Terwilliger's Catering Plus, Inc., In re

Decision Date13 August 1990
Docket NumberNo. 89-3561,89-3561
Citation911 F.2d 1168
Parties-5453, 59 USLW 2139, 90-2 USTC P 50,460, 23 Collier Bankr.Cas.2d 694, 20 Bankr.Ct.Dec. 1411, Bankr. L. Rep. P 73,605 In re TERWILLIGER'S CATERING PLUS, INC., Debtor. E. Hanlin BAVELY, Plaintiff, State of Ohio, Department of Taxation, Defendant-Appellant, v. UNITED STATES of America, INTERNAL REVENUE SERVICE, Defendant-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

Robert A. Goering, Cincinnati, Ohio, for Terwilliger's Catering Plus, Inc.

E. Hanlin Bavely, Cincinnati, Ohio, pro se.

Gregory S. Severance (argued), Chester T. Lyman, Jr. (argued), Office of the Atty. Gen. of Ohio, Columbus, Ohio, for State of Ohio, Dept. of Taxation.

Gary R. Allen, Acting Chief, Gary D. Gray, Kenneth W. Rosenberg (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., Ronald T. Jordan, Office of the Dist. Counsel, Cincinnati, Ohio, for U.S.I.R.S.

Before KENNEDY and NORRIS, Circuit Judges, and COHN, District Judge. *

KENNEDY, Circuit Judge.

The United States and the State of Ohio each claim priority in this bankruptcy case to proceeds from the sale of the debtor's liquor license. The United States' claim is based on a valid, perfected federal tax lien filed against all of the debtor's property prior to the bankruptcy proceedings. The state's claim is based on an Ohio statute that prohibits the Liquor Control Commission from approving the sale of a license until the licensee pays all taxes owed to the state. The Bankruptcy and District Courts held that under the priority rules of the Bankruptcy and Tax Codes, the United States was entitled to the proceeds. The State of Ohio appeals, claiming that a liquor license is not property to which a tax lien can attach or which can become part of a debtor's estate. In the alternative, the state argues that even if the license is property, the trustee must still conform to the state's requirement that state taxes be paid before the license is transferred. For the reasons stated below, we AFFIRM.

I.

This case arises out of the Chapter 7 bankruptcy case of Terwilliger's Catering Plus, Inc. Terwilliger's filed a petition for relief in July 1987. At the time of its filing, Terwilliger's held a class D-1, D-2, D-3, and D-6 liquor license issued by the Ohio Department of Liquor Control. The United States filed a proof of claim stating that the debtor was indebted to it in the amount of $36,734.98 as of the petition date for unpaid employee income tax withholdings, FICA taxes, FUTA taxes, and interest and penalties that were assessed on various dates between December 1985 and September 1986. As a result of the unpaid taxes, a federal tax lien had attached to all of the debtor's property pursuant to I.R.C. Sec. 6321. Notices of the liens were filed on April 14, 1986 and December 9, 1986. The state does not challenge the validity of the IRS liens or the filings that secured them. The State of Ohio also filed a proof of claim with the Bankruptcy Court based on unpaid pre-petition sales tax liabilities of $13,866.43 incurred between 1984 and 1986. The amount and validity of the state tax claims is also undisputed.

The trustee sought permission of the Bankruptcy Court to sell the liquor license free of all state claims. Pursuant to an agreement between the trustee, the United States, and the State of Ohio, the license was sold and the parties' respective rights attached to the proceeds. The license was subsequently sold for $8,921.00.

On June 2, 1988, the Bankruptcy Court issued an opinion, In re Terwilliger's Catering Plus, Inc., 86 B.R. 937 (1988), holding that the license was property to which the federal tax lien attached and which became part of debtor's estate. The court rejected the state's argument that the estate took the license subject to the state restriction, reasoning that such a requirement would undermine the federal bankruptcy scheme. On appeal, the District Court affirmed, again rejecting the state's claims.

II.

The State of Ohio first argues that the liquor license is not property to which a tax lien could attach or which could become part of a bankruptcy estate. The state relies on several state court decisions which stand for the proposition that a liquor license is a privilege granted by the State of Ohio and does not give rise to property or contract rights. See Salem v. Liquor Control Comm'n, 34 Ohio St.2d 244, 298 N.E.2d 138 (1973); Abraham v. Fioramonte, 158 Ohio St. 213, 226, 107 N.E.2d 321 (1952); State ex rel. Zugravu v. O'Brien, 130 Ohio St. 23, 28-29, 196 N.E. 664 (1935). The state also points out that a license may be suspended or revoked for many reasons, including the failure to pay an excise tax and assigning, transferring, or pledging the liquor license in a manner contrary to commission rules. Ohio Rev.Code Ann. Sec. 4301.27 (Anderson 1989). 1 State law also provides that the Liquor Control Commission is required to cancel permits in the event of the holder's death, bankruptcy, or assignment of the license for the benefit of creditors, except as provided under the Commission's transfer rules. Ohio Rev.Code Ann. Sec. 4303.26(B)(1) (Anderson 1989); see also Ohio Admin.Code Sec. 4303:1-1-14(A) (1989), infra note 4.

If the license is not property within the meaning of the tax lien statute, I.R.C. Sec. 6321, 2 then the federal government's tax lien is invalid. If the license is not property within the meaning of the Bankruptcy Code, 11 U.S.C. Sec. 541, 3 then it does not become part of the bankruptcy estate and therefore cannot be sold by the trustee. The IRS argues that the tax lien issue has already been decided by this Circuit's decision in Paramount Finance Co. v. United States, 379 F.2d 543 (6th Cir.1967). Paramount Finance involved a dispute between the IRS and the holder of a prior security interest over the proceeds from the sale of an Ohio liquor license seized and sold by the IRS. The Court held that the IRS "was authorized to collect the tax due it from the taxpayer by levy on and seizure of the state liquor license." Id. at 544. Nonetheless, the Court directed that the proceeds be used to satisfy the lender's security interest since that interest was perfected long before the IRS tax lien.

The state argues that Paramount Finance incorrectly interpreted Ohio law on the legal nature of the debtor's interest in a liquor license. The state also asserts that the Court's holding that a tax lien attaches to a liquor license is dictum since the Court ultimately concluded that the tax lien did not have priority. We disagree with both of these assertions. Paramount Finance, as a necessary element of the case, decided that a liquor license was property within the meaning of the tax lien statute. Although state law may have changed in the intervening period, we do not believe that the changes, if any, change the outcome of our prior decision. Nevertheless, since Paramount Finance did not explain its reasoning, we address the question at greater length here.

The term "property" is not defined by the tax lien statute and numerous cases have held that federal law does not create any rights to property. Instead, courts look to state law to determine what legal interests in property a debtor or taxpayer has and to federal law to determine whether these state-created interests constitute property or rights to which a tax lien can attach. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979); Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960); see also United States v. Bess, 357 U.S. 51, 56-57, 78 S.Ct. 1054, 1057-58, 2 L.Ed.2d 1135 (1958) (holding that cash surrender value of a life insurance policy is subject to a tax lien even though it is not subject to a creditor's lien under state law since the taxpayer would have had access to these funds during his lifetime); 21 West Lancaster Corp. v. Main Line Restaurant, Inc., 790 F.2d 354 (3d Cir.1986) (mere fact that state law declares that a liquor license is not property and is not subject to a security interest does not prevent a federal tax lien from attaching where liquor license has value to the holder and can be sold); Rodriguez v. Escambron Dev. Corp., 740 F.2d 92, 97 (1st Cir.1984) (once state-created rights are determined "federal law governs whether these rights are 'rights to property' to which a tax lien may attach"); Young, Priority of the Federal Tax Lien, 34 U.Chi.L.Rev. 723, 726-28 (1967); Note, Property Subject to the Federal Tax Lien, 77 Harv.L.Rev. 1485, 1487 (1964) ("[s]tate labels should not control where the realities--the beneficial incidents of ownership--belie them").

21 West Lancaster is particularly instructive. The IRS and the holder of a prior perfected security interest disputed the ownership of the proceeds from the sale of a liquor license. As in the case before us, the panel acknowledged that a liquor license was not considered "property" and was not subject to a security interest under state law. The Third Circuit nevertheless held that a liquor license constituted "property" or "rights to property" within the meaning of federal law since the state had created rights in the license--it had beneficial value for its holder and could be transferred or sold--sufficient for it to be considered property. 790 F.2d at 356-58.

Like Pennsylvania, Ohio allows a liquor license to be transferred sold, inherited, and renewed. See generally, Ohio Rev.Code Ann. Secs. 4303.26, 4303.271, and 4303.273 (Anderson 1988) and Ohio Admin.Code Sec. 4301:1-1-14. It is undeniable that a liquor license has pecuniary value to its holder since the license enables the holder to sell alcoholic beverages and can be sold for value. Since the state has vested the owner of a liquor license with these beneficial interests, a liquor license constitutes "property" or "rights to property" within the meaning of federal...

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