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UNITED STATES v. WAITE

UNITED STATES DISTRICT COURT, WESTERN DISTRICT OF PENNSYLVANIA


December 4, 1979

UNITED STATES OF AMERICA, Plaintiff
v.
WAITE, INC., f/k/a C. F. WAITE, INC., OTTO F. HUNGER, ATLANTIC RICHFIELD COMPANY, CITY OF PITTSBURGH - DEPARTMENT OF CITY TREASURER, COMMONWEALTH OF PENNSYLVANIA - DEPARTMENT OF REVENUE, BUREAU OF LIQUID FUELS TAX, BUREAU OF CORPORATION TAXES, BUREAU OF PERSONAL INCOME TAX, BUREAU OF COUNTY COLLECTIONS and BUREAU OF TAXES FOR EDUCATION, and COMMONWEALTH OF PENNSYLVANIA - DEPARTMENT OF LABOR AND INDUSTRY, Defendants

The opinion of the court was delivered by: SNYDER

This is an action on a case stated to reduce to judgment federal tax assessments against the Defendant Waite, Inc., formerly known as C. F. Waite, Inc., and to foreclose the federal tax lien in an amount in excess of $ 39,000 against the real property of Waite, Inc. located at Smallman Street and Haslett Way in Pittsburgh, Allegheny County, Pennsylvania. Other lien creditors of Waite, Inc. have been joined. The Court has now received the tax documents and affidavits of the taxpayer's attorney and the Internal Revenue case agent, and the matter is ripe for decision. We find the Government's lien proper and superior to those of the other Defendants.

Waite, Inc., under contract, sorted and hauled mail for the United States Government. It ceased doing business in February 1975, and its several tax liabilities included, inter alia, withholding and FICA taxes (employment taxes) for the third quarter of 1974. Demand (assessment) was made for this unpaid tax on December 2, 1974, which then became a lien on all Waite's personal and real property on that date, 26 U.S.C. § 6321. *fn1" The notice of federal tax lien was promptly filed in the Allegheny County Prothonotary's Office on December 10, 1974. The Commonwealth of Pennsylvania filed liens against Waite, Inc. on March 14, 1975 ($ 499.62), on July 10, 1975 ($ 5,045.40), and on December 8, 1975 ($ 14,966.49). Atlantic Richfield obtained a judgment lien against Waite, Inc. on March 15, 1976 ($ 60,537.37).

 In its Complaint, the United States seeks to reduce to judgment its several tax assessments against Waite, Inc. (the assessments are itemized later in this opinion). All of Waite's assets have been disposed of (through judicial sales) prior to this action with the exception of the Smallman Street property. While this action was pending, the property was sold on February 22, 1978, by order of this Court at a Marshal's Sale for $ 37,000. The property was sold to Four States Realty Company free and clear of all encumbrances. The present action will determine the distribution of the proceeds of that sale of property formerly owned by Waite, Inc. *fn2" The United States is competing with the Commonwealth of Pennsylvania and Atlantic Richfield Company for status as a superior lien creditor of Waite, Inc. on the Smallman Street property fund by asserting its lien based on the assessment for the employment taxes for the third quarter of 1974. *fn3"

 There is no dispute that notice of a tax lien in favor of the United States was filed on December 10, 1974, and long prior to the liens of the Commonwealth and Atlantic Richfield. The question here is whether the United States properly applied subsequent payments and tax credits against the amounts owed by Waite, Inc. to the United States, and if the United States may have released its lien. To resolve this, we first must refer to an agreement reached between the taxpayer's attorney and the Internal Revenue Service.

  Harry W. Schwab, Esquire represented Waite, Inc. when it ceased doing business (as well as the corporation's owner, Donald G. Waite), and handled the numerous Internal Revenue claims for unpaid taxes. Schwab stated that his primary concern was to eliminate the potential personal liability, under 26 U.S.C. § 6672, *fn4" of Donald Waite, as an officer, for the failure of Waite, Inc. to collect taxes. Realizing that the withholding and FICA taxes due for the third quarter of 1974 were secured by a "first and best" lien on the real property on Smallman Street in Pittsburgh, Schwab orally agreed with Internal Revenue Agent Donald Newvahner that additional monies received by or on behalf of Waite, Inc. were to be applied to the Internal Revenue claims Other than for the third quarter of 1974. In accordance with this agreement, Schwab made payments and these were credited to outstanding corporate liabilities other than the employment tax liability for the third quarter of 1974. Similarly, Newvahner credited involuntary payments (levies served on debtors of Waite, Inc.) to liabilities other than the third quarter of 1974.

 During an Internal Revenue audit, it was determined that a credit of $ 21,712.83 was due Waite, Inc. on its 1972 corporate income tax. On August 19, 1976, Newvahner, having recently learned of the credit, sent to the Internal Revenue Service's Cincinnati Service Center, "Payment Tracer Requests" ordering the funds from the credit to be applied to liabilities other than the employment tax for the third quarter of 1974. Specifically, the credit was to be applied to other tax assessments which are itemized below. *fn5"

 TABLE

 TABULAR OR GRAPHIC MATERIAL AT THIS POINT IS NOT DISPLAYABLE

 The credit was mistakenly applied to the third quarter of 1974, reducing the tax liability for that quarter to zero. Discovering the mistake, Newvahner, on March 7, 1977, sent another set of Payment Tracer Requests again ordering the credit to be applied to tax liabilities other than the third quarter of 1974. The credit to the third quarter was removed and the credits were applied as Newvahner requested. Internal Revenue records show that as of June 30, 1979, the balance due on the employment tax for the third quarter of 1974 was $ 39,745.62. *fn6" Interest and penalties continue to accrue, but the balance due well exceeds the purchase price of the property and therefore the exact amount is not material.

 Although the Internal Revenue records temporarily reflected that the assessed balance for the third quarter of 1974 was zero, a certificate of release was not issued.

 Discussion

 As stated above, this is primarily an action to enforce the federal tax lien on the proceeds of the sale of the Smallman Street property. Under 26 U.S.C. § 7403, the Court must first determine if the United States has established its claim on the underlying tax liability.

 We start with the legal proposition that federal tax assessments are presumptively correct and establish a prima facie case of liability. Helvering v. Taylor, 293 U.S. 507, 55 S. Ct. 287, 79 L. Ed. 623 (1935); United States v. Tinghino, 396 F. Supp. 743 (E.D.N.Y.1975); United States v. Duffy, 378 F. Supp. 22 (M.D.Pa.1974). Waite, Inc. was assessed for third quarter employment taxes on December 2, 1974 and the balance due as of June 30, 1979 was $ 39,745.62. The taxpayer was properly served with the complaint in this action and was given ample opportunity to contradict the assessment, but chose not to do so. The assessment, unimpeached, is therefore sufficient to establish the claim of the United States. See also United States v. Raleigh Restaurant, 398 F. Supp. 496 (E.D.N.Y.1975) (default judgment to the United States if taxpayer fails to appear to contest tax assessment).

 Federal law determines the priority of competing liens on property on which there is a federal tax lien or levy. Aquilino v. United States, 363 U.S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). Section 6321 of the Internal Revenue Code, 26 U.S.C. § 6321, provides that upon assessment of a taxpayer for failing to pay any federal taxes owed, a lien in favor of the United States in the amount of the unpaid tax and any interest, penalty and additional tax which accrues immediately attaches to all property and rights to property, real or personal, belonging to such person.

 A contest between the federally created tax lien and a competing lien is resolved by the first in time, first in right rule enunciated in United States v. City of New Britain, 347 U.S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954). See also United States v. Beaver, 252 F.2d 486 (3rd Cir. 1958). Section 6323 of the Code, 26 U.S.C. § 6323, provides that the federal lien is not valid as against judgment lien creditors until the filing of notice of the lien in accordance with 26 U.S.C. § 6323(f). The state lien is prior in time if it becomes a choate lien against the property prior to the filing of the federal tax lien. See Bank of California v. United States, 520 F.2d 302 (9th Cir. 1975); Atlas, Inc. v. United States, 459 F. Supp. 1000 (D.N.D.1978); United States v. Pennsylvania Department of Highways, 349 F. Supp. 1370 (E.D.Pa.1972). A state created lien is choate if the lienor has obtained judgment on the lien or if the lien is enforceable against the property by summary proceedings. United States v. Equitable Life Assurance Society, 384 U.S. 323, 86 S. Ct. 1561, 16 L. Ed. 2d 593 (1966); New York Life Insurance Co. v. Central National Bank, 453 F. Supp. 37 (N.D.Ill.1978).

 The record indicates that notice of the federal tax lien was filed in Allegheny County on December 10, 1974, in accordance with 26 U.S.C. § 6323. *fn7" Pennsylvania's and Atlantic Richfield's liens were not choate as of that date, and thus the federal tax lien is superior to the state liens.

 Finally, we must decide whether the federal lien was released. Subsequent to the filing of the federal lien, the Internal Revenue collected tax payments from or on behalf of Waite, Inc., and Waite, Inc. became entitled to a tax credit, all of which were applied to Waite's tax liabilities other than the third quarter of 1974. As we stated earlier, these payments were directed away from the third quarter of 1974 assessment pursuant to an agreement between the attorney for Waite, Inc. and an Internal Revenue Agent. Neither the Commonwealth nor Atlantic Richfield have challenged the propriety of this selective application of payments, and our review of the applicable provisions of the Internal Revenue Code reveals such latitude is afforded the taxpayer and the Internal Revenue Service. See, e.g., 26 U.S.C. § 6402 (the Secretary may credit overpayments against Any tax liability of the person who made the overpayment).

 For a period of approximately seven months (August 1976 through March 1977), the Internal Revenue records mistakenly showed that a tax credit had been applied to Waite, Inc.'s third quarter tax liability. (The credit was subsequently applied to different tax liabilities.) However, the mistaken application of a payment or credit on Internal Revenue records to a tax liability secured by a tax lien does not per se release the lien.

 Section 6325 of the Internal Revenue Code, 26 U.S.C. § 6325, governs the release of federal tax liens. The Secretary or his delegate must issue a certificate of release of the lien which must be filed in the same office as the notice of lien or in the Clerk's office. 26 U.S.C. § 6325(f) and (g). *fn8" The Secretary issues the certificate when he makes a finding that the liability for the amount assessed has been fully satisfied or has become legally unenforceable, or if he accepts a bond conditioned upon payment of the amount assessed. 26 U.S.C. § 6325(a). The lien, however, is not released until the certificate is issued. Should the Secretary, for any reason, refuse to issue the certificate of release, the taxpayer may institute action to force issuance of a certificate. In the interim, the lien stands. Cf. Brunwasser v. Jacob, 453 F. Supp. 567 (W.D.Pa.1978); Roberts v. United States, 436 F. Supp. 560 (E.D.Tex.1977); Kurio v. United States, 281 F. Supp. 252 (S.D.Tex.1968).

 Here, there was no finding by the Secretary that Waite, Inc.'s liability for the 1974 third quarter employment taxes was satisfied or legally unenforceable, and no certificate of release was issued by the Secretary. Thus, the lien was not released and continues to date.

 We conclude that the federal tax lien on the Smallman Street property (properly filed on December 10, 1974) was superior to the claims of other lien creditors, the Commonwealth of Pennsylvania and Atlantic Richfield Company. In view of the fact that the Government's lien is for an amount in excess of the selling price of the property, we need not make further findings on priorities.

 The foregoing shall constitute the Court's findings of fact and conclusions of law as required by F.R.Civ.P. 52. An appropriate order shall be entered distributing the proceeds from the sale of the property to the United States.


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