certiorari was denied by the Supreme Court on January 3, 1944.
The issues, aside from jurisdiction, remain to be decided by this Court.
On August 12, 1933, the Bureau of Internal Revenue made an assessment against James K. Bowen for income tax deficiencies of $15,297.68, plus interest of $5,883.53. Notice thereof was filed in the office of the Prothonotary of Lehigh County, Pa. and in the office of the Clerk of the United States District Court for the Eastern District of Pennsylvania in October, 1933. On May 22, 1935, an assessment was made against Bowen and others for deficiencies of distilled spirits tax amounting to $13,108.92, notice whereof was duly filed with the said Prothonotary of Lehigh County and the said Clerk of the District Court in May, 1935. These two tax claims became liens against the real estate of Bowen situate in Lehigh County, valid prior to other liens entered after the respective dates of the filing of notices.
In September, 1935, Henry Baker obtained a judgment against Bowen in the Court of Common Pleas of Lehigh County, Pa., in the amount of $79,240.42. Bowen owned various parcels of real estate in Lehigh County. These properties were encumbered by mortgages which were liens prior to those of the United States and of Baker. There were many other judgments entered against Bowen in Lehigh County. Some of these judgments were recorded prior to both tax liens, several intervened between the two tax liens, some intervened between the tax liens and the lien of Baker's judgment, and one was subsequent to the lien of Baker's judgment. Baker, subsequently, acquired four of the intervening judgments by assignments from judgment creditors. The position of these judgments will be shown later.
In December, 1938, Baker filed with the Collector of Internal Revenue for the First District of Pennsylvania at Philadelphia an application for the release or discharge of the liens of the United States as to one of the properties owned by Bowen. This property was situate at 809-11-13 Hamilton Street, Allentown, Pa. The application was made pursuant to section 3186(c) (4) of the Revised Statutes, now section 3674(b) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 3674(b), which provides for the partial discharge of tax liens of the United States. The Act reads as follows (53 Stat. 449, 26 U.S.C.A. Int.Rev.Code, § 3674(b): "Subject to such regulations as the Commissioner, with the approval of the Secretary, may prescribe, the collector charged with an assessment in respect of any tax may issue a certificate of discharge of any part of the property subject to the lien if there is paid over to the collector in part satisfaction of the liability in respect of such tax an amount determined by the Commissioner, which shall not be less than the value, as determined by him, of the interest of the United States in the part to be so discharged. In determining such value the Commissioner shall give consideration to the fair market value of the part to be so discharged and to such liens thereon as have priority to the lien of the United States."
At that time the Hamilton Street property was occupied by S.S. Kresge Co. under a lease for a term of thirty years from March 1, 1926, at a rental of $25,000 per annum for the first fifteen years, and $30,000 per annum for the balance of the term. Under the provisions of the lease the lessee was to pay real estate taxes assessed against the property, to furnish policies insuring the buildings against fire loss, and was to make all necessary repairs.
All rents under the Kresge lease had been assigned by Bowen to the Lehigh Valley Trust Co. on January 16, 1928, under an agreement whereby it was provided that the Trust Company should collect the rents and apply them in payment of all indebtedness of Bowen to the Trust Company theretofore or thereafter created.
In the application for discharge Baker stated that the rents from the property had been assigned to the mortgagee, that he expected to be obliged to engage in litigation in order to realize on his judgments, and was desirous of obtaining a certificate of discharge of the liens of the United States before proceeding further. Attached to the application was a list of the judgments entered of record against Bowen in Lehigh County, a copy of the assignment of rents, a copy of the agreement between Bowen and the mortgagee under which the assignment of rents was given, a list of the mortgages against the property, and two appraisals of the value of the property made by real estate brokers. One appraisal stated the value of the property to be $308,600; the other $314,600.
On March 10, 1939, the Commissioner of Internal Revenue authorized the Collector of Internal Revenue at Philadelphia, Pa., to issue certificates of discharge upon payment of the sum of $150. The Collector of Internal Revenue, upon receiving that sum from Baker, filed certificates of discharge with the Prothonotary of Lehigh County and the Clerk of the District Court in April, 1939, thereby discharging the liens of the tax claims as to the Hamilton Street property.
On November 8, 1939, Bowen filed a voluntary petition in bankruptcy. Subsequently, in August, 1940, the Hamilton Street property was sold by the trustee in bankruptcy for $457,500 clear of liens. After the sale it appeared that the fund realized was sufficient to have paid the tax liens if they had not been discharged. The government thereupon, in January, 1941, filed a petition with the referee to set aside the discharge of the lien of the distilled spirits tax claim and for an order that the lien be paid in the order of its priority, out of the proceeds of the sale of the property. In that petition the government expressly excluded any claim for the income tax deficiency, stating that such claim was barred by operation of the applicable statute of limitations. Subsequently, the government filed an amended petition seeking reinstatement of both liens.
The grounds set forth in the amended petition, for the relief sought, are that the Commissioner of Internal Revenue was misled by Baker's application, first, as to the value of the Hamilton Street property and, secondly, as to the actual amount of the indebtedness on the various prior judgment liens. Baker filed an answer to the amended petition denying that the government officials were misled in any particular, denying that the value of the property was in excess of the appraisals as of the time of the application, averring that the government had made full investigation of all relevant facts, and further averring that the income tax claim was barred by operation of the statute of limitations.
The referee fixed hearings to take testimony on the issues raised by the amended petition and answer. Two such hearings were had, one on January 31, 1941, and the other on February 19, 1941. The evidence taken at these two hearings was transcribed. The government, in support of its petition, introduced into evidence, inter alia, Baker's application for the discharge of the liens, the lease, and various written communications between government officials pertaining to the application, investigation of the merits of the application and the disposition of the application. It also introduced the testimony of various government officials who investigated, considered and acted on the application. Further, it introduced expert testimony as to the value of the Hamilton Street property at the time of the application, and records of the Court of Common Pleas of Lehigh County showing that Bowen had been contesting the validity and enforceability of certain of the judgments in December, 1938. Baker offered no evidence.
It appears that, at the time the application was made, the primary liens consisted of a series of mortgages held by the Lehigh Valley Trust Co., the principal amount of which totalled $294,600.
A list of the judgments including the government liens, entered of record against Bowen in Lehigh County, arranged in chronological order is as follows:
Holder Entry Amount
1. Houston Land & Trust Co. 3/6/31 $4,616.25
2. W.I.M. Corporation 12/3/31 117.00
3. Citizens Trust Co. of Allentown 12/7/31 40,000.00
4. E. Amanda Marsh, assigned to H. Baker 11/16/32 20,000.00
5. U.S.A. Income Tax 10/3/33 21,181.21
6. Second Natl. Bank, assigned to H. Baker 12/4/33 10,000.00
7. Liberty Trust Co., assigned to H. Baker 2/8/34 20,000.00
8. Allentown Trust Co. 5/24/34 10,000.00
9. Allentown Trust Co. 8/9/34 10,000.00
10. Citizens Trust Co. assigned to H. Baker 1/9/35 20,000.00
11. U.S.A., Distilled Spirits Tax 5/31/35 13,108.92
12. Henry Baker 9/30/35 79,240.42
13. Leon Darling, Dep. Rec. 11/13/35 17,688.25
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