Conflicts of Law Page3

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³ This section exempts wearing apparel and school books, fuel, provisions, furniture and personal effects, books and tools of a trade, business or profession, unemployment benefits, undelivered mail and workmen's compensation benefits.

⁴ Also in accord with the decision of this Court and the Court of Appeals is Sec. 157(d) of the Restatement (Second) of Trusts (1959): "Although a trust is a spendthrift trust or a trust for support, the interest of the beneficiary can be reached in satisfaction of an enforceable claim against the beneficiary . . . by the United States or a State to satisfy a claim against the beneficiary." See also the Comment on Clause (d).

⁵ Sec. 64-2201, T. C. A., provides:

To authenticate an instrument for registration, its execution shall be acknowledged by the maker, or proved by two (2) subscribing witnesses, at least.

Opinion Concurring in Part; Dissenting in Part

BROCK, Justice:

I concur in the opinion of the Court in all respects, except its determination that income from a Tennessee spendthrift trust is subject to a federal tax lien.

The United States Supreme Court has made in clear, I think, that federal law does not create any property rights or determine the nature, attributes, or quality of property rights of a taxpayer; instead, it has left that determination to the several states. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 S. Ct. 1054 (1958); Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 60 S. Ct. 424 (1940).

I also think it clear, as stated in the majority opinion, that under Tennessee law the interest of a beneficiary of a spendthrift trust is of such a nature and quality that it may not be alienated either voluntarily by the beneficiary-debtor or involuntarily by his creditors; inalienability is an attribute of such an interest. State v. Caldwell, 181 Tenn. 74, 178 S. W. 2d 624 (1944). Therefore, such a beneficiary, as a debtor for taxes owed to the United States, does not, insofar as his trust interest is concerned, own any property or rights to property within the terms of 26 U. S. C. §63.21. It is not a matter of such a beneficiary having property which is exempt from the claims of creditors; rather, he simply has never received from the settlor of the trust any right which he may alienate or which may be taken from him.

The question here presented is not answered merely by finding, as does the majority, that the debtor-taxpayer owns property or rights to property; it is necessary to go further and ascertain the nature of such property or rights, i. e., whether it is alienable by the taxpayer. In my view, the Aquilino decision clearly shows that this determination is one to be made by state courts based upon state law; it is not determined by federal statutes and the supremacy clause of the Constitution has no application.

In Aquilino, supra, the taxpayer was a general contractor. The government asserted its tax lien against an indebtedness allegedly owed by a property owner to the general contractor. A dispute concerning the nature and extent of the interest of the taxpayer-contractor ensued. Certain subcontractors, who had performed work on the job, asserted that the money actually received by the contractor-taxpayer and his right to collect amounts still due under the construction contract constituted a direct trust for the benefit of sub-contractors, and that the only property rights which the contractor-taxpayer had in the trust were to bare legal title to any money actually received and a beneficial interest in so much of the trust proceeds as remain after the claims of sub-contractors should be settled. The Federal Government, on the other hand, claimed that the New York State Lien Law merely gave sub-contractors an ordinary lien, and that the contractor-taxpayer's property rights encompassed the entire indebtedness of the owner under the construction contract. In dealing with this problem, the Supreme Court said:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by (citation omitted). Thus, as we held two (citation omitted). Thus, aswe held two Terms ago, Section 3670 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . .' United States v. Bess, (citation omitted). However, once the tax lien has attached to the taxpayer's state-created interest, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.' (Citations omitted.) The application of state law in ascertaining the taxpayer's property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interests of its citizens, and the necessity for a uniform admin istration of the federal revenue statutes." (Emphasis added.)

The Supreme Court continued:

"This conflict [regarding the nature of the contractor-taxpayer's interest] should not be resolved by this Court, but by the highest court of the State of New York . We cannot say from the opinion of the Court of Appeals that it has been satisfactorily resolved. We find no discussion in the court's opinion to indicate the nature of the property rights possessed by the taxpayer under state law. Nor is the application to be made of federal law clearly defined. We believe that it is in the interests of all concerned to have these questions decided by the state courts of New York . We therefore vacate the judgment of the Court of Appeals, and remand the case to that court so that it may ascertain the property interests of the taxpayer under state law and then dispose of the case according to established principles of law." (Emphasis added.)

80 S. Ct. at 1280, 1281.

It therefore conclude that Tennessee is free to determine the nature and quality of the interest of a beneficiary under a Tennessee spendthrift trust; that for more than 150 years it has been the law of Tennessee as shown by State v. Caldwell, supra, and other decisions of this Court and by T. C. A., §26-601, that such a beneficiary has no interest which may be alienated either voluntarily or involuntarily and thus is of a nature and quality which cannot be reached by creditors, even the United States government. Accordingly, I respectfully dissent from that portion of the majority opinion which is to the contrary.

 

 

[60-2 USTC ¶9632]Desert Air Conditioning, Inc., Plaintiff v. Wilson B. Wood, District Director of Internal Revenue of the United States of America, and The United States of America, Defendants

U. S. District Court, Dist. Ariz., Civil Action No. 3039 Phx., 7/25/60

[1954 Code Sec. 6323]

Tax lien: Validity against transferee: Filing notice: Federal v. state law.--A Federal tax lien which was not filed strictly in accordance with state law was held to give the U. S. government a superior claim on a truck to a transferee for value and without notice where the state law, in derogation of Sec. 6323, went further than merely designating a place in which to file notices of Federal tax liens.

Scott, Cavness & Yankee, 510 Luhrs Tower, Phoenix , Ariz. , for plaintiff. Jack D. H. Hayes, United States Attorney, Phoenix , Ariz. , for defendant.

Findings of Fact and Conclusions of Law

LING, District Judge:

The above styled cause having been submitted to the Court for a decision on an Agreed Statement of Facts and Briefs, and the Court having been fully advised in the premises, the Court, pursuant to Rule 52, Federal Rules of Civil Procedure, makes the following findings:

Findings of Fact

I. The United States of America was during all times hereinafter mentioned a corporation sovereign and body politic.

II. The counterclaim brought on behalf of the United States of America has been authorized and requested by the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury and is brought under the direction of the Attorney General of the United States.

III. Jurisdiction of the counterclaim is conferred on this Court under Sections 1340 and 1345 of Title 28, U. S. C. and under Sections 7401 and 7403 of Title 26, U. S. C.

[Assessment of Taxes]

IV. On various dates and for various periods and in amounts as set out herein below, and in accordance with law, assessments of corporate income taxes, Federal Unemployment Tax Act taxes and withholding taxes were made against D. H. Walker Construction Company, Inc., as follows:

                                    Tax              Amount             Date         Notice and Demand               Date Notice

Type of Tax                      Period         Outstanding         Assessed                    Issued            of Lien Filed*

IT-CORP ..............             1957          $ 3,034.58           
5-2-58
                    
5-2-58
                  
11-28-58

FUTA .................             1958              133.45          
2-20-59
                   
2-20-59
                   
3-27-59

WT & IC ..............          
9-30-58
            2,467.24         
11-14-58
                  
11-14-58
                  
12-17-58

Dep. Rec. Penalty ....          
9-30-58
              115.02           
3-6-59
                    
3-6-59

WT & IC ..............         
12-31-58
            2,510.44           
2-6-59
                    
2-6-59
                   
3-17-59

WT & IC ...                     
3-31-59
            2,418.62          
3-16-59
                   
3-16-59
                   
3-17-59

                                                 $10,679.35

* Liens filed with County Recorder of Maricopa County , Arizona .

V. Within ten days after the assessments alleged above, notices were given and demand made upon the taxpayer for the payment of the amounts assessed. No part of the balance due as shown above has been paid up to the present time. There is now due and owing from D. H. Walker Construction Company, Inc., the sum of $10,679.35 plus interest until paid.

VI. On various dates as shown in paragraph IV above notices of federal tax liens were duly filed with the County Recorder of Maricopa County , Arizona .

VII. From the date of its acquisition up to March 12, 1959, the 1955 International Winch Truck, Motor Number SD 240H107058, which is the subject of this action, was the property of D. H. Walker Construction Company, Inc., referred to in paragraph IV above.

VIII. At the time of each assessment set forth in paragraph IV above with the exception of the last assessment listed, specifically the WT & IC assessment of $2,418.62 made on March 16, 1959, the 1955 International Winch Truck, Motor Number 240H107058 was the property of D. H. Walker Construction Company, Inc.

[Transfer of Truck]

IX. On March 22, 1959, D. H. Walker Construction Company, Inc., through its president executed an assignment of its right, title and interest to the 1955 International Winch Truck, Motor Number 240H107058 to the Desert Air Conditioning, Inc.

X. The consideration from the Desert Air Conditioning, Inc., to D. H. Walker Construction Co., Inc., for the assignment of the latter's right, title and interest to the truck, described in paragraph VII above, was the cancellation of a debt due Desert Air Conditioning, Inc., from D. H. Walker Construction Co., Inc., for services in the nature of air conditioning and sheet metal work rendered prior to January 1, 1959.

XI. On March 16, 1959, the defendant Wilson B. Wood as District Director of Internal Revenue, through his agents, seized the truck described in paragraph VII above for the non-payment of federal taxes due and owing from D. H. Walker Construction Co., Inc., as shown in paragraphs IV and V above.

XII. Thereafter the instant action was brought by the plaintiff to restrain the sale of the truck, described on paragraph VII above, on the grounds that the truck was the personal property of the plaintiff and not subject to any lien for taxes due from D. H. Walker Construction Co., Inc.

XIII. Pursuant to a stipulation executed by the respective parties on May 29, 1959 , the truck described in paragraph VII above was sold and the proceeds of $775.00 deposited with the Clerk of this Court. This stipulation of sale further provided that the proceeds shall represent and stand for the property involved in this action and that the sale shall not affect the rights of the parties in the proceeds of the property as they shall appear upon the conclusion of this case.

[Transferee for Value and Without Notice]

XIV. The conveyance described in paragraphs IX and X, above, was a bona fide transaction between said transferor and transferee.

XV. The defendants did not comply with the requirements of Section 11-464 A, A. R. S. 1956 as amended and 28-325 A. R. S. 1956, in that no lien or notice thereof was deposited or filed with the Motor Vehicle Division of the Arizona State Highway Department.

XVI. The plaintiff had no knowledge of the defendants' lien claims at the time of the conveyance referred to in paragraph IX above.

Conclusions of Law

I. This Court has jurisdiction of this controversy and the parties hereto.

II. Section 6321 through 6323 of the Internal Revenue Code of 1954, and Sections 11-464 and 28-325 of the Arizona Revised Statutes are all applicable to this litigation.

III. The filing of the tax liens as found by the Court in paragraph VI of the Findings of Fact did not company with the requirements of Section 11-464 A, Arizona Revised Statutes 1956 as amended and 28-325 Arizona Revised Statutes 1956.

[State Law in Derogation of Code]

IV. This Court has held in Merchants Loan Co. v. United States, decided May 27, 1957 [57-2 USTC ¶9741] (52 A. F. T. R. 1603) that a federal tax lien need not be filed in conformity with Section 28-325 of the Arizona Revised Statutes. The 1958 amendment to Section 11-464 of the Arizona Revised Statutes was intended to impose the filing requirements contained in Section 28-325 of the Arizona Revised Statutes upon the United States . This amendment is in derogation of Section 6323 of the Internal Revenue Code of 1954 since Section 28-325 goes further than merely designating a place in which notices of Federal tax liens need be filed. Union Planters National Bank v. Godwin, 140 F. Supp. 528 (E. D. Ark.) [56-2 USTC ¶9671].

V. The tax liens of the United States are prior and superior to any claim or interest which Desert Air Conditioning, Inc., has in the $775.00 deposited with the Clerk of the Cour; hence the United States, pursuant to its counterclaim, is entitled to Judgment directing the Clerk to distribute the $775.00 to it for application against the tax liabilities due from D. H. Walker Construction Company, Inc. and Judgment dismissing the complaint filed by Desert Air Conditioning, Inc.

 

 

[84-2 USTC ¶9732]Air Power, Inc., Appellant v. The United States of America , Appellee

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 83-1667, 741 F2d 53, 8/9/84

[Code Sec. 6323]

Collection of tax: Wrongful levy: Validity of lien: Priority of creditors: Judgment creditor: Court of record.--A judgment lien was superior to a federal tax lien even though the creditor obtained the judgment through a state circuit court which had been labeled under statute as a court not of record. By reversing a federal district court's holding to the contrary, a federal court of appeals determined that the competency of a local tribunal to perfect a judgment lien for federal tax purposes was a question of federal law and was not governed by inconsistent state admin istrative practices. To insure uniformity and consistency in the admin istration of federal tax policy, the federal court employed its own criteria to determine the competency of the lower court issuing the judgment.

David Hugh Boyd, for appellant. Elsie L. Munsell, United States Attorney, Alexandria, Va. 22314, Glenn L. Archer, Jr., Assistant Attorney General, Michael L. Paup, William S. Estabrook, Department of Justice, Washington, D. C. 20530, for appellee.

Before HALL, MURNAGHAN, and SPROUSE, Circuit Judges.

SPROUSE, Circuit Judge:

Air Power, Inc. (Air Power), appeals from the district court's decision granting a federal tax lien priority over its earlier state judgment lien against properties belonging to VWV Utility Construction Company, Inc. (VWV). The parties agree that Air Power's judgment lien was perfected under Virginia state law before the United States filed the required notice of its tax lien. 26 U. S. C. §6323(f). The single issue presented on appeal is whether Air Power's judgment was secured from a "court of record," as required by Supreme Court decision and the governing Internal Revenue Service (IRS) regulations, thus entitling Air Power to "judgment lien creditor" status and priority over a later-filed federal tax lien. United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361 (1953); 26 C. F. R. §301.6323(h)1(g). See also 26 U. S. C. §6323(a). The district court resolved this issue in favor of the United States , noting that the Virginia legislature has characterized the Virginia general district court from which Air Power secured its judgment as a "court not of record." VA. CODE §16.1-69.5(a). We hold 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 and that application of uniform criteria places the general district courts of Virginia in that category. Accordingly, we reverse.

I

On April 22, 1982 , Air Power secured a prejudgment writ of attachment from the General District Court of Loudon County, Virginia, against personal property belonging to VWV. The identified property was seized two weeks later by the Sheriff in satisfaction of VWV's $4,803 debt and default judgment was entered in Air Power's favor soon afterwards for the full amount of the debt. After the required legal notices were given, the general district court authorized the Sheriff to sell the seized property on June 25, 1982 , with the proceeds to be paid to Air Power, the judgment lien creditor.

Meanwhile, the IRS had demanded payment from VWV for delinquent federal employment taxes. Although VWV failed to respond to its demand in early April 1982, the IRS did not file the required notice of tax levy against VWV with the Virginia State Corporation Commission until June 24, 1982 , the day before the scheduled sheriff's sale. The IRS then notified the Sheriff of Loudon County not to release any proceeds from the sale to Air Power, contending the federal tax lien superseded its state court judgment. Air Power responded by bringing this wrongful levy action in federal district court claiming priority to the proceeds of the Sheriff's sale by virtue of its earlier perfected lien. See 26 U. S. C. §7426(a)(1). The district court, on proper motion, awarded summary judgment to the United States , ruling that Air Power's state lien was not entitled to priority because its judgment was not obtained from a "court of record." It based its ruling on the language of the Virginia statute specifically characterizing the general district court as a "court not of record."

On appeal, Air Power contends that the district court erred in relying solely on the label given by Virginia state law to the general district court in determining whether its judgment lien issued from a "court of record." It argues that whether a judgment issues from a "court of record" for purposes of determining priority under 26 U. S. C. §6323(a) is a question of federal law and that the specific and intrinsic attributes of Virginia general district courts make them courts of record for this purpose. We agree.

II

The United States possesses a statutory lien against all personal and real property belonging to a delinquent taxpayer from the time he refuses or neglects to heed a lawful demand for payment. 26 U. S. C. §6321. A federal tax lien's priority over other lawful debts is generally determined by applying "the first in time, first in right" rule. See United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U.S. 84, 87 (1963). Orginally, a federal tax lien took priority over virtually all other general liens perfected after the government made a lawful demand for payment from the delinquent taxpayer, even if the competing lienholder had no notice of the government's claim. Cf. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84-88 (1954). Although it has retained this basic scheme of priority for most competing general liens throughout the history of the Internal Revenue Code, 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. See 26 U. S. C. §6323(a). One such protected class is the "judgment lien creditor." ¹

The priority of a judgment creditor's lien over a federal tax assessment is determined from the time the government files its notice of a lien with appropriate state officials, rather than from the time of its demand for payment. 26 U. S. C. §6323(a). A qualifying creditor's rights are superior as long as his judgment is perfected ² before the government gives constructive notice of its right to the delinquent taxpayer's assets. Congress' purpose in imposing the notice requirement on the government was to protect the perfected interests of innocent third parties from "secret tax liens." Gilbert Associates, 345 U. S. at 363-64.

The dispute between the parties in this appeal turns on whether Air Power qualifies as a "judgment lien creditor' for the purposes of special lien priority under section 6323(a). The IRS regulations implementing this statutory provision define a "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 . . . [and] who has perfected a lien under the judgment on the property involved . . ..

26 C. F. R. §301.6323(h)-1(g) (emphasis supplied).

The "court of record" requirement, which was the basis of the ruling below in favor of the United States, originates from the Supreme Court's decision in United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361. In that case, the Town of Walpole, New Hampshire admin istratively assessed a local tax lien against a company facing a similar tax lien from the United States government. The town claimed priority over the federal tax lien because its assessment was perfected under state law before the United States filed the notice of its own lien, as required by the predecessor statute to section 6323. The United States conceded its filing was later in time, but argued that the town was not a "judgment creditor" ³ within the meaning of the applicable statute, and thus not entitled to notice of the pre-existing lien. The Supreme Court agreed, explaining that the need for uniformity in defining "judgment creditor" required that the effect of the state's tax assessment on the federal priority question be determined according to federal law:

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 [predecessor to ¶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.

Gilbert Associates, 345 U. S. at 364 (footnote omitted) (emphasis supplied).

The crucial language in Gilbert for our purposes is that by which the Supreme Court equated the term "judgment creditor" with someone possessing "a judgment of a court of record." The IRS, which has incorporated Gilbert's "court of record" requirement into its admin istrative regulations. takes the position before this court that the Virginia statute labeling its general district courts as "courts not of record" should control the issue of whether Air Power's state judgment is entitled to priority over a federal tax lien. The district court below agreed. Air Power, seeking to overturn this ruling, argues that allowing the state's label to control would strike at the very heart of federal tax policy--the need for uniformity.

A.

The taxing power is one of the most jealously guarded prerogatives exercised by Congress. State law simply may not provide controlling guidance in this sensitive area unless "the federal taxing act by express language or necessary implication makes its operation dependent upon state law." Lyeth v. Hoey [38-2 USTC ¶9602], 305 U. S. 188, 194 (1938). See also Morgan v. Commissioner, 309 U. S. 78, 80-81 (1940). State law unquestionably defines the property rights being asserted in section 6323(a) cases, for the very purpose of the provision is to give effect to certain state-created property interests when they are competing with a federal tax lien. See 1966 Senate Report, supra, note 3, at 3722-23. However, nothing in section 6323(a) of the Internal Revenue Code or its legislative history indicates that Congress, either explicitly or by necessary implication, contemplated giving state law preeminence in matters relating to the treatment or priorty a judgment lien is be accorded when competing with a federal tax lien. ⁴ The relevant statutory language simply states that the government's lien "shall not be valid as against any . . . judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate." 26 U.S.C. §6323(a) (emphasis supplied). Although the Internal Revenue Code offers no definition of "judgment lien creditor," ⁵ the senate committee report discussing this aspect of federal tax law makes it plain that a person qualifying for judgment creditor status "will be entitled as such to the protection of this section irrespective of the designation [state law gives to that person]" S. Rep. No. 1622, 83d Cong., 2d Sess., reprinted in 1954 U. S. Code Cong. & Ad. News 4621, 5224. ⁶ Courts have confirmed congressional intent in this area by holding uniformly that judgment lien priority is governed by federal law and federal concerns. See, e.g., United States v. Speers [66-1 USTC ¶9101], 382 U. S. 266, 270-72 (1965); Gilbert Associates, 345 U. S. at 364; United States v. Hunt [75-1 USTC ¶9327], 513 F. 2d 129, 133 (10th Cir. 1975).

Gilbert's direction that the term "judgment [lien] creditor" be defined "in the usual, conventional sense of a judgment of a court of record." Gilbert, 345 U. S. at 364, must be interpreted in light of the overriding and long-established principle that federal law governs tax policy. ⁷ The United State 's position on the resolution of the "court of record" issue would seriously undermine this principle and be at odds with Gilbert itself. The Supreme Court in Gilbert held that the Town of Walpole could not qualify as a judgment creditor for federal tax purposes simply because the state of New Hampshire conferred that status upon it. The Court, in essence, recognized that many state practices, although legitimate within their own jurisdictional sphere, could not be binding on a federal court in a lien priority case arising under the federal tax laws. The priority rights conferred by Congress, the Court explained, are distinctly federal in nature and must be decided accordingly. These rights cannot vary depending on the locale, but "should have the same application in all the states." Gilbert, 345 U. S. at 364. Uniformity, the Court further emphasized, is the guiding principle in matters relating to the federal government's taxing power. In short, the unmistakable message of Gilbert is that inconsistent state practices, though controlling in the host jurisdiction, must yield to a consistent federal rule to insure uniform application of the tax laws.

B.

We obviously cannot intrude on the state of Virginia 's prerogatives to organize and structure its courts in the way it deems appropriate to meet local concerns. Our purpose is simply to determine whether the judgment of one of its general district courts is entitled to respect from a federal court considering a federal lien priority case. The answer can only be supplied by analyzing the true character of the issuing court in light of Congress' expressed desire to confer special protection to certain qualifying state-created property interests.

The design Virginia has chosen for its court system generally conforms to the model used by other jurisdictions. The Virginia Supreme Court of Appeals is at the apex of the judicial hierarchy and has final appellate jurisdiction over all civil and criminal matters. See generally VA. CODE §§ 17-93 to -116. Directly below it is the recently created Virginia Court of Appeals, which will assume appellate jurisdiction over lower court decisions beginning in 1985. VA. CODE §§ 17-116.01 to -166.014. At the trial level, the various circuit courts fulfill the function of courts of general jurisdiction. They have original jurisdiction in all criminal matters involving felonies and in all civil matters involving more than $7,000. VA. CODE §17-123. They also possess concurrent jurisdiction with general district courts for civil cases involving less than $7,000 but more than $1,000, VA. CODE §16.1-76, 77, and may undertake de novo review of the decisions of "courts not of record" in certain instances. VA. CODE §16.1-106.

At the bottom of the judicial ladder are Virginia general district courts. Despite their label as "courts not of record" and their limited jurisdiction in civil and criminal matters, these courts have many of the attributes of Virginia 's circuit courts. General district courts keep and preserve a written record of their proceedings, VA. CODE §16.1-91 and are presided over by individuals trained in the law, VA. CODE §16.1-69.15. These courts also possess virtually all the same powers of their circuit court counterparts. They may punish contemnors, VA. CODE §16.1-69.24, issue subpoenas, VA. CODE §16.1-69.25, admin ister oaths, VA. CODE §16.1-69.27, permit discovery in certain cases, VA. CODE §16.1-82 to -89, and take affidavits, VA. CODE §16.1-69.27. Procedurally, it is likewise difficult to distinguish the general district court from a "court of record" as that institution was known at common law. Cf. 20 Am. Jr. 2d Courts §26. Suits in general district court must be initiated by a warrant or motion for judgment served on the opposing party. VA. CODE §16.1-81. The defendant in any action has the right to assert counterclaims against the plaintiff and to have them determined in the same proceeding. VA. CODE §16.1-88.01. A losing party concededly may appeal an adverse decision to the circuit court and receive a de novo trial, but he is precluded from expanding either his claim or request for remedies beyond those presented to the general district court. VA. CODE §16.1-106. See also Stacy v. Mullins, 185 Va. 837, 40 S. E. 2d 265 (1946); Addison v. Salyer, 185 Va. 644, 40 S. E. 2d 260 (1946).

Finally, and perhaps most significantly, the substantive effect of a final decision from the general district court is the same as that of a final decision from a circuit court. Its decision not only can be enforced by the same mechanisms as the judgment of a circuit court, VA. CODE §16.1-116, but it is entitled to the same preclusive effect from other state courts. Petrus v. Rob bins, 195 Va. 861, 80 S. E. 2d 543 (1954). See also Boyd, Graves & Middleditch, Virginia Civil Procedure §12.11 (1982). Because federal courts are bound to honor state court judgments to the same extent as the issuing state itself, a Virginia general district court decision presumably would be entitled to full faith and credit if interposed as a defense in a federal suit between the same parties. See 28 U. S. C. §1738. See also Kremer v. Chemical Construction Corp., 456 U. S. 461, 466 (1982); Allen v. McCurry, 449 U. S. 90 (1980).

In sum, the label "courts not of record" given to general district courts by the Virginia legislature, though no doubt serving a legitimate state purpose, is not entirely reflective of the true character of present day competency of those tribunals.

C.

The label a state gives its own courts, of course, provides some guidance on whether a judgment springs from a court of record, but it alone cannot be determinative. See, e.g., Gilbert, 345 U. S. at 363-64. An individual state's reasons for labeling one tribunal "a court of record" and another "not a court of record" may have more to do with the jurisprudential history of the state than the present day competency of the particular tribunal. The factors the state weighed in reaching its labeling decision are almost certain to address different concerns than those implicated in federal tax policy. Weaving these wholly state concerns into the fabric of national tax policy could only negatively affect a tax policy designed to achieve uniform results. To insure consistency and fairness in the application of section 6323(a), a federal court must look to the basic structure and competency of the court issuing the judgment. The dispositive question is not whether the tribunal carries the rubric "court of record," but whether it has been cloaked by its host state with the usual and conventional powers of a "court of record" and operates as a judicial body. The general district courts of Virginia have those powers and operate in the usual manner of courts of record.

D.

Deferral to diverse state rules which purport to make ultimate conclusions on the "court of record" question in tax cases not only would defeat the uniformity Gilbert sought to achieve, but in given cases could create unconscionable results for individual creditors raising the same claim in different jurisdictions. The case we consider vividly makes this point: Air Power prosecuted its $4,800 claim against VWV in Virginia general district court, a tribunal with competent jurisdiction to hear such claims up to $7,000. Va. Code §16.1-77. If we are bound to the label Virginia gave this court rather than the actual judicial powers it possesses, as the government urges, Air Power's claim could not take priority over a later filed federal tax lien, even though the state judgment creditor had no notice of the lien's existence and would be entitled to priority if he were competing with another state lienor. ⁸ The rule's application to the very same claim now raised by Air Power in other states, however, would produce different results. In the adjoining state of West Virginia , for example, Air Power's claim would take priority over the identical federal lien because that state denominates courts with the power to rule on $4,800 claims as "courts of record." See generally W. Va. Code §§ 51-2-1, -2.

Congress obviously could not have intended such patently unfair and inconsistent results when it cast the language of section 6323(a). See Gilbert, 345 U. S. at 364. The lien priority provisions of the Internal Revenue Code were specifically designed to preserve the perfected interests of innocent third parties from "secret tax liens." This overriding purpose completely unravels if a creditor's entitlement to protection becomes captive to the label the individual states give to the court issuing the judgment. ⁹

In view of all these considerations, we hold that the general district court of Virginia is a "court of record" for the purpose of affording a judgment lien creditor the special protections contained in section 6323(a) of the Internal Revenue Code.

REVERSED

¹ The applicable provision of the Internal Revenue Code states 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 or his delegate.

26 U. S. C. §6323(a) (emphasis supplied).

The predecessor provision to section 6323(a) only provided notice protection to a "mortgagee, pledgee, purchaser, or judgment creditor." See Priority of Federal Tax Liens and Levies, Hearings on H. R. 11256 and 11290 Before the House Comm. on Ways and Means, 89th Cong. 2d Sess. 37 (March 2, 1966) (Statement of Stanley S. Surrey, Ass't Secretary of Treasury). The 1966 amendments to the Internal Revenue Code expanded this protected group to include mechanic's lienors and holders of a security interest. These same amendments created "superpriorty" protection for certain creditors whose interests arose before notice of the federal tax lien, but were not choate until after notice was received. See 26 U. S. C. §6323(b), (c) and (d). These changes were designed to increase the protection afforded private sector creditors and to modernize the relationship between federal tax liens and other commercial creditors. See United States v. Kimbell Foods, Inc., 440 U. S. 715, 738 (1979).

² Courts generally look to state law in determining whether a competing state court lien is perfected or choate against third party creditors, but federal law governs the actual legal effect of the judgment for tax priority purposes. See Hartford Provision Co. v. United States [78-1 USTC ¶9392], 579 F. 2d 7, 9 (2d Cir. 1978). See also 26 C. F. R. §301.6323(h)-1(g). Additionally, certain threshold federal requirements of choateness must be satisfied before the lien can qualify for priority treatment. See United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954).

³ Under the predecessor statute to section 6323, a "judgment creditor" was entitled to notice of an existing federal tax lien. In its 1966 revisions to the Internal Revenue Code, however, Congress changed "judgment creditor" to "judgment lien creditor." The Senate Report discussing this change made it plain that the addition of the word "lien" did not alter the definition courts had traditionally given to "judgment creditor." S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U. S. Code Cong., & Admin. News 3722, 3724 [hereinafter cited as 1966 Senate Report.]

⁴ There are several references in the provisions of subsection 6323(b), (c), and (d) allowing lien priority to be determined in accordance with state law for certain claimants, but no similar expressions for a section 6323(a) judgment lien creditor. The legislative history indicates that Congress was satisfied with the interpretations courts had historically given to the notice provisions of 6323(a) and chose not to disturb them. Its clear purpose in tying section 6323(b) and (c) protection to state law, however, was to override federal court decisions that had made these identified state property interest subordinate to federal tax liens. United States v. Kimbell Foods, Inc., 440 U. S. at 720 n. 6. Uniformity was not an overriding concern when Congress allowed state law to control in these special cases because most states had moved in the direction of incorporating the provisions of the Uniform Commercial Code into their own laws. The rules controlling "judgment lien creditor" status were presumably left undisturbed because the Uniform Commercial Code does not treat this category of creditors. See U. C. C. §9-104(h).

⁵ In conjunction with the 1954 revisions to the Internal Revenue Code, the House of Representatives passed a version of section 6323 that made a judgment lien creditor's priority rights contingent upon him "actually obtain[ing] 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," H. R. Rep. No. 1337, 83d Cong., 2d Sess., reprinted in 1954 U. S. Code Cong. & Ad. News 4017, 4555. The purpose of this proposed requirement was to make it clear "that particular persons [will] not be treated as judgment creditors because State or Federal law artificially provides or concedes such persons rights or privileges of judgment creditors, or even designates them as such, when they have not actually obtained a judgment in the conventional sense." Id. The competing Senate version did not contain this requirement and ultimately became the approach enated into statute. The conferees adopted the Senate's version to continue in effect existing law, including applicable rules developed by judicial construction. H. R. Rep. No. 2543, 83d Cong., 2d Sess., reprinted in 1954 U. S. Code Cong. & Ad. News 5280, 5340.

⁶ This discussion of the meaning of "judgment creditor" occurred before the 1966 revisions to section 6323 of the Internal Revenue Code. As previously mentioned, however, the only change affecting "judgment creditor" was the addition of the word "lien." See not 3 supra.

⁷ In commenting on Gilbert's "court of record" language, the American Bar Association's Committee on Federal Liens indicated that "there appears no reason to discriminate against judgments rendered by lesser courts if, by docketing, they have become liens." American Bar Association Final Report of the Committee on Federal Liens, 26 (1959), reprinted in Priority of Federal Tax Liens and Levies: Hearings on H. R. 11256 and H. R. 11290 Before the House Comm. on Ways and Means, 89th Cong., 2d Sess. 60, 167 (1966) (statement and submissions of Laurens Williams, Chairman, Special Committee on Federal Liens, ABA). The ABA Committee was a driving force in the successful effort to modernize the federal law respecting lien priority. The Supreme Court itself implicitly cautioned against a mechanical interpretation of Gilbert's "court of record language" in United States v. Speers, 382 U. S. at 270-71.

⁸ Although it is true Air Power could have proceeded against VWV in Virginia Circuit Court, a tribunal carrying the label "court of record," we see no justifiable reason for penalizing "it" for making a choice legitimately provided by Virginia law as long as the judicial tribunal to which it resorted had the necessary attributes of a court of record.

⁹ The IRS makes the argument that deferring to the state's designation would actually enhance uniformity by drawing a bright lien separating a "court of record" from a "court not of record." The uniformity Congress had in mind when it enacted section 6323, however, relates to ensuring the same treatment for a third party creditor wherever he resides; it does not refer to the ease with which the rule is applied. If the states had formulated a universal scheme for defining a "court of record," the position urged by the IRS would have more force. Such a scheme, however, does not exist, and federal courts are thus bound to formulate a rule that protects a Virginia judgment lien creditor to the same extent as a lienholder in other states.

Dissenting Opinion

HALL, Circuit Judge, dissenting:

I cannot agree with the majority's conclusion that the general district court of Virginia is a "court of record" for the purpose of affording a judgment lien creditor protection under 26 U. S. C. §6323(a) (1983). I, therefore, dissent.

As the majority recognizes, the cardinal principle of federal tax policy is to advance a uniform application of the federal tax laws among the states. In striving for such uniformity, the Supreme Court in United States v. Gilbert Associates, Inc. ¹ explicitly stated that only judgments from courts of record can confer upon a creditor the status of a judgment creditor for federal tax lien purposes.

All states have designated certain courts of original general jurisdiction as courts of record. In the instant case, the Virginia legislature determined that its general district courts were "courts of record." Va. Code §16.1-69.5 (1972). ² The majority's opinion not only ignores the plain language of the Virginia statute but also violates the principle of uniformity. The majority's expansive construction of the phrase "court of record" will inevitably result in extensive inquiries concerning whether each particular court in the country is a court of record, and will foster inconsistent application of the federal tax laws among the states.

Reference to state statutes, on the other hand, promotes uniformity by providing consistent results as to whether a particular court is a court of record. The application of §16.1-69.5 in conjunction with federal tax laws dealing with judgment lien creditors would not prejudice creditors such as Air Power because they can proceed in the Virginia Circuit Court, which has been designated a court of record. Furthermore, the application of §16.1-69.5 in conjunction with federal tax laws provides a bright-line test which can easily be followed by both creditors and courts in other states.

In my view, Va. Code §16.1-69.5 (1972) is dispositive of this case. Its use advances a uniform application of the federal tax laws and is consistent with the principles of comity. Accordingly, I would affirm the district court.