West") signed an agreement of sale ("May agreement") which purported to transfer the assets of Main Line's liquor and restaurant business to 21 West. In this May agreement Main Line agreed to sell the liquor license to 21 West in accordance with the rules and regulations of the Pennsylvania Liquor Control Board (the "board").
On May 23, 1983, Jaybee assigned its title and interest in the liquor license to the Plaginos.
The appropriate financing statements were timely filed with the Recorder of Deeds of Montgomery County, the Prothonotary of Montgomery County, and the Secretary of the Commonwealth of Pennsylvania. Presumably the Plaginos also took possession of the liquor license.
On June 23, 1983, the May agreement was revised by supplemental agreement ("June agreement") between Main Line, the Plaginos, and 21 West. In the June agreement Main Line agreed to transfer the liquor license directly to 21 West for a consideration of $60,000.00,
and the Plaginos agreed to sell the other liquor and restaurant assets of Main Line, excluding those for which the May agreement directed an inventory to be taken,
to 21 West for a consideration of $115,000.00 Payment of the consideration for the liquor license and the $115,000.00 inventory was to be made directly to the Plaginos.
On August 17, 1983, the government served notice on 21 West seeking all property of Main Line which was in 21 West's possession, plus statutory additions. This amount totaled $60,359.58. On June 18, 1984, 21 West, pursuant to a court Order, deposited the sum of $62,283.12 with the Registry of the Court which represents the sum of $60,000.00 plus interest thereon from December 20, 1983. From this fund, 21 West was awarded costs of $30.50.
The Plaginos and the government are now before the court claiming the interest in the fund. The parties stipulate that no funds have been turned over to the government.
Main Line, 21 West, and the Commonwealth of Pennsylvania disclaim all further interest in the fund.
The Plaginos argue: (1) the government's execution on a Pennsylvania liquor license is wrongful because the federal statute permits the government to levy upon property only as defined by state law and a liquor license is not property under Pennsylvania law; (2) execution on the liquor license by the government is wrongful because the execution would impair the Plaginos' property interest in the license; and (3) execution on the liquor license by the government is wrongful because the execution would impair the Plaginos' property interest.
The government argues on the contrary that: (1) the Plaginos acquired no property right directly in or collateral to the liquor license; and (2) the Internal Revenue Code authorizes the Commissioner to lien and levy upon property, including a Pennsylvania liquor license.
At the heart of this case is the validity of the government's claim and the Plaginos' claim. Determination of the validity of the claims involves a two-prong analysis. In re Halprin, 280 F.2d 407 (3d Cir. 1960). The first prong is merely an examination of the "incidences" of a Pennsylvania liquor license under Pennsylvania law. The second prong is "whether an interest thus created and defined falls within the 'property or rights to property' category" under the federal statute or the "property" category under the Uniform Commercial Code ("UCC"), which authorizes federal and UCC liens on property.
A. Validity of Private Creditor's Claim
With respect to the Plaginos' claim, the court turns to the first prong of the analysis. A summary of the relevant principles of the Pennsylvania Liquor Code, 47 Pa.Cons.Stat.Ann. 1-101, et seq. (Purdon 1984) (the "Code"), is appropriate here.
The Code creates the Pennsylvania Liquor Control Board, Code § 2-201, and authorizes the board to issue retail liquor licenses for premises kept or operated by a restaurant. Code § 4-401(a). A liquor license is a privilege. It does not constitute property in the hands of the licensee. Code § 4-468(b.1); 1412 Spruce v. Pennsylvania Liquor Control Board, 504 Pa. 394, 474 A.2d 280 (1984). A restaurant liquor license entitles the restaurateur to purchase liquor from Pennsylvania liquor stores and sell, on the restaurant premises, liquor to patrons.
The Code bars the restaurateur from assigning or transferring a restaurant liquor license directly to another person. Code § 4-468(a). The Code, however, permits the board to transfer a license issued by it from one person to another "upon payment of the transfer filing fee and the execution of a new bond." Code § 4-468(a). The board has the exclusive power to fix the time of transfer of liquor licenses "except in cases of emergency such as death, serious illness, or [certain] circumstances beyond the control of the licensee." Id. In the case of death of a licensee, the board may transfer the license to the surviving spouse or personal representative or a person designated by him. Id.
It is well settled in Pennsylvania that a liquor license cannot be subject to the execution process, 1412 Spruce, supra, nor can it be subject to a valid security interest. In re Revocation of Liquor License No. R-2193, 72 Pa. Commw. 367, 456 A.2d 709 (Pa.Commw.Ct. 1983). The rationale underlying this rule is that the "Uniform Commercial Code -- Secured Transactions," 13 Pa.Cons.Stat.Ann. § 9101, et seq. (Purdon 1984), which provides for the attachment and enforceability of security interests, permits only attachment and enforcement of security interests upon collateral. 13 Pa.Cons.Stat.Ann. § 9203. Collateral is defined as "the property subject to a security interest. . . ." 13 Pa.Cons.Stat.Ann. § 9105(a). Since, under the Code, a liquor license is expressly not property, a liquor license cannot be collateral under the UCC. It cannot be attached nor can a lien upon it be enforced under the UCC by a private creditor.
Although a liquor license is not assignable, the license does enhance the value of the licensee's business. A liquor license is not without value. Due process requires the state to pay the licensee just compensation for the liquor license in the context of condemnation proceedings. Redevelopment Authority of Philadelphia v. Lieberman, 461 Pa. 208, 336 A.2d 249 (1975). Also, after the licensee's death the statutory right to apply for transfer of the liquor license is includable in decedent's estate for Pennsylvania inheritance tax purposes, even though the value of a liquor license is not includable in the decedent's estate. See In re Feitz Estate, 402 Pa. 437, 167 A.2d 504 (1961). Therefore the court concludes that although the Code bars assignment of the license, it does not bar assignment of the value enhancement component of the license. See Branding Iron, Inc. v. Business Loans, Inc., 7 Bankr. 729 (Bankr. E.D. Pa. 1980). The "assignee" cannot transfer or assign the license nor can he initiate execution proceedings. The "assignee" can, however, claim a prior right to the proceeds in the event that the liquor license is transferred by the board. Id.
In the present case, Main Line intended to assign and did assign its interest in the liquor license to Jaybee, which in turn intended to and did assign its interest to the Plaginos. Since, at the time of the assignments, the only interest in the assignor was the liquor licensee's value enhancement component, only this component was assigned to Jaybee and, subsequently, to the Plaginos.
B. Validity of the Government's Claim
Following Halprin's two-prong analysis, the court turns to the first prong and incorporates by reference here the discussion above of the "incidences" of a Pennsylvania liquor license under Pennsylvania law. Additionally, the court notes that the government does not contend that it has the power or authority to transfer the liquor license, absent approval by the board. Under the Code, only the board can transfer the liquor license. Code § 4-468. In fact, the government's brief seems to concede that, prior to the transfer of liquor licenses collected by the government, the board must have the opportunity to review and approve the location descriptions and plans of the transferee's business.
The court turns now to the government's rights in the liquor license, the second prong of the Halprin analysis.
The Internal Revenue Code provides for a lien on "all property and rights to property" of a delinquent taxpayer, 26 U.S.C. § 6321,
and authorizes the Secretary of the Treasury to levy on "all property or rights to property" belonging to a delinquent taxpayer or on which there is a lien. 26 U.S.C. § 6331.
The government argues in the present case that a Pennsylvania liquor license should be characterized as "property or rights to property" under the Internal Revenue Code, and, thus, that the government has a lien upon and can execute upon the liquor license.
In order to resolve this question, the court must first determine whether, as a matter of statutory construction, the characterization of "property or rights to property" as used in 26 U.S.C. §§ 6321 and 6331, is a question of state law or federal law. The Plaginos argue that interpretation of the term property or rights to property is the question of state law, and, since Pennsylvania law characterizes a Pennsylvania liquor license as a privilege and not as property, 26 U.S.C. §§ 6321 and 6331 do not authorize the government to lien or execute on a Pennsylvania liquor license. The government, arguing the contrary position, asserts that interpretation of a federal statute is a federal question, and that characterization of a Pennsylvania liquor license, therefore, is a federal question.
The Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 84 L. Ed. 585, 60 S. Ct. 424 (1940), considered an analogous question. The Court held that a power of appointment characterized by Wisconsin state law as a special power of appointment could be classified and taxed under the federal estate tax as a general power of appointment.
State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed. Our duty is to ascertain the meaning of the words used to specify the thing taxed. If it is found in a given case that an interest or right created by local law was the object intended to be taxed, the federal law must prevail no matter what name is given to the interest or right by state law.
309 U.S. at 80-81. At the time Morgan was decided, Congress had not defined in the Internal Revenue Code a general power of appointment. As a result, the Morgan Court looked elsewhere. Citing "Sugden on Powers (8th Ed.) p. 394 [and] Farwell on Powers (2d Ed.) p. 7," the Court applied "the distinction usually made between a general and a special power" and did not apply Wisconsin law. The Court also found Congressional intent to adopt the "usual distinction" into federal estate tax laws because Congress had reenacted the gross estate inclusion section without tampering with an outstanding Treasury regulation, which had set forth the "usual distinction."
In Halprin, supra, the Third Circuit Court of Appeals applied an analysis similar to that of the Morgan Court. The Halprin court recognized that, while creation of legal interests is a state law question, construction of a federal statute is a federal question. The circuit court said:
Under the terms of Section 6321 of the Internal Revenue Code of 1954 a duly perfected lien of the United States for taxes attaches to "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. Application of this statute involves a two-step inquiry in which both state and federal law must be consulted. State law creates legal interests and defines their incidents, but the ultimate question whether an interest thus created and defined falls within a category stated by a federal statute requires an interpretation of that statute, which is a federal question. Morgan v. Commissioner, 1940, 309 U.S. 78, 60 S. Ct. 424, 84 L. Ed. 585; Fidelity & Deposit Co. of Md. v. New York City Housing Authority, 2 Cir., 1957, 241 F.2d 142.
280 F.2d at 409. The circuit court, assuming that the purported legal interest was valid under state law, proceeded to determine whether it was property or rights to property under 26 U.S.C. § 6321. The appropriate analysis of this second prong of the inquiry, the Halprin court indicated, was as follows:
Our federal problem is whether, in a wholly executory bilateral contract, valid under state law, a promise to pay for goods or services which are yet to be delivered or performed is property of the promisee within the meaning of this lien-creating statute. We must apply what relevant data we can find, including our understanding of the nature and characteristics of contract rights and property rights at common law, in order to decide what kinds of intangible rights Congress covered in the phrase "property and rights to property," as it is used in Section 6321.