¶50,158] In re Hydro-Chem Processing, Inc. and Engineered Steel
Products of Atlanta, Inc., Debtors. John W. Ragsdale, Jr., as Trustee,
Plaintiff v. Blaw Knox Corp., Electralloy Corp., The Export-Import Bank
of The U.S., Fisher Controls International, Inc., Fisher Controls
Company of Canada, Ingersoll Rand Co., Manior Electroalloys Corp.,
Radnor Alloys, Inc., Smither Equipment, Inc., Georgia Department of
Labor, Internal Revenue Service, et al., Defendants
U.S. Bankruptcy Court, No. Dist. Ga., Atlanta
Div., 91-82431, 10/10/95, 190 BR 129
Validity of lien: Priority: Bankruptcy: Judgment creditors: State
Under federal law, the IRS's claim for a bankrupt corporation's unpaid
taxes had priority over the claims of two judgment lien creditors who
obtained their judgments after the IRS recorded its tax lien even
though, under state (Georgia) law, the creditors had equal priority with
two other creditors who obtained judgments before the IRS. Thus, the IRS
was entitled to funds from the liquidation of the bankruptcy estate, as
determined by the dates on which the liens were recorded. However, in
order to ensure that the junior judgment lien creditors were not
deprived of their state law property rights, the senior judgment lien
creditors whose claims had priority over the IRS's lien were deemed to
have captured a fund equal to the amount of their claims which was
distributed pro rata among all four creditors.
Harkleroad, Harkleroad & Hermance, P.C.,
229 Peachtree St.
, for debtor. John W. Ragsdale, Jr.,
229 Peachtree St.
, for trustee.
proceeding is before the court on Trustee's motion for summary judgment.
Trustee proposes in the motion for summary judgment a distribution,
based upon the priority of the relevant liens of the claimants, of
certain encumbered funds in Trustee's possession as a result of
liquidation of Debtor's estate. The issue presents a conflict of lien
priority law between
state law and federal law, as a sizable IRS tax lien falls,
chronologically, in the middle of four state liens which state law
accords equal priority.
facts appear to be undisputed:
holds a fund in the amount of $675,175.22 (the "Fund"), which
represents the net proceeds from the sale of property of the Debtor to
2. The Fund is
subject to numerous liens. 1
The total of the liens asserted against the Fund exceeds the amount of
the Fund. The liens relevant to Trustee's motion are:
Export-Import Bank of the U.S. ("Eximbank"), pursuant to a
UCC-1 financing statement filed in Cherokee County Superior Court
January 31, 1989: $96,603.57
State of Georgia Department of Labor ("Georgia Labor"),
pursuant to writs of Fieri Facias filed in Cherokee County
Superior Court January 4, 1991 and February 26, 1991: $17,759.11
Blaw Knox Corporation ("Blaw Knox"), pursuant to a writ of Fieri
Facias filed in Cherokee County Superior Court April 19, 1991, on a
judgment obtained April 16, 1991: $89,408.08 (plus postpetition
Ingersoll Rand Company ("Ingersoll") pursuant to a writ of Fieri
Facias filed in the Cherokee County Superior Court
June 7, 1991
, on a
May 9, 1991
judgment obtained from Fulton County Superior Court: $94,440.88
Radnor Alloys, Inc., ("Radnor"), pursuant to a writ of Fieri
Facias filed in Cherokee County Superior Court June 7, 1991, on a
judgment obtained May 28, 1991: $115,607.84
Manior Electralloys Corporation ("Manior") pursuant to a writ
of Fieri Facias filed in Cherokee County Superior Court June 11,
1991 on a judgment obtained from the Lorrain County, Ohio Court of
Common Pleas, domesticated in Georgia in Cherokee County Superior Court
June 11, 1991: 2$82,323.57 (plus postpetition interest)
The United States of America ("IRS"), pursuant to a Notice of
tax lien filed in Cherokee County Superior Court
June 21, 1991
: approximately $800,000
Electralloy Corporation ("Electralloy"), pursuant to a writ of
Fieri Facias filed in Cherokee County Superior Court July 29,
1991, on a judgment obtained July 9, 1991: $210,993.00
Fisher Controls International, Inc. and Fisher Controls Company of
Canada (collectively "Fisher"), pursuant to a writ of Fieri
Facias filed in Cherokee County Superior Court July 30, 1991, on a
judgment obtained July 30, 1991: $461,166.76
Smither Equipment, Inc. ("Smither"), pursuant to a writ of Fieri
Facias filed in Fulton County Superior Court Sept.13, 1991, on a
judgment obtained from the State Court of Fulton County 3
8/30/91: $39,957.19 (plus prepetition post-judgment interest)
suggests that the
istrative expenses to be paid from the Fund should be allocated pro
rata among the secured creditors receiving distributions from the
Labor, and Blaw Knox appears to be undisputed. The dispute arises with
respect to the remaining claims, i.e. those of Ingersoll, Manior,
Radnor, IRS, Electralloy, Fisher and Smither. All of those claimants
except IRS are judgment lien creditors.
claimants and Trustee clearly and cogently presented their respective
positions in this contest of lien priorities for purposes of payment.
Rather than recount the respective positions of each creditor, the
dispute will be framed, initially, by a description of the positions
maintained by the Trustee, which includes the positions of Trustee,
Ingersoll, Manior, Radnor, and IRS, and by Fisher, which includes the
positions of Fisher and Electralloy.
proposes that the priority of the above-described liens should be based
upon the dates the liens were recorded. If Trustee's position is
accepted, the Fund will be depleted by the IRS claim, leaving nothing
for Fisher, Electralloy and Smither, as each of those claims were
recorded after the IRS claim was recorded. Fisher asserts that
law would require that all of the judgment liens for which the judgments
were obtained at the same term of court should be considered of equal
date, and therefore, of equal priority. Fisher, however, further
proposes that, in order to accord effect to both federal and state law,
those claimants whose liens were recorded before the IRS tax lien will
be deemed to have captured a fund in which the later claimants will
share pro rata. Although the facts which have emerged during the
course of the proceedings on Trustee's motion for summary judgment will
require some refinement of the result proposed by Fisher, Fisher's
position has merit.
Pursuant to 11
U.S.C. §724(b) ,
only lienholders whose liens are senior to a federal tax lien may obtain
a distribution of property of the estate ahead of the IRS. Additionally,
federal tax law provides that when a notice of tax lien has been duly
recorded, the IRS lien takes priority over all other liens (with certain
exceptions not applicable to the facts in this proceeding). 26 U.S.C. §6323
. Internal Revenue Regulations further provide that a judgment lien
will take priority over a tax lien only if (a) it has been previously
determined in amount, and (b) appropriately recorded or docketed,
"[i]f recording or docketing is necessary under local law before a
judgment becomes effective against third parties." Internal Revenue
Regulation (26 C.F.R.) §302.6323(h)-1(g). Trustee thus advocates
determination of the seniority of the various judgment liens based upon
the date those liens were recorded.
law, no judgment lien is effective against third parties until the
judgment is entered on the General Execution Docket (GED) for the
Superior Court of the county in which the judgment debtor is a resident.
. When so recorded, however, for priority purposes, the judgment lien
relates back to the date of rendition of the judgment and is considered
of equal date (and, therefore, equal priority) with other perfected
liens arising from judgments rendered at the same term of court.
; National Bank of
v. Morris-Weathers Co., 248
798 (1982). 4Pro rata distribution from property subject to more than one
judgment lien is appropriate where the aggregate amount of the liens
exceeds the value of the property. Wellington v. Lenkerd Co., 157
App. 755 (1981).
term of court in
(the Blue Ridge Circuit) commenced the second Monday in May,
May 13, 1991
, and ended
August 31, 1991
. The relevant terms of court in
(the Atlanta Circuit) commenced the first Monday in May,
May 6, 1991
, and ended
June 30, 1991
(Ingersoll), and began the first Monday in July,
July 1, 1991
, and ended
August 31, 1991
(Smither). Therefore, it appears that the judgments of Manior, Radnor,
Electralloy, and Fisher were all rendered during the same term of
Cherokee County Superior Court and, thus, are of equal date and priority
with the Radnor judgment, rendered May 28, 1991, which was the earliest
judgment obtained in that term of court. As the Ingersoll judgment was
rendered during a different, earlier term of court, it stands alone and
prior to the later
judgments. Eads v. Southern Surety Co. 178
348 (1934). As the Smither judgment was rendered during a different,
later term of court, it is subordinate to liens on judgments obtained
during an earlier term of court. 5Id.
[See chart at Figure 1].
Mode ofAmountDates of Fi.Fa è1st Day of
CreditorPerfection (000's)JudgmentCourt Term
Cherokee$96n/a (1989) n/an/a
Cherokee$946/07/91 è 5/09/915/6/91
Cherokee$ 1166/07/91 è 5/28/915/13/91
Cherokee$ 2117/29/91 è 7/9/915/13/91
Cherokee$ 4619/30/91 è 7/30/915/13/91
Fulton$409/13/91 è 8/30/917/1/91
* Amounts used are rounded in thousands, based upon the
amounts set forth in Trustee's brief. This chart does not
constitute a conclusion by this court that a claim is allowed
in a particular amount.
arises, however, because the IRS tax lien is interposed between the
judgments of Manior and Radnor, and the judgments of Electralloy and
Fisher. Without dispute, the liens of Manior and Radnor are senior to
the IRS tax lien. Also, without dispute, the IRS lien is senior to the
liens of Electralloy and Fisher, as those liens were neither determined
as to amount nor recorded prior to the recordation of the Notice of tax
lien. The refined issue, therefore, is whether this court can give
effect to both the federal law and the state law applicable to
determination of priority of liens.
A firmly held
principle of bankruptcy law is that, except in those areas specifically
addressed by Congress in a federal statute, property rights in a
debtor's assets are determined in accordance with state law. Butner
interests are created and defined by state law. Unless some federal
interest requires a different result, there is no reason such interests
should be analyzed differently simply because an interested party is
involved in a bankruptcy proceeding. Uniform treatment of property
interests by both state and federal courts within a State serves to
reduce uncertainty, to discourage forum shopping, and to prevent a party
from receiving "a windfall merely by reason of the happenstance of
bankruptcy." (Citations omitted.)... [T]he federal bankruptcy court
should take whatever steps are necessary to ensure that the [secured
creditor] is afforded in federal bankruptcy court the same protection he
would have under state law if no bankruptcy had ensued.
Id. at 55, 56. Therefore, to the extent that
state law may be given effect in defining a claimant's interests in
property of a debtor, the court has a duty to apply state law to assure
that the claimant is not deprived of those state law property rights.
this court has three choices as to determining the priority of the liens
in this case: First, apply only federal law and, therefore, look only to
the dates the liens were recorded, with the result that Fisher and
Electralloy get nothing and lose the benefit of their rights under state
law to equal priority with Radnor and Manior. Second, apply only state
law and, therefore, move Fisher and Electralloy ahead of IRS, with the
result that Radnor, Manior, Electralloy and Fisher share pro rata
in the balance of the Fund remaining after payment in full of the first
four claimants and IRS loses its federal law priority and receives
nothing. Third, apply federal law to determine that the IRS claim has
priority over the Electralloy and Fisher claims, with the result that
Electralloy and Fisher receive none of the funds to which the IRS is
entitled; then apply state law by creating a fund equal to the amount of
the claim of Radnor plus the claim of Manior and then distributing the
fund pro rata among Radnor, Manior, Electralloy and Fisher.
This court is
bound by the Supremacy Clause 6
to apply federal law to determine the priority of the claim of the IRS. U.S.
v. Rodgers [83-1
USTC ¶9373 ], 461 U.S. 677 (1982). Therefore, only the third choice
fulfills the bankruptcy court's duty to employ the federal law
applicable to the federal tax claim and also assure that the state court
judgment lien claimants are not deprived of their state law property
rights. The application of state law is especially appropriate in the
instant case as the state law, O.C.G.A. §
, is intended to achieve a purpose also intended by the Bankruptcy Code:
to achieve equality of distribution among creditors by avoiding a
"race to the courthouse." See, National Bank of
v. Morris-Weathers Co., 248
798 (1982). Creditors who obtain judgments in the same term of court in
the same county have equal lien priority on their writs of Fieri
proposed in his motion for summary judgment that the
istrative expenses allocated to and payable from the Fund should be
allocated pro rata among the claimants who receive payment from
the Fund. The responses of Blaw Knox and Ingersoll oppose allocation of
istrative expenses among the claimants to the Fund.
may recover from property securing an allowed secured claim the
reasonable, necessary costs and expenses of preserving, or disposing of,
such property to the extent of any benefit to the holder of such claim.
that property subject to tax liens shall be distributed first to senior
lienholders and next to priority claimants asserting claims under §507(a)(1)
-(7). Administrative expenses are accorded priority under §507(a)(1)
. The plain language of both §506 and §724
appears to contemplate that
istrative expenses are a separate claim against the relevant property.
Under §506, the trustee's costs and expenses are deducted ahead of
payment of the secured creditor's claim. In re Afco Enterprises, Inc.,
35 B.R. 512 (Bankr. D.
1983). Under §724 ,
istrative expenses are deducted after payment of secured creditors'
claims but before payment of a tax lien.
§506 nor §724 is a pro
rata assessment against each of the claimants an option. In the
instant case, this court cannot approve such a procedure without consent
of all the claimants. As objections to the Trustee's proposal have been
raised, it cannot be approved. Accordingly, it is hereby
that Trustee's motion for summary judgment is granted in part and denied
in part: With respect to the Fund identified above, Trustee may
distribute the Fund as follow:
(a) Payment in
full to Eximbank;
(b) Payment in
full to Georgia Labor;
(c) Payment in
full to Blaw Knox;
(d) Payment in
full to Ingersoll;
of a fund equal to the amount of the allowed secured claim of Radnor
plus the amount of the allowed secured claim of Manior. From that fund
shall be paid pro rata, the claims of Radnor, Manior, Electralloy
(f) Payment of
priority claimants as provided in 11 U.S.C. §724(b)(2)
remaining balance of the Fund to the IRS.
the validity, priority and extent of liens has thus been finally
determined pursuant to the above-captioned complaint filed pursuant to
Rule 7001, it is further
that issues regarding allowance of claims, including
istrative expenses and other priority claims, will be determined on
appropriate motion or other pleading filed in the main case.
IT IS SO
In the original complaint, Trustee named 70 lien claimants as
defendants. As a result of either consent order or default judgment, the
majority of the original defendants have no lien or interest of any kind
in the Fund.
This representation of the facts as to Manior's judgment lien differs
slightly from Trustee's statement of undisputed facts, but is based upon
the documents in Manior's answer.
Only Smither's judgment was recorded in
. Smither's judgment is perfected pursuant to O.C.G.A. 9-12-B1, however,
because Debtor was a resident of
as well as
. No party to this proceeding has argued that Smither's claim lacks
validity or priority because it was recorded in
The case specifically rejected the holding in the case of In re
Tinsley, 421 F. Supp. 1007 (M.D. Ga. 1976), which held that the
single date and sole criterion for measuring priorities between
competing judgment liens and for determining the effect of a judgment on
the title to real property was the date of recordation of the judgment.
The overlapping dates of the relevant terms of court set forth above
illustrate an anachronism in the use of terms of court as a vehicle for
determining priority of judgment liens. Smither's lien relates back to
August 30, 1991
judgment date. Because the term of court to which it dates for priority
purposes began July 1, however, it becomes a "different,
later" term of court. In fact, however, Cherokee's similar term of
court, which began May 13 and ended August 31 in 1991, encompasses two
, the earlier of which began May 6 and the later of which ended August
31. Thus a lien obtained through a judgment rendered August 31 in
would be prior to a lien obtained by judgment rendered August 30 in
's relevant term of court did not begin until July 1.
technological advances in transportation and telecommunication, as well
as the proliferation of multi-county, multi-state and multi-national
companies, render it increasingly likely that competing judgment liens
will be obtained from different circuits with different terms of court.
Because of the non-standardization of terms of various courts set forth
in the Georgia Code, Ingersoll wins full payment in this lien contest
because it was able to obtain its
judgment before the Cherokee County Superior Court's term even began.
Similarly, Smither loses this lien contest even though it obtained its
judgment before the end of the Cherokee term of court, because it filed
, where new terms of court commence every two months.
¶50,540] John E. Tompkins, as Executor of the Last Will and Testament
of Steven M. Tompkins, Deceased, Plaintiff-Appellee v. The
, Defendant-Appellant, Internal Revenue Service, Defendant
U.S. Court of Appeals, 11 Circuit, 90-8825, 11/8/91, Affirming a
District Court decision, 90-2
Liens: Validity: Priority of claims: Discharge.--A seller's lien
in a wraparound mortgage survived his purchase of the real estate at a
nonjudicial foreclosure sale, although he failed to give notice to the
IRS prior to the sale. Under state (
) law, the seller's lien retained its priority over the federal tax lien
because the mortgage lien did not merge with the underlying fee. The IRS
was properly enjoined from levying on and selling the real estate.
Harris, Jr., Karsman, Brooks & Callaway, P.C., 301 W. Congress St.,
Savannah, Ga. 31412, James P. Gerard, Julia R. Friedman, Oliver, Maner
& Grey, 218 W. State St., Savannah, Ga. 31401, for
plaintiff-appellee. Elizabeth Sullivan, Gary R. Allen, David M. Moore,
Brian C. Griffin, Ernest J. Brown, Department of Justice, Washington,
D.C. 20530, for defendant-appellant.
EDMONDSON and COX, Circuit Judges.
In this action
to quiet title, defendant-appellant Internal Revenue Service appeals an
adverse district court summary judgment enjoining the IRS from seizing
the property in question and holding that plaintiff-appellee's interest
in the property is superior to that of the IRS. We affirm.
1985, plaintiff-appellee Tompkins sold real property in
to the Hildreths, retaining a purchase money wraparound security
At the time of the purchase, the Hildreths owed money to the Internal
Revenue Service, and the IRS had a properly filed lien on all Hildreth
property, including after-acquired property. As a result, when the
Hildreths acquired Tompkins' property, the IRS also acquired a lien on
that property; its lien, however, was subordinate to Tompkins'. 2
Within a year,
the Hildreths defaulted, and Tompkins foreclosed, exercising his right
under the security deed and state law to conduct a non-judicial
foreclosure sale. In 1986, Tompkins purchased the property at the
foreclosure sale for the amount of its secured interest plus fees,
approximately $100,000. Although the sale was publicly advertised
according to Georgia law, the IRS received no specific, individualized
notification as defined in Section
7425 of the Internal Revenue Code, 26 U.S.C.A. §7425(c)(1)
. Both parties agree that one of the consequences of this oversight
was continuation of the IRS lien after the sale. 26 U.S.C.A. §7425(b)(1)
In 1989, the
IRS levied upon and seized the property in partial satisfaction of the
Hildreths' unpaid federal income tax liabilities. Shortly thereafter,
Tompkins brought this action to quiet title, asserting the levy was
wrongful and seeking to enjoin sale of the property. The district court
granted summary judgment for Tompkins, concluding that his lien not only
survived the foreclosure sale, but also remained superior to the IRS
traditionally governs the definition of property interests to which a
federal tax lien may attach. United States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d
236 (1983); Acquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1279-80, 4
L.Ed.2d 1365 (1960); United States v. Brosnan [60-2
USTC ¶9516 ], 363 U.S. 237, 240-42, 80 S.Ct. 1108, 1110-11, 4
L.Ed.2d 1192 (1960). Before we can evaluate the priority of the liens,
we must first determine Tompkins' post-foreclosure sale property rights.
usually dictates that senior lienors become fee owners when they
purchase at a foreclosure sale conducted on their own lien. In states
that adhere to the merger doctrine, the lesser estate (or lien)
"merges" into the greater estate and is thereby extinguished.
Because the merger doctrine varies in its application from state to
state, the former senior lienor's property interest depends upon how
applicable state law treats merger.
general codification of the merger doctrine, 3
"an intent not to merge will be presumed and will
control" in the state of Georgia. Gosnell v. Waldrip, 158
Ga.App. 685, 282 S.E.2d 168, 170 (1981) (emphasis added). In addition,
"in the absence of proof to the contrary, [the presumption will be]
that [the mortgagee or senior lienor] intended what would best accord
with his interests." Barron Buick, Inc. v. Kennesaw Fin. Co.,
105 Ga.App. 451, 124 S.E.2d 918, 921 (1962) (quoting 59 C.J.S. 681,
Mortgages, §441 ).
exception to the merger doctrine has been decisive in many
cases. See Fraser v. Martin, 195
683, 25 S.E.2d 307 (1943) ("Whenever a merger will operate
inequitably, it will be prevented. The controlling consideration is the
intention, expressed or implied, of the person in whom the estates
unite.") (citation omitted); Pope v. Hammond, 168
818, 149 S.E. 204 (1929) (no merger "if the continued existence of
the mortgage is necessary to protect against intervening liens").
and the IRS agree that Tompkins never manifested an intent to merge lien
and fee. Tompkins' best interests compel the exception and not merger;
otherwise, his entire interest in the property exception and not merger;
otherwise, his entire interest in the property can be wiped out by the
IRS, with no relief from his continued liability as holder of the first
mortgage. The only realistic conclusion under
law is that no merger of the lien and fee took place when Tompkins
bought the property at foreclosure; his lien continues.
is consistent with those reflecting state merger law comparable to
's. See, e.g.,
USTC ¶9260 ], 872 F.2d 338 (10th Cir.1989) (applying
law); First Am. Title Ins. Co. v. United States [88-2
USTC ¶9408 ], 848 F.2d 969 (9th Cir.1988) (applying
Nor do we act
inconsistently with the two circuit cases concluding that merger
extinguished the senior lien. United States v. Polk [87-2
USTC ¶9432 ], 822 F.2d 871 (9th Cir.1987), was resolved on the
law, which considers the senior lienor's intent irrelevant. Id.
at 874. In Southern Bank of Lauderdale County v. IRS [85-2
USTC ¶9670 ], 770 F.2d 1001 (11th Cir.1985), cert. denied sub
nom. Mid-State Homes, Inc. v. United States, 476 U.S. 1169, 106
S.Ct. 2890, 90 L.Ed.2d 977 (1986), the applicable law was the law of
Alabama, which espouses merger. Id.
at 1007. Although
acknowledges equitable exceptions to merger, Bay Minette Prod. Credit
Assoc. v. Federal Land Bank, 442 So.2d 47, 49 (Ala.1983), in Southern
Bank these exceptions were never briefed by counsel nor addressed by
the court in the context of defining the senior lienor's property
interests. "Instead, after the court determined that [merger
had occurred and] the liens did not survive the sale, the lienors
apparently argued that
law would provide equitable relief on the priority issue." First
Am. Title Ins. Co. [88-2
USTC ¶9408 ], 848 F.2d at 971-72 (emphasis added).
federal law governs the priority of a tax lien against other claims to
property, Rodgers [83-2 USTC ¶9374], 461 U.S. at 683, 103 S.Ct.
at 2137 (citations omitted), we agree with the panel in Southern Bank
that state equitable principles cannot override federal priority
standards. But a case is not binding precedent for any proposition that
was not then before the court, and priority and property are two
distinct issues. Southern Bank, therefore, does not preclude our
consideration of state law in determining property interests. Accord
First Am. Title Ins. Co. [88-2
USTC ¶9408 ], 848 F.2d at 971-72. Southern Bank is limited
and should be understood as authority only for the issues before that
panel. Our approach here--relying on a state-law equitable exception to
the merger doctrine--has been adopted by every other circuit that has
addressed the issue we address. Applying
law means that Tompkins' lien survives.
that Tompkins' property rights (or lack thereof) post-sale can be
determined by section
7425 runs counter not only to case law, but also to the plain
language of the statute itself, which is entitled, appropriately,
"Discharge of Liens," not "Priority of Liens."
Nowhere does section
7425 indicate that the priority status of the tax lien changes when
no notice (or improper notice) is given. Instead, the statute says that
the sale, or ensuing title, is "made subject to and without
disturbing [the federal] lien or title" (emphasis added). 4
of section 7425 came
about in part because Congress believed that the interests of the
were insufficiently protected where, pursuant to state law, junior
federal tax liens were being extinguished without notice to the
. S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U.S.
Code Cong. & Admin. News 3722, 3748. If any pre-emptive effect was
intended by Congress, we believe it is limited to preemption of local
laws which would completely discharge the government's junior interest
without clear notice to the government.
provides the government with the "opportunity to review its
position and determine the appropriate action without placing an undue
burden on a foreclosing creditor." Id.
If notice of a non-judicial foreclosure sale is properly given and the
consents to the sale, the sale divests the property of the government
lien. 26 U.S.C.A. §7425(c)(2)
. Even when the
does not consent, proper notice gives effect to local law, which, in
most cases, operates to discharge the junior liens. 26 U.S.C.A. §7425(b)(2)
. The survival (not the elevation) of inferior federal tax liens is
the penalty Congress intended to impose on senior lienholders who fail
to give the presale notice prescribed by section
7425 . See First Am. Title Ins. Co. [88-2
USTC ¶9408 ], 848 F.2d at 972-73. This penalty allows the IRS to
maintain the status quo of its lien, as well as benefit from future
increases in the value of the property.
determined that both the Tompkins lien and the IRS lien continue
following the foreclosure sale, we return to federal law to determine
the priority of those interests. See Rodgers [83-1
USTC ¶9374 ], 461
at 683, 103 S.Ct. at 2137 (citations omitted). According to the Federal
Tax Lien Act, the former senior lien remains superior because it was
properly perfected under state law before the IRS lien. 26 U.S.C.A. §6323(a)
, (h)(1) ;
see also Aetna Ins. Co. v. Texas Thermal Indus., Inc. [79-1
USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir.1979) (per curiam).
hold as a matter of law that Tompkins' lien survived his purchase at the
non-judicial foreclosure sale, although he failed to give notice to the
IRS before the sale. Furthermore, Tompkins' lien retains its priority
over the federal tax lien, and the government was properly enjoined from
levying on and selling the real property in question.
court is AFFIRMED.
The property was sold for $99,500, 90% of which was deferred. The
deferred amount was secured by a purchase money, wraparound mortgage on
the property. Under this type of arrangement, the mortgagee, Tompkins,
remained liable on a superior (first) mortgage despite his sale of the
property, but he used the payments received from his
purchaser/mortgagor, the Hildreths, to make payments on the first
A tax lien is generally subordinate to a previously perfected security
interest in real property, such as a prior mortgage. 26 U.S.C.A. §6323(a)
Only the most torturous stretch of the phrase "subject to"
would permit section
7425 to be interpreted as defining priority levels, and that
interpretation requires ignoring the words "without
disturbing" the lien.
¶9594]Colonial Baking Company of
, a Delaware Corporation v.
United States of America
S. District Court, No. Dist.
, Atlanta Div., C76-2066a,
[Code Sec. 6323--result unchanged by '76 Tax Reform Act]
Tax liens: Levy: Priorities: Bank Accounts: Judgment lien.--A tax
lien had priority to certain bank accounts over that of a judgment
law the judgment creditor had not reached the status of a lien creditor
against the accounts since it had not commenced a garnishment action
against either bank. The federal tax lien was perfected as of the date
of filing and it had priority over any inchoate claim by the judgment
Hall, Lipshutz, Zusmann, Sikes, Pritchard & Cohen, 1795 Peachtree
Rd., NE, Atlanta, Ga. 30309, for plaintiff. John W. Stokes, Jr., United
States Attorney, Sherman R. Johnson, Assistant United States Attorney,
, George Rita, Department of Justice,
, D. C. 20530, for defendant.
This is an
action to set aside a levy by the Internal Revenue Service on certain
bank accounts. Plaintiff, Colonial Baking Company of
corporation, licensed and doing business in
, alleges that it had a prior perfected judgment lien on the funds which
were levied upon. The case is presently before the Court on cross
motions for summary judgment. Defendant seeks dismissal of the action.
Plaintiff seeks an order directing defendant to pay to plaintiff a sum
sufficient to satisfy plaintiff's judgment from the funds obtained as a
result of defendant's levy.
facts in this case are as follows: On
April 1, 1975
, plaintiff recovered a judgment in the
against Ralf's Country Stores, Inc., a
corporation. The judgment fi. fa. was recorded on the General Execution
Docket of the
April 23, 1975
March 12, 1976
April 9, 1976
, notices of tax liens were filed and recorded in
by the Internal Revenue Service. A levy was made by Internal Revenue
Service agents on
July 14, 1976
, against the bank accounts of Ralf's Country Stores, Inc., at the First
Citizens Bank of
, and the Fairburn Banking Company in
contends that the levy by Internal Revenue Service agents was wrongful
in that plaintiff's recorded judgment created a lien in its favor prior
to the notice of lien by the Internal Revenue Service. Therefore,
plaintiff asserts, it is entitled to satisfy its judgment out of the
funds seized by the Internal Revenue Service.
maintains that bank accounts which were levied upon were choses in
action and that under the law of
, a judgment does not become a choate lien upon a chose in action until
a judgment creditor garnishes the chose in action. Based on the fact
that plaintiff did not commence garnishment proceedings prior to the
filing of the tax liens, defendant argues that plaintiff has no interest
in the bank accounts which were levied upon.
The law is
clear that summary judgment may be granted only where no genuine issue
as to any material fact exists. Poller v.
Broadcasting System, 368
464 (1962). In this case, the only question to be decided is whether, as
a matter of law, plaintiff has a choate judgment lien upon the bank
accounts so as to have priority over the subsequently recorded federal
tax lien is based on the Internal Revenue Code, 26 U. S. C. §6321,
which provides for a general lien in favor of the United States upon all
of the property and rights to property belonging to any person who fails
to pay any tax after demand for payment. However, a federal tax lien
will be invalid against a prior judgment lien which has become choate
before the tax lien arises. Such a lien is considered to be choate if
the identity of the lienor, the property subject to the lien and the
amount of the lien are established. United States v.
The effect of
a lien in relation to a provision of federal law for the collection of
debts owing to the
is always a federal question. Hence, although the classification by a
state court of a lien as perfected is entitled to weight, it is subject
to reexamination. On the other hand, if the state court itself describes
the lien as unperfected or inchoate, that classification is practially
conclusive. U. S. Security Trust and Savings Bank, 340
47 (1950); Illinois v.
, it is settled that money placed on general deposit in a bank creates a
chose in action in the depositor. Macon National Bank v. Smith,
332 (1930); Fulton
v. Wright, 146
447 (1917); McGregor v.
557 (1907). Furthermore, a judgment alone does not create a lien on a
chose in action; a lien on a chose in action is created only by the
service of a summons of garnishment and the lien dates from the date of
the service of summons, and not from the judgment. Armour Packing Co.
v. Wynn, 119
683 (1904); General Lithographing Co. v. Sight and Sound Projectors,
App. 304 (1973).
The facts of
this case show that plaintiff did not commence a garnishment action
against either bank. Therefore, it has never reached the status of lien
creditor against the accounts in either bank. The federal tax lien was
perfected as of the date of filing and it had priority over any inchoate
claim by plaintiff.
the Court finds that the seizure of the bank accounts by the Internal
Revenue Service was lawful. Defendant's motion for summary judgment is
hereby GRANTED; plaintiff's motion for summary judgment is DENIED.
¶9299]United States of America v. Claude E. Ridley, Mrs. Dimple Gray
Ridley, sometimes known as Mrs. Dimple G. Ridley and as Mrs. Dimple
Ridley, L. B. Ridley and W. A. Ridley
the United States District Court, Northern District of Georgia, Atlanta
Division, Civil Action No. 4718, 120 FSupp 530, March 20, 1954
Accounting periods and methods: Net worth increase: Apportionment
over several years.--In a suit by the United States alleging that
the taxpayers, husband and wife, owed taxes, and that other defendants
claimed liens against or interests in property belonging to the
taxpayers, the United States asserted its liens against such property
and asked for a receiver and injunction and that the claims of the
taxpayers and other defendants be determined and the government's liens
foreclosed. The taxpayers questioned the correctness of the tax
assessment which had been based on the net worth and expenditures method
for the years 1939 through 1951. Taxpayers had kept no records and filed
no returns. The method used by the Commissioner for determining the time
that income was received was based entirely upon the time of
expenditure, and this resulted in a great difference in the taxes
assessed in the various years. Because there was evidence that the
taxpayers' earnings were about equal in each of the taxable years, 1942
through 1951, the Court, after making some adjustment of estimated
expenditures in favor of the taxpayers, distributed the income evenly
over 1939-1951, so that the opening net worth as of December 31, 1941,
was increased by at least $42,414.44.
Lien for taxes: Property subject to lien: Another's interest in
property.--Pursuant to an oral contract, relatives of the husband
(the other defendants) did some work on the husband's farm on the
understanding that they would receive a half-interest if they would go
in there and "clean up". It was held that the defendants had
acquired no interest in the land, equitable or oterwise, since the
contract was too vague and uncertain to be capable of enforcement.
Priority of liens: Materialmen's and laborers' liens.--The
relatives also agreed with the husband that they would furnish material
and labor in erecting two houses on other property of the husband and
that they would receive payment on sale. The Court held that there was
no evidence that laborers' or materialmen's liens had been obtained and
ordered that the goverment's liens be foreclosed. The Court saw no
necessity for a receiver or injunction.
Lien for taxes: Property subject to lien: Joint ownership.--The
interest of the husband in joint ownership bonds was subject to the
government's claim for taxes owed.
Additions to tax in case of nonpayment: Failure to file declaration
of estimated tax: Double penalties.--An addition of 10% to the tax
was made for failure to file a declaration or to pay the installment of
the estimated tax. However, the Court refused to apply the 6% addition
for substantial underestimation for the reason that the taxpayer had
made no underestimation (having filed no returns) and that he had
suffered "the greater sanction of 10%." BACK REFERENCES: §39.294-54FED
¶1 at 54FED ¶544 CCH 1524.3195.
Dorsey, United Attorney, Post Office Box 912, Atlanta 1, Ga., for
plaintiff. Hal Lindsay, M. Neil Andrews, 924 Healy Building,
, for defendants.
brings this complaint in equity alleging that the Commissioner of
Internal Revenue has made tax assessments against the defendant, Claude
Ridley, for the years 1942 through 1951, inclusive, which taxes,
penalties and interest amount to $106,674.37.
lien for taxes on described property, the
alleges that the other named defendants claim liens against or interests
in the described property.
further that the defendant, Claude Ridley, was likely to encumber or
transfer the property, the plaintiff prays for a receiver and injunction
and that the claims of the defendants be determined and the plaintiff's
make answer. The defendant, Claude Ridley, denies the correctness of the
tax assessments; denies fraud or intent to evade the payment of tax and
prays that this Court determine the amount of taxes due. The other
defendants each assert some claim upon or interest in some of the
described properties and seek a determination thereof.
defendants, Claude Ridley and Mrs. Dimple Ridley are husband and wife.
They are about forty years of age and were married about twenty years
ago and have no children. Neither has any education and can neither read
or write. They have lived on a farm all of their lives and have raised
some cotton and corn, hay, produced a few chickens and eggs, and sold
some milk and butter. So far as can be determined, they never raised in
bales of cotton or two to three hundred bushels of corn in any one year.
Their marriage apparently took place about 1934, and in 1937 Claude
Ridley, together with Nathan Ridley, entered a plea of guilty in the
District Court of the United States for the Northern District of Georgia
to the offense of possession of 113 gallons of illicit liquor, the
containers not having affixed thereto revenue stamps, and it appears
that from this time on the defendant, Claude Ridley, was engaged in the
illegal liquor traffic, both manufacturing and selling. Though this
business may not have been continuous, the evidence not disclosing the
facts in this respect, the circumstances indicate a fairly continuous
illicit liquor business.
Ridley and his wife were frugal to the point of miserliness; had no
luxuries of life, and the barest necessities. From the evidence, and
from their appearance, it is determined, with reasonable certainty, that
they have lived frugually through the years and have spent little for
living expenses, the Court being of the opinion, and here finds, that
the expenditures of Claude Ridley and his wife, Dimple Ridley, for
living expenses during the years 1937, 1938, 1939, 1940, 1941, 1942,
1943, 1944, 1945, 1946, 1947 and 1948 did not exceed the sum of
$1,000.00 per year, and that during the years 1949, 1950 and 1951 that
said expenditures did not exceed the sum of $1500.00 per year.
and his wife saved their money and some years later purchased a small
farm upon which there was situated a residence and a small store
building, the same containing fifteen to twenty acres of land. This farm
apparently was placed in the name of the wife, Dimple Ridley, and for
many years they have lived on the farm and have operated the country
store, selling groceries and gasoline. No records were kept of the
amount of income or of the business transacted, and it is impossible to
determine accurately the amount of income received by Claude Ridley, nor
is it possible to determine accurately the years in which the income was
received. It does appear, and the Court finds, that during the years
1942 through 1951, the defendant, Claude Ridley, and his wife, Dimple
Ridley, purchased United States Savings Bonds in the sum of $98,550.00;
real estate in the sum of $23,030.50; an automobile-truck $1425.00;
spent for building materials and for the improvement of real estate,
$2,199.83; deposited $1,308.00 in cash in the bank; expended $1,750.00
in the construction of a grist mill building; all of such purchases and
expenditures were made from taxable income received by Claude Ridley
during the years 1937 through 1951, inclusive.
In 1952 a
special agent of the Internal Revenue Service, United States Department
of Internal Revenue, commenced an investigation of the tax liability of
Claude Ridley, and finding that no records had been kept by Claude
Ridley, and that it was impossible to determine his income with accuracy
since no records were kept, said special agent began the investigation
by talking with the taxpayer, examining the public records of Murray and
Whitfield counties, examining the bank records and the bond purchases by
the said Claude Ridley, and determined that the best method by which to
compute the taxable income of Claude Ridley would be the net worth and
nondeductible expenditures method and accordingly the investigator
adopted that method of determining the income and computing the tax, and
in so doing, the special agent determined the year that the purchases
were made and the year that the other expenditures were made and charged
said amounts as income in the year in which the purchases or
expenditures were made. The special agent testifying that he was unable
to find money or property belonging to Claude Ridley prior to 1942,
fixed as the opening net worth as of December 31, 1941, nothing, and
although he determined from investigation that the said Claude Ridley
did in January, 1942, purchase United States Government Bonds in the sum
of $7,500.00, he charged the said sum of $7,500.00 as having been earned
and received by the said Claude Ridley in the year 1942, and taxable as
used by the special investigator for determining the time that income
was received by Claude Ridley was based entirely upon the time of the
purchase or expenditure, and this has resulted in a great difference in
the taxes assessed in the various years. For instance, for 1942 a tax of
$2,584.00, besides interest and penalties is assessed, while in the year
1943, a tax of $181.28 is assessed. In 1947 a tax of $15,277.54 is
assessed, while in 1948 a tax of $483.00 is assessed, the amount of
income allocated in each year being based entirely upon the amount of
the purchases or expenditures in that year.
There is in
evidence the positive testimony of Claude Ridley and his wife that their
earnings were about equal in each of the years. There is no evidence of
greater income in one year than in another (except the date of the
including the year 1937, the first year that the evidence shows Claude
Ridley to have been in the illicit liquor business, his sources of
income were substantially the same from 1937 through 1951, inclusive,
said sources of income being: (1) From the illicit liquor business; (2)
the farming operations, and (3) the country store and filling station.
without dispute that Claude Ridley did not deposit his money in banks
but kept it in cash, all payments for bonds and real estate being made
in cash. It appears that on one occasion that he carried from six
thousand to six thousand five hundred dollars in coins to the bank for
the purchase of bonds and that the coins had been buried for so long
that they were in bad shape, rusted and corroded.
During the ten
year period from 1942 through 1951, inclusive, Claude Ridley made
expenditures for investment of approximately one hundred twenty thousand
dollars, while during the same period only thirteen hundred and eight
dollars was deposited in any bank.
circumstances corroborating the testimony of the taxpayer as to receipt
of income, in the opinion of the Court, entitles the testimony of the
taxpayer to credit. Furthermore, in the absence of proof to the the
contrary, it is more logical and reasonable to believe that the income
received was in substantially equal amounts in each of the years from
1937 through 1951 inclusive. The evidence preponderates to this theory.
From the evidence it is not clear just how much money was expended in
the purchase of United States Government Bonds. However, looking to the
defendants' answer to the amended complaint, it appears from paragraphs
5 and 6 thereof that the defendants admit purchasing said bonds at a
cost of $102,300.00, while it appears from the original complaint that
of said sum $3,750.00 of said bonds were redeemed, so that the
expenditures for the purchase of United States Government Bonds, for tax
purposes, would be $98,550.00. The Court therefore finds that the total
income of Claude Ridley for the years 1937 through 1951 was as follows:
Total Expenditures ......................$128,243.33
This makes a
total income, except for living expenses of $128,243.33, which income,
under the findings here made, will be divided equally over the fifteen
year period from 1937 through 1951, inclusive, which will give to Claude
Ridley an opening net worth as of December 31, 1941 of $42,414.44, which
is one-third of the total income shown by these expenditures.
For the years
1942 through 1948, inclusive, there will be added the sum of $1,000.00
per year as income expended for living expenses, and for the years 1949
through 1951, inclusive, there will be added the sum of $1,500.00 as
income expended for living expenses, in accordance with the findings
here made. Thus, the Court finds that the taxable income of Claude
Ridley for each of the years from 1942 through 1951, inclusive, is as
1942 ....$ 9,549.56
years 1937 through 1951, inclusive, the defendant, Claude Ridley, was
engaged in the business of farming, operating a country store and
filling station, and of manufacturing and selling illicit whiskey. In
each of these endeavors he was aided and assisted by his wife, Dimple
Ridley, and he derived income from each of these sources.
made purchases with the aforesaid income of the following series
"E," "F," and "G" Savings Bonds issued in
the names of the respective payees and beneficiaries on the dates and in
the face amounts, as follows:
On the 6th day
of April, 1951, Claude Ridley purchased from Waco Byers, Hattie Byers
and John Byers 199 acres of land in Murray County, Georgia, paying
therefor the sum of $10,557.00, and shortly thereafter, Claude Ridley
agreed with his brother, W. A. Ridley, and his nephew, L. B. Ridley,
that if the said W. A. Ridley and L. B. Ridley would go in there and
"clean up" the farm that he would give them a half interest in
the same. W. A. Ridley and L. B. Ridley agreed to this but didn't do
much on it during the year 1951, but during the years 1952 and 1953 they
spent some two to three hundred man hours working on the farm and
cleaning it up; they have a bulldozer there that would normally rent for
about $14.00 an hour and have used the bulldozer to clear up about fifty
acres of land and to clean up around the edges of fields already
cleared; they have not completed their cleaning up but intend to do so
in the future. The agreement between Claude Ridley and W. A. Ridley and
L. B. Ridley with respect to this was an oral agreement; there was no
definite agreement as to just what the cleaning up would consist of; how
much work was to be done, or when it was to be done, nor does it appear
how much has been completed or how much remains to be completed in the
future. The Government's claim of lien was recorded in
November 24, 1952
On the 2nd day
of October, 1950, Claude Ridley purchased 46 lots of land in what is
known as the Albert Rogers Subdivision in Whitfield County, Georgia for
$4,963.50 and thereafter L. B. Ridley and W. A. Ridley furnished
materials and performed labor in erecting two houses on said lots under
an agreement with Claude Ridley that they were to be paid when the
houses were sold; the said Claude Ridley now owes L. B. Ridley and W. A.
Ridley approximately $700.00 for such labor and materials. The contract
of employment for the building of the houses was not in writing, nor
does the evidence show when the buildings were completed. Claude Ridley
received during the period from
January 1, 1942
through and including the year 1951, taxable income in the amount of
$98,550.00; never filed any tax returns; kept no records of income;
refused to cooperate with the agents of the Internal Revenue Department
when they undertook to investigate his income.
offers no reasonable explanation of his failure to file returns, and the
Court finds as a matter of fact that the defendant is guilty of fraud
with the intent to evade the payment of income taxes due. The Court
further finds that the said Claude Ridley failed to file any declaration
of estimated taxes and failed to pay the taxes due.
granted to the Commissioner of Internal Revenue, where records are not
kept by the taxpayer to use such method of computing his taxable income
as would clearly reflect his income (26 U. S. C. A. Sec. 41), is nothing
more than the grant of authority to the Commissioner to use indirect or
circumstantial evidence where direct evidence such as records can not be
obtained. The net worth and expenditures method adopted by the
Commissioner through the agent in this case is simply the exercise of
the authority to use circumstantial evidence in computing the taxpayer's
determination of the Commissioner, as evidenced by the assessment of the
tax, is not conclusive but only furnishes prima facie evidence of its
and where, as here, the United States files its complaint in equity
seeking to foreclose its lien for taxes, and asking this Court to direct
all persons having liens or claiming interests in the property be
brought into Court, and that the merits of their claims be determined,
seeking a receiver and injunctive relief, and where the defendant
taxpayer denies that he owes the taxes so assessed and avers that the
tax assessments are erroneous, and introduces evidence both direct and
circumstantial, which if fully credited would require the Court to
determine that the deficiency tax assessments made by the Commissioner
of Internal Revenue are incorrect, and to determine anew the taxpayer's
tax liability, the Court is free to determine for itself from all of the
evidence in the case just what the taxpayer's liability is, and where,
as here, the only circumstantial evidence before the Commissioner was
the fact that the taxpayer made certain expenditures, mostly in the
nature of investments, and where those facts are likewise before the
Court, with other evidence in addition thereto, this Court is free to
weigh all of the evidence and to reach a conclusion different from that
of the Commissioner.
In this case
the taxpayer, Claude Ridley, failed to keep records as required by law, 2
and the Commissioner of Internal Revenue had the right to use such
method of computing his taxable income as in his opinion would clearly
reflect the income, 3
and the Commissioner chose the net worth method of computing income.
This method at best is subject to the criticism that when heedlessly
resorted to and loosely applied, it is dangerous and inexorable. In all
cases, civil and criminal, it should be used with the utmost caution to
avoid injustice to honest taxpayers which might otherwise result. This,
however, does not incapacitate it as an instrument of evidential value
in cases where it may be properly applied. When a taxpayer violates the
mandate of the statute which requires him to keep proper records of his
income, and conditions are otherwise such that his taxable income may be
determined in retrospect only by resort to circumstantial evidence of
this character, he will not be permitted to rely upon his ability to
conceal the distorted facts of income and his fraudulent conduct to
avoid the imposition of taxes which the collection authorities may show
to be lawfully due. 4
of Net Worth Method Justified]
This Court is
of the opinion that under the facts of this case that the use of the net
worth and expenditures method of determining the income is justified.
However, the Court is of the further opinion that this method has been
"too loosely applied" in the following particulars:
circumstances show that the opening net worth as of
December 31, 1941
should have been at least $42,414.44, the amount of that portion of the
total income received prior to
January 1, 1942
2. That the
higher estimate of the agent as to the amount of expenditures for living
expenses must yield to the evidence and strong corroborating
circumstances, and such expenditures should be fixed as set forth in the
3. That the
allocation of income by the agent as being in the years that the
investment expenditures took place is a loose application of the net
worth-expenditures method of determining income and is not supported by
any other fact or circumstance, while the oral testimony, as well as
other circumstances, indicate that such investment purchases were made
from accumulated savings rather than from current income, and there is
no other evidence to indicate great income in one year and little income
in another. The income should be distributed evenly over the years 1937
through 1951, inclusive, in accordance with the foregoing findings of
W. A. Ridley
and L. B. Ridley claim an interest in the 199-acre farm bought by Claude
Ridley from the Byers. The basis of this claim is an oral contract that
they were to have a one-half interest in the farm if they would
"clean it up." They claim that they have done much work on it
during 1952 and 1953, but that the work has not been completed. In order
for this promise, for the sale of an interest in lands, to be binding
upon the obligor, it must be in writing. 5
Although the Georgia Code provides that this requirement shall not
extend to cases where there has been such part performance of the
contract as would render it a fraud of the party refusing to comply if
the Court did not compel a performance, 6
the contract here is too vague and uncertain to be capable of
The contract has not yet been completed, and though W. A. Ridley and L.
B. Ridley may have a valid claim against Claude Ridley for the value of
the work done, they have not acquired any interest in the land,
equitable or otherwise.
W. A. Ridley
and L. B. Ridley also claim an interest in two certain houses and lots
in the Albert Rogers Subdivision, the basis of this claim being an
alleged oral agreement with Claude Ridley that they would furnish the
labor and material and construct upon the described two lots two houses,
Claude Ridley agreeing to reimburse them when the property was sold. A
balance of approximately $700.00 is now due them.
Lien or Interest]
facts as contended for by said claimants, they have neither a lien upon
nor an interest in the described property.
Georgia law provides that a laborer, 8
or a materialman,/9/ may acquire a lien where labor is performed and
material is furnished in improving real estate, by complying with the
requirements of the statutes as to the filing and recording of the
notices of claim of lien within the time prescribed, there is no
evidence here that such liens have been obtained. The claim of lien or
interest in the property of W. A. Ridley and L. B. Ridley for the
construction of the two houses is denied.
contend that to subject the interest of Claude Ridley in the joint
ownership bonds would affect the right of survivorship. This has been
decided contrary to the contentions of the defendants.
incidence of the bonds here in question as governed by the regulations
in respect to their issue is that while there is preserved the right of
survivorship, that right is preserved only when co-ownership is not
otherwise terminated under the circumstances recognized by the
regulations. The present bonds within certain limitations may be reached
by creditors for the debts of a co-owner. . . . When subjected to
process by creditors there is recognition of the extent of interest
therein of each of the respective co-owners." Guldager v.
, 204 Fed. (2d) 487, 489.
finds that the bonds, as detailed in the findings of fact, purchased in
May, 1945 and registered in the name of Claude Ridley only, as
prescribed by Title 31, Code of Federal Regulations, Sec. 315.4, are the
sole property of Claude Ridley in accordance with section 315.2 of said
In the list of
bonds as set out in the findings of fact, the Court finds that where the
bonds were registered in co-ownership as prescribed by Title 31 of the
Code of Federal Regulations, Section 315.4 (2), the Court finds that
pursuant to Section 315.13(c), that Mrs. Dimple Ridley is the owner of a
one-half interest in such bonds and the taxpayer, Claude Ridley, owns a
one-half interest in such bonds.
In the list of
bonds as set out in the findings of fact, where the bonds are registered
in the beneficiary form--Claude Ridley, P. O. D., Mrs. Dimple Ridley,
or, Claude Ridley, P. O. D., Mrs. Dimple Gray Ridley, the Court finds in
accordance with Title 31, of the Code of Federal Regulations, Sec.
315.13(c), that Claude Ridley is the owner of such bonds as set forth in
sections 315.4(3) and 315.46 of said regulations.
penalties or additions to the tax made by the Commissioner, are the
10% of the tax
for failure to file a declaration or pay the installment of estimated
tax as provided by section 294(d)(1) of Title 26,
6% of the
amount by which the tax exceeds estimate (total tax here) for
substantial understimate of estimated tax as provided by Sec. 294(d)(2)
of Title 26,
of 10% of the tax for failure to file the declaration or to pay the
installment of the estimated tax is proper to be added in the applicable
years. However, the addition of 6% for substantial underestimate of
estimated tax is improper for the very obvious reason that the tax was
not underestimated, indeed, the taxpayer filed no declaration of
estimated tax at all the suffers the greater sanction of 10% addition to
the tax for the failure, and the failure to pay the tax.
of the Government that the failure to file the declaration of estimated
tax is in effect a declaration of no tax, thus subjecting the taxpayer
to this penalty, is rejected as contrary to a proper construction of the
The tax will
be computed in accordance with the findings here made. Interest and
additions to tax as computed will be made in the manner applied by the
agent, except the addition of 6% for substantial underestimate shall not
showing the necessity for a receiver or injunction was offered, and no
necessity therefor appears.
The lien of
for taxes here found to be due attaches to all of the property of Claude
Ridley and the prayer of the
for foreclosure is granted.
A judgment for
the taxes, penalties and interest, computed in accordance with these
findings and conclusions, may be prepared and presented.
1U. S. v. Anderson, 269
422 [1 USTC ¶155]; McCarl v. U. S., 42 Fed. (2d) 346 (and cases
Code, 67-2002, et seq. (Materialmen's Liens).
¶9141]Allen McCain, et al. v. The Liberty National Bank, et al.
the United States District Court for the Northern District of Georgia,
Rome Division, Civil Action No. 738, September 29, 1953
Lien for taxes: Priority over state taxes: Priority of creditors.--The
husband and wife were fatally injured in an automobile accident and the
wife died shortly before the husband. Claims which had priority over the
U. S. tax were: a compromise amount in lieu of a year's support for the
decedent's minor daughter, fees and expenses of the minor daughter's
guardian, court costs, and receiver's fees and expenses including
counsel fees. After paying these claims, the remainder of the estate was
less than the U. S. tax, leaving no funds for payment of State taxes,
the wife's doctor bills and funeral expenses, claims for damages to
persons riding with the deceased at the time of the accident, or support
(Stewart and York) and E. L. Gammage, Jr., all of
, for plaintiffs.
J. Ellis Mundy
and James W. Dorsey, United States Attorneys, Lee S. Radford, Department
of Revenue, Income Tax Unit, Atlanta, Ga., James K. Rankin and Malcolm
A. Brenner, Atlanta, Ga., W. W. Mundy, Jr., C. C. Bunn, Jr., and
Brantley Edwards, Cedartown, Ga., Marshall, Greene, Baird and Neely, and
Powell, Goldstein, Frazer and Murphy, Atlanta, Ga., Chester A. Austin,
Birmingham, Ala., J. M. Grubbs, Jr., Cedartown, Ga., John P. Stewart,
Atlanta, Ga., John W. Maddox (Matthews and Maddox) and Maddox and
Maddox, Rome, Ga., Glenn T. York, Jr., Forrest C. Oates, Jr., and James
I. Parker, Cedartown, Ga., Covington and Andrews, Rome, Ga., and Murphy
and Murphy, Bremen, Ga., for defendants.
of the Case
was removed from the Superior Court of Polk County, Georgia, where Allen
McCain, as Administrator of the Estate of J. H. Harvell, deceased (also
alleging himself equitable owner of the assets of Harvell Motor Company,
Inc.) began an action against Marion H. Allen, Collector of Internal
Revenue for Georgia, and others. Mr. Allen having died Charles H. Dunn
was substituted as party defendant and on his motion the action was
removed to this court pursuant to 28 United States Code, Sec.
1442(a)(1). A large number of defendants were named and various other
parties at interest intervened, their individual claims being
hereinafter discussed or disposed of in groups. A great many hearings
were had in this court but almost without exception the questions
involved were those of law, there being practically no dispute in the
evidence. Assets of defendant Harvell Motor Company, Inc. and of the
Harvell estate were sold. A great many claims were settled by agreement,
by stipulation of all parties in open court at one of the hearings, at
which hearing all parties at interest were notified to appear. No
Findings of Fact will be necessary in cases where the amounts and
priorities of the claims were stipulated. As to other claims where
priority was in dispute, Findings of Fact and Conclusions of Law will be
given below in connection with each claim. Attached hereto and marked
"Exhibit A" is a statement showing all amounts received by
Allen McCain as Executor of the Estate of J. H. Harvell and also as
Receiver for Harvell Motor Company, also disbursements heretofore made
pursuant to written orders or directions of this Court, or stipulation
of parties, and then a list of payments to be made pursuant to this
order and judgment of the court, this being a Final Judgment and Decree
in said case.
of Fact and Conclusions of Law
Claims Against the Estate of J. H. Harvell, Deceased
1. Claim of
. This claim while originally made in a much larger sum was by
stipulation of parties to the case, made in open court and without
objection, agreed to be in the sum of $14,000.00. Although the priority
as between this claim and claims of the State of
, and others hereinafter referred to, remained in dispute.
conclusion of law this Court finds that the claim of the
United States of America
against said estate on account of taxes due and owing to the
at the time of the death of the said J. H. Harvell, are superior to the
claims of the State of
for taxes against the deceased. This ruling is predicated upon the
provisions of 31
Code, Section 191, which provides that "whenever the estate of
any deceased debtor, in the hands of executors or
istrators is insufficient to pay all the debts due from the deceased,
the debts due to the
shall be first satisfied." The situation referred to in that
statute exists in this case, and that statute, rather than state
statutes, must control. See Michigan v. United States, 317 U. S.
338 [43-1 USTC ¶9225]; United States v. Gilbert Associates, 345
U. S. 361, decided April 6, 1953, reported in 21 Law Week, 4275 [53-1
The payment of
the claim of the
will exhaust all funds remaining in the hands of the Receiver after
payment of various sums having priority thereto as listed on the
attached "Exhibit A."
made no objection to the allowance of a year's support to the minor
daughter of J. H. Harvell, deceased, as shown on said Exhibit, nor the
funeral expenses of J. H. Harvell, the doctors' bills during his last
illness, the costs of
istration of said estate, and the expenses of this litigation. The
United States did object, however, to the allowance of claim in behalf
of Dr. W. P. Downey who attended upon the wife of J. H. Harvell during
her last illness, and Miller Funeral Home for funeral expenses of said
Mrs. Harvell, as to which the Court will make Findings of Fact and
Conclusions of Law as follows:
Medical and Funeral Expenses]
2. The Court
finds that Mr. and Mrs. J. H. Harvell were injured in an automobile
accident, Mrs. Harvell dying as a result thereof a short time before Mr.
Harvell died, and that medical expenses were incurred in favor of Dr. W.
P. Downey and funeral expenses in behalf of Miller Funeral Home.
finds, however, that as a Conclusion of Law that the above claims do not
have priority as claims against the estate of J. H. Harvell to the same
extent as doctors' bills and funeral expenses in connection with the
last illness and burial of J. H. Harvell would have. Counsel for said
creditors in a comprehensive brief very ably insist to the contrary,
citing as authority for such contention, the provisions of Georgia Code
Section 113-1508, providing in part as follows:
against the estate of a decedent shall rank in the following order: (1)
year's support for the family, (2) funeral expenses, to correspond with
circumstances of the deceased in life, including physician's bills and
expense of the last sickness."
It is insisted
that the expression "funeral expenses" covers funeral expenses
incurred by the estate of the deceased not only for burial of the
deceased, but for his next of kin. While the Court can readily
appreciate the fact that the statute in question, if construed as this
claimant contends, would be a wise and salutory statute, tending to
expedite the burial of a wife when killed in a common disaster with her
husband, this Court is not of the opinion that the statute, when
enacted, was intended to so provide.
due the United States would not have priority over all the claims
enumerated in Georgia Code Section 113-1508, need not be decided for the
reason that the United States in this case has conceded that expenses of
the last illness and burial of Mr. Harvell take priority over taxes due
the United States. Such a concession by the Government is certainly in
accord with the dictates of wisdom and humanity, for it would be
unfortunate indeed if a man in his last illness could not be attended by
a physician, and in his death not be interred, without any assurance
that the doctor and the undertaker would be paid.
Claims Against Estate]
3. Annie Pearl
Daniel filed a claim in the sum of $8,400.00 based upon a contract made
with her by J. H. Harvell during his lifetime in which he recognized the
paternity of her two minor children and agreed to support them. The
Court rules that Annie Pearl Daniel under such circumstances has no
priority of payment out of such estate but ranks only with ordinary
creditors and therefore, is not entitled to participate in the
distribution of his estate.
ert McCain and Mrs. Ruby McCain, riding with J. H. Harvell at the time
of his fatal accident, filed a claim for damages including $409.00
medical bills. The Court rules that these claimants would rank as
ordinary creditors and cannot participate in the distribution.
5. Mrs. Mavis
Harvell Austin expended the sum of $105.00 for the benefit of the estate
and is awarded a refund of that amount without objection.
Receiver is directed to pay to T. L. Williams for reporting evidence,
the sum of $30.00 and to the Clerk of this Court, for court costs, the
sum of $15.00.
Receiver is directed to pay the following sums incurred in connection
with this case covering fees and expenses:
E. L. Gammage, Jr., Guardian ad litem for Mrs. Mavis Harvell Austin, a
minor, for a compromise of her claim for year's support, the sum of
E. L. Gammage, Jr., fees and expenses as Guardian ad litem for Mrs.
Mavis Harvell Austin, a minor, $548.30.
Malcolm A. Brenner, Jr., fees and expenses as court appointed certified
public accountant for the Receiver, $1765.00.
Allen McCain, Receiver, for fees and expenses, $3,751.15.
Henry A. Stewart, Sr., fees and expenses as court appointed counsel for
8. The above
leaves on hand the sum of $4,628.05, which Receiver is directed to pay
United States of America
upon account of its tax lien stipulated to be in the sum of $14,000.00.
This leaves unpaid the claim of the State of
for taxes in the sum of $2,889.94 and interest thereon.
when the time for appeal from this Judgment and Decree is over, may pay
out the aforesaid sums.
It is further
ordered and decreed that Harvell Motor Company, Inc., a corporation of
the State of
, be, and it is hereby adjudicated as dissolved as of this date.
Presented by Alvin Brown and Associates,
tax attorney, formerly with the Office of the Chief Counsel of the
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