Prior Law Page16

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 [Government Claim for Taxes Due and Unsecured]

This brings us to category 3 which involves Government claims for taxes which are concededly due and unsecured. The Collector contends that Section 68(a) of the Bankruptcy Act, 11 U. S. C. 108, ^* allows him to set-off the surplus from the distraint sale against these unsecured claims.

It is true that the taxes due were a debt; as to the Collector the bankrupt stood as a debtor. But we think that the account-ability of the Collector for the surplus in his hands remaining after the satisfaction of valid tax liens was not such a mutual debt as was envisaged by §68(a). In making his levy he surely incurred no "debt": he did not thereupon "owe" the bankrupt the amount which he later, after the intervention of bankruptcy, realized from the sale of the liened property. Ivanhoe Bldg. Assn. v. Orr, 295 U. S. 243; McDaniel Nat. Bank v. Bridwell, 8 Cir. 74 Fed. (2d) 331. On the intervention of bankruptcy the Collector was subject only to a contingent liability, viz., to account to the bankrupt for so much of his property as should not be required to satisfy the lien under process of enforcement by distraint. This contingency did not fall in until after bankruptcy: not until then did it develop that there would be any surplus for which the Collector was accountable. We agree with Judge Palmieri that the necessary mutuality was absent. In re Sandy 's Novelty Corp., 116 Fed. Supp. 132, and In re Autler, 23 Fed. Supp. 756. See also Libby v. Hopkins, 104 U. S. 303, and Morris v. Windsor Trust Co., 213 N. Y. 27. Gibson v. Central Nat. Bank of McKinney , 5 Cir., 171 Fed. (2d) 398, as we read the opinion, is distinguishable in that there the creditor had realized on its security prior to the intervention of its debtor's bankruptcy. As to this item, we affirm the holding below.

Reversed and remanded for entry of a judgment modified to conform with this opinion.

^* Section 68(a) provides that "In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid."

 

 

[55-2 USTC ¶9693] United States of America , Appellant v. John O. England, Trustee in Bankruptcy of the Estate of Bradford Welch, Inc., a Corporation, Bankrupt, Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,467, 226 F2d 205, October 5, 1955

Appeal from the United States District Court for the Northern District of California, Southern Division.

[1939 Code Sec. 3670--substantially unchanged in 1954 Code Sec. 6321; 1939 Code Sec. 3671--substantially unchanged in 1954 Code Sec. 6322; 1939 Code Sec. 3672(a)--substantially unchanged in 1954 Code Sec. 6323(a)]

Priority of liens: Government v. trustee in bankruptcy.--Government filed a claim for taxes against a bankrupt corporation, and secured part of its claim by a tax lien on said corporation's property. Referee in Bankruptcy allowed the claim in its entirety as a priority claim but the Trustee in Bankruptcy claiming to be a judgment creditor under the Bankruptcy Act alleges that the lien is not valid against him, for no notice of said lien was filed by the Collector. Court decided the term "judgment creditor" has reference only to a creditor holding a judgment obtained by judicial proceedings, the trustee does not come within that definition and consequently, a valid tax lien in favor of the government arose prior to the adjudication of bankruptcy.

H. Brian Holland, Assistant Attorney General, Dudley J. Godefrey, Jr., A. F. Prescott, Ellis N. Slack, Morton K. Rothschild, Special Assistants to Attorney General, Washington, D. C., Lloyd H. Burke, United States Attorney, Charles E. Collett, Assistant United States Attorney, San Francisco, Calif., for appellant. Stanley M. McLeod, San Francisco , Calif. , for appellee.

Before ORR and LEMMON, Circuit Judges, and JAMES M. CARTER, District Judge.

ORR, Circuit Judge:

The question here for solution is the status of a claim of the United States for taxes filed in a bankruptcy proceeding. Bradford Welch, Inc., the taxpayer, was adjudicated a bankrupt on July 23, 1951. John O. England was thereafter appointed Trustee in Bankruptcy.

On April 28, 1952 the Collector of Internal Revenue filed a claim with the Trustee in Bankruptcy for withholding and insurance contributions taxes and interest thereon. An amended claim was filed August 22, 1952, claiming the sum of $2,192.64 in taxes and interest due. Of this amount the sum of $945.37 was asserted to be secured by liens on the property of Bradford Welch, Inc., by virtue of the provisions of §§ 3670 and 3671 of the Internal Revenue Code of 1939 ¹ for the reason that on this amount assessment lists had been received by the Collector and demand duly made prior to the adjudication of bankruptcy. The Trustee objected. The Referee in Bankruptcy allowed the claim in its entirety as a priority claim, but disallowed any part thereof as a secured claim because "the United States never has filed any notice of the aforesaid claimed statutory lien as provided in §3672 of the Internal Revenue Code." Sec. 3672(a) reads in part: "(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. . . ."

On May 25, 1954 the District Court [54-2 USTC ¶9580] entered an order affirming the order of the referee. It is conceded that no notice was filed by the Collector under the provisions of §3672(a) of the Revenue Act; hence, the lien of the United States was not valid against any mortgagee, pledgee, purchaser or judgment creditor. The trustee argues that he comes within the exception because he is a judgment creditor, constituted such by §70(c) of the Bankruptcy Act (11 U. S. C. A. 1946 ed., supp. IV, §110) which reads in part, ". . . the trustee . . . shall be deemed vested as of the date of bankruptcy with all the rights, remedies and powers of a creditor then holding a lien thereon by legal or equitable proceedings. . . ." It is conceded by the trustee that prior to the adjudication of bankruptcy the United States held a valid tax lien in the sum of $945.37 pursuant to the provisions of §§ 3670 and 3671, Internal Revenue Code, on all the property and rights to property of the bankrupt, but he denies that it had a secured claim for the reason that it had failed to file notice. The contention of the trustee that the provisions of §70(c) of the Bankruptcy Act (11 U. S. C. A. 1946, supp. IV, §110) establishes him a judgment creditor within the meaning of that term as used in §3672 of the Revenue Act, has been resolved against him.

The Supreme Court in the case of United States v. Gilbert Associates, 345 U. S. 361, 364 [53-1 USTC ¶9291], has defined the term "judgment creditor" as used in said section. In that case the Court said: "Congress used the word 'judgment creditor' in sec. 3672 in the usual, conventional sense of a judgment of a court of record, since all states have such courts." The Supreme Court in the Gilbert Associates case, supra, cited the concurring opinion of Justice Jackson in United States v. Security Trust and Savings Bank, 340 U. S. 47, 51-53 [50-2 USTC ¶9492], wherein he considered the legislative history of §3672 and reached the conclusion, page 52, that only a judgment creditor in the conventional sense is protected.

In In the Matter of Green, N. D. Ala., 124 Fed. Supp. 481 [54-2 USTC ¶9705] the Court was concerned with the identical question. It concluded that a Trustee in Bankruptcy is not a "judgment creditor" within the meaning of §3672. See also United States v. Security Trust and Sav. Bank, supra, United States v. City of New Britain, 347 U. S. 81 [54-1 USTC ¶9191], and In Re Taylorcraft Aviation Corp., 6 Cir., 168 Fed. (2d) 808 [48-1 USTC ¶9288]. Hence, the term "judgment creditor" as used in §3672 having reference only to a creditor holding a judgment obtained by judicial proceedings, the trustee does not come within that definition and, consequently, a valid tax lien in favor of the United States arose pursuant to the provisions of §§ 3670 and 3671, prior to the adjudication of bankruptcy.

The order of the referee and the order of the District Court confirming are reversed insofar as said orders reject the claim of the United States to valid liens for unpaid taxes and interest in the amount of $945.37 and to priority payment under §67 of the Bankruptcy Act.

¹ Internal Revenue Code of 1939:

"Sec. 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." (26 U. S. C. 1952, ed., Sec. 3670.)

"Sec. 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." (26 U. S. C. 1952 ed., Sec. 3671.)

 

 

[55-2 USTC ¶9536] United States of America , Plaintiff-Appellant v. Kings County Iron Works, Inc., Defendant-Appellee

(CA-2), In the United States Court of Appeals for the Second Circuit, No. 268, October Term, 1954, Docket No. 23310, 224 F2d 232, June 29, 1955

Appeal from the United States District Court for the Eastern District of New York.

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Tax liens: Priority as against subcontractor's mechanic's lien.--A, the owner of real property, entered into an agreement with taxpayer as general contractor for the renovation of the property. Taxpayer engaged the services of B as subcontractor to do certain iron and steel work and to furnish the necessary materials as an agreed price. All of the work required to be performed under the contract was completed by May 21, 1947 . On August 27, 1947 , B filed a mechanic's lien in New York County for its unpaid balance. The District Court concluded that the Government's prior filing of its notice of tax liens on August 21, 1947 in Kings County, where taxpayer resided, was defective in that under New York law the Government should also have filed in New York County where the funds and premises in question were located. That Court awarded priority to B as a "purchaser" protected from unfiled federal liens pursuant to 1939 Code Sec. 3672, and as a prior lienor by virtue of its lien filed in New York County on August 27, 1947 under the state-created trust fund theory. The Appeals Court reversed on the ground that the Government lien attached at the time that the local Collector received the assessment list, which was prior to the date of filing of any of the liens. The mechanic's lienor, B, having failed to file a timely civil action on his lien under New York law, the taxpayer retained a paramount interest in the property. As of August 21, 1947 , B had as yet acquired no lien on the property.

Leonard P. Moore, United States Attorney, Brooklyn, N. Y. (H. Brian Holland, Assistant Attorney General, and Ellis N. Slack, A. F. Prescott, Frederic G. Rita, Special Assistants to Attorney General, Washington, D. C., and Elliott Kahaner and William C. Gordon, Assistant United States Attorneys, Brooklyn, N. Y., on the brief), for plaintiff-appellant. Samuel F. Berkon, New York City , N. Y., for defendant-appellee.

Before CLARK, Chief Judge, and FRANK ANDHASTIE, Circuit Judges.

CLARK, Chief Judge:

This appeal by the United States involves the relative priority of a federal tax lien and a mechanic's lien under state law. The defaulting taxpayer, Preferred Contractors, Inc., had performed contracting services on premises in New York City for Standard Tinsmith & Roofer Supply Corporation for which it had not been fully paid. When the United States sought to assert its statutory lien under I. R. C. §3670 on this debt, it was informed that Standard was holding the sum in trust for Kings County Iron Works, Inc., a subcontractor of Preferred, which claimed a mechanic's lien. Ultimately Standard paid the amount in question into court for judicial determination of priority between the United States and Kings. The facts of indebtedness of Preferred to the United States , of Preferred to Kings, and of Standard to Preferred have not been contested by any of the parties concerned. The district court awarded priority to Kings as a "purchaser" protected from unfiled federal liens pursuant to I. R. C. §3672, and as a prior lienor by virtue of its filing of its mechanic's lien in New York County on August 27, 1947. Judge Abruzzo concluded that the government's prior filing on August 21 in Kings County, where Preferred resided, was defective in that under N. Y. Lien Law §240 the government should also have filed in New York County, where the funds and premises in question were located. D. C. E. D. N. Y., 122 Fed. Supp. 219 [54-1 USTC ¶9352]. The government's appeal challenges Judge Abruzzo's final conclusion, as well as his subordinate findings concerning the character of the mechanic's lien and the sufficiency of the government's filing.

[Opinion]

The Internal Revenue Code gives the government a broad lien for tax collection purposes. I. R. C. §§ 3670-3672. This lien attaches to property of the taxpayer at the time that the local collector receives the appropriate assessment lists. From then on, the lien is fully perfected against all subsequent liens and interests except that of a mortgagee, pledgee, purchaser, or judgment creditor of the taxpayer. For full protection, even against these special classes, notice of the tax lien must be filed in the places designated by state law, or in the appropriate district court if the state has failed so to designate. Here the assessment lists were all received prior to August 21, 1947, when notices of the liens were filed. Apart from the appropriateness of this filing under N. Y. Lien Law §240, the government argues that no perfected prior interests existed as of this date and that filing is not required for perfection of its lien against Kings.

New York law provides Kings as a mechanic's lienor with two separate and distinct forms of protection for its claim. One of these is the ordinary lien on the real estate improved by Kings' services, which lien Kings perfected by filing on August 27, 1947. N. Y. Lien Law §5. The other, on which Kings mainly relies here, is an interest in the funds which the owner of the improved real estate owes the prime contractor. These funds are deemed a trust fund for the payment of subcontractors, N. Y. Lien Law §§ 13(7), 36-a, and the trust fund arises when the subcontractor performs his services. Thus the main question before us is the relative priority of the federal tax lien and the antedating interest which Kings has in this state-created trust fund.

[General Rule of Priority]

Generally speaking, the federal tax lien can be defeated only in one of three ways. Competing lienors may establish that the property on which the government seeks to levy is not the property of the taxpayer at all. They may claim a prior specific and perfected lien entitled to precedence under the rule that "first in time is first in right." United States v. City of New Britain, 347 U. S. 81 [54-1 USTC ¶9191]. Or, as long as the federal lien is unfiled, they may seek to bring themselves within the classes of creditors discussed above, which are specifically protected by I. R. C. §3672. ¹ All these questions--whether the property is that of the taxpayer, whether a prior lien is sufficiently perfected, whether a creditor can qualify as "mortgagee, pledgee, purchaser, or judgment creditor"--are, in the final analysis, matters of federal law, although state law will be considered where relevant. United States v. Security Trust & Sav. Bank of San Diego, 340 U. S. 47 [50-2 USTC ¶9492]; United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291]; United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138]; United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 [55-1USTC ¶9136]; United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137]; Rowen v. C. I. R., 2 Cir., 215 Fed. (2d) 641 [54-2 USTC ¶9581]. The reason for broad reference to federal principles is the obvious desirability of uniformity in the application of our federal tax laws.

Kings here argues that on all three rationales it is entitled to priority over the federal tax lien, as Judge Abruzzo held. Its main argument for precedence is based on the trust fund created by New York law for the benefit of subcontractors out of funds owing from the owner of the improved property to the contractor. N. Y. Lien Law §§ 13(7), 36-a. This trust fund is available to the mechanic's lienor without filing, Wade v. Nassau Suffolk Lumber & Supply Corp., 275 App. Div. 864, 89 N. Y. S. (2d) 294, and has been said to make him a statutory assignee of the fund. Cranford Co. v. L. Leopold & Co., 189 Misc. 388, 70 N. Y. S. (2d) 183, affirmed 273 App. Div. 754, 75 N. Y. S. (2d) 512, affirmed 298 N. Y. 676, 82 N. E. (2d) 580, followed in Bain v. Caruso-Sturcey Corp., S. Ct., 134 N. Y. S. (2d) 246 [54-1USTC ¶9375], and Aquilino v. United States, 133 N. Y. L. J. 13, col. 3 (S. Ct. Mar. 18, 1955).

[State Trust Fund Theory]

We cannot see, however, that the trust fund given by these statutory provisions either divests the contractor of his property interest in his chose in action against the property owner or gives the mechanic's lienor a specific and perfected lien, for federal tax purposes. Even if we were to follow the New York cases, they would not take us this far. InCranford Co. v. L. Leopold & Co., supra, the lienor was held entitled to priority by analogy to a purchaser, under I. R. C. §3672--a contention with which we shall deal later. The case does not purport to give the lienor any specific property right beyond the status of a "statutory assignee." The other case on which appellee relies, United States Fidelity & Guaranty Co. v. Triborough Bridge Authority, 297 N. Y. 31, 74 N. E. (2d) 226 [47-2 USTC ¶9327], is even more remote to the issues now under discussion, for it deals with the rights of a surety who has paid the subcontractor's claims. The surety was held to have perfected his claim to the trust fund as of the date when he first gave the required bond. This allowed the surety an earlier date of perfecting than even the subcontractor would have had, and antedated also the government's receipt of assessment lists. Whether or not such a predating of the surety's rights would be upheld as against perfected federal tax liens under the more recent decisions of the Supreme Court, we need not now decide. The case as it stands adds nothing to our knowledge of New York 's appraisal of the status of the mechanic's lienor as such.

Our reading of the statutes and the cases leads us to conclude that, at least for purposes of federal taxation, Kings must be considered essentially like the holder of an attachment or a garnishment lien before it has matured into a judgment. The use of a trust fund rationale by New York in order to give the mechanic's lienor this kind of lien may be the result of the severe restrictions ordinarily imposed by that law on the attachment of debts. See N. Y. C. P. A. §916. Until and unless the mechanic's lienor perfects his rights to the trust fund by filing a timely civil action in accordance with §75 of N. Y. Lien Law, the contractor retains a paramount interest in the property in question, so that the debt belongs to him and is subject to federal levy as such. Furthermore, until such a suit is brought, the fact and the amount of the final mechanic's lien remain uncertain. This means that for federal tax purposes the state lien is general and inchoate until such time. Illinois ex rel. Gordon v. Campbell, 329 U. S. 362; United States v. Security Trust & Sav. Bank of San Diego, supra, 340 U. S. 47 [50-2 USTC ¶9492];United States v. Acri, supra, 348 U. S. 211 [55-1USTC ¶9138]; United States v. Liverpool & London & Globe Ins. Co., supra, 348 U. S. 215 [55-1 USTC ¶9136]; United States v. Scovil, supra, 348 U. S. 218[55-1 USTC ¶9137]. And see Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L. J. 905 (1954).

[Enforcement of Mechanic's Lien]

Kings never sued to enforce its trust, and Standard's action in refusing to surrender the moneys it held to the tax collector cannot be taken as a legal substitute for such action. The mere fact that in this case Preferred did not contest the validity of Kings' claim does not serve to perfect it as a matter of law before suit or payment. Standard, or any other similarly situated property owner, is not in a position to have either the knowledge or the legal status to assert possible defenses to the claims of the mechanic's lienor; thus it should not be allowed to compromise finally either Preferred's or Kings' rights to the trust fund. Nor can Standard's refusal to surrender these moneys be justified by reference to provisions in its contract with Preferred concerning payment of subcontractors. Such private contractual arrangements are clearly subordinate to the paramount rights of the government to levy on the property of its taxpayers.United States v. Manufacturers Trust Co., 2 Cir., 198 Fed. (2d) 366 [52-2 USTC ¶9417]. At the most, Standard's action can be argued to have perfected Kings' lien when it was taken. But this in itself postdated the attachment of the government's lien, for Standard's letter was a response to the notice of lien sent it by the tax collector.

Our analogy to the principles of attachment and garnishment liens is supported here by the clear indicia that New York contemplates some kind of perfecting by the mechanic's lienor of his interest in the trust fund. But it seems extremely doubtful to us that any trust fund device could ever supersede federal tax liens, even if the state purported to omit all perfecting requirements. To be fully choate a lien must attach to specified property, and the amount of the lien must be precisely established. Whether any general trust fund, coming into existence when the mechanic's lienor completes his services, can ever be sufficiently specific to meet these criteria is thus questionable. Illinois ex rel. Gordon v. Campbell, supra, 329 U. S. 362. Moreover, such a "lien" would not be accompanied by a change in title or possession, which was found in United States v. Gilbert Associates, Inc., supra, 345 U. S. 361 [53-1 USTC ¶9291], to be a prerequisite to the perfecting of liens.

Thus as of the crucial date of attachment of the government's lien the trust fund gave Kings no more than an inchoate and general lien. And the mechanic's lien on the improved real estate was then in no better state. In one sense this second lien is of course irrelevant, for it attached to different property, i. e., Standard's real estate, than did the government's lien, which was concerned only with the debt owed to Preferred. But, more significantly, this lien was not perfected until after the government's lien attached, and the New York law is clear that such lien is a complete nullity until notice thereof has been filed. Riverside Contracting Co. v. New York, S. Ct., 148 N. Y. S. 281, affirmed 165 App. Div. 972, 150 N. Y. S. 1109, affirmed 218 N. Y. 596, 113 N. E. 564, Ann. Cas. 1918C 1075. As of August 21, 1947 , the latest date of attachment of the government's lien, Kings had as yet acquired no lien on the real property at all.

[Filing of Tax Lien Not Required]

The mere attachment of the government's lien gives it a fully perfected claim superior to all except mortgagees, pledgees, purchasers, or judgment creditors of the taxpayer. I. R. C. §3672. The this case the government sought the fullest measure of protection by filing notices of its lien by August 21, 1947, in Kings County, where the taxpayer Preferred resided. Judge Abruzzo found this filing fatally defective, presumably under the last sentence of N. Y. Lien Law §240(2), enacted pursuant to I. R. C. §3672(a)(1). The New York law provides: "If the property is in the city of New York at the time the lien arises, the notice or certificate shall be filed in the county within the city of New York or in the town or city where the owner, or each of several owners who are residents of the state, resides at the time the lien arises, and also in the county where the property is situated." While we are disposed to disagree with the conclusion below that a debt should be considered to have a situs apart from that of its owner, the creditor, see Investment & Securities Co. v. United States, 9 Cir., 140 Fed. (2d) 894 [44-1 USTC ¶9210], we need not finally decide that issue here, since we are convinced that Kings does not fall within any of the special classes against whom filing is required.

The only claim made by Kings to come within the protection of I. R. C. §3672 is that it should be considered as akin to a purchaser. This was in effect the holding ofCranford Co. v. L. Leopold & Co., supra. Since then, the Supreme Court has had occasion to discuss the definition of "purchaser" in this context, in a case dealing with a landlord's distress lien. United States v. Scovil, supra, 348 U. S. 218, 221 [55-1 USTC ¶9137]. In refusing to consider the landlord a purchaser, the court said: "A purchaser within the meaning of §3672 usually means one who acquires title for a valuable consideration in the manner of vendor and vendee." It is obvious without further discussion that Kings, even as statutory assignee of a trust fund, is not a purchaser for federal tax purposes.

The judgment of the district court is therefore reversed and the action is remanded for the entry of a judgment awarding priority to the government's lien over the claim of Kings.

Reversed and remanded.

¹ In the special case of securities, I. R. C. §3672(b) protects what may broadly be considered as bona fide purchasers, even if the government has filed notice of its lien. We are not concerned with that special case here.

 

 

[55-1 USTC ¶9487]United States of America, Appellant v. Edward I. Eiland, Trustee in Bankruptcy of Sport Coal Company, Inc., a corporation, Bankrupt, Appellee

(CA-4), In the United States Court of Appeals for the Fourth Circuit, No. 6959, 223 F2d 118, May 23, 1955

Appeal from the United States District Court for the Southern District of West Virginia, at Charleston.

[1939 Code Secs. 3672(a) and 3690--similar to 1954 Code Sec. 6323(a) and 6331, respectively]

Lien for tax: Filing of Notice: State requirements: Items subject to distraint.--Where the United District Director made a levy and demand upon taxpayer-bankrupt's debtor prior to the institution of bankruptcy proceedings, the appellate court reversed the District Court's holding that the tax lien was not valid as against an order of the referee in bankruptcy transferring the amount owned under the debt to the trustee in bankruptcy because notice had not been filed in accordance with state law in the clerk's office of the county in which the bankrupt's business was located. The court pointed out that the federal and state statutes pertaining to filing notices relate to tangible property, and not to debts. Also reversing the District Court, the appellate court stated that it was clear that a statutory tax lien could be asserted against intangible property such as a debt and that the proper way to assert the lien was by levy and notice as was served herein. Also, the rights of the United States were not postponed to admin istration and wage claims by Bankruptcy Act Sec. 67(c).

Louise Foster, Special Assistant to the Attorney General (H. Brian Holland, Assistant Attorney General, Ellis N. Slack and A. F. Prescott, Special Assistants to the Attorney General, Duncan W. Daugherty, United States Attorney, and William T. Lively, Jr., Assistant United States Attorney, on brief), for appellant. Claude A. Joyce (Edward I. Eiland on brief), for appellee.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

[The Facts]

PARKER, Chief Judge:

This is an appeal in the bankruptcy proceedings of the Sport Coal Company, Inc., a corporation which had its office and principal place of business in Logan County , West Virginia , and which was adjudicated a bankrupt on a voluntary petition in bankruptcy filed June 29, 1953 . On June 26, 1953, before the institution of the bankruptcy proceedings, a levy was issued by the District Director of Internal Revenue on form 668-A directed to the Boone County Coal Corporation, levying upon any indebtedness owing by the Boone County Coal Corporation to the Sport Coal Company, Inc., up to the sum of $7,172.42 and demanding that the Boone County Coal Corporation pay same to the Director from the amount so owing. The Boone County Coal Corporation, which owed the Sport Coal Company, Inc., the sum of $1,885.54 at that time, accepted service of this notice of levy and demand. After the adjudication of bankruptcy it paid this sum into the hands of the Trustee in Bankruptcy pursuant to an order of the referee. The United States claims a lien on this amount for the taxes for which its levy and demand were made upon the Boone County Coal Company.

The Referee in Bankruptcy held that the United States was not entitled to prevail against the trustee in bankruptcy with respect to its claim on this fund because no lien was filed in the office of the Clerk of the County Court of Logan County, West Virginia. He held, also, that, even if this position were not sustained, the claim of the United States should be postponed to admin istration and wage claims under section 67(c) of the Bankruptcy Act and that, as these exceeded the total of the assets of the bankrupt estate, the United States would not be entitled to receive anything on its claim, in any event. The District Judge [55-1 USTC ¶9203] sustained the referee on the first of these holdings and found it unnecessary to pass upon the second. Two questions are presented by the appeal: (1) Did the failure to file notice in the office of the Clerk of the Court of Logan County defeat the rights of the United States under the levy and notice served upon the Boone County Coal Corporation? (2) If not, is the right of the United States under such levy and notice postponed to the admin istration and wage claims? We think that both of these questions should be answered in the negative.

[Levy Upon Debt]

It should be noted in the first place, that what we are dealing with here is, not a levy upon corporeal property, where the property is left in the possession of the bankrupt to serve as a basis for credit, but a levy upon an indebtedness with service of notice upon the debtor, the effect of which is to transfer to the United States the right to receive payment of the indebtedness up to the amount of the tax. A lien for taxes upon failure to pay on demand is provided for by 26 U. S. C. §3670; and this lien arises upon deposit of the assessment list with the Director, 26 U. S. C. §3671. Where taxpayer neglects or refuses to pay the taxes due, assertion of this lien is authorized by 26 U. S. C. §3692 by levy upon all property and rights to property of taxpayer except such as is specifically exempted by 26 U. S. C. §3691, which has no application here. Upon such levy, it becomes the duty of the debtor to pay the indebtedness levied upon, up to the amount of the tax, to the Director. 26 U. S. C. §3710. Levy here was made under section 3692 on form 668-A, which notified the Boone County Coal Corporation: "That all property, rights to property, moneys, credits and/or bank deposits now in your possession and belonging to the aforesaid taxpayer and all sums of money owing from you to the said taxpayer are hereby seized and levied upon for the payment of the aforesaid tax, together with penalties and interest, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth above from the amount now owing from you to the said taxpayer, or for such lesser sum as you may be indebted to him, to be applied in payment of the said tax liability."

There can be no question, we think, but that the lien for taxes provided by the statute can be asserted against intangible property such as a debt. United States v. Liverpool, London & Globe Ins. Co., 348 U. S. 215; Cannon v. Nicholas, 10 Cir., 80 Fed. (2d) 934 [35-2 USTC ¶9672]; Kyle v. McGuirk, 3 Cir., 82 Fed. (2d) 212 [36-1 USTC ¶9121]; United States v. First Nat. Bank, 8 Cir., 89 Fed. (2d) 116 [37-1 USTC ¶9201]; McKenzie v. United States, 9 Cir., 109 Fed. (2d) 540; United States v. Long Island Drug Co., 2 Cir., 115 Fed. (2d) 983, 985-986 [41-1 USTC ¶9140]; United States v. Warren R. Co., 2 Cir., 127 Fed. (2d) 134, 137-138 [42-1 USTC ¶9391]; Investment & Securities Co. v. United States, 9 Cir., 140 Fed. (2d) 894 [44-1 USTC ¶9210]; United States v. Manufacturers Trust Co., 2 Cir., 198 Fed. (2d) 366 [52-2 USTC ¶9417]; United States v. Ocean Accident & Guarantee Corporation, 76 Fed. Supp. 277 [48-1 USTC ¶9178]. And we think it equally clear that the proper way to assert the lien is by levy and notice such as was served here. There is apparent holding to the contrary in such cases as United States v. O'Dell, 6 Cir., 160 Fed. (2d) 304 [47-1 USTC ¶9190] and Givan v. Cripe, 7 Cir., 187 Fed. (2d) 225 [51-1 USTC ¶9169], to the effect that a "warrant of distraint" is necessary in addition to the notice to the debtor; but where, as here, the Director serves notice upon the debtor stating that the money owing "is seized and levied upon" for the payment of the tax and that demand is made upon the debtor for the amount necessary to satisfy the tax, he is serving a "warrant of distraint". No peculiar virtue inheres in the name ascribed to the notice. As said in Raffaele v. Granger, 3 Cir., 196 Fed. (2d) 620, 623 [52-1 USTC ¶9321]: "Distraint is a summary, extra-judicial remedy having its origin in the common law. There, a form of self-help, it consisted of seizure and holding of personal property by individual action without intervention of legal process for the purpose of compelling payment of debt."

[Perfection of Lien]

A creditor ordinarily perfects a lien upon a debt by attachment and garnishment with service of notice thereof upon the debtor. See Miller v. United States , 11 Wall. 268, 297; Kennedy v. Brent, 6 Cranch 187; Rickman v. Rickman, 180 Mich. 224, 146 N. W. 609, Ann. Cas. 1915C 1237, 1248; Strawberry Growers' Selling Co. v. Lewellyn, 158 La. 303, 103 So. 823, 39 A. L. R. 1502; 4 Am. Jur. p. 896; 5 Am. Jur. p. 94; 7 C. J. S. p. 403. When this has been properly done, the effect thereof is to give to the attaching creditor a lien upon the indebtedness for the amount necessary to satisfy the judgment rendered in the proceedings in his favor. The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. There is no necessity for adjudicating the amount of the tax under the statutory proceeding (United States v. Morris & Essex R. Co., 2 Cir., 135 Fed. (2d) 711 [43-1 USTC ¶9432], cert. den., 320 U. S. 754); and, consequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt. Columbian Nat. Ins. Co. v. Welch, 1 Cir., 88 Fed. (2d) 333 [37-1 USTC ¶9131]; United States v. Ocean Accident & Guarantee Corp., 76 Fed. Supp. 277, 278 [48-1 USTC ¶9178]; United States v. Marine Midland Trust Co., 46 Fed. Supp. 38 [42-2 USTC ¶9590]. When bankruptcy occurs after the levy and notice have been served upon a debtor of the bankrupt, the trustee in bankruptcy cannot interfere with the rights of the United States thereby perfected before bankruptcy.

[Filing of Notices]

There is nothing in 26 U. S. C. §3672(a)(1) which invalidates as against a trustee in bankruptcy rights acquired under such a levy upon a debt. That section has reference to liens upon tangible personal property having a situs, not to the levy upon or the transfer of debts, as to which no recording of lien could be of any advantage to creditors. The section is as follows:

"(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 are 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; or * * *."

For authorization of filing by state law reliance is placed upon West Virginia Code (1949) ch. 38, art. 10, sec. 1, which after providing for the filing of federal tax liens in the offices of clerks of county courts provides:

"No such tax shall be a valid lien as against any mortgagee, purchaser or judgment creditor, until such notice shall be filed in the office of the clerk of the county court of the county or counties in which the property subject to such lien is situated."

Both the federal statute and the statute of West Virginia manifestly have reference to tangible property, which left in the possession of taxpayer may serve as a basis of credit, and as to which the taking of possession by a lien claimant is generally held equivalent to the recording of lien. Firestone Tire & Rubber Co. v. Cross, 4 Cir., 17 Fed. (2d) 417. Only tangible property can properly be said to be "situated" in a county within the meaning of the statutes quoted; and it would be unreasonable to apply their provisions to debts, since debtors could not be expected to search the clerk's office before paying a debt, to see whether or not tax liens had been filed against their creditors, nor could banks be expected to make such search before honording checks drawn on deposits. With respect to such intangible property entirely different provisions are needed and have been made by the taxing statutes. Prior to levy and notice, the debtor may discharge his debt by payment to the creditor, whatever may have been filed in the clerk's office; thereafter it may be discharged as to the amount of the tax, only by payment to the Director. 26 U. S. C. §3710(b).

There can be no question, of course, but that a trustee in bankruptcy is vested by law with all the rights which a creditor could have obtained by legal or equitable proceedings at the time of the bankruptcy. Under the bankruptcy act of 1898, 30 Stat. 544, 565-566, as originally enacted, the trustee was vested with no greater rights in the property of the bankrupt than the bankrupt himself had, with the result that unregistered chattel mortgages and other secret liens could be asserted against the trustee after adjudication, although by adjudication creditors were prevented from attaching a lien to the property by legal process. Bailey v. Baker Ice Machine Co., 239 U. S. 268; Carey v. Donahue 240 U. S. 430; Martin v. Commercial Bank, 245 U. S. 513. Subsequent amendments to the bankruptcy act were designed to remedy the evils which had arisen from this situation. See House Report No. 1293, 81st Congress, 2d Session; United States Congressional Service, 81 Congress, 2d Session, vol. 2, pp. 1985-1990. The Amendment of 1952, 66 Stat. 420, 430, finally put section 70(c) in its present form providing: "The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as if such date with the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists."

The effect of the section as amended is to vest the trustee, not only with rights with respect to the bankrupt's property which creditors had acquired at the date of bankruptcy, but also with all rights which creditors might have acquired by legal or equitable process on that date; but this does not help the trustee here, since no creditor could have acquired any rights on that date with respect to a debt on which the United States had already made a levy and served a notice, the effect of which was to transfer the right to receive payment of the debt to the United States. We need not concern ourselves here with what the rights of the United States would be had there been no levy and its rights were dependent upon the inchoate lien on all property created by sections 3670 and 3672 of Title 26 of the Code. In such case, questions of a very different nature would be presented. What we have is a perfected lien created by levy with respect to a specific indebtedness. See Goggin, Trustee v. Division of Labor Enforcement of California , 336 U. S. 118 [49-1 USTC ¶9142]; Untied States v. Sands, 2 Cir. 174 Fed. (2d) 384 [49-1 USTC ¶9264].

[Administration and Wage Claims]

We think, also, that the rights of the United States are not postponed to admin istration and wage claims by section 67(c) of the Bankruptcy Act which provides:

"c. Where not enforced by sale before the filing of a petition initiating a proceeding under this Act, and except where the estate of the bankrupt is solvent: (1) though valid against the trustee under subdivision b of this section, statutory liens, including liens for taxes or debts owing to the United States or to any State or any subdivision thereof, on personal property not accompanied by possession of such property, and liens, whether statutory or not, of distress for rent shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 of this Act and such liens for wages or for rent shall be restricted in the amount of their payment to the same extent as provided for wages and rent respectively in subdivision a of section 64 of this Act. * * *."

That section also manifestly has reference to tangible property which can be taken into possession, not to indebtedness which has been levied upon with notice to the debtor so that it is to all intents and purposes assigned to the United States . City of New York v. Hall, 2 Cir. 139 Fed. (2d) 935, upon which the trustee relies, dealt with tangible property. If the statute be construed to apply to indebtedness, however, then what was done by the United States here must be construed as taking into possession within meaning of the statute. The United States had done everything that it could do to assert dominion over the indebtedness and by the levy and notice had made it impossible for the debtor to secure a discharge thereof by payment to any one other than the United States . We may say of the action taken by the United States here what was said by the Supreme Court of ordinary garnishment in Miller v. United States , supra, 11 Wall. 268, 279, viz.: "It arrests the property in the hands of the garnishee, interferes with the owner's or creditor's control over it, subjects it to the judgment of the court (here the payment of the tax), and therefore has the effect of a seizure". (Italics supplied).

For the reasons stated, the judgment appealed from will be reversed and the case will be remanded with direction to enter an order that the amount received by the Trustee in Bankruptcy from the Boone County Coal Corporation be paid over to the Director of Internal Revenue.

Reversed.

 

 

[55-1 USTC ¶9391]Hattie Mae Moss, Administratrix of Estate of G. E. (Jack) Moss, Deceased, Plaintiff v. United States of America , Defendant

In the United States District Court for the Western District of Oklahoma, Civil No. 6099, March 15, 1955

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Priority of tax lien: Levy on automobile: Claim of purchaser from debtor.--The tax claim of the United States was properly satisfied by the levy on an automobile where notice of the tax lien was filed in the County Clerk's office on January 3, 1952, the levy thereon was made on January 7, 1952 and a sale thereof at public auction was made on January 18, 1952. The Government's lien was superior to the rights of plaintiff as purported purchaser of the automobile from taxpayer-debtor after the filing of the lien, it appearing that such debtor was the record owner of the automobile on January 4, 1952 .

Carmon C. Harris, Cravens Building , Oklahoma City, Okla. , for plaintiff. Paul W. Cress, United States Attorney, Leonard L. Ralston, Assistant United States Attorney, P. O. Box 778, Oklahoma City, Okla., for defendant.

Findings of Fact, Conclusions of Law and Judgment

CHANDLER , District Judge:

This cause came on regularly for trial before Honorable Stephen S. Chandler, Jr., sitting without a jury, on February 23, 1955 . The Court makes the following Findings of Fact, and Conclusions of Law:

Findings of Fact

1. This action was initially instituted by Jack Moss seeking judgment for $1500, plus interest and costs, the purchase price of a 1950 Oldsmobile automobile, Motor No. 8A-532518-H, allegedly purchased by Jack Moss from one Grady King and his wife, Judy Cummings King, which automobile was seized by the government to satisfy a Federal tax lien against Grady King and and Judy King, nee Judy Cummings.

2. The plaintiff, Jack Moss, now deceased, was at the time of institution of this suit, a citizen of the United States of America and of the State of Oklahoma and a resident of the Western District of Oklahoma.

3. Hattie Mae Moss is the duly appointed and acting admin istratrix of the estate of G. E. (Jack) Moss, deceased, and this action was properly revived in the name of Hattie Mae Moss, Administratrix of said estate.

4. Judy Cummings, and/or Judy Cummings King, was the record owner of the automobile above described, on January 4, 1952 .

5. Notice of Federal tax lien against Grady and Judy King, aggregating an amount in excess of the amount involved in this action, was duly filed by the Collector of Internal Revenue or his duly authorized agent, with the County Clerk of Oklahoma County, Oklahoma, on January 3, 1952 at 2:38 P. M., against all property and rights to property belonging to Grady and Judy King, and prior to the purported sale in question to Jack Moss.

6. A levy was duly made by the Collector of Internal Revenue through Chester C. Smith, Deputy Collector, on the automobile in question, on January 7, 1952 .

7. Notices of sale at public auction were duly posted and the automobile in question was sold on January 18, 1952 , pursuant to said notices, at public auction to the highest bidder.

8. The payment of $1500 by Jack Moss to Judy Cummings was, at most, voluntary on behalf of the said Jack Moss.

Conclusions of Law

1. The defendant, United States of America, having a tax lien on all property and rights to property belonging to Grady and Judy Cummings King by reason of the notice of tax lien filed in the County Clerk's Office on January 3, 1952 by the Collector of Internal Revenue, and having thereafter duly and properly levied on the said automobile, one 1950 Oldsmobile, Motor No. 8A-532518-H, belonging to Judy Cummings and/or Judy Cummings King, and thereafter duly and properly advertising said automobile for sale and selling said automobile as provided by said notices, has a valid and superior claim to the proceeds thereof, which is superior to any alleged claim of the plaintiff Jack Moss or Hattie Mae Moss, Administratrix of the Estate of Jack Moss, deceased, and Jack Moss and/or Hattie Mae Moss, Administratrix of the Estate of Jack Moss, deceased, have no claim to said amount against the defendant, United States of America.

2. The payment of $1500.00 by Jack Moss to Judy Cummings was, at most, voluntary on behalf of the said Jack Moss and Jack Moss and/or Hattie Mae Moss, Administratrix of the Estate of Jack Moss, Deceased, have no claim against the defendant United States of America for said amount.

Judgment

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the defendant, United States of America, have judgment, that the plaintiff take nothing, and that this action be dismissed, with prejudice, upon its merits and that all costs of court herein, in the sum of $20.50, be taxed against the plaintiff.

 

 

[55-1 USTC ¶9357]In the Matter of Brokol Manufacturing Company, Bankrupt

(CA-3), In the United States Court of Appeals for the Third Circuit, No. 11,403, 221 F2d 640, April 14, 1955

Appeal of Louis Freeman, Trustee in Bankruptcy.

Appeal from the United States District Court for the District of New Jersey.

[1939 Code Sec. 3672(a)--substantially similar to 1954 Code Sec. 6323(a); 1939 Code Sec. 3710--substantially similar to 1954 Code Sec. 6332]

Tax liens: Sale under warrant of distraint: Excess of sale: Validity against trustee in bankruptcy: Jurisdiction.--Where, prior to the filing of a petition in bankruptcy, the Government's claim for certain taxes due by the debtor had been secured by a perfected lien and it had taken possession of all of the debtor's property under warrants of distraint, it was held that, as to whether other taxes owing by debtor which were omitted from such warrants had priority against the trustee in bankruptcy for the payment of wage claims and admin istration costs to the extent of the excess of sale proceeds realized under the warrants, was a question which the Court of Bankruptcy had no jurisdiction to decide. The trustee's remedy, if any exists, lies in a plenary suit against the Collector.

A. Rob ert Rothbard, 786 Broad St. , Newark 2, N. J., for appellant. James C. Pitney, Assistant United States Attorney, Post Office Bldg., Newark 1, N. J., for appellee.

Before GOODRICH, KALODNER, Circuit Judges, and LORD, District Judge.

Opinion of the Court

KALODNER, Circuit Judge:

The appellant, trustee in bankruptcy of Brokol Manufacturing Company ("Brokol") was adjudicated a bankrupt in the United States District Court for the District of New Jersey on December 18, 1951 , following an involuntary petition in bankruptcy filed on December 12, 1951 . At the time Brokol was indebted to the United States for tax arrearages totalling $19,806.85. On December 11th, a day before the petition in bankruptcy was presented, the Collector of Internal Revenue seized all of Brokol's assets under warrants of distraint for $5,742.25.

By stipulation the Collector was permitted to sell these assets, retaining $5,742.25 plus costs of the sale, the surplus to be admin istered in accordance with the order of the Bankruptcy Court. The stipulation expressly provides (paragraph 5) "Any of the rights which either of the parties . . . may have had at the time of the filing of the petition in bankruptcy . . . are preserved and are not waived in any manner . . .".

The parties have joined issue on whether the amount over $5,742.25 plus costs should be retained by the government and applied by it against its tax claim, or be admin istered by the Bankruptcy Court. If the latter course is adopted the government's remaining claims for taxes would be postponed to the payment of wage claims and admin istrative expenses. ¹

[Referee's Order]

The Referee entered an order on April 17, 1952 , directing the Collector to turn over the surplus funds to the trustee to be admin istered under the Bankruptcy Act. The District Court [53-1 USTC ¶9319] reversed this determination holding that Goggin v. Division of Labor Law Enforcement of California, 336 U. S. 118 (1948) [49-1 USTC ¶9142] was dispositive of the controversy and required that the government be given priority as to these funds. That part of the case which is relevant to our inquiry established that Sec. 67(c) requires the subordination of statutory liens to admin istrative and wage claims only where at the time of the filing of the petition the lienholder had not perfected its lien by possession of the bankrupt's assets. The lienholder involved was the Collector of Internal Revenue who had a perfected statutory lien accompanied by actual physical possession. ² No question was there raised as to the procedure by which possession had been accomplished and if no such question were involved here the direction of our decision would be established by the Goggin case.

But the Referee's determination was not in conflict with this case for he gave the government priority as to the $5,742.25 for which warrants had been issued. On the contrary Goggin throws no light on the issue presented on this appeal. The only disagreement with which we are concerned relates to the significance to be attached to the fact that the government's seizure was made under warrants of distraint not for the full amount of the tax claim, but for only $5,742.25. There is unanimity by the parties on the government's right to retain the sum represented by the warrants which had been employed in the seizure.

[Government's Claim]

The interest of the government in the disputed fund is predicated on a seizure made pursuant to Sections 3690-3697 of the Internal Revenue Code. ³ These sections require that a levy by a deputy collector be accompanied by warrants of distraint. The government explains its failure to employ warrants for the full amount claimed, by an admin istrative oversight: warrants for the total claim were issued but only a portion of them were delivered to the deputy collector who made the seizure. The trustee, on the other hand, contends that this " admin istrative oversight" resulted in giving the government legal possession of only $5,742.25 worth of the debtor's assets, that as to the remaining sum there had been no seizure and consequently that sum must be returned to be admin istered under the Bankruptcy Act.

We do not, however, reach this question as to whether the government's omission to follow strictly the statutory procedure is fatal, for we are of the opinion that a Court of Bankruptcy does not have jurisdiction to decide this question. The trustee's remedy, if any exists, lies in a plenary suit against the Collector.

Cline v. Kaplan, 323 U. S. 97 (1944) makes quite clear that a Bankruptcy Court has jurisdiction only of those assets in the actual or constructive possession of the bankrupt at the time the petition is filed; if property of the bankrupt is in the hands of an adverse claimant whose claim is "ingenuous or substantial", interests in that property cannot be determined by a Court of Bankruptcy without the consent of the adverse claimant. Said the Court, (pages 98, 99):

"A bankruptcy court has the power to adjudicate summarily rights and claims to property which is in the actual or constructive possession of the court. Thompson v. Magnolia Co., 309 U. S. 478, 481. If the property is not in the court's possession and a third person asserts a bona fide claim adverse to the receiver or trustee in bankruptcy, he has the right to have the merits of his claim adjudicated 'in suits of the ordinary character, with the rights and remedies incident thereto.' Gailbraith v. Vallely, 256 U. S. 46, 50; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U. S. 426. But the mere assertion of an adverse claim does not oust a court of bankruptcy of its jurisdiction. Harrison v. Chamberlin, 271 U. S. 199, 194. It has both the power and the duty to examine a claim adverse to the bankrupt estate to the extent of ascertaining whether the claim is ingenuous and substantial. Louisville Trust Co. v. Comingor, 184 U. S. 18, 25-26. Once it is established that the claim is not colorable nor frivolous, the claimant has the right to have the merits of his claim passed on in a plenary suit and not summarily. Of such a claim the bankruptcy court cannot retain further jurisdiction unless the claimant consents to its adjudication in the bankruptcy court. MacDonald v. Plymouth County Trust Co., 286 U. S. 263." Italics supplied.)

There is no contention here that the government has registered such a consent. Nor can we say that the government's interest in the fund is grounded in a "colorable or frivolous" claim.

[Jurisdiction of Bankruptcy Court]

The trustee, in effect, contends that tax controversies, of the order presented are not within the ambit of the principle embodied in Cline v. Kaplan. In support of this position he relies upon In re Florence Commercial Co., 19 Fed. (2d) 468 (1927) which sustained the jurisdiction of the Bankruptch Court to determine the validity of a lien on properties in the hands of state taxing authorities at the time bankruptcy proceedings were initiated. This case stands alone in adopting such a view and at least one case has refused to follow it. Denver v. Warner, 169 Fed. (2d) 508, 511 (1948). Section 64(a) of the Bankruptcy Act, Comp. St. sec. 9648, as then constituted, required that the Bankruptcy Court order the trustee to pay all taxes before payment of dividends to creditors, "and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court." ⁴ From this statutory reference the Court reasoned that since dividends to creditors are to be postponed to the payment of taxes there should be "an adequate but at the same time simple and direct mode of adjudicating tax claims." p. 469. As to the issue now before us the Court concluded: "Nor are we inclined to the narrow view that, while there may be jurisdiction to determine the amount of the tax, it does not extend to the incidental matter of the tax lien. The bankruptcy court is to see to it that the estate fully discharges all legal obligations in respect of taxes; and accordingly it is invested with power to decide all questions incidental to the performance of that duty." p. 470.

But the Bankruptcy Court is charged with the duty to see that All legal obligations of the bankrupt are accounted for, and it would seem to be no more or less "incidental to the performance of that duty" to determine the validity of a creditor's possession than to determine the validity of the taxing authorities' possession. And yet it is clear that where, at the time the petition is filed, a creditor is in possession of the bankrupt's property under a substantial claim, the Bankruptcy Court has no jurisdiction to determine interests therein. Taubel-Scott-Kitzmiller Co. v. Fox, 264 U. S. 426 (1924). We can perceive no statutory justification for differentiating between the possession of a creditor and that of a taxing authority as respects the jurisdiction of a Bankruptcy Court to adjudicate summarily interests in the possessed property. Accordingly we must decline to follow the Florence case.

For the reasons stated, the judgment of the court below will be vacated and the cause remanded with directions to proceed in accordance with this opinion.

¹ Section 67(c) of the Bankruptcy Act, as amended, 11 U. S. C. sec. 107(c):

"Where not enforced by sale before the filing of a petition initiating a proceeding under this title, and except where the estate of the bankrupt is solvent: (1) though valid against the trustee under subdivision (b) of this section, statutory liens, including liens for taxes or debts owing to the United States or to any State or any subdivision thereof, on personal property not accompanied by possession of such property, and liens, whether statutory or not, of distress for rent shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 104 of this title . . ."

11 U. S. C. 104(a) in clauses (1) and (2) relates to admin istrative expenses and certain wage claims.

² See also United States v. Sands, 174 Fed. (2d) 1384 [384] (2d Cir. 1949) [49-1 USTC ¶9264].

³ 26 U. S. C. §3690: "Authority to Distrain--If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes . . . by distraint and sale, in the manner provided in this subchapter . . ."

26 U. S. C. §3692: "Levy--In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property . . ."

⁴ 11 U. S. C. A. 104(a) applicable to the present case is in substance identical: ". . . in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the court."

 

[49-1 USTC ¶9264] United States of America , Appellee v. Sidney N. Sands, Trustee in Bankruptcy of Jewelry Mart, Inc., Appellant

(CA-2), In the United States Court of Appeals for the Second Circuit, No. 215, Dkt. No. 21274, 174 F2d 384, Decided April 25, 1949

Appeal from the United States District Court for the Southern District of New York.

Jeopardy assessment: Collector's distraint of property prior to taxpayer's bankruptcy: Priority of liens.--As against taxpayer's trustee in bankruptcy, the United States was entitled to the proceeds from the sale of personal property, owned by the bankrupt, upon which a collector of internal revenue had levied a distraint for unpaid taxes, the subject of a jeopardy assessment, prior to the bankruptcy. The decisive factor was the collector's possession of the property prior to bankruptcy. Affirming the decision of the District Court, reported at 48-2 USTC ¶9339.

Sam H. Lipson, of New York City (Nachamie & Benjamin and Max Nachamie, all of New York City , on the brief), for appellant. James A. Devlin, Asst. U. S. Atty., of New York City (John F. X. McGohey, U. S. Atty., of New York City, on the brief), for appellee.

Before CHASE, CLARK and FRANK, Circuit Judges.

CLARK, Circuit Judge:

This appeal by a bankruptcy trustee attacks a district court order directing him to turn over to the United States the proceeds of personal property owned by the bankrupt, upon which a collector of internal revenue had levied a distraint for unpaid taxes prior to the bankruptcy. The trustee's position is that no lien was acquired on the property, since no notice thereof was filed in a local recording office, and hence the claim for taxes is postponed to both expenses of admin istration and claims for wages under Bankruptcy Act, §64a, 11 U. S. C. A. §104(a). This view was accepted by the bankruptcy referee, upon the trustee's application for such an adjudication. Upon petition for review, however, the district court upheld the lien as against the trustee and directed payment to the United States . The sum in question was actually the proceeds from the sale of the property made by the trustee, but upon a stipulation of the parties and order of the bankruptcy court that it should be without prejudice to the respective rights of the parties, and the claim of lien made by the collector.

[Unrecorded Tax Lien]

The proceedings began on January 9, 1945, with the serving upon Jewelry Mart, Inc., of a notice of "jeopardy assessment" under I. R. C. §3660 for unpaid taxes in the sum of $1,777.99 by the Collector of Internal Revenue for the Third District of New York. Armed with a warrant of distraint the collector on January 12, 1945, levied upon personal property of the taxpayer and removed it to his office in New York City. On January 25, 1945, the taxpayer filed a petition for arrangement under the Bankruptcy Act, §322, 11 U. S. C. A. §722. Thereafter appellant was appointed its trustee in bankruptcy and made the sale as agreed upon, realizing the sum of $1,110.41, the sum in issue.

While we agree with the contention of the Government, we put to one side as only confusing and misleading a suggestion accepted below and partially urged here, in reliance upon a dictum of In re Taylorcraft Aviation Corp., 6 Cir., 168 Fed. (2d) 808, 810 [48-1 USTC ¶9288], that "an unrecorded tax lien of the collector was good against a trustee because a trustee was not a judgment creditor." We do not see how this dictum can be followed in view of the express provision to the contrary in Bankruptcy Act, §70c, 11 U. S. C. A. §110(c), and the frequent decisions upholding the rights of a bankruptcy trustee over conditional vendors and other creditors holding improperly filed instruments of security. Thus see Empire State Chair Co. v. Beldock, 2 Cir., 140 Fed. (2d) 587, 589, certiorari denied 322 U. S. 760, citing cases. As a matter of fact the view we regard as necessarily correct was followed in the Taylorcraft case below, D. C. N. D. Ohio, 76 Fed. Supp. 81, 85 [48-1 USTC ¶9104].

[Collector's Possession of Property]

The decisive factor which we believe makes the Government's contention controlling is the collector's possession of the property, pursuant to appropriate statutory authority, prior to the bankruptcy. Whether viewed as the "perfecting" of an imperfect lien, or as itself a statutory lien, the levy of a distraint upon specific property seems well within the protective features of the Bankruptcy Act, §67b, 11 U. S. C. A. §107(b). The statutory provisions for the collection of unpaid taxes show a complete scheme for the protection of the governmental revenues of the very kind which the bankruptcy provision is designed to uphold, even though bankruptcy ensues. When a jeopardy assessment is made, then the amount due becomes a "lien" upon the debtor's property under I. R. C. §3670. The lien arises at the time the assessment list is received by the collector, §3671; as shown by this statute and several others defining its operation and enforcement, §§ 3673-3679, it exists without respect to state filing. But by the terms of §3672, "such lien shall not be valid [i. e., enforceable] as against any mortgagee, pledgee, purchaser, or judgment creditor" until notice has been filed by the collector in accordance with state law where the state has provided for the filing of such notice. New York has provided for the filing of such notice in the office of the Register of the County of New York . N. Y. Lien Law §240. Admittedly no notice was filed in this case.

We cannot, however, stop with this provision, as did the referee; we must consider also the extensive provisions for distraint, I. R. C. §§ 3690-3716. Thus, under §3690 the collector may proceed at once (it being a jeopardy assessment) to collect the taxes "by distraint and sale" of the taxpayer's personal property. And by §3692 the levy may be upon all the property--except that exempt under §3691--"belonging to such person, or on which the lien provided in section 3670 exists." Thus the provision is in the alternative, showing both that the existence of a lien is not made a prerequisite and that the reference is to the general lien under §3670, and not the perfected lien under §3672. Further sections deal with the enforcement of the levy by sale, the similar distraint upon real property, and miscellaneous provisions, including a direction in §3710 for surrender of the property to the collector by all persons not holding an earlier right.

[Bankruptcy Act]

Sec. 67b of the Bankruptcy Act preserves certain statutory liens, including those for taxes and debts owing to the United States, even though arising or perfected while the debtor is insolvent and within four months of bankruptcy; indeed, it goes further and allows the perfecting of such liens as have arisen, but have not been perfected, before bankruptcy. By §67c, however, such liens for taxes "on personal property not accompanied by possession of such property" are postponed to the first two priorities of §64a, supra, even though valid under §67b, unless they have been enforced by sale before bankruptcy. But this particular levy was accompanied by possession taken before bankruptcy; it appears therefore to satisfy every requirement to come under subdivision b, rather than c. The wide scope to be accorded the word "lien" in this section seems properly indicated by its opening language in subdivision a(1), even though that deals with the dissolution of those liens in bankruptcy which are not preserved under the later provisions; thus it speaks of "every lien against the property of a person obtained by attachment, judgment, levy, or other legal or equitable process or proceedings." These are broad terms, indeed; to them possession is added as an additional alternative element by subdivision c. Compare Aldrich Shoe Co. v. Kagan, 1 Cir., March 25, 1949; Strom v. Peikes, 2 Cir., 123 Fed. (2d) 1003, 1006, 138 A. L. R. 937. It is difficult to see what the intended meaning can have been if it is not satisfied by a complete taking of possession under lawful claim for taxes due as provided in the revenue statutes.

This appears to be the accepted view. It is supported by wholly analogous state cases of persuasive, even if not legally controlling, authority. Sport-Craft, Inc. v. Lasker, 177 Misc. 872, 32 N. Y. S. 2d 360; Shenk Realty & Construction Co. v. Barrett, 178 Misc. 857, 36 N. Y. S. 2d 624. And it is the necessary result of the recent decision of the Supreme Court in Goggin v. Division of Labor Law Enforcement of California, 336 U. S. 118 [49-1 USTC ¶9142]. There the question was whether a tax claim of the United States, secured by a perfected lien and accompanied by possession at the time of bankruptcy, was lost by reason of the collector's relinquishment of the property to the trustee in bankruptcy for sale by him. The Court, in holding for the United States , emphasizes throughout both the perfecting of the lien and the taking of actual physical possession of the property. Thus it cites approvingly our two cases of Davis v. City of New York, 2 Cir., 119 Fed. (2d) 559, and City of New York v. Hall, 2 Cir., 139 Fed. (2d) 935, the first a case where "the City perfected its lien for retail sales taxes by seizure of assets of the taxpayer" before bankruptcy, the second a case where the City lost because until a matter of some minutes after the petition was filed its "lien was not accompanied by actual possession of the personal property to which it attached." 336 U. S. at page 125 [49-1 USTC ¶9142]. And speaking for the entire Court, Mr. Justice Burton said, 336 U. S. at pages 127-129 [49-1 USTC ¶9142]: "The purpose of §67 in requiring a public warning of the existence of an enforceable statutory lien for taxes was served in the instant case not only by the steps taken to perfect the Government's lien but by the Collector's seizure and actual possession of the personal property of the taxpayer before the filing of the taxpayer's petition in bankruptcy."

Order affirmed.

 

 

[48-1 USTC ¶9185]Edward Miller, Appellant v. Bank of America, N. T. & S. A., United States of America and George C. Welden, an individual doing business as Wholesalers Adjustment Bureau of San Francisco, Appellees

(CA-9), In the United States Circuit Court of Appeals for the Ninth Circuit, No. 11,628, 166 F2d 415, February 19, 1948

Upon Appeal from the District Court of the United States for the Northern District of California, Southern Division.

Lien for taxes: Priority of creditors: Judgment creditor.--Judgment creditor did not have a lien upon personal property of the debtor under California law, because a writ of execution under the judgment had not been levied. Consequently, he had no claim or right to a fund on deposit in a bank or against a tax lien of the United States . Affirming decision of District Court, 73 Fed. Supp. 303, reported at 47-1 USTC ¶9296.

Bernal & Bernal, Berkeley , Calif. , for appellant. Theron L. Caudle, Assistant Attorney General, Helen R. Carloss, A. F. Prescott, Newton K. Fox, and Ellis N. Slack, Special Assistants to the Attorney General, Washington, D. C., Frank S. Hennessy, U. S. Attorney, William E. Licking, Assistant U. S. Attorney, San Francisco, California, for appellee.

Before GARRECHT, MATHEWS and HEALY, Circuit Judges.

GARRECHT, Circuit Judge:

The claim of appellant arises out of an action instituted against Lyle B. Everett and Joseph B. McEachern in the Superior Court for Mendocino County , California . On January 5, 1944 , a writ of attachment for $8,212.52 was issued and served upon the Bank of America. On March 11, 1944 , a judgment by default in favor of appellant was entered in the amount of $5,052.43, plus attorneys' fees and interest and costs, which judgment was entered on the book of judgments in the office of the County Clerk of Mendocino County , California , on said date.

One claim of the United States is based upon the amount of $2,520.75 for withholding tax, interest and penalties due from Everett and McEachern. The Commissioner's assessment list was received by the Collector on March 27, 1944 . On April 3, 1944 notice and demand for payment was made on the taxpayers. On April 21, 1944 a notice of tax lien fro $2,620.51 was filed with the Recorder of Sonoma County, California.

Another claim for social security tax due from the same taxpayers for $629.85 was assessed by the Commissioner on April 11, 1944; the Commissioner's assessment list was received by the Collector on April 14, 1944; on April 17, 1944, notice and demand for payment was made, and on April 21, 1944, a notice of tax lien for $661.34 was filed of record with the County Rccorder of Sonoma County, California.

On April 21, 1944 , the Collector served a notice of levy for the total taxes upon the Bank of America at its Healdsburg Branch, Sonoma County , California .

Bank of America thereupon brought an action of interpleader and for declaratory relief against the United States, appellant, Everett and others, as conflicting claimants to a fund of $3,199.59 on deposit with the Bank in its Healdsburg Branch, to the credit of Everett.

Judgment by default was entered against Everett and McEachern in favor of the Bank. Thereafter the Bank was dismissed from the action leaving pending a motion for an order allowing it attorneys' fees and costs. The respective claims of the appellant, Miller, and the United States , to the fund, remained for settlement.

On these facts the District Court concluded that liens in favor of the United States arose when the Collector received the Commissioner's assessment list, as aforesaid, and on April 31, 1944 such liens were rendered valid when the Collector filed notices of same in the Recorder's office, Sonoma County, California, and served notice of levy upon the Bank at its Healdsburg Branch. The Court then held that the tax liens of the United States were superior to the "rights, claims and liens of the creditor defendant in and to the sum of $3,199.59 because recorded in Sonoma County, California, prior to the effectuation of any judgment liens in said County by any of said defendants."

The appellant now contends that a "judgment creditor" within the meaning of Section 3672(a) of the Internal Revenue Code requires nothing more than the rendition and entry of a judgment.

The appellee asserts, on the other hand, that the fact that a judgment has been entered is not, in and of itself, the establishment of a lien on personal property.

The statutes applicable to the present case are as follows: Sec. 3670, 26 U. S. C. 1940 ed.; Sec. 3671, 26 U. S. C. 1940 ed.; Sec. 3672 [as amended by Sec. 505 of the Revenue Act of 1942, c. 619, 56 Stat. 798]. ¹

There is no question that the Government perfected its lien to the fund as far as it was able to do so and that it complied with the law of the State of California providing for the filing of notice of lien for internal revenue taxes in the office of the recorder of the county in which the property subject to the lien is situated. ²

Appellant asserts that the above federal statutes should be literally construed and since the word "lien" is omitted in connection with the term "judgment creditor" as used therein, that it was not necessary for him to take any further action to perfect his right to the fund on deposit with the Bank of America: that the entry and docketing of the judgment was sufficient to entitle him to priority over the perfected lien of the Government in said fund.

The principle that a clear and unambiguous statute must be literally construed is long established. ³

If a literal construction would defeat the object or scope intended by Congress, or would result in "absurdities so gross 'as to shock the general moral sense', then the courts may be entitled to depart from the strict wording in order to give the statute a reasonable construction." ⁴

While the interpretation of the statute insisted upon by appellant probably would not have absurd or shocking results, if would clearly defeat the object intended by Congress. Moreover, it would be unreasonable to conclude that the Government intended to place itself at a disadvantage in procuring a tax lien when the decisions of the courts and the very history of the legislation in question show that before the enactment of the above statutes no lien whatsoever existed in favor of any class or classes of creditors. ⁵

Although the precise question presented has not been decided, there have been many decisions under the statutes here involved where the courts by implication exclude [d] the theory advanced by appellant. In all these cases it is certain that it is the lien created by the claim of a creditor within the meaning of recording acts which is contemplated, and not just the claim itself. ⁶

A judgment in and of itself does not necessarily constitute a lien upon any property unless made so by statute. In Von Segerlund et al. v. Dysart, et al. [CCA 9], 137 F. 2d 755, 757, this court said:

"A judgment lien as it exists in the United States is a creature of statute, and in the absence of statute does not give rise to a lien until an execution is delivered to the sheriff. 34 C. J. 568, 569, §870. 'Except in the few jurisdictions where a judgment does not of itself bind land, a judgment attaches as a lien without the use of any process, except as to property which is not commonly subject to the lien of a judgment, but can be made so by the levy of an execution, as trust property or personalty * * *.' Id. , pp. 584, 585, §892. 'The lien [of a judgment] does not attach to personal property except where a statute so provides.' Id. , pp. 587, 588, §898. See also 31 Am. Jur., Judgments, §308, p. 23."

The general rule is that goods and chattels of a judgment debtor are subject to liens predicated upon an execution but are not subject to liens predicated upon the rendition or entry of judgment. In re Bailey, D. C., 144 F. 215, it is said:

"A judgment itself does not necessarily constitute a lien upon any property, unless made so by statute. Usually, as it respects personal property, it only becomes a lien by virtue of an execution and a levy thereunder. From the time of the levy, the lien is deemed to attach, and not before." ⁷

In Nogi v. Greenwood, D. C., 1 F. Supp. 60, 62, cited with approval in Von Segerlund v. Dysart, supra, we find the following language:

"A judgment is not a lien on personal property of the debtor; it is only the enforcement of such judgment that can possibly create a preference. The mere entry of judgment cannot."

In re Richenell Fabric Mfg. Co., Inc., D. C. 31 F. Supp. 645, 647, also cited with approval in the Von Segerlund case, the court said:

"In the case of judgments, judgment creditors obtain no lien against personal property until execution and levy."

California follows the general rule that goods and chattels of a judgment debtor are subject to liens based upon an execution and not upon the rendition or entry of judgment.

In Summerville v. Stockton Milling Co., 142 Cal. 529, 540, 76 P. 243, the California Supreme Court held that a leasehold estate for a term of years was personal property and that no lien could be acquired thereon under a judgment until levy of execution. Stressing the difference between the effectuation of a lien on personalty and that on real property, the court said:

"The claim of the plaintiff that no formal levy was necessary upon the growing crop nor upon the leasehold interest is, by reason of the proposition which we have just considered, necessarily untenable. It may be conceded, as was decided in Lenhardt v. Jennings, 119 Cal. 192; Bagley v. Ward, 37 Cal. 121; . . . and Blood v. Light, 38 Cal. 654, . . . that the levy of an execution is not necessary where the judgment itself constitutes a lien upon the real property which is the subject of the execution sale. But, as we have seen, the judgment in this case did not constitute a lien upon the property [personal] sold, and as there was no levy, it follows that the sale, if otherwise valid, took effect upon the day of its date, and not before, or at all events, not before the notices of the sale were posted. We think therefore, that there was no lien upon the leasehold estate of Stuart in favor of the plaintiff until the sale took place or the notices were posted . . . and consequently that, so far as that question determines his right, Hewlett had the superior right to the possession of the wheat in controversy, so far as that possession may be necessary to protect his lien thereon for the payment of the debts aforesaid." [Italics supplied.]

Later, in Summerville v. Kelliher, 144 Cal. 155, 157, 77 P. 889, the California Supreme Court reiterated its opinion in the above case as follows:

"The judgment of Watson was not a lien on the leasehold interest of Stuart, and, there being no levy of the execution, the plaintiff's right takes its inception from the time of the sale, or from the giving of the notice thereof." ⁸

Even though the property is held by attachment, under California law the judgment does not become a lien. ⁹

In conformity with the laws of California , the venue of the case before us, in order that a judgment creditor may obtain a lien upon personal property under a judgment it is necessary that a writ of execution issued under the judgment be levied on said property wherever situated. Since there was no levy of execution herein, it follows that the appellant had no claim or right to the fund on deposit with the Bank of America belonging to the debtor as against the paramount and superior lien of the Government.

The judgment of the district court is affirmed.

¹ Sec. 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. 443.)

"Sec. 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).

"Sec. 3672. Validity against mortgagees, pledgees, purchasers, and the 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 accordance with 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 provided for the filing of such notice; or . . .."

² II Deering's General Laws of California (1937) 3850-3851: Act 8487. Notices of Liens for Internal Revenue Taxes. [Stats. 1923, p. 1124] * * *

§1. Notices, etc., may be filed. Notices of liens for internal revenue taxes payable to the United States of America and certificates discharging such liens may be filed in the office of the county recorder of the county or counties within which the property subject to such lien is situated."

³ Hamilton v. Rathbone, 175 U. S. 414, 20 S. Ct. 155, 44 L. Ed. 219; Thompson v. United States, 246 U. S. 547, 38 S. Ct. 349, 62 L. Ed. 876; Crooks v. Harrelson, 282 U. S. 55, 51 S. Ct. 49, 75 L. Ed. 156 [2 USTC ¶616].

⁴ United States v. Beaver Run Coal Co., 99 F. (2d) 610 [38-2 USTC ¶9540]; Helvering v. New York Trust Co., 292 U. S. 455, 54 S. Ct. 806, 78 L. Ed. 1361 [4 USTC ¶1293]; Crooks v. Harrelson, 282 U. S. 55 [2 USTC ¶616], supra.

⁵ "Prior to the enactment of the amendment in 1913 the Act contained no provision for priority on the part of any third parties. Decisions under the Act prior to 1913 repeatedly held that no third parties, not even innocent purchasers for value, were protected under any circumstances from an unrecorded tax lien. United States v. Snyder, 149 U. S. 210, 13 S. Ct. 846, 37 L. Ed. 705. In 1913, 37 Stat. 1016[,] Congress added the provision that the tax lien shall not be valid against 'any mortgagee, purchaser, or judgment creditor' until recordation of the notice. Congress at this time undoubtedly recognized that under the statute as it existed prior to 1913 no third person was protected under any circumstances, from an unrecorded federal tax lien . . ." MacKenzie v. United States, [CCA 9] 109 F. (2d) 540 [40-1 USTC ¶9229].

Cf. Reconstruction Finance Corporation v. Maley, 125 F. (2d) 131, 135.

⁶ Glass City Bank v. United States, 326 U. S. 265, 266 [45-2 USTC ¶9449]; Citizens Nat. Trust & Savings Bank of Los Angeles v. United States et al., 135 F. (2d) 527, 528 [43-1 USTC ¶9426]; Underwood v. United States, [CCA 5] 118 F. (2d) 761 [41-1 USTC ¶9296]; United States v. City of Greenville et al., 118 F. (2d) 963, 966 [41-1 USTC ¶9381]; United States v. Beaver Run Coal Co., [CCA 3], 99 F. (2d) 610 [38-2 USTC ¶9540]; United States v. Spreckels et al., [DC 9], 50 F. Supp. 789, 791 [43-2 USTC ¶9572].

⁷ See also Rock Island Plow Co. v. Reardon, 222 U. S. 354, 56 L. Ed. 231, 32 S. Ct. 164; Wilson v. Bell, 20 U. S. 201, 22 L. Ed. 259.

⁸ See Balzano v. Traeger, 93 Cal. App. 640, 643.

⁹ Summerville v. Stockton Milling Co., supra.

 

 

[47-2 USTC ¶9383] United States of America , Appellant v. Edward L. Fogarty, Trustee in Bankruptcy of Inland Waterways, Inc., Appellee

(CA-8), United States Circuit Court of Appeals, Eighth Circuit, No. 13,500, 164 F2d 26, November 4, 1947

Appeal from the District Court of the United States for the District of Minnesota.

Collection of income tax at the source: Definition of employer: Trustee in bankruptcy.--Where a trustee in bankruptcy made payments on wage claims against the bankruptcy (a corporation engaged in the shipbuilding business), the amounts paid did not lose their identity as "wages," the trustee was the employer within the meaning of Code Secs. 1621 (d) and 1622, and, in the absence of proof that any of the wage earners had paid income tax sufficient to discharge the withholding taxes due on the trustee's payment to them, he was liable for the withholding taxes assessed against the bankrupt's estate. Reversing the decision of the District Court, reported at 47-1 USTC ¶9200, 71 Fed. Supp. 134.

Mr. John E. Garvey, Special Assistant to the Attorney General (Mr. Theron L. Caudle, Assistant Attorney General; Mr. Sewall Key, Mr. Lee H. Jackson, and Miss Helen Goodner, Special Assistants to the Attorney General; Mr. Victor E. Anderson, United States Attorney, and Mr. James J. Giblin, Assistant United States Attorney, were with him on the brief) for Appellant. Mr. Arthur M. Clure (Mr. E. L. Fogarty, Trustee in Bankruptcy, and Messrs. McCabe, Gruber, Clure, Donovan & Crassweller were with him on the brief) for Appellee.

Before GARDNER, WOODROUGH, and RIDDICK, Circuit Judges.

WOODROUGH, Circuit Judge, delivered the opinion of the Court.

This is an appeal by the United States from a judgment in the amount of $1,491.34 with 6 per cent interest, rendered against it in bankruptcy proceedings in favor of the trustee in the bankruptcy. The judgment is intended to compel payment to the trustee of said sum of $1,491.34, which the United States is withholding as a partial offset against taxes which the court found to be invalid. The facts were stipulated and we summarize them from our study of the record and the statements of facts made by opposing counsel (which are in conflict in some particulars) as follows:

Summary of Facts

Inland Waterways, Inc., was a corporation engaged in the shipbuilding business at Duluth , Minnesota , in which it employed about 200 persons. On December 19, 1942 , it filed a petition for reorganization under Chapter 10 of the Bankruptcy Act, and Edward L. Fogarty was appointed trustee with authority to continue the operations of the bankrupt until a plan of reorganization was approved or until an adjudication of bankruptcy was made. It was soon ascertained that the continuation of the business was not justified and all the bankrupt's employees were discharged. On June 2, 1945 , an adjudication of bankruptcy was made. The bankruptcy owed its employees wages earned within ninety days prior to December 19, 1942 , not exceeding $600 each, in a total amount of $44,168.89. These wage claims were allowed by the District court on May 10, 1946 , and assigned first priority for payment under Section 64(a) of the Bankruptcy Act.

At the time it filed its petition, the bankrupt was constructing vessels for the United States Navy. Subsequently, the trustee and the Navy Department agreed in a compromise settlement that there was due the bankrupt on account of uncompleted work the amount of $14,505.38. On April 23, 1945 , the trustee received a check for $10,972.18, representing the amount of $14,505.38 minus $3,533.20 retained by the United States to pay employment taxes on wages paid in 1942 due the United States from the bankrupt in this amount.

Said sum of $3,533.20 was made up of assessments of so-called "Title VIII" taxes and so-called "Title IX" taxes. Claims for these taxes had previously been filed with the trustee by the Collector of Internal Revenue and on May 10, 1946 , they were allowed by the District court and assigned a priority for payment second only to the wage claims of $44,168.89.

On June 2, 1945 , when the adjudication of bankruptcy was made, the trustee was ordered to pay a 25 per cent dividend on the labor claims having priority under the bankruptcy law. In June, 1945, the trustee paid wage claimants the amount of $10,530.38, in respect of wages earned by them as employees of the bankrupt prior to bankruptcy and having priority. The assets thereafter remaining in the trustee's hands will suffice only to provide an additional payment to the wage claimants of not to exceed 20 per cent.

The Collector of Internal Revenue demanded that the trustee file returns for, and pay employment and withholding taxes in respect of the $10,530.38 payment, but he refused to do so. He did, however, supply to the Collector figures and information to assist the Collector to compute the amounts of such claimed taxes and no objection is made as to the methods of computation.

In October, 1945, employment taxes and interest of $209.33 were assessed on the $10,530.38 payment and in November, 1945, withholding tax and interest of $1,887.48 were assessed on the payment, the total being $2,096.81. The Collector filed claims for these taxes as an admin istrative expense. On December 27, 1945 , the Commissioner of Internal Revenue advised the trustee that the amount of $1,491.34, representing part of the assessments for 1942 totaling $3,533.20, had been abated and that the amount abated would be credited against any other like taxes which were due, or be refunded. No part of the assessment of "Title VIII" taxes was abated.

Since the amount of $3,533.20 had been retained by the United States from the amount owed by it to the bankrupt, the $1,491.34 so abated was applied by the United States to pay in part its claims for employment and withholding taxes and interest for 1945 which had been assessed, as stated, in October and November, 1945, leaving a balance due the United States on these assessments of $900.44.

Upon these facts the District court concluded that the United States had a valid claim for employment taxes of $2,041.86 (i. e., $3,533.20 less $1,491.34) on wages paid by the bankrupt in 1942 and that it was entitled to collect this amount by deducting it from the amount owed by it to the bankrupt; that the assessments of employment and withholding taxes totaling $2,096.81 on the dividend payment in June, 1945, of wage claims by the trustee were invalid; and that the United States was not entitled to collect the amount of $1,491.34, as a partial payment on these assessments. Accordingly, it entered judgment in favor of the trustee against the United States in the amount of $1,491.34, with interest at 6 per cent from April 23, 1945 .

The memorandum opinion of the District court is reported at [47 USTC ¶9200] 71 F. Supp. 134. This court has jurisdiction of the appeal under Section 128(a) and (c) of the Judicial Code, as amended.

Opinion

The Government assigns error in the trial court's holding that the assessments of employment and withholding taxes in respect to the amounts paid by the trustee in bank ruptcy under court order on account of wages earned by bankrupt's former employees prior to bankruptcy were not enforcible against the trustee and were invalid. ¹

(1) The Employment Taxes of $209.33 involved here are those imposed by Sections 1400 and 1410 of the Internal Revenue Code, 26 U. S. C. A. They are the federal insurance contributions taxes, originally levied by Sections 801 and 804 nof the Social Security Act of 1935, c. 531, 49 Stat. 620. They are referred to generally as "Title VIII" taxes. The federal unemployment taxes, referred to as "Title IX" taxes, imposed on employers of eight or more originally by Section 901 of the Social Security Act, and for 1939 and subsequent years by Section 1600, et seq., of the Internal Revenue Code, are not involved in this case. Section 1400 levies a one per cent income tax on wages received in the year 1945 with respect to employment, Section 1401(a) requires the tax to be collected by the employer by deducting the amount of the tax from the wages as and when paid, and Section 1401(b) makes the employer liable for the payment of the tax. ² Section 1410 levies upon an employer an excise tax, with respect to having individuals in his employ, of one per cent of the amount of wages paid by him during 1945. For purposes of both the employees' and employer's tax, Section 1426(a) defines "wages" as "all remuneration for employment," with certain exceptions not applicable here, and Section 1426(b) defines "employment" in part as "any service, of whatever nature, performed after December 31, 1939, by an employee for the person employing him," with exceptions for various special types of service not applicable here. ³ The term "employer" is not specifically defined for purposes of these taxes, and the only definition of "employee" is that it includes an officer of a corporation. Section 1426(d).

The social security legislation established a broad assistance program for the aged and others and levied the Title VIII and Title IX taxes to supply additional general revenue which when appropriated would yield funds to carry out the program. The constitutionality of the legislation is settled, Helvering v. Davis, 301 U. S. 619; Steward Machine Co. v. Davis, 301 U. S. 548; United States v. New York , 315 U. S. 510; Illinois v. United States, 328 U. S. 8, and the function of the courts is to apply the provisions so as to effectuate the declared intent of Congress. No part of that intent is made more clearly manifest than that the basis for the admin istration of federal old age benefits is wages. "Only those who earn wages are eligible for benefits. The periods of time during which wages were earned are important and may be crucial on eligibility under either the original act or the Amendments of 1939. * * * The benefits are financed by payments from employees and employers which are calculated on wages. The Act defines 'wages' for old age benefits as follows: 'Sec. 210. When used in this title--(a) the term "wages" means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash; * * *.' Employment is defined thus: '(b) The term "employment" means any service, of whatever nature, performed within the United States by an employee for his employer, except--'" Social Security Board v. Nierotko, 327 U. S. 358. Undoubtedly if the $44,168.89 of wages here involved had been partially paid to the extent of the $10,530.38 by the bankrupt itself, it would have been liable for the taxes claimed. Those receiving the wages would have been rendered eligible for benefits to that extent and the periods of time fixed. The fact that at the time payments were made those receiving them might no longer have been in the employ of the company would not be material. And certainly in many relations a trustee in bankruptcy stands in the shoes of a bankrupt and the property in his hands unless otherwise provided in the bankruptcy act, is subject to all of the equities impressed upon it in the hands of the bankrupt. Security Warehousing Company v. Hand, 206 U. S. 415. But if the trustee may not be held liable for the taxes here in question, it would seem that the broad purposes of the legislation would not be accomplished in the instances where the employer goes into bankruptcy and the wages due from him earned within ninety days of his bankruptcy are paid in whole or in part out of his assets through the bankruptcy proceedings.

It is contended for the trustee that such result can not be avoided because upon the occurrence of bankruptcy the bankrupt's estate is brought into the bankruptcy court and the distributions are made under the bankruptcy law and are payments of dividends ordered by the court and the character of the payments as wage payments is lost. It is pointed out that the wages here were not earned in any employment of the wage earners by the trustee or in doing work for him, and that he was never their "employer" within the meaning of the statute.

On the other hand, it is contended for the Government that the statutes imposing taxes payable by employers on wages paid with respect to employment ought to be liberally construed to accomplish their broad social purpose and should apply to a trustee in bankruptcy paying wage claims to his bankrupt's former employees. That the character of the payment as wages should be determinative of liability for the taxes, rather than whether the payor of the wages fits within the usual concept of an employer. That in paying wage claims the trustee stands in the shoes of the employer-bankrupt and should be equally subject to these taxes as the employer. That the trustee's $10,972.18 payment was precisely within the statutory definition of wages as remuneration paid for services rendered by an employee, and its nature was not changed when it was allowed as a claim against the estate and ordered paid. That the court order directing payment by the trustee did not create a different obligation; it recognized and sanctioned the contract right of the bankrupt's employees to earned wages. It is also claimed that long continued admin istrative construction supports the liability fo the trustee for the taxes.

In support of the claimed admin istrative construction we are cited first to Section 402.227 of Treasury Regulations 106, which provide that,

"Remuneration for employment * * * constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them."

We think this regulation is within the permissible limits of admin istrative interpretation and is in furtherance of the purposes of the Acts. It properly emphasizes that the taxing provisions are concerned with the character of the payments as wages rather than with the relationship of the payor to the payee and recognizes that in the failure of the statute to define employers and employees specifically, the intent is to have those terms derive their meaning from the definitions of wages and employment in Section 1426(a) and (b). The tax was contemplated, though at the time the wages were paid employment may have ceased and there might be no one who would then come within the strict definition of an employer or an employee. The Regulation clearly indicates the admin istrative determination that the relation between the payor and payee of wages at the time of payment is not determinative and that it is the accrual and payment of wages the give rise to the tax.

S. S. T. 120, 1937-1 Cum. Bull. 375, is also cited, holding that,

trusts or estates managed and conducted by a fiduciary should be held generally to be the employer under the provisions of Titles VIII and IX of the Social Security Act. This construction of the Act is applicable not only to strict trusts but also to corporations and estates whose affairs are being admin istered or liquidated by trustees in bankruptcy and State and Federal receivers, including bank liquidators.

Also Section 29.52-2 of the Treasury Regulations 111, which provides that where a corporation's property is in the custody of a trustee in bankruptcy, subject to court order, the trustee is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation if they were in control.

But though we consider that the cited Regulations tend to support the contentions for the Government, we think they find stronger support in the reasoning of the Supreme Court in Social Security Board v. Nierotko, supra. ⁴ There a wage earner was wrongfully discharged by his employer and was ordered reinstated with back pay by the National Labor Relations Board. He applied under §205(c)(3) of the Social Security Act, 53 Stat. 1369, to have the award of back pay which he received credited to him on his Old Age and Survivors Insurance Account with the Board, and the Board refused to credit the "back pay" as "wages." Under agreement the employing company withheld 1% of the amount for the payment of the Social Security tax pending the outcome of the litigation in the courts. The ground of the Board's refusal to credit the back pay award was that it did not constitute "wages." The court stated the applicable statutory definition of "employment" and "wages" and noted that they were similar to those here involved and discussed not only the holding of the particular agency whose action was for review, but also that of the Bureau of Internal Revenue on the problem whether "back pay" was wages subject to tax under Titles VIII and IX of the Social Security Act. Holding that "back pay" must be treated as "wages," the court said,

"The purpose of the federal old age benefits of the Social Security Act is to provide funds through contributions by employer and employee for the decent support of elderly workmen who have ceased to labor. Eligibility for these benefits and their amount depends upon the total wages which the employee has received and the periods in which wages were paid. While the legislative history of the Social Security Act and its amendments or the language of the enactments themselves does not specifically deal with whether or not 'back pay' under the Labor Act is to be treated as wages under the Social Security Act, we think it plain that an individual, who is an employee under the Labor Act and who receives 'back pay' for a period of time during which he was wrongfully separated from his job, is entitled to have that award of back pay treated as wages under the Social Security Act definitions which define wages as remuneration for employment' and employment as 'any service . . . performed . . . by an employee for his employer . . ."

"Surely the 'back pay' is 'remuneration.' Under Section 10(c) of the Labor Act, the Labor Board acts for the public to vindicate the prohibitions of the Labor Act against unfair labor practices (section 8) and to protect the right of employees to self-organization which is declared by Section 7."

The problem thus disposed of by the Supreme Court is essentially of the same nature as that presented here. There the money received by the workman came to him through the award of the Board, as in this case it came to the workman through the judgment of the bankruptcy court, but in both cases it must be identified as "wages" in order to effectuate the intent of the Social Security Act and the Revenue Acts which implement it. Neither the judgment of the Board in Nierotko's case nor the judgment of the bankruptcy court in this case rested on traditional processes of common law or bankruptcy. The Circuit Court of Appeals said in Nierotko's case (page 276):

"When we give consideration to the rationalization in Helvering v. Davis [301 U. S. 619], by which the power of Congress to enact the Social Security Act under the General Welfare Clause, was sustained, the reasoning that the award of old age benefits was in response to a problem national in area and dimensions, to save men and women from the rigors of poverty and the haunting fear that such a lot awaits them, and when we consider that its enactment followed hard upon the passage of the National Labor Relations Act, and that both were the result of an integrated national labor policy designed to mitigate the hardships of an economic crisis which impelled the adoption of both, it seems inconceivable that the Congress, in its concurrent endeavor to prevent labor strife and preserve the continuity and stability of labor remuneration, could have intended that Social Security benefits should be denied to a large class of employees reasonably expected to come into existence by virtue of the remedial provisions of the National Labor Relations Act, and this by a definition of employment which, as now sought to be interpreted, is in conflict with its meaning in the earlier statute, unrealistic in the light of human experience, and may well have been purely fortuitous."

Here the preference given to wage claims by Section 64(a) of the Bankruptcy Act derives from similar considerations and recognizes the same necessity of drawing a sharp line of differentiation between debts in general and claims for wages . The section imposes a special duty on the Bankruptcy court in respect to wage claims, and both as a practical matter and under the wording of the section the action of the court in allowing the wage claims preferentially and that of the trustee in paying them pursuant to the court's order, strictly preserves the identification of the wages both as to the time they were earned and as to the amounts due as wages. If the Supreme Court had not considered that that same identification carried through the award of the board it could hardly have reached the conclusion it reached in Nierotko's case. In view of that decision and of Section 64(a), we hold that the wages involved here did not lose their identitfy as such and that the assessment of employment taxes in respect of the partial payment of wages in this case was valid and enforcible against the trustee in bankruptcy.

(2) The Income Withholding Taxes of $1,887.48 here involved are referable to the Current Tax Payment Act of 1943, c. 120, 57 St. 126, by which Congress undertook to establish a system whereby individual taxpayers would pay the general income tax currently. Section 1622(a) of the Internal Revenue Code, as added by Section 2 of the Current Tax Payment Act, requires an employer making payment of wages to deduct and withhold from such wages a tax equal to an amount there specified, and Section 1623 makes the employer liable for the payment of the tax so required to be deducted and withheld. Section 1621(a) defines wages as "all remuneration for services performed by an employee for his employer" with exceptions not material here, and Section 1621(d) defines "employer" as the "person for whom an individual performs or performed any service, of whatever nature, as the employee of such person except that" "if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term 'employer' ⁵ means the person having control of the payment of such wages."

Although much of what has been said concerning the liability of the trustee for the employment taxes is applicable to the question of his liability for these taxes, the last quoted statutory provisions appear on their face to apply directly to the situation here where the company which employed the wage earners has gone into bankruptcy and lost control over the payment of the wages and its trustee succeeded to the custody and control of its assets and actually made the payment out of such assets. The result would be no different if it is argued that the bankruptcy court rather than its trustee is "the person having control of the payment of such wages." There is no provision excepting a court from the requirement of withholding on amounts paid an employee as defined in Section 1621(c) and Section 1621(d) plainly indicates the intent to include the United States and its instrumentalities as employers. Section 405.105 of Treasury Regulations 116 includes agencies of the United States within the definition of employer. We think, however, that the trustee was the one in control of the payment of wages within the intent of Section 1621(d). The purpose is to treat the actual payor of the remuneration as the employer for withholding and payment purposes. ⁶

There appears to have been no admin istrative ruling expressly stating that a trustee in bankruptcy is an employer within Section 1621(d) and 1622 for withholding tax purposes, but S. S. T. 120, supra, providing that a trustee is an employer for the purposes of the employment taxes may be regarded as pertinent here, for as was stated in H. Conference Rep. No. 510, 78 Cong., 1st Sess., p. 28 (1943 Cum. Bull. 1351),

"* * * the methods of collection, payment, and admin istration of the withholding tax were coordinated generally with those applicable to the Social Security tax imposed on employees under Section 1400 of the Code. This proposal was made in order to facilitate the work of both the Government and the employer in admin istering the withholding system."

Not only are the two types of withholding tax intended to operate alike in so far as employers are concerned, but the trustees in bankruptcy should be treated as the employer for the further reason that he, for general purposes, stands in the shoes of the bankrupt and is so treated for other income tax purposes. Section 29.52-2 Treasury Regulations 111.

Under Section 35 ⁷ of the Internal Revenue Code the employee from whose wages a tax has been deducted and withheld under Section 1622 is entitled to a credit against his total income tax for the year equal to the amount withheld, and Section 1622(d) prohibits collection of the tax from the employer who has failed to withhold in cases where the employee has paid his income tax in full, including the amount which should have been withheld. But the employer is not relieved of his liability for the tax until the employee has in fact paid what the employer owes, and even then he remains liable for penalties and additions to the tax resulting from his failure to withhold. The trustee here is thus primarily liable for the employees' income tax to the extent required to be withheld and he is the one to whom the statute looks for the tax. In this case, there is no proof that any of the wage earners have paid income tax for the year 1945 sufficient to discharge the withholding taxes due on the trustee's payment to them. Hence, on the present record there is no basis for holding that the trustee is not liable for any of the withholding taxes assessed against the bankrupt's estate.

(3) The taxes which we conclude are valid and enforcible against the estate of the bankrupt should be allowed and classified as an expense of admin istration having priority under Section 64(a) of the Bankruptcy Act. The taxes were not payable at the time the petition was filed by the bankrupt and only accrued "as and when paid," that is, on the actual payment of 25% of the wage claims during the admin istration of the estate pursuant to the orders of the bankruptcy court. State of Missouri v. Gleick, 8 Cir., 135 F. 2d 134, 137; United States v. Killoren, 8 Cir., 119 F. 2d 364 [41-1 USTC ¶9448], cert. den., 314 U. S. 640; In re Lambertville Rubber Co., 3 Cir., 111 F. 2d 45; cf. Michigan v. Michigan Trust Co., 286 U. S. 334; Ingels v. Boteler, 9 Cir., 100 F. 2d 915, affirmed, 308 U. S. 57.

Other questions have been presented on the appeal, but our determination that the assessments of employment and withholding taxes amounting to $2,096.81 on the $10,530.38 payment on wage claims were valid and enforcible against the trustee obviates the necessity of passing upon or discussing them. The judgment is reversed with direction to allow the claim for employment and withholding taxes, deducting the $1,491.34 as an offset and ordering the balance of $900.44 to be classified for payment as an expense of admin istration.

Reversed with directions.

¹ No previous case deciding the precise question was found and it has been very thoroughly briefed on both sides. The power of the District court to pass on the validity of the assessments is not questioned.

² The employer is liable to pay the tax whether or not be has deducted it from the wages of the employee. United States v. New York , 315 U. S. 510, 514-516.

³ The exception in Section 1426(b)(6) for service performed in the employ of the United States Government or of an instrumentality of the United States, either wholly owned or exempt from the employer's tax under some other provision of law, does not fit this case. The services for which the trustee made payment here were performed in the employ of the bankrupt corporation, which was not the United States or one of its instrumentalities.

⁴ The court affirmed the judgment of the Sixth Circuit Court of Appeals, 149 F. 2d 273, and the facts presented appear more fully from inspection of both opinions.

⁵ An exception is made that the term "employer" does not have this meaning in connection with determining whether a payment is "wages" within the meaning of Section 1621(a).

⁶ S. Rep. No. 221, 78th Cong., 1st Sess., (1943 Cum. Bull. 1314), explained with respect to this definition (pp. 19-20):

* * * Under the House bill and under the bill as reported by your committee, the definition of withholding agent has been eliminated. Both bills generally define the term "Employer" to mean the person for whom an individual performs or performed any service of whatever nature, as the employee of such person. This general definition is not adequate, however, to cover certain special cases, such as the case where the local agent of a nonresident alien individual, foreign partnership, or foreign corporation pays wages to a citizen or resident of the United States, and the case of the person making payment of wages in situations where the wage payments are not under the control of the person for whom the services are or were performed, as, for instance, in the case of certain types of pension payments. The House bill provided for these cases by an exception to the general definition of the term "employer" which provided that if the wages are paid by a person other than the person for whom the services are or were performed, the term "employer" means the person paying such wages. The committee bill has restated the exception in order to make clear that it is a departure from the basic purpose to centralize responsibility for withholding, returning, and paying the tax and furnishing receipts.

Accordingly, the bill provides in Section 1621(d)(1) that if the person for whom the services are or were performed does not have control of the payment of the wages for such services, the term "employer" means the person having control of the payment of such wages. * * *

See also H. Rep. No. 401, 78th Cong., 1st Sess., pp. 23-24, (1943 Cum. Bull. 1283), which states that the definition of the term "employer" has been broadened to include "persons paying wages for services performed for another." The Senate definition was ultimately adopted. H. Conference Rep. No. 510, 78th Cong., 1st Sess., pp. 30-31.

⁷ Section 35 as added by Sec. 172, Revenue Act of 1942, c. 619, 56 Stat. 798 as amended by Sec. 3, Current Tax Payment Act of 1943, c. 120, 57 St. 126, Credit for Tax withheld on Wages.

 

 

[47-1 USTC ¶9137]The United States of America , Plaintiff-Appellant v. Leonard B. Ettelson, Executor, et al., ect., Defendants-Appellees

(CA-7), In the United States Circuit Court of Appeals for the Seventh Circuit, No. 9118. October Term, 1946, January Session, 1947, 159 F2d 193, Filed January 27, 1947

Appeal from the District Court of the United States for the Eastern District of Wisconsin.

Limitation upon assessment and collection: Assessment of tax: Evidence.--Certified copies of assessment certificates and income tax assessment lists, both under seal of the Treasury Department of the United States , are competent to prove that assessments were made within three years of the filing of returns by taxpayer.

Limitation upon assessment and collection: Reducing claim to judgment as tolling statute of limitations.--Reduction of a claim for income taxes to judgment tolls the statute of limitations, within the meaning of Code Sec. 276. Reversing a decision of the District Court for the Eastern District of Wisconsin, 67 Fed. Supp. 257, 46-1 USTC ¶9283.

Sewall Key, J. Louis Monarch, and Timothy T. Cronin, for plaintiff-appellant. J. L. McMonigal and Harry V. Meissner for defendants-appellees.

Before SPARKS and MINTON, Circuit Judges, and LINDLEY, District Judge.

[Nature Of Proceedings]

MINTON, Circuit Judge:

This suit was commenced on April 3, 1944 to enforce a lien for unpaid income taxes against a piece of real estate located in Green Lake County , Wisconsin , and owned in his lifetime by the deceased taxpayer, Samuel A. Ettelson. ¹ The District Court after trial dismissed the Government's complaint because of its failure to prove the specific dates upon which the assessment lists were received by the Collector of Internal Revenue for the First District of Illinois, which District includes the City of Chicago where the deceased taxpayer had lived. For such failure of proof the District Court held that the Government had no lien. From this judgment, the Government has appealed.

The contest here is only between the United States Government and one Frank G. Lueck, and between the Government and the County of Green Lake. Lueck on November 21, 1940 became the assignee of certain certificates for delinquent real estate taxes assessed against the property in question by the County of Green Lake, which taxes became delinquent in the year 1939; Green Lake County is the owner of certificates for delinquent taxes on this property for the years subsequent to 1939. The question of priority is not before us as it was not decided by the District Court. In fact, the sole question for decision is whether the Government failed to prove that it had a lien.

[Defendants' Contention]

The defendants contend that the Government failed because there was no competent evidence, first, that the assessments were made within three years after the taxpayer had filed his returns; and secondly, that the Government had failed to prove the precise dates upon which the assessment lists were received by the Collector of Internal Revenue for the First District of Illinois.

[First Question]

As to the first point. The pertinent provision of the statute is Section 275 of the Internal Revenue Code ² which provides that the assessment must be made within three years after the filing of the return by the taxpayer. As its Exhibit No. 3, the Government introduced in evidence, without objection, certified copies of the assessment certificate and the pertinent portion of the January 1, 1937 income tax assessment list, First Illinois Collection District, assessing an additional tax against the taxpayer for the year 1934. This certificate and list were executed under the seal of the Treasury Department of the United States. This Exhibit No. 3 and the Government's Exhibits Nos. 4 to 10, inclusive, were all of similar import and showed assessments by the Commissioner of Internal Revenue against the taxpayer for the years 1934, 1935, 1936, 1937, and 1938 in the total sum of $96,242.96. Since these certified copies were under the seal of the Treasury Department, they were admissible in evidence by the terms of the statute, and we are required by the same statute to take judicial notice of the seal. 28 U. S. C. 1940 ed., Sec. 661.

From the assessment list for January 1, 1937, we learn that the Commissioner on January 8, 1937 assessed the taxpayer additional income tax for the year 1934 in the sum of $26,724.63, with interest calculated to January 8, 1937 in the sum of $2,911.52 or a total of $29,636.15, with which the Collector for the First District of Illinois was charged as of the date January 8, 1937. So as to this assessment there can be no question but that it was made within three years of the filing of the return for 1934, which could not have been filed before January 1. 1935.

From these certificates from the office of the Commissioner of Internal Revenue, all under the seal of the Treasury Department, it is undisputed on this record that all of the assessments were made within three years of the filing by the taxpayer of his return for each of the years 1934, 1935, 1936, 1937, and 1938.

[Second Question]

As to the second question. Did the Government fail to establish it had a lien by failure to prove the precise dates upon which the Collector received the assessment lists?

Samuel A. Ettelson died May 9, 1938 , and to enforce the collection of these assessments, the Collector filed a claim therefor against his estate in the Probate Court of Cook County, Illinois. A certified copy of this claim was filed in the trial of this case without objection or limitation of any kind. While this certified copy of the claim may not have been the best evidence, it was admitted without objection and will be considered for what it shows that may be material to this case. Kansas City Southern Railway Company v. C. H. Albers Commission Co., 223 U. S. 573, 596, 32 S. Ct. 316, 56 L. Ed. 556; Diaz v. United States, 223 U. S. 442, 450, 32 S. Ct. 250, 56 L. Ed. 500; United States v. McCoy, 193 U. S. 593, 598, 24 S. Ct. 528, 48 L. Ed. 805; Simmons et al. v. Stern, 9 Fed. (2d) 256, 257, and cases cited; Board of Sup'rs. of Riverside County , Cal. , et al. v. Thompson et al., 122 Fed. 860, 863; United States v. Homestake Min. Co., 117 Fed. 481, 489.

From an examination of this claim certified from the Cook County Probate Court, it is uncontradicted that on September 30, 1938 the Collector executed and on October 3, 1938 filed claim for unpaid income taxes assessed against Samuel A. Ettelson for the following years:

                   Amount of Tax          Interest

1934 .....           *$29,136.15         $3,037.82

1935 .....              2,043.15            128.30

1936 .....              3,542.99            168.17

1937 .....              8,999.72            130.43

Total ....                              $47,186.73

* The amount of this item of the claim varies from the amount stated in the January 1, 1937 list because a payment of $500 had been made thereon in the lifetime of the taxpayer.

This claim was allowed by the Probate Court in full on February 9, 1939 .

The interest of the deceased taxpayer in the real estate involved, it was stated at the argument, was worth approximately $10,000. We shall not burden this opinion with the recital of further claims filed.

We think the evidence on this record is uncontradicted and the inference inescapable that on September 30, 1938 , the date on which the Collector executed the claim above set forth, he had in his possession the assessment lists for 1937 and 1938 upon which this claim was based. It will be presumed in the absence of evidence to the contrary, of which there is none in this record, that the Collector of Internal Revenue, a public official acting in his official capacity in executing this claim on September 30, 1938, had in his possession the assessment lists for 1937 and 1938 to which he referred in the claim he filed and which were his authority for acting. R. H. Stearns Co. v. United States, 291 U. S. 54, 63, 54 S. Ct. 325, 78 L. Ed. 647 [4 USTC ¶1210]; United States v. Royer, 268 U. S. 394, 398, 45 S. Ct. 519, 69 L. Ed. 1011.

Furthermore, we agree with the District Court that the filing of the claim in the Probate Court against the estate of the deceased taxpayer was a demand of payment made at the only place that it could be made. That being so, the amount demanded was a lien upon all of the property of the taxpayer, pursuant to Section 3670 of the Internal Revenue Code. ³ Section 3671 of the Code ⁴ fixes the time when the lien shall arise as the time the assessment list was received by the Collector. That he had the assessment lists on September 30, 1938 we have held, and the lien was then continuing unless the liability for the amount claimed was satisfied or became unenforceable by reason of lapse of time.

There is no contention that the liability was satisfied. There was an allegation in the answer of the defendants that the lien was barred by operation of law because the action to enforce it was not commenced within the time allowed by the statute of of limitations. The only statute of limitations cited is the six-year limit provided in Section 276 of the Internal Revenue Code. ⁵ If this section is a limitation upon the action of the Government, which we shall assume, we agree with the District Court that the filing of the claim in the Probate Court was a proceeding in court ⁶ to collect these taxes, and that it was commenced on October 3, 1938 and was within six years of the dates the assessments were made. It is this claim upon which the lien asserted in this suit is partially based. The claim in the sum of $47,186.73 filed on October 3, 1938 and allowed by the Probate Court on February 9, 1939 was a judgment ⁷ in that amount and the form of the obligation owing the Government was changed from an unliquidated claim to a claim based on judgment.

This claim was a proceeding in court within the meaning of Section 276 of the Internal Revenue Code and was brought within six years of the dates of assessment as provided therein. This court proceeding was sufficient to stop the running of the statute of limitations contained in this section. The judgment could thereafter be enforced at any time. There is no Federal statutory provision as to the period of limitation on this judgment. Investment & Securities Co. v. United States , 140 Fed. (2d) 894, 896 [44-1 USTC ¶9210]. The judgment was a proper claim upon which to assert a lien. The Government had a lien on September 30, 1938 which had not been satisfied nor barred by the lapse of time.

[Conclusion And Disposition]

The District Court erred in holding that the precise date that the lien arose had to be proved and that the Government had no lien because of failure to make such proof. For that reason, the judgment of the District Court is reversed, and the cause is remanded with instructions to restate its findings of fact and conclusions of law in accordance with this opinion.

¹ 26 U. S. C. 1940 ed., Sec. 3678.

² 26 U. S. C. 1940 ed., Sec. 275.

³ 26 U. S. C. 1940 ed., Sec. 3670.

⁴ 26 U. S. C. 1940 ed., Sec. 3671.

⁵ 26 U. S. C. 1940 ed., Sec. 276.

⁶ United States v. Paisley , 26 Fed. Supp. 237.

⁷ Ford v. First Nat. Bank, 201 Ill. 120, 128, 66 N. E. 316, 317, 318; Mitchell v. Mayo, 16 Ill. 83, 84.

 

 

[44-1 USTC ¶9314]Bernard J. Youngblood, individually and as Register of Deeds in and for Wayne County, Michigan, Appellant, v. United States of America, Appellee

(CA-6), United States Circuit Court of Appeals, Sixth Circuit, No. 9594, 141 F2d 912, Decided April 6, 1944

Appeal from the United States District Court for the Eastern District of Michigan.

Liens: Procedure for filing U. S. tax lien in state.--Code Sec. 3672(a), as amended by the 1942 Act, provides that a federal tax lien shall not be valid against mortgagees, pledgees, purchasers, and judgment creditors until a lien notice has been filed in an office designated by state law. The Court holds that where the state ( Michigan ) has designated the office for filing, but has conditioned acceptance for filing there upon the inclusion of a description of the land in the notice of lien for federal taxes, the United States must meet such condition. Reversing unreported District Court ( Mich. ) decision.

Helen W. Miller, Detroit , Mich. (William E. Dowling and Samuel Brezner, both of Detroit , Mich. , with her on brief), for appellant. Newton K. Fox, Washington, D. C., (Samuel O. Clark, Jr., Sewall Key, William B. Waldo, all of Washington, D. C., John C. Lehr and Arnold W. Lungerhausen, both of Detroit, Mich., on brief), for appellee.

Before HICKS, MARTIN and MCALLISTER, Circuit Judges.

MARTIN, Circuit Judge:

The United States District Court for Eastern Michigan entered an order in the nature of a writ of mandamus, directing appellant Youngblood, individually and as Register of Deeds for Wayne County, Michigan, to accept and file notice of tax lien under internal revenue laws, when presented with a fifty-cent filing fee by the United States Collector of Internal Revenue, and to index the notice in a record book of United States tax liens. The entry of the order followed a hearing on the petition of the United States for an order to show cause. The basic facts are not disputed; but the legality of the order is challenged by the State of Michigan and defended by the United States of America .

[Validity of Lien]

Michigan says that the notice of lien, as presented, is not in a form authorized by its statutes for filing; and that its Register of Deeds is, therefore, not authorized to accept and file the notice.

The United States concedes that the tax lien notice contains no description of the land of the delinquent taxpayer as directed by the Michigan statute, but insists that no such description is necessary. The Government points to Section 505 of the Revenue Act of 1942 [Ch. 619, 56 Stat. 798, Sec. 3672(a) of the Internal Revenue Code] as the controlling law of the case. This section provides, inter alia, that a federal tax lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor, until notice thereof has been filed by the collector 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 its borders; and that, whenever a State or Territory has not by law authorized the filing of the notice in an office within its boundaries, the office of the Clerk of the United States District Court for the judicial district where is situated the property subject to the lien is to be substituted as the place for filing the notice.

The State of Michigan insists that, notwithstanding this federal statute, a register of deeds in Michigan is not permitted by state law to accept for filing a United States tax lien notice, unless it contains a description of the land upon which the lien is claimed. It is declared that, should the register do so, he would plainly violate his duty under Michigan Statutes Annotated, Vol. 6, Section 7.751 [C. L. 29, Sec. 3746].

With respect to the pertinent point, this state statute authorizes the collector of internal revenue, or any other official collectors of taxes payable to the United States desiring to acquire a lien in favor of the United States, to file "a notice of lien, setting forth that name and the residence or business address of such taxpayer, the nature and the amount of such assessment, and a description of the land upon which a lien is claimed, in the office of the register of deeds in and for the county or counties in Michigan in which such property subject to such lien is situated; and such register of deeds shall, upon receiving a filing fee of fifty [50] cents for such notice, file and index the same in a separate book, entitled 'Record of United States Tax Liens,' indexing the same according to the name of such taxpayer as stated in the notice; all in pursuance of said section three thousand one hundred eighty-six [3186] of the revised statutes of the United States."

No ambiguity inheres in the Michigan statute. Its mandate that the notice of lien shall contain a description of the land is unmistakable; and the authority of the register of deeds, a ministerial officer, is clearly limited to the recordation of only such notices of United States tax liens as comply with the requirements of the statute.

With reference to certain requirements in other Michigan recordation statutes, the State Supreme Court has said: "These provisions are plain and unambiguous. If they are complied with the paper is entitled to be recorded. If they are not complied with the paper is not entitled to record." Nelson v. Schofield, 219 Mich. 595, 597.

The comment was made by Chief Justice Cooley in Sinclair v. Slawson, 44 Mich. 123, 126, that "the doctrine that he who claims the benefit of the registry laws must bring himself within them is universally admitted." The record of an instrument not executed in conformity with the recording laws of Michigan is notice to no one. Galpin v. Abbott, 6 Mich. 17, 36. General recognition has been accorded the principle that an instrument which does not conform to the provisions of a recordation statute is not entitled to be recorded.

It could hardly be controverted that the authority of ministerial officers is to be strictly construed as including only such powers as are expressly conferred, or necessarily implied. In Van Husan v. Heames, 96 Mich. 504, the court held that, though the register of deeds is a constitutional officer, the conditions under which deeds are entitled to record rest entirely within the discretion of the legislature and are not to be invalidated for harshness. If a court should not invalidate a legislative act, certainly a ministerial officer should not do so.

The federal statute before us for interpretation prescribes that the collector of internal revenue shall file the lien notice in an office designated by state law. The Michigan legislature has denominated that office as the office of the register of deeds; but has conditioned acceptance for filing there upon the inclusion of a description of the land in the notice of lien for federal taxes.

This court affirmed [116 F. (2d) 935 [40-2 USTC ¶9786]], upon the grounds and for the reasons stated in the opinion of the district court, the decree in United States v. Maniaci, 36 F. Supp. 293 [39-1 USTC ¶9307], declaring a federal income tax lien to be invalid as against a purchaser in good faith, where the lien notice, though filed with the register of deeds, did not describe the land as required by Act No. 104 of the Public Acts of Michigan for 1923, as amended by Act No. 13 for 1925 [Sec. 3746 of the Compiled Laws of Michigan for 1929], supra. The court was then considering the effect of Section 3186 of the Revised Statutes of the united States, as amended by the Act of May 29, 1928, Section 613, 45 Stat. 875, 26 U. S. C. A., Int. Rev. Acts, page 461, which provided for the filing of federal tax lien notices "in accordance cordance with the law of the state in which the property subject to the lien is situated, whenever the state or territory has by law provided for the filing of such notice." The national legislation [Section 505 of the Revenue Act of 1942, supra] now under consideration changed the provision of the earlier Act with respect to filing a lien notice so as to require the notice to be filed "in the office in which the filing of the notice is authorized by the law of the state or territory in which the property subject to the lien is situated."

A state's right to safeguard muniments of title to land within its borders should not be lightly denied upon a strained assumption that Congress meant to impeach that right. The amendment contained in the Revenue Act of 1942 evidences no change of attitude on the part of Congress in its recognition of the right of a state to regulate the filing of federal tax lien notices. Under the existing enactment the notice must be filed in an office authorized by the state; or, if no such office has been designated, then in the office of the United States District Court Clerk. Michigan has designated an office, that of the register of deeds; but has not authorized the filing of the notice in the form presented by the collector. In the lien notice under present consideration, an essential ingredient to conform to the state law is missing. The land is not described. Mere inconvenience to federal tax officials in procuring and filing descriptions of land owned by delinquent taxpayers supplies no sound basis for the issuance of peremptory writ of mandamus by a federal court, direction a state ministerial officer to violate his obvious duty of compliance with the state law under which he acts.

We adhere to the view, plainly indicated in our approval of the opinion of District Judge Raymond in the Maniaci case, supra, that there is nothing unreasonable in the requirement of the Michigan statute that a lien notice shall contain a description of the property upon which the lien is claimed, in order to enable such lien to affect the rights of third parties; and that confusion commonly resulting from indices of the names of persons is avoided and reasonable certainty attained by identifying the land upon which the lien is claimed. We still think the district judge correctly stated: "Such an interpretation in no wise affects the lien as against any interest the delinquent taxpayer may retain in the property, places no unreasonable burden upon the commissioner, involves no unusual delegation of powers to state legislatures, and is appropriate to remedy the injustice the amendatory legislation [Sec. 3746 of the Compiled Laws of Michigan of 1929] was designed to meet." 36 F. Supp. 293 [39-1 USTC ¶9307].

[Writ of Mandamus in District Court]

The instant action was brought in the United States District Court in the nature of an original petition for a writ of mandamus, and not as auxiliary to enforcement of an order, judgment or decree in a pending cause of action. As early as McIntire v. Wood, 7 Cranch 503, the power of an inferior federal court to issue the writ of mandamus was held to be confined exclusively to a case in which the writ may be necessary to the exercise of jurisdiction; as late as Covington & Cincinnati Bridge Company v. Hager, 203 U. S. 109, 111, it was held to be settled beyond controversy that, until Congress shall otherwise provide, no power exists in these courts to issue a writ of mandamus in an original action brought for the purpose of securing relief by the writ, even if the relief sought concerns an alleged right secured by the Constitution of the United States. See intervening Supreme Court decisions to the same effect: Bath County v. Amy, 13 Wallace 244; Graham v. Norton, 15 Wallace 427; Davenport v. County of Dodge, 105 U. S. 237, 242; Rosenbaum v. Bauer, 120 U. S. 450. See also, Fuller v. Aylesworth, 75 Fed. 694, 698, 699 (C. C. A. 6); Barber v. Hetfield, 4 Fed. (2d) 245 (C. C. A. 9). Smith v. Bourbon County, 127 U. S. 105, has foreclosed the once ingenious thought that lack of jurisdiction to issue a writ of mandamus can be supplied by converting the proceeding into a bill in equity.

Civil Procedure Rule 81(b) abolished the writ of mandamus, but provided that relief thereby formerly available may be obtained now by appropriate action or motion under the rules. Substantive rights are still governed by the principles formerly applied in mandamus cases. George Allison & Co. v. Interstate Commerce Commission, 107 Fed. (2d) 180 (D. C. App.); Levine v. Farley, Postmaster General, 107 Fed. (2d) 186 (D. C. App.).

Undoubtedly, Congress has power to authorize inferior courts of the United States to issue writs of mandamus in original proceedings. Knapp v. Lake Shore & Michigan Southern Railway Company, 197 U. S. 536, 542. But, in the cited case, it was pointed out that, if Congress had intended by the Act of March 3, 1887, 24 Stat. 552, to confer power on the circuit courts to issue mandamus in an original proceeding, language would not have been employed which had been construed from the foundation of the Government not to confer such jurisdiction.

No merit is found in the argument of the Government, based on the opinion of the Supreme Court in Amos Kendall, Postmaster General, v. United States, 12 Peters 524. In that case, the right of a circuit court of the District of Columbia to issue a writ of mandamus was shown to rest uniquely upon the power vested in the courts of the State of Maryland , from which territory the District of Columbia was carved out. It is a non sequitur from the decision in the Kendall case that, since the adoption of the Revised Statutes, the entire judicial power under the Constitution has been delegated in actions at common law brought by the United States to the federal courts of first instance. Nor do we find the vestiture of such sweeping power in the inferior courts either by the Act of March 3, 1911 , ch. 331, 36 Stat. 1087, or by any other Acts of Congress. The courts of the United States possess only such power as the Congress has granted them.

Again, in United States v. Schurz, 102 U. S. 378, 394, the authority of the Supreme Court of the District of Columbia to issue writs of mandamus in cases in which the parties were by common law entitled to such writs was rested upon peculiar powers derived from Maryland law, and strengthened by a federal statute.

United States v. Snyder, 149 U. S. 210, adds no force to the Government's contention for the reason that, while it was there held that the tax system of the United States is not subject to the recording laws of the states, the Acts of Congress since that decision have required recording of United States tax liens: first, in accordance with the law of the state where the property subject to lien is situated; and later and presently, in the office in which the filing of notices is authorized by the state law. Upon obvious principles of comity, the Congress of the United States has provided for compliance by the Government with state recording laws. The notice of tax lien involved in this controversy does not so comply.

The judgment of the district court is accordingly reversed; the relief prayed in the original petition of the appellee is denied; and the petition is directed to be dismissed.

 

 

[43-2 USTC ¶9617] United States of America , Appellant, v. City of Detroit , Michigan , et al., Appellees.

(CA-6), United States Circuit Court of Appeals, Sixth Circuit., No. 9488., 138 F2d 418, 10/18/43

Lien of United States for income taxes: Effect of state requirement as to description of property.A lien of the United States for income taxes is valid neither against an innocent purchaser of real estate nor against the state to whom it was forfeited for taxes, where in filing its lien the U.S. did not comply with Michigan law requiring notices of lien to contain a description of the property on which the lien is claimed in order to enable such lien to affect the rights of third parties.

Paul E. Krause, John G. Dunn, William E. Dowling, Detroit, Mich., Rob ert M. Drysdale, Detroit, Mich., Beaumont, Smith & Harris, Detroit, Mich., Herbert J. Rushton, Peter E. Bradt and Elbern Parsons, Lansing, Mich., for appellees. John C. Lehr and Arnold W. Lungerhausen, Detroit , Mich. , for U.S.

Before SIMONS, MARTIN, and MCALLISTER, Circuit Judges.

SIMONS, Circuit Judge:

It appearing by brief, argument and concession on the part of the appellant, that the legal issue involved, namely the validity of a tax lien of the United States without full compliance with the statute of the State of Michigan requiring the lien, upon recording, to specifically describe real estate belonging to the taxpayer, is the same as the issue decided adversely to the appellant in United States v. Thomas Maniaci, 116 Fed. (2d) 935 [40-2 USTC ¶9786], wherein we adopted the reasoning of the District Court for the Western District of Michigan in an opinion reported in 36 Fed. Supp. 293 [39-1 USTC ¶9307], and

The court not being persuaded by brief and argument that our decision in that case was unsound and not in accordance with law,

IT IS ORDERED that the decision below be and it is hereby affirmed.

 

 

[41-1 USTC ¶9448]United States of America, Appellant, v. William H. Killoren, Trustee in Bankruptcy of Hamilton-Brown Shoe Company, a corporation, Appellee

(CA-8), United States Circuit Court of Appeals for the Eighth Circuit, No. 11892. March Term, 1941, 119 F2d 364, Filed April 30, 1941, Cert. denied, 314 U. S. 640, 62 S. Ct. 78

Appeal from the District Court of the United States for the Eastern District of Missouri.

Lien for unpaid federal taxes during attempted reorganization preceding bankruptcy: Order of payment.--Under Sec. 64(a) of the Bankruptcy Act of 1898, as amended, a claim of the United States for taxes incurred during an attempted reorganization of a corporation before the appointment of the bankruptcy trustee has equal priority with admin istrative expenses incurred by the trustee in bankruptcy. Decision of the District Court (Eastern District of Missouri) reversed.

Mr. J. Louis Monarch, Special Assistant to Attorney General (Mr. Samuel O. Clark, Jr., Assistant Attorney General; Mr. Sewall Key and Miss Louise Foster, Special Assistants to the Attorney General; Mr. Harry C. Blanton, U. S. Attorney, and Mr. Russell Vandivort, Assistant U. S. Attorney, were on the brief) for appellant.

Mr. Harry S. Gleick (Messrs. Jones, Hocker, Gladney & Grand, and Messrs. Gleick & Strauss were with him on the brief) for appellee.

Mr. Dupuy G. Warrick (Messrs. Warrick, Koontz & Hazard and Mr. Lester G. Seacat with him on the brief) for E. E. Amick, Trustee, etc., Amicus Curiae.

Before WOODROUGH, JOHNSEN, and VAN VALKENBURGH, Circuit Judges.

WOODROUGH, Circuit Judge, delivered the opinion of the court:

Statement

On April 19, 1939 , the Hamilton-Brown Shoe Company filed its petition for a corporate reorganization under the provisions of Chapter X of the Bankruptcy Act, and James J. Vardaman and John W. Lake were appointed co-trustees to effect the reorganization. However, on June 22, 1939, the Hamilton-Brown Shoe Company was adjudicated a bankrupt, and on July 7, 1939, William H. Killoren, being appointed trustee for the purpose of liquidating the estate, took charge of the assets and began the liquilation.

Between April 19, 1939 , and July 7, 1939 , Lake and Vardaman, while acting as trustees, became indebted to the United States on account of taxes which accrued during that period and which greatly exceed taxes which accrued thereafter while Killoren was acting as trustee.

On February 29, 1940 , after a hearing on the trustee's petition from an order respecting distribution and priority of payment, the referee in bankruptcy entered an order providing that the claims against the bankrupt's estate be classified and that distribution be made by the trustee out of funds in his hands as follows:

1. Claims allowed as trust funds in the hands of the trustee, and property held subject to reclamation petitions.

2. Fees and expenses allowed or to be allowed, and costs incurred, in the admin istration of this estate before the referee in bankruptcy, including referee's fees and costs, fees and expenses allowed or to be allowed to William H. Killoren, trustee, fees and expenses allowed or to be allowed to the attorneys for the trustee, and any other fees, costs of court or admin istration that may be allowed in the regular bankruptcy proceedings.

3. All claims allowed or to be allowed as preferred as a result of operation of the business of the bankrupt subsequent to the filing of the petition for corporate reorganization in these proceedings, including on a parity all such claims for that period of operation (beginning with the filing of the petition for corporate reorganization up to the time that William H. Killoren as trustee took charge of the assets), including tax, wage, merchandise, and service claims, and including allowances made by the United States District Judge for fees and expenses of the trustees appointed by him, of counsel for the trustees appointed by him, of counsel for the bankrupt, and of counsel for the creditors' committee: it being intended hereby to include in this class all obligations incurred during the corporate reorganization proceedings in this estate and up to the time William H. Killoren as trustee in bankruptcy took charge of the assets.