and dutiable at 10 percent ad valorem. The duty on wool fabric, generally, would be 37.5 cents per pound plus 60 percent ad valorem. The 1965 amendment corrected the wool-ramie situation by subjecting such a fabric to a compromise duty of 30 cents per pound plus 45 percent ad valorem which is, generally, equivalent to a duty based on paragraph 1122 of the old tariff structure. (Under the old tariff structure, prior to August 31, 1963, woven fabrics containing 17 percent or more of wool by weight were, in effect, separated into their component fibers with wool rates applying to the wool content and other rates applying to the nonwool content of the fabric.) Recently, there have been increasing imports of a new type woolen fabric containing small quantities of high-value rabbit hair and quantities of low value reprocessed wool. Since rabbit hair (or other animal fur) comprises the chief value of the fabric, it is presently dutiable at only 17.5 percent, rather than the much higher rates for wool fabrics. This bill would amend the present law to treat such a woven fabric of wool and fur at a compound duty of 30 cents per pound plus 50 percent ad valorem. As in the case of the 1965 amendment, this compromise rate is, generally, equivalent to the duties which would have applied to this fabric under section 1122 of the old tariff structure. Effective date As passed by the House on October 5, 1965, the amendments made by this bill would have applied with respect to imports entered or withdrawn for consumption after December 7, 1965. In view of the passage of time, this effective date may no longer be appropriate since it would involve an increase in duties on articles already imported. 12. H.R. 11216-ARTICLES ASSEMBLED ABROAD (Passed the House on October 21, 1965) Prior to the inauguration of the Tariff Schedules of the United States in August 1963, articles assembled abroad in whole or in part of fabricated components produced in the United States were by virtue of court ruling partially exempt from duty. The theory of the court ruling, which related to a U.S. motor exported for installation in a foreign motorboat which was then shipped to this country, was that the American component had not been advanced in value or improved in condition by the assembly process. The court ruling (C. J. Tower and Sons v. United States, CD 1628 (1954)) introduced anomalies into the customs treatment of imported articles containing U.S. components, such as, for instance, attributing advance in value arising from the assembly operation wholly to the foreign components in the assembled article. Another anomaly growing out of this court ruling was the doctrine of "constructive segregation" under which duty-free treatment applied if the U.S. components were readily identifiable and could be removed without injury to the assembled article. In the Tariff Schedules of the United States a specific provision (Item 807.00) continued this court-approved practice. However, the new provision eliminated the anomalies involved in the old practice, first by recognizing that U.S. components do increase in value by assembly operations and second by making it unnecessary to show that the U.S. component could be removed without injury to the assembled article. At the same time it was provided that for the duty-free treatment to apply on its return the U.S. component must have been sent abroad "for the purpose of assembly." In the Tariff Schedules Technical Amendments Act of 1965 item 807.00 was clarified to make it clear that cleaning, lubricating, and painting could be performed in connection with the assembly function without subjecting the U.S. components to duty on their return to this country. In making this clarification, however, an additional restrictive clause was added to the duty-free provision. It requires that at the time of exportation of the U.S. component there be an intention that the assembled article is to be shipped to the United States. This additional restriction has raised complaints by interested importers and foreign shippers, and has also been said to introduce problems of customs administration. H.R. 11216 would eliminate both the requirement that the American component be exported "for the purpose of such assembly" and the requirement that there be an intention at the time of exportation that it be returned to the United States. It would still be necessary, however, for the importer to establish by satisfactory proof that the components of an imported article for which duty-free treatment is claimed are, in fact, components produced in the United States. Moreover, it must be shown that they have not lost their physical identity in the assembled article and have not been advanced in value or improved in condition abroad except by the assembly operation, or operations, incidental to assembly. The bill as passed by the House would apply as if the amendments were made by the Tariff Schedules Technical Amendments Act of This means, in effect, that refunds of tariffs paid on American products assembled abroad would be available to the importer with respect to articles imported after August 30, 1963. However, the 1965 act required that claims for refunds of duty must be filed within 120 days after enactment (Oct. 7, 1965). This means that unless the bill is enacted into law before February 4, 1966, this refund procedure would not apply. 1 13. H.R. 136 AND H.R. 3438 -BILLS TO AMEND THE BANKRUPTCY PROCEDURES, RE-REFERRED TO THE COMMITTEE ON FINANCE AFTER FAVORABLE CONSIDERATION BY THE COMMITTEE ON THE JUDICIARY (Passed the House on August 2, 1965) The three major proposals contained in these bills involve: (a) the circular priority problem; (b) priorities of "secret" tax liens; and (c) the discharge of remaining tax liabilities after a bankruptcy. (a) Circuity of preferences The problem of circular priority results as a consequence of conflicting preferences assigned different types of claims or liens in bankruptcy. If the assets of a bankrupt estate are not sufficient to satisfy all claims, the problem arises as to the portion of the assets of the estate to be allocated to each claim. i These two House bills are essentially the same as S. 1912 and S. 976. In bankruptcy, secured claims are paid first. Both the tax lien and the judicial lien are examples of secured liens and if the tax lien is first in time, it would ordinarily be paid before the judicial lien. However, the Bankruptcy Act (sec. 67) provides that statutory liens on personal property (unaccompanied by possession) are to be postponed to the administrative expenses and certain wage claims of the bankrupt estate. Despite this postponement, the judicial lien, which is not a statutory lien, is not so postponed by the Bankruptcy Act. Consequently, there arises the classic circular priority problem: the tax lien is superior to the judicial lien, but the tax lien is postponed to the administrative expenses and wage claims while the judicial lien is not so postponed. The courts have interpreted present law as providing a number of different solutions to this circuity problem. H.R. 136 would solve the problem by changing present law in three respects. It defines what constitutes a "statutory lien" for purposes of the Bankruptcy Act (sec. 1 of H.R. 136), alters types of liens to be postponed (sec. 5 of H.R. 136), and also establishes a pattern of payment for those liens which are postponed (sec. 5 of H.R. 136). With respect to the definitional problem, the bill limits the "statutory lien" to those which arise by force of statute (such as a tax lien) and excludes those merely protected or regulated by statute (such as a chattel mortgage). This amendment clarifies the question as to the type of liens which are to be treated as "statutory liens." Therefore, those liens which are merely protected or regulated by statute will not be postponed. The circular priority problem is resolved by the following scheme: 1. Nonpostponement. With the exception of tax liens (Federal, State, and local), statutory liens on personal property, not accompanied by possession would no longer be postponed. Thus, the circuity problem in this manner would be limited to tax liens. However, the tax liens referred to above would continue to be postponed. 2. Pattern of payment.-To resolve the circular priority problem which otherwise would result from the postponement of these tax liens, a pattern of payment would be provided by the bill. The pattern of payment provides that every statutory tax lien on personal property not accompanied by possession would be postponed in payment to the administrative expenses and wage claims (whose priority is established in clauses (1) and (2) of sec. 64a of the Bankruptcy Act). If the statutory tax lien is prior in right to liens indefeasible in bankruptcy (for example, a judicial lien), the proceeds from the sale of the personal property to which the statutory tax lien attaches (less actual cost of the sale) would be allocated first to the payment of the administrative expenses and wage claims, and to the extent of any excess over these debts, to the statutory tax lien. The indefeasible lien, which is next in time to the Federal tax lien, would then be paid out of the remaining proceeds. Also, if the personal property sold were subject to a chattel mortgage prior in right to the Federal tax lien, the chattel mortgage would, of course, be paid first, even before the administrative expenses or wage claims. Additionally, in a case where there are not sufficient funds to pay the tax lien in full, any deficiency remains a claim which (under sec. 64a (4)) is entitled to a priority from the other assets of the estate. e tar he llowing se rty, not tax liens E x lien on pes postponed s (whose pr liens indefes proceeds from tax lien atta st to the par and to the a tax lien. T al tax lien. So, if the per prior in of course, be age claims funds to par which (unde ets of the estate In bankruptcy there are two classes of claims-secured and gener However, within the category of general claims certain priorities payment are established. These groups have priority over gene creditors. In general, the Bankruptcy Act provides that in the case of bankruptcy, secured claims are entitled to be paid the amount their claims from the properties which are their security. Secur claims included mortgages, pledges, judgments, and tax liens wheth on real or personal property and whether or not recorded. The maining funds of the bankrupt estate are distributed first to claims given priority status by the Bankruptcy Act and then to general creditors. The following is the established priority (sec. 6 of the Bankruptcy Act): 1. Costs of administration; 2. Wage claims; 3. Costs of refusing a discharge; 4. Taxes, Federal, State, and local; and 5. Certain debts owed to any person entitled to priority und Federal law and rents. Federal tax liabilities are by statute established as secured clai if the tax liabilities have been assessed and the taxpayer has receiv notice and demand of the taxes owed (sec. 6321 of the Internal Reven Code). It is not necessary for a notice of a tax lien to be filed for t tax liabilities to be accorded secured status. However, the Internal Revenue Code (sec. 6323) provides that t tax lien is not valid as against mortgagees, pledgees, purchasers, judgment creditors until notice of the lien has been filed. Therefo as against the interests of these types, the unfiled Federal tax lien treated as a junior claim. In the very recent case of In re Ku Roofing Co., (decided December 13, 1965), affirming (6th Cir., 196 335 F. 2d 311, sub nom. U.S. v. Speers, the Supreme Court interpret the Bankruptcy Act (sec. 70c) as conferring upon the trustee in ban ruptcy the status of judgment creditor within the meaning of th term as used in the Internal Revenue Code (sec. 6323). Therefor since the trustee represents all the general creditors in a bankrupt proceeding, the Government's claim for unpaid taxes, where the li was not filed, is reduced to the status of an unsecured claim, shari fourth-class priority with unsecured State and local tax claims (s 64a (4) of the Bankruptcy Act) and ranking behind administrati expenses, certain wage claims, and specified creditor expenses. No change is suggested by the House bills with respect to t secured status of Government tax claims where the notice of li has been filed. However, if the taxes have been assessed but notice of lien has been filed, significant changes are proposed wi respect to both the secured status and the priority of payment stat of these claims. It should also be remembered that these bills we drafted prior to the Supreme Court decision in the Kurtz Roof Company case. 1. Judgment creditor.-The most important amendment under t House bills would provide that tax claims for which no notice h been filed lose their secured status (sec. 5 of H.R. 136). This resu is obtainable by making the trustee in bankruptcy a judgme creditor. As indicated above, the Supreme Court in the Ku Roofing Company case decided that the present statutes provide that a trustee in bankruptcy is a judgment creditor. Prior to this case, a number of circuit courts had held that although the trustee in bankruptcy is treated as a judgment creditor, he does not constitute a "judgment creditor" within the intent of the Internal Revenue Code (sec. 6323). 2. Priority amendments.-Section 3 of H.R. 3438 amends the fourth category of priority to limit the claims in this category to those which are not released in the new discharge provisions of that bill (sec. 2). The discharge provision, in turn, provides for the discharge of tax claims which have been "legally due and owing" for more than 3 years prior to bankruptcy. In discussion with the proponents of these bills subsequent to their consideration by the Senate Judiciary Committee, it was understood that the date of "tax assessment" would be substituted for the terms "legally due and owing." In other words under this proposal, taxes which have been assessed more than 3 years prior to bankruptcy for which no lien has been filed would be excluded from the fourth category of priority. Additionally, these taxes do not fall into the general governmental claims priority, the fifth category of priority, since as amended by section 3 of H.R. 136 the fifth category of priority specifically excludes tax debts. (c) Discharge in bankruptcy Under present law Federal tax claims are not discharged in bankruptcy. Section 2 of H.R. 3438 amends the Bankruptcy Act to provide for the discharge of certain tax claims. This section would, subject to certain exceptions, discharge tax claims, whether or not filed as liens, which were assessed against the bankrupt 3 years or more prior to the bankruptcy. |