The opinion of the court was delivered by: RYAN
The Government in these two suits filed on February 24, 1949 seeks (1) judgment against the Estate of Isaac Regensburg, deceased, and the Estate of Bellette Regensburg, deceased, for unpaid income taxes assessed by the Commissioner of Internal Revenue against each of the decedents and this respective estate; (2) the setting aside of foreclosures by the corporate defendant E. Regensburg & Sons of alleged liens asserted by it on certain shares of its capital stock registered in the names of the decedents; (3) the adjudication of the lien of the United States for the unpaid income taxes of the decedents to be a valid lien against these shares, prior in preference to the claim of the corporate defendant, and, finally, (4) a judgment directing that a judicial sale of the stock be held and the proceeds of the sale applied first to the satisfaction of the Government's lien. This court has jurisdiction by virtue of 28 U.S.C.A. § 1340 and Int.Rev.Code, § 3678, 26 U.S.C.A. § 3678.
The suits by consent have been consolidated for purposes of trial.
Defendant E. Regensburg & Sons was incorporated in New York on April 6, 1903. Its entire capital stock of 1,000 common shares has always been held by members of the Regensburg family and its affairs have been under the control and management of that family. Edward Regensburg, the father, was president of the corporation until his death on June 18, 1910. The son, Mortimer, was elected president on July 13, 1910 and continued in that office at least through 1943; the son, Isaac, served as treasurer until his death, December 1, 1943; the son, Bellette, was secretary from July 12, 1910 until January 18, 1931 when he was elected vice president, which office he held to the date of his death, February 14, 1944.
This suit concerns the stock interests of Isaac and Bellette Regensburg and their dealings with the corporation.
Isaac Regensburg acquired 230 shares at the time of incorporation, 34 shares on September 1, 1931, and 4 3/8 shares on October 30, 1940, thus owning a total of 268 3/8 shares at the time of his death.
Bellette Regensburg acquired 50 shares at the time of incorporation, 30 shares on April 18, 1908, 34 shares on September 1, 1931, and 4 3/8 shares on October 30, 1940; a total of 118 3/8 shares at the time of his death.
The corporate ledgers carried accounts in the name of the father, Edward, and of each of his five sons, Mortimer, Isaac, Jerome, Melville and Bellette. To these accounts there were debited withdrawals of funds by each of the individuals and amounts paid out on their behalf by the corporation; credited were salaries, dividends and other miscellaneous credit.
It was held in a suit involving the income tax liability for the years 1936 to 1940 inclusive of the four brothers, Mortimer, Isaac, Melville and Jerome Regensburg that the payments through these years to them were taxable as 'distribution out of earnings or profits accumulated,' therefore as 'dividends' paid to them, as that term is defined by Section 115(a) and (b) of the Revenue Acts of 1936 and 1938, Int.Rev.Code, § 115, 26 U.S.C.A. § 115. Regensburg v. Commissioner of Internal Revenue, 2 Cir., 1944, 144 F.2d 41, affirming 1 CCH T.C.Svce. 16,406, Dec. 13,138(M) (T.C. 1943), certiorari denied 1944, 323 U.S. 783, 65 S. Ct. 272, 89 L. Ed. 625. The corporate defendant herein was not a party to this prior tax litigation and the holding therein is not binding upon it.
On October 8, 1934 the stockholders of E. Regensburg & Sons, including Isaac and Bellette Regensburg, entered into an agreement pledging their stockholdings to the company as security for advances made to them, as well as for future advances. On or about that date, the stock certificates were delivered to the company, endorsed to that effect and have been retained by the company continuously since then.
The company caused the shares of Isaac and Bellette Regensburg to be sold at public auction at which the company purchased the shares.
No charge of fraud is made by the Government; reliance is placed upon Int.Rev.Code, § 115 (defining taxable corporate distributions) and §§ 3670-3672, 26 U.S.C.A. §§ 3670-3672. Section 3670 provides that upon failure to pay taxes after demand a lien shall arise 'in favor of the United States upon all property and rights to property, whether real or personal, belonging' to the delinquent taxpayer; § 3672 provides further that until filed the tax lien shall be invalid 'as against any mortgagee, pledgee, purchaser, or judgment creditor'.
The Government filed tax lien notices against the estates of Isaac and Bellette Regensburg on January 17, 1945.
The issue is -- What rights to the stock of E. Regensburg & Sons did Isaac and Bellette Regensburg, or their estates, have on the date the tax lien was filed? The rights of the Government can rise no higher than those of the delinquent taxpayers. U. S. v. Winnett, 9 Cir., 1947, 165 F.2d 149, Karno-Smith Co. v. Maloney, 3 Cir., 1940, 112 F.2d 690.
Sections 3670 and 3672 have been enacted within the scope of the taxing power granted to Congress under the Constitution. Insofar as these sections may conflict with state law, under the Supremacy Clause, state law must yield. But Congress has left undefined the meaning to be attributed to the phrase 'rights to property', U. S. v. Anders Contracting Co., Inc., D.C.W.D.S.C., 1953, 111 F.Supp. 700, 702, and to the term 'pledgee.' Indubitably, Congress could, pursuant to its taxing power, have given federal content to these terms as it has to others, e. g. Int.Rev.Code, §§ 166 (income of revocable trust taxable to settlor), 811(c) (gifts taking effect at death), 811(d) (revocable transfers), 811(f) (powers of appointment), 811(l) (gifts in contemplation of death). 26 U.S.C.A. §§ 166, 811(c, d, f, l). An investigation of the available legislative history of the Acts of July 13, 1866, c. 184, § 9 (the original predecessor enactment of § 3670), of March 4, 1913, c. 166 (the original predecessor enactment of § 3672), and of ...