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June 26, 1962

UNITED STATES of America, Plaintiff,
John A. ALLEN, Defendant, and Land Title Company of Spokane, a corporation, Defendant and Third-Party Plaintiff, v. SEATTLE-FIRST NATIONAL BANK, a national banking association, Third-Party Defendant

The opinion of the court was delivered by: POWELL

This is an action to recover a payment made after the filing of a federal tax lien under Sections 6321 and 6322 of Title 26 U.S.C.A. The facts as found are set forth hereafter and made a part of this opinion.

It is my opinion that plaintiff is entitled to recover in this action against Land Title Company, defendant. The taxpayer, John A. Allen, has defaulted and judgment has been entered against him. The plaintiff claims that after the tax liens were filed and notice of the filings was given to the Land Title Company, it paid certain funds of defendant Allen to him or for his benefit. That company is referred to hereafter as though it were the only defendant.

 Land Title Company, defendant, was the escrow agent of funds of a builder, one Larch G. Cody. It made payment in the sum of $ 2,415.87 on July 30, 1957, to the Opportunity Branch, Seattle First National Bank. The defendant claims the payment was to meet a payroll, which represented lienable labor claims. The bank was originally a defendant in this action but was dismissed out by stipulation. Later it was brought back into the case as a third party defendant on the application of the defendant who is also third party plaintiff.

 The Land Title Company asserts that the taxpayer had no property interest in the funds involved for the following reasons:

 1. The estimates showed that the taxpayer was overpaid, the work being only 60% Completed and the taxpayer having received more than that percentage of the contract price under the contract between the builder, Larch G. Cody, and the taxpayer Allen, as contractor.

 2. The payment was on items of unpaid payroll representing wage claims, which were lienable items, and that since the taxpayer was required under his contract with Cody to pay all labor and material claims so there would be no liens, the payment was in fact a payment by Cody to protect his property and taxpayer had no property interest in the funds.

 The plaintiff states that the payment was made by defendant for the account of the taxpayer with the bank, with full knowledge of the tax assessment and liens, and it seeks to recover that payment from the defendant, who seeks recovery over from the third party defendant. The court has ordered all questions on the third party complaint held in abeyance until the liability of the defendant to the plaintiff is determined. This opinion deals only with the claim of the plaintiff against the defendant.

 There is little dispute in the law. The statute, 26 U.S.C.A. §§ 6321 and 6322, give the plaintiff a lien on the property of the taxpayer. The nature of the question here is stated in Johnson Service Company v. Roush, 57 Wash.2d 80, 85; 355 P.2d 815, 818, as follows:

 '(1) 'Whatever interest the United States might have herein is predicated upon section 6321 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 6321, which reads as follows:

 "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) 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.' (Italics ours.)

 '(2) 'Thus, the initial question to be resolved is not one of priority, but one of property. It must first be determined to what extent, it any, the taxpayer had 'property' or 'rights to property' in the retained percentage fund to which the federal tax liens could attach. This is a matter to be ascertained under state law. As the United States supreme court so recently stated in Aquilino v. United States, 363 U.S. 509, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365:

 "The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' of 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has bong been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the statute.' ( § 6321, supra) Morgan v. Commissioner, 309 U.S. 78, 82, 60 S. Ct. 424, 84 L. Ed. 585, 1035. Thus, as we held only two Terms ago, Section 3670 ( § 6321 of the 1954 Code) '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, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135, * * *."

 The question for determination is whether the taxpayer Allen had property or rights in property in and to the funds when the defendant made payment. If he did have, the plaintiff's lien attached and that payment was wrongful. Plaintiff could then recover because of conversion of the funds and impairment of the lien. Exeter Company v. Holland Corporation, 172 Wash. 323, 20 P.2d 1, 23 P.2d 864; American State Bank v. Sullivan, 134 Wash. 300, 235 P. 815.

 The cases passing on this question have primarily dealt with a situation where the taxpayer's property rights in funds representing retained percentages under a construction contract are disputed. It has been held that a taxpayer who was obligated to pay all labor and materialmen has no property interest in the retained percentage which does not equal or exceed the total of lienable items. B-Line Transport v. Poitevin, 159 Wash.Dec. 593; 369 P.2d 310; Johnson Service Company v. Rough, 57 Wash.2d 80, 355 P.2d 815; Jackson v. Flohr, 227 F.2d 607 (9 Cir. 1955).

 The case most nearly in point here is Fryer & Co. v. Thompson, 14 Wash.2d 141, 127 P.2d 408. There the plaintiff recovered judgment against the defendant for $ 333.47. A writ of garnishment was issued to the garnishee to recover the amount of the judgment. In answer to the writ the garnishee stated that the defendant agreed to construct a residence and furnish all labor and material and that the garnishee defendant was to withhold sufficient monies to see that all labor and materials were paid. The answer stated that at the time of ...

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