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
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
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
's Novelty Corp., 116 Fed. Supp. 132, and In re Autler, 23
Fed. Supp. 756. See also Libby v. Hopkins, 104
303, and Morris v. Windsor Trust Co., 213 N. Y. 27. Gibson v.
Central Nat. Bank of
, 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.
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."
United States of America
, Appellant v. John O. England, Trustee in Bankruptcy of the Estate of
Bradford Welch, Inc., a Corporation, Bankrupt, Appellee
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.
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.
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,
, for appellee.
Before ORR and
LEMMON, Circuit Judges, and JAMES M. CARTER, District Judge.
here for solution is the status of a claim of the
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.
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. . . ."
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
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
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.
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
v. Security Trust and Sav. Bank, supra, United States v. City of New
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.
Internal Revenue Code of 1939:
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.)
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.)
United States of America
, Plaintiff-Appellant v. Kings County Iron Works, Inc.,
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
[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
August 27, 1947
, B filed a mechanic's lien in
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
August 27, 1947
under the state-created trust fund theory. The
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
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.
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.
Chief Judge, and FRANK ANDHASTIE, Circuit Judges.
This appeal by
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
and Kings. The facts of indebtedness of Preferred to the
, 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.
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.
Rule of Priority]
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
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.
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.
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
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).
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
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
'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
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.
ex rel. Gordon v. Campbell, 329
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.
of Mechanic's Lien]
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
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
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.
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.
of Tax Lien Not Required]
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
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.
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.
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
¶9487]United States of America, Appellant v. Edward I. Eiland, Trustee
in Bankruptcy of Sport Coal Company, Inc., a corporation, Bankrupt,
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
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
were not postponed to
istration and wage claims by Bankruptcy Act Sec. 67(c).
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
Chief Judge, and SOPER and DOBIE, Circuit Judges.
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
, and which was adjudicated a bankrupt on a voluntary petition in
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
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
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
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
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
istration and wage claims? We think that both of these questions should
be answered in the negative.
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
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.
v. Liverpool, London & Globe Ins. Co., 348
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];
v. First Nat. Bank, 8 Cir., 89 Fed. (2d) 116 [37-1 USTC ¶9201];
McKenzie v. United States, 9 Cir., 109 Fed. (2d) 540;
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."
ordinarily perfects a lien upon a debt by attachment and garnishment
with service of notice thereof upon the debtor. See Miller v.
, 11 Wall. 268, 297; Kennedy v. Brent, 6 Cranch 187; Rickman
v. Rickman, 180
224, 146 N. W. 609, Ann. Cas. 1915C 1237, 1248; Strawberry Growers'
v. Lewellyn, 158
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
thereby perfected before bankruptcy.
nothing in 26
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:
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--
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 * * *."
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
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."
federal statute and the statute of
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
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
118 [49-1 USTC ¶9142]; Untied States v. Sands, 2 Cir. 174 Fed.
(2d) 384 [49-1 USTC ¶9264].
and Wage Claims]
also, that the rights of the
are not postponed to
istration and wage claims by section 67(c) of the Bankruptcy Act which
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. * * *."
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
. City of
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
here must be construed as taking into possession within meaning of the
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
. We may say of the action taken by the
here what was said by the Supreme Court of ordinary garnishment in Miller
, 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".
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.
¶9391]Hattie Mae Moss, Administratrix of Estate of G. E. (Jack) Moss,
Deceased, Plaintiff v.
United States of America
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
, for plaintiff. Paul W. Cress, United States Attorney, Leonard L.
Ralston, Assistant United States Attorney, P. O. Box 778, Oklahoma City,
Okla., for defendant.
of Fact, Conclusions of Law and Judgment
, District Judge:
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
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.
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
and a resident of the Western District of Oklahoma.
3. Hattie Mae
Moss is the duly appointed and acting
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
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.
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.
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
¶9357]In the Matter of Brokol Manufacturing Company, Bankrupt
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
[1939 Code Sec. 3672(a)--substantially similar to 1954 Code Sec.
6323(a); 1939 Code Sec. 3710--substantially similar to 1954 Code Sec.
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
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.
786 Broad St.
2, N. J., for appellant. James C. Pitney, Assistant United States
Attorney, Post Office Bldg., Newark 1, N. J., for appellee.
GOODRICH, KALODNER, Circuit Judges, and LORD, District Judge.
of the Court
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
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
the Collector was permitted to sell these assets, retaining $5,742.25
plus costs of the sale, the surplus to be
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 . . .".
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,
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
istrative expenses. 1
entered an order on
April 17, 1952
, directing the Collector to turn over the surplus funds to the trustee
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
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
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
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.
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
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 "
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
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.
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):
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
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
46, 50; Taubel-Scott-Kitzmiller Co. v. Fox, 264
426. But the mere assertion of an adverse claim does not oust a court of
bankruptcy of its jurisdiction. Harrison v. Chamberlin, 271
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,
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
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.
of Bankruptcy Court]
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.
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.
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
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
reasons stated, the judgment of the court below will be vacated and the
cause remanded with directions to proceed in accordance with this
Section 67(c) of the Bankruptcy Act, as amended, 11 U. S. C. sec.
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 . . ."
U. S. C. 104(a) in clauses (1) and (2) relates to
istrative expenses and certain wage claims.
See also United States v. Sands, 174 Fed. (2d) 1384  (2d
Cir. 1949) [49-1 USTC ¶9264].
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 . . ."
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 . . ."
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
United States of America
, Appellee v. Sidney N. Sands, Trustee in Bankruptcy of Jewelry Mart,
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,
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.
CLARK and FRANK, Circuit Judges.
This appeal by
a bankruptcy trustee attacks a district court order directing him to
turn over to the
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
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
. 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
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
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].
Possession of Property]
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
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
has provided for the filing of such notice in the office of the Register
. N. Y. Lien Law §240. Admittedly no notice was filed in this case.
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
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.
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
, 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
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
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
¶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
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
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
. Affirming decision of District Court, 73 Fed. Supp. 303, reported at
47-1 USTC ¶9296.
, 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.
GARRECHT, MATHEWS and HEALY, Circuit Judges.
The claim of
appellant arises out of an action instituted against Lyle B. Everett and
Joseph B. McEachern in the Superior Court for
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
, on said date.
One claim of
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
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
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.
April 21, 1944
, the Collector served a notice of levy for the total taxes upon the
Bank of America at its Healdsburg Branch,
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.
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
, 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."
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.
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
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
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.
that a clear and unambiguous statute must be literally construed is long
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
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
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:
judgment lien as it exists in the
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 * * *.'
, pp. 584, 585, §892. 'The lien [of a judgment] does not attach to
personal property except where a statute so provides.'
, pp. 587, 588, §898. See also 31 Am. Jur., Judgments, §308, p.
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:
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:
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."
Richenell Fabric Mfg. Co., Inc., D. C. 31 F. Supp. 645, 647, also
cited with approval in the Von Segerlund case, the court said:
the case of judgments, judgment creditors obtain no lien against
personal property until execution and levy."
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.
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:
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
155, 157, 77 P. 889, the California Supreme Court reiterated its opinion
in the above case as follows:
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
the property is held by attachment, under
law the judgment does not become a lien. 9
with the laws of
, 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.
of the district court is affirmed.
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.
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.
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--
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 . . .."
II Deering's General Laws of
(1937) 3850-3851: Act 8487. Notices of Liens for Internal Revenue Taxes.
[Stats. 1923, p. 1124] * * *
etc., may be filed. Notices of liens for internal revenue taxes payable
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."
Hamilton v. Rathbone, 175
414, 20 S. Ct. 155, 44 L. Ed. 219; Thompson v. United States, 246
547, 38 S. Ct. 349, 62 L. Ed. 876; Crooks v. Harrelson, 282
55, 51 S. Ct. 49, 75 L. Ed. 156 [2 USTC ¶616].
United States v. Beaver Run Coal Co., 99 F. (2d) 610 [38-2 USTC
¶9540]; Helvering v. New York Trust Co., 292
455, 54 S. Ct. 806, 78 L. Ed. 1361 [4 USTC ¶1293]; Crooks v.
55 [2 USTC ¶616], supra.
"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.
v. Snyder, 149
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].
Finance Corporation v. Maley, 125 F. (2d) 131, 135.
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].
See also Rock Island Plow Co. v. Reardon, 222
354, 56 L. Ed. 231, 32 S. Ct. 164; Wilson v. Bell, 20
201, 22 L. Ed. 259.
See Balzano v. Traeger, 93
App. 640, 643.
Summerville v. Stockton Milling Co., supra.
United States of America
, Appellant v. Edward L. Fogarty, Trustee in Bankruptcy of Inland
Waterways, Inc., Appellee
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
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.
GARDNER, WOODROUGH, and RIDDICK, Circuit Judges.
Circuit Judge, delivered the opinion of the Court.
This is an
appeal by the
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
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:
Waterways, Inc., was a corporation engaged in the shipbuilding business
, 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
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
to pay employment taxes on wages paid in 1942 due the
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.
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
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
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
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.
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.
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
in the amount of $1,491.34, with interest at 6 per cent from
April 23, 1945
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.
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
Employment Taxes of $209.33 involved here are those imposed by Sections
1400 and 1410 of the Internal Revenue Code, 26
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
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).
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
619; Steward Machine Co. v. Davis, 301
510; Illinois v. United States, 328
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
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,
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
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
istrative construction supports the liability fo the trustee for the
In support of
istrative construction we are cited first to Section 402.227 of Treasury
Regulations 106, which provide that,
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
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
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,
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
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
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 . . ."
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
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):
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."
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
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."
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
and its instrumentalities as employers. Section 405.105 of Treasury
Regulations 116 includes agencies of the
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
to have been no
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
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
istering the withholding system."
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.
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
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
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.
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
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.
The employer is liable to pay the tax whether or not be has deducted it
from the wages of the employee.
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
or one of its instrumentalities.
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.
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).
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
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.
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.
United States of America
, Plaintiff-Appellant v. Leonard B. Ettelson, Executor, et al., ect.,
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
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
, 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.
and MINTON, Circuit Judges, and LINDLEY, District Judge.
This suit was
April 3, 1944
to enforce a lien for unpaid income taxes against a piece of real estate
Green Lake County
, and owned in his lifetime by the deceased taxpayer, Samuel A.
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
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.
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;
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
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.
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.
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.
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.
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
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
, et al. v. Thompson et al., 122 Fed. 860, 863; United States v.
Homestake Min. Co., 117 Fed. 481, 489.
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
January 1, 1937
list because a payment of $500 had been made thereon in the lifetime of
This claim was
allowed by the Probate Court in full on
February 9, 1939
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
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
54, 63, 54 S. Ct. 325, 78 L. Ed. 647 [4 USTC ¶1210]; United States
v. Royer, 268
394, 398, 45 S. Ct. 519, 69 L. Ed. 1011.
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.
, 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.
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.
26 U. S. C. 1940 ed., Sec. 3678.
26 U. S. C. 1940 ed., Sec. 275.
26 U. S. C. 1940 ed., Sec. 3670.
26 U. S. C. 1940 ed., Sec. 3671.
26 U. S. C. 1940 ed., Sec. 276.
, 26 Fed. Supp. 237.
Ford v. First Nat. Bank, 201
120, 128, 66 N. E. 316, 317, 318; Mitchell v. Mayo, 16
¶9314]Bernard J. Youngblood, individually and as Register of Deeds in
and for Wayne County, Michigan, Appellant, v. United States of America,
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
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 (
) 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
must meet such condition. Reversing unreported District Court (
(William E. Dowling and Samuel Brezner, both of
, 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.
MARTIN and MCALLISTER, Circuit Judges.
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
for an order to show cause. The basic facts are not disputed; but the
legality of the order is challenged by the State of
and defended by the
United States of America
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.
concedes that the tax lien notice contains no description of the land of
the delinquent taxpayer as directed by the
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
insists that, notwithstanding this federal statute, a register of deeds
is not permitted by state law to accept for filing a
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].
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  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  of the revised statutes of the United States."
inheres in the
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
tax liens as comply with the requirements of the statute.
to certain requirements in other
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
was made by Chief Justice Cooley in Sinclair v. Slawson, 44
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
is notice to no one. Galpin v. Abbott, 6
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.
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.
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
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
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."
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
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].
of Mandamus in District Court]
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:
County v. Amy, 13 Wallace 244; Graham v. Norton, 15
Wallace 427; Davenport v. County of Dodge, 105
237, 242; Rosenbaum v. Bauer, 120
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
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.
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.).
Congress has power to authorize inferior courts of the
to issue writs of mandamus in original proceedings. Knapp v.
Southern Railway Company, 197
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
, from which territory the
District of Columbia
was carved out. It is a non sequitur from the decision in the
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
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
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
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
has provided for compliance by the Government with state recording laws.
The notice of tax lien involved in this controversy does not so comply.
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.
United States of America
, Appellant, v.
City of Detroit
, et al., Appellees.
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
Krause, John G. Dunn, William E. Dowling, Detroit, Mich.,
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,
MARTIN, and MCALLISTER, Circuit Judges.
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.
¶9448]United States of America, Appellant, v. William H. Killoren,
Trustee in Bankruptcy of Hamilton-Brown Shoe Company, a corporation,
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
for taxes incurred during an attempted reorganization of a corporation
before the appointment of the bankruptcy trustee has equal priority with
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.
WOODROUGH, JOHNSEN, and VAN VALKENBURGH, Circuit Judges.
Circuit Judge, delivered the opinion of the court:
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
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.
April 19, 1939
July 7, 1939
and Vardaman, while acting as trustees, became indebted to the
on account of taxes which accrued during that period and which greatly
exceed taxes which accrued thereafter while Killoren was acting as
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:
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
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
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.