Back v. I.R.S.

Decision Date02 June 1982
Docket NumberNo. 1051,1051
Citation445 A.2d 1057,51 Md.App. 681
PartiesLeon B. BACK, Receiver v. INTERNAL REVENUE SERVICE.
CourtCourt of Special Appeals of Maryland

Charles M. Tatelbaum, Baltimore, with whom were James A. Vidmar, Jr., and Sherbow, Shea & Tatelbaum, P. A., Baltimore, on the brief, for appellant.

Joan I. Oppenheimer, Washington, D.C., with whom were Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup and William S. Estabrook, Washington, D.C., on the brief, for appellee.

Argued before LISS and BISHOP, JJ., and DAVID WILLIAM SIMPSON, Special Judge.

LISS, Judge.

This is an appeal by Leon B. Back, appellant, as receiver for J. B. Broadcasting of Baltimore, Ltd., (hereinafter J.B.), an annulled corporation, which before and after the annulment of its charter operated radio station WEBB in Baltimore, Maryland. The appeal is from the disposition by the Circuit Court of Baltimore City of the receiver's objections to the claims for withholding and unemployment taxes by the Internal Revenue Service.

The case originated on March 17, 1978, when Leon Back and others, all judgment creditors of J.B., filed a bill of complaint in the Circuit Court of Baltimore City in which they sought the appointment of a receiver for the assets of J.B., on the basis that J.B. was unable to pay its debts as they matured in the ordinary course of business. See Maryland Code (1975), Corporations and Associations Article, § 3-413. J. B. Broadcasting of Baltimore, Ltd. had its corporate charter annulled in the State of Maryland on January 21, 1976. Counsel for J.B. and its officers and directors vigorously contested the claim of the complainants and it was not until July of 1978 that J.B. (by James Brown, who had served as president of J.B. and was the owner of the overwhelming majority of the stock), filed a consent to the entry of summary judgment and the appointment of a receiver. On July 21, 1978, the court appointed Leon Back as receiver; however, because the necessary approval of the Federal Communications Commissioner was delayed, the receiver did not take control of the assets of J.B. until August 1, 1978. It is conceded by all parties that J.B.'s property at the time it was taken over by the receiver was in "deplorable condition." The receiver, who had extensive experience in the radio field and is an expert in the construction, licensing, operation and management of radio stations, marshalled the tangible assets of the station and subsequently was able to find a qualified purchaser (Brunson Broadcasting Corp. of Baltimore), who offered $430,000 for the station's assets. The sale was ratified by the F.C.C. on November 20, 1979. In the interim, the receiver continued to operate the station. It is agreed by all parties that the receiver performed excellently in preserving and selling the assets of J.B.

Numerous claims were filed in the receivership. Exclusive of the claims of the Internal Revenue Service, the total claims of creditors exceeded $850,000. Included in these claims were those of judgment creditors amounting to more than $650,000. The Internal Revenue Service filed claims for withholding and unemployment taxes covering the entire period of J.B.'s existence. These claims were divided into three distinct periods. For Period One, which ran from 1970 through 1974, during which J.B. filed quarterly withholding returns, the I.R.S. claimed taxes due of $160,540, including interest and penalties. For Period Two, which ran from 1975 through part of 1978, during which J.B. and its successors filed no returns, IRS claimed taxes due of $268,586.90, including interest and penalties. For Period Three, which included the remainder of 1978 through the end of the receiver's tenure in November, 1979, the IRS filed a number of claims which in the aggregate, including interest and penalties, amounted to $61,557.41. The IRS claimed lien and priority status for its claims and the total claims of the IRS would have exhausted the entire trust estate to the exclusion of all other creditors.

The receiver filed objection to all of the claims of IRS. An evidentiary hearing was held in the Circuit Court of Baltimore City, at which time the amounts of the Internal Revenue's claims for Periods Two and Three were called into question. At the conclusion of the evidentiary hearing the court indicated that supplemental memoranda should be filed by April 22, 1981 and a further hearing was scheduled for the following day. In an attachment to its additional memorandum the IRS recomputed its figures for Periods Two and Three. Period Two liability was restated to be $113,856.39 (of which $81,876.60 constituted taxes and the remainder interest and penalties); the claims for the second quarter of 1978 were included in Period Two, removing them from Period Three. Oral argument was heard and the trial judge filed a memorandum opinion and order which accepted the IRS restated amount of claim for Period Two, overruled the receiver's objections to the several claims of IRS and allowed the claim of the IRS in the total amount of $320,032.07. Two days later the court sua sponte filed a revised memorandum opinion and order in which it struck its previous order and entered a new order disallowing interest and penalties for Period Three and reduced the allowed claim of the Internal Revenue to $308,143.57.

The receiver has called this Court's attention to an apparent mathematical error in which an additional $1,000 was erroneously added to the Internal Revenue Service's restated amount for Period Two. The appeal in this case is from the judgment of the trial court allowing the IRS claims in the total amount of $308,143.57. The appellant raises the following nine issues to be decided by this appeal:

I. Does the Federal Tax Lien Act or section 3466 of the revised statutes permit payment of federal tax claims before the claims of pre-existing judgment lien creditors in accordance with Maryland Law?

II. Did the Internal Revenue Service adequately establish the prerequisites for the applicability of lien or priority status in this case?

III. Was the receiver's status under Maryland law superior to the Internal Revenue Service's priority and lien status, even if they were established?

IV. Could the Internal Revenue Service revive any lien status it possessed by purporting to revoke its release of liens during the pendency of the receivership while the trust estate was in custodia legis ?

V. Should the Internal Revenue Service have been allowed to collect taxes in this receivership proceeding because it failed to prove timely assessment or collection?

VI. Did the lower court err in its determination of taxes due on the basis of speculation?

VII. Did the lower court err in refusing to find that taxes that become due after a corporation ceases to exist are not collectable from the corporation in a receivership proceeding?

VIII. Should the penalties claimed for Period Two have been disallowed because there was no proof of lack of good cause to excuse them?

IX. Should the lower court, in allowing the claim of the Internal Revenue Service for unemployment taxes, have granted a credit for amounts payable to the Unemployment Fund of the Maryland Department of Human Resources?

I. and II.

The most important question to be decided in this case is the interplay between federal and state laws in determining the order of payment of claims against insolvent debtors in receivership. Simply stated, the inquiry is whether federal statutes and regulations establishing priorities in insolvency proceedings and providing for government liens for taxes impair the rights of judgment creditors under Maryland law. The Internal Revenue Code, (26 U.S.C.), section 6321 provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, 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.

Section 6323(a) provides for the circumstances under which the lien imposed by section 6321 becomes effective. It states:

(a) The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

In Maryland, a judgment lien is created by Maryland Code (1975, 1980 Repl. Vol.), Courts and Judicial Proceedings Article, § 11-402, and by Maryland Rule 620. The statute provides in subsection 11-402(b) as follows:

(b) Judgment of court of original entry.--If indexed and recorded as prescribed by the Maryland Rules or the Maryland District Rules, a judgment of a court constitutes a lien to the amount and from the date of the judgment on the judgment debtor's interest in land located in the county in which the judgment was rendered except a lease from year to year or for a term of not more than five years and not renewable.

Section 11-403 states that a writ of execution does not become a lien on personal property until an actual levy is made. Maryland Rule 620 a provides as follows:

A judgment shall constitute a lien to the amount and from the date thereof upon all real estate of the judgment debtor lying in the county wherein the judgment was entered, and upon all leasehold interest and terms for years of the judgment debtor in land, except leases from year to year and leases for terms of not more than five years and not renewable.

The receiver urges that some of the judgment creditors should be afforded priority under 26 U.S.C. § 6323(a), supra, which provides that a federal tax lien has no priority over a judgment lien until notice of the claim has been filed. It is conceded that some of the judgments were recorded first in...

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