                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
