On Appeal from the United States District Court for the Eastern District of Pennsylvania Civil No. 84-2005
Before: ADAMS, GIBBONS and WEIS, Circuit Judges.
This appeal arises out of a conflicting claims to a liquor license. A restaurant operator borrowed money and gave the lender a security interest in the restaurant equipment and its liquor license. Subsequently, the Internal Revenue Service (IRS) filed a lien on the license to recover taxes owed by the restaurant operator. The district court held that the prior security interest defeated the claim of the IRS. Because we conclude that a Pennsylvania liquor license is not "property" subject to a valid security interest, but is "property" subject to a federal tax lien, we will reverse.
The liquor license at issue in this case was originally owned by Main Line Restaurant, Inc. (Main Line), a restaurant operator in suburban Philadelphia. In June, 1980, Main Line borrowed $60,000 from Jaybee Loan Company (Jaybee), and in exchange granted Jaybee a security interest in its restaurant equipment and its liquor license. Apparently as a result of financial difficulties. Main Line failed to pay taxes due the IRS in the latter part of 1980. The following year, 1981, the IRS made assessments against Main Line for unpaid federal employment taxes and interest for the third and fourth quarters of 1980 and for 1981.
In May, 1983, 21 West Lancaster Corporation (21 West) purchased all of the Main Line's assets, including its liquor license. Several days later, on May 23, 1983, Jaybee, the $60,000 creditor, assigned its security interest in the liquor license to William and Maria Plaginos. In June, 1983, in response to the assignment of the security interest to the Plaginos, 21 West and Main Line revised the agreement by which 21 West was to buy Main Line's assets. The revision divided the purchase into two transactions, one for the liquor license and one for the remaining assets. Main Line sold the liquor license to 21 West for $60,000, which was to be paid by the buyer directly to the Plaginos, as assignees of Jaybee's security interest in the license. In the second part of the sale, Main Line transferred the remainder of the assets to 21 West for $115,000, also to be paid directly to the Plaginos.
On August 17, 1983, the IRS served a notice of levy upon 21 West seeking $65,729.21 in unpaid tax assessments owed by Main Line. As a result, 21 West was faced with conflicting demands: it owed the Plaginos $60,000 for the liquor license, and the IRS was seeking from it an almost identical amount to satisfy the tax lien. To resolve the situation, on June 18, 1984, 21 West deposited $62,283.12 into the registry of the district court, representing the $60,000 owed to the Plaginos, plus interest earned on that sum from December 20, 1983. Thereafter, 21 West filed an interpleader action in the district court, seeking an adjudication of the competing claims to the fund by the IRS and the Plaginos.
The district court ruled that the security interest granted in 1980 to Jaybee, into whose position the Plaginos stepped, took precedence over the subsequent IRS tax lien. It first acknowledged that under Pennsylvania law a liquor license is not property and cannot be subject to a security interest. 1412 Spruce, Inc. v. Pennsylvania Liquor Control Board, 504 Pa. 394, 474 A.2d 280 (1981); In re Revocation of Liquor License No. R-2193, 72 Pa. Commw. 367, 456 A.2d 709 (1983). Noting, however, that the license does enhance the value of the licensee's business, the district court ruled that this "value enhancement component" could be subject to a security interest. Accordingly, it held that the security interest assigned by Main Line to Jaybee in 1980 was valid, and that it was senior to the subsequent lien held by the IRS. The government filed a timely appeal.
Under the Internal Revenue Code, a federal tax lien is created in the amount of any unpaid tax on "all property and rights to property, whether real or personal, belonging to the delinquent taxpayer." 26 U.S.C. § 6321 (1982). The lien arises automatically when the outstanding taxes are assessed. 26 U.S.C. § 6322, and extends to all property belonging to the taxpayer, Glass City Bank v. United States, 326 U.S. 265, 267-68, 90 L. Ed. 56, 66 S. Ct. 108 (1945) (interpreting predecessor section of § 6321). A lien arising under § 6321 is afforded priority over all other unperfected liens or claims asserted against the taxpayer's property. § 6323(a). An IRS lien is ineffective against certain parties, including a "purchaser, holding of a security interest, mechanic's lien or judgment lien creditor." until the notice of the lien has been properly filed by the government. Id.
Thus the threshold question here is whether Main Line, as owner of the liquor license, possessed "property" or "rights to property" within § 6321 such that an IRS lien could attach to it.*fn1 If the license is property, and an IRS lien did attache to it, we must then determine whether the IRS lien is ineffective under § 6323(a) because of a prior lien or claim.
Determining whether an IRS lien attaches to property rights entails inquiry into both state and federal law. The Internal Revenue Code itself "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55, 2 L. Ed. 2d 1135, 78 S. Ct. 1054 (1958). A court therefore must first look to state law to ascertain the existence and nature of the interests against which an IRS lien has been asserted. See, e.g., Aquilino v. United States, 363 U.S. 509, 512-14, 4 L. Ed. 2d 1365, 80 S. Ct. 1277 (1960); Rodriguez v. Escambron Development Corp., 740 F.2d 92, 97 (1st Cir. 1984). While state law creates legal interests and defines their incidents, "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." In re Halprin, 280 F.2d 407, 409 (3d Cir. 1960); see Bess, 357 U.S. at 56-57; Rodriguez, 740 F.2d at 97 ...