In re Bowen, 8237.

• Decision Date: 02 September 1943
• Docket Number: No. 8237.,8237.
• Citation: 138 F.2d 22
• Parties: In re BOWEN.
• Court: U.S. Court of Appeals — Third Circuit

138 F.2d 22 (1943)

In re BOWEN.

No. 8237.

Circuit Court of Appeals, Third Circuit.

Argued May 20, 1943.

Decided September 2, 1943.

Writ of Certiorari Denied January 3, 1944.

Homer R. Miller, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Samuel H. Levy, Sp. Assts. to Atty. Gen., and Gerald A. Gleeson, U. S. Atty., and J. Barton Rettew, Jr., Asst. U. S. Atty., both of Philadelphia, Pa., on the brief), for appellant.

Herman H. Krekstein, of Philadelphia, Pa. (David Getz, of Allentown, Pa., and Herbert S. Leman, of New York City, on the brief), for appellee.

Before BIGGS, GOODRICH, and WOODBURY, Circuit Judges.

Writ of Certiorari Denied January 3, 1944. See 64 S.Ct. 430.

WOODBURY, Circuit Judge.

On August 12, 1933, the Bureau of Internal Revenue made an assessment against Bowen for income taxes for the year 1926, which, with accrued interest, amounted to over twenty-one thousand dollars. Notice of the Government's lien for this tax was duly filed during the following October. Later the Bureau of Internal Revenue made an assessment against Bowen and others for distilled spirits taxes on alcohol manufactured in December, 1926, in the amount of over thirteen thousand dollars and notice of this tax lien was duly filed during the same month. In September, 1935, one Henry Baker obtained a judgment in a state court against Bowen in the amount of approximately eighty thousand dollars which, since it was subsequent in date to both tax liens, was inferior to them. It appears that Bowen's principal asset, in fact the only one upon which as a practical matter the above liens could attach, was a piece of real property with the building thereon located in Allentown, Pennsylvania.

In December, 1938, Baker, in compliance with Treasury Decision 4446, filed an application with the appropriate collector of internal revenue for certificates of discharge of the tax liens on the Allentown property pursuant to § 3674(b)¹ of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 3674(b). On March 10, 1939, an investigation having been made, the Commissioner authorized the collector to issue certificates of discharge and such certificates were issued and filed of record on April 14, 1939. For the discharges of both tax liens Baker paid $150.

Seven months later, on November 8, 1939, Bowen filed a voluntary petition in bankruptcy, was subsequently adjudicated a bankrupt, and in August, 1940, the Allentown property was sold at public sale by the trustee in bankruptcy for $457,500, less broker's commission.

The referee's schedule of distribution shows that if the Government's tax liens are given priority they will be satisfied in full and that the lien of Baker's judgment will be satisfied only in part, but that if they are not given priority, Baker's judgment will be satisfied in full and nothing will be available to satisfy the tax liens. No parties other than the United States and Baker appear to have any interest in the funds which resulted from the sale of the property.

After the property was sold the United States filed a petition with the referee alleging, inter alia, that the Commissioner in authorizing the discharges of the tax liens had been misled by Baker both as to the value of the property and as to the actual amount of the indebtedness due on various prior judgment liens upon it. Baker answered, and, after a hearing, the referee found that Baker in his application for certificates of discharge of the tax liens had made incorrect and incomplete statements and had failed to divulge information in his possession. This, the referee found, induced the Government to discharge its liens and amounted to "constructive fraud." In consequence the referee ordered that the discharges of the Government's tax liens be stricken off and the liens reinstated; that its claims for both the income and distilled spirits taxes be "impressed as a lien upon the funds in the hands of the trustee in bankruptcy", and that the amounts thereof be paid out of said funds in the order of their priority.

On petition for review the district court concluded that the referee was without jurisdiction to set aside the certificates of discharge of the Government's liens for taxes and therefore considered it unnecessary to express any opinion upon what it called the "merits" of the controversy. Accordingly it reversed the order of the referee and directed that the funds in the hands of the trustee be distributed without regard to the tax liens. On this appeal to us, then, the only question presented is whether a court of bankruptcy has jurisdiction to set aside certificates discharging liens for federal taxes when such discharges have been fraudulently obtained.

Section 3675 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 3675, provides that "A certificate of release or of partial discharge issued under this subchapter shall be held conclusive that the lien upon the property covered by the certificate is extinguished." Construing this section, the district court concluded that it was the intention of Congress to make a...