WALLER, Circuit Judge.
Mrs. Carolyn C. Maxwell, a resident of England, earned, during the years 1931, 1934, and 1935, income and profits on stock market transactions in the State of New York as reflected by her account with her brokers, G. M. P. Murphy & Company, of New York City. She failed to make returns of her income from these profits. On July. 8, 1937, after obtaining information from her as to the costs and dates of purchase of certain stocks, the Internal Revenue Agent in charge of the Second District of New York mailed to her the usual thirty-day letter informing her of the deficiencies. Upon receipt of the field examination report from such Agent, the Commissioner of Internal Revenue filed, in the Second District of New York, income tax returns for the taxpayer for each of the years in question. After sending her the usual notice with statement of the deficiencies and receiving no reply, the Commissioner assessed the deficiencies against taxpayer and transmitted the assessment list to the Collector of the Second District of New York, who, in turn, mailed to her two notices of demand for payment.
No payment having been made, the Government, in 1944, filed suit in the United States District Court for the Northern District of Texas seeking to establish and have declared a lien on taxpayer’s interest in a trust estate created under the will of Mrs. Belle Shumard and administered by the Dallas National Bank, as trustee. Under the terms of the will
the taxpayer did not have the legal title to the corpus of the trust, nor did she have the use, possession, or the right to the possession of such corpus, but she received net income therefrom amounting to approximately $54 per month.
A copy of the complaint and a copy of the order to appear in said suit were served upon Mrs. Maxwell through the United States Consul's office in England.
The Trustee Bank has withheld payments to taxpayer since the filing of the suit.
As stated by the Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 80, 626, 60 S.Ct. 424, 426, 84 L.Ed. 585, 1035, “state law creates legal interests and rights,” therefore, whether or not the cestui que trust here has been given any property or rights thereto' in the trust which may be subjected to lien, must be determined by the law of Texas.
42 Tex.Jur. § 27, page 628, states that “the extent of the beneficiary’s interest is determined by interpretation of the settlor’s language.” Mrs. Shumard devised her Main Street property in Dallas,. Texas, to her executor and trustee, in trust for taxpayer and other named beneficiaries, “the net revenues” of the trust property to be distributed to the beneficiaries each month. Therefore, Mrs. Maxwell has not the title to the corpus of the trust, but is to
receive only a proportionate part of the net revenues.
Although the testatrix intended to create an estate which would not be subject to seizure, sale, or execution for debts of any kind or character by placing such restraint upon the corpus and income, and such provisions in a will are valid under the Texas law and are respected by the courts,
this would not prevail against the fastening of a lien by the Federal Government for unpaid taxes on any property owned by the delinquent taxpayer.
We held in Shambaugh v. Scofield, 5 Cir., 132 F.2d 345, that the provision of the Texas Constitution exempting homesteads from forced sale did not operate to exempt a Texas homestead from a sale to satisfy a federal income tax lien. Having been enacted within the scope of the power delegated to the Federal Government, the Internal Revenue statutes are a part of the supreme law of the land. If they are in conflict with State law, constitutional or statutory, the latter must yield.
The provisions of the will of an individual which seek to exempt from debts property bequeathed for the benefit of another cannot rise higher than a statutory or constitutional exemption provided by a State.
Mrs. Maxwell has no title to the corpus of any property other than the profits after they have accrued and have been passed to her account and made available to her by the Trustee. In other words, after “the net revenues,” amounting to approximately $54 per month, accrue, or are set apart and become payable to her, such net revenues then belong to her and are then subject to the lien of the Government for taxes, and are available as an appropriate res in a proceeding in rem by the Government to have a lien for delinquent taxes declared and enforced against such revenues.
The Government is entitled to a lien upon these monthly payments of net revenue in the hands of the Trustee, by virtue of the law as stated in 26 U.S.C.A, Int.Rev. Code, §§ 3670 and 3671.
Under the holding of Glass City Bank of Jeanette, Pa. v. United States of America, 66 S.Ct. 108, that the lien of the United States attaches to after-acquired property, we think that such lien will continue to be fastened on the monthly income from the trust as it becomes payable to the taxpayer.
The District Court held that there had been no valid service upon the taxpayer in London, England, because there is no statutory right for a substituted service upon such an inchoate property interest as she
had in the trust estate
Sec. 57 of the Judicial Code, Title 28 U.S.C.A. § 118, provides that when in any suit commenced in any district court of the United States to enforce any legal or equitable lien upon or claim to real or personal property within the district where such suit is brought, one or more of the defendants therein shall not be an inhabitant or found within said district, it shall be lawful for the court to make an order directing such absent defendant to appear, plead, answer, or demur by a day certain to be designated, which order shall be served on such absent defendant or defendants, if practicable, wherever found, and also upon the person or persons in possession or charge of said property, if any there be.
As heretofore stated, a certified copy of the complaint and order for service were served upon the taxpayer through the office of the United States Consul at London. The Trustee was properly served with process, and the Court had jurisdic
tion of such of the res in the Trustee’s hands as belonged to the taxpayer. Any accruals of net revenues belonging to the taxpayer were, sufficient for this purpose. It is not the quantity, but the actuality, of the res within the Court’s jurisdiction that is of consequence.
Although
the
legal title to the corpus of the trust estate is not in the taxpayer, and the-corpus is not subject to alienation bj he! or to execution or levy by her creditors, nevertheless, it cannot be said that she has no rights whatsoever in the corpus of the property of the trust estate in the hands of the Trustee.
Free access — add to your briefcase to read the full text and ask questions with AI
WALLER, Circuit Judge.
Mrs. Carolyn C. Maxwell, a resident of England, earned, during the years 1931, 1934, and 1935, income and profits on stock market transactions in the State of New York as reflected by her account with her brokers, G. M. P. Murphy & Company, of New York City. She failed to make returns of her income from these profits. On July. 8, 1937, after obtaining information from her as to the costs and dates of purchase of certain stocks, the Internal Revenue Agent in charge of the Second District of New York mailed to her the usual thirty-day letter informing her of the deficiencies. Upon receipt of the field examination report from such Agent, the Commissioner of Internal Revenue filed, in the Second District of New York, income tax returns for the taxpayer for each of the years in question. After sending her the usual notice with statement of the deficiencies and receiving no reply, the Commissioner assessed the deficiencies against taxpayer and transmitted the assessment list to the Collector of the Second District of New York, who, in turn, mailed to her two notices of demand for payment.
No payment having been made, the Government, in 1944, filed suit in the United States District Court for the Northern District of Texas seeking to establish and have declared a lien on taxpayer’s interest in a trust estate created under the will of Mrs. Belle Shumard and administered by the Dallas National Bank, as trustee. Under the terms of the will
the taxpayer did not have the legal title to the corpus of the trust, nor did she have the use, possession, or the right to the possession of such corpus, but she received net income therefrom amounting to approximately $54 per month.
A copy of the complaint and a copy of the order to appear in said suit were served upon Mrs. Maxwell through the United States Consul's office in England.
The Trustee Bank has withheld payments to taxpayer since the filing of the suit.
As stated by the Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 80, 626, 60 S.Ct. 424, 426, 84 L.Ed. 585, 1035, “state law creates legal interests and rights,” therefore, whether or not the cestui que trust here has been given any property or rights thereto' in the trust which may be subjected to lien, must be determined by the law of Texas.
42 Tex.Jur. § 27, page 628, states that “the extent of the beneficiary’s interest is determined by interpretation of the settlor’s language.” Mrs. Shumard devised her Main Street property in Dallas,. Texas, to her executor and trustee, in trust for taxpayer and other named beneficiaries, “the net revenues” of the trust property to be distributed to the beneficiaries each month. Therefore, Mrs. Maxwell has not the title to the corpus of the trust, but is to
receive only a proportionate part of the net revenues.
Although the testatrix intended to create an estate which would not be subject to seizure, sale, or execution for debts of any kind or character by placing such restraint upon the corpus and income, and such provisions in a will are valid under the Texas law and are respected by the courts,
this would not prevail against the fastening of a lien by the Federal Government for unpaid taxes on any property owned by the delinquent taxpayer.
We held in Shambaugh v. Scofield, 5 Cir., 132 F.2d 345, that the provision of the Texas Constitution exempting homesteads from forced sale did not operate to exempt a Texas homestead from a sale to satisfy a federal income tax lien. Having been enacted within the scope of the power delegated to the Federal Government, the Internal Revenue statutes are a part of the supreme law of the land. If they are in conflict with State law, constitutional or statutory, the latter must yield.
The provisions of the will of an individual which seek to exempt from debts property bequeathed for the benefit of another cannot rise higher than a statutory or constitutional exemption provided by a State.
Mrs. Maxwell has no title to the corpus of any property other than the profits after they have accrued and have been passed to her account and made available to her by the Trustee. In other words, after “the net revenues,” amounting to approximately $54 per month, accrue, or are set apart and become payable to her, such net revenues then belong to her and are then subject to the lien of the Government for taxes, and are available as an appropriate res in a proceeding in rem by the Government to have a lien for delinquent taxes declared and enforced against such revenues.
The Government is entitled to a lien upon these monthly payments of net revenue in the hands of the Trustee, by virtue of the law as stated in 26 U.S.C.A, Int.Rev. Code, §§ 3670 and 3671.
Under the holding of Glass City Bank of Jeanette, Pa. v. United States of America, 66 S.Ct. 108, that the lien of the United States attaches to after-acquired property, we think that such lien will continue to be fastened on the monthly income from the trust as it becomes payable to the taxpayer.
The District Court held that there had been no valid service upon the taxpayer in London, England, because there is no statutory right for a substituted service upon such an inchoate property interest as she
had in the trust estate
Sec. 57 of the Judicial Code, Title 28 U.S.C.A. § 118, provides that when in any suit commenced in any district court of the United States to enforce any legal or equitable lien upon or claim to real or personal property within the district where such suit is brought, one or more of the defendants therein shall not be an inhabitant or found within said district, it shall be lawful for the court to make an order directing such absent defendant to appear, plead, answer, or demur by a day certain to be designated, which order shall be served on such absent defendant or defendants, if practicable, wherever found, and also upon the person or persons in possession or charge of said property, if any there be.
As heretofore stated, a certified copy of the complaint and order for service were served upon the taxpayer through the office of the United States Consul at London. The Trustee was properly served with process, and the Court had jurisdic
tion of such of the res in the Trustee’s hands as belonged to the taxpayer. Any accruals of net revenues belonging to the taxpayer were, sufficient for this purpose. It is not the quantity, but the actuality, of the res within the Court’s jurisdiction that is of consequence.
Although
the
legal title to the corpus of the trust estate is not in the taxpayer, and the-corpus is not subject to alienation bj he! or to execution or levy by her creditors, nevertheless, it cannot be said that she has no rights whatsoever in the corpus of the property of the trust estate in the hands of the Trustee. We think that such rights, although inchoate, unvested, and unenforceable,' together with such net monthly revenues as are accrued and un paid to her, are sufficient to support a proceeding in rerr, to test the question of whether or not taxpayer’s interest in such res is subject tc a lien for delinquent taxes due the Government. Without doubt, she has some sort of an equitable, even though untouchable, interest in the corpus of the trust estate
The taxpayer seeks to avoid the suit, and the lower Court sustained her contention, by saying she could be proceeded against only through the Collector at Baltimore, Maryland, relying upon the provisions of 26 U.S.C.A. Int.Rev.Code, § 53(b) (1).
We do not regard this provision as either jurisdictional or mandatory. It is directory only. Under this statute a non-resident alien is directed to file his return at his principal place of business in the United States if he has one, or with the Collector at Baltimore. The principal place at which the business of the taxpayer was transacted in the United States was the office of G. M. P. Murphy & Company, in New York, through whose office the investments yielding her unreported income were made, and it was lawful for the return to be filed there. Mrs. Maxwell failed to file a return for the three years in question, either in Baltimore or elsewhere, and she cannot insist upon .the privilege of having her income tax liabilities determined by the Collector at Baltimore after having failed or refused for three years to file returns with such Collector for such purpose.
Under the facts and circumstances of this case, we think that the tax was lawfully determined and imposed, and that the United States has a valid lien for the unpaid taxes for the years in question.
The Government has a right to file suit and have s lien for delinquent income taxes declared upon any property belonging to such taxpayer in a District Court of the United Sta-tes in any district in which such property is located, without regard tc the place of residence of the taxpayer, the place tc which his taxes were returnable. or the place at which the income was earned The appropriate situs for a suit to establish a liei. upoi. property is in the court of the district in which the property is located.
The judgment of the lower Court is reversed for further proceedings conformable to the views herein announced.
Reversed and remanded.