Union Guardian Trust Co. v. Commissioner

UNION GUARDIAN TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Union Guardian Trust Co. v. Commissioner Docket No. 94687. United States Board of Tax Appeals 41 B.T.A. 1306; 1940 BTA LEXIS 1075; May 29, 1940, Promulgated *1075 Petitioner is not liable under section 311(a)(2) of the Revenue Act of 1928 and section 3467 of the Revised Statutes for payment of debts of a decedent in disregard of the Government's priority in respect of claims for income taxes against the decedent, where the obligations so discharged constituted valid prior liens. Louis F. Dahling, Esq., for the petitioner. P. A. Sebastian, Esq., for the respondent. LEECH *1306 This is a proceeding to redetermine a deficiency in income tax of $7,119.44 for the calendar year 1928. The issue is whether petitioner, the executor of a decedent's estate, is answerable in its own person and estate under section 311(a)(2) of the Revenue Act of 1928 and section 3467 of the Revised Statutes for having paid debts due by decedent before paying income taxes owed by decedent to the United States. FINDINGS OF FACT. Petitioner was the duly appointed executor of the estate of Harry J. Lindsley, who died March 12, 1930, a resident of the State of Michigan. Petitioner as executor filed an inventory of the estate in the Probate Court of Wayne County, Michigan, on September 22, 1930, and this inventory contained*1076 a list of the real and personal property comprising decedent's estate. Thereafter, petitioner filed its first annual account of its administration of decedent's estate, covering the *1307 period from May 12, 1930, to June 16, 1931. The Probate Court duly approved this account on October 15, 1931. The second and final account, covering the period from June 16, 1931, to April 19, 1934, was subsequently filed, and on June 24, 1934, the Probate Court approved and allowed the account and discharged petitioner as executor, thus closing the estate. Respondent has stipulated that all items shown in the first account under the heading "Expense of Administration", and under the heading "Disbursements" in the second account, were proper expenses of administration and are not questioned. The only other items listed as disbursements in the accounts are shown by the first account, and are as follows: DISBURSEMENTS I PAYMENT OF CLAIMS As allowed by the Commissioners on Claims as per report on file in this Court [1930] June 26 Gross Isle Golf & Country Club (Deducted from avails of sale of membership ctf.) $41.25 Sept. 23 Peoples Wayne County Bank $6,000.00 Sept. 19 Peoples Wayne County Bank 15,251.05 (Deducted from avails of sale of stock held as collateral) Sept. 30 Collector of Internal Revenue 1928 Income Tax 72.57 $21,364.87 II INTEREST ACCRUED ON CLAIMS Peoples Wayne County Bank Int. 2/5/30 to 3/12/30 on $6,000.00 at 6 1/2% 40.08 Int. 1/31/30 to 3/12/30 on 1,250.00 at 6 1/2% 9.25 Int. 2/19/30 to 3/12/30 on 14,000.00 at 6 1/2% 58.70 108.03 III INTEREST PAID Peoples Wayne County Bank Claim Int. 3/12/30 to 9/25/30 on $6,000.00 at 6 1/2% 209.08 Int. 3/12/30 to 9/19/30 on $1,250.00 at 6 1/2% 39.71 Int. 3/12/30 to 9/19/30 on $14,000.00 at 6 1/2% 431.30 680.09 *1077 Included in the assets of decedent was a membership in the Grosse Ile Golf & Country Club. A sale of the membership certificate was negotiated by the club, and pursuant to the provisions of the certificate the avails of the sale, less $41.25 owed by decedent to the club, were delivered to petitioner as executor. Petitioner received only the net amount as an asset of the estate. The decedent at the date of his death was indebted to the Bank of Michigan and the Peoples Wayne County Bank. These institutions were consolidated under the name of Peoples Wayne County Bank on May 1, 1930. The indebtedness was evidenced by three promissory notes. The first note was in the amount of $14,000, was dated February 19, 1930, was due one month after date, and bore interest at the rate of 6 percent per annum. It was secured by collateral consisting *1308 of 1,500 shares of Bound Brook Oil-less Bearing Co. preferred stock, and 3,527 shares of Hewitt Sales Co. capital stock. The note bore the following provisions: The undersigned has deposited and pledged with said Bank as collateral security for the payment of this note and all other liabilities, absolute or contingent, present*1078 or future, of the undersigned, to the said Bank, the following property owned by the undersigned, viz.: 1,500 shares Bound Brook Oil-less Bearing Co. the value of which is now $15,000.00, 3,527 shares Hewitt Sales Company the value of which is now $112,865.00, which property with any other property hereafter deposited in substitution therefor, or in addition thereto, the holder of this note, in default in payment thereof, is authorized to sell at public or private sale with or without notice, and at its option to purchase at such sale, and to apply the proceeds, after deducting all expenses of collection and sale, in payment of this note and the balance upon such other of said liabilities as the holder may elect. In case of decline in the value of the securities at any time pledged for any of the above liabilities, the Bank shall have the right in its discretion to call for additional security satisfactory to the Bank, and upon failure to furnish the same, or if the undersigned becomes insolvent or commits an act of bankruptcy, or if a petition in bankruptcy or an application for the appointment of a receiver, or for the liquidation of the business or assets of the undersigned be*1079 filed by or against the undersigned the Bank may declare the principal of said note due and payable forthwith, and may sell said collateral property and apply the proceeds in the manner above provided. The second note was in the amount of $1,250, was made by Elizabeth Stanley, and was endorsed by the decedent. The third note was in the amount of $6,000, was dated February 5, 1930, was payable March 15, 1930, and bore interest at 6 1/2 percent. It was secured by collateral consisting of 1,700 shares of Bound Brook Oil-less Bearing Co. preferred stock. The note bore the following provisions: The undersigned has deposited with said Bank as collateral security for the payment of this note and all other liabilities, absolute or contingent, present or future, of the undersigned, to the said Bank, the following property, namely: 1,700 Bound Brook Oil-less Bearing Co. Par $10.00 pfd. stock the value of which is now $17,000.00, which property and any other property hereafter deposited in substitution therefor or in addition thereto, or any part of any of the same, the holder of this note, in default in payment thereof, is authorized, without demand of payment and without notice, *1080 to sell at public or private sale and at its option to purchase at such sale and to apply the proceeds in payment of this note and the balance upon any of said other liabilities. Petitioner made an effort to refinance the above indebtedness, and the Peoples Wayne County Bank at first agreed to do so, and thereupon proceedings were taken in the Probate Court to secure an order authorizing petitioner as executor to borrow money to pay the indebtedness. The order was obtained, but the bank subsequently declined to go through with the refinancing. *1309 On August 23, 1930, the bank issued a notice of sale of the collateral held by it on the $14,000 note, which notice was received by petitioner. At the sale, which was held on September 19, 1930, 1,500 shares of Bound Brook Oil-less Bearing Co. stock were sold for $9,200 and 2,500 shares of Hewitt Sales Co. stock were sold for $17,075. From the proceeds of the sale the bank deducted the amount of the $14,000 note, with interest, and the amount of the $1,250 note, with interest. It declined to turn over to petitioner the balance of the avails of the collateral or the excess collateral unless petitioner paid the $6,000 note*1081 held by the bank. Petitioner paid the note as requested in order to secure the release of the collateral and the balance of the avails. Included in petitioner's first account of the decedent's estate was an asset item described as a membership in the Bloomfield Hills Country Club. It was subsequently discovered that this membership actually belonged to one W. A. Hamlin, and in the second account it was eliminated, with the notation of its being in Hamlin's name and the fact of its having been foreclosed and canceled on account of Hamlin's indebtedness to the club in question. A deficiency in income tax of the decedent for the year 1928 was determined on April 16, 1932. Petitioner took an appeal to this Board as executor of the estate, which was dismissed for lack of prosecution on May 10, 1932, a deficiency being entered on that date for that amount against decedent's estate. The estate of decedent was insolvent. OPINION. LEECH: The principal question in this case is whether petitioner paid debts of the decedent in disregard of the priority of the United States in respect of claims for income taxes and hence brought itself within the provisions of section 311(a)(2) *1082 of the Revenue Act of 1928 and section 3467 of the Revised Statutes. These sections, together with the relevant section 3466 of the Revised Statutes, are set out in the margin. 1 *1083 *1310 Petitioner is liable only if out of the assets received from decedent it paid out moneys in discharge of debts to which the Government claim had priority. Conversely, it is not liable if the obligations which it paid had priority over the Government's claim for taxes. . It is settled law that Federal taxes have no priority over valid preexisting liens. As was said in , the Government's "priority is no more than a right of prior payment out of the general funds of the debtor." ; affd., , and ; ; (Case No. 14912); ; ;. The collateral given by the decedent here to secure his notes to the Peoples Wayne County Bank could be applied not only to the note*1084 itself, but to "all other liabilities, absolute or contingent, present or future" of decedent. Such a provision in a note is valid in Michigan, ; , and elsewhere, ; ; . The bank thus had valid liens against the collateral from the proceeds of the sale of which the disputed payments on the lien debts were made. These liens existed at decedent's death and therefore had priority over the Government's later asserted claim for decedent's income taxes. Respondent also claims that the Government had priority in respect of the debt of $41.25 owed by decedent to the Grosse Ile Golf & Country Club. We hold that in the light of the above authorities the club in question likewise had a lien prior to the Government's claim for income taxes. Respondent contends that the cancellation of the membership in the Bloomfield Hills Club for debts owing the club was a payment of a debt of the decedent. This contention has no merit, since the *1311 membership*1085 never belonged to decedent and such debts were not owed by him. We hold, therefore, that petitioner paid no debts owed by the decedent in disregard of the priority of the United States claim for income taxes of decedent. In consequence, it is not liable for those taxes. In view of this result, it will not be necessary to pass upon the second point raised by petitioner, namely, that respondent can not assess the tax against petitioner because of a reorganization in which petitioner's liabilities were assumed by another entity. Decision will be entered for the petitioner. Footnotes 1. SEC. 311. TRANSFERRED ASSETS. (a) Method of collection. - The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title * * *: * * * (2) FIDUCIARIES. - The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the taxpayer. Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax. SEC. 3466. (Priority in Administration.) 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 hereby 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. SEC. 3467. (Liability of Fiduciary.) Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person, or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid. [As amended by sec. 518, Revenue Act of 1934.] ↩