United States v. Dallas Nat. Bank, 11196.

• Decision Date: 18 January 1946
• Docket Number: No. 11196.,11196.
• Citation: 152 F.2d 582
• Parties: UNITED STATES v. DALLAS NAT. BANK et al.
• Court: U.S. Court of Appeals — Fifth Circuit

152 F.2d 582 (1945)

UNITED STATES v. DALLAS NAT. BANK et al.

No. 11196.

Circuit Court of Appeals, Fifth Circuit.

December 19, 1945.

Rehearing Denied January 18, 1946.

Homer R. Miller and Sewall Key, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and A. W. Christian, Asst. U. S. Atty., of Dallas, Tex., for appellant.

J. L. Lipscomb, Wm. A. Blakley, and Hoyet A. Armstrong, all of Dallas, Tex., for appellee.

Before SIBLEY, McCORD, and WALLER, Circuit Judges.

WALLER, Circuit Judge.

Mrs. Carolyn C. Maxwell, a resident of England, earned, during the years 1931, 1934, and 1935, income and profits on stock market transactions in the State of New York as reflected by her account with her brokers, G. M. P. Murphy & Company, of New York City. She failed to make returns of her income from these profits. On July 8, 1937, after obtaining information from her as to the costs and dates of purchase of certain stocks, the Internal Revenue Agent in charge of the Second District of New York mailed to her the usual thirty-day letter informing her of the deficiencies. Upon receipt of the field examination report from such Agent, the Commissioner of Internal Revenue filed, in the Second District of New York, income tax returns for the taxpayer for each of the years in question. After sending her the usual notice with statement of the deficiencies and receiving no reply, the Commissioner assessed the deficiencies against taxpayer and transmitted the assessment list to the Collector of the Second District of New York, who, in turn, mailed to her two notices of demand for payment.

No payment having been made, the Government, in 1944, filed suit in the United States District Court for the Northern District of Texas seeking to establish and have declared a lien on taxpayer's interest in a trust estate created under the will of Mrs. Belle Shumard and administered by the Dallas National Bank, as trustee. Under the terms of the will¹ the taxpayer did not have the legal title to the corpus of the trust, nor did she have the use, possession, or the right to the possession of such corpus, but she received net income therefrom amounting to approximately $54 per month.

A copy of the complaint and a copy of the order to appear in said suit were served upon Mrs. Maxwell through the United States Consul's office in England.

The Trustee Bank has withheld payments to taxpayer since the filing of the suit.

As stated by the Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 80, 626, 60 S.Ct. 424, 426, 84 L.Ed. 585, 1035, "state law creates legal interests and rights," therefore, whether or not the cestui que trust here has been given any property or rights thereto in the trust which may be subjected to lien, must be determined by the law of Texas.

42 Tex.Jur. § 27, page 628, states that "the extent of the beneficiary's interest is determined by interpretation of the settlor's language." Mrs. Shumard devised her Main Street property in Dallas, Texas, to her executor and trustee, in trust for taxpayer and other named beneficiaries, "the net revenues" of the trust property to be distributed to the beneficiaries each month. Therefore, Mrs. Maxwell has not the title to the corpus of the trust, but is to receive only a proportionate part of the net revenues.

Although the testatrix intended to create an estate which would not be subject to seizure, sale, or execution for debts of any kind or character by placing such restraint upon the corpus and income, and such provisions in a will are valid under the Texas law and are respected by the courts,² this would not prevail against the fastening of a lien by the Federal Government for unpaid taxes on any property owned by the delinquent taxpayer.

We held in Shambaugh v. Scofield, 5 Cir., 132 F.2d 345, that the provision of the Texas Constitution exempting homesteads from forced sale did not operate to exempt a Texas homestead from a sale to satisfy a federal income tax lien. Having been enacted within the scope of the power delegated to the Federal Government, the Internal Revenue statutes are a part of the supreme law of the land. If they are in conflict with State law, constitutional or statutory, the latter must yield.

The provisions of the will of an individual which seek to exempt from debts property bequeathed for the benefit of another cannot rise higher than a statutory or constitutional exemption provided by a State.

Mrs. Maxwell has no title to the corpus of any property other than the profits after they have accrued and have been passed to her account and made available to her by the Trustee. In other words, after "the net revenues," amounting to approximately $54 per month, accrue, or are set apart and become payable to her, such net revenues then belong to her and are then subject to the lien of the Government for taxes, and are available as an appropriate res in a proceeding in rem by the Government to have a lien for delinquent taxes declared and enforced against such revenues.

The Government is entitled to a lien upon these monthly payments of net revenue in the hands of the Trustee, by virtue of the law as stated in 26 U.S.C.A. Int.Rev. Code, §§ 3670 and 3671.³

Under the holding of Glass City Bank of Jeanette, Pa. v. United States of America, 66 S.Ct. 108, that the lien of the United States attaches to after-acquired property, we think that such lien will continue to be fastened on the monthly income from the trust as it becomes payable to the taxpayer.

The District Court held that there had been no valid service upon the taxpayer in London, England, because there is no statutory right for a substituted service upon such an inchoate property interest as she had in the trust estate

Sec. 57 of the Judicial Code, Title 28 U.S.C.A. § 118, provides that when in any suit commenced in any district court of the United States to...