United States v. Security-First Nat. Bank

• Decision Date: 20 November 1939
• Docket Number: Equity No. 838-RJ.
• Citation: 30 F. Supp. 113
• Court: U.S. District Court — Southern District of California
• Parties: UNITED STATES v. SECURITY-FIRST NAT. BANK OF LOS ANGELES et al.

30 F. Supp. 113

UNITED STATES v. SECURITY-FIRST NAT. BANK OF LOS ANGELES et al.

Equity No. 838-RJ.

District Court, S. D. California, Central Division.

November 20, 1939.

COPYRIGHT MATERIAL OMITTED

Ben Harrison, U. S. Atty., E. H. Mitchell, Asst. U. S. Atty., and Eugene Harpole, Sp. Atty. for the Treasury Department, all of Los Angeles, Cal., for the United States.

M. J. Rankin, S. I. Colver, and Milo V. Olson, all of Los Angeles, Cal., for defendants Security-First National Bank of Los Angeles and Los Angeles Trust & Safe Deposit Co.

Arch H. Vernon, Earl E. Johnson, and Gilbert E. Harris, all of Los Angeles, Cal., for defendants Title Insurance & Trust Co. and Title Guarantee & Trust Co.

JENNEY, District Judge.

This is an action by the United States of America to collect federal estate taxes and interest thereon, through the enforcement of liens against certain properties alleged to have been acquired from the estate of decedent by defendants, after the government lien had attached.

Decedent, Alla Wheeler Hallett, died February 13, 1926, owning all of the real property involved herein. It is agreed by all parties that the estate was subject to a federal estate tax, and that a return should have been filed by February 13, 1927. No return was filed however, until February 2, 1933, nearly seven years after decedent's death. Upon the filing of this return, the tax in question was assessed, appearing in the April and June, 1933, assessment lists. On August 11, 1933, notice of lien was filed by the Collector of Internal Revenue in Los Angeles County in accordance with the provisions of Section 3186, R.S., 26 U.S.C. A. § 1562.

In the meantime, the estate had borrowed money, securing the same by a deed of trust, upon that part of its property hereinafter referred to as "Parcel I". Default having occurred in repayment of the loan, the deed of trust was foreclosed, and Parcel I was conveyed, on December 21, 1937, by trustee's deed to defendant, Title Insurance and Trust Company of Los Angeles.

The legal question first presented in connection with this defendant is this: Did the lien of the government take effect, as against a bona fide encumbrancer for value, as of the date of death, February 13, 1926, or as of the date of recordation, August 11, 1933. If the lien is held to have taken effect at the earlier time, it is conceded that the Government is entitled to prevail over defendant, Title Insurance and Trust Company. If the later date is determined to be controlling, it is conceded that this defendant acquired Parcel I free and clear of the government's lien.

Prior to the recordation of the government's lien, which occurred on August 11, 1933, the estate borrowed additional funds, in the amount of $10,000, giving as security therefor a mortgage upon property hereinafter referred to as "Parcel II". The proceeds of this loan are alleged to have been spent for the most part in paying expenses of administration and charges against the estate. The exact amounts so used will be indicated later in this opinion.

Subsequent to the recordation of the Government lien, and on September 4, 1934, this mortgage loan on Parcel II was refinanced and additional funds, in the amount of $6,000, were borrowed from defendant Security First-National Bank of Los Angeles, a deed of trust on Parcel II being given as security therefor. These additional funds, likewise, were allegedly spent to defray expenses of administration and charges against the estate. This latter loan was never repaid, and on January 15, 1937, a sale was had under the deed of trust; at which sale Parcel II was bought in by defendant Security-First National Bank.

The general legal issue presented as to defendant Security-First National Bank, is this: Was the bank's property interest, as purchaser at the sale, taken free and clear of the Government lien, because of the use made by the estate of the borrowed funds. Further facts will be developed and the subsidiary issues on this part of the case will be stated later in this opinion.

The court will now consider the first question involved, namely, the liability of the Title Insurance and Trust Company. Section 315(a) of the Revenue Act of 1924, 43 Stat. 312 (which for all purposes here was the same as Section 209 of the Revenue Act of 1916, 39 Stat. 780 and Section 409 of the Revenue Acts of 1918 and 1921, 40 Stat. 1100 and 42 Stat. 283), provided: "Unless the tax is sooner paid in full, it shall be a lien for ten years upon the gross estate of the decedent, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof, shall be divested of such lien. If the Commissioner is satisfied that the tax liability of an estate has been fully discharged or provided for, he may, under regulations prescribed by him with the approval of the Secretary, issue his certificate, releasing any or all property of such estate from the lien herein imposed."

The lien arising thereunder was held by the courts to take effect as of the date of decedent's death. Hertz v. Woodman, 218 U.S. 205, 223, 30 S.Ct. 621, 54 L.Ed. 1001; Page v. Skinner, 8 Cir., 298 F. 731, at page 732. This construction was widely recognized and observed.

United States v. Ayer, 1 Cir., 12 F.2d 194, 5 Am.Fed.Tax R. 5935. Congress, presumably aware of this judicial construction of its enactment, and having subsequently re-enacted the statute without alteration, is deemed to have placed its approval upon the interpretation given by the courts, and to have made such judicial construction part of the law itself. The Abbotsford, 98 U.S. 440, 25 L.Ed. 168; United States v. Ryan, 284 U.S. 167, 52 S.Ct. 65, 76 L.Ed. 224; Helvering v. R. J. Reynolds Tobacco Co., 306 U.S. 110, 59 S.Ct. 423, 83 L.Ed. 536.

Defendant contends that the decision, fixing the time of the attachment of the lien as of the date of decedent's death, did so only with respect to the estate itself or the beneficiaries thereof, and did not deal with a situation where bona fide encumbrancers for value were involved. There are no authorities cited supporting this contention, and the court feels that it is unsound. The statute is broad and general, and its meaning — that the lien attaches as of the date of decedent's death — seems clear. To say that this lien attaches at one time as against the estate and beneficiaries (at decedent's death), and at another time as against third parties (perhaps at time of recordation), would ignore the essential nature of liens. A tax lien can arise but once. It can only have one effective date of beginning. (Whether, once it has attached, it can prevail over conflicting claims against the same property is an entirely different question.) Manifestly such a construction would read into the tax statute an unwarranted exception based upon reasons of so-called policy — considerations which are more properly cognizable by the legislature than the courts. Tax laws may not be rewritten by courts simply because they may be dissatisfied with the statutes as drafted by Congress.

This court must hold, therefore, that the lien, arising by virtue of Section 315(a) of the Revenue Act of 1924 attaches as of the date of decedent's death to all property in the estate and as against all persons.

Defendant's next contention is this: Since Sec. 3186 of the Revised Statutes, as amended in 1913, 26 U.S.C.A. 1560-1562, was in effect in 1924 when the Revenue Act here pertinent was passed, Congress must have intended to have Sec. 315(a) modified by and interpreted in the light of Sec. 3186. Thereby the estate tax lien would be no different from the general tax lien of Sec. 3186 — which lien arises when the assessment list is received by the Collector, and is only valid as against a mortgagee, purchaser or judgment creditor after due recordation.

Congress, presumed to know the law, undoubtedly had Section 3186 in mind when it passed Section 315(a). Yet no specific reference to the former appears in the latter. Under such circumstances, if possible, it is the duty of a court to construe the two acts together, avoiding repugnancies and implied repeals. See Penziner v. West American Finance Co., 10 Cal.2d 160, at page 176, 74 P.2d 252. Defendant, recognizing this proposition, insists that although Section 315(a) is to be construed as fixing the time its lien arises, that section is silent as to when its lien shall become valid as against mortgagees, purchasers and judgment creditors. Hence, they contend the time fixed by Section 3186 — i. e., the date of recordation — must be read into Section 315(a) for the sake of consistency, and both liens would be valid as against bona fide encumbrancers for value only after proper recordation. This construction is urged as one which will prevent "secret liens", a situation which Congress is asserted to have disapproved in 1913, when it amended Section 3186 to eliminate what was theretofore a secret lien, by requiring recordation.

Defendant's argument tacitly assumes that there can be but one lien to enforce a tax in favor of the Government. However, there is no limit to the number of remedies Congress, in its discretion, may place at the disposal of the Commissioner for the enforcement of taxes. Clearly Congress, with complete propriety, may provide one lien to protect its rights pending the assessment of a tax, and another to enforce the collection thereof, once assessed. In any event, however unwise a secret lien may be, the remarks of the court in United States v. Curry, D.C., 201 F. 371, 374, are pertinent to the situation here even as they were when in 1913 the same problem arose before the amendment to Section 3186:

"It would seem that by a comparatively slight change of the statute law the rights of the United States could be sufficiently protected without endangering the interests of other persons. The collector of...