Monica Fuel, Inc. v. I.R.S.

• Decision Date: 02 June 1995
• Docket Number: No. 94-5406,94-5406
• Citation: 56 F.3d 508
• Parties: -2591, 95-2 USTC P 50,477 MONICA FUEL, INC. Appellee, v. INTERNAL REVENUE SERVICE, Department of Treasury, United States of America; State of New Jersey, Department of Treasury, Division of Taxation. Division of Taxation, Department of the Treasury, State of New Jersey, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 508

56 F.3d 508

75 A.F.T.R.2d 95-2591, 95-2 USTC P 50,477

MONICA FUEL, INC. Appellee, v. INTERNAL REVENUE SERVICE, Department of Treasury, United States of America; State of New Jersey Department of Treasury, Division of Taxation Division of Taxation, Department of the Treasury, State of New Jersey, Appellant.

No. 94-5406.

United States Court of Appeals Third Circuit.

Argued Jan. 24, 1995.

Decided June 2, 1995.

Martin L. Wheelwright, Kevin M. Schatz (argued), Office of Atty. Gen. of N.J., Trenton, NJ, for appellant.

David A. Kasen, Kasen, Kasen & Braverman, Cherry Hill, NJ, for appellee, Monica Fuel, Inc.

Gary R. Allen, William S. Estabrook, David A. Shuster (argued), Pamela C. Berry, U.S. Dept. of Justice, Tax Div., Washington, DC, for appellee, I.R.S., Dept. of Treasury, U.S.

Before: SLOVITER, Chief Judge, LEWIS and WEIS, Circuit Judges.

OPINION OF THE COURT

LEWIS, Circuit Judge.

This case presents a single issue of law: the relative priority of Internal Revenue Service ("IRS") liens, which arise upon assessment under 26 U.S.C. Secs. 6321 and 6322, ¹ versus New Jersey motor fuels tax liens, which arise under New Jersey's State Tax Uniform Procedure Law. At summary judgment, the United States District Court for the District of New Jersey found the federal liens to be superior. Because we believe the state liens were choate before the liens of the IRS arose and were, therefore, entitled to priority, we will reverse the district court's judgment.

I.

The material facts of this case are generally undisputed. The necessary factual background concerns New Jersey's uniform procedures for assessing and collecting taxes and the State of New Jersey, Division of Taxation's ("Division") activities with respect to Monica Fuel, Inc. ("Monica Fuel").

A.

The state liens involved in this case arose under N.J.Stat.Ann. Sec. 54:49-1, which provides in pertinent part:

The taxes, fees, interest and penalties imposed by any such State tax law ... from the time the same shall be due, shall be a personal debt of the taxpayer to the State, recoverable in any court of competent jurisdiction in an action in debt in the name of the State. Such debt, whether sued upon or not, shall be a lien on all the property of the debtor except as against an innocent purchaser for value in the usual course of business and without notice thereof, and except as may be provided to the contrary in any other law....

The Division is authorized to make an assessment after a report is filed and it is determined that there is a deficiency in payment. Notice of such a deficiency assessment is then given to the taxpayer and demand for payment is made. N.J.Stat.Ann. Sec. 54:49-6. The taxpayer must remit to the Division the assessed amount within fifteen days after the notice and demand are mailed. N.J.Stat.Ann. Sec. 54:49-8. Non-payment within the 15-day period results in the imposition of an additional penalty of five percent. N.J.Stat.Ann. Sec. 54:49-9.

The Division is not limited to demand and imposition of penalties as the only tools for effectuating collection of unpaid taxes. The Division may, as an alternative remedy, issue a certificate of debt to the Clerk of the New Jersey Superior Court. The clerk immediately enters upon the record of docketed judgments the name and business address of the debtor, the certified amount of the debt and the name of the tax. N.J.Stat.Ann. Sec. 54:49-12. The entries are given the same force and effect as any entry of a docketed judgment, and provide the Division with all of the remedies available for recovery of a judgment in action. We note that this alternative remedy creates no additional rights nor additional liabilities; rather "[i]t is a device for collecting taxes[.]" C.J. Kowasaki, Inc. v. New Jersey, 13 N.J.Tax 160, 168-169 (1993).

The New Jersey statute provides an additional remedy to enforce collection of taxes. The Division may issue a warrant of execution to the sheriff of any county who, in turn, files the warrant with the county clerk. ² The clerk then enters in the judgment docket the name of the taxpayer and the amount the taxpayer owes to the State. As with the certificate of debt, the warrant does not create the lien; instead the warrant provides a procedural tool for enforcing a judgment. In re Blease, 605 F.2d 97, 98 (3d Cir.1979).

B.

On March 23, 1989, the Division made an assessment of $76,554.19 against Monica Fuel, a Williamstown, New Jersey, corporation engaged in the business of retail fuel oil distribution, for unpaid motor fuels taxes. On August 30, 1989, the Division assessed against Monica Fuel an additional $2,125.61, bringing the total state assessments to $78,679.70. Thereafter, between September 18, 1989, and June 4, 1990, the IRS made seven separate assessments against Monica Fuel for unpaid federal excise and employment taxes, totalling $68,288.37. ³ On February 5, 1990, the Division filed a certificate of debt with the clerk of the New Jersey Superior Court, who entered judgment on the record of docketed judgments on February 14, 1990. Nine days later, on February 23, 1990, the Division issued a warrant of execution on the personalty of Monica Fuel which was available for payment of the taxes due. This amounted to $60,000 which Monica Fuel expected to receive from the bulk sale of its business assets to Star Oil Company, Inc. ("Star Oil"). ⁴

C.

On October 26, 1990, Monica Fuel instituted this interpleader action in the Superior Court of New Jersey. The IRS then removed the action to the district court. On cross-motions for summary judgment, the district court concluded that the IRS's statutory liens were superior to those of New Jersey, and granted judgment in favor of the IRS. Specifically, the court held that the Division's tax liens, arising under N.J.Stat.Ann. Sec. 54:49-1, were not sufficiently choate to defeat the priority of the federal tax liens arising under sections 6321 and 6322. The court further found that the Division's tax assessments did not "elevate the state to the level of 'judgment creditor' within the meaning of 26 U.S.C. Sec. 6323(a)." ⁵ Monica Fuel, Inc. v. IRS, No. 91-748 at 10 (D.N.J. Nov. 20, 1991) (order granting summary judgment). The Division moved for reargument, claiming that the tax deficiency assessments it issued in 1989 rendered its tax liens fully choate and, therefore, superior to the federal liens in question. The court again rejected the Division's argument, noting that "the state liens were not choate at the time assessed because N.J.S.A. 54:49-1 contemplates judicial enforcement of state liens." ⁶ Monica Fuel, Inc. v. IRS, No. 91-748 at 3 (D.N.J. May 10, 1994) (order granting summary judgment). The Division now appeals. We have jurisdiction under 28 U.S.C. Sec. 1291.

The district court's determination that New Jersey's tax liens were inchoate and therefore not entitled to priority is a legal conclusion subject to plenary review. Keystone Chapter, Associated Builders and Contractors, Inc. v. Foley, 37 F.3d 945, 953 (3d Cir.1994), citing Gregoire v. Centennial School Dist., 907 F.2d 1366, 1370 (3d Cir.1990).

II.

Federal tax liens do not automatically prime all other liens. Rather, priority is governed by the federal common-law principle that " 'the first in time is the first in right.' " ⁷ United States v. McDermott, --- U.S. ----, ----, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993), quoting United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954). As stated by Chief Justice Marshall in Rankin & Schatzell v. Scott, 12 Wheat. (25 U.S.) 177, 179, 6 L.Ed. 592 (1827): "The principle is believed to be universal that a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds...." 12 Wheat. at 179. It is critical, therefore, for the purpose of determining priority, to ascertain when competing liens, whether federal- or state-created, arise.

Under 26 U.S.C. Secs. 6321 and 6322, federal tax liens arise when the underlying taxes are assessed. The priority of a state lien depends on when it "attached to the property in question and became choate." New Britain, 347 U.S. at 86, 74 S.Ct. at 370. As the Supreme Court has stated, "a competing state lien [is considered] to be in existence for 'first in time' purposes only when it has been 'perfected....' " McDermott, --- U.S. at ----, 113 S.Ct. at 1528, quoting New Britain, 347 U.S. at 84, 74 S.Ct. at 369. That is, the state lien must be "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. Vermont, 377 U.S. 351, 355, 84 S.Ct. 1267, 1269, 12 L.Ed.2d 370 (1964).

The Division argues that New Britain controls this case and that the state liens have priority because the identity of the lienor (the State of New Jersey), the property subject to the lien (all of Monica Fuel's property, according to N.J.Stat.Ann. Sec. 54:49-1) and the amount of the lien (the amount of the assessments) were all established prior to when the federal liens arose.

The IRS does not dispute that the first two choateness requirements were satisfied. It concedes that the identity of the lienor and the property subject to the lien were known well before the federal liens arose. The IRS does, however, claim that the amount of the state liens were not sufficiently established and, consequently, not entitled to priority. Moreover, in the event that we find the state lien amounts were sufficiently fixed to satisfy the final New Britain factor, the IRS makes an additional argument, namely that the state tax liens were inchoate because they were not summarily enforceable. ⁸ We will address these two distinct issues in turn.

A.

As noted above, one requirement of choateness under the standard articulated by the Supreme Court in New Britain is that the amount of the state lien be "establish...