In re Bowen

• Decision Date: 02 December 1942
• Docket Number: No. 21101.,21101.
• Citation: 48 F. Supp. 67
• Parties: In re BOWEN.
• Court: U.S. District Court — Western District of Pennsylvania

48 F. Supp. 67

In re BOWEN.

No. 21101.

District Court, E. D. Pennsylvania.

November 25, 1942.

As Amended December 2, 1942.

David Getz, of Allentown, Pa., Herbert S. Leman, of New York City, and Herman H. Krekstein, of Philadelphia, Pa., for Henry Baker.

Gerald A. Gleeson, U. S. Atty., and J. B. Rettew, Jr., Asst. U. S. Atty., both of Philadelphia, Pa., Joseph Lawrence, Director, Bond and Spirits Division, Department of Justice, Harry B. DeAtley, Asst. to the Director, Julian D. Simpson, Atty., Department of Justice, and Homer R. Miller, Sp. Atty., Bureau of Internal Revenue, all of Washington, D. C., for the United States.

Fred B. Gernerd, of Allentown, Pa., for Trustee in Bankruptcy.

Charles M. Bolich, of Allentown, Pa., for Bankrupt.

KALODNER, District Judge.

Has the bankruptcy court jurisdiction to set aside a certificate of discharge of a bankrupt's real estate from Federal tax liens, the certificate having been issued and recorded by the Collector of Internal Revenue under express authorization of the Commissioner of Internal Revenue, pursuant to the provisions of Section 3186(c) (4) Revised Statutes, under Section 3674(b) Internal Revenue Code, Title 26 U.S.C.A. Int.Rev.Code § 3674(b)?¹

The pertinent facts so far as the question posed is concerned may be briefly summarized as follows:

On August 12, 1933, the Bureau of Internal Revenue made an assessment for income taxes for 1926 against the bankrupt, Bowen, in the amount of $15,297.68, plus accrued interest of $5,883.53, or a total of $21,181.21. Notice of tax lien was filed in October, 1933, in the Office of the Prothonotary of Lehigh County, Pennsylvania, and in the Office of the Clerk of the United States District Court for the Eastern District of Pennsylvania.

In May, 1935, the Bureau of Internal Revenue made an assessment against Bowen and others of $13,108.92 for distilled spirits taxes on alcohol manufactured in December, 1926. Notices of this lien were filed in May, 1935, in the Office of the Prothonotary of Lehigh County, Pennsylvania, and in the Office of the Clerk of the United States District Court for the Eastern District of Pennsylvania.

Through the filing of notices of these tax liens the United States of America acquired liens against all of Bowen's property, both real and personal, good against Bowen and subsequent mortgagees, purchasers in good faith, and judgment creditors. Section 3672 Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 3672, Revised Statutes Section 3186(c) and (d).

Subsequently in September, 1935, one Henry Baker obtained a judgment against Bowen in the Court of Common Pleas of Lehigh County in the sum of $79,240.42. Since the notices of tax liens above referred to were filed prior to Baker's judgment, the latter was of course inferior to both of the Federal tax liens.

At the time of the filing of the tax liens and the entry of Baker's judgment, Bowen's principal asset was the ground and building at XXX-XX-XX Hamilton Street, Allentown, Lehigh County, Pennsylvania. Bowen owned other properties which, while they are not concerned with the issue here, it may be stated, were mortgaged for more than their value.

In December, 1938, when the Hamilton Street property was still Bowen's principal asset, Baker in compliance with Treasury Decision 4446² filed an application for a certificate of discharge from the Hamilton Street property of the Federal tax liens above mentioned with the Collector of Internal Revenue.

The application listed purportedly outstanding liens against the property, and included two appraisals by independent realty appraisers, one at $308,000 and the other at $314,600.

Baker paid $150 as a consideration for the discharge.

On March 10, 1939, following an investigation of Baker's application, the Commissioner authorized the Collector to issue the certificates of discharge.

The certificates were issued and filed of record April 14, 1939, with the Prothonotary of Lehigh County and the Clerk of the United States District Court, thereby extinguishing the Federal tax liens as to the Hamilton Street property, under Section 3675 of the Internal Revenue Code, Section 3675, 26 U.S.C.A. Int.Rev.Code.

Section 3675 reads as follows:

"§ 3675. Effect of certificates of release or partial discharge "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. 53 Stat. 450."

On November 8, 1939, almost seven months after the filing of the certificates of discharge, Bowen filed a voluntary petition in bankruptcy.

In August, 1940, the Hamilton Street property was sold at public sale by the trustee in bankruptcy for $457,500 less broker's commission.

In January, 1941, the government filed a petition with the referee to set aside the discharge of the lien of the distilled spirits tax and to pay the lien in the order of its priority out of the proceeds of the sale of the property.

Subsequently, the government filed an amended petition in which it sought reinstatement of both the income tax lien and the distilled spirits tax lien.

The government based its petitions for vacation of the recorded discharges of the liens on the ground that the Commissioner of Internal Revenue was misled by the application of Baker for the certificates of discharge (1) as to the value of the Hamilton Street property and (2) as to the actual amount of the indebtedness on various prior judgment liens.

The referee held hearings on January 31, 1941, and February 14, 1941, on the government's petitions, and on December 3, 1941, entered orders allowing the income tax and distilled spirits tax claims, and further ordering that the discharge of the liens "be stricken off, the liens reinstated" and the claims as to distilled spirits and income taxes "impressed as a lien upon the funds in the hands of the trustee in bankruptcy in said estate and directed to be paid out of said funds in its order of priority."

Baker thereupon filed a petition for review of the referee's orders, raising the issue posed at the outset of this opinion.

In discussing the issue here presented, it must be kept in mind that there was no dispute "as to the amount or legality" of the Federal tax liens. The controversy hinged in effect on the government's petition to reinstate the priority over other judgments which the Federal tax liens had once held, and which priority had been surendered when the tax liens were discharged. Determination that the tax liens cannot be reinstated means, of course, that the government's claims for the income taxes and the distilled spirits taxes will be subordinated to the existing judgment liens, instead of enjoying their once-held lien status priority to these judgments.

Both Baker and the government have argued very vigorously in their respective briefs what might be described as the "merits" of the controversy.

The government here, as in the proceedings before the referee, contends that "* * * Baker's incorrect and incomplete statements * * * amount to constructive fraud". Baker denies the charge of constructive fraud, and contends that the discharge had been granted after complete investigation, and that the government "* * * not only had equal access to all material facts but had actual knowledge of such facts as are now said to have been withheld".

It is unnecessary for me to express any opinion at this time as to the "merits" of the controversy, in view of my conclusion that the referee was without jurisdiction to set aside the certificates of discharge from the Federal tax liens issued and recorded by the Collector of Internal Revenue under the express authorization of the Commissioner of Internal Revenue in consonance with Section 3674(b).

As was ruled in Arkansas Corporation Commission et al. v. Thompson, Trustee, 313 U.S. 132, 138, 139, 61 S.Ct. 888, 85 L. Ed. 1244, the sole source of the jurisdiction and powers of the bankruptcy court with reference to tax claims is Section 64, sub. a of the Bankruptcy Act, 11 U.S. C.A. § 104, sub. a. That section provides:

"* * * The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates * * * shall be * * * (4) taxes legally due and owing by the bankrupt to the United States or any State * * *: Provided, * * * That, in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the bankruptcy court."

In the Arkansas Corporation Commission case, supra, the Supreme Court of the United States held (page 142 of 313 U. S., page 891 of 61 S.Ct., 85 L.Ed. 1244): "* * * What section 64, sub. a (4) relates to is `taxes legally due and owing by the bankrupt.' And what that section further provides is that `in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the court; * * *.'"

Discussing the meaning of Section 64, sub. a (4) and the Congressional intent, the Supreme Court stated (page 145 of 313 U. S., page 892 of 61 S.Ct., 85 L.Ed. 1244): "* * * But there is nothing in the history of bankruptcy or reorganization legislation to support the theory that Congress intended to set the federal courts up as super-assessment tribunals over state taxing agencies. * * * Nothing in the language of the Act requires such a construction."

In the Arkansas Corporation Commission case, the District Court sitting in bankruptcy reversed the valuation of an order which had been fixed pursuant to the state law as the basis for a state tax by the Arkansas Corporation Commission, a state agency vested with general and complete supervision over the valuation and assessment of public utilities and all other property. As stated by Mr. Justice Black in delivering the opinion of the court, the case raised "questions concerning the right and power of a federal bankruptcy court to revise and...