IN THE COURT OF APPEALS OF TENNESSEE
FILED
AT KNOXVILLE July 13, 1999
Cecil Crowson, Jr.
Appellate C ourt
ESTATE OF J.P. WALKER, ) C/A NO. Clerk
03A01-9808-PB-00250
)
Plaintiff, )
)
v. )
)
)
)
TENNESSEE DEPARTMENT OF REVENUE, ) APPEAL AS OF RIGHT FROM THE
) SEVIER COUNTY PROBATE COURT
Defendant-Appellant, )
)
and )
)
)
)
UNITED STATES OF AMERICA, )
) HONORABLE CHARLES S. SEXTON,
Defendant-Appellee. ) JUDGE
For Appellant For Appellee
PAUL G. SUMMERS WILLIAM S. ESTABROOK
Attorney General and Reporter ROBERT L. BAKER
Nashville, Tennessee Tax Division
Department of Justice
M. TY PRYOR Washington, D.C.
Assistant Attorney General
Nashville, Tennessee CARL K. KIRKPATRICK
United States Attorney,
Eastern District of Tennessee
Knoxville, Tennessee
O P I N IO N
AFFIRMED AND REMANDED Susano, J.
1
This appeal requires us to determine whether the claim
of the United States against the Estate of J.P. Walker (“the
Estate”) for federal income and estate taxes is entitled to
priority treatment as against the Tennessee Department of
Revenue’s claim for state inheritance taxes. The trial court --
the Sevier County Probate Court -- held, pursuant to the Federal
Insolvency Statute, 31 U.S.C.A. § 3713, that the United States
was entitled to priority as to the remaining assets of the
Estate. The Department of Revenue appeals, contending that its
inheritance tax claim is on an equal footing with the federal
claim and, therefore, should share pro rata in the distribution
of the Estate’s remaining assets.
I
J.P. Walker died testate on January 4, 1991. His
estate was subsequently assessed federal estate taxes of
approximately $2,000,000, plus interest and penalties, as well as
federal income taxes1 of approximately $700,000, again plus
interest and penalties. As of January 31, 1995, the Estate’s
aggregate federal tax liability had grown to $4,245,627.10. The
Department of Revenue’s claim against the Estate, including
interest and penalties, is in the amount of $634,528.
On October 25, 1996, the Estate filed a notice of
insolvency in the trial court. On February 20, 1998, it filed a
number of motions, including a motion in the nature of
interpleader, a motion regarding final distribution, and a notice
1
The income tax component of the federal claim apparently is based on
taxes due on income earned by the Estate after Walker’s death.
2
of deposit of funds, asking the trial court to determine the
priority of the competing tax claims. The parties agree that the
Estate is insolvent and that it does not have sufficient funds to
pay both tax claims in full.2
In connection with the Estate’s motions, the United
States contended, and still contends, that it is entitled to a
priority position with respect to the funds deposited by the
Estate in the registry of the trial court. It claims a priority
based on the Federal Insolvency Statute, 31 U.S.C.A. § 3713.
That statute provides, in pertinent part, as follows:
A claim of the United States Government shall
be paid first when--
* * *
(B) the estate of a deceased debtor, in the
custody of the executor or administrator, is
not enough to pay all debts of the debtor.
31 U.S.C.A. § 3713(a)(1)(B). In the alternative, the United
States argues that it holds federal income and estate tax liens
against the Estate that are entitled to priority under the
Internal Revenue Code, specifically 26 U.S.C.A. §§ 6321 and
6324.3
2
The Estate deposited $675,653.09 with the trial court, said amount
representing essentially all of the remaining assets of the Estate.
3
26 U.S.C.A. § 6321 provides, in pertinent part, as follows:
If any person liable to pay any tax neglects or
refuses to pay the same after demand, the amount...
shall be a lien in favor of the United States upon all
property and rights to property, whether real or
personal, belonging to such person.
26 U.S.C.A. § 6324 establishes a lien for estate taxes, providing that
[u]nless the estate tax imposed by chapter 11 is
sooner paid in full, or becomes unenforceable by
reason of lapse of time, it shall be a lien upon the
gross estate of the decedent for 10 years from the
date of death....
3
The Department of Revenue contended below, as it does
on appeal, that the Federal Insolvency Statute, specifically 31
U.S.C.A. § 3713(a)(1)(B), does not apply to the instant case,
because the state inheritance tax claim is not a “debt of the
debtor” since it arose after his death; that its lien for state
inheritance taxes arose at the same time as the federal estate
tax lien, i.e., upon Walker’s death; that its lien is
sufficiently perfected or choate so as to have equal priority
with the federal liens; and that, in the absence of a federal
statute specifying how priority between these liens should be
determined, the competing claims should share pro rata in the
distribution of the Estate’s remaining assets, pursuant to T.C.A.
§§ 30-2-317 and 67-1-1403.4
Following a hearing on the Estate’s motions, the trial
court found
that the laws of the United States in this
instance and under these facts and
circumstances pre-empt the statutes of the
State of Tennessee and that the IRS is
entitled to priority of distribution to the
4
T.C.A. § 67-1-1403(d) provides that a lien for inheritance taxes shall
“arise at the date of death,” while T.C.A. § 30-2-317 provides, in pertinent
part, as follows:
(a) All claims or demands against the estate of any
deceased person shall be divided into the following
classifications, which shall have priority in the
order shown:
* * *
(2) Second: Taxes and assessments imposed by the
federal or any state government or subdivision
thereof;....
* * *
(b) All demands against the estate shall be paid by
the personal representative in the order in which they
are classed, and no demand of one class shall be paid
until the claims of all prior classes are satisfied or
provided for; and if there shall not be sufficient
assets to pay the whole of any one class, the claims
in such class shall be paid pro rata.
4
full extent of its tax claims over the claim
asserted by the [Department of Revenue].
Inasmuch as there are insufficient funds with
which to discharge in full the IRS claim, it
follows that the IRS is entitled to the
entirety of the funds on deposit in the
registry of the Court together with the
balance of funds, if any, which will be
available to the Estate for application
toward satisfaction of these claims following
payment of “winding up” expenses of
administration....
II
Our review of this non-jury case is de novo upon the
record of the proceedings below; however, that record comes to us
with a presumption that the trial court’s factual findings are
correct. Rule 13(d), T.R.A.P. We must honor this presumption
unless we find that the evidence preponderates against those
findings. Id.; Union Carbide Corp. v. Huddleston, 854 S.W.2d 87,
91 (Tenn. 1993); Old Farm Bakery, Inc. v. Maxwell Assoc., 872
S.W.2d 682, 684 (Tenn.App. 1993). The trial court’s conclusions
of law, however, are not accorded the same deference. Campbell
v. Florida Steel Corp., 919 S.W.2d 26, 35 (Tenn. 1996); Presley
v. Bennett, 860 S.W.2d 857, 859 (Tenn. 1993). The issue before
us is one of law; hence our review is de novo with no
presumption.
III
We are of the opinion that the trial court correctly
determined that the United States is entitled to a priority as to
the funds on deposit in the trial court, by virtue of the Federal
Insolvency Statute, 31 U.S.C.A. § 3713. Several reasons lead us
to this conclusion.
5
In analyzing § 3713,5 the United States Supreme Court
has noted that the priority created by the statute is based upon
a public policy recognizing the necessity of securing an adequate
revenue to provide for the public welfare, and that the statute
has been applied with this purpose in mind for almost 200 years.
United States v. Moore, 423 U.S. 77, 96 S.Ct. 310, 313, 46
L.Ed.2d 219 (1975). Likewise, it is well-settled that in order
to effectuate its purpose, § 3713 is to be construed and applied
liberally. Id.; United States v. Key, 397 U.S. 322, 90 S.Ct.
1049, 1051, 25 L.Ed.2d 340.
The Supreme Court has observed that in cases of
insolvency, § 3713 expressly confers an absolute priority to
federal claims, permitting on its face no exceptions to that
priority. United States v. State of Vermont, 377 U.S. 351, 84
S.Ct. 1267, 1270-71, 12 L.Ed.2d 370 (1964). The Supreme Court
has also noted that
the courts have applied the priority statute
to Government claims of all types.... Indeed,
under the decisions of this Court, “[o]nly
the plainest inconsistency would warrant our
finding an implied exception to the operation
of so clear a command as that of [the
predecessor to § 3713].”
Moore, 96 S.Ct. at 314 (quoting United States v. Emory, 314 U.S.
423, 62 S.Ct. 317, 322-23, 86 L.Ed. 315 (1941)). A party
claiming exemption from operation of the statute has the burden
5
Several cases cited in this opinion address prior versions of the
Federal Insolvency Statute, which was most recently amended in 1982. However,
no substantive changes in the statute have occurred since the cited cases were
decided. See United States v. Coppola, 85 F.3d 1015, 1019 n.3 (2nd Cir.
1996)(citing H.R. Rep. No. 651, 97th Cong., 2d Sess. 1-3, reprinted in 1982
U.S.C.C.A.N. 1895, 1895-97). Therefore, we are comfortable in relying on
cases decided prior to the amendment in our analysis of the statute in its
current form.
6
of showing that the party does not fall within its terms.
Bramwell v. United States Fidelity & Guaranty Co., 269 U.S. 483,
46 S.Ct. 176, 177, 70 L.Ed. 368 (1926).
Furthermore, under the Supremacy Clause of the United
States Constitution, federal law as a general rule prevails when
there is a conflict between state and federal statutes. U.S.
CONST. art. VI; Howard v. United States, 566 S.W.2d 521, 525
(Tenn. 1978).
The Department of Revenue argues that its claim for
inheritance taxes falls outside the scope of § 3713(a)(1)(B). It
bases this assertion on the theory that, because inheritance
taxes do not arise during a decedent’s lifetime, but only upon
death, such obligation cannot constitute a “debt of the debtor,”
as that term is used in the statute. According to the Department
of Revenue, such tax liability is more properly characterized as
a debt of the estate; thus, so the argument goes, it does not
fall within the ambit of § 3713(a)(1)(B) and cannot be defeated
by operation of that statute.
In support of this contention, the Department of
Revenue relies upon the unpublished decision of this Court in
Estate of Gray v. Internal Revenue Service, C/A No. 03A01-9507-
CH-00227, 1996 WL 64006 (Tenn.App., E.S., filed February 15,
1996, McMurray, J.). In Gray, we found that the Federal
Insolvency Statute was not applicable and held that the federal
income tax claim in question there was not entitled to priority
over a surviving spouse’s elective share. Id. at *5. Stating
that § 3713 “applies expressly to all debts of the debtor,
7
nothing more,” we concluded that the elective share was not a
“debt of the debtor.” Id. at *3.
The Department of Revenue relies upon the Gray opinion
to support its contention that its inheritance tax claim does not
constitute a “debt of the debtor.” While we acknowledge that
Gray does contain some general language -- such as that quoted
above -- that arguably supports the State’s position, we do not
believe that it controls our decision in the instant case. We
held in Gray that a widow’s elective share was not a debt of any
kind, but rather a statutory entitlement. Id. at *4.
Specifically, we found the elective share to be “a statutory
charge against the estate [that] is not available as an asset
from which unsecured debts of any creditors can be satisfied....”
Id. The same cannot be said of the state inheritance tax claim
at issue here. That claim is clearly a debt of the estate.
Therefore, Gray does not control our decision in the instant
case.
After careful analysis of § 3713(a)(1)(B), we have
concluded that both the federal and state tax claims in the
instant case are “debts of the debtor” within the meaning of the
statute. This conclusion is consistent with the United States
Supreme Court’s liberal construction of the Federal Insolvency
Statute in favor of the priority of the claims of the federal
government. See, e.g., Moore, 96 S.Ct. at 313-14; Key, 90 S.Ct.
at 1051.
Decisions in other jurisdictions support our conclusion
in this case. For example, in United States v. Estate of Young,
8
592 F.Supp. 1478 (E.D. Pa. 1984), the District Court rejected the
state of Pennsylvania’s contentions that federal estate taxes
were not the decedent’s “debts” prior to his death, and that the
Federal Insolvency Statute thus did not mandate priority
treatment of a federal estate tax lien over the state’s
inheritance tax lien. In so doing, the District Court stated as
follows:
The Commonwealth’s attempt to impose a narrow
construction upon § 3713 must fail. As a
measure designed to protect the public fisc,
§ 3713 “‘is to be construed liberally. Its
purpose is not to be defeated by
unnecessarily restricting the application of
the word “debts” within a narrow or technical
meaning.’”
Estate of Young, 592 F.Supp. at 1484 (citing County of Spokane,
Washington v. United States, 279 U.S. 80, 93, 49 S.Ct. 321, 324,
73 L.Ed. 621 (1929)(quoting Price v. United States, 269 U.S. 492,
500, 46 S.Ct. 180, 181, 70 L.Ed. 373 (1926))). The Young Court
also noted that
In the context of antecedent state-created
liens, the priority statute provides the
federal government [with] a particularly
potent weapon. Against such encumbrances,
the federal claim is entitled to prevail
unless the prior lienor can meet a test of
“choateness” approaching actual possession of
the collateral.... “In claims of this type,
‘specificity’ requires that the lien be
attached to certain property by reducing it
to possession, on the theory that the United
States has no claim against property no
longer in the possession of the debtor.”
Estate of Young, 592 F.Supp. at 1483-84 (quoting United States v.
Gilbert Associates, Inc., 345 U.S. 361, 366, 73 S.Ct. 701, 704,
9
97 L.Ed. 1071 (1953)). Circumstances evidencing such specificity
clearly are not present in the instant case.
The issue of the relative priority of a federal estate
tax lien and a state inheritance tax lien has also been addressed
by a New Jersey appellate court. In the case of In the Matter of
the Estate of Kurth, 449 A.2d 546 (N.J.Super.Ct.App.Div. 1982),
the State of New Jersey -- much like the Department of Revenue in
this case -- contended that the competing liens had attached
simultaneously at the decedent’s death; that the liens shared
equal priority; that the Federal Insolvency Statute did not apply
because the federal estate tax was not a debt of the decedent
during his lifetime; and that the claims should be satisfied on a
pro rata basis, pursuant to a New Jersey statute. The Court in
Kurth rejected the state’s position, however, holding that
federal estate taxes fall within the ambit of the statute, thus
giving the United States priority where the estate is
insufficient to pay its debts. Id. at 547. The Court also noted
that 31 U.S.C.A. § 191 (now § 3713(a)) must be read in pari
materia with 31 U.S.C.A. § 192 (now § 3713(b)), which speaks in
terms of debts due from debtors as well as estates.6
We agree with the analysis set forth in the two cases
discussed above. Accordingly, we hold that § 3713 does apply to
6
31 U.S.C.A. § 3713(b) provides as follows:
A representative of a person or an estate (except a
trustee acting under title 11) paying any part of a
debt of the person or estate before paying a claim of
the Government is liable to the extent of the payment
for unpaid claims of the Government.
10
the competing claims in the instant case.7 The Department of
Revenue has not demonstrated that its inheritance tax lien is in
some way exempt from operation of the statute. Thus, under the
circumstances of this case, application of § 3713 mandates the
priority distribution of the assets of this insolvent estate to
satisfy as much of the federal tax lien as possible. This
mandate means that the United States is entitled to the entirety
of the remaining funds of the Estate.
In view of this conclusion, we deem it unnecessary to
address the Department of Revenue’s argument that the United
States failed to prove the existence of the separate income tax
component of its overall tax lien. By the same token, we need
not address the United States’ contention that the Department of
Revenue has waived the right to challenge the United States’
claim of priority for its lien for income taxes by failing to
make any argument specifically regarding that claim.
7
The Department of Revenue also contends that, even if § 3713 applies to
debts of a decedent’s estate, the statute’s application nevertheless is
limited. The Department of Revenue argues that it “does not specifically
address federal tax lien priorities,” which are instead set forth at 26
U.S.C.A. § 6321, et seq. It relies in part upon the case of United States v.
Estate of Romani, 523 U.S. 517, 118 S.Ct. 1478, 140 L.E.2d, 710 (1998), in
which the Supreme Court held that an exception to the absolute priority of §
3713 exists in the case of a judgment creditor’s previously-filed lien that
falls within the scope of 26 U.S.C.A. § 6323(a). That section provides, in
pertinent part, that the general federal tax lien set forth at 26 U.S.C.A. §
6321 “shall not be valid as against any purchaser, holder of a security
interest, mechanic’s lienor, or judgment lien creditor until notice thereof”
is properly recorded. However, prior decisions of the Supreme Court indicate
that state and local tax liens are not “judgment liens” and do not fall within
the scope of 26 U.S.C.A. § 6323(a). See United States v. Gilbert Associates,
Inc., 345 U.S. 361, 363-65, 73 S.Ct. 701, 97 L.Ed. 1071 (1953) (holding that
the existence of a local tax lien does not make the taxing entity a “judgment
lien creditor” under the predecessor to § 6323.); see also United States v.
City of New Britain, 347 U.S. 81, 88, 74 S.Ct. 367, 98 L.Ed. 520 (1954)
(“There is nothing in the language of [the predecessor to § 6323] to show that
Congress intended antecedent federal tax liens to rank behind any but the
specific categories of interests set out therein, and the legislative history
lends support to this impression.”) Thus, the Romani decision is not
applicable to the facts of this case. The Department of Revenue’s argument on
this point is without merit.
11
Furthermore, our conclusion that § 3713 is applicable to the
facts of this case renders discussion of the parties’ arguments
concerning the federal lien statutes, 26 U.S.C.A. § 6321, et
seq., unnecessary as well.
IV
The judgment of the trial court is affirmed. Costs on
appeal are taxed to the appellant. This case is remanded to the
trial court for such further proceedings as are necessary,
consistent with this opinion.
__________________________
Charles D. Susano, Jr., J.
CONCUR:
________________________
Houston M. Goddard, P.J.
________________________
Herschel P. Franks, J.
12
Estate of J.P. Walker v. Dpt.of Revenue
Combined Opinion