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 [Perfection of Statutory Liens]

The consequence is that all of the liens claimed herein, if otherwise established, are subject to the provisions of this statute since it is admitted that the personal property was not seized or sold prior to the filing of the petition.

11 USCA 96b grants to statutory lien holders, where the lien arises before the filing of the petition but is not perfected until after bankruptcy, a valid lien if perfected within the time prescribed by the statute under which it arose, except where seizure of the property is required. It is therefore clear that so far as property other than personal is concerned the statutory lien may be valid if it arises prior to and is perfected after bankruptcy and is binding on the trustee.

We must therefore determine when a statutory lien arises and when it is perfected. The answer to this question must be found in the statute, whether federal or state, which creates the lien.

So far as the state of Kansas is concerned the only fact we have as to when this lien came into being is the date of filing the lien, which is after the filing of the petition. Consequently the lien did not arise until after the filing of the petition, and the statute has no application to the claim of the state of Kansas . Missouri does not claim a lien.

It is provided by statute that where a person fails to pay taxes on demand the United States shall have lien on the property belonging to such person. (26 USCA 3670) Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector. (Supra, 3671) Such lien shall not be valid against certain creditors until it is filed in accordance with the law of the state. (Supra)

It has been held by the Supreme Court that the lien created by this statute is a continuing lien covering all property or rights to property owned by the tax delinquent, including property acquired after the lien arose. (Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC 9449])

[When Lien Arises]

It seems clear from these statutes that the lien arises when the assessment list is received by the collector, but it is not perfected until the notice of the tax lien is filed with the register of deeds in accordance with the laws of the state of Kansas . Therefore all claimed tax liens, the assessment of which was received by the collector prior to the filing of the petition and thereafter perfected by filing the notice with the register of deeds, are valid against the trustee on all property except personal property. Where, however, the assessment does not reach the collector until after the filing of the petition, no lien is created and the claim must be assigned to the tax classification.

[Interest Allowed to Date of Payment]

The trustee contends that the United States is entitled to interest only until the date of the filing of the petition. The general rule with reference to interest is stated in Ticonic Bank v. Sprague, 303 U. S. 406, as follows:

"With respect to analogous liquidations the rule just announced has long been in force. This Court has already held that a lienholder may look to his lien not only for the principal but also for interest accruing up to the date of payment, though his debtor has gone into bankruptcy (Coder v. Arts, 213 U. S. 223, 245, affirming 152 Fed. 943, 950) or into equity receivership (American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U. S. 261), and though interest will be denied the unsecured creditors if the assets are insufficient to pay all claims in full. Compare In re Humber Ironworks & Shipbuilding Co., IV Ch. App. Cas. 643, with In re Humber Ironworks & Shipbuilding Co., V Ch. App. Cas. 88. The same rule was applied to state bank in Washington-Alaska Bank v. Dexter Horton National Bank, 263 Fed. 304, 306." (p. 413)

The theory has been advanced that since the adoption of the Chandler Act, which requires the United States to file its claim on the same basis as other creditors, it is only entitled to interest to the date of the filing of the petition. I think there is much force in this argument, which was discussed by the First Circuit in Davie v. Green, 133 Fed. (2d) 451. The court, however, reached the conclusion that under the statute (11 USCA 93j) interest should be allowed. I agree with this conclusion. The statute appears to be specific on the question that the United States on its claims may recover "such interest as may have accrued thereon according to law."

[Delinquency Penalties Not Allowed in Bankruptcy Proceeding]

It is the contention of the United States that where a tax lien is established as provided by law that the penalty included therein is allowable notwithstanding Section 57j of the Bankruptcy Act. (11 U. S. C. A. 93j)

This contention is based upon the decision of the Ninth Circuit, which was followed by the Sixth Circuit. (In re Knox-Powell-Stockton Co., 100 Fed. (2d) 979 [39-1 USTC 9277]; Commonwealth of Kentucky v. Farmers Bank and Trust Co., 139 Fed. (2d) 266)

The Ninth Circuit case involved the claim of the state of California for taxes and penalties payable under the provision of the California Oil and Gas Conservation Act. The California law provides a lien for the assessment and charges levied under the provision of the act, including a penalty for delinquency. The lien had been established before bankruptcy. The court said:

"It may be conceded that section 57j of the Bankruptcy Act (11 U. S. C. A. 93j), precludes the 'allowance' of a claim for penalties, but as pointed out earlier, adjudication in bankruptcy does not affect a valid and existing lien, consequently where a lien exists to support a penalty at the time of adjudication, section 57j does not come into operation. Hiscock v. Varick Bank, supra; see, also, State of California v. Moore, 9 Cir. 1937, 88 Fed. (2d) 564. In New York v. Jersawit, 263 U. S. 493, 44 S. Ct. 167, 68 L. Ed. 405, cited by appellant, there was a simple claim for priority unsupported by a lien." (p. 983)

It will be noted that this decision was rendered on the statute as it existed prior to the Chandler Act. The statute referred to in the opinion and quoted at length at page 982 of the opinion was repealed by the Chandler Act. This, to my mind, nullifies the effect of the opinion. The following is a brief analysis of the cases cited:

In Hiscock v. Varick Bank, supra, the Supreme Court said:

"The Bankruptcy Act did not attempt by any of its provisions to deprive a lienor of any remedy which the law of the State vested him with."

In California v. Moore , supra, the court held that there was no pecuniary loss and consequently there was no lien.

In New York v. Jersawit, supra, the court held that a rate of interest fixed by the state of New York for delinquency in payment of a tax was a penalty and could not be allowed in bankruptcy. (Citing section 57j)

The court in the Sixth Circuit, supra, followed the decision in the Ninth Circuit without argument. In this case, however, Judge Simons dissents and in my judgment states the correct rule of law, holding that a penalty cannot be enforced in a court of bankruptcy by reason of the provisions of section 57j.

After due consideration of these cases I find myself unable to agree with the conclusions reached by the courts. It is my understanding that this court is not bound by the decisions of other circuits, although they are very persuasive and must be given full consideration. This court is, of course, bound by the decision of this circuit and the Supreme Court of the United States .

The basic principle of the law of bankruptcy is to make an equitable division of the assets of the bankrupt estate among the creditors, having due regard for valid liens. The validity of a lien does not, however, determine the amount the lienor is entitled to recover. The lien may be valid but the debt which it secures may include a penalty, and a penalty should not be imposed on other creditors. The idea of an equitable division among creditors was carried into effect by the Congress in adopting section 57j, (11 U. S. C. A. 93) which is in part as follows:

"Debts owning to the United States or any State or subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, . . ."

It is well settled that this section applies to penalties imposed for nonpayment of taxes. (In re: Denver & R. G. W. R. Co., 27 Fed. Supp. 983, and cases there cited.)

In the case of Boteler v. Ingels, 308 U. S. 57, the Supreme Court had before it the question of whether a bankrupt's estate was liable for penalties imposed by a state statute for nonpayment of an automobile license fee, which accrued while the trustee was operating the business. The court held the estate liable. In the course of the opinion, however, it said:

"Subdivision 57(j) prohibits allowance of a tax penalty against the bankrupt estate only if incurred by the bankrupt before bankruptcy by reason of his own delinquency. After bankruptcy, it does not purport to exempt the trustee from the operation of state laws, or to relieve the estate from liability for the trustee's delinquencies." (p. 59)

The question therefore hinges on whether the establishment of a statutory lien prior to bankruptcy fixes the amount of the lien to the extent that it is binding on the bankruptcy court and closes the door to its established right to look behind the lien and determine the provability of the claim.

In Pepper v. Litton, 308 U. S. 295, the Supreme Court said:

"This court has held that a bankruptcy court has full power to inquire into the validity of any claim asserted against the estate and to disallow it if it is ascertained to be without lawful existence. Lesser v. Gray, 236 U. S. 70. And the mere fact that a claim has been reduced to judgment does not prevent such an inquiry. As the merger of a claim into a judgment does not change its nature so far as provability is concerned, Boynton v. Ball, 121 U. S. 457, so the court may look behind the judgment to determine the essential nature of the liability for purposes of proof and allowance." (p. 305)

In Woodruff v. Heiser, 150 Fed. (2d) 869, citing Pepper v. Litton, supra, Judge Bratton said:

"A bankruptcy court in which an estate is being admin istered has full power to inquire into the validity of an alleged debt of the bankrupt upon which a claim against the estate is based. And the merger of the original debt or obligation into judgment does not take away the power of the bankruptcy court to inquire into its provability." (p. 870)

This principle of law was cited and approved in Heiser v. Woodruff, 327 U. S. 726.

Can it be that a court vested with jurisdiction to look behind a judgment of another court to determine the provability of a claim can not look behind an ex parte statutory lien to determine whether the debt which the lien secures is provable: I think not.

A statutory lien comes into existence at the instance of the lienor who sets in motion the statutory authority. The lien is dependent for its existence on a valid debt or obligation. The debt may survive the lien, but the lien cannot survive the debt. If the debt fails or ceases to exist, the lien is nugatory. The lien does not establish the amount of the debt. It can not make an indebtedness legal that otherwise would be illegal.

The sole purpose of a penalty is to punish for a delinquency. This is especially true under the tax laws. The imposing of a penalty on a bankrupt estate is not a punishment of the delinquent but of the creditor--the innocent bystanders. It is contrary to every principle of American law that one person should be punished for the delinquency of another.

If Section 57j of the bankruptcy act is set aside by the establishment of a lien, then the estate may be wiped out, not by debts but by penalties. If Section 57j is not enforcible against tax liens, what is to be done with Section 67c? The first makes a penalty disallowable, the second postpones the lien. If the first statute is nullified by an established lien, why is not the second?

It is my conclusion that the United States is not entitled to recover penalties, although they may be a part of an established lien.

[Taxes Accruing in Operation of Business by Trustee Not Provable Debts]

It is contended that Claim No. 216 filed May 9, 1947 , is filed out of time. The limitation on the United States for filing claims is found in 11 U. S. C. A. 93n. The date set for the first meeting of the creditors which brings into effect this statute was November 11, 1946 . ( New York v. Irving Trust Co., 288 U. S. 329; In Re: Matisoff, 36 Fed. Supp. 897) The claim was filed in time. All taxes accruing as a consequence of the operation of the business by the owner, receiver and trustee are expenses of admin istration. They are not provable debts. (2 Rem. 231; McColgan v. Maier Brewing Company, 134 Fed. (2d) 385; Ingels v. Boteler, 100 Fed. (2d) 915)

[Application of Payments Not Made by Trustee]

The trustee raises the question as to whether the United States may apply the refund at its discretion to the payment of taxes of its own choosing. The general rule is that a debtor owing more than one debt to a creditor has the right to direct to which debt a payment made by him will be applied. This right, however, may be lost by the debtor if he fails to give the direction at the time of payment. (40 Am. Jur. 792, et seq.) There is nothing in the record to show that the trustees exercised their privilege under the law. Failing in this, the privilege failed and the United States had the right to apply the payment at its descretion.

[Priority of Claim Not Involved]

The conclusions I have reached eliminates the question of priority of liens. The only liens surviving the adjudication are the liens of the United States . There is no priority of claims in a class. This to say, that when claims are classified as provided by the statute the funds available are prorated to the claims in the class and hence no question of priority arises. ( United States v. Killoren, 119 Fed. (2d) 364 [41-1 USTC 9448])

The attorneys are requested to prepare an order as of January 5, 1948 , in accordance with the views herein expressed.

IT IS SO ORDERED.

 

 

[47-2 USTC 9363] United States of America , Plaintiff, v. Rogers Caldwell, Defendant

United States District Court for the Middle District of Tennessee, Nashville Division, No. 2682--Law, 74 FSupp 114, Filed August 11, 1947

Lien of United States for taxes: After-acquired property: Effect of Uniform Warehousing Law: Pledge to creditor with notice.--A lien for Federal taxes filed in 1932 and a judgment against taxpayer for such taxes in 1938, upon which an execution and levy was made on May 10, 1946, were held to establish a prior lien on tobacco acquired in 1945 and warehoused by taxpayer on March 1, 1946, although covered by negotiable warehouse receipts taken on May 4, 1946 by a creditor to secure a pre-existing indebtedness of taxpayer, where such creditor had previous personal knowledge of the Government's lien and the pledging of such warehouse receipts by taxpayer, while insolvent, constituted an act of bankruptcy, notwithstanding the provisions of the Uniform Warehousing law. The lien itself attached to the property in this case upon its acquisition by taxpayer. Prior lien of the United States was subject only to warehouseman's charges.

A. O. Denning, Assistant United States Attorney, of Nashville , Tennessee , and Courtnay C. Hamilton, Special Attorney, Department of Justice, Washington , D. C., for plaintiff. W. M. Fuqua, Attorney, of Nashville , Tennessee , for defendant.

Findings and Conclusions

DAVIES, D. J.:

The above entitled cause was heard before the Court on the 21st day of May, 1947, and subsequent days.

The cause was submitted upon the pleadings, evidence, exhibits, and argument of counsel for plaintiff and defendant, and, after due consideration thereof, the Court enters its Findings of Fact and Conclusions of Law, as follows:

Findings of Fact

1. That the petitioner James E. Caldwell & Company is a corporation existing under the laws of Tennessee since 1931, with its principal office in Nashville . It is a closed corporation. All of its capital stock is held in trust for the benefit of the children and grandchildren of James E. Caldwell and wife May Winston Caldwell, the defendant Rogers Caldwell being the beneficial owner of one thousand shares of said stock denominated Class "A" stock, and one thousand shares of said stock denominated Class "B" stock. Both of these stocks have voting rights in the conduct of the company's affairs. Some 10,220 shares of the capital stock of said corporation, of the 22,270 shares outstanding, are held by him, as Trustee, for his sister and various of his brothers and nephews and nieces.

2. That the defendant Rogers Caldwell became indebted to James E. Caldwell & Company for loans of money made to him from time to time at the direction of his father James E. Caldwell, while the latter was the president of the corporation, in the total amount of $28,000, for which sum he executed his promissory note to the company under date of May 10, 1938. Said note was unsecured, and nothing has been paid on the indebtedness, nor has any demand ever been made on the defendant for the payment of any part thereof. The note, however, has since been twice renewed.

3. That on July 2, 1932 , the Commissioner of Internal Revenue duly and legally assessed against the defendant Rogers Caldwell income taxes for the calendar year 1930 in the amount of $203,171.37, together with interest thereon in the amount of $15,805.62. The assessment list of said taxes and interest was received by the Collector of Internal Revenue for the District of Tennessee on July 7, 1932 , and on that same date demand was duly made on the said Rogers Caldwell for the payment of said tax and interest. Thereafter and on August 8, 1932, the Collector of Internal Revenue filed with the Clerk of this Court, and with the Register of Deeds of Davidson County, Tennessee, on Treasury Department's Form 668, as required by law, a notice of tax lien under the internal revenue laws in the amount of $218,976.99 upon all property and rights to property belonging to the said Rogers Caldwell. No part of said assessment, taxes or interest, has been paid.

4. That on June 29, 1938 , this cause was commenced in this court to reduce to judgment the aforesaid assessment, together with the accrued interest thereon; and on October 26, 1939 , this Court rendered judgment in this cause in favor of the United States and against Rogers Caldwell in the amount of $314,877.96. No part of the judgment has been paid and the full amount thereof, together with the interest thereon, is wholly due and unpaid.

5. During the calendar year 1945 the defendant Rogers Caldwell produced a crop of Burley tobacco on what is known as the Brentwood Hall property in Davidson County , Tennessee . This tobacco was by him transported to Bowling Green , Kentucky , and delivered in bulk to one C. D. Watson, a public warehouseman to be redried, prized and stored. A part of the tobacco was delivered shortly before March 1, 1946 . For the tobacco thus delivered, the said C. D. Watson, under date of March 1, 1946, issued and delivered to the defendant Rogers Caldwell twenty-two original negotiable warehouse receipts for 22 hogsheads, containing 20,306 pounds; and under date of April 25, 1946, said C. D. Watson issued and delivered to the defendant Rogers Caldwell eleven additional negotiable warehouse receipts for 11 hogsheads, containing 10,786 pounds.

6. At the time of the issuance of said warehouse receipts and the levy of the execution issued in this cause, the Uniform Law of Warehouse Receipts and Warehousing was in effect both in the State of Tennessee and in the Commonwealth of Kentucky, the Tennessee law on the subject being contained in Sections 7536-7595, both inclusive, of the 1932 Code of Tennessee.

7. That on or about May 4, 1946, the defendant Rogers Caldwell executed his promissory note to the petitioner James E. Caldwell & Company in the amount of $28,000, as a renewal of his note in like amount dated May 2, 1944, the latter note being a renewal of the original note of May 10, 1938, for the $28,000 indebtedness owing by him to James E. Caldwell & Company; and to secure the payment of the note of May 4, 1946, he pledged with James E. Caldwell & Company the aforesaid 33 negotiable warehouse receipts for said tobacco, by endorsing the same in blank and attaching them to the said note of May 4, 1946.

8. That on May 10, 1946 , an execution was duly issued on the aforesaid judgment and delivered to the United States Marshal for the Western District of Kentucky, who on that same day levied said execution on 33 hogsheads of tobacco, containing approximately 31,092 pounds, as the property of Rogers Caldwell.

9. That the tobacco levied on in this cause and represented by the 33 werehouse receipts was and is the property of Rogers Caldwell.

10. That at the time the warehouse receipts in question were pledged to James E. Caldwell & Company, and throughout the calendar year 1946, the defendant Rogers Caldwell was the president of said corporation and a member of its board of directors.

11. That the time the warehouse receipts in question were pledged to James E. Caldwell & Company, and ever since August 8, 1932, the defendant Rogers Caldwell had personal knowledge of the filing of the Government's notice of tax lien under the internal revenue laws.

12. That the pledge of said warehouse receipts to James E. Caldwell & Company was made and done at the instance of the defendant Rogers Caldwell.

13. That at the time the warehouse receipts in question were pledged to James E. Caldwell & Company, and prior thereto, the defendant Rogers Caldwell was insolvent, and he so remains.

14. That the defendant Rogers Caldwell, by pledging the warehouse receipts in question with James E. Caldwell & Company to secure a pre-existing debt, transferred while insolvent that portion of his property with intent to prefer said James E. Caldwell & Company over his other creditors, and thereby committed an act of bankruptcy within the provisions and meaning of Section 3466 of the Revised Statutes of the United States (Sec. 191, Title 31, U. S. C.).

15. The charges made by the warehouseman C. D. Watson for redrying, sampling and storing said tobacco amount to $423.97.

Conclusions of Law

1. By the assessment, which was duly and legally made by the Commissioner on July 2, 1932, the defendant Rogers Caldwell became liable to pay to the United States an income tax in the amount of $203,171.37, and the interest thereon in the amount of $15,805.62, totaling in all the sum of $218,976.99, and, having neglected or refused to pay the same after demand, the said amount of $218,976.99, by virtue of Section 3670, Title 26, United States Code, became a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the said Rogers Caldwell. Such lien included also any interest, penalty, additional amount, or addition to such tax, together with any costs that might accrue in addition thereto. And such amount was a lien not only upon all the property and rights to property belonging to the said Rogers Caldwell at the time the assessment list was received by the Collector, but also was and is a lien upon all property and rights to property thereafter acquired by him.

[After-Acquired Property]

2. Another date not being specifically fixed by law, the aforesaid lien, by virtue of Section 3671, Title 26, United States Code, arose at the time the assessment list was received by the Collector of Internal Revenue for the District of Tennessee. Since the liability for the amount of said assessment has not been satisfied, and since the United States commenced in this court in this cause a suit and obtained a judgment for said tax and interest so assessed within the period of the six year statute of limitations, the liability for the tax and interest has not become unenforceable by reason of lapse of time. Hence, the United States has a lien on the tobacco levied on in this cause and the 33 warehouse receipts representing said tobacco. The lien on the tobacco was in full force and virtue at the time of the delivery thereof to the warehouseman, and the lien on the warehouse receipts attached when they were issued and delivered to Rogers Caldwell and was in full force and virtue at the time of their pledge to the petitioner James E. Caldwell & Company. At the time of the pledge of said warehouse receipts, James E. Caldwell & Company, through its president Rogers Caldwell, at whose instance the pledge was made, had knowledge of the existence of the lien on said warehouse receipts. Said warehouse receipts, therefore, came to James E. Caldwell & Company burdened with the lien of the United States in the amount of the judgment in this cause against Rogers Caldwell, together with interest thereon, and the costs accrued. A like amount is also a lien on said tobacco, and both the lien on the warehouse receipts and on the tobacco are superior to any lien or right or interest therein or thereto of the petitioner James E. Caldwell & Company. The United States , therefore, has a right to the possession of the tobacco and of the warehouse receipts, and has the right in this proceeding to have the same sold and the proceeds thereof applied on the judgment in its favor in this cause.

[Effect of Uniform Warehouse Law]

3. The levy on the tobacco by the United States Marshal for the Western District of Kentucky under the execution issued on the judgment in this cause was good and valid, even though the Uniform Warehousing Law which was in effect in both the states of Tennessee and Kentucky provides that: "If goods are delivered to a warehouseman by the owner . . . and a negotiable receipt is issued for them, they cannot thereafter, while in possession of the warehouseman, . . . be levied upon under an execution unless the receipt be first surrendered to the warehouseman or its negotiation enjoined." This is true, because a State cannot pass a statute which would defeat the United States in the collection of its debt for taxes against property upon which it has a lien for such taxes. The quoted statute, therefore, was of no force and effect against the United States so far as concerns its right to assert its lien and levy upon the tobacco. However that may be, any question on the validity of the levy of the execution by reason of the operation of the quoted statute has become moot. The court has jurisdiction both of the subject matter and of all the parties claiming an interest in the tobacco and the warehouse receipts. The warehouseman is making no claim in this case, except for his warehouse charges, and that claim is being made only in his testimony as a witness at the trial. His rights are not beyond the protection of this Court in this proceeding, because the warehouse receipts are in the hands of James E. Caldwell & Company and are subject to the orders of this Court. The case made by the pleadings and the proof is, therefore, merely a contest between two creditors claiming the same property or fund.

[Taxpayer's Insolvency]

4. Since the defendant Rogers Caldwell committed an act of bankruptcy within the provisions and meaning of Section 3466 of the Revised Statutes of the United States by pledging, while insolvent, the warehouse receipts in question with James E. Caldwell & Company to secure a pre-existing debt with intent to prefer said Company over his other creditors, both the tobacco and the warehouse receipts therefor constitute property or funds out of which the debt of the United States against the said Rogers Caldwell shall be first satisfied. Not only was the insolvency of the defendant Rogers Caldwell amply established otherwise by the proof, but such insolvency also was manifested by the act of bankruptcy committed by him.

5. The warehouseman, C. D. Watson, is entitled to be paid $423.97, the amount of his warehousing charges for redrying, sampling and storing said tobacco.

6. The plaintiff United States is entitled to have a decree for the sale of the tobacco under execution and the proceeds of the sale, after the payment of the warehouse charges and the costs and expenses incident to the levy and sale, applied on its judgment against the said Rogers Caldwell in this cause.

7. The plaintiff United States is entitled to have the warehouse receipts delivered into the hands of the Clerk of this Court for delivery to the United States Marshal for the Western District of Kentucky, for delivery by him to the purchaser or purchasers at the sale of the tobacco.

Judgment accordingly.

 

 

[47-1 USTC 9274]In the Matter of Capital Foundry Corporation, Debtor

United States District Court, Eastern District of New York, Bankruptcy--No. 46,229, 69 FSupp 421, January 31, 1946

Lien for taxes: Priority of creditors: Mechanic's lien.--The Government's lien for taxes, notice of which was filed on February 21, 1945, is superior to a New York mechanic's lien filed on March 27, 1945, for work completed on February 19, 1945.

Jerome Voletsky, Esquire, Attorney for Petitioner. T. Vincent Quinn, Esquire , United States Attorney. Attorney for Collector of Internal Revenue, Respondent. Eli Resnikoff, Esquire, Assistant United States Attorney, of Counsel.

[The Facts and Opinion]

GALSTON, D. J.:

The motion is for an order to vacate the order of this court authorizing and directing the trustees of the debtor to pay to the Kingsway Sheet Metal and Roofing Co., Inc. the sum of $260.

On November 2, 1945, the creditor appeared on a motion for the order based on a petition which set forth that the debtor had on or about February 15, 1945 employed the creditor to do certain repair work on its premises in Brooklyn; that the work was completed on February 19, 1945; and that on March 27, 1945, pursuant to the lien law of the State of New York; the petitioner duly filed, in the office of the Clerk of Kings County, a notice of mechanic's lien. The petition also recites that the petitioner duly filed a claim with the trustees, asserting its lienor's rights under the mechanic's lien law of the State of New York : that on September 28, 1945 the real property was sold, free and clear of encumbrances, but that a claim to the proceeds was made by the Collector of Internal Revenue. The petitioner asserts such claim is subordinate to that of the mechanic's lienor.

The motion was granted on default, no opposition having been made by the Internal Revenue department. On December 7, 1945 one of the Assistant United States Attorneys verified an affidavit in opposition, but that affidavit was not filed in the clerk's office of the United States District Court until December 20, 1945 .

Despite the delay indicated, and because of the importance of the legal issue raised, the motion to vacate the order of priority was granted, to enable the question to be determined on the merits.

The Government's affidavits disclose that the tax assessments are in two groups: one, those that were received by the Collector of Internal Revenue prior to the date on which the mechanic's lien was filed, and two, those received by the Collector subsequent to the date of the filing of that lien. The first group consists of two items: (a) income tax for the fiscal year ending September 30, 1943, in the amount of $89,417.72, which assessment was received in the office of the Collector of Internal Revenue, First District of New York, on February 18, 1944; and (b) an additional income tax for the income for the fiscal year ending September 30, 1942 in the amount of $2,168.82, which assessment was received in the same Collector's office on December 13, 1943. On February 21, 1945 , according to the Government's affidavit, a notice of lien was filed by the Collector in the amount of $98,804.97.

On March 2, 1945 the debtor filed a petition for reorganization, pursuant to Chapter X. Since that time the assets of the debtor have been sold. There still remains for consideration a plan to be submitted for the distribution of those assets. Meanwhile, whatever instruction under the Act is given in respect to priorities among creditors is found in Title 11, Sec. 207(k)(5):

"Debts shall be entitled to priority as provided in Sec. 104 of this title."

Sec. 104 provides that the court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States in the order of priority as set forth in paragraph (b). Paragraph (b), after enumerating five different classes not necessary to retail here, provides: "(6) Taxes payable under paragraph (a) hereof." The reference to paragraph (a) is: "The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States * * *"; and then paragraph (b) goes on to say: "(7) Debts ewing to any person who by the laws of the states or the United States is entitled to priority."

Also provision is made in subdivision (o) of Sec. 207 that:

"In proceedings under this section * * * the duties of the debtor and the rights and liabilities of the creditors and of all persons with respect to the debtor and its property, shall be the same as if a voluntary petition for adjudication had been filed, and a decree of adjudication had been entered on the day when the debtor's petition or answer was approved."

Thus it is clearly indicated in the enumeration of priorities that taxes due the United States take priority over a claim of a mechanic's lien law of any state. Though in Michigan v. United States, 317 U. S. 338 [43-1 USTC 9225], the facts were somewhat different, there is enough in the facts to make what was said about the applicable law pertinent in the matter before us. In that case a lien for estate taxes was asserted by the Government. The City of Detroit, the County of Wayne and the State of Michigan asserted liens for City, County and State taxes on the real estate in question, accruing subsequently to the federal estate tax lien. The municipalities contended that the city liens were given superiority over the federal lien by virtue of state statutes. But Mr. Chief Justice Stone wrote that the argument ignores the "effect of a lien for federal taxes under the supremacy clause of the Constitution".

Considering for the moment only the tax assessments which were received by the Collector prior to February 19, 1945, when the creditor performed certain labor and furnished materials, it appears that on February 21, 1945, after the work was performed, but before the creditor filed its mechanic's lien, the Collector of Internal Revenue duly filed a notice of the United States lien for income taxes in the amount of $98,804.97. The lien of the Government is based on Title 26, U. S. Code, Secs. 3670 et seq. These sections are quoted in the margin. * Thus it appears that the Government acquired tax liens both on December 13, 1943 and on February 18, 1944, when the assessments for income taxes were received in the office of the Collector of Internal Revenue. They then became effective against all persons on those respective dates and after February 21, 1945, on which day the notice of the tax lien was filed by the Collector, valid against any persons including mortgagees, purchasers and judgment creditors. Of course, the Kingsway Sheet Metal and Roofing Company, Inc. did not fall within the category of "mortgagee, pledgee, purchaser or judgment creditor." The most that could be asserted by that creditor was that under the laws of the State of New York it acquired the right within four months of the performance of the work and the furnishing of the materials, to file a notice of mechanic's lien. That was done on March 27, 1945. Reference to the New York State lien law would seem to be decisive of the question as to when the mechanic's lien became effective. Sec. 3 of the Act provides:

"A contractor, * * * or material man * * * shall have a lien for the principal and interest, of the value of the agreed price, of such labor or materials * * * from the time of filing of notice of such lien as prescribed in this chapter."

Sec. 4 defines the extent of the lien and in part reads:

"Such lien shall extend to the owner's right * * * in the property * * * existing at the time of filing the notice of lien,"

Thus the language of the state statute is clear, and led the court in Tisdale Lumber Co. v. Read Realty Co., 154 App. Div. 270, to say

"There is no such thing as an 'inchoate' mechanic's lien. The sole right given by the statute is to create a lien, which has no existence inchoate or otherwise until the notice is filed and until this is done, no priority among claims of creditors is recognized. The lien and a consequent priority originates when a notice is filed. Mack v. Colleran, 136 N. Y. 617, 620, 32 N. E. 604."

Additional support is afforded the Government's position by the provisions of Sec. 191, Title 31, U. S. Code:

"Priority established. Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."

For discussion of this section, see In Re Knox-Powell-Stockton Co., 100 Fed. (2d) 979 [39-1 USTC 9277], which held that the section afforded priority to the United States over all creditors, including those with inchoate liens. See also United States v. Reese, 131 Fed. (2d) 466 [42-2 USTC 9763].

[Conclusion]

For the foregoing reasons the order of December 20, 1945 must be vacated and the motion of the Kingsway Sheet Metal and Roofing Co., Inc. for payment out of the proceeds of sale of the real property of the debtor denied.

* 3670. Property subject to lien.--If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. (53 Stat. 448.)

3671. Period of lien.--Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time. (53 Stat. 449.)

3672. Validity against mortgagees, purchasers, and judgment creditors.--(a) Invalidity of lien without notice.--Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

(1) Under state or territorial laws.--In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory.

 

 

[47-1 USTC 9197]In the Matter of Rob ert Treat Platt, Bankrupt

United States District Court for the District of Oregon, No. B-28024, 72 FSupp 41, February 3, 1947

Relief from double payments in 1943: Effect of Current Tax Payment Act of 1943 upon bankrupt.--The discharge of 1942 federal income tax liability "as of September 1, 1943 * * *" by the Current Tax Payment Act of 1943 does not affect the liability of one who filed a voluntary petition in bankruptcy on July 2, 1943, since it was not the intention of Congress in enacting the Act to release a bankruptcy estate from tax liability for which the United States has priority and for the payment of which there is a lien in its favor.

Wilber Henderson, Attorney for bankrupt, U. S. Bank Bldg., Portland, Ore. Ralph A. Coan, attorney for trustee, Pittock Block, Portland, Ore.

FEE, JAMES ALGER, District Judge:

This is a proceeding to review the action of the Referee sustaining objection of the Trustee to the claim of the United States to receive the amount unpaid at date of bankruptcy, on the income tax liability shown by the tax return filed by bankrupt before the filing of his voluntary petition.

[The Facts]

The facts are conceded. On March 15, 1943 , Platt filed an individual income tax return showing liability for $4,244.33 which he elected to pay in four equal installments. He paid one installment with the return and another upon June 15, 1943 . On July 2, 1943 , he filed a voluntary petition in bankruptcy wherein was scheduled the balance of the 1942 taxes yet unpaid.

[Opinion]

The whole question here arises by reason of the fact that Congress, on June 6, 1943, passed the Current Tax Payment Act of 1943 (57 Stat. 126) which discharged "as of September 1, 1943 . . ." the balance of 1942 taxes then unpaid, if the liability of the particular taxpayer was greater for 1943 than for 1942.

Honorable Estes Snedecor, one of the exceptionally capable referees, held originally and again when the matter was re-referred upon specific questions by the court, that the claim must be denied. Unquestionably this must give us pause. Especially is this true where the creditors who are of first concern to a bankruptcy court will have percentages of recovery reduced and the bankrupt will not be required to pay the major portion of his income tax for 1943.

But in the construction of the bankruptcy and taxing acts strict legal doctrines must be applied to arrive at a result, rather than to obtain it by balancing doubtful theories of moralities.

If any of the following measures had been taken, the question would not have arisen. Platt might have postponed his increased income tax to 1944, for if his taxes for 1943 had been less than those for 1942, these latter would not have been subject to discharge. Platt might have paid the taxes before he filed the bankruptcy petition, and this act would have been valid and would have discharged liability for this sum on both years. The Government might have obtained payment for its claim before September 1, 1943 , by petition to the Referee in view of the undoubted priority over general creditors. Any of these legal methods would have ended the controversy.

Then again, courts are prone to look upon that which should have been done as actually accomplished. If the bankruptcy estate had been settled before September 1, 1943 , this amount would have been paid to the United States . Of course, the estate could not have been closed in fact, because the required periods of time for taking action herein could not expire before that date. However, if all liabilities could have been known as of the date of filing of the petition, and distribution made then, the liability would have been discharged by payment. Particularly is this true since the United States had a lien against the assets.

[Conclusion and Supporting Reasons]

The overwhelming reasons why the claim of the United States must be allowed are two: First, the taxing act was passed for the purposes, one was to assure the United States of the collection of certain amounts from each taxpayer for 1942 and 1943, and the second was to benefit the taxpayer once such amount was paid. An intention, actual, constructive or hypothetical, to release a bankruptcy estate from a liability for taxes set out in the income tax return, due and payable on March 15, 1943, for which the United States was given priority and for the payment of which there was a lien in its favor sufficient to assure payment, cannot be discovered. Indeed, it cannot be said that Congress had in contemplation affecting the Acts relating to bankruptcy or disturbing any relations thereunder by the passage of this statute relating solely to taxation. The fundamental right of the United States to collect taxes from the most available source should not be sacrificed for considerations of doubtful expediency applicable only to this particular case. Second, the doctrine upon which all of the structure of the bankruptcy law stands is that of the fixation of rights by filing of the petition. From this date all computations of time run backwards and forwards. On this date, there is a fund created in which priorities and liens are recognized but in which creditors share equally after the expenses of admin istration. Liens and priorities are on that date created and on that date others are destroyed. The Trustee is vested with rights at that time in the property of the bankrupt and given extraordinary powers in connection therewith. These often work to the serious disadvantage of creditors, who are attempting to protect themselves. See In re Western Bond & Mortgage Co., 44 F. Supp. 89, affirmed 9 Cir., 132 Fed. (2d) 769.

The claim of the United States must be allowed because no other solution squares with this axiom of bankruptcy law.

 

 

[47-1 USTC 9151]Earl Yates, et al. v. L.C. Russell, et al.

In the District Court of Jefferson County, Texas., No. 58,099., 12/09/46

Lien for taxes: Validity: Priority: Texas statute.--Lien for federal taxes is inferior to attachment liens asserted under Articles 5472a and 5472b, R.C.S. 1925, for the reason that federal taxes do not constitute labor and material within the meaning of the Texas statute.

E.B. Votaw and H.C. Cunningham for Earl Yates and W.O. Yates, plaintiffs. Gilbert T. Adams for L.C. Russell, defendant; Jep S. Fuller for Jefferson County, defendant; John H. Benchkenstein and Jack M. Moore for Cooper-Duke Co., defendant; Steve M. King for U.S. intervener, defendant; Orgain, Bell & Tucker for Associated Indemnity Corp., defendant; and John Bell for Beaumont Bldg. Material Corp., defendant.

Judgment

 

KENNA, Judge:

Be it remembered that on the 8th day of October, 1945 came on to be heard the above entitled and numbered cause and the plaintiffs and defendants in cross-action, Earl Yates and W.O. Yates, and the original defendant and plaintiff in cross-action, L.C. Russell, all appearing in person and by their respective attorneys of record, and the interveners John M. Kilgore, Harris Cooper and Malcolm Duke, copartners doing business as Cooper-Duke Company, Beaumont Building Material Corporation, Gulf Portland Cement Company, L.L. Parrish, Harry J. Lohman, Pyramid Concrete Products Company, Inc., and the United States of America, appearing by their respective attorneys of record, and the defendant in cross-action Fidelity and Deposit Company of Maryland, appearing by its attorney of record, and the defendants County of Jefferson, State of Texas, and Associated Indemnity Corporation likewise appearing by their respective attorneys of record; and cross-plaintiff, L.C. Russell having duly filed and presented his motions for severance and for trial separate from all other parties on his cross-action against said Yateses and said Fidelity and Deposit Company of Maryland, and after due consideration said motions of L.C. Russell were overruled, to which actions of the Court said Russell excepted; then said Russell presented his special exceptions and pleas, and all of same were overruled, to which action of the Court said Russell excepted; and thereupon Cooper-Duke Company presented and urged its plea in abatement, and after consideration thereof the Court in all things overruled such plea, to which action Cooper-Duke Company then and there excepted; whereupon all parties announced ready for trial on the merits; and L.C. Russell in his capacity as cross-plaintiff in the cross-action for alleged wrongful attachment against cross-defendants Earl Yates and W.O. Yates and Fidelity and Deposit Company of Maryland demanded a jury. Whereupon came twelve duly qualified jurors who were duly empaneled and sworn to try the issues of fact between the said Earl Yates and W.O. Yates and Fidelity and Deposit Company of Maryland on the one hand and L.C. Russell on the other hand. Plaintiffs Earl Yates and W.O. Yates offered evidence on their original cause of action as between them and the said L.C. Russell and in support of their attachment lien, and the said L.C. Russell as cross-plaintiff introduced evidence in connection with his cross-action for alleged wrongful attachment, and at the conclusion of all of the testimony pertaining to said issues as between the said Earl Yates and W.O. Yates and Fidelity and Deposit Company of Maryland on the one hand and L.C. Russell on the other hand, plaintiffs and defendants in cross-action, Earl Yates and W.O. Yates, and cross-defendant, Fidelity and Deposit Company of Maryland, filed and presented a motion to withdraw all issues of fact from the jury as between the said Earl Yates and W.O. Yates and the Fidelity and Deposit Company of Maryland on the one hand and L.C. Russell on the other hand, and to enter judgment on said plaintiffs' original cause of action in favor of the said Earl Yates and W.O. Yates, and to likewise enter judgment against the cross-plaintiff L.C. Russell and in favor of the cross-defendants W.O. Yates, Earl Yates and Fidelity and Deposit Company of Maryland on said cross-action, at which time all other parties announced their desire to try all other issues without a jury, and the Court having duly considered said motion, the evidence and the pleadings of said parties, did on the 12th day of October, 1945 in all things sustain said motion and discharge said jury, and did announce in open Court his judgment in favor of the said Earl Yates and W.O. Yates for the full amount sued for in their original cause of action herein and against L.C. Russell, and did likewise in open Court on said date announce judgment of the Court against the said L.C. Russell, cross-plaintiff on his cross-action and in favor of cross-defendants Earl Yates, W.O. Yates and Fidelity and Deposit Company of Maryland; to all of which action and ruling of the Court the said L.C. Russell in open Court duly excepted.

Thereupon came on for hearing all other issues in said cause, all parties waiving a jury thereon and agreeing to submit said matters solely to the Court for its determination and the Court having considered the pleadings of all of the parties and the evidence, and upon conclusion of the evidence the Court requested the parties to present verbal and written argument in support of their various contentions as to the legal questions involved and a portion of said arguments was presented during said term of Court, but final presentation and disposition of the same was delayed due to the illness of the Judge of the Court, and thereafter on the 21st day of June, 1946 the Court announced the following findings of facts and conclusions of law and rendered its judgment herein, as follows:

Findings of Facts

 

1. The Court finds from the undisputed evidence of L.C. Russell that just prior to the suing out of said writ of attachment by Earl Yates and W.O. Yates and just before said writ of attachment was levied upon the property of L.C. Russell described in the Officer's Return, the said L.C. Russell executed a Chattel Mortgage to his father-in-law, one Hebert, purporting to secure an indebtedness far in excess of the amount that was actually owed by the said L.C. Russell to the said Hebert. The Court further finds from the undisputed evidence that the said L.C. Russell in executing said mortgage to his said father-in-law not only attempted to secure an existing debt, but also attempted to create a new debt at the time of the execution of said mortgage representing cash to be advanced by the said Hebert to the said L.C. Russell in the future, and that all advances under such purported security were in fact made to the said L.C. Russell after the execution of said mortgage.

2. The Court finds that there is no evidence in the record that the said L.C. Russell attempted to mitigate his alleged damages occasioned by the suing out of said writ of attachment by procuring or attempting to procure or file a replevy bond and to thereby obtain possession of the said property.

[Amounts Due And Unpaid]

 

3. The defendant L.C. Russell in his second original answer and cross-action admits and the Court finds as fact from the pleadings and evidence that the said L.C. Russell entered into a contract with the said Earl Yates and W.O. Yates for the rent of certain equipment and Russell agreed to pay the said Yates the sum of Four Thousand Five Hundred ($4,500.00) as set out in Yates' pleadings and that the said L.C. Russell owes to said Yates the sum of Four Thousand Five Hundred ($4,500.00) for the rent of said equipment; and the Court further finds that the said L.C. Russell owes to the said Earl Yates and W.O. Yates the further sum of Five Hundred Fifteen ($515.00) under said contract, together with the further sum of Five Hundred Seventy-six ($576.00) Dollars which the said Russell agreed to pay to the said Earl Yates and W.O. Yates for the cost of moving said equipment back to Trinidad, Texas, and that said sums of money aggregate Five Thousand Five Hundred Ninety-one ($5,591.00) Dollars which amount the Court finds just due and unpaid and that all lawful credits and offsets have been allowed as required by law.

4. The Court further finds that during the progress of the trial on its merits the intervener, Pyramid Concrete Products Company, Inc. at the request of its counsel of record was dismissed from this cause without prejudice to any and all rights it then asserted or might or could assert as against the original defendant L.C. Russell.

5. The Court further finds that one E.P. Baker was named by the County of Jefferson as a possible intervener and claimant against the fund held by Jefferson County herein, but that the said E.P. Baker was not served with process and wholly failed to appear and answer, and the Court further finds that the said E.P. Baker wholly failed to file a claim or to perfect a lien against the funds withheld by the County of Jefferson.

6. The Court further finds that on or about the 7th day of April, 1944, said L.C. Russell abandoned his contract with Jefferson County covering the construction of the Mid-County Airport and that thereafter the said Earl Yates and W.O. Yates under contract with Jefferson County completed the same.

[Claims And Liens]

 

7. The Court further finds that the claimants Earl Yates and W.O. Yates on the 17th day of April, 1944 duly and timely filed and perfected their claim and lien with the employer, County of Jefferson, under Articles 5472a and 5472b, R.C.S. 1925 for the sum of Five Thousand Five Hundred Ninety-one ($5,591.00) Dollars and that said Earl Yates and W.O. Yates are entitled to share pro rata in the funds being withheld by Jefferson County and hereinafter mentioned.

8. The Court further finds that the labor claimant Harry J. Lohman on the 14th day of February, 1944 duly and timely filed and perfected his labor claim and lien with the employer, County of Jefferson, under Articles 5472a and 5472b R.C.S. 1925 in the amount of Five Hundred Ninety-six and 40/100 ($596.40) Dollars and the Court further finds that said labor claimant duly filed his statutory labor lien with Fred G. Hill, the County Clerk of Jefferson County, Texas, under Article 5160, R.C.S. 1925 as against the defendant, Associated Indemnity Corporation and that by stipulation between the said Harry J. Lohman and said Association Indemnity Corporation it was agreed that only the amount of Two Hundred Forty-five and 60/100 ($245.60) is enforceable herein against said bonding company; the Court further finding that as to said amount of Two Hundred Forty-five and 60/100 ($245.60) Dollars said Associated Indemnity Corporation is subrogated to the rights of the said Harry J. Lohman in and to said funds with held by Jefferson County herein mentioned. The Court further finds that the said Harry J. Lohman is entitled to share pro rata under Articles 5472a and 5472b, R.C.S. 1925 in the funds so withheld by Jefferson County to the extent of Three Hundred Fifty and 80/100 ($350.80) Dollars, being the difference between the sum due Harry J. Lohman from said Associated Indemnity Corporation and his full claim for labor as above set out.

9. The Court further finds that the claimant L.L. Parrish on April 7, 1944 duly and timely filed and perfected his claim and lien for rental of equipment, with the employer, Jefferson County, under Articles 5472a and 5472b, R.C.S. 1925 for the sum of Two Hundred Eight [sic] ($280.00) Dollars and that on April 17th, 1944 the said L.L. Parrish likewise filed and perfected his amended lien and claim in said amount with said Court and that the said L.L. Parrish is entitled to share pro rata in the funds withheld by said County of Jefferson.

10. The court further finds that the claimant Beaumont Building Material Corporation on the 14th day of February, 1944 duly and timely filed and perfected its claim and lien for materials furnished, with said employer, Jefferson County, under Articles 5472a and 5472b, R.C.S. 1925 for the sum of Five Hundred Eighty-four and 27/100 ($584.27) Dollars and that therefore the said Beaumont Building Material Corporation is entitled to share pro rata in the fund withheld by said County of Jefferson.

11. The Court further finds that the claimant John M. Kilgore on January 3rd, 1944 duly and timely filed and perfected his claim and lien for rental on equipment furnished, with the employer, County of Jefferson, under Articles 5472a and 5472b, R.C.S. 1925, and that by agreement made during the trial said claim was established in the amount of Two Hundred Fifty ($250.00) Dollars and that therefore the said John M. Kilgore is entitled to share pro rata in the funds withheld by the County of Jefferson to the extent of his claim in the amount agreed upon as aforesaid.

12. The Court further finds that the claimant Gulf Portland Cement Company on February 14, 1944 duly and timely filed and perfected its claim and lien for materials furnished, with the employer, County of Jefferson, under Articles 5472a and 5472b, R.C.S. 1925, for the sum of Six Thousand Six Hundred Ninety-seven and 50/100 ($6,697.50) Dollars which said claim and lien was on April 17, 1944 duly amended showing the return of materials in the amount of Eight Hundred Ninety-Five and 50/100 ($895.50) Dollars, thereby establishing as the final claim and lien of the said Gulf Portland Cement Company in the amount of Five Thousand Eight Hundred Two ($5,802.00) Dollars in which amount said claimant is entitled to share pro rata in the funds withheld by the said County of Jefferson.

13. The Court further finds that the alleged claimant Cooper-Duke Company, a co-partnership composed of Harris Cooper and Malcolm Duke, on February 14, 1944 filed and purported to perfect a claim and lien with the employer, County of Jefferson, under Articles 5472a and 5472b, R.C.S. 1925 in the amount of Three Thousand Thirty-one and 51/100 ($3,031.51) Dollars which said amount was due as insurance premiums on Workmen's Compensation Insurance and Public Liability Insurance policies covering employees of the said L.C. Russell.

[Performance Bond]

 

14. The Court further finds that on July 30, 1943 said Associated Indemnity Corporation duly executed its performance bond in the amount of $80,450.00 guaranteeing the performance of the contract between L.C. Russell and Jefferson County, and executed as required under Article 5160, R.C.S. 1925 as amended.

15. The Court further finds that during the progress of the trial the Associated Indemnity Corporation made separate and distinct stipulations and agreements with each said Gulf Portland Cement Company, said John M. Kilgore, said Cooper-Duke Company, said L.L. Parrish, said Earl Yates and W.O. Yates, and Beaumont Building Material Corporation, that said Associated Indemnity Corporation was not liable to either of said claimants in either or any of said claims in any amount whatsoever under Article 5160, R.C.S. Texas 1925.

16. The Court further finds that the said Earl Yates and W.O. Yates on May 15, 1944 duly perfected their attachment lien, levied on said date, against the property described in the Officer's Return thereof and that said personal property should be sold at public sale and the net proceeds thereof should be applied to the indebtedness of the said L.C. Russell owing to the said Earl Yates and W.O. Yates in the amount of Five Thousand Five Hundred Ninety-one ($5,591.00) Dollars; and in such connection the Court finds that prior to the filing of the within judgment said personal property has been so sold under Order of this Court and that there is now on deposit with the District Clerk of Jefferson County, Texas, the amount of $2,770.12, being the net proceeds of said sale after deduction of all costs incidental to said attachment and sale; and the Court further finds that the said Earl Yates and W.O. Yates shall be entitled to share pro rata with the other statutory lien claimants in the funds withheld by Jefferson County for the balance of their claim of Five Thousand Five Hundred Ninety-one ($5,591.00) Dollars after said funds from the attachment proceedings herein have been applied on the indebtedness to the said Earl Yates and W.O. Yates.

17. The Court further finds that the employer, defendant Jefferson County, Texas, now withholds the sum of Seven Thousand Eight Hundred Twelve and 04/100 ($7,812.04) Dollars which sum should be paid out pro rata by Jefferson County in the manner hereinabove indicated to the lien claimants and interveners who have duly perfected their statutory liens under Articles 5472a and 5472b, R.C.S. 1925, said lien claimants being Earl Yates and W.O. Yates; John M. Kilgore; Beaumont Building Material Corporation; Gulf Portland Cement Company; L.L. Parrish; and Harry J. Lohman.

[Federal Taxes Due]

 

18. The Court further finds that the intervener, United States of America, claiming under Sections 3670, 3671 and 3672 of the Internal Revenue Code claims and asserts herein the following Federal Taxes to be due from the said L.C. Russell, the nature of the tax, the amount thereof, the date the assessment list was received by the Collector, the date the demand therefor was made of the taxpayer, and the date that the lien therefor was filed with the County Clerk of Jefferson County, Texas, being as follows:

 

19. The Court further finds that attempting to assert a lien under Articles 5472a and 5472b, R.C.S. 1925, the United States of America did on or about September 15, 1945 file with the employer, County of Jefferson, its alleged claim for each and all of the amounts as specified in the last preceding paragraph hereof.

20. The Court further finds that at all pertinent times and including the dates of filing of the liens by the parties entitled to participate in the fund retained by said employer, County of Jefferson, and including the date of the perfection of the attachment lien, the said L.C. Russell was solvent.

Conclusions of Law

 

The Court makes the following conclusion of law:

1. That the writ of attachment of Earl Yates and W.O. Yates was properly sued out and that no justiciable cause exists to the cross-plaintiff L.C. Russell for wrongful attachment herein.

2. That under the pleadings of the plaintiffs Earl Yates and W.O. Yates, and under the pleadings of the defendant L.C. Russell, as well as under undisputed evidence, the said Yateses are entitled to recover judgment of the said Russell in the amount of Five Thousand Five Hundred Ninety-one ($5,591.00) Dollars; that of said amount the said Yateses are entitled to judgment against the said L.C. Russell for the sum of Two Thousand Seven Hundred Seventy and 12/100 ($2,770.12) Dollars, being the amount on deposit with the Clerk of this Court representing the net proceeds of the attachment sale, together with a foreclosure of said attachment lien against the personal property shown in the Officer's Return thereof; that the said Yateses are entitled to judgment for the sum of Two Thousand One Hundred Thirty-one and 62/100 ($2,131.62) Dollars as against the said L.C. Russell, together with a foreclosure of their lien under Articles 5472a and 5472b, R.C.S. 1925, said sum representing Yates' pro rata share in the funds withheld by the employer, Jefferson County, Texas; that in addition thereto the said Earl Yates and W.O. Yates are entitled to recover a personal judgment as against the said L.C. Russell in the sum of Six Hundred Eighty-nine and 26/100 ($689.26) Dollars being the balance owing the said Yates after application of the proceeds from their liens aforesaid.

3. That the intervener Harry J. Lohman has established his right to recover against the said L.C. Russell and Associated Indemnity Corporation in the total sum of Five Hundred Ninety-six and 40/100 ($596.40) Dollars; that of said sum the said Harry J. Lohman is entitled to recover personal Judgment of and from said Associated Indemnity Corporation in the sum of Two Hundred Forty-five and 60/100 ($245.60) Dollars; that said Harry J. Lohman is entitled to recover judgment against the said L.C. Russell in the sum of Two Hundred Sixty-five and 90/100 ($265.90) Dollars, together with a foreclosure of his lien against the funds withheld by the employer, Jefferson County, under Articles 5472a and 5472b, R.C.S. 1925, the same being the pro rata amount that the said Harry J. Lohman is entitled to share in said fund so withheld by Jefferson County after having deducted his recovery against said Associated Indemnity Corporation; that said Associated Indemnity Corporation is entitled to recover judgment of and from the said L.C. Russell in the sum of One Hundred Eighty-five and 70/100 ($185.70) Dollars together with a foreclosure of its lien in subrogation against the funds withheld by the employer, Jefferson County, Texas under Articles 5472a and 5472b, R.C.S. 1925, said amount representing the pro rata share to which the Associated Indemnity Corporation is subrogated in said funds; and that in addition thereto the said Associated Indemnity Corporation is entitled to recover personal judgment of and from L.C. Russell in the sum of Fifty-nine and 90/100 ($59.90) Dollars, being the balance remaining from said sum of Two Hundred Forty-five and 60/100 ($245.60) Dollars after applying thereto said Associated Indemnity Corporation's pro rata claim in subrogation against said fund; and that the said Harry J. Lohman is entitled to recover personal judgment of and from the said L.C. Russell in the sum of Eighty-four and 90/100 ($84.90) Dollars, being the balance of said Five Hundred Ninety-six and 40/100 ($596.40) Dollars due Lohman and remaining after the application thereto of the payments aforesaid to him from Associated Indemnity Corporation and from the fund withheld by the employer, Jefferson County, Texas.

4. That the following interveners are entitled to recover the respective sums hereinafter set out, together with a foreclosure of their respective liens against the funds withheld by the employer, Jefferson County, under Articles 5472a and 5472b, R.C.S. 1925; L.L. Parrish, Two Hundred Eleven and 72/100 ($211.72) Dollars; Beaumont Building Material Corporation, Four Hundred Forty-one and 74/100 ($441.74) Dollars; John M. Kilgore, One Hundred Eighty-nine and 05/100 ($189.05) Dollars; Gulf Portland Cement Company, Four Thousand Three Hundred Eighty-six and 35/100 ($4,386.35) Dollars; the above sums representing each of said interveners pro rata share in said retained funds. The Court further finds that the above interveners are entitled to recover personal judgment of and from the said L.C. Russell in the following respective amounts representing the respective balance due each of said interveners after applying said pro rata part of said retained funds as aforesaid: L.L. Parrish, Sixty-eight and 20/100 ($68.20) Dollars; Beaumont Building Material Corporation, One Hundred Forty-two and 53/100 ($142.53) Dollars; John M. Kilgore, Sixty and 95/100 ($60.95) Dollars; Gulf Portland Cement Company, One Thousand Four Hundred Fifteen and 65/100 ($1,415.65) Dollars.

5. The Court concludes that the instrument filed by Cooper-Duke Company and purporting to constitute a lien against said retained fund was sufficient in form and in substance, but that Workmen's Compensation Insurance premiums and Public Liability Insurance premiums do not constitute labor and material within the meaning of Articles 5472a and 5472b, R.C.S. 1925, and for such reason no lien was created by the filing of said instrument. The Court therefore concludes that Cooper-Duke Company is not entitled to participate in said fund withheld by said employer, Jefferson County , but that said Cooper-Duke Company is entitled to recover personal judgment against L.C. Russell in the amount of Three Thousand Thirty-one and 51/100 ($3,031.51) Dollars.

[Federal Tax Claim]

 

6. The Court concludes that the instrument filed by the Government of the United States with the Commissioners' Court of Jefferson County on September 15, 1945, and purporting to constitute a lien against said retained fund, was sufficient in form and in substance, but that the Federal Taxes sued for herein do not constitute labor and material within the meaning of Articles 5472a and 5472b, R.C.S. 1925, and for such reason no lien was created by the filing of said instrument.

7. The Court further concludes that the intervener United States of America is entitled to recover personal judgment against the defendant L.C. Russell in the amount of Ten Thousand Four Hundred Sixty-six and 33/100 ($10,466.33) Dollars, together with a foreclosure of its lien asserted under the Laws of the United States, but that each and all of the liens established and perfected by the plaintiffs and interveners herein, both as against the funds retained by the employer, Jefferson County, and the above mentioned attachment lien, were each and all prior and in all things superior to the lien of the United States Government herein-above referred to and described as against either said fund retained by the employer, County of Jefferson, or as against the proceeds of said attached property.

8. That the defendant Jefferson County should pay in to the Registry of this Court the said sum of Seven Thousand Eight Hundred Twelve and 04/100 ($7,812.04) Dollars for proration and distribution as herein adjudged.

IT IS THEREFORE CONSIDERED BY THE COURT, So Ordered, Adjudged and Decreed that the defendant, County of Jefferson, be and it hereby is ordered and directed to deposit in the Registry of this Court the sum of Seven Thousand Eight Hundred Twelve and 04/100 ($7,812.04) Dollars, and that thereafter no further liability be adjudged against said defendant herein, and it is further Ordered that said defendant thereupon go hence and recover its costs.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the plaintiffs Earl Yates and W.O. Yates do have and recover of and from the defendant, L.C. Russell, the sum of Two Thousand Seven Hundred Seventy and 12/100 ($2,770.12) Dollars, together with a foreclosure of their said attachment lien hereinabove described, and it further Ordered that the said L.C. Russell take nothing by his cross-action against the said Earl Yates and W.O. Yates for alleged wrongful attachment. It is further Ordered that the Clerk of this Court be, and he hereby is Ordered and directed to pay over to the Earl Yates and W.O. Yates said sum of Two Thousand Seven Hundred Seventy and 12/100 ($2,770.12) Dollars, being the net proceeds of the sale of the above referred to personal property under attachment on deposit in the Registry of this Court.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the following parties do have and recover judgment for the respective amounts hereinafter set out against the defendant, L.C. Russell, together with a foreclosure of their respective liens under Articles 5472a and 5472b, R.C.S. 1925, as follows: Earl and W.O. Yates, Two Thousand One Hundred Thirty-one and 62/100 ($2,131.62) Dollars; Harry J. Lohman, Two Hundred Sixty-five and 90/100 ($265.90) Dollars; Associated Indemnity Corporation, One Hundred Eighty-five and 70/100 ($185.70) Dollars; L.L. Parrish, Two Hundred Eleven and 72/100 ($211.72) Dollars; Beaumont Building Material Corporation, Four Hundred Forty-one and 74/100 ($441.74) Dollars; John M. Kilgore, One Hundred Eighty-nine and 05/100 ($189.05) Dollars; and Gulf Portland Cement Company, Four Thousand Three Hundred Eighty-six and 35/100 ($4,386.35) Dollars. It is further Ordered that the Clerk of this Court be, and he hereby is ordered and directed to pay from the funds to be deposited by Jefferson County as above ordered to each said Earl Yates and W.O. Yates, Harry J. Lohman, L.L. Parrish, Associated Indemnity Corporation, Beaumont Building Material Corporation, John M. Kilgore, and Gulf Portland Cement Company said respective sums last above enumerated.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the intervener, Harry J. Lohman, do have and recover of and from the defendant, Associated Indemnity Corporation, the sum of Two Hundred Forty-five and 60/100 ($245.60) Dollars, and that thereafter it is further adjudged and decreed that each and all other parties to this suit take nothing as against said Associated Indemnity Corporation.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the parties hereinunder set out do have and recover personal judgment against the defendant, L.C. Russell, in the respective amounts hereafter shown, to-wit: Earl Yates and W.O. Yates, Six Hundred Eighty-nine and 26/100 ($689.26) Dollars; Harry J. Lohman, Eighty-four and 90/100 ($84.90) Dollars; Associated Indemnity Corporation, Fifty-nine and 90/100 ($59.90) Dollars; L.L. Parrish, Sixty-eight and 20/100 ($68.20) Dollars; Beaumont Building Material Corporation, One Hundred Forty-two and 53/100 ($142.53) Dollars; John M. Kilgore, Sixty and 95/100 ($60.95) Dollars; Gulf Portland Cement Company, One Thousand Four Hundred Fifteen and 65/100 ($1,415.65) Dollars; and Harris Cooper and Malcolm Duke, copartners, doing business as Cooper-Duke Company, Three Thousand Thirty-one and 51/100 ($3,031.51) Dollars, and it is further Ordered that each such party shall have their respective execution and/or executions therefor as and when required.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the United States of America do have and recover of and from the defendant L.C. Russell judgment in the sum of Ten Thousand Four Hundred Sixty-six and 33/100 ($10,466.33) Dollars for which it shall have its execution or executions as and when required; it is further Ordered, Adjudged and Decreed that said United States of America have foreclosure of its lien under the Laws of the United States of America, but it is further Ordered, Adjudged and Decreed that said lien of the United States of America is in all things subordinate, inferior and secondary to the attachment lien asserted by Earl Yates and W.O. Yates; and it is further adjudged and decreed that said lien of the United States of America is likewise in all things subordinate, inferior and secondary to the respective liens asserted by Earl Yates and W.O. Yates, Harry J. Lohman, Associated Indemnity Corporation in subrogation, L.L. Parrish, Beaumont Building Material Corporation, John M. Kilgore and Gulf Portland Cement Company, asserted under Articles 5472a and 5472b, R.C.S., 1925.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the said L.C. Russell take nothing by his cross-action as against the defendant Fidelity and Deposit Company of Maryland, and that said defendant go hence without day and recover its costs.

Pursuant to the agreement made during the trial that $1,000.00 was a reasonable sum to allow Associated Indemnity Corporation as attorney fees against the said L.C. Russell; IT IS FURTHER ORDERED, ADJUDGED AND DECREED that in addition to any and all amounts above decreed to Associated Indemnity Corporation that it do have and recover of and from the defendant L.C. Russell the further sum of $1,000.00 as attorney fees and that it have its execution and/or executions therefor as and when required.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the interveners Pyramid Concrete Products Company, Inc. and E.P. Baker, be, and they hereby are dismissed from this suit without prejudice, and it is further Ordered that all other parties not herein above specifically mentioned are hereby dismissed.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that all issues between any of the parties hereto not herein specifically disposed of, be, and the same hereby are in all things decided against the party asserting same.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that all costs herein be, and the same are hereby taxed against the defendant L.C. Russell, for which the Officers of this Court shall have execution and/or executions.

To the entry of said judgment L.C. Russell, United States of America , and Harris Cooper and Malcolm Duke, co-partners, did in open Court duly except and L.C. Russell and Cooper-Duke Company did in open Court give notice of appeal to the Court of Civil Appeals for the Ninth Supreme Judicial District of Texas at Beaumont .

 

 

[46-2 USTC 9342]Personal Finance Company, a corporation Plaintiff, v. Chicago Air College, Inc., Defendant, National Acceptance Company of Chicago, a corporation, Garnishee, United States of America, Intervening Petitioner

District Court of the United States for the Northern District of Illinois, Eastern Division, No. 45 C 571, June 28, 1946

Lien of taxes: Priority of creditors.--Under the provisions of Sec. 3466, R. S., a United States lien against property of insolvent debtor for taxes due, is held to be entitled to priority over the lien of a judgment creditor and a state lien for taxes levied under state law.

Olson & Hanelin, 30 N. LaSalle St. , Chicago , Ill. , for plaintiff. J. Albert Woll, U. S. Attorney, Joe A. Pearce, Assistant Attorney General, 222 W. North Bank Dr., Chicago, Ill., for defendant.

Findings of Fact and Conclusions of Law

SULLIVAN, J.:

1. The Chicago Air College, Inc., is a corporation incorporated and doing business under and by virtue of the laws of the State of Illinois .

2. On November 17, 1944 , said Chicago Air College , Incorporated, executed and delivered a valid assignment for the benefit of its creditors, which assignment immediately became effective on said date.

3. The National Acceptance Company of Chicago, a corporation, prior to November 17, 1944 , had a valid chattel mortgage on all the equipment and assets of the said Chicago Air College, Inc., and that on said November 17, 1944 , did foreclose said chattel mortgage.

4. The said sale realized the sum of $1,240.93 over and above the amount due on said chattel mortgage.

5. Prior to November 16, 1944, the Personal Finance Company of Chicago, a corporation, had recovered a judgment against the Chicago Air College, Inc., in the Municipal Court of Chicago, and on November 16, 1944, instituted garnishment proceedings on said judgment and served a garnishment summons on the National Acceptance Company of Chicago, a corporation.

6. The State of Illinois has asserted claims in this proceeding for unemployment taxes under the laws of the State of Illinois, for the first, second, third and fourth quarters of the year 1944, with interest thereon, all in the sum of $944.70, and claims a lien on the amount in the hands of the said National Acceptance Company of Chicago, a corporation, for said taxes by virtue of the laws of the State of Illinois.

7. The said Chicago Air College, Inc., on November 17, 1944 , was indebted to the United States of America for taxes under Title VIII and Title IX of the Social Security Act and for withholding taxes in the amount of $3,367.84.

8. The National Acceptance Company of Chicago, a corporation, deposited with the Clerk of this Court the said sum of $1,240.93, and was dismissed from said cause.

9. Each of the parties asserted claims of priority against the said fund for the amount of its claim.

Conclusions of Law

1. The Court has jurisdiction of the parties herein and of the subject-matter.

2. All of the claims asserted herein are valid claims.

3. The taxes for which claims have been asserted herein by the United States of America are duly, timely and properly assessed, and the Chicago Air College, Inc., is indebted to the United States of America for said tax liability.

4. By virtue of Section 191, Title 31, U. S. C. A., the United States of America is entitled to priority of payment over and above the other claimants herein.

5. The Clerk of this Court shall pay to the Collector of Internal Revenue for the First District of Illinois, the sum of $1,240.93 to be applied by said Collector on the said liabilities of the said Chicago Air College, Inc.

 

 

[43-1 USTC 9413]Warwick Hotel, Inc., Plaintiff, v. Frank Scofield, United States Revenue Collector, and O. R. Seagraves and Wife, Defendants

District Court of the United States for the Southern District of Texas, Houston Division, Civil Action No. 816, March 31, 1943

Property subject to lien: Validity against pledgee.--Where plaintiff and the United States both claimed a lien on certain furniture, furnishings and personal property of one Seagraves and his wife, who were indebted to plaintiff under a contract lien and a statutory Texas Hotelkeeper's lien for lodging, food, etc., covering a long period, and who were also indebted to the United States for unpaid income taxes, the Court holds that Secs. 3670, 3671 and 3672 of Title 26, U. S. C. A., are controlling between the Government and the plaintiff, that plaintiff, by reason of its contractual and statutory liens, is a pledgee within the meaning of Sec. 3672, that pledgees were not included in Sec. 3672 nor protected as such, prior to June 29, 1939, and that the Government's liens fixed against the property prior to June 29, 1939 are superior to the plaintiff's liens but that the plaintff's liens after that date are superior to those of the Government.

Baker, Botts, Andrews & Wharton ( Paul Port ), of Houston , Texas , for plaintiff. Douglas W. McGregor, U. S. Attorney, and Brian S. Odem, Assistant U. S. Attorney, Houston, Texas, for defendant.

Statement of the Case

KENNERLY, D. J.:

Plaintiff, the owner and operator of the Warwick Hotel, in Houston, had in its possession on June 11, 1942, and continuously during a number of years before that date, a large quantity of furniture, furnishings, and other personal property belonging to Defendants O. R. Seagraves and wife, guests at such Hotel, upon which Plaintiff claimed both a Contract Lien and a Lien under the Texas Hotelkeepers' Lien Statutes (Article 4594, Vernon's Texas Civil Statutes), to secure a large indebtedness of Seagraves and wife to Plaintiff for their lodging, rooms, board, food, etc. at such Hotel over a long period of time.

The United States also claimed a Lien on such property, to secure Income Tax owing by Seagraves and wife, and on June 11, 1942, Defendant Scofield, as United States Revenue Collector, by his deputies, agents, etc., entered Plaintiff's Hotel and over Plaintiff's protest, forcibly seized and carried away such property, and advertised same for sale to satisfy the Government's claimed Lien. On Plaintiff's application, the proposed sale was enjoined by this Court, and this is a trial on the merits to determine and adjudicate the respective rights of Plaintiff and the Government to, and to give direction as to the disposition of, such property.

Findings of Fact

(a) An Agreed Statement of Facts has been filed, setting forth part of the facts. There appears to be no good reason to copy it here, but it is referred to.

(b) In addition to the matters set forth in the Agreed Statement, I find that Defendants Seagraves and wife not only recognized that Plaintiff had a Lien against such property under the Laws of Texas, but agreed that Plaintiff should have a Contract Lien against same, i.e., they pledged it to Plaintiff to secure such indebtedness.

Conclusions of Law

1:--This is not a suit by a Taxpayer such as were Czieslik v. Burnet, 57 Fed. (2d) 715 [1932 CCH 9046], Maryland Casualty Co. v. Charleston Lead Works, 24 Fed. (2d) 836 [1928 CCH D-8246], Stafford Mills v. White, 41 Fed. (2d) 58 [1930 CCH 9193], United States v. Alabama, 313 U. S. 274, and Metropolitan Life Ins. Co. v. United States, 107 Fed. (2d) 311 [39-2 USTC 9771], which are cited by the Government. This is a suit by Plaintiff, a third party, to protect its Lien on personal property, and I think the rule laid down in Tomlinson v. Smith, 128 Fed. (2d) 808 [42-2 USTC 9540], and cases there cited, is controlling.

2:--As between the Government and Seagraves and wife, the Government fixed and had a Lien under Sections 3670 and 3671, Title 26, U. S. C. A., against such property on the date and in the amount as follows:--


November 24, 1936--


O. R. Seagraves .......          $ 875.68



Florence

 Seagraves ....            510.02

June 14, 1939--

O. R. Seagraves .......             47.95

Florence Seagraves ....             54.30

April 17, 1940--

O. R. Seagraves .......             11.03



Florence

 Seagraves ....             75.53

December 6, 1940--

O. R. Seagraves .......         10,466.76



Florence

 Seagraves ....         58,216.21

May 11, 1941--



Florence

 Seagraves ....         6,318.88.

 

3:--As between Plaintiff and Seagraves and wife, Plaintiff has had since 1930 a Lien, both contractual and under the Texas Hotelkeepers' Lien Statute, against such property, to secure the indebtedness of Seagraves and wife to it, now amounting to $13,298.96, and under the testimony of the witness O'Leary, and under the Agreed Statement of Facts, it was not waived by the execution to Plaintiff by Seagraves of certain notes or by the foreclosure proceedings in the State Court.

4:--As between the Government and Plaintiff, Sections 3670, 3671 and 3672, of Title 26, U. S. C. A., are controlling, and Plaintiff, by reason of both its contractual and statutory liens, is a Pledgee within the meaning of Section 3672.

5:--Pledgees were not included in Section 3672, nor protected as such thereunder, prior to June 29, 1939 . Therefore, the Government's Lien fixed against such property November 24, 1936, for $1,385.70, and June 14, 1939, for $102.25, is to that extent superior to Plaintiff's Lien.

6:--As between the Government and Plaintiff, under Section 3672, Title 26, U. S. C. A., the Government fixed its Lien against such property on the date and in the amount as follows:--

April 24, 1940--

O. R. Seagraves .......         $11.03



Florence

 Seagraves ....         75.53.

 

The Lien of Plaintiff for the amount owing April 1, 1940 ($10,823.56) by Seagraves and wife to Plaintiff is, therefore, to that extent, superior to the Government's Lien fixed on April 24, 1940.

7:--As between the Government and Plaintiff, under Section 3672, Title 26, U. S. C. A., the Government fixed its Lien against such property on the date and in the amount as follows:


December 22, 1941--


O. R. Seagraves .......         $10,466.76



Florence

 Seagraves ....          64,535.09

 

The Lien of Plaintiff for the amount owing to it on December 1, 1941 , over and above the $10,823.56 owing April 1, 1940 , is $675.40, and is superior to the Government's Lien for such sum of $75,001.85 fixed December 22, 1941 .

8:--The property should be sold, and after the payment of costs, the proceeds of sale should be distributed in the following order:--

(a) To the Government $1487.95.

(b) To Plaintiff $10,823.56.

(c) To the Government $86.56.

(d) To Plaintiff $675.40.

(e) To the Government $75,001.85.

(f) To Plaintiff $1800.00.

Let a Decree be drawn and presented accordingly.

 

 

[42-1 USTC 9412] United States of America , Plaintiff, v. McKay Engineering and Construction Co., Defendant

In the United States District Court for the Northern District of Illinois, Eastern Division, No. 2708, January 3, 1942Under Code Secs. 3670 and 3671, the United States acquired a lien upon all the property and rights to property of the delinquent taxpayer who had been served with a notice and demand for payment. Consequently a judgment debtor of the taxpayer may pay the United States the amount of the judgment less the Master's fees and costs and be relieved of the debt under Code Sec. 3678. The lien of the United States was acquired prior to the date of service by an attorney of his attorney's liens against the judgment debtor and the lien of the United States is superior.

J. Albert Woll , U. S. Attorney, for plaintiff. George F. Barrett, Attorney General, Joe A. Pearce, 222 Bank Drive, Pritzker & Pritzker, 134 N. LaSalle St., John J. Dowdle, 135 S. LaSalle St., H. E. Soble, 100 W. Monroe St., Ernest Buhler, 910 S. Michigan Ave., Joseph Chauken, 33 N. LaSalle St., Albert O. Hoffman, 135 S. LaSalle St., Deut, Weichelt & Hampton, 1111--The Rookery, all of Chicago, Ill., for defendant.

Memorandum

HOLLY, D. J.:

I am of the opinion that the report of the Master should be sustained except as to the attorney's fee of John J. Dowdle.

It would seem from a reading of the statute and from the statements in some of the Illinois cases that the lien of the attorney attaches to the claim when it is placed in his hands for collection or suit, but in Fornoff v. Smith, 281 Ill. App. where an attorney recovered a judgment for his client, but before serving his notice of lien the judgment debtor was garnished by a creditor of his client, it was held that the lien of the attorney was subordinate to that of the garnishing creditor. I feel that I am bound to follow that case.

Findings of Fact and Conclusions of Law (January 6, 1942)

The Court, having examined the pleadings, the transcript of evidence, the arguments of counsel and the briefs submitted, the Report of the Master herein and the objections thereto, and being fully advised in the premises, makes the following findings of fact and conclusions of law:

Findings of Fact

1. That the above cause was referred to Master in Chancery William O. Burns, Esquire, for hearing, and that after the conclusion of the hearings, and after arguments of counsel, the said Master filed his Report with this Court, and that objections were filed to said Report by certain of the parties hereto.

2. That the Court approves the Findings of Fact in said Master's Report, except as to that portion referring to the claim of John J. Dowdle for legal fees and an attorney's lien, to which said portion of said Report the objections of the United States of America are sustained in accordance with the memorandum opinion filed by this Court in this cause; and the Court adopts the findings of fact in said Master's Report, except that portion which refers to the said claim of John J. Dowdle, and the Court's findings as to the claims of John J. Dowdle are contained in the said memorandum opinion.

Conclusions of Law

1. That the Court has jurisdiction of the subject-matter and of the parties hereto, and that the reference by this Court to the Master in Chancery, the hearings conducted by said Master, and the Report filed by him herein, were all in accordance with and pursuant to law.

2. That the taxes asserted by the plaintiff, the United States of America, against the McKay Engineering and Construction Company, a corporation, as set forth and incorporated in the Findings of Fact in the Master's Report, and adopted by this Court as aforesaid, were duly, timely, and properly assessed by the Commissioner of Internal Revenue against the said McKay Engineering and Construction Company, a corporation, on the dates set forth in said Findings of Fact.

3. That the assessment lists relating to the aforesaid tax liabilities were received by the Collector of Internal Revenue for the First Collection District of Illinois, at Chicago, Illinois, within five days after the date of each of said assessments, and that within two days after the receipt of each of said assessment lists by the said Collector, a notice and demand for payment of each of said taxes was issued and made by said Collector upon the McKay Engineering and Construction Company, a corporation, in accordance with law, and that no part of any of said assessments has ever been paid by said taxpayer, except the sum of $78.72 paid on June 14, 1938, which was credited to said taxpayer on the assessment for Social Security tax for February, 1937.

4. That the said McKay Engineering and Construction Company, a corporation, never paid any of the tax liabilities, for which the aforesaid assessments were made, upon demand for such payment, except as noted in paragraph 3, supra, whereupon, in accordance with the provisions of Sections 3670 and 3671 of the Internal Revenue Code, the United States of America, the plaintiff herein, acquired a lien upon all the property and rights to property of the said McKay Engineering and Construction Company, a corporation, upon the dates on which said assessment lists were received by the said Collector.

5. That the liens acquired by the United States of American for the said tax liabilities of the said McKay Engineering and Construction Company, a corporation, as aforesaid, are paramount and prior to the liens and claims of any other parties hereto, subject, however, to the Master's fees and costs herein.

6. That the liens of the United States of America, as aforesaid, are prior and paramount to the claim and attorney's lien of John J. Dowdle against the funds now held by the Sanitary District of Chicago, a municipal corporation, in that the said liens of the United States of America were acquired prior to the date of service by said John J. Dowdle of his attorney's liens upon the said Sanitary District of Chicago, a municipal corporation.

7. That the said McKay Engineering and Construction Company, a corporation, is indebted to the United States of America for the following taxes in the following amounts, plus accrued interest thereon to and including January 6, 1942 , as follows:

                                         Total

                                          Amount           Accrued

Tax                                     Assessed           Interest

Social Security Title VII .....         $1691.47            $ 356.13

February, 1937

Paid 
6/14/38
 ..................            78.72

Balance due ...................         $1612.75

Social Security Title VIII

March, 1937 ...................         $1645.64            $ 372.42

Social Security Title IX

1936 ..........................         $9722.15            $2267.98

Social Security Title IX

1937 ..........................         $6936.79            $1451.66

Additional 1935 Income Tax ....         $9313.81            $2001.83

Capital Stock 1937 ............         $ 232.16             $ 45.18


and that the United States of America is entitled to judgment against the McKay Engineering and Construction Company, a corporation, in the total amount of $35,968.50.

8. That by virtue of the provisions of Section 3678 of the Internal Revenue Code, the United States of America is entitled to receive the sum of $6,340.00 now held by the Sanitary District of Chicago, a municipal corporation, on account of its liability to the McKay Engineering and Construction Company, a corporation, by virtue of a judgment entered in the Municipal Court of Chicago in case number 2777799 entitled McKay Engineering and Construction Company, a corporation, v. The Sanitary District of Chicago, a municipal corporation, less, however, the Master's fees and costs herein in the sum of $750.00.

9. That upon payment by the Sanitary District of Chicago, a municipal corporation, of said amount of $6,340.00 to the United States of America, subject to the Master's fees as aforesaid, the said Sanitary District of Chicago, a municipal corporation, is entitled to have the judgment in favor of the McKay Engineering and Construction Company, a corporation, against it in the Municipal Court of Chicago, case number 2777799, satisfied.

10. That upon receipt by the United States of America or the Collector of Internal Revenue for the First Collection District of Illinois, of the fund of $6,340.00, less $750.00 Master's fees and costs, the said McKay Engineering and Construction Company, a corporation, is entitled to have said amount so received by the United States of America or the Collector of Internal Revenue, applied against the tax liabilities set forth herein, but not in complete satisfaction thereof, as a part payment against the tax liabilities set forth above, and is also entitled to have said amount so received by the United States of America or the Collector as aforesaid, apply as a part payment against the judgment herein, but not in complete satisfaction thereof.

11. That the Conclusions of Law contained in said Master's Report, insofar as they are not inconsistent with the specific Conclusions of Law of this Court as stated hereinabove, are approved and adopted by this Court.

 

 

[39-2 USTC 9729]J.R. Drake, Agent for the Shareholders of the First National Bank of Monticello, Illinois, and Louis Hammerschmidt, Plaintiffs, v. V.Y. Dallman, Collector of Internal Revenue and United States of America, Defendants.

District Court of the United States for the Eastern District of Illinois., No. 25-D Civil Action., 10/02/39 , See 9775 herein.

Lien for taxes: Statute of limitations.--The Government's lien for an income tax deficiency due from a taxpayer, assessed on February 19, 1931, was an effective lien against real estate purchased by the plaintiffs at a sheriff's sale on July 2, 1937, more than six years after the date of the assessment, but within the unrecorded extension of time for collection agreed to by taxpayer in connection with an offer in compromise. Such extension was binding on judgment creditors.

Rob ert F. White and C.E. Corbett, Sullivan , Illinois , for the plaintiffs. Arthur Roe, U.S. Attorney, Danville , Ill. , for the defendants.

Findings of Fact

 

LINDLEY, Judge:

The Court finds the facts to be:

1. Allen F. Moore, Sr., the owner of the real estate in question, suffered an assessment against him for income tax deficiency for the year 1936, and notice of the lien for such deficiency was filed by the Collector on March 8, 1933, in the office of the Recorder of Piatt County, Illinois, and in the office of the Clerk of this Court on March 9, 1933. The notice of lien is for a deficiency accruing under an assessment list received by the commissioner on February 19, 1937, in the amount of five thousand four hundred ninety-four dollars and twenty-five cents ($5,494.25), less credits thereon, aggregating one thousand sixty dollars and fifty cents ($1060.50).

2. On the date of the filing of the notice of lien, title to the property in question was in Moore . On March 30, 1935 , Drake, Receiver of the First National Bank of Monticello , obtained a judgment in the Circuit Court of Piatt County against Moore , in the sum of six thousand four hundred ninety-two dollars and forty-one cents and execution issued thereon. Under subsequent execution, the judgment creditors levied upon the real estate in question, and the properties were sold at sheriff's sale on July 2, 1937 , at which sale, one tract was purchased by plaintiff Hammerschmidt for a consideration of seven hundred fifty dollars and one tract by the judgment creditor Drake for the sum of seventeen hundred thirty dollars. The usual sheriff's certificates of purchase were issued to the purchasers, respectively, on July 2, 1937 , and recorded. The statutory period of fifteen months allowed for redemption from sheriff's sales in Illinois having lapsed, the usual sheriff's deeds were issued to the purchasers respectively in exchange for the certificates of purchase, and recorded October 4, 1938 . Since that date the purchasers have been in possession of the real estate.

3. No formal action was taken by the Collector of Internal Revenue seeking to enforce collection of the income tax deficiency as against the property in question until December 22, 1938 , when the Collector filed his notice of distraint and advertised the property for sale for January 22, 1939 . Prior to the date of sale, plaintiffs filed their bill, and this court temporarily restrained the attempted sale.

4. On December 2, 1936, and again on February 7, 1938, and at various times between these dates, the taxpayer, Moore, made offers of compromise to the Commissioner of Internal Revenue the last offer being the sum of twenty-eight hundred dollars submitted on the commissioner's form provided for that purpose, which contains the following language:

"The proponent hereby expressly waives:--

"2. The benefit of any statute of limitation applicable to this assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitation and/or collection for periods during which this offer is pending and the period during which any installment remains unpaid and for one year thereafter."

5. The offer submitted December 2, 1936 , by the tax paper contained a similar provision, but no public record was made of the socalled waiver or extension or the period of collection by the taxpayer.

Conclusions of Law

 

1. The sections of the Internal Revenue Code applicable to this case provide that there shall be a lien in favor of the United States upon all property of the taxpayer, whether real or personal (Title 26, U.S.C.A., section 1560). Such lien shall arise at the time the assessment list was received by the Collector and continue until the liability is satisfied or becomes unenforceable by reason of lapse of time (Title 26, U.S.C.A., Section 1561). But such lien shall not be valid as against any mortgage, purchaser or judgment creditor until a notice thereof has been filed by the Collector in the County in which the property is situated and also in the office of the Clerk of the District Court of the United States in the district in which the property is located (Title 26, U.S.C.A., section 1562). The limitation sections of the Internal Revenue Code applicable to this case provide that the tax may be collected by distraint or proceeding in court, but only if begun within six years after the assessment, or prior to the expiration of any period for collection agreed upon between the commissioner and the taxpayer before the expiration of such six-year period (Title 26, U.S.C.A., section 276c). It is further provided in Title 28, sections 812 and 814, U.S.C.A., that judgments of courts of the United States shall be liens upon property in the same manner and to the same extent and under the same conditions only as judgments rendered by courts of general jurisdiction of the state and shall be subject to the same requirements as to recording, docketing and indexing in the county in which the property is situated. (Section 812.) Such judgments shall cease to be liens on real estate or chattels real in the same manner and at like periods as judgments and decrees of courts of such state by law to be liens thereof. (Section 814.)

2. The Statutes of Illinois (Illinois Revised Statutes, Chapter 77, sections 69 and 69a) provide for the recording of judgments of the federal courts to become liens and deal with them the same as with judgments in state courts. Statutes of Illinois (Smith-Hurd Revised Statutes, Chapter 82, sections 66 to 70) provide for the recording of internal revenue tax liens referred to in the sections of the Internal Revenue Code cited above.

3. The question involved in this case is whether the Government's lien for income tax deficiency due from Allen F. Moore, upon which the assessment list was returned and received February 19, 1931, remains an effective lien against the real estate of Moore purchased by the plaintiffs at sheriff's sale, for valuable consideration, on July 2, 1937, more than six years after the date of the assessment but within the unrecorded extension of time agreed to by Moore.

4. The Government's lien as against Moore arose on February 9, 1931 , when the assessment list was received by the Collector and as against Moore 's mortgagee and judgment creditors on March 8, 1933 , when notice was filed in the office of the Recorder of Deeds.

5. The Government's lien, existing by law for the period of six years from the date of filing, was extended by valid agreements between Moore and the Government to September 30, 1939 .

6. The extension of time thus agreed upon between the Government and Moore are binding upon judgment creditors. Plaintiffs were bound to take notice of the statute providing for such extensions and are bound likewise by the extensions. Furthermore in 1933 Drake knew of the Government's claim. The lien of the Government is prior to the rights of plaintiffs.

7. Plaintiffs' complaint is without equity and should be dismissed for want of equity at the costs of plaintiffs payable in due course of admin istration by Drake and with execution against his co-plaintiff which is hereby awarded.

8. I include herein the findings and conclusions contained in my memorandum of even date.

 

 

[39-2 USTC 9707] United States of America , Plaintiff, v. Ruth Kent Steele, et al., Defendants

United States District Court, Northern District of New York, In Eq. No. 2972, Decided September 7, 1939

Enforcement of tax lien on insurance proceeds.--A lien for income taxes, obtained during taxpayer's lifetime, may not be enforced against the proceeds of insurance policies paid on his death, although decedent had reserved all rights under the policy. The property rights in the policy were fixed by New York statutes.

Ralph L. Emmons, Esq., United States Attorney, (B. F. Tompkins, Asst. U. S. Atty., Andrew D. Sharpe, Esq., and Frank J. Ready, Esq., Special Assts. to the Attorney General, of counsel) for the plaintiff. Messrs. Ferris, Burgess, Hughes & Dorrance, attorneys, (Mr. H. T. Dorrance of counsel) for the defendants.

BRYANT, D. J.:

This is an Equity suit, brought under Sec. 3207 of the Rev. Statutes, as amended by Sec. 802 of the Revenue Act of 1936, c. 690, to recover income tax deficiencies aggregating $7,200.36, plus interest, assessed against Frank B. Steele, now deceased, during his life time, through the enforcement of liens, for these unpaid tax assessments, alleged to have been obtained, under Sec. 3186 of the Rev. Statutes, as amended, (U. S. C. A. Title 26, Secs. 1560, 61, 62) against the proceeds of certain insurance policies issued upon the life of the decedent.

All parties interested in these policies and the monies due and payable thereunder are before the court as party defendants. The case was submitted to the court, without a jury, upon admissions in pleadings and stipulated facts.

[The Facts]

On November 21, 1929 , decedent, Frank B. Steele, had nine insurance policies then in force on his life aggregating $87,250.00. These policies, issued by seven different insurance companies, were all payable to his wife, but with the right reserved to the insured, at any time and without the beneficiary's consent, to change beneficiaries, assign the policies or to borrow against their cash surrender value. The trust agreement named Ruth Kent Steele, the wife of the insured, and the predecessor of defendant Trust Company, as trustees. Pursuant to the trust instrument, the trustees were substituted as beneficiaries and the policies were delivered to them. Under the trust agreement, the trustor reserved the unqualified power to take to his own use and benefit all dividends, endowments or other payments accruing during his life time, including cash surrender value, and also reserved the power and right to to borrow against, pledge or assign any of the policies or change beneficiaries under same, and to add or to take from the trust, all without the consent of the trustees or of any beneficiary. The trust was to become effective at decedent's death. It provides for collection and investment of the proceeds of the policies and the payment of the income therefrom, less certain deductions, to the widow during her life time and then to the children and eventually to pay over the corpus to grand children of insured.

The validity of the deficiency assessments and the timeliness and sufficiency of the notices and demands are unquestionable. After decedent defaulted in payment of the assessment, the Collector of Internal Revenue filed notices of liens against the property and rights of property of the decedent taxpayer, on the prescribed Treasury Department form 899, with the Clerk of Oneida County at Utica, New York, and, also, in the office of the Clerk of this Court at Utica, New York. Thereafter, the Collector sent copies of similar notices of lien, on Treasury Department form 668 by registered mail, to the home, offices of the seven life insurance companies and, at the same time, sent copies of these notices of lien to the wife of the insured and the trustees named in the trust agreement.

All of these events took place in the life time of the decedent and while he was a resident of Utica , Oneida County , New York .

The net cash surrender value of the above mentioned nine insurance policies upon decedent's life, immediately prior to his death, after due allowance for all unpaid premiums, loans, advances or other charges against the property, was $7,287.43.

Shortly prior to the insured's death, he made an offer in compromise. The offer was rejected and the money tendered under the offer was, after the commencement of this action, paid by the Treasury Department to the executrix of the decedent's estate without prejudice to either party.

Through agreement between the parties, $10,000.00 of the insurance monies was deposited in the registry of the court to await decision in this suit and plaintiff's alleged liens were released from the balance of the funds.

The amendments to Section 3207 of the Revised Statutes by Sec. 802, Revenue Act of 1936, enacted subsequent to the commencement of the action, confers jurisdiction. United States v. Western Union Telegraph Co., 50 F. (2d) 102 [2 USTC 754], decided prior to above amendment, does not apply. The amendment specifically covers suits pending at the time of enactment. Congress had ample power to confer jurisdiction over pending suits. Federal Reserve Bank of Richmond v. Kalin, 77 F. (2d) 50; in Petition of Callanan, 51 F. (2d) 1067.

[Effect of New York Law]

The claim for the unpaid taxes is a debt, not changed in character because it has priority. The United States, by the acts of one of its Collectors, obtained a lien on the property and the rights of property of the taxpayer. Did the lien, under the present facts, cover the cash surrender value of the policies in such manner and to such extent that it is enforceable here? The answer depends largely upon the effect given to New York Statutes, Sec. 55-A of the Insurance Law and Sec. 52 of the Domestic Relations Law. If these sections are property right Statutes, covering policies when the husband retains rights as here stated, then the alleged lien is non-enforceable. The tax cannot be enforced through the sale of a third party's property. Authorities are not needed to support this proposition. If these laws are exemption Statutes, then the United States is not bound thereby. Authorities are not needed to support the proposition that persons through State Exemption Laws cannot escape the payment of United States tax. The Federal Government alone has the power to grant such exemptions.

The policies in question are affected by the Statutes mentioned to the same degree as though the beneficiary had not been changed from wife to trustees. The purpose of the insurance was not changed. In both instances the insurance was intended to provide support for wife and children after the death of the husband and father. It was for the protection of this "most beneficent object" that the Statutes were passed.

My attention has not been called to any case directly in point. Succession tax and bankruptcy decisions cannot be considered as precedents. In the former, the question is not one of ownership of property but rather whether it is taxable and, in the latter, in addition to exemption Statutes, there is a trustee vested with title.

[Effect of Lien]

I cannot agree in whole with the interpretations of either party. Where, as here, the husband reserves the right to change the beneficiary, borrow on the policies and receive cash surrender values, the State Statutes do not strictly give an exemption of the property rights of the husband. (Maurice v. Travellers Ins. Co., 121 Misc. 427-35). Under the same authority, we can say that the beneficiary had no vested rights during the life time of the assured. In the absence of any decisions to the contrary, I will hold that the property rights in the policies were in the assured during his lifetime to an extent sufficient to make those rights liable for payment for taxes due by him to the United States . However, this does not mean that the named beneficiaries had no rights therein. They had an inchoate or contingent right which became a vested right upon the death of assured without a change of beneficiary. The property right of the assured, at the time of the filing of the tax lien, was the cash surrender value of the policies. That was a right personal to the assured. It may be said it was an amount owing to him which he could have received any time during his lifetime. However, it was a property right that could not survive his death unless the policies were made payable to himself or to his estate. This was never done. The alleged lien of the Government was impressed upon this so-called property right, that is the right to receive the cash surrender value. Under no circumstances could the so-called lien confer rights superior to the rights of the taxpayer. Manifestly, the assured, while living, could have received the cash surrender values and we will assume that the United States , by appropriate action, could have done likewise. When the assured died that property right expired. Upon his death, the only right remaining was the right of the beneficiaries to receive the amounts due on the policies. The right to receive the cash surrender values was then nonenforceable. This holding is not contrary to the law that "a lien once filed shall continue". Even though the lien continues it is of no avail if the property rights covered thereby have disappeared. Neither is it contrary to the authorities cited by the plaintiff.

The authorities, although not directly in point, indicate that my decision is supported generally. (Maurice v. Travellers Ins. Co., 121 Misc. 427; Weil v. Marquis, 256 Pa. 608; Fink v. Fink, 171 N. Y. 616; Hillard v. Life Ins. Co., 137 Wisc. 208.)

Defendant is entitled to judgment dismissing the complaint.

 

 

[39-2 USTC 9684] United States of America v. Albert Henry

District Court of the United States for the Eastern District of Pennsylvania, No. 29612, Decided September 1, 1939

Lien for taxes: Defenses against lien.--On motion of the United States to dismiss a petition of taxpayer to strike a lien for taxes for diversion of distilled spirits the Court rules as follows: (1) It has no jurisdiction to cancel a tax lien. (2) The fact that an indictment against taxpayer for violation of the National Prohibition Act was nolle prossed does not affect the validity of the lien. (3) That liability for tax was not affected by a discharge in bankruptcy. (4) The assessment was not a penalty. Sur motion on behalf of the United States to dismiss petition to strike tax lien from record.

J. Cullen Ganey , U. S. Attorney, and J. Barton Rettew, Jr., Assistant U. S. Attorney, for plaintiff. Bernard R. Cohn, 913 Franklin Trust Bldg., Philadelphia , Pa. , for defendant.

KALODNER, J.:

This is a motion to dismiss a petition to strike a tax lien from the record.

[The Facts]

On March 27, 1935 , a tax lien was filed against Albert Henry by the Commissioner of Internal Revenue in the amount of $14,869.80, with interest, based upon an assessment for diversion of distilled spirits, under Section 600-A, Revenue Act of 1918, as amended by Section 900 of the Revenue Act of 1926.

On May 5, 1939, Henry filed a petition to strike the tax lien from the record averring--that he had been indicted in 1933 for unlawfully conspiring to violate the National Prohibition Act and the United States Tariff Act, in a diversion of distilled spirits, under Section 600-A of the Revenue Act of 1918 as amended; that the indictment had been nolle prossed in 1934 (with repeal of the 18th Amendment); that defendant had been discharged from bankruptcy in 1939; that the tax lien results from an intentional and unjust discrimination against him; and that the assessment constituted a penalty and not a tax.

The United States thereupon moved for dismissal of the petition to strike the tax lien from the record.

The motion must be granted.

[Jurisdiction]

This court has no jurisdiction to extinguish a tax lien of the United States : Czieslik v. Burnet, 57 F. (2d) 715 [1932 CCH 9046], and cases there cited. The court said (page 716):

The United States of America is a sovereign and cannot be sued without its consent (State of Louisiana v. McAdoo, 234 U. S. 627, 34 S. Ct. 938, 58 L. Ed. 1506), and a waiver by the United States of America of sovereign immunity from suit must be strictly construed. U. S. v. Michel, 282 U. S. 656, 51 S. Ct. 284, 75 L. Ed. 598 [2 USTC 677].

The action at bar is in effect an action to remove a lien, and the United States has not consented to be sued to remove a lien nor to compel the taking of steps for the enforcement of the tax, except in a case where there is real estate subject to the lien, on which there is a lien held by any person. In such a case, the holder of such lien or a purchaser at a sale to satisfy the same may request the Commissioner of Internal Revenue to take proceedings to enforce such lien, and, if the same are not taken within the time prescribed by law, may with the permission of the court file a bill in chancery, under which the court shall proceed to adjudicate the matters involved. For the purposes of such adjudication, the assessment of the tax upon which the lien of the United States is based shall be conclusively presumed to be valid. Title 26, section 136, U. S. Code (26 USCA Sec. 136) originally section 3207 Revised Statutes; Maryland Casualty Co. v. Charleston Lead Works, supra.

Even under the section, the District Court is not empowered to completely extinguish tax liens of the United States of America on the premises, but merely to provide for their removal as liens on the premises on which they constitute a cloud on title. Sherwood v. United States (D. C.) 5, F. (2d) 991 (1925 CCH 7088).

Singularly appropriate also is further language of the court in the same case:

The circumstances of this case are not such as would justify taking this case out from under the statute. The only unusual circumstance is the size of the lien; but that is not sufficient, as I am at a loss to understand how the plaintiff can suffer irreparable damage, or even very severe damage, when you consider that he made no move for the relief which he now seeks for three and one-half years; the notice of lien having been filed on May 8, 1928, and the complaint in the instant suit not having been filed until November 9, 1931.

The petition to strike the tax lien may well be dismissed solely for the reasons already outlined; but it is also evident that the grounds relied upon in the petition are without merit.

[Nolle Prosse of Indictment]

The nolle prossing of the indictment has obviously nothing to do with the validity or propriety of the lien; the fact that the defendant may not have been guilty of any criminal act does not, of course, imply as a consequence that he does not owe a tax or that the tax lien has not been properly filed against him. Moreover, there is nothing in the record to show that there is any identity between the grounds for the indictment and the filing of the lien.

[Effect of Discharge in Bankruptcy]

The fact of the defendant's discharge in bankruptcy is likewise irrelevant in this discussion; a discharge in bankruptcy does not release a bankrupt from taxes levied by the United States : Chandler Act, Section 17(1).

[Status as Penalty]

Finally, the defendant Henry contends that the tax assessment constitutes a penalty and not a lien. Aside from the circumstance that the record is absolutely barren of any facts from which defendant draws this conclusion of law, it may be pointed out that taxes for diversion of distilled spirits have been adjudged not to be penalties: Feroni v. United States, 53 F. (2d) 1013, Kessler v. Rothensies, this District, March term, 1935, No. 8647 [36-2 USTC 9476]. The Court (Dickinson, J.) said in the case last quoted:

It is a perverted idea that a penalty is imposed upon a permit holder for unlawful diversion of alcohol. It is the alcohol which is taxed.

AND NOW, to wit, the 1st day of September, 1939, the plaintiff's motion is granted, and the defendant Henry's petition to strike the tax lien from the record is dismissed.

 

 

[39-1 USTC 9333]David L. Ullman, and Gertrude E. Ullman, his Wife, v. W. J. Rothensies, Collector of Internal Revenue

District Court of the United States for the Eastern District of Pennsylvania, M-845, Decided February 23, 1939

Distraint against joint bank account of spouses for taxes due from husband.--Under the law of Pennsylvania a joint bank account of husband and wife, with rights of survivorship and equal withdrawal rights, was an estate by entireties and was not subject to distraint for taxes due from the husband alone. Such an estate is beyond the reach of creditors in Pennsylvania and the State law as to the nature of title in the property is binding on the rights of the Federal Government.

Walter I. Summerfield, 728 Bankers Securities Bldg., Philadelphia , Pa. , attorney for plaintiff. J. Cullen Ganey, United States Attorney, Thomas J. Curtin, Assistant United States Attorney, James W. Morris, Assistant Attorney General, and Andrew D. Sharpe and Jerome P. Carr, Special Assistants to the Attorney General, attorneys for the defendant.

Sur Petition to Quash Warrant of Distraint

Before KIRKPATRICK, J.:

A tax was assessed against the plaintiff, as transferee of a corporation, for income taxes due from the corporation, and, after demand and due filing of notices of tax lien, a warrant of distraint was issued against a bank account which had been opened by the plaintiff and his wife jointly and which had stood in their names since a time prior to the filing of the lien. The contract with the bank under which the account was opened provided that the account should be the joint property of husband and wife with right of survivorship and with full power in either to draw against the account to its extinction.

[Motion]

The plaintiff and his wife have filed this petition to quash the warrant of distraint and testimony has been taken. The foregoing statement covers all the relevant facts.

[Question]

The single question involved is whether any part of the bank account standing in the names of husband and wife may be taken by distraint and levy for unpaid Federal income taxes due from the husband alone.

[Status Under Pennsylvania Law]

It is conceded that, by the law of Pennsylvania , the account was owned by the entireties. Madden v. Gosztonyi S. & T. Co., 331 Pa. 476; Werle v. Werle, 332 Pa. 49. The "chief distinguishing incident" of an estate by entireties is that it may not be taken on levy or execution for the individual obligation of one of the spouses. This, however, is not by reason of any exemption statute or any policy of the law exempting property belonging to a debtor from the claims of his creditors. Confusion in this regard probably arises from such general statements of the Pennsylvania courts as, "It is this striking peculiarity of the estate--the entirety alike in the husband and wife--that operates to exempt it from execution and sale at the suit of a creditor of either separately." Beihl v. Martin, 236 Pa. 519, 523. The next sentence of that opinion, however, shows what the Court meant by the estate being "exempt." The Court said, "The enforcement of such process would be the taking of the property of one to pay the debt of another."

The interest of either spouse in an estate by the entirety is beyond the reach of creditors in Pennsylvania because of its inherent nature--because there is no title or ownership in either spouse, but only in the marital unit, a distinct legal entity. These considerations dispose of the Government's argument based upon the rule that the Federal law may reach property withdrawn from amenability to state execution process by the state exemption laws, as was decided in Kyle v. McGuirk, 82 F. (2d) 212 [36-1 USTC 9121].

[Effect of State Law]

The Government also invokes the general rule stated in Burnet v. Harmel, 287 U. S. 103, 110 [3 USTC 990], to the effect that "State law may control only when the operation of the Federal taxing act, by express language or necessary implication, makes its own operation dependent upon the state law." This rule, however, applies to taxing statutes where the thing taxed is either income (property made subject to federal taxation by constitutional amendment and consequently within the power of Congress to define) or the transmission of property upon death, as in Tyler v. U. S., 281 U. S. 497 [2 USTC 532], a case which had to do with the taxability of the transfer which takes place upon the death of one of the spouses, dissolving the marital unit which owned an estate by entireties.

Congress could not, if it desired, subject to levy and distraint against a taxpayer property in which the law of the state says that he has no title, ownership or interest, no matter how clearly its intention to do so might be expressed in the statute. As a matter of fact, there is nothing in the relevant statutes in this case from which an intention to reach estates by entireties can be deduced. The Revenue Act of 1928, Sec. 613, providing for the lien for taxes, merely says that taxes "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." The Revenue Act of 1924, Sec. 1016, providing for distraint, says that levy may be made upon "the goods, chattels, or effects, including * * * bank accounts * * * of the person delinquent." Whether or not this bank account is property belonging to the husband or is a bank account of the husband depends upon the law of the state of Pennsylvania . The state law is plain to the effect that it is neither.

The prayer of the petition to quash is granted, and an order quashing the warrant of distraint may be entered.

 

 

[39-1 USTC 9204]United States of America, Plaintiff, v. Carl Rosenfield, and David J. Harris, individuals, Packard Motor Company, a corporation, Edward Morrison, J. Henry Townsend, Clarence J. Blaker, C. Wesley Townsend, Joseph M. Fitzgerald, R.F. Hyman, James B. Miley, and Reginald P. Rose, trading as a co-partnership under the firm name and style of Morrison & Townsend, Defendants.

District Court of the United States for the Eastern District of Michigan, Southern Division., No. 4080 Equity., 26 FSupp 433, 12/8/38

Enforcement of tax lien.--A purchaser for value of stock from a seller against whom a lien for income tax had been previously filed, though not having actual knowledge of such lien, took subject to the Government's lien priority. The Court orders the stock sold, the proceeds to be applied against the seller's taxes. Conflicting provisions of the Michigan Uniform Stock Transfer Act are subordinate to Federal law.

James W. Morris, Assistant Attorney General, Andrew Sharpe, Special Assistant to the Attorney General, Frank Ready, John C. Lehr, United States Attorneys, and J. Thomas Smith, Assistant United States Attorney, of Detroit, Mich., for plaintiff. Bodman, Longley, Bogle, Middleton & Farley, and John M. Hudson and Rob ert McKean of Bulkley, Ledyard, Dickinson & Wright, all of Detroit, Mich., for defendants.

Findings of Fact and Conclusions of Law

 

LEDERLE, D.J.:

This cause came on to be heard and it was agreed between the parties that it might be submitted on a written stipulation of facts plus the exhibits attached thereto and the pleadings filed therein. Both sides submitted excellent proposed findings of fact and conclusions of law at the date of the hearing of the oral arguments and these proposed findings may be filed as part of the records. These proposed findings and conclusions were stated in great detail. As I view the case, however, the material facts and applicable law may be stated briefly as follows:

Findings of Fact

 

1. This is a bill in equity filed by the United States to enforce or foreclose a lien upon 500 shares of stock of the Packard Motor Car Company registered in the name of defendant Carl Rosenfield in accordance with the provisions of the Acts of Congress providing for the assessment and collection of Federal taxes.

2. On or prior to October 26, 1929 , the defendant Carl Rosenfield became the owner of 500 shares of stock of the Packard Motor Car Company and this stock was duly registered in his name by the registrar agent of the said Packard Motor Car Company. On or about November 23, 1929 , the Commissioner of Internal Revenue made a jeopardy assessment against the defendant Carl Rosenfield for additional income tax together with interest and fraud penalties for the calendar years 1927 and 1928 in the amount of $36,753.12. The assessment list containing this assessment was received by the Collector of Internal Revenue for the District of Michigan on November 25, 1929 . Notices and demands on the said Rosenfield for payment of the additional taxes so assessed were served and made by the Collector of Internal Revenue on November 25, and December 16, 1929 . The Collector of Internal Revenue on December 26, 1929 , issued a warrant of distraint against the property of the said Carl Rosenfield and served notice thereof on the Packard Motor Car Company.

3. On November 26, 1929, the Collector of Internal Revenue for the District of Michigan, pursuant to the provisions of the statutes of the United States, filed a notice of tax lien under the Revenue Laws of the United States for the amount of the assessments with the Register of Deeds for Wayne County, Michigan, and also filed a notice of tax lien in the office of the Clerk of the District Court of the United States for the Eastern District of Michigan.

4. On January 7, 1930 , the Commissioner of Internal Revenue notified defendant Carl Rosenfield by registered mail of such assessments and advised him of his privilege to petition the United States Board of Tax Appeals for a redetermination of his tax liability. On March 6, 1930 , the defendant Carl Rosenfield filed with the United States Board of Tax Appeals his petition to re-determine these deficiencies. On May 20, 1938, the defendant Carl Rosenfield filed with the Board of Tax Appeals a stipulation that an order might be entered re-determining a deficiency in the aggregate amount of $2,000 plus the interest thereon amounting, as of May 20, 1938, to $3,171.66.

5. 500 shares of Packard Motor Car Company stock owned by Carl Rosenfield were represented by certificates numbered D-16365 to D-16369, both inclusive. On January 20, 1930, these certificates of stock duly-endorsed in blank by the defendant Carl Rosenfield were presented to the officers of the defendant partnership of Morrison & Townsend at the City of Detroit for sale by one David J. Harris, together with a letter signed by Carl Rosenfield authorizing the disposition of such stock or the proceeds thereof and any income therefrom in any manner which the said David J. Harris might direct including the credit therefor to his personal account with said Morrison & Townsend. Morrison & Townsend thereupon in the regular course of business and without actual notice of the existence of any asserted income tax liability of said Carl Rosenfield or of any claimed lien against or on the property or rights to property of said Carl Rosenfield for unpaid income tax, bought said shares of stock, received the certificates therefor, and issued its check payable to said David J. Harris in the sum of $7,730 in payment therefor. This was the market value of the stock in question on that date.

6. February 21, 1930 , Morrison & Townsend presented to the Packard Motor Car Company, or its transfer agent, for transfer to its name, the above-mentioned stock certificates for the 500 shares of stock so purchased by it. The Packard Motor Car Company refused to make the transfer due to the fact that the Collector of Internal Revenue at Detroit , Michigan , had notified said company that the Government of the United States claimed a lien and right of possession of said shares of stock for the payment of taxes assessed against the said Carl Rosenfield.

7. The defendants Morrison & Townsend had no notice of the existence of any asserted lien against the property of the said Carl Rosenfield prior to said February 21, 1930 . On March 14, 1930 , the Collector of Internal Revenue of Detroit, Michigan, issued and served upon the defendant Morrison and Townsend a notice of distraint upon all property and rights to property then in the possession of Morrison and Townsend and belonging to said Carl Rosenfield with particular reference to the aforementioned Packard Motor Car Company stock.

Conclusions of Law

 

1. This is a suit in equity by the United States under the provisions of Section 3207 of the Revised Statutes of the United States, as amended by Section 1127(2) of the Revenue Act of 1926, c. 27, 44 Stat. 123, and as further amended by Section 802 of the Revenue Act of 1936, c. 690, 49 Stat. 1648, to enforce a tax lien asserted by the plaintiff, United States of America, with respect to certain deficiency assessments of income taxes made by the Commissioner of Internal Revenue on November 23, 1929, against the defendant Carl Rosenfield, for the calendar years 1927 and 1928, of taxes, penalties, and assessed deficiency interest, aggregating $36,759.18; and this Court has jurisdiction in this proceeding by virtue of the statutes just mentioned, Section 617 of the Revenue Act of 1928, c. 852, 45 Stat. 791, and Section 24, Subdivisions First and Fifth of the Judicial Code, as amended (U.S.C., Title 28, Sec. 41(1) and (5).

2. When the assessment list signed by the Commissioner of Internal Revenue covering the above-mentioned income tax assessments against the defendant Carl Rosenfield was received in the office of the Collector of Internal Revenue at Detroit, Michigan, on November 25, 1929, and the said Collector on the same date issued and served notice and demand for payment of said tax assessments upon the defendant Carl Rosenfield, and the defendant Rosenfield neglected or refused to pay said taxes in whole or in part after said notice and demand, a lien arose or accrued in favor of the plaintiff, United States of America, upon all the property and rights to property, whether real or personal, belonging to the defendant Carl Rosenfield, thereby subjecting all of the property and rights to property, whether real or personal, belonging to the said Carl Rosenfield to the payment of the aforesaid tax assessments against him by virtue of the provisions of Section 3186 of the Revised Statutes of the United States, as amended by Section 613 of the Revenue Act of 1928.

3. The aforesaid tax lien upon all the property and rights to property, whether real or personal, belonging to the defendant Carl Rosenfield, became effective as of November 25, 1929, that being the date on which the assessment list covering the aforesaid tax assessments against the defendant Carl Rosenfield was received in the office of the Collector of Internal Revenue at Detroit, Michigan.

4. When, after notice and demand for payment and refusal to pay these tax assessments as aforesaid, the said Collector, on November 26, 1929, filed notices of lien covering said tax assessments and caused same to be recorded in the offices of both the Register of Deeds of Wayne County, Michigan, and the Clerk of the United States District Court for the Eastern District of Michigan, the said tax liens upon all of the property and rights to property, whether real or personal, belonging to the said Carl Rosenfield became effective as of November 25, 1929, that being the date upon which the assessment list signed by the Commissioner of Internal Revenue covering said deficiency assessments was received in the office of said Collector at Detroit, Michigan.

5. The aforesaid lien of the plaintiff, United States of America, upon all the property and rights to property, whether real or personal belonging to the said delinquent taxpayer, the defendant Carl Rosenfield, accrued and became a charge against certain personal property then belonging to the said defendant and consisting of the 500 shares of the capital stock of the Packard Motor Car Company described in the bill of complaint and now held subject to the further orders of this Court under the order heretofore entered in this proceeding on May 21, 1930.

6. Although the defendant Carl Rosenfield endorsed in blank the five certificates covering the aforesaid 500 shares of stock of the Packard Motor Company and delivered or caused same to be delivered to the defendant partnership of Morrison & Townsend on January 20, 1930, for the purpose of sale thereof in the regular course of the brokerage business of said defendant partnership, and although the defendant Morrison & Townsend purchased said 500 shares of stock on said date in the regular course of its business as a stock broker and paid the then market price of $7,730.00 for said shares to the defendant Carl Rosenfield or to his order, without actual notice or knowledge of the aforesaid tax liens or of the fact that the plaintiff had on November 26, 1929, filed and recorded the aforesaid notices of said tax liens with the Clerk of this Court and the Register of Deeds for Wayne County, Michigan--the Court concludes that the defendant Morrison & Townsend purchased and took the said 500 shares of Packard Motor Company stock subject to the superior and underlying lien of the United States for its said unpaid taxes, by virtue of the provisions of Section 3186 of the Revised Statutes of the United States, as amended.

7. The aforesaid Acts of Congress, providing the manner and form by which the plaintiff, United States of America, acquired its aforesaid tax liens upon all the property and rights to property belonging to the defendant Carl Rosenfield in general, and upon the aforesaid 500 shares of stock of the Packard Motor Car Company in particular, for the defendant Rosenfield's said delinquent income taxes, are the supreme law of the land applicable to the enforcement of the internal revenues of the United States. Said Federal statutes are controlling here and override any provisions of the Uniform Stock Transfer Act enacted by the State of Michigan as Act 106, 1913, p. 180, effective August 14, 1913, (Compiled Laws of Michigan, 1929, Volume 2, Sections 9520-9541), which are in conflict with said Acts of Congress, and under which the defendant Morrison & Townsend asserts its conflicting right, title or interest in said shares of stock.

8. In view of the final order of redetermination entered by the United States Board of Tax Appeals, by consent of the Commissioner of Internal Revenue and the defendant Carl Rosenfield, on May 20, 1938, the entry of which has been stipulated by the parties herein, the defendant Carl Rosenfield is indebted to the plaintiff United States of America, and the plaintiff is entitled to a decree against the said defendant for income taxes due by him of $1,000, for the calendar year 1927 and of $1,000, for the calendar year 1928, aggregating the principal sum of $2,000, plus interest thereon computed at 6% per annum on $1,000, from March 15, 1928, until May 20, 1938, of $610.83 totalling $1,610.83 for the year 1927 and similar interest on $1,000 from March 15, 1929, until May 20, 1938, of $550.83 totaling $1,550.83 for the year 1928, and aggregating $3,171.66, plus further interest upon the said principal sum of $2,000, from and after May 20, 1938, according to law until fully paid.

9. Plaintiff is also entitled to an order and decree declaring and adjudging that the lien of the plaintiff upon the aforesaid shares of stock for the unpaid taxes of the defendant Carl Rosenfield is superior to the rights and equities of the defendant Morrison & Townsend in the said 500 shares of stock in The Packard Motor Car Company and to an order of sale of said shares of stock under the directions of this Court for the purpose of applying the proceeds of such sale upon plaintiff's decree herein against the defendant Carl Rosenfield for his aforesaid 1927 and 1928 income taxes, together with decree for costs and the right to such process of the Court as is available for the enforcement of the rights of the plaintiff as adjudged and decreed herein.

Final decree may be entered pursuant to the special findings of fact and conclusions of law hereinbefore adopted by the Court, with full exceptions being allowed to the party or parties adversely affected thereby.                                                      

 

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