Back v. Internal Revenue Service

Liss, J., delivered the opinion of the Court. This is an appeal by Leon B. Back, appellant, as receiver for J. B. Broadcasting of Baltimore, Ltd., (hereinafter J.B.), an annulled corporation, which before and after the annulment of its charter operated radio station WEBB in Baltimore, Maryland. The appeal is from the disposition by the Circuit Court of Baltimore City of the receiver’s objec ⁶⁸³ tions to the claims for withholding and unemployment taxes by the Internal Revenue Service. The case originated on March 17, 1978, when Leon Back and others, all judgment creditors of J.B., filed a bill of complaint in the Circuit Court of Baltimore City in which they sought the appointment of a receiver for the assets of J.B., on the basis that J.B. was unable to pay its debts as they matured in the ordinary course of business.

See Maryland Code (1975), Corporations and Associations Article, § 3-413. J. B. Broadcasting' of Baltimore, Ltd. had its corporate charter annulled in the State of Maryland on January 21, 1976. Counsel for J.B. and its officers and directors vigorously contested the claim of the complainants and it was not until July of 1978 that J.B. (by James Brown, who had served as president of J.B. and was the owner of the overwhelming majority of the stock), filed a consent to the entry of summary judgment and the appointment of a receiver.

On July 21,1978, the court appointed Leon Back as receiver; however, because the necessary approval of the Federal Communications Commissioner was delayed, the receiver did not take control of the assets of J.B. until August 1, 1978. It is conceded by all parties that J.B.’s property at the time it was taken over by the receiver was in "deplorable condition.” The receiver, who had extensive experience in the radio field and is an expert in the construction, licensing, operation and management of radio stations, marshalled the tangible assets of the station and subsequently was able to find a qualified purchaser (Brunson Broadcasting Corp. of Baltimore), who offered $430,000 for the station’s assets. The sale was ratified by the F.C.C. on November 20, 1979. In the interim, the receiver continued to operate the station.

It is agreed by all parties that the receiver performed excellently in preserving and selling the assets of J.B. Numerous claims were filed in the receivership. Exclusive of the claims of the Internal Revenue Service, the total claims of creditors exceeded $850,000. Included in these claims were those of judgment creditors amounting to more than $650,000. The Internal Revenue Service filed claims for ⁶⁸⁴ withholding and unemployment taxes covering the entire period of J.B.’s existence.

These claims were divided into three distinct periods. For Period One, which ran from 1970 through 1974, during which J.B. filed quarterly withholding returns, the I.R.S. claimed taxes due of $160,540, including interest and penalties. For Period Two, which ran from 1975 through part of 1978, during which J.B. and its successors filed no returns, IRS claimed taxes due of $268,586.90, including interest and penalties. For Period Three, which included the remainder of 1978 through the end of the receiver’s tenure in November, 1979, the IRS filed a number of claims which in the aggregate, including interest and penalties, amounted to $61,557.41.

The IRS claimed lien and priority status for its claims and the total claims of the IRS would have exhausted the entire trust estate to the exclusion of all other creditors. The receiver filed objection to all of the claims of IRS. An evidentiary hearing was held in the Circuit Court of Baltimore City, at which time the amounts of the Internal Revenue’s claims for Periods Two and Three were called into question. At the conclusion of the evidentiary hearing the court indicated that supplemental memoranda should be filed by April 22, 1981 and a further hearing was scheduled for the following day.

In an attachment to its additional memorandum the IRS recomputed its figures for Periods Two and Three. Period Two liability was restated to be $113,856.39 (of which $81,876.60 constituted taxes and the remainder interest and penalties); the claims for the second quarter of 1978 were included in Period Two, removing them from Period Three. Oral argument was heard and the trial judge filed a memorandum opinion and order which accepted the IRS restated amount of claim for Period Two, overruled the receiver’s objections to the several claims of IRS and allowed the claim of the IRS in the total amount of $320,032.07. Two days later the court sua sponte filed a revised memorandum opinion and order in which it struck its previous order and entered a new order disallowing interest and penalties for Period Three and reduced the allowed claim of the Internal Revenue to $308,143.57. ⁶⁸⁵ The receiver has called this Court’s attention to an apparent mathematical error in which an additional $1,000 was erroneously added to the Internal Revenue Service’s restated amount for Period Two.

The appeal in this case is from the judgment of the trial court allowing the IRS claims in the total amount of $308,143.57. The appellant raises the following nine issues to be decided by this appeal: I. Does the Federal Tax Lien Act or section 3466 of the revised statutes permit payment of federal tax claims before the claims of preexisting judgment lien creditors in accordance with Maryland Law?

II

Did the Internal Revenue Service adequately establish the prerequisites for the applicability of lien or priority status in this case?

III

Was the receiver’s status under Maryland law superior to the Internal Revenue Service’s priority and lien status, even if they were established?

IV

Could the Internal Revenue Service revive any lien status it possessed by purporting to revoke its release of liens during the pendency of the receivership while the trust estate was in custodia legis? V. Should the Internal Revenue Service have been allowed to collect taxes in this receivership proceeding because it failed to prove timely assessment or collection?

VI

Did the lower court err in its determination of taxes due on the basis of speculation?

VII

Did the lower court err in refusing to find that taxes that become due after a corporation ceases to exist are not collectable from the corporation in a receivership proceeding?

VIII

Should the penalties claimed for Period Two have been disallowed because there was no proof of lack of good cause to excuse them? ⁶⁸⁶ IX. Should the lower court, in allowing the claim of the Internal Revenue Service for unemployment taxes, have granted a credit for amounts payable to the Unemployment Fund of the Maryland Department of Human Resources? I. and II. The most important question to be decided in this case is the interplay between federal and state laws in determining the order of payment of claims against insolvent debtors in receivership.

Simply stated, the inquiry is whether federal • statutes and regulations establishing priorities in insolvency proceedings and providing for government liens for taxes impair the rights of judgment creditors under Maryland law. The Internal Revenue Code, (26 U.S.C.), section 6321 provides: If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. Section 6323 (a) provides for the circumstances under which the lien imposed by section 6321 becomes effective. It states: (a) The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

In Maryland, a judgment lien is created by Maryland Code (1975, 1980 Repl. Vol.), Courts and Judicial Proceedings ⁶⁸⁷ Article, § 11-402, and by Maryland Rule 620. The statute provides in subsection 11-402 (b) as follows: (b) Judgment of court of original entry. — If indexed and recorded as prescribed by the Maryland Rules or the Maryland District Rules, a judgment of a court constitutes a lien to the amount and from the date of the judgment on the judgment debtor’s interest in land located in the county in which the judgment was rendered except a lease from year to year or for a term of not more than five years and not renewable. Section 11-403 states that a writ of execution does not become a lien on personal property until an actual levy is made.

Maryland Rule 620 a provides as follows: A judgment shall constitute a lien to the amount and from the date thereof upon all real estate of the judgment debtor lying in the county wherein the judgment was entered, and upon all leasehold interest and terms for years of the judgment debtor in land, except leases from year to year and leases for terms of not more than five years and not renewable. The receiver urges that some of the judgment creditors should be afforded priority under 26 U.S.C. § 6323 (a), supra, which provides that a federal tax lien has no priority over a judgment lien until notice of the claim has been filed. It is conceded that some of the judgments were recorded first in time; nevertheless, the case law seems to establish that in order to be entitled to priority under § 6323 (a), the judgment lien must be "choate and specific” prior to the filing of the federal lien. To meet this test the judgment lien must be defínite in three respects: (1) the identity of the lienor, (2) the property subject to the lien; and (3) the amount of the lien.

See United States v. Kimbell Foods, Inc., 440 U.S. 715 , 99 S. Ct. 1448 , 59 L. Ed. 2d 711 (1979). ⁶⁸⁸ In the case at bar, no evidence was offered by the receiver to establish whether any of the judgment liens would meet the "choate and specific” test. The appellee contends that it not only has a lien against the appellant’s property under section 6321 as we have heretofore stated it, but also under the provisions of the Revised Statutes § 3466 ( 31 U.S.C., § 191 ). That section provides in pertinent part as follows: Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed. The priority established under this section does not apply, however, in a case under Title 11.

Appellee urges that by its broad terms the statute admits of no exceptions in conferring absolute priority for debts due the United States from an insolvent person or estate. United States v. Vermont, 377 U.S. 351 , 84 S.Ct. 1267 , 12 L.Ed.2d 370 (1964). It is not contested that when the receiver in this case was appointed by the Circuit Court of Baltimore City on July 21, 1978, substantial sums were due the United States on account of unemployment and withholding taxes. Appellant points out that there is an apparent conflict between the Federal Tax Lien Act, IRC 6321-6323 and the statute affording federal claims priority in insolvency under section 3466 of the Revised Statutes and contends that in the light of the conflict, pre-existing judgment liens should be paid before federal tax claims. ⁶⁸⁹ The IRS urges that this Court adopt the reasoning found in the treatise on Federal Tax Liens by William T. Plumb, Jr. (3d ed. 1972), in which the author stated at page 192, "On its face, the Government’s priority in distribution, which applies to federal tax claims [footnote omitted] whether or not secured by an antecedent lien, is absolute and admits of no exceptions.5” [Emphasis added].

Footnote 5 refers to United States v. Waddill, Holland and Flinn, 323 U.S. 353 , 65 S.Ct. 304 , 89 L.Ed. 294 (1945), and United States v. Vermont, supra, as support for the quoted statement. In the 1981 supplement, however, Plumb has modified the language of the above quote and changes the footnote: P. 192 (text): Change 5th line from top to read: an antecedent lien, has been said to be absolute, admitting of no exception.5 [Emphasis added], P. 192, n. 5. Change note 5 to read: The Supreme Court statements are all dicta; the strongest is most recent. United States v. Vermont, 371 U.S. 351, 358 (1964).

But the issue was not fully briefed in Vermont or any of the other cases repeating the dicta. Reliance has been placed mainly on United States v. Gilbert Associates, 343 U.S. 361 (1953), which, in turn, relied upon Thelusson v. Smith, 15 U.S. (2 Wheat.) 396 (1817). Conrad v. Atlantic Ins. Co., 26 U.S. (1 Pet.) 386 (1828), which fully disposes of Thelusson, while fitfully cited, has been truly neglected.

It upheld a lien for a loan to an importer on outbound and future inbound cargo over the priority and refused to read section 3466 literally, holding, on the contrary, that it is p. 438 "a mere right of prior payment, out of the general funds of the debtor in the hands of the assignee.” Brent v. Bank of Washington, 37 U.S. (10 Pet.) 569 (1836), held a bank lien upon its shares for any debt of the shareholder to the bank was not defeated by section 3466. It would thus appear that section 3466 does not impose a stricter test of ⁶⁹⁰ perfection of a competing lien than the later enacted federal tax lien. In the rest of the text of this chapter, we have not attempted to qualify the dicta, though the issue is worth presenting for decision. In United States v. Vermont, supra, at 357-59, the Supreme Court said: Section 3466 on its face permits no exception whatsoever from the statutory command that "[w]henever any person indebted to the United States is insolvent . .. debts due to the United States shall be first satisfied.” The statute applies to all the insolvent’s debts to the Government, whether or not arising from taxes, and whether or not secured by a lien.

In United States v. Gilbert Associates, 345 U.S. 361 , without questioning that the lienor was identified, the amount of the lien certain or the property subject to the lien definite, this Court accorded priority to subsequently arising claims of the United States against an insolvent debtor on the ground that: "In claims of this type, 'specificity’ requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the possession of the debtor.. .. The taxpayer had not been divested by the Town of either title or possession. The Town, therefore, had only a general, unperfected lien.” Id., at 366 . [Footnote omitted]. The state tax commissioner’s assessment and demand in the present case clearly did not meet that standard, nor, so far as that goes, did the writ of attachment served ‘on the Chittenden Trust Company. 8 But the New Britain case, 347 U.S. 81 , ⁶⁹¹ in which "[t]he taxpayer had not been divested by the Town of either title or possession,” makes quite clear that different standards apply where the United States’ claim is based on a tax lien arising under §§ 6321 and 6322. 9 "When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing to the United States, whether secured by liens or otherwise, by § 3466 of the Revised Statutes, 31 U.S.C. . . § 191.

In that circumstance, where all the property of the debtor is involved, Congress has protected the federal revenues by imposing an absolute priority [citing United States v. Gilbert Associates, 345 U.S. 361 ; United States v. Waddill, Holland & Flinn, 323 U.S. 353 ]. Where the debtor is not insolvent, Congress had failed to expressly provide for federal priority ... although the United States is free to pursue the whole of the debtor’s property wherever situated.” United States v. New Britain, 347 U.S. 81, 85 . It is undisputed that the State’s lien here meets the test laid down in New Britain that "the identity of the lienor, the property subject to the lien, and the amount of the lien are established.” 347 U.S., at 84 . Moreover, unlike those cases in which the Security Trust rationale was applied to subordinate liens on the ground that judgment had not been obtained prior to the time the federal lien arose, [Footnote omitted], it is as true of Vermont’s lien here [Footnote omitted] as it was of the federal lien in New Britain that "The assessment is given the force of a judgment, and if the amount assessed is not paid when due, administrative officials may seize the debtor’s property to satisfy the debt.” Bull ⁶⁹² v. United States, 295 U.S. 247, 260 . [Footnote omitted].

For these reasons, we hold that this antecedent state lien arising under a statute modeled after §§ 6321 and 6322 is sufficiently choate to obtain priority over the later federal lien arising under those provisions. Appellant in his brief has called our attention to a number of State decisions as well as cases decided in several of the Circuit Courts of Appeals which have held to the contrary. We particularly note United States v. State, 227 S.C. 187 , 87 S.E.2d 577 (1955); and Muniz v. United States, 129 Ind. App. 433 , 155 N.E.2d 140 (1958), both decided before United States v. Vermont, supra, where it was held that section 3466 did not give the United States government absolute preference over antecedent recorded judgments.

Appellant argues that the weight of the State decisions as well as the decisions of the federal courts has in many instances ruled against the government’s asserted absolute priority. We note, however, that Revised Statutes § 3466 is a priority statute while IRC §§ 6321-6323 is a lien statute. It seems clear to us that section 3466, enacted as it was, almost at the very beginning of the Republic, was intended to protect the federal tax revenues by imposing an absolute priority. Congress undoubtedly has been aware of the clear language by which it established a statutory mandate which, on its face, permits no exception and although it has adopted new lien statutes from time to time, it has chosen not to change the priority section.

The Supreme Court has had before it on several occasions the question of whether the priority granted under section 3466 may not be overcome by a fully perfected and specific lien, e.g., in Illinois v. Campbell, 329 U.S. 362 , 67 S.Ct. 340 , 91 L.Ed. 348 (1946), but declined a direct determination as to whether section 6323 provides an exception to section 3466. See United States v. Gilbert Associates, Inc., 345 U.S. 361 , 73 S.Ct. 701 , 97 L.Ed. 1071 (1953). See also Commonwealth of Kentucky Dept. of Revenue v. United States of America, 383 F.2d 13 (6th Cir. 1967). ⁶⁹³ In light of the strong dicta quoted from United States v. Vermont, supra,