United States v. O'DELL

• Decision Date: 10 March 1947
• Docket Number: No. 10188.,10188.
• Citation: 160 F.2d 304
• Parties: UNITED STATES v. O'DELL
• Court: U.S. Court of Appeals — Sixth Circuit

160 F.2d 304 (1947)

UNITED STATES v. O'DELL

No. 10188.

Circuit Court of Appeals, Sixth Circuit.

March 10, 1947.

Lee A. Jackson, of Washington, D. C. (Sewall Key, A. F. Prescott, and Lee A. Jackson, all of Washington, D. C., and John C. Lehr and Morris Zwerdling, both of Detroit, Mich., on the brief), for appellant.

John Sklar, of Detroit, Mich. (Meyers & Keys and John Sklar, both of Detroit, Mich., on the brief), for appellee.

Before HICKS, ALLEN, and MILLER, Circuit Judges.

ALLEN, Circuit Judge.

This is an action instituted by the Government under section 3710, I.R.C., 26 U. S.C.A.Int.Rev.Code, ß 3710, to collect from a trustee for benefit of creditors of the Howie Company, an insolvent Michigan corporation, certain unpaid excise taxes which had theretofore been assessed against the Howie Company. The District Court dismissed the complaint, and this appeal was prosecuted.

The facts are stipulated, and show that on June 2, 1939, the Howie Company delivered to one William G. Starr, as trustee for the benefit of creditors, a trust chattel mortgage, together with all of its assets. The appellee, successor trustee, was later given possession and control of the assets, liquidated them, and placed the proceeds, $2,933.66, on deposit in a Detroit bank. On September 15, 1941, the Collector of Internal Revenue made demand in writing upon the appellee for payment of past due social security taxes amounting to $1,336.84. Four of the assessment lists for the various items of taxes claimed by the Collector, aggregating $386.11, had been received by him prior to the delivery of the trust mortgage. Three other items aggregating $711.98 were received by the Collector subsequent to the delivery of the mortgage. On September 9, 1941, the total taxes due the City of Detroit, the County of Wayne, and the State of Michigan, amounted to $3,858.45, and under sections 7.81, 7.91 and 7.44, Mich.Stat.Ann., and the charter of the City of Detroit, sections 1, 4a, 8 and 26, had become a lien upon the property of the taxpayer.

Section 3710, I.R.C., 26 U.S.C.A.Int.Rev. Code, ß 3710, and other pertinent statutes are printed in the margin.¹

The Government asserts that under section 3466, R.S., 31 U.S.C. ß 191, 31 U.S. C.A. ß 191, the excise taxes due must first be satisfied. Section 3466 applies here, for the Howie Company is indebted to the United States, and its estate is insufficient to pay all of its debts. The District Court held that the statutes did not authorize recovery because the fund was the property not of the taxpayer, but of the trustee, and also, relying upon In re Dissolution of Ever Krisp Food Products Co., 307 Mich. 182, 11 N.W.2d 852, held that the local liens were specific and perfected and prior to the federal tax claims. The Government contends that the Supreme Court of the United States, in United States v. Waddill, Holland & Flynn, 323 U. S. 353, 65 S.Ct. 304, 89 L.Ed. 294, a case involving facts similar to those of the Ever Krisp case, held the federal lien to have priority, and that the judgment herein is therefore clearly erroneous. The Waddill case declared that a federal question was presented as to whether a state or local lien was specific and perfected, and the judgment of the Supreme Court of Virginia upholding a landlord's lien as against a federal claim for taxes was reversed. The Supreme Court of the United States in that case decided that the landlord's lien was not specific nor perfected, but the question of the applicability of section 3466, R.S., to prior specific and determined liens was reserved, as it had also been reserved in previous decisions. United States v. State of Texas, 314 U.S. 480, 62 S.Ct. 350, 86 L.Ed. 356. The Waddill case has recently been followed and applied in People of Illinois ex rel. Gordon v. Campbell, Collector, 67 S.Ct. 340.

Section 3466 does not create a lien, but establishes a priority. Beaston v. Farmers' Bank of Delaware, 37 U. S. 102, 9 L. Ed. 1017; United States v. Fisher, 6 U. S. 358, 2 Cranch 358, 2 L.Ed. 304. Section 3670, however, does create a lien in favor of the Government which arises at the date when the assessment list is received by the Collector. Section 3671. As to the first four excise tax items listed in the stipulation, the assessment lists were received before the date of the delivery of the mortgage, and the lien of the Government as to $386.11 is clearly prior to possession of the assets by the trustee, although not prior to the attachment of a majority of the liens for local taxes, under Michigan law. But under this record the question of priority is not conclusive. The judgment was correct, not for the reasons stated by the District Court, but because of the failure of the Government to comply with the statutory requirements.

Section 3710 requires the surrender of property or rights to property (1) subject to distraint; (2) upon which a levy has been made; (3) unless such property is subject to an attachment or execution under judicial process. This section is new, having been enacted in 1926, Act of Feb. 26, 1926, section 1114(e) and (f), 44 Stat. 117; but the provision authorizing the Collector after failure or refusal of the taxpayer to pay taxes due, to levy upon his property or property rights (section 3692) dates from 1866. As pointed out in United States v. Metropolitan Life Ins. Co., 2 Cir., 130 F. 2d 149, 151, the procedure for distraint authorized under section 28 of the Revenue Act of 1864, 13 Stat. page 233, was in substance like that of Section 3692 except that nothing was said about a levy. In 1866, 14 Stat. 107, ß 9, Congress, among other changes, provided that a levy was required to be made "upon all property and rights to property * * * belonging to" the taxpayer. The provision authorizing levy is unchanged in the statute applicable here (section 3692). Thus Congress enacted section 3710 with knowledge that for some sixty years levy had been authorized in these cases. In section 3710, which provides a method of forcing a third person to surrender property of the taxpayer for the payment of the taxes due, Congress not only required that the property surrendered should have been levied upon, but emphasized this provision by making the allowance for costs and interest contained in subsection (b) run "from the date of such levy." The property involved here falls within the classes of property subject to distraint, section 3690, and is not subject to an attachment or execution; but the record fails to show that levy has been made.

The stipulation covering levy is as follows:

"That one Giles Kavanagh, the duly appointed, qualified and acting Collector of Internal Revenue for the District of Michigan, on September 8, 1941, as said Collector, gave written notice to the defendant LeRoy E. O'Dell that the tax assessment . . . totalling $1,336.84, including interest thereon, were unpaid and due and further notified the defendant that all property, rights to property, moneys, credits and/or bank deposits then in his possession or under his control and belonging to said Howie Company, and all sums of money owing from the defendant to said Howie Company, were seized and levied upon for the payment of said taxes, together with penalties and interest, and demand was then made upon the defendant for the sum of $1,336.84, or such lesser sum as he was then indebted to said Howie Company, to be applied in payment of said tax liabilities."

This paragraph describes a mere statement or notice of claim. Nothing alleged to have been done amounts to a levy, which requires that the property be brought into legal custody through seizure, actual or constructive, levy being "an absolute...