Randall v. H. Nakashima & Co., Ltd., 75-1626

Citation542 F.2d 270
Decision Date12 November 1976
Docket NumberNo. 75-1626,75-1626
Parties76-2 USTC P 9770, 20 UCC Rep.Serv. 1302 J. N. RANDALL, Sr., and American International Telephone Co., Plaintiffs-Appellees, v. H. NAKASHIMA & CO., LTD., Defendant-Appellee, United States of America, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Wayman G. Sherrer, U. S. Atty., Charles D. Stewart, Asst. U. S. Atty., Birmingham, Ala., Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Section, Gary R. Allen, Dennis M. Donohue, Ernest J. Brown, Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant.

Dewayne N. Morris, Birmingham, Ala., for J. N. Randall, Sr., et al.

Hubert A. Grissom, Jr., Birmingham, Ala., for H. Nakashima & Co., et al.

Appeal from the United States District Court for the Northern District of Alabama.

Before RIVES, GOLDBERG and GEE, Circuit Judges.

GOLDBERG, Circuit Judge:

In this case we re-enter the tortured meanderings of federal tax lien law, intersected now by the somewhat smoother byway of the Uniform Commercial Code. See Texas Oil & Gas Corporation v. United States, 466 F.2d 1040, 1041 (5th Cir. 1972), cert. denied, 410 U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973). We must decide between the competing claims to a PBX line telephone system asserted by the government, pursuant to duly filed federal tax liens, and the party to whom the delinquent taxpayer subsequently conveyed his rights in the telephone equipment. The question presented is whether the taxpayer, who conveyed his interest in the PBX equipment before he acquired legal title thereto under a partially executed contract, ever had "property" or the "right to property" such that the federal tax lien, filed prior to the conveyance, attached under Section 6321 1 of the Internal Revenue Code of 1954. 2

The parties to the case at bar have equated property with enforceable legal title thereto. Accordingly, they have chosen an ancient battleground, arguing and briefing the case as though it were a metaphysical problem, as though "legal title" were some noumenal quality that inhered for an infinitesimal duration in the taxpayer despite his attempt to divest himself of it. We believe the parties might better have addressed themselves to the question whether the taxpayer had "property" before he or his assignee acquired legal title to the PBX system. In short, we think that the taxpayer's contract rights under a partially executory contract for the PBX equipment themselves constituted "rights to property" such that the tax lien attached before the rights were assigned or the contract was fully performed.

I. Facts

On April 18, 1973, Alton M. Hambric (taxpayer), North American Telephone Corporation (NATC), and its principal shareholder, H. Nakashima and Company (Nakashima), entered into an agreement whereby Nakashima agreed to exchange a PBX line telephone system and other consideration for 5,000 shares of NATC stock owned by Hambric. On the same day, Hambric delivered 2,000 shares of his NATC stock to Nakashima, and NATC executed a bill of sale conveying the PBX system to Hambric. The bill of sale conditioned transfer of title in the equipment on Hambric's delivering the remaining 3,000 shares of NATC stock within two days. Hambric was not immediately free to transfer the 3,000 shares, having previously pledged them to J. N. Randall to secure the latter's $25,000 loan to Hambric.

In order to free the remaining shares of his NATC stock, Hambric executed a "bill of sale" on April 19, 1973, by which he transferred to Randall's corporation, American International Telephone Company (AITC), for good consideration all rights and interests in the PBX equipment conveyed to him by the previous day's bill of sale from NATC. 3 On the same day, Randall released Hambric's 3,000 shares of NATC stock. On the following day, April 20, 1973, the secretary of NATC verified receipt of stock certificates representing the 3,000 shares. 4

When the dust settled, AITC apparently had title to the PBX system and Nakashima had 5,000 shares of NATC stock. Neither Randall nor Nakashima had actual knowledge that the United States had filed notices of federal tax liens against Hambric in Jefferson County, Alabama, on January 7, 1971, and April 11, 1973. The Internal Revenue Service seized the PBX equipment, which was located in an NATC warehouse, on June 7, 1973.

Randall and AITC sought, inter alia, a determination that AITC owned the equipment free of the government's liens. The District Court held that because AITC had acquired Hambric's contractual right to the PBX equipment, upon Hambric's delivering the 3,000 shares of NATC stock in satisfaction of the condition precedent specified in the April 18 bill of sale, legal title vested not in Hambric but in AITC, which took the equipment free of the government's tax liens. The Court also ruled that the liens did not attach to the stock transferred to Nakashima. The Government has brought this appeal, apparently contesting only the court's order regarding AITC. 5

II. Property or Rights to Property

The threshold question in any case involving the federal government's assertion of its tax lien is whether and to what extent the taxpayer had "property" within the meaning of the federal tax lien statute. Section 6321 of the Internal Revenue Code affords the government a lien for delinquent taxes upon "all property and rights to property" belonging to the taxpayer. The government's lien extends to after-acquired property. Glass City Bank v. United States, 326 U.S. 265, 66 S.Ct. 108, 90 L.Ed. 56 (1945). The Supreme Court has held that federal law controls on matters of priority once it is determined that a tax lien attaches. See United States v. City of New Britain, 347 U.S. 81, 86, 74 S.Ct. 367, 98 L.Ed. 520 (1954). The Court has also held that state law determines whether the taxpayer has property or the right to property to which the tax lien may attach. See Aquilino v. United States, 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960).

The Supreme Court has not made clear whether state law merely determines the existence of an interest that must then be classified according to federal law to determine whether it is property subject to the lien, or whether state law controls both the existence and classification of rights. In Glass City Bank v. United States, supra, the Court declared in dictum that whether "future earning capacity" was property or a right to property was "not to be determined by resorting to the local law of Pennsylvania." 326 U.S. at 268, 66 S.Ct. at 110. In United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135, the Court said that the federal tax lien provision "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." The case relied on as authority for that statement, Fidelity & Deposit Co. v. New York City Housing Authority, 241 F.2d 142, 144 (2d Cir. 1957), clearly states that "the statute was fashioned to require the courts to determine for federal purposes whether those state-created interests are 'property' or 'rights to property.' " All of this appears to indicate that a federal court looks to state law to determine whether an interest exists, and then determines under a federal standard whether such an interest amounts to a "property" interest.

There are dicta in several Supreme Court opinions, however, that suggest a different approach. In Aquilino v. United States, supra, 363 U.S. at 513-14, 80 S.Ct. at 1280, the Court relied on Bess but appeared to limit the reach of federal law to the determination of priorities, saying that "once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which . . . determines the priority of competing liens . . . ." In Meyer v. United States, 375 U.S. 233, 236, 238, 84 S.Ct. 318, 320, 321, 11 L.Ed.2d 293 (1963), the Court cited Bess but observed that "our recent cases . . . (hold) that state law controls the determination of what is included within . . . 'property or right to property' . . . ."

Succinctly stated, the issue is whether a federal tax lien attaches if and only if the taxpayer holds an interest recognized as a "property" interest under state law. Conceivably there are interests recognized but not specifically labelled "property" interests under state law to which the tax lien would attach. 6 We seemed to be intimating such a distinction in our most recent tax lien case, United States v. Citizens and Southern National Bank, 538 F.2d 1101 (5th Cir. 1976). In that case we said that "having determined that a depositor in a Georgia bank is vested with a chose in action, we look to federal law to determine whether a chose in action is property or rights to property under §§ 6321 and 6331."

We need not resolve these doctrinal ambiguities in the case at bar, because under both federal and state standards the taxpayer's contract right to the PBX equipment constituted a right to property, so that the federal tax lien attached on April 18 and was not ousted by any subsequent transaction.

III. The Taxpayer's Contract Right

Alabama has adopted the Uniform Commercial Code. See Code of Ala., Tit. 7A, § 1-101 et seq. It is the appellees' position in this case that because the taxpayer lacked the right to demand legal title to the PBX equipment prior to the time he transferred his interest in such equipment to Randall, the taxpayer at no time had property or the right to property. This contention founders on the Code provisions that treat a contract right itself as a property right. See Code of Ala., Tit. 7A, §§ 9-102, -106, -204.

Section 9-106 of the Alabama Code defines "contract right" as "any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper." 7 Section 9-102(1)(a) specifically identifies a contract right as a...

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