 of Tract I. Since the paramount rights of the City of Albany are dependent on the nature of the title acquired by the County of Linn on the tax foreclosure, my decision on the rights of the county will dispose of the major issue raised by the city. However, the city, in addition to its claim under the conveyance from the county, claims a sewer improvement assessment lien for $83.67 assessed on October 24, 1962 , and the same type of a lien in the sum of $34.50 assessed on the 24th day of January, 1962, against the property which was later conveyed by Linn County to the city.

In the spring of 1963, Linn County commenced a foreclosure suit in the Circuit Court of the State of Oregon for Linn County , for the purpose of foreclosing its tax liens against said tracts for the assessments made on October 15th in the tax years 1960-1961, 1961-1962 and 1962-1963. years 1960-1961, 1961-1962 and 1962-1963.

Neither the plaintiff, United States of were named as parties defendant in said foreclosure suit. A final decree was entered in said suit on April 1, 1963 , foreclosing said liens and directing the sheriff to issue a sheriff's certificate of sale to defendant Linn County . Later, the sheriff, pursuant to law, issued his deeds to said county purporting to convey the real property with which we are here concerned. Later, as above mentioned, pursuant to the provisions of ORS 310.280, defendant city exercised its rights to purchase the real property subject to its sewer assessment liens. The deed from the county to the city, being dated September 3, 1965 , and recorded on September 27, 1965 . The parties agree that on December 6, 1961 , the tax liens of the United States attached to and became valid and subsisting liens on the real property described in said Tracts I and III.

Under ordinary circumstances, the validity of the tax foreclosure proceeding would be governed by Oregon law. Guthrie v. Ham, 159 Ore. 50, 76 P. 2d 292 (1938); Murphy v. Clackamas County , 200 Ore. 423, 264 P. 2d 1040, 266 P. 2d 1065 (1963).

Since the validity of plaintiff's lien is conceded, and the United States was not made a party pursuant to the provisions of 28 U. S. C. §2410(a)(b), ¹ and since the statute under construction, is federal rather than state, the decisions of the United States Courts must govern. Empire State Collateral Co. v. Bay Realty Corp., 232 F. Supp. 330 (E. D. N. Y. 1964); Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). Furthermore, a municipality may not avoid the priority rules of federal tax liens by characterizing local liens as expenses of sale. United States v. Buffalo Savings Bank [63-1 USTC ¶9166], 371 U. S. 228 (1963). In Buffalo Savings Bank the question involved was the distribution of the proceeds of a sale of real property on a mortgage foreclosure proceeding instituted by the bank. The state court held that real estate taxes which became liens subsequent to the government's federal tax liens should be paid out of the proceeds of sale, as part of the expenses of the sale, prior to the payment of the government lien. The Supreme Court reversed stating, ". . . federal tax liens have priority over subsequently accruing liens for local real estate taxes, even though the burden of the local taxes in the event of a shortage would fall upon the mortgagee whose claim under state law is subordinate to local tax liens. . . ." The principle that federal tax liens are superior to subsequent local tax liens, despite the fact that, under state law, local tax liens have priority over earlier liens, was first established in United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). The same general principles are stated in United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964) and United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963). I find no distinction between the general lien of the county and its title against those under the sewage assessment lien of the city. For that matter, the assessment lien of the city was probably merged in the title which it later acquired.

It is my finding and conclusion that plaintiff has a first, prior and superior right and lien on the real property described as Tracts I and III and that out of the proceeds of the sale in this proceeding, the agreed amounts owing to plaintiff on its tax liens, as shown in the pre-trial order, shall first be paid. Tract No. III should be first sold and if the proceeds are not sufficient to pay plaintiff's claims, interest and costs, then that portion of Tract I, if any, now owned by the county, or those claiming under the county, if any, (excepting the city) shall be sold, and if those proceeds, together with the proceeds of Tract III shall not be sufficient to satisfy plaintiff's claims, then that portion of Tract I, previously conveyed to the city, shalll be sold and the proceeds of said sale applied toward the satisfaction of the balance of the amounts due plaintiff.

The plaintiff, or any one of the defendants, may purchase at such sale. Plaintiff shall be entitled to a deficiency judgment against J. Francyl Howard and Mary G. Howard, husband and wife, for the unsatisfied portion, if any, of its claims as finally fixed in the decree. Plaintiff is entitled to its costs and disbursements, except as to the fraud claims against certain of defendants.

Counsel for plaintiff shall forthwith prepare, serve and present an appropriate decree.

This opinion shall serve as my findings and conclusions on the issues here presented.

¹ 28 U. S. C. §2410(a)(b).

"(a) Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter, to quiet title to or for the foreclosure of a mortgage or other lien upon real or personal property on which the United States has or claims a mortgage or other lien.

"(b) The complaint shall set forth with particularity the nature of the interest or lien of the United States . In actions in the State courts service upon the United States shall be made by serving the process of the court with a copy of the complaint upon the United States attorney for the district in which the action is brought or upon an assistant United States attorney or clerical employee designated by the United States attorney in writing filed with the clerk of the court in which the action is brought and by sending copies of the process and complaint, by registered mail, or by certified mail, to the Attorney General of the United States at Washington, District of Columbia. In such actions the United States may appear and answer, plead or demur within sixty days after such service or such further time as the court may allow."

* * *

 

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

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

[Code Secs. 6321 and 6323 ]

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

Per Curiam

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

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

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

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

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

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

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

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

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

Sec. 473.397 CLASSIFICATION OF CLAIMS AND STATUTORY ALLOWANCES

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

(1) Costs;

(2) Expenses of admin istration;

(3) Exempt property, family and homestead allowances;

(4) Funeral expenses;

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

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

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

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

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

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

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

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

Sec. 6321 . LIEN FOR TAXES

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

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

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

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

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

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

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

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

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

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

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

Priority of Government Claims

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

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

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

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

(iii) an act of bankruptcy is committed; or

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

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

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

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

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

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

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

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

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

The judgment is affirmed.

All concur.

 

 

[76-1 USTC ¶9431]Wm. N. Cash, Plaintiff and Cross-Defendant v. Don Deramus, etc., et al., Defendants; Pacific Employers Insurance Company, etc., Defendant, Cross-Defendant and Respondent; United States of America, Cross-Defendant and Appellant; State of California, Defendant, Cross-Complainant and Respondent

Appellate Department, Superior Court, State of California , County of Los Angeles , No. C-709, 4/6/76

[Code Sec. 6323]

Lien for taxes: Priority of claims: Security interest: Judgment lien creditor.--The California appellate court reversed the finding of the lower court and held that the government's perfected lien had priority over the unperfected claim of a secured creditor. The creditor had a security interest in an obligatory disbursement agreement and claimed that such interest was protected against the government's claim since the government was a judgment lien creditor. However, since the court did not agree that the government was a judgment lien creditor, the creditor's argument was found to be without merit.

Lester G. Sachs, Suite 903 , First American Bldg., 675 N. First St. , San Jose , Calif. , for plaintiff and cross-defendant. Montgomery, Bottum, Regal & McNally, 1100 Glendon Ave., Suite 1250, Los Angeles, Calif., for Pacific Employers Ins. Co. William D. Keller, United States Attorney, Charles H. Magnuson, Mason C. Lewis, Assistant United States Attorneys, Rob ert L. Meyer, United States Attorney, Bruce A. Tondre, Los Angeles, Calif., for United States. Harry S. Fenton, Joel G. Philipp, Department of Public Works, 1120 N St., P. O. Box 1499, Sacramento, Calif., for State of Calif. Rob ert L. Martin, Wild, Christensen, Carter & Blank, Eighth Floor, Helm Bldg., Fresno, Calif., for John Birges.

Trial Judge, Adrian W. Adams, Municipal Court. Appellate Judges, Memorandum Opinion written by John L. Cole, Arthur K. Marshall, (Presiding Judge) and Arthur L. Alarcon concurred.

Memorandum Opinion and Judgment

The United States appeals from a summary judgment in favor of Pacific Employers Insurance Company (Pacific Employers). The two parties assert conflicting claims to a sum of money interpleaded in the court below by the State of California . The facts are undisputed; the issue presented is the relative priority of a tax lien claim of the United States against Don Deramus and of a claim by Pacific Employers which paid out money pursuant to a bond it had issued with Deramus as obligor. We conclude that the claim of the United States is entitled to priority. Accordingly, we reverse.

I. This case arises out of a May 29, 1969 contract for construction work on Highway 5, entered into by Deramus and the State of California . Pursuant to sections 4200, et seq., of the Government Code, Deramus filed with the State a labor and material bond and a performance bond executed by Pacific Employers, as surety. A contract--"Agreement of Indemnity"--was executed by Deramus in favor of Pacific Employers in consideration of the issuance of said bonds. ¹

On October 27, 1969, a notice of federal tax lien with respect to a May 23, 1969 assessment against Deramus, the current balance of which is $230.11, was filed in Riverside County; additionally, on December 15, 1969, a notice of federal tax lien, with respect to a September 26, 1969 assessment against Deramus in the amount of $6,643.21, was filed in Riverside County. No issue has been raised by any of the parties to this action concerning the validity, under the federal and state laws, of the notices of federal tax liens, as to their having been perfected by the filings of October and December of 1969. ²

On December 4, 1969 , William Cash filed a verified Notice of Claim and Notice to Withhold with the State for unpaid wages. Pursuant to the terms of sections 1190.1, et seq. of the Code of Civil Procedure, the state withheld from Deramus certain sums to answer the Notices of Claim and Notices to Withhold filed by Cash and other State notice claimants. These sums were interpleaded.

Pursuant to its obligations under its bonds, Pacific Employers on June 24 and 27, 1970, made payments of $1,880.00 to Cash and paid various sums to other claimants for unpaid wages and materials supplied by them to Deramus.

II. Appellant United States contends that the previously perfected tax liens of October 27 and December 15, 1969 , take priority over unperfected security interests of Pacific Employers, which arose at the time of the disbursements made by that company under its bond obligations on June 24 and 27, 1970. Pacific Employers, on the other hand, argues that it has a security interest in qualified property covered by the terms of the written agreement with Don Deramus entered into before the tax lien was filed.

Since the United States did perfect its federal tax liens, which form the basis of its claim to the interpleaded fund in this case, prior to the actual disbursement of funds by Pacific Employers in 1970 under its bond obligations, the question before us is whether federal law, when read in conjunction with state law, includes any provision which nevertheless would give priority to Pacific Employers' interest.

26 U. S. C. section 6323(c)(1) provides:

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

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

(i) a commercial transactions financing agreement,

(ii) a real property construction or improvement financing agreement, or

(iii) an obligatory disbursement agreement, and

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

The United States concedes that Pacific Employers has a "security interest" in "qualified property covered by the terms of a written agreement entered into before tax lien filing" which constitutes an "obligatory disbursement agreement." The issue, then is what the statute means by requiring the security interest to be "protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation."

Pacific Employers' argument is, in essence, that under California law a judgment itself has no effect on personal property; when the abstract is recorded the judgment becomes a lien on real property in the county of recordation. ³ Since the interpleaded funds in question here constitute personal property, the argument continues, Pacific Employers' security interest is "protected under local law against a judgment lien" within the meaning of 26 U. S. C. section 6323, subdivision (c)(1).

The argument also recognizes that it has been held that, under California law, in order that a "judgment creditor may obtain a lien upon the personal property under a judgment, it is necessary that a writ of execution issued under the judgment be levied on said property . . ." (Miller v. Bank of America, N. T. & S. A. [9 Cir. 1948] [48-1 USTC ¶9185] 166 F. 2d 415, 419.) It is urged, without citation of authority, that the lien which is created on real property by recording an abstract of judgment "is much different" from the lien created by a levy of a writ of execution. ". . . Since it is the levy and not the mere issuance of the writ which creates the lien . . ., as between execution creditors priority goes to the creditor who first levies." (5 Witkin , Calif. Proc. [2d ed. 1971] p. 3448.) We do not see why such a creditor's priority against one in the position of Pacific Employers is not as good as that of a judgment creditor who achieves priority over one with an interest in land by means of a recorded abstract of judgment.

The trouble with Pacific Employers' argument is that under 26 U. S. C. section 6323(c)(1) the reference to "judgment lien" refers to just such a hypothetical judgment lien creditor.

The legislative history of the Federal Tax Lien Act of 1966 (Public Law 89-719), which added subsection (c) to 26 U. S. C. section 6323, indicates that Congress did not intend the construction argued for by Pacific Employers. Senate Report Number 1708, 89th Congress, 2d Session (1966), in its general explanation of subsection (c), states:

"The priority over filed tax liens for advances made after, or with respect to property coming into existence after, the filing of a tax lien is to occur only if local law gives priority in such cases. This protection under local law must be provided against a judgment lien creditor as of the time of the tax lien filing for the priority to be available." (Emphasis added.) (U. S. Code Cong. and Admin. News [1966] p. 3728.)

Federal decisions control the interpretation of federal statutes dealing with tax lien priorities (Ersa, Inc. v. Dudley [3 Cir. 1956] [56-2 USTC ¶9621] 234 F. 2d 178, 180; United States v. Hunt [10 Cir. 1975] [75-1 USTC ¶9327] 513 F. 2d 129, 133); but the question whether and to what extent a lien is created is one of state law (Dugan v. Missouri Neon & Plastic Advertising Company [8 Cir. 1973] [73-1 USTC ¶9211] 472 F. 2d 944, 949). Miller v. Bank of America, supra, denied priority to a judgment creditor whose judgment was obtained before the competing tax lien was secured. It did so because the judgment creditor had not secured a lien upon the debtor--taxpayer's personal property (a bank deposit) by levying execution thereon. That decision controls us here. Pacific Employers simply is not protected from a levying judgment creditor.

We are fortified in this result by the observation it would be absurd to conclude that Congress intended to give priority to all security agreements merely because they pertain to personal property, thus placing the government at a tremendous disadvantage in enforcing its tax liens.

Since we reject Pacific Employers' basic argument for the reasons stated above, we need not dwell on the subordinate contention that a surety cannot protect itself under the Uniform Commercial Code and therefore need not file a financial statement. The remedy for that situation is legislative, not judicial.

In view of our conclusion, we find it unnecessary to reach appellant's second contention, namely, that respondent Pacific Employers is not entitled to recover for attorneys' fees and other costs.

The judgment is reversed.

¹ Paragraph Sixth of the contract provides: "That should The Contractor in 'Such Bonds' be declared in default by the obligee or obligees therein named, then The Company shall have the right to collect and receive all reserved percentages and all money due and to become due The Contractor under any such contracts guaranteed by 'Such Bonds', and to hold and apply the same as collateral to this Agreement of Indemnity . . ."

² The notices of federal tax liens related to liens which arose by operation of federal law against Don Deramus upon his failure to pay an Internal Revenue assessment after demand. These liens are provided for in 26 U. S. C. section 6321:

"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 provisions of federal law regarding the relative priority of tax liens, vis-a-vis other claims against the taxpayer, appear in 26 U. S. C. section 6323(a):

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

³ This is a correct statement of law. The California judgment lien statute is Code of Civil Procedure section 674. It provides, inter alia, that the recordation of an abstract of judgment with the county recorder creates a lien on all non-exempt real property of the judgment debtor in that county.

 

 

[80-2 USTC ¶9644] United States of America , Plaintiff v. Bollinger Mobile Home Sales, Inc., et al., Defendants

U. S. District Court, No Dist. Tex., Dallas Div., Civil Action No. 3-75-1177-H, 492 FSupp 496, 7/9/80

[Code Sec. 6323]

Lien for taxes: Priority over third parties: Place for filing notice.--A federal tax lien on the dealer reserve accounts of a taxpayer was entitled to priority over the judgment lien of another claimant, who failed to establish that he was a lien creditor under Texas law and thus was not entitled to priority. The federal lien was properly filed in the office of the county clerk in the county where the taxpayer had his principal place of business at the time of filing in accordance with Texas law and Code Sec. 6323 and was not a security interest within the meaning of the Texas Uniform Commercial Code so the place of filing was not governed by that statute.

Frank D. McCown, United States Attorney, Charles Cabaniss, Assistant United States Attorney, Dallas, Texas 75202, Kenneth J. Mighell, United States Attorney, Fort Worth, Texas 78102, Howard A. Weinberger, William Guild, Johnny D. Mixon, Joe Earnest, Department of Justice, Washington, D. C. 20530, for plaintiff. Thomas R. Helfand, Rob ert L. Trimble, Winstead, McGuire, Sechrest & Trimble, 1700 Mercantile Dallas Building, Dallas, Texas 75201, for Sam & E. W. Bollinger, John B. Garrett, Garrett, Burkett & Bodin, Suite 102 Oil & Gas Building, Fort Worth, Texas 76102, for Commercial Credit Corp. Arch A. Beasley, 2001 Bryan Tower, Dallas, Texas 75201, for General Electric, defendants.

Memorandum Opinion

SANDERS, District Judge:

This case is before the Court on cross motions for summary judgment filed by Plaintiff United States of America on May 16, 1980 , and by Defendant Sam Bollinger on June 6, 1980 . The facts are not disputed. The sole question for the Court is whether the federal tax lien on the property of taxpayer-Defendant Bollinger Mobile Home Sales, Inc. ("BMHS") (specifically, certain dealer reserve accounts of BMHS currently held by Defendants General Electric Credit Corporation and Commercial Credit Corporation) is entitled to priority over the judgment lien which Defendant Sam Bollinger asserts against the same property.

Plaintiff's Motion for Summary Judgment is GRANTED and Defendant's Motion for Summary Judgment is DENIED.

In the determination of priorities, Plaintiff relies on its Notices of Federal Tax Lien filed in Tarrant County , Texas , on January 16, 1970 , and in Dallas County , Texas , on January 19, 1980 . Defendant relies on a judgment in favor of Bollinger Mobile Air Conditioning, Inc. against BMHS, dated December 17, 1970, an abstract of which judgment was filed of record in Tarrant County , Texas , on January 14, 1971. Defendant contends that Plaintiff's Notice of Tax Lien was not properly filed in accordance with the requirements of 26 U. S. C. §6323(f)(1)(A)(ii), and therefore, that Defendant's lien as a judgment creditor is superior to the federal tax lien.

The Court finds that, prior to the adoption in Texas of the Uniform Tax Lien Registration Act, as Vernon 's Tex. Rev. Civ. Stat. Ann., Title 122A, art. 1.07C (effective January 1, 1972), the place of filing for notices required under 26 U. S. C. §§ 6323(f)(1)(A)(ii), (2)(B) was controlled by Vernon 's Tex. Rev. Civ. Stat. Ann., art. 6644, which contemplated that a Notice of Federal Tax Lien affecting intangible personal property was to be filed in the office of the county clerk in the county in which the taxpayer-corporation had its principal place of business at the time of filing. American Surety Co. of New York v. M-B Ise Kream Co., 38 S. W. 2d 118 (Tex. Civ. App.--Dallas, 1931), aff'd, 65 S. W. 2d 287 (Tex. Comm. App. 1933, holding approved); United States v. Ray Thomas Gravel Co., 373 S. W. 2d 333 (Tex. Civ. App.--Waco, 1963), rev'd on other grounds, 380 S. W. 2d 576 (Tex. 1964); Gulf Coast Marine Ways v. The J. R. Hardee [52-2 USTC ¶9448], 107 F. Supp. 379, 383 (S. D. Tex. 1952). Plaintiff's filings were in accord with the provisions of art. 6644 and its lien was perfected and entitled to priority with regard to the dealer reserve accounts as against all claimants not perfected prior to the dates of filing.

It is not disputed by either party that, since 1972, art. 1.07C has controlled the determination of the proper place for filing of Notices of Federal Tax Lien. Nor can it be disputed that the cases cited above establish that, prior to the enactment of art. 1.07C, the place of filing was controlled in Texas by art. 6644 from the time of its enactment in 1923. Defendant contends, however, that by the adoption of the Uniform Commercial Code in 1967 Texas designated a different method for filing federal tax liens, which was in effect from 1967 to January 1, 1972 .

The Court does not find persuasive the argument by Bollinger that place of filing was controlled by Section 9.401 of the Tax. Bus. and Comm. Code. Defendant cites no authority in support of the applicability of the Commercial Code to the mechanics of the recording of tax liens or in support of the argument that a federal tax lien may be a "security interest" within the meaning of Tex. Bus. and Comm. Code §1.201(37). There are cases that suggest the contrary, however, where, for the period between 1966 and 1972, Notices of Federal Tax Liens were deemed properly filed for the purposes of §6323(f) if filed in Texas pursuant to art. 6644. See, e.g., Kurio v. United States [68-1 USTC ¶9382], 281 F. Supp. 252, 256 (S. D. Tex. 1968). In sum, Plaintiff's Notice of Federal Tax Lien was properly filed.

Moreover, Defendant has failed to establish that he enjoys the status of a judgment lien creditor, under applicable Texas law, with regard to the dealer reserve accounts. Defendant admits that these accounts are the intangible personal property of BMHS. In order to perfect a judgment lien in Texas on personal property, a form of execution such as garnishment is required; no lien on the personal property of the debtor is created by filing an abstract of judgment. Donley v. Youngstown Sheet and Tube Co., 328 S. W. 2d 192 (Tex. Civ. App.--Eastland, 1959, writ ref'd n. r. e.), Herndon v. Cocke, 138 S. W. 2d 298 (Tex. Civ. App.--El Paso, 1940, no writ); Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1965). Bollinger has not alleged that he sought a writ of garnishment on his judgment in order to create the lien on the personal property of BMHS. The Court, in any event, is unable to conclude that these accounts were subject to garnishment because the right of BMHS to receive the amounts held in the dealer reserve accounts was and is subject to a number of contingencies. Alexander v. Berkman, 3 S. W. 2d 864, 867 (Tex. Civ. App.--Waco, 1927, writ ref'd); First National Bank of Burkburnett v. Friend, 23 S. W. 2d 482 (Tex. Civ. App.--Fort Worth, 1929, no writ); Uhlhorn v. Reid, 398 S. W. 2d 169 (Tex. Civ. App.--San Antonio, 1965, writ ref'd, n. r. e.).

Under 26 U. S. C. §6323(a), the federal tax lien becomes valid as against purchasers, holders of security interests, mechanic's lienors and judgment lien creditors only upon the filing of a notice thereof which meets the requirements of §6323(f). The federal tax lien would be superior to any competing claim even though the government failed to file or improperly filed a Notice of Federal Tax Lien, unless the competing claim fell within one of the four types specified in §6323(a). Therefore, if Bollinger does not enjoy the status of a judgment lien creditor or one of the other three classes of protected claimants, his claim would not be entitled to priority over the federal tax lien even if the Court were to hold that Plaintiff had improperly filed its Notice of Federal Tax Lien.

For the foregoing reasons, the Plaintiff's Motion for Summary Judgment on the Issue of Priority of Liens is GRANTED, and Defendant's Motion for Summary Judgment is DENIED. Plaintiff will submit to the Court by Monday, July 14, 1980 , a proposed Final Judgment suitable for entry in this cause.

SO ORDERED.

Final Judgment

In accordance with the Memorandum Opinion filed on July 9, 1980 on the issue of priority, and in accordance with the Stipulations between the United States and Commercial Credit Corporation and between the United States and General Electric Credit Corporation on the question of amount, it is hereby

ORDERED ADJUDGED, and DECREED as follows:

(1) That the United States of America is entitled to recover all sums now due, or hereafter to become due, from General Electric Credit Corporation and/or from Commercial Credit Corporation to Bollinger Mobile Homes Sales, Inc. from the proceeds of the dealer reserve accounts which are the subject of this action;

(2) That none of the named defendants are entitled to recover anything from General Electric Credit Corporation or Commercial Credit Corporation by virtue of any claim they might have had to the dealer reserve accounts of Bollinger Mobile Home Sales, Inc. now held by General Electric Credit Corporation and Commercial Credit Corporation;

(3) That the United States of America recover $11,997 from General Electric Credit Corporation as the full amount now due, or hereafter to become due, from General Electric Credit Corporation to Bollinger Mobile Homes Sales, Inc., from the proceeds of the dealer reserve account which is subject to this action; and

(3) That the United States of America recover $2,223.47 from Commercial Credit Corporation as the full amount now due, or hereafter to become due, from Commercial Credit Corporation to Bollinger Mobile Homes Sales, Inc., from the proceeds of the dealer reserve account which is subject to this action;

(4) That the Default Judgment entered on May 14, 1980, against Bollinger Mobile Homes Sales, Inc. in favor of the United States in that amount of $414,916.77 remain in full effect; and

(5) That all parties to this action bear their own costs of action.

 

 

[78-1 USTC ¶9396]Laurence B. Howard, Jr., Petitioner (and Respondent) v. United States of America , Respondent (and Petitioner) and William F. Howard, Trustee, Respondent

Supreme Court of Tenn., at Nashville , 566 SW2d 521, 4/24/78

[Code Secs. 6321, 6331 and 6334--result unchanged by '76 Tax Reform Act]

Spendthrift trust: Income interest: Subject to tax lien: State v. Federal law.--Income from a spendthrift trust was subject to a lien for the payment of federal taxes. Under federal law, the income right was a property right reachable by a tax levy. Federal law, and not Tennessee state law, determined whether the income was exempt from federal taxation.

One Justice dissented.

[Code Sec. 6323--result unchanged by '76 Tax Reform Act]

Tax lien: Notice of: Filing: Legal registration: State v. federal law.--Two certified notices of tax lien were legaly registered and admissible as evidence in a state trial. They did not meet the state law requirements for admissibility, but they were validly filed under federal law, and federal law was held to be controlling.

Maclin P. Davis, Jr., Elliott Warner Jones, Waller, Lansden, Dortch & Davis, One Commerce Place, Nashville, Tenn. 37239, for petitioner (and respondent). Harold D. Hardin, United States Attorney, Nashville , Tenn. 37902 , for respondent (and petitioner). M. Carr Ferguson, Assistant Attorney General, Gilbert E. Andrews, Crombie J. D. Garrett, Carleton D. Powell, Department of Justice, Washington, D. C. 20530, for respondent (and petitioner). William F. Howard, pro se.

Opinion

HENRY, Chief Judge:

In this action of interpleader, the principal inquiry is whether the income from a spendthrift trust is subject to a lien for the payment of federal taxes.

The last will and testament of Laurence B. Howard established a residuary trust with his two sons, Laurence B. Howard, Jr. and William Felder Howard, designated as income beneficiaries, with income payable quarterly during their respective lives, and with the trust being terminated upon the death of the survivor. Item VI(m) reads, in pertinent part, as follows:

[N]either the principal nor the income of the trust estates shall be liable for the debts of any beneficiary nor shall the same be subject to seizure by attachment, garnishment or execution, nor by any writ of proceeding at law, in equity, in bankruptcy or receivership; nor shall the beneficiaries thereof have the right or power to sell, assign, transfer, pledge, mortgage or in any other manner encumber or anticipate or dispose of their interest in the trust estates or in the income therefrom.

All parties agree, and we hold, that this language operates to create a spendthrift trust.

It should be emphasized that the income beneficiaries do not have the legal title to the corpus of the trust estate, nor do they have any right to the use or possession of any part of the corpus. They are purely income beneficiaries.

On September 24, 1974 , the Nashville District of the Internal Revenue Service served upon William F. Howard, as trustee, a Notice of Levy reciting an indebtedness in the sum of $27,068.95 owed by Laurence B. Howard, Jr., for federal taxes.

Petitioner, Laurence B. Howard, Jr., disputes the entitlement of the Internal Revenue Service to levy upon the trust proceeds and makes other defenses to the claim. ¹

The Chancellor, after a full evidentiary hearing, concluded that the federal tax lien attached to the trust income while in the hands of the trustee. The Court of Appeals "affirm[ed] the abstract legal conclusion of the Chancellor that the Federal Government is entitled to attach income from a spendthrift trust in spite of Tennessee Decisions and Statute" but declined to affirm the Chancellor's award in favor of the government on the basis of its view that the evidence necessary to document the government's claim was not competent.

I. Is the income from a spendthrift trust subject to seizure in satisfaction of a federal tax lien?

We respond to the captioned question in the affirmative and thus affirm both the Chancellor and the Court of Appeals as to this phase of the controversy. We specify our reasoning in some detail in view of the fact that there are no guiding precedents under Tennessee decisional law.

At first blush the answer would appear to be determined by Section 26-601, T. C. A., which reads as follows:

26-601. Grounds for discovery and subjection--The creditor whose execution has been returned unsatisfied, in whole or in part, may file a bill in the chancery court against the defendant in the execution, and any other person or corporation, to compel the discovery of any property, including stocks, choses in action, or money due to such defendant, or held in trust for him, except when the trust has been created by, or the property so held has proceeded from some person other than the defendant himself, and the trust is declared by will duly recorded or deed duly registered. Provided, however, that where the state of Tennessee shall be such judgment creditor, the chancery court shall have jurisdiction to subject such property to the satisfaction of the claims of the state, despite the fact that the trust has been created or the property so held has proceeded from some person other than the defendant himself and the trust declared by will duly recorded or deed duly registered.

The history of this statute is simultaneously significant and interesting. In 1831 Tennessee abolished imprisonment for debt. ² As stated in 35 Tennessee Law Review 319, at 320, "[a]lthough this was entirely in keeping with the moral sense of Tennesseans at the time, it did have the effect of eliminating a part of the plaintiff's remedy at law."

While the decisions are conflicting, the case of Erwin v. Oldham, 14 Tenn. 185 (1834) (decided under the law as it existed prior to the adoption of Chapter 11, Public Acts of 1832), is clear authority for the proposition that in the absence of fraud, the court has no power to subject "stocks, credits, and rights of action" held by a debtor to the satisfaction of his indebtedness. The Court specifically relied upon the New York case of Donovan v. Finn, 1 Hopk. Ch. 59, 14 Am. Dec. 531 (N. Y. 1823), as "conclusively settling the point."

By Chapter 11, Public Acts of 1832, the Tennessee Legislature enacted a statute patterned after a New York act designed to meet Donovan. This statute forms the basis for Sec. 26-601, T. C. A.

Thus within a two-year period, a Tennessee creditor lost the remedy of imprisonment for debt, but gained the right to discover assets in equity and subject them to his demands.

But the equitable remedy was withheld for trust funds when the trust was created by a third person by recorded will or registered deed. This provision breathed the breath of life into spendthrift trusts in Tennessee . The landmark case is Jourolmon v. Massengill, 86 Tenn. 81, 5 S. W. 719 (1887).

There the Court, in an opinion by Justice Lurton, held that the 1832 act was "a rule of property, and . . . very many such trusts have been created in reliance upon it." Id. at 126, 5 S. W. at 734.

The last proviso of Sec. 26-601, T. C. A., excepts from the application of the statute cases where the state of Tennessee is the judgment creditor. This proviso, with additional language making it retroactive, was adopted by Chapter 108, Public Acts of 1943, in an abortive effort to reach the assets of three spendthrift trusts created for Rogers Caldwell by his parents, in satisfaction of an indebtedness to the state in an amount in excess of four million dollars. This Court, in State v. Caldwell, 181 Tenn. 74, 178 S. W. 2d 624 (1944), declared the 1943 amendment "invalid insofar as it is retrospective in character." The court declared that the 1832 act was a rule of property and "not an exemption statute for the benefit of poor debtors."

Thus spendthrift trusts are solidly entrenched in our law and it is clear that Sec. 26-601 is a rule of property and not an exemption statute.

If we were dealing solely with Tennessee statutory and decisional law, we would be inclined to hold that the income from spendthrift funds is insulated against the claims of all creditors, including the Internal Revenue Service; however, such is not the situation.

Article VI, clause 2 of the Constitution of the United States contains the Supremacy Clause:

This Constitution, and the laws of the United States which shall be made in pursuance thereof; [and all treaties] shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution of laws of any state to the contrary notwithstanding.

The ensuing paragraph requires that all judges, state and federal, "shall be bound by oath or affirmation, to support this Constitution."

The imposition and collection of federal income taxes are governed by federal laws deriving their validity from the sixteenth amendment to the federal constitution. As a general rule, where there is a conflict between state laws and federal laws, the latter must prevail. United States v. Dallas National Bank [46-1 USTC ¶9117], 152 F. 2d 582 (5th Cir. 1946).

Under 26 U. S. C. Sec. 6321, it is provided that unpaid federal taxes, after demand

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. (Emphasis supplied).

There is no exception in favor of income beneficiaries under spendthrift trusts and most assuredly such income is embraced within the phrase "property and rights to property."

This section creates no property rights but merely attaches federally defined consequences to state created rights. See United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 S. Ct. 1054, 2 L. Ed. 2d 1135 (1958) (construing a similar provision of the Internal Revenue Code of 1939). State law governs the question of the existence of "property" or "rights to property" and the "nature of the legal interest" that the taxpayer has in the property. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960).

Under Tennessee law, it is essential to the creation of a spendthrift trust that (1) legal title be vested in the trustee, (2) the gift to the donee be of an equitable interest in the income, and (3) the trust be active. Rob ertson v. Brown, 13 Tenn. App. 211 (1931). In the instant case these criteria are met; petitioner as income beneficiary has a vested property right in the income generated by the trust.

Once we have made the determination that under Tennessee law petitioner owns property or rights to property, federal law takes over for the purpose of determining whether a lien will attach. United States v. Bess, supra; Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097 (5th Cir. 1972); United States v. Taylor [66-2 USTC ¶9522], 254 F. Supp. 752 (N. D. Cal. 1966).

As we have heretofore indicated, we are in full accord with petitioner Howard's position that Sec. 26-601, T. C. A., is not an exemption statute. See State v. Caldwell , supra. If it were, the results we reach would be no different. This follows from the established legal proposition that federal law exclusively governs what is exempt from federal taxation. United States v. Mitchell [71-1 USTC ¶9451], 403 U. S. 190, 91 S. Ct. 1763, 29 L. Ed. 2d 406 (1971).

The lien for federal taxation arises under 26 U. S. C. Sec. 6321 and covers "all property and rights to property." Levy is governed by Section 6331(a), and exemptions are enumerated in Section 6334(a). ³ Section 6334(c) specifically provides that "no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."

The fact that we do not deal with an exemption statute is of no significance. What is significant is the fact that we deal with "property and rights to property." The argument of petitioner Howard is precisely the same as was made by the taxpayer in Leuschner v. First Western Bank and Trust Company [58-2 USTC ¶9723], 261 F. 2d 705 (9th Cir. 1958). The Court responded thusly:

But the bastion of the claim built up by Leuschner is that he had a property right to receive this income. . . . It is for the very reason that Leuschner acquires a property right that the government has the power to levy thereon. (Emphasis supplied).

261 F. 2d at 708.

Petitioner Howard relies upon Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233, 84 S. Ct. 318, 11 L. Ed. 2d 293 (1963). But Meyer stands for the proposition that state law determines what is "property or rights to property," and generally it is the policy of Congress to recognize and give effect to state exemption laws. This holding was made in the context of the applicability of the doctrine of marshaling assets. The holding is not at variance with the general rule that federal law determines exemptions from federal taxation.

The conclusion of the Court of Appeals is fully validated by the cases it cited, notably United States v. Dallas National Bank, supra; Leuschner v. First Western Bank and Trust Company, supra; and In re Rosenberg's Will [35-2 USTC ¶9650], 269 N. Y. 247, 199 N. E. 206 (1935). We fully agree with petitioner that we are not bound by the decisions of the courts of our sister states nor of the federal system; however, we respect their decisions and are entitled to follow the conclusions reached in any well-reasoned opinion irrespective of source.

We affirm the action of the Chancellor and Court of Appeals and hold that respondent's share of the income generated by the spendthrift trust may be subjected to the payment of federal taxes, assuming a proper levy and the observance of all requisite procedural steps. ⁴

II. The Certificates of Assessments

The Court of Appeals held that the Certificates of Assessments and Payments were not properly validated or certified under Rule 44.01, Tenn. R. Civ. P., because (1) the signature of the Director of the Internal Revenue Service was affixed thereto by a deputy and (2) there is no provision in Rule 44.01 for certifying a "true extract."

We dispose of the latter contention first. Rule 44.01 provides for the proof of an official record "by a copy attested by the officer having the legal custody of the record, or by his deputy." We do not think it even arguable that the right to evidence an official record by the presentation of a certified copy does not carry with it the right to certify pertinent parts of the record. If other parts are germane, our rules contain ample procedures to require their production and inspection.

Under Rule 44.01, Tenn. R. Civ. P., official records, if in the custody of any public official within this state, "may be evidenced by an official publication thereof or by a copy attested by the officer having the legal custody of the record, or by his deputy." Clearly, under this rule the Certificates of Assessments and Payments could have been certified by Claude A. Kyle, the Director of the Internal Revenue Service Center for the Southeast Region, at Memphis , or by his deputy, Dale Crimpley, Branch Chief of the Certification Branch, who had been designated to sign Kyle's name.

The difficulty in this case stems from the fact that the Certificates bear the purported signature of Kyle, affixed by Crimpley, without any indication that it was so signed. The failure of Crimpley to sign his own name as Branch Chief, and therefore, as Kyle's "deputy," is unexplained in the record. While we view this as incredibly sloppy procedure, under the facts of this case, we hold that these records were admissible.

Not only were the documents certified over an official signature and under an official seal, but also the government presented these records by a senior technician employed at the Memphis Service Center , who testified that they were made under her supervision and personally verified by her. Further, the accuracy of these figures is not challenged. In the last analysis we deal with a formality that should not be permitted to frustrate the orderly reception in evidence of an official record.

III. Notice of Tax Liens

Two certified notices of tax lien were received in evidence by the Chancellor. Each was certified by the Deputy Register of Davidson County , but neither was acknowledged by an official of the Internal Revenue Service, and neither was witnessed. Instead, they contained a certificate over the signature of a Revenue officer. Below the signature of the Revenue officer appears this notation:

(Note: Certificate of officer authorized by law to take acknowledgments is not essential to the validity of Notice of Federal Tax Lien G. C. M. 26419, C. B. 1950-51, 125.)

The Court of Appeals, relying upon Sec. 64-2201, T. C. A., ⁵ held that these notices were not legally registered and were inadmissible in evidence. We disagree.

It is true, as noted by the Court of Appeals, that Haynes v. State, 213 Tenn. 447, 374 S. W. 2d 394 (1964), stands for the general proposition that an instrument will not be considered legally registered unless acknowledged by the maker or properly witnessed.

The filing of tax liens in Tennessee is governed by Sec. 64-2110, T. C. A., which reads, in pertinent part, as follows:

Notices of liens for taxes payable to the United States of America and certificates discharging such liens shall be filed in the office of the register of deeds of the county within which the property subject to such liens is situated.

It will be noted that there is no requirement that they be acknowledged or witnessed--merely that they be filed.

This statutory authorization for the filing of tax liens derives its efficacy from federal statutes, since remedies for the collection of federal taxes have "always been conceded to be independent of the legislative action of the States," and the federal statute (now 26 U. S. C. Sec. 6323[f]) "does not purport to permit the States to prescribe the form or the contents of that notice." United States v. Union Central Life Insurance Co., [62-1 USTC ¶9103], 368 U. S. 291, 293-94, 82 S.Ct. 349, 351, 7 L. Ed. 2d 294, 296-97 (1961). In the cited case the Court points out that allowing the respective states to prescribe the form and contents of tax notices would run "counter to the principle of uniformity which has long been accepted practice in the field of federal taxation." Id. at 294, 82 S. Ct. at 351, 7 L. Ed. 2d at 297. See also Atlas Finance Co. v. Wilkerson, 214 Tenn. 619, 382 S. W. 2d 529 (1964).

Further, as held in United States v. Estate of Donelly, 397 U. S. 286, 294, 90 S. Ct. 1083, 1038, 25 L. Ed. 2d 312, 319 (1970):

Acts of Congress are generally to be applied uniformly throughout the country from the date of their effectiveness onward.

Controlling federal law relating to form and contents is contained in 26 U. S. C. Sec. 6323(f)(3):

The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien. (Emphasis supplied).

The place of filing personal property liens is governed by 26 U. S. C. Sec. 6323(f)(1)(A)(ii), which provides that the notice shall be filed "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." Sec. 64-2110, T. C. A. is Tennessee 's designation. Notices so filed must meet the requirement of federal law. We hold that such notices need not be acknowledged or witnessed.

Finally, it is the declared purpose of Sections 64-2110-64-2115, T. C. A., to "authoriz[e] the filing of notices of liens in accordance with the provisions of Sections 6321-6326 of the United States Internal Revenue Code of 1954, and any acts or parts of acts of Congress amendatory thereof." Sec. 64-2114, T. C. A. This section points unerringly to federal law and by that law we are bound.

There is for further consideration the fact that the lien imposed by Sec. 6321 arises at the time the assessment is made; and, therefore, unlike other liens its perfection does not depend upon its recordation. In re DeKalb Avenue Reconstruction, Borough of Brooklyn, City of New York , 11 App. Div. 2d 240, 205 N. Y. S. 2d 125 (1960), aff'd mem., 12 N. Y. 2d 1051, 190 N. E. 2d 240, 239 N. Y. S. 2d 880 (1963).

IV. The Specific Claims

This suit involves two claims, asserted by the government. One of them was based on petitioner's ownership of Harding at Harding Car Wash; the other on his status as a responsible officer of Roman International, Inc. Involved were unpaid Withholding and Federal Insurance Contribution Act (FICA) taxes. Separate notices of tax liens were filed in the Register's office of Davidson County on May 30, 1974 . A notice of levy was served on the Trustee on September 24, 1974 , and prior demand had been made upon the Petitioner.

There is a presumption that tax assessments are valid and the burden is on the taxpayer to prove that they are erroneous. United States v. Rexach [73-2 USTC ¶9527], 482 F. 2d 10 (1st Cir. 1973). We agree with the Chancellor that there is no such proof in the record. Actually the taxpayer agreed to the assessment against Roman International. We concur in all factual findings made by the Chancellor and in the conclusion he reached.

V. Conclusion

The taxes in question were due and unpaid; assessments were legally made; the taxpayer had actual notice of the claim and demand for payment had been made; notices of liens were seasonably filed. We find nothing in this record that would justify giving relief to this taxpayer. Absent a bona fide dispute as to tax liability, we do not look with favor upon technical objections which, if sustained, would frustrate the government in the collection of tax revenues. This record does not reflect a bona fide defense to the claims asserted by the government.

This action is remanded to the Chancery Court at Nashville for the entry of a final order containing the current amount of the tax liability and such other matters as may be appropriate. The judgment heretofore entered in chancery will bear interest at the legal rate. All costs--both those in the trial court and those incident to this appeal--will be taxed one-half to the United States of America and one-half to the Petitioner. The entire judgment and Petitioner's share of the court costs are payable out of the income of the trust estate.

¹ Simultaneously with the filing of the Complaint, the trustee tendered into the registry of the court all funds in his hands belonging to Laurence B. Howard, Jr., and has since paid into court all sums due him when and as income has accrued. The total so deposited as of the date of the hearing in Chancery Court was approximately $28,000.00.

² Ch. 40, Public Acts of 1831, "An Act to abolish imprisonment for debt except in cases of fraud." This act would be suspect today--it prohibited the imprisonment of female debtors under any circumstances.