NEVADA R. & S. CO. v. United States Dept. of Treasury IRS

• Decision Date: 30 April 1974
• Docket Number: Civ. No. LV-1566.
• Citation: 376 F. Supp. 161
• Parties: NEVADA ROCK AND SAND COMPANY, a Nevada corporation, Plaintiff, v. The UNITED STATES of America, DEPARTMENT OF the TREASURY INTERNAL REVENUE SERVICE, et al., Defendants.
• Court: U.S. District Court — District of Nevada

376 F. Supp. 161

NEVADA ROCK AND SAND COMPANY, a Nevada corporation, Plaintiff, v. The UNITED STATES of America, DEPARTMENT OF the TREASURY INTERNAL REVENUE SERVICE, et al., Defendants.

Civ. No. LV-1566.

United States District Court, D. Nevada.

April 30, 1974.

Albright & McGimsey, Las Vegas, Nev., for plaintiff.

V. DeVoe Heaton, U.S. Atty., Las Vegas, Nev., for defendants.

OPINION

ROGER D. FOLEY, Chief Judge.

FACTS

This interpleader action was brought by Nevada Rock and Sand Company (NRSC) under the provisions of 28 U. S.C. §§ 1335, 1340 and § 7402 of the 1954 Internal Revenue Code. The facts, as developed by the pretrial order and stipulations of counsel at the trial, are undisputed:

On July 6, 1970, defendant Coop Oil Products, Inc. (COOP) assigned to defendant-claimant Witco Chemical Corporation (WITCO) all monies due or to become due from NRSC to COOP by reason of a certain designated contract between NRSC and COOP. Although WITCO was not required to render any performance under the NRSC-COOP contract, the assignment was not for the purpose of collection only. COOP's assignment to WITCO constituted a transfer of a significant part of the outstanding contract rights of COOP, and under the terms of the assignment NRSC was to pay the monies directly to WITCO. NRSC received notice of this assignment and consented to its terms on July 10, 1970. On October 1, 1970, the NRSC-COOP contract was completed and $10,810.30 had become due COOP; under the COOP-WITCO assignment this amount was to be paid to WITCO.

On October 26, 1970, the Internal Revenue Service (IRS) assessed taxes against COOP, and on February 4, 1971, a further assessment of taxes against COOP was made. Federal tax liens for these assessments were filed by the IRS with appropriate Nevada officials prior to any filing by WITCO, under Nevada's Uniform Commercial Code, of the COOP-WITCO assignment of COOP's contract rights. The Court will refer to the IRS liens as a single tax lien, inasmuch as neither the rights of the parties nor the issues presented are affected thereby, and simplicity of discussion is facilitated. Pursuant to the tax lien, the IRS sought to collect from NRSC the monies due and owing COOP under the NRSC-COOP contract.

Since both the IRS and WITCO claimed the funds due under the NRSC-COOP contract, NRSC filed an interpleader action on February 9, 1971, naming the IRS, WITCO and COOP as defendants, and deposited the entire fund due under the contract with the Court. Defendant COOP has not made an appearance in this action. NRSC has been dismissed as a party.

ISSUES

1. Did COOP, on October 26, 1970, and February 4, 1971, possess any property interest in the contract rights assigned to WITCO sufficient to allow the attaching thereto of a federal tax lien against COOP?¹

2. If a federal tax lien has so attached, is this lien entitled to priority over the claims of the assignee, WITCO, to such funds?

CONCLUSIONS

1. Yes.

2. Yes.

DISCUSSION

1. IS THE ASSIGNMENT OF CONTRACT RIGHTS THAT BECOME DUE AND OWING PRIOR TO THE ASSESSMENT AND FILING OF A TAX LIEN AGAINST THE ASSIGNOR SUFFICIENT TO DIVEST THE ASSIGNOR OF SUCH PROPERTY SO AS TO FORECLOSE ATTACHMENT OF THE TAX LIEN UPON IT, EVEN THOUGH THE ASSIGNMENT IS NOT PERFECTED UNDER THE STATE'S UNIFORM COMMERCIAL CODE PROVISIONS FROM CLAIMS OF LIEN CREDITORS HAVING NO KNOWLEDGE OF THE ASSIGNMENT?

The principal issue discussed herein involves the frontiers of our society's fundamental notion of private ownership of property. The issue is presented within the framework of unsettled judicial decisions, new concepts embodied in the Uniform Commercial Code (U.C.C.), and recently amended tax statutes. The problem of resolving this issue is exacerbated by the fact that the claimants in this case do not directly clash. Arguing from the same initial premise, but from entirely different perspectives as regards the impact of the U.C.C., the role in which the IRS is to be cast, and the definition of how "property right" is to be defined, claimants provide two diverging planes of thought, each leading to its own, judicially supported conclusion. Coherent discussion of this issue, then, is in itself a formidable task.

A. The Initial Premise: Title 26, Section 6321, of the United States Code, provides that if a person liable for any tax refuses to pay that tax after demand, the amount thereof, including interest, penalty or addition to such tax "shall be a lien in favor of the United States upon all property and rights to property" belonging to such person. 26 U.S.C. § 6321 (emphasis added).² In Aquilino v. United States, 363 U.S. 509, 512-514, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960), the Supreme Court stated:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had `property' or `rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law . . . However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's `property' or `rights to property.' . . . This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interests of its citizens, and the necessity for uniform administration of the federal revenue statutes."

In the companion case, United States v. Durham Lumber Co., 363 U.S. 522, 80 S. Ct. 1282, 4 L.Ed.2d 1371 (1960), the Court made it clear that to the extent, under applicable state law, the taxpayer has no property interests in the funds sought to be subjected to a tax lien, there is nothing to which the lien can attach.³ Both WITCO and the IRS accept this premise: the tax lien can attach to the NRSC fund only if Nevada law establishes COOP's interest in that fund to be "property" or "rights to property."

B. WITCO'S Argument: WITCO urges a traditional point of view. It argues that the IRS has rights that can rise no higher than those of the taxpayer whose right to property is sought to be levied upon. United States v. Winnett, 165 F.2d 149, 151 (9th Cir. 1947); Stuart v. Willis, 244 F.2d 925, 929 (9th Cir. 1957). And the rights of the IRS must be determined on the basis of the condition of the property as it exists at the time the tax lien arises. Board of Sup'rs of La. State Univ. v. Hart, 210 La. 78, 26 So.2d 361, 364 (1946). WITCO asserts that at this crucial juncture, COOP was already bound by a prior valid assignment to WITCO of the monies due from NRSC. See Jones v. P. W., L. & F. Co., 13 Nev. 359, 373 (1878) (between the parties, the assignment is complete the moment it is made). Even though WITCO did not file the assignment as required by the U.C.C. (NRS § 104.9302) to protect its interest against third party creditors (NRS § 104.9301), the assignment is nevertheless binding between the parties. See NRS § 104.9201; United States v. Lebanon Woolen Mills Corp., 241 F. Supp. 393, 401 (D.N.H.1964) (recording statute is irrelevant re: perfection of interest against party to the transaction). Therefore, WITCO concludes, COOP no longer had any property or rights to property held by NRSC and there was nothing upon which the tax lien could attach. See In re Halprin, 280 F.2d 407 (3rd Cir. 1960); Monroe Banking & Trust Co. v. Allen, 286 F.Supp. 201 (N.D.Miss.1968); United States v. Lebanon Woolen Mills Corp., supra; United States v. Lester, 235 F. Supp. 115 (S.D.N.Y.1964); Transmix Concrete of Rockdale v. United States, 142 F.Supp. 306 (W.D.Tex.1956); Central Surety & Insurance Corp. v. Martin Infante Co., 164 F.Supp. 923 (D.N.J. 1958), affirmed 272 F.2d 231 (3rd Cir. 1959); Hartford Accident and Indemnity Co. v. State, 85 S.D. 608, 187 N.W.2d 663 (1971); Pitcher & Co. v. Ralph Nay Constr. Co., 103 N.H. 357, 172 A.2d 360 (N.H.1961); Board of Sup'rs of La. State Univ. v. Hart, supra.

C. The IRS'S Argument: The IRS develops its argument through the use of the U.C.C., adopted in Nevada in 1965. NRS Article 8, Chap. 104. First, looking to Article 9 of the U.C.C., the IRS notes that although that article does not apply to an assignment of contract rights for the purpose of collection only or to an assignment of such rights where the assignee is also to perform under the contract (NRS § 104.9104(6)), it does apply to:

". . . any transaction (regardless of its form) which is intended to create a security interest in . . . accounts or contract rights;⁴

". . . any sale of accounts, contract rights or chattel paper(;)

". . . (and) to security interests created by contract including pledge (or) assignment . . . intended as security."

(NRS § 104.9102(1)(a) and (b), (2).)

The IRS concludes from this language that whether the WITCO assignment is considered a sale of or security interest in the COOP accounts or contract rights, the transaction is within the scope of Article 9.⁵ See United States v. Trigg, 465 F.2d 1264, 1268 (8th Cir. 1972); L. B. Smith, Inc. v. Foley, 341 F.Supp. 810, 813 (W.D.N.Y.1972); Centex Construction Co. v. Kennedy, 332 F. Supp. 1213, 1214-1216 (S.D.Tex.1971); Standard Lumber Co. v. Chamber Frames, Inc., 317 F.Supp. 837, 839 (E.D. Ark.1970).

Second, the IRS points to the fact that Article 9 is not concerned with traditional questions of title, but, rather, directs its provisions to questions of "rights, obligations and remedies." See NRS § 104.9202; Annotation, 30 A.L.R.3rd 9, 31 and cases cited at n. 16. As regards the rights of third parties, NRS § 104.9301(1)(b) provides in relevant part:

"(1) . . . an unperfected security interest is subordinate to the rights of:

"* * * * * *

"(b) A person who becomes a lien creditor without knowledge of the security interest and before it is perfected."

This provision is the focal point of the IRS's argument. Un...