Magavern v. U.S.

Decision Date24 February 1977
Docket NumberNo. 362,D,362
Parties77-1 USTC P 9249 Samuel D. MAGAVERN, as Executor and Trustee of the Last Will and Testament of Margaret C. Duncan, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. ocket 76-6111.
CourtU.S. Court of Appeals — Second Circuit

Samuel D. Magavern, Buffalo, N. Y. (Magavern, Magavern, Lowe, Beilewich & Dopkins, Charles B. Draper, Buffalo, N. Y., of counsel), for plaintiff-appellant.

Alfred S. Lombardi, Atty., Tax Div., Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Ernest J. Brown, Attys., Washington, D. C., on the brief, Richard J. Arcara, U. S. Atty., Buffalo, N. Y., of counsel), for defendant-appellee.

Before MOORE, OAKES and TIMBERS, Circuit Judges.

MOORE, Circuit Judge:

This case arises out of the efforts of the Internal Revenue Service to satisfy an outstanding tax assessment by levying on what it asserts is the taxpayer's interest in a testamentary trust established by his mother. The dollar amount being contested is relatively small, the parties having stipulated that the Government seeks to acquire only approximately $2300. The legal issues confronted, however, are nonetheless significant.

I.

Thomas W. Doran ("Doran"), the taxpayer herein, was deficient in his federal tax payments for various amounts during 1965, 1966 and 1968-1971, resulting in the assessment against him of federal taxes and interest in the aggregate amount of $112,753.51. On November 7, 1974 a total of $108,303.96, plus penalties and interest, remained unpaid. 1 As might be expected, the Government began to seek assets against which it could levy to satisfy this large unpaid assessment.

One asset against which the Government proceeded is the trust at issue here. Margaret C. Duncan, Doran's mother, had died in 1965 leaving the residue of her estate in trust for her husband, her son, Doran, and the children and grandchildren of Doran. In each of the years from 1968 to 1973, Doran had received small monetary amounts from the trust. 2 On December 5, 1973, the Government served a notice of levy under §§ 6321 and 6331 of the Internal Revenue Code ("Code"), 26 U.S.C. §§ 6321 and 6331, on the trustee of the trust, appellant herein, Samuel D. Magavern. The levy purported to cover "all property and rights to property" belonging to Doran. However, the trustee refused to honor the levy on the ground that under the terms of the trust, Doran had no rights in the trust property.

On June 27, 1974, the trustee commenced a proceeding in the Surrogate's Court of Erie County, New York, seeking to determine the validity and effect, if any, of the notice of levy on Doran's beneficial interest in the trust. The Government appeared specially in the Surrogate's Court, arguing only that the Surrogate had no jurisdiction to affect the levy. On December 27, 1974 the Surrogate filed a decision holding that he did not have jurisdiction to "vacate, annul, cancel or discharge" the levy, but that pursuant to his continuing jurisdiction over Margaret Duncan's Last Will and Testament he could decide whether or not the trust beneficiaries had any property rights in the trust. Accordingly, he proceeded to hold that by the trust's terms the trustee had complete and sole discretion to withhold the income from any individual member of the family group, and that as a consequence Doran had no property rights in the trust. In re Will of Duncan, 80 Misc.2d 32, 362 N.Y.S.2d 788 (Surr.Ct.Erie Co., 1974).

On August 23, 1974, while the Surrogate's Court proceeding was still pending, the trustee commenced the instant action in the Western District of New York seeking, pursuant to § 7426(a) of the Code, 26 U.S.C. § 7426(a), to enjoin enforcement of the levy. Upon announcement of the Surrogate's decision, the trustee moved for summary judgment on the basis of the Surrogate's finding that Doran had no right to property in the trust, and the Government cross-moved for enforcement of the levy. The district court on June 8, 1976, rendered its decision, reported in 415 F.Supp. 217. It reasoned that under New York law the trust instrument by mandatory language requires the trustee to pay at least some income to each of the beneficiaries, including Doran, so that Doran had a right to the trust property which was subject to levy. Moreover, the district court held that the contrary decision of the Surrogate's Court, though it must be afforded proper regard, was not binding on a federal court. Judgment was entered for the Government in the stipulated amount, and the trustee timely brought this appeal.

II.

The Internal Revenue Code contains several sections dealing with the use of federal tax liens to collect unpaid taxes. See Plumb and Wright, Federal Tax Liens (2d ed. 1967). Section 6321 3 provides that a lien shall attach in favor of the United States on all property and rights to property of any person who, after demand, neglects or refuses to pay federal taxes for which he liable. Section 6332 4 provides that any person in possession of property or rights subject to levy must surrender them upon demand of the Secretary or his delegate.

It is long-established, and conceded by both parties to this case, that in asserting its federal tax lien, the Government must look to state law for a determination of what legal rights and interests, if any, comprise "property and rights to property" to be attached. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Durham Lumber Co., 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960); United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958). As the Supreme Court stated in Aquilino :

"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, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.' Morgan v. Commissioner of Internal Revenue, 309 U.S. 78, 82 (60 S.Ct. 424, 84 L.Ed. 585)." 363 U.S. at 512-13, 80 S.Ct. at 1280 (footnote omitted).

Both parties here agree that the question before us is thus whether or not under New York law Doran had a property interest or right to property in the trust established by his mother.

Unfortunately, the parties' agreement as to the authority of New York law does not insure accord as to what that applicable law is, or how the federal courts should discover it. The trustee strongly urges upon us that the decision of the Surrogate's Court is binding on the federal courts. He suggests that under New York law the Surrogate's Court, the court which originally probated Mrs. Duncan's will, has continuing, exclusive jurisdiction over her estate, including construction of her will. He concludes that the Surrogate's interpretation of the trust instrument must be considered an in rem judgment binding for all purposes, in effect prohibiting any varying interpretations of the language of the will by federal courts.

But the Supreme Court has conclusively rebutted the trustee's argument. In Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967), the Court decided two cases concerned with the effect a federal court should give to a decision by a lower state court. In Bosch, the state court holding concerned the validity of a decedent's release of a power of appointment over a New York trust. The taxpayer had filed a petition in the Supreme Court of New York to obtain a decision on the validity of the release, which if declared invalid could have qualified the corpus of the trust for the federal tax marital deduction, 26 U.S.C. § 2056. The state court held the release a nullity and the United States Tax Court looked on that decision as binding. A divided panel of this court affirmed, 363 F.2d 1009 (1966), but the Supreme Court reversed. The Court explained that a lower state court decision was a significant factor for a federal court in ascertaining state law, but federal tribunals should not consider lower state court decisions binding where the highest state court has not spoken on the point. As Mr. Justice Clark stated, speaking for the Court:

"(W)hen the application of a federal statute is involved, the decision of a state trial court as to an underlying issue of state law should a fortiori not be controlling. This is but an application of the rule of Erie R. Co. v. Tompkins (304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)), where state law as announced by the highest court of the State is to be followed. This is not a diversity case but the same principle may be applied for the same reasons, viz., the underlying substantive rule involved is based on state law and the State's highest court is the best authority on its own law." 387 U.S. at 465, 87 S.Ct. at 1782.

The companion case decided in Bosch further confirms the point. The Supreme Court there affirmed the opinion of this court in Second National Bank v. United States, 351 F.2d 489 (1965), where this court had expressly upheld a federal district court's finding that "decrees of the Connecticut Probate Court . . . under no circumstances can be construed as binding and conclusive upon a federal court in construing and applying the federal revenue laws." 351 F.2d at 494, aff'g in part 222 F.Supp. 446, 457 (D.Conn.1963).

The trustee tries to avoid the consequences of the holdings in Bosch by suggesting that the instant case is distinguishable because here the Government appeared in the Surrogate's Court. But the Government only appeared specially, solely to contest that court's...

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