Forfeited Property

---

[89-1 USTC ¶9278] Peter M. Eggleston, Plaintiff v. The State of Colorado , et al., Defendants- -Cross-Appellees/Cross-Appellants. United States of America , Plaintiff-Appellant/Cross-Appellee v. $1,508,440.00 in United States Currency, Defendant United States of America , Plaintiff v. Twelve Gold Bars, Defendants

(CA-10), U.S. Court of Appeals, 10th Circuit, 86-2151, 86-2192, 4/21/89, Reversing and remanding the District Court, 636 F.Supp. 1312, 86-2 USTC ¶9552

[Code Secs. 6321 , 6322 and 6851 ]

Tax liens: Jeopardy assessment: Priority of liens.--The proceeds of illegal drug transactions were forfeited and the federal government's claim to the funds was given priority over federal and state (Colorado) income tax claims because title to the funds related back to the time of the illegal drug transaction, thereby defeating all competing claims to the property. After the state police seized proceeds of illegal drug transactions, the state prepared sales, income and Regional Transportation District tax assessments against the taxpayer and a state district court entered judgment in favor of the state. The IRS assessed a jeopardy assessment against the taxpayer and when he was unable to pay, a lien arose by operation of law. However, the Federal Drug Enforcement Administration (DEA) also claimed the money under the civil forfeiture provisions stating that the forfeiture related back to the moment of illegal use of the property, vesting title to the property in the federal government. The court held that the civil forfeiture provisions provide that the forfeiture related back to the illegal use of the property, thus preventing the attachment of all liens arising subsequent to the moment of illegal use.

Robert N. Miller, United States Attorney, F. Joseph Mackey III, Assistant United States Attorney, Denver, Colo., for plaintiff-appellant. Duane Woodard, Attorney General, Larry A. Williams, Assistant Attorney General, Charles B. Howe, Deputy Attorney General, Richard H. Forman, Solicitor General, Department of Revenue, Denver, Colo., for defendants-appellees.

Before TACHA, and SETH, Circuit Judges, and SAFFELS, District Judge. ^*

TACHA, Circuit Judge:

This appeal arises from a dispute between state and federal agencies over property seized by law enforcement officials as proceeds of illegal drug trafficking. The federal Drug Enforcement Administration (DEA), the Internal Revenue Service (IRS), the Colorado Department of Revenue, and several other parties each claimed an interest in the property. The district court held that the Colorado Department of Revenue's lien for income taxes had priority over all claims and ordered the remainder of the property to be applied in partial satisfaction of a federal income tax lien, denying all other claims. We reverse and remand.

I.

This case was tried upon stipulated facts that are set out in detail in the district court's opinion, Eggleston v. Colorado [86-2 USTC ¶9552 ], 636 F.Supp. 1312 (D. Colo. 1986). We therefore do not repeat them here, except for the following background facts necessary for our decision.

On November 21, 1982, Lakewood , Colorado police seized twelve one-ounce gold bars and approximately $1.5 million in cash from the home of Victoria and Albert Levy. Id. at 1316. This property was the proceeds of illegal drug transactions. Id. Soon after this seizure, several parties claimed an interest in the property and began maneuvering to establish the priority of their claims. Id. at 1316-17. The claims of all interested parties were consolidated for trial before the district court. Id. at 1314-15. Most pertinent to this appeal are the claims of the Colorado Department of Revenue, the IRS, and the DEA. ¹

The Colorado Department of Revenue prepared sales, income, and Regional Transportation District (RTD) tax assessments against Albert Levy on December 22, 1982. Id. at 1317. Notices of tax lien and garnishment under distraint for collection were filed, and the Arapahoe County district court entered judgment in favor of the Department on December 23, 1982, as follows: Colorado sales tax--$115,880.12; Colorado income tax--$58,677.00; and RTD sales tax--$19,313.39. Id.

On January 5, 1982, the IRS assessed a tax liability of $1,962,563 against Albert Levy pursuant to its power under 26 U.S.C. §6851(a) . Eggleston, 636 F.Supp. at 1317, 1319. Levy received notice of the assessment and demand for payment, but failed to pay the assessment. Id. at 1319. A lien therefore arose by operation of law on January 5, 1982. Id. (citing 26 U.S.C. §§6321 , 6322 ).

Finally, the DEA claimed the property under the civil forfeiture provisions of 21 U.S.C. §881(a)(6). Eggleston, 636 F.Supp. at 1318. Although the Government had not yet obtained a judgment of forfeiture and did not file a claim for forfeiture until after the state and federal tax liens had been filed, the DEA argued that forfeiture relates back to the moment of illegal use of the property, thereby vesting title to the property in the federal government as of that moment and preventing the attachment of all liens arising subsequent to the moment of illegal use. Id.

Applying settled principles of priority, the district court denied the claims of all parties other than the DEA, the IRS, and the Colorado Department of Revenue. The court held that because the state and federal tax liens were clearly established before the other claims had been filed, or had become choate, those other claims were inferior to the tax liens. Id. at 1319-20 (citing United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84, 85 (1954)). Furthermore, the amount of the tax liens clearly exceeded the value of the seized property, making a decision as to the validity and priority of the inferior claims unnecessary.

The critical issues before the district court therefore concerned the validity of the state tax liens and the priority among the claims of the DEA, the IRS, and the Colorado Department of Revenue. The district court upheld the validity of the state income tax lien, but denied the validity of the Colorado Department of Revenue's state sales tax and RTD sales tax claims. Id. at 1324. The district court decided that, under Colorado law, state sales and RTD taxes can be imposed only if the underlying sales can be construed as retail, rather than wholesale, transactions. Id. (citing Colo. Rev. State. §39 -26-104(1)(a) (1982)). The court, therefore, held that the sales tax liens in this case were invalid because the Department had failed to produce evidence indicating that the underlying drug sales had been retail sales. Id.

Regarding priority, the state income tax lien was held to be superior to the federal tax lien because it was filed first. Id. at 1324-25. The IRS conceded that the state income tax lien was filed first, but argued along with the DEA that forfeiture to the federal government under 21 U.S.C. §881 should prevail over all tax liens because such forfeiture related back to the time of the offense. Eggleston, 636 F. Supp. at 1318.

The district court rejected the DEA's forfeiture claim, holding that forfeiture did not relate back to the time of the offense because 21 U.S.C. §881 is a permissive, rather than a mandatory, forfeiture provision. Eggleston, 636 F. Supp. at 1323-24. Accordingly, the DEA's claim for forfeiture could vest only when the judgment of forfeiture has been entered, and the forfeiture would operate prospectively from that time. See id. The court did not enter a judgment of forfeiture, apparently for the same reason that other inferior claims were denied--the superior tax liens would have exhausted the property in dispute, making futile an order of forfeiture that did not relate back prior to the time such liens were entered.

The DEA appealed, claiming that the district court erred in its construction of 21 U.S.C. §881 by refusing to recognize that such forfeiture related back to the time the property was unlawfully used. The Colorado Department of Revenue filed a cross-appeal, contending that the district court erred in denying the validity of the Department's state sales tax and RTD sales tax liens. The Department further contends that even if the forfeiture relates back, sales tax proceeds held by Albert Levy are exempt from forfeiture under the so-called "innocent owner" exception of 21 U.S.C. §881(a)(6).

II.

Three questions are presented by this appeal: first, whether civil forfeiture under 21 U.S.C. §881 relates back to the moment that property was received in an illegal transaction, thereby voiding subsequent interests in the property; second, if forfeiture relates back, whether the sales tax liens, if valid, are preserved from forfeiture; and, finally, if such liens are preserved from forfeiture, whether the district court erred in placing the burden of proof upon the Department of Revenue to establish that retail, and not wholesale, sales were involved.

A.

Civil forfeiture statutes, such as 21 U.S.C. §881 , "grow out of a legal heritage in which objects considered 'guilty' were held forfeit." United States v. $39,000 in Canadian Currency, 801 F.2d 1210, 1218 n.4 (10th Cir. 1986). "The legal fiction underlying civil forfeitures characterizes them as proceedings in rem against 'offending inanimate objects' as defendants." Id. at 1218 (quoting Bramble v. Richardson, 498 F.2d 968, 971 (10th Cir.), cert. denied, 419 U.S. 1069 (1974)). The fiction that the "offense" was committed by the property subject to forfeiture underlies the common-law doctrine of relation back. At common law, after the government took legal steps to assert its rights to property subject to forfeiture, thereby vesting title to the property in the government, the doctrine of relation back applied in some case to "carr[y] back the title to the commission of the offense." United States v. Grundy & Thornburgh, 7 U.S. (3 Cranch) 337, 350-51 (1806).

When Congress has provided for forfeiture by statute, however, we need not rely on the common law of forfeiture:

Where a forfeiture is given by a statute, the rules of the common law may be dispensed with, and [whether] the thing forfeited may either vest immediately, or on the performance of some particular act, shall be the will of the legislature. This must depend upon the construction of the statute.

Id. at 351; see United States v. 1960 Bags of Coffee, 12 U.S. (8 Cranch) 398, 404-05 (1814). The Supreme Court has stated as "settled doctrine" the following rule of construction:

[W]henever a statute enacts that upon the commission of a certain act specific property used in or connected with that act shall be forfeited, the forfeiture takes effect immediately upon the commission of the act; the right to the property then vests in the United States, although their title is not perfected until judicial condemnation; the forfeiture constitutes a statutory transfer of the right to the United States at the time the offense is committed; and the condemnation, when obtained, relates back to that time, and avoids all intermediate sales and alienations, even to purchasers in good faith.

United States v. Stowell, 133 U.S. 1, 16-17 (1890).

With this rule of construction in mind, we turn to the relevant language of section 881 :

The following shall be subject to forfeiture to the United States and no property right shall exist in them:

. . .

(6) All moneys, negotiable instruments, securities, or other things of value furnished or intended to be furnished by any person in exchange for a controlled substance in violation of this subchapter, all proceeds traceable to such an exchange, and all moneys, negotiable instruments, and securities used or intended to be used to facilitate any violation of this subchapter, except that no property shall be forfeited under this paragraph, to the extent of the interest of an owner, by reason of any act or omission established by that owner to have been committed or omitted without the knowledge or consent of that owner.

21 U.S.C. §881(a) (emphasis added).

We find that section 881 , on its face, provides for immediate forfeiture to the government at the time the illegal act is committed. The United States ' title in the illegally obtained property therefore relates back to the time of the offense. See United States v. $41,305.00 in Currency & Travelers Checks, 802 F.2d 1339, 1346 (11th Cir. 1986); Western Pac. Fisheries, Inc. v. SS President Grant, 730 F.2d 1280, 1286-87 (9th Cir. 1984); United States v. $84,000 in United States Currency, 717 F.2d 1090, 1101-02 (7th Cir. 1983), cert. denied, 469 U.S. 836 (1984); United States v. One Parcel of Real Estate, 660 F. Supp. 483, 487 (S.D. Miss.), appeal dismissed without published op., 822 F.2d 57 (5th Cir.), and aff'd and remanded for sanctions, 831 F.2d 566 (5th Cir. 1987). But see United States v. Thirteen Thousand Dollars in United States Currency, 733 F.2d 581, 583-84 (8th Cir. 1984).

The Colorado Department of Revenue contends that section 881 is permissive, rather than mandatory, and therefore forfeiture does not relate back to the time of the offense. This argument is premised upon the fact that the language of section 881(a) , "shall be subject to forfeiture," does not identically track the "shall be forfeited" language used by the Supreme Court in Stowell. This difference, the Department contends, prevents application of the relation back doctrine applied by Stowell. We disagree.

First, the Department's argument ignores the statutory language that follows: "The following [types of property] shall be subject to forfeiture to the United States and no property right shall exist in them . . . ." 21 U.S.C. §881(a) (emphasis added). This language makes clear that property rights are divested immediately at the moment such property is used in a manner or context prescribed by section 881 , and not at some future time. The language "subject to forfeiture" is merely used in this statute to give notice of the scope of property that shall be forfeited.

Second, in order to be a permissive statute, the face of the statute must provide an option for the government to institute forfeiture. See Grundy & Thornburgh, 7 U.S. (3 Cranch) at 350-52. In Grundy & Thornburgh, the forfeiture statute gave the government the option of pursuing an action for forfeiture of a ship or an action for the value of the ship. Id. at 351. Because such an option was present, the Supreme Court held that forfeiture of title did not relate back to the time of the illegal act. Id. at 354. No similar option exists in section 881 . Although the government apparently could choose to forgo forfeiture altogether, see Western Pac. Fisheries, 730 F.2d at 1287 (noting that limitations period would prevent forfeiture action at some point), governmental discretion that is not founded on explicit language of the statute does not make the statute permissive.

The Colorado Department of Revenue further contends that section 881 is permissive because of its provision for an exception in the case of the so-called innocent owner:

[N]o property shall be forfeited under this paragraph, to the extent of the interest of an owner, by reason of any act or omission established by that owner to have been committed or omitted without the knowledge or consent of that owner.

21 U.S.C. §881(a)(6). The Department relies upon the following language in Henderson's Distilled Spirits, 81 U.S. (14 Wall.) 44 (1871), which summarizes the rule applied in the cases decided up to that time:

Many such adjudged cases are to be found in the reported decisions of this court, and it must be admitted that they establish as the rule beyond all doubt, that the forfeiture becomes absolute at the commission of the prohibited acts, and that the title from that moment vests in the United States in all cases where the statute in terms denounces the forfeiture of the property as a penalty for a violation of law, without giving any alternative remedy, or prescribing any substitute for the forfeiture, or allowing any exceptions to its enforcement, or employing in the enactment any language showing a different intent . . . .

Id. at 57 (emphasis added). Thus, the Department argues that even if section 881 does not give an alternative remedy, as in Grundy & Thornburgh, the fact that the statute provides an exception to its enforcement prevents forfeiture from relating back.

Whatever the merits of the rule stated by the Supreme Court in 1871, the Court's subsequent decision in Stowell made clear that an exception for innocent holders did not prevent forfeiture from relating back in the case of holders who did not qualify for the exception. A forfeiture statute in Stowell applied to real property owned by a person who " 'knowingly has suffered or permitted the business of a distiller to be there carried on, or has connived at the same.' " Stowell, 133 U.S. at 2 n.1 (quoting Act of Feb. 8, 1875, ch. 36, §16 , 18 Stat. 307, 310). Referring to that statute, the Court stated:

Congress had thus clearly manifested its intention that the forfeiture of land and buildings shall not reach beyond the right, title, and interest of the distiller, or of such other persons as have consented to the carrying on of the business of a distiller upon the premises.

Id. at 14. This did not preclude application of the relation back doctrine. See id. 17-18.

Finally, we note that the legislative history of the 1984 amendments to section 881 also support this result. Section 881(h) was added in 1984 to state explicitly that forfeiture divested title upon commission of the illegal act. 21 U.S.C. §881(h). The Senate report explaining that amendment shows that Congress relied upon the common-law "taint" theory--that property is considered tainted from the time of its prohibited use or acquisition--in enacting 21 U.S.C. §881(h). See S. Rep. No. 225, 98th Cong., 2d Sess. 196, 215, reprinted in 1984 U.S. Code Cong. & Admin. News 3182, 3379, 3398. The report notes that the relation back principle of 21 U.S.C. §881(h) is "well established in current law," S. Rep. No. 225, 98th Cong., 2d Sess. 215, reprinted in 1984 U.S. Code Cong. & Admin. News 3182, 3398, thus indicating that Congress had intended to apply relation back all along.

We therefore hold that when the government brings an action for forfeiture under 21 U.S.C. §881 , a judgment of forfeiture relates back to the time of the unlawful act, vesting title to forfeited property in the government as of that moment. Forfeiture therefore cuts off the rights of subsequent lienholders or purchasers, subject to the so-called innocent owners exception in section 881(a)(6). We next must determine, therefore, whether the state sales tax liens, if valid, are preserved from forfeiture under this exception.

B.

The Colorado Department of Revenue contends that even if forfeiture under section 881 generally relates back to the time of the illegal transaction, its sales tax liens are preserved from such forfeiture under the innocent owner exception of section 881(a)(6). Under Colorado law,

[a]ll sums of money paid by the purchaser to the retailer as taxes imposed by this article shall be and remain public money, the property of the state of Colorado, in the hands of such retailer, and he shall hold the same in trust for the sole use and benefit of the state of Colorado until paid to the executive director of the department of revenue.

Colo. Rev. Stat. §39 -26-118(1) (1982). The Department thus claims that Albert Levy, the person transacting in drugs, never owned the sales tax portion of the drug sale proceeds, but merely held them in trust for the state, which was unaware of the use of such property in drug transactions. The Department contends that it qualifies as a so-called innocent owner of the property, thereby exempting the sales tax proceeds from forfeiture under 21 U.S.C. §881(a)(6).

This argument misapprehends the fact that forfeiture occurs before any property interest in a sales tax "trust" arises. The innocent owner exception applies only to owners whose interest vests prior to the date of the illegal act that forms the basis for the forfeiture. United States v. One Parcel of Real Estate, 660 F.Supp. at 487; cf. Simons v. United States , 541 F.2d 1351, 1352 (9th Cir. 1976) (applying same principle to 49 U.S.C. §782). The sales tax trust alleged in this case does not exist until the vendor receives value from the purchaser. The Colorado statute upon which the Department relies clearly states that the trust applies to all "sums of money paid by the purchaser to the reatiler" and that such payments do not become "public money" until they are "in the hands of such retailer." Colo. Rev. Stat. §39 -26-118(1).

In contrast, forfeiture under section 881 occurs before value is received by the vendor. Section 881(a)(6) applies to "[a]ll moneys, negotiable instruments, securities, or other things of value furnished or intended to be furnished by any person in exchange for a controlled substance." 21 U.S.C. §881(a)(6). Forfeiture therefore occurs while the value is still in the hands of the purchaser, at the moment when the purchaser manifests intent to exchange value for a controlled substance.

We find that the Colorado Department of Revenue is not an innocent owner for purposes of section 881(a)(6) because the title to such property vested in the United States through forfeiture prior to any ownership interest held by the State. Because we find that the state sales tax liens are not exempt from forfeiture, we need not address whether the district court erred in requiring that the Department of Revenue establish that retail, and not wholesale, sales were involved.

III.

We hold that the property at issue in this case should be forfeited to the United States and that title in the United States relates back to the time of the illegal drug transaction, thereby defeating all competing claims to the property. The district court did not enter an order of forfeiture for the apparent reason that such an order would be futile if superior claims would exhaust the property. From the stipulated facts, we see no reason why such an order should not be granted. We therefore REVERSE and REMAND to the district court with direction to enter an order of forfeiture in favor of the United States and to direct such other action as may be appropriate and consistent with this opinion.

^* Honorable Dale E. Saffels, United States District Judge for the District of Kansas, sitting by designation.

¹ Other parties also claimed an interest in the property, including a bank, Albert Levy, Victoria Levy, the State of Colorado , and the trustee of a trust to which Albert Levy had assigned all of his interest in the property for the purpose of paying any federal income tax liability. Eggleston v. Colorado [86-2 USTC ¶9552 ], 636 F.Supp. 1312, 1319 (D. Colo. 1986).

 

 

[85-2 USTC ¶9825] United States of America , Plaintiff v. Gerald H. Wilkinson, et al., Defendants

U. S. District Court, Dist. Colo., Civil Action No. 81-C-2061, 628 FSupp 29, 7/25/85

[Code Sec. 6321]

Lien for taxes: Property not subject to lien: Forfeited property: Colorado.--Cash and other property seized by a county sheriff from a drug dealer was not subject to a federal tax lien filed after the seizure in connection with a tax assessment against the drug dealer because the property and cash had been forfeited to the state. Although the court's order of a forfeiture occurred after the filing of the lien, under Colorado law the drug dealer was divested of all his rights in the property at the time of its seizure. Thus, the drug dealer held no interest in the property against which the lien could be enforced. A motion by the county, which was also a defendant, for attorney's fees against the government was denied because the action involved close legal questions with no established precedent in Colorado .

U. S. Attorney, Nance E. Rice, Assistant United States Attorney, Denver, Colo., Robert Horwitz, John D. Steffan, Department of Justice, Washington, D. C. 20530, for plaintiff. William Ahlstrand, Box 191, Boulder, Colo. 80306, Peter VanZante, William Meyer, 1215 Spruce Street, Boulder, Colo. 80306, for defendants.

Order

CARRIGAN, District Judge:

On June 11, 1980, officers from the Boulder County, Colorado, Sheriff's Department discovered 340 pounds of marijuana, other narcotics, $605,000 in cash and sixteen precious stones at Gerald H. Wilkinson's house in Boulder County , Colorado . On June 2, 1980, the Boulder County District Attorney filed a civil action in Boulder County District Court pursuant to Colo. Rev. Stat. §16-13-303 (1973) seeking seizure and forfeiture of the property. On June 13, 1980, Judge Richard Dana entered an appropriate order and the Boulder County Sheriff executed that order by seizing the property and cash. The $605,000 cash was deposited in the First National Bank of Boulder .

The Internal Revenue Service (IRS) assessed $2,331,675.55 in income taxes against Wilkinson for the period from January 1, 1980 to June 30, 1980. On June 19, 1980, the United States filed a notice of federal tax lien with the Boulder County Recorder. On October 14, 1980, Judge Dana issued an order declaring that the property was forfeited as of June 13, 1980. Judge Dana's order placed $300,000 of the cash in an escrow account to be used to pay "the Internal Revenue Service of the United States of America for income tax liability of the defendant resulting from this circumstance only."

The United States filed this action on November 27, 1981, seeking to foreclose on its revised tax lien of $700,000. The government can only enforce its tax lien against the seized cash and property if Wilkinson had property rights in it at the time the lien was filed. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513 (1960). Because no Colorado law existed regarding when Wilkinson's property rights terminated, the following question was certified to the Colorado Supreme Court:

"What is the nature and extent of the property interest, if any, retained by a person subsequent to the seizure of his property pursuant to §16-13-303, C. R. S. 1973, as effective on June 13, 1980, but prior to judicial determination pursuant to §§ 16-13-307, et seq., C. R. S. 1973?"

The State Supreme Court thus resolved the issue on August 27, 1984:

"We hold that a person is divested of all rights and interests in property upon its seizure under the Colorado Abatement of Public Nuisance statute (Public Nuisance statute), sections 16-13-301 to -316, 8 C. R. S. (1978 & 1983 Supp.). Therefore, our answer to the certified question is that there is no property interest retained during the period in question."

The parties have submitted cross motions for summary judgment. Defendant County of Boulder also seeks attorneys' fees from the plaintiff. The parties have briefed the issues thoroughly, and oral argument would not assist in resolving them. Jurisdiction is based on 28 U. S. C. §§ 1340 and 1345 (1982).

Under the rule announced by the Colorado Supreme Court, Wilkinson's property rights ended on June 13, 1980, the date of the seizure. Thus on June 19, 1980, when the IRS filed notice of its tax lien against Wilkinson's property Wilkinson had no property interest in the contested funds and property. It had been forfeited to Boulder County , nunc pro tunc. The tax lien cannot be enforced because it is a lien against nothing.

The government agrees that Colorado property law governs the issue of Wilkinson's ownership rights. However, it argues that the "legal fiction" of terminating Wilkinson's ownership on the date of the seizure cannot cut off the federal tax lien. The government relies on two cases: United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); and United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). In both Acri and Security Trust, a competing creditor had obtained an attachment lien prior to the date the tax lien arose, but did not obtain a judgment against the taxpayer until after the tax lien arose. Under applicable state law, the judgment lien related back to the time the attachment arose. The Supreme Court held that the "relation back doctrine" would not defeat the priority of the federal tax lien.

Those cases are unlike the present case because they involved the competing priority of liens. Here, the issue does not involve the priority of Boulder County 's "lien" or the date on which Wilkinson encumbered his property rights with a lien, but rather the date on which Wilkinson surrendered all his ownership rights.

The government contends that even if Judge Dana's forfeiture order related back to June 13, 1980, and thereby avoided the government's tax lien, the government is still entitled to the $300,000 that Judge Dana escrowed for the express purpose of paying Wilkinson's federal tax liability. The government argues that even if it cannot enforce its tax lien, Judge Dana granted them part of their claim in his forfeiture order.

Colorado Revised Statute §16-13-311 (1973), in effect at the time Judge Dana considered this matter, set forth how property obtained in §16-13-303 forfeiture proceedings was to be distributed. Section 16-13-311 does not allow distribution of forfeiture proceeds to lien creditors ¹ or to pay tax liability. Judge Dana simply did not have the authority to grant the seized property to the federal government to pay Wilkinson's unpaid taxes.

Boulder County has moved for attorneys' fees against the government. Because this action involved very close legal questions presented without guidance of any established precedents, and because the briefs on both sides competently argued the issues, it would not be appropriate to assess attorneys' fees against the government.

Accordingly, IT IS ORDERED that

1. Defendant's motion for summary judgment is granted; the plaintiff's complaint is dismissed with prejudice;

2. Plaintiff has no interest in the funds and personal property held by the First National Bank of Boulder ; and

3. Defendant's motion for costs and attorneys' fees is denied.

Judgment

Pursuant to and in accordance with the Order entered by The Honorable Jim R. Carrigan on July 25, 1985, it is hereby

ORDERED that judgment is entered for the defendant and against the plaintiff, United States of America , and it is

FURTHER ORDERED that this civil action and complaint be and are hereby dismissed, with prejudice, and it is

FURTHER ORDERED that plaintiff has no interest in the funds and personal property held by the First National Bank of Boulder , It is,

FURTHER ORDERED that each party shall bear its own costs.

DATED at Denver , Colorado , this 27th day of July, 1985.

¹ The government was not even a lien creditor.

 

 

[58-2 USTC ¶9761]United States of America v. Hyman Harvey Klein, Isidor J. Klein, Albert McLennan, George Norgan, Ellis Rosenberg, Maurice Haas, Irving A. Koerner, Morris O. Alprin and Albert Roer, Defendants

U. S. District Court, So. Dist. N. Y., C-144-144, C-145-147, 163 FSupp 823, 7/31/58

[1954 Code Sec. 6323(a)--similar to 1939 Code Sec. 3672(a)]

Tax lien: Notice of tax lien and levy to Clerk of District Court: Fund in custody of Court as bail: Prior satisfaction of fine imposed in criminal proceedings.--The Court sustained the motion of taxpayer that a fine of $8,000 imposed upon him as a defendant in criminal proceedings be satisfied out of a fund of $50,000 on deposit with the Court to satisfy bail requirements, rather than first applying the fund in satisfaction of a tax lien and levy, notices of which were served upon the Clerk of the Court. The Court, however, further ordered that the remaining balance of the fund, in the sum of $42,000, be held until final disposition of the jeopardy assessment against the taxpayer.

Davis Polk Wardwell Sunderland & Kiendl, William R. Meagher, of counsel, 15 Broad Street, New York 5, N. Y., for defendant. Paul W. Williams, United States Attorney, William M. Tendy, of counsel, United States Court House, Foley Square, New York 7, N. Y., for United States of America.

Memorandum

SUGARMAN, District Judge:

Hyman Harvey Klein was indicted in this court in 1954 and on May 28, 1954 he posted $50,000 bail on the indictments.

Upon conviction Klein was sentenced to a term of imprisonment and a fine of $8000 was imposed. Bail was fixed at $15,000 pending appeal. By order dated September 29, 1955, Judge Irving Kaufman directed that the Clerk apply out of the $50,000 fund the amount of $15,000 "as surety for the bail of the defendant." The balance of $35,000 was "discharged" but Judge Kaufman directed "that the Clerk of this Court shall not release said sum of $35,000 from his custody and control until further order of this Court."

Prior to Judge Kaufman's aforesaid order, the District Director of Internal Revenue had filed a notice of tax lien and a notice of levy with the Clerk, noting thereon that such lien and levy applied to the funds above mentioned.

Defendant Klein moves for an order directing that the Clerk shall pay out of the bail fund the fine of $8000 and remit the balance of $42,000 to him.

The government opposes on the ground that the bail funds are not a proper source of payment of the fine because, it claims, the entire fund is subject to tax liens of the Internal Revenue Service.

There is a question whether funds in the Registry of the Court are subject to attachment, garnishment or liens such as the lien filed here by the United States. ¹

However, it has been held that even when bail funds are owned by a third party, a fine imposed by the court may be satisfied from the deposit.

"Annotation, 7 A. L. R. 389: 'In jurisdictions where, by statute, a deposit of money may be made in lieu of bail in criminal cases, the decisions are unanimous in holding that a fine imposed on the accused may be satisfied from the cash deposit; and this is true, although the money has been furnished by a third person.' Cyclopedia of Federal Procedure (2d Ed.) §3973, also states categorically that, 'Accused has the right to deposit in cash the amount of bail required, instead of giving a bail bond. Such cash bail is subject to payment of a fine.'" ²

A fortiori, a fine may be ordered paid out of a defendant's own funds even though there may be a lien thereon.

The balance of $42,000, however, will be held by the Clerk in the Registry of the Court pending final disposition of the jeopardy assessment against Klein. ³

Settle an order.

¹ See 7 Moore's Fed. Prac., para. 67.06.

² Rudd v. United States, 138 Fed. (2d) 745 (7th Cir. 1943).

³ The Lottowanna, 87 U. S. 201, 224, 225 (1874).

 

 

[73-1 USTC ¶9276]Jefferson Trust and Savings Bank of Peoria, a corporation, Plaintiff v. Charlotte Aircraft Corporation, a corporation; Chicago & Southern Airlines, Inc., a corporation; and the United States of America, Defendants

U. S. District Court, So. Dist. Ill., No. Div., No. P-CIV-72-37, 12/12/72

[Code Sec. 6321]

Assessment: Deficiency: Collection: Lien for taxes.--The taxpayer had no property interest in funds placed in an escrow account and therefore such property could not be the subject of a Federal lien for taxes. Since under the terms of a sublease agreement funds placed in an escrow account were forfeited upon default, the taxpayer had no property interest in the escrow funds and they could not be the object of a Federal lien for taxes.

John Dolan, Davis, Morgan & Witherell, 1125 First Nat'l Bank Bldg., Peoria, Ill., for plaintiff. Donald B. Mackey, United States Attorney, Max J. Lipkin, Assistant United States Attorney, Peoria, Ill., Jackson P. Newlin, 1307 First Nat'l Bank Bldg., Peoria, Ill., for Charlotte Aircraft Corp., for defendants.

Decision and Order

MORGAN, District Judge:

After its complaint in interpleader as an escrow agent faced with conflicting claims, plaintiff was allowed by this court to deposit the proceeds of its escrow account, less its costs and expenses, with the clerk of this court and be discharged. Chicago and Southern Airlines, Inc. did not appear herein, though served, and default was entered against it. The other two defendants here both answered and set forth the basis of their respective claims to the fund. Pending for decision are cross motions for summary judgment pursuant to Rule 56, F. R. Civ. P.

[Facts]

The uncontested facts are that on or about November 6, 1970, defendant Charlotte entered into an Aircraft Sublease Agreement with Chicago & Southern, which provided for the sublease to Chicago & Southern of a certain aircraft for a term of twelve months, commencing on that date. On the same day, Charlotte and Chicago & Southern entered an escrow agreement with plaintiff which provided that Chicago & Southern would create an engine overhaul reserve account with the plaintiff. Thereafter, Chicago & Southern made the required deposits in this account which accumulated over $16,000, but none of the funds were ever used to overhaul any engines. On August 27, 1971, while in the control of Chicago & Southern, the aircraft crashed and was destroyed. By check dated March 23, 1972, the insurance carrier settled with Charlotte, Chicago & Southern, and PSL Air Lease Corporation, the aircraft owner, for $310,500. By the terms of the lease, the stipulated loss value was $376,292.

On December 13, 1971, the United States served notice of levy on plaintiff herein, demanding that the funds in the overhaul reserve account, also now claimed by Charlotte, be applied to Chicago & Southern's outstanding federal tax liability. Plaintiff filed its interpleader action in an Illinois state court, and that action was removed to this court by the Government pursuant to Title 28, United States Code, Section 1442.

[Property Interest]

The single issue presented is whether Chicago & Southern had a property interest in the escrow fund when the federal notice of levy was served, to which the federal lien for taxes could attach. Both the United States and Charlotte agree that there is no genuine issue of material fact for trial. Hence, the present cross motions for summary judgment.

It is not disputed that Chicago & Southern is indebted to the United States for taxes, and Section 6321 of the Internal Revenue Code, upon which the United States relies, provides a lien against all property and rights to property belonging to the taxpayer. 26 U. S. C. §6321. Therefore, this court must examine the terms of the sublease and escrow agreements to determine what rights, obligations, and property interests, if any, were intended by the parties. The determination of a property interest is a matter of state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960).

Charlotte's theory entitling it to the interpleaded fund is an alleged default on the part of Chicago & Southern under paragraph 12(b) of the sublease agreement, requiring Chicago & Southern to pay to Charlotte within thirty days after any loss of the aircraft the stipulated loss value of $376,292. Charlotte further contends that this alleged default works a forfeiture of Chicago & Southern's interest in the escrow account pursuant to paragraph 6 of the escrow agreement, which provides as follows:

"6. Except as expressly provided herein, Charlotte shall have no right, title or interest in or to said Escrow Account, the funds accumulated and placed therein, or any interest accrued thereon, and any amounts remaining in said Escrow Account after the expiration or termination of the lease, the return of the Aircraft as therein provided and the payment or credit of such funds as provided above, shall, unless C & S shall be in default under the Lease, and such default shall be continuing, be and remain the property of C & S, If C & S is in default, and such default is continuing, the amounts remaining in the Escrow Account, after the payments and credits above specified, shall be applied against any amounts owing by C & S to Charlotte by reason of said default."

[Conclusion]

Applying this language, it is hard to see how anyone can really doubt that Chicago & Southern has been in continuing default to Charlotte since September 26, 1971, the expiration of the thirty days after the destruction of the aircraft. Chicago & Southern had an unconditional obligation to pay the stipulated loss value within that time period and has yet failed to do so. It has remained in default for the difference between $310,500 and $376,292, or $65,792.

The Government contends that an apparent mistake in the insurance coverage for the aircraft (Chicago & Southern being also committed to insure it for the stipulated loss value) and Charlotte's acceptance of $310,500 from insurance proceeds ought to preclude Charlotte from reaching the escrow fund. This simply does not follow from a reading of the agreements between the parties. The intention of the parties seems entirely clear that the full risk of loss of the aircraft was to be carried by Chicago & Southern. Insurance was simply one specified method of carrying that risk for the benefit of itself, as well as the lessor and the owner. Failing to meet that obligation, Chicago & Southern has been in continuing default since September 26, 1971--more than two months prior to the government notice of levy.

The Government fashions another argument to the effect that paragraph 6 of the escrow agreement quoted above precludes Charlotte from claiming any interest in the overhaul reserve fund unless the aircraft is returned after the termination or expiration of the lease. In effect, this argues that Chicago & Southern could have breached the lease agreement in various possible ways on numerous occasions without losing its interest in the reserve fund, so long as the aircraft was not returned. Such reasoning is unpersuasive. The escrow fund was unquestionably created to provide funds for engine overhaul, but secondarily to protect Charlotte against loss through any other continuing default by the lessee. Possible destruction of the aircraft, obviously rendering its return impractical, was not overlooked by the parties; and the fact that its return upon termination of the lease was also contemplated under normal circumstances does not render failure to carry full insurance or to pay the agreed value upon destruction any less of a default on the part of the lessee.

Chicago & Southern's default working a forfeiture to Charlotte of any interest in the escrow account prior thereto, the Government's assertion of a federal tax lien against said fund must fail. The taxpayer by then had no property interest therein.

[Order]

IT IS ORDERED, accordingly, that Charlotte's motion for summary judgment is ALLOWED, and that the Government's motion for summary judgment is DENIED.

IT IS FURTHER ORDERED that the sum of $16,404.28, which has been deposited with the clerk of this court, be paid to Charlotte Aircraft Corporation.

 

 

[58-1 USTC ¶9472]United States of America, Plaintiff v. Harold A. Keats, Defendant

U. S. District Court, So. Dist. Fla., Miami Div., No. 7294-M-Civil, 2/28/58

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Another's property: Liquor license.--A lessor transferred his liquor license to taxpayers, who had leased his premises. The lease provided that they would transfer the liquor license then in force back to the lessor upon termination of the lease for any cause whatever by breach of its terms. Later, the taxpayers abandoned the premises and were delinquent in rent. The Government made a levy on all property in the possession of the lessor, which belonged to taxpayers, including the liquor license. The court held that taxpayers' right to the use of the liquor license was contingent upon their fulfilling the terms of the lease. Upon their default in the terms of the lease, their right to the use of the license reverted to the lessor. Therefore, the taxpayers had no interest in the license upon which the Government could levy.

James L. Guilmartin, United States Attorney, 234 Post Office Building, Miami, Fla., for plaintiff. Pallot, Cassel, Marks, duPont Building, Miami, Fla., for defendant.

Findings of Fact and Conclusions of Law

CHOATE, District Judge:

This cause having come on before the Court for trial, without jury, on the 20th day of February, 1958, and the Court having heard the evidence, having examined memoranda of counsel, and being fully advised in the premises thereof, the Court hereby enters the following findings of fact and conclusions of law:

Findings of Fact

1. Plaintiff is the United States of America.

2. Defendant Harold A. Keats resides at 1732 N. E. 16th Terrace, Fort Lauderdale, Florida.

3. In October, 1950, defendant Harold A. Keats leased certain premises known as 824 N. E. 18th Avenue, Fort Lauderdale, Florida, to Edward and Dorothy Brooks. As a condition of the lease, Keats agreed to transfer to the Brooks his liquor license issued for the above premises. Subsequently the application was made and the transfer to Dorothy Brooks was approved by the State Beverage Department.

4. The aforesaid lease provided that upon termination of the lease for any cause whatever by breach of the terms, the lessee would transfer the liquor license (and others) then in force back to the lessor.

5. By August, 1951, the lease was in default and the lessees had abandoned the premises and were delinquent in rent. However, the liquor license was renewed (using defendant's advance of money) by Mrs. Brooks on September 20, 1951.

6. On October 29, 1951, plaintiff made a levy on all property in possession of defendant Harold A. Keats, and belonging to the taxpayers Edward P. Brooks and Dorothy Brooks, trading as Littlebrook Inn, to satisfy a debt of $8,161.84, allegedly owing to plaintiff by said taxpayers for unpaid taxes.

7. On March 3, 1952, the plaintiff made an amended levy on all property in the possession of defendant Harold A. Keats and belonging to the aforesaid taxpayers to satisfy an alleged debt of $5,069.54 then owing to the plaintiff by said taxpayers for unpaid taxes. The property referred to in the possession of the defendant was the aforesaid liquor license.

8. In May, 1952, the taxpayer Brooks filed a voluntary Petition in Bankruptcy. The following September, the Trustee in Bankruptcy petitioned and obtained an order of Referee Earl Curry, authorizing a bankruptcy sale of the liquor license to Keats for the sum of $800.00. Keats had made application to the state for transfer of the license on July 17, 1952, and the transfer was approved by the State Beverage Department on September 24, 1952. Keats subsequently in 1953 transferred the license to others.

9. There has been no showing as to the specific value of the liquor license in question, the one witness saying it had no value in the hands of Brooks where the lease called for its return on default.

Conclusions of Law

1. The Court has jurisdiction of the parties and the subject matter herein.

2. Edward and Dorothy Brooks' right to the use of the liquor license in question was contingent upon their fulfilling the terms of that lease entered into with defendant Harold A. Keats. Upon their default in the terms of the lease, their right to the use of the license reverted to defendant Keats. See House v. Cotton, 52 So. 2, 340 (Fla. 1951). Therefore the Brooks' had no interest in the license upon which the plaintiff could levy. The reversion of interest to defendant Harold A. Keats was not contingent upon the formal transfer by the State Beverage Department.

3. It would further appear that the sale of the license by the Trustee in Bankruptcy would be free of any lien that plaintiff might have had since plaintiff filed a claim therein. In addition the plaintiff has failed to prove the liquor license had any value, and actually in Brooks' hands after default it had no value.

 

 

[75-1 USTC ¶9281]Matter of City of N. Y.

N. Y. Supreme Court, Trial Term, Pt. 6, Bronx County, 1/30/75

[Code Sec. 6323]

Liens for taxes: Priority: State taxes: Judgment creditors.--Priority of claims against the taxpayer for funds held by the Comptroller of New York City was determined. The state court concluded that state claims for unpaid taxes and assessments which were choate and antedated the Federal tax lien by five years had first priority. The Federal tax lien, next in time, was found to have priority over two judgment creditors. The court also determined that the claim of a third judgment creditor had no priority since she failed to fulfill all of the requirements for enforcement of her judgment.

WATERMODE, Judge:

Three judgment creditors of W. A. Smith Realty Corporation, the fee owner of Damage Parcel 1 in this condemnation proceeding, and the United States Internal Revenue Service which filed a tax assessment lien against W. A. Smith Realty Corporation for non-payment of taxes, seeks orders directing the Comptroller of the City of New York to pay their respective judgments and tax liens out of the sum of $6,471.67 representing the balance of the final award made for the damage parcel. Since the total amount of the three judgments and tax liens is far in excess of the balance of the award held by the comptroller, the court must determine the order of priority of these claims.

[Judgment Creditors]

The movant Benjamin A. Mint, obtained his judgment in the Civil Court of the City of New York, County of Bronx, on July 22, 1974, and filed a transcript of the judgment in the sum of $4,520 in the Bronx county clerk's office on July 23, 1974. An execution on the judgment was delivered to the Sheriff of the City of New York on Aug. 2, 1974, and the sheriff levied on the judgment, by serving a copy of the execution on the comptroller's office on Aug. 5, 1974.

The cross-movant, Angela Levi, obtained her judgment in the Civil Court of the City of New York, County of New York, on Sept. 14, 1972, and filed a transcript of the judgment in the sum of $1,520 in the New York county clerk's office on Sept. 15, 1972. She then served a restraining notice to garnishee pursuant to CPLR 5222 on the comptroller's office on Sept. 20, 1972. However, she took no further legal proceedings to enforce the payment of her judgment.

The cross-movant, the Workmen's Compensation Board of the State of New York, entered its judgment in the sum of $51,042.80 in the New York county clerk's office on March 3, 1973. A restraining notice to garnishee was served on the comptroller's office on Sept. 13, 1974. An execution with notice to garnishee was served on the office of the Sheriff of the City of New York on Sept. 18, 1974, and the sheriff levied on the execution by serving the comptroller's office on Sept. 23, 1974.

The United States Internal Revenue Service made its tax assessment against W. A. Smith Realty Corporation on April 16, 1973. The taxes due amounted to $1,396.63, plus accrued interest in the sum of $131.88 and accrued penalties of $40.42, for a total of $1,568.92. Additional interest and penalties amounting to $103.28 have accrued since April 16, 1974, making a total due of $1,672.21 as of December 16, 1974. The papers reflect that the notice of federal tax lien was filed with the New York Secretary of State on July 16, 1973, pursuant to the provisions of 26 USCA 6323, subdivision (f), and Lien Law, section 240.

[Judgment Without Levy]

With reference to the three judgment creditors, the issue to be determined is whether a judgment creditor who has only served a restraining notice to garnishee pursuant to CPLR 5222, is entitled to priority over judgment creditors who subsequently procured a judgment and levied on their judgments.

City of New York v. Panzirer (23 A. D. 2d 158) is apposite to the case at bar. At pages 162 and 163, the court wrote:

"The result, then, is that in order for a judgment to attain status in the ranking of priorities there must either be a levy, an order directing delivery of property, or the appointment of a receiver. Any other measures taken by the judgment creditor no matter how diligent, on an absolute or comparative basis, do not suffice to qualify for priority. In a given situation, as in this case, the effect may be that a less diligent creditor may prevail over a more diligent one, but the values of certainty and ease of determination of priorities are better achieved. Moreover, once the practice is settled, the judgment creditor, except in the rarest of situations where he lacks information, will be able to establish his priority, and disputes about priority will be relatively easily solved. Total lack of information will be rare, for the judgment creditor must have known enough to serve the information subpoena and restraining notice on the third person."

"These conclusions do not deprive restraining notices of all usefulness as the city argues. The restraining notices serve the purpose of preventing the third person or garnishee from surrendering the debtor's assets pending obtaining of a turnover order. It simply means that restraining notices are no longer effectual to affect priorities, as was the case under the decisional precedents under the Civil Practice Act."

Since Angela Levi took no steps to enforce the payment of her judgment other than to serve a Restraining Notice to Garnishee (CPLR 5222), and because both Mint and Workmen's Compensation Board served executions of their judgment on the office of the Sheriff of the City of New York, who thereafter made levies on the executions, the court concludes on the authority of City of New York v. Panzirer, supra, that the Mint and Workmen's Compensation Board judgments have priorities over the Levi judgment.

Counsel for the Workmen's Compensation Board concedes that the Mint judgment has priority over the Workmen's Compensation Board's judgment (see CPLR 5234, subdivison b) on the basis of priority of time.

The remaining issue is the priority of the tax lien of the United States Internal Revenue Service, 26 USCA 6321 provides that if a person neglects to pay any tax due from him, the amount of the tax including any interest and penalties "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." The lien imposed by section arises at the time the assessment was made (26 USCA 6322). However, 26 USCA 6323 provides that the lien "shall not be valid against any * * * judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed * * *." Subsection (f) provides for the filing of the notice of the tax lien in the office designated by State Law.

[Federal v. State Claims]

The relative priority of a lien of the United States for unpaid taxes is a Federal question to be determined by the rulings of the Federal courts (Aquilino v. United States of America, 3 N. Y. 2d 511; United States v. Acri, 348 U. S. 211). The Federal rule is firmly established that once a government tax lien is properly filed, no subsequently recorded lien or claim may prevail against it (United States v. Acri, supra).

The determination of whether a creditor who has obtained a money judgment in a State court attains the status of a judgment lien creditor within the purview of 26 USCA 6323, is reached by reference to the State Law to ascertain the effect of the judgment as a lien on the taxpayer's property (United States v. Cohen, 271 F. Supp. 709). Under New York Law, the mere entry of a money judgment creates no lien against the personal property of the judgment debtor. The lien comes into existence only upon the issuance of execution to a Sheriff (Ruppert v. Community National Bank, 22 A. D. 2d 165; Meyerhardt v. Heinzelman, 71 N. Y. S. 2d 692, aff'd 272 App. Div. 800; CPLR 5202).

In the motions at bar, the tax lien of the United States, filed in the Office of the Secretary of State of the State of New York as complied with 26 U. S. C. A. 6323, subsection (f), and New York Lien Law, section 240, subdivision 2(a) which provides that a Federal tax lien on personal property of a corporation is to be filed with the Secretary of State of New York. The filing on April 16, 1973, antedates the delivery of the executions on the Mint and Workmen's Compensation Board judgments to the Sheriff of the City of New York. The Levi judgment never became a lien against the personal property of W. A. Smith Realty Corp., because she never delivered an execution on her judgment to the sheriff. It therefore follows for the reasons hereinbefore stated, that the tax lien of the United States of America has priority over the Mint Workmen's Compensation Board and Levi judgments.

Section 415(1)-7.0 of the Administrative Code of the City of New York provides that all real estate taxes, assessments, sewer rents, water charges and the interest thereon, which have been imposed on real estate, shall constitute liens thereon when imposed, and shall continue to be liens until paid. Thus, the City of New York on May 1, 1968, when title to damage parcel 1 vested in the city, had a lien for any unpaid real estate taxes, assessments, sewer rents, water charges and the interest thereon. The city's lien pre-dates the Federal Tax Lien by some five years. Choate state-created liens have priority over later federal tax liens (United States v. Pioneer American Insurance Co., 374 U. S. 84; Matter of Walton, 20 A D 2d 386, 390). A lien becomes choate "when the identity of the lienor, the property subject to the lien and the amount of the lien are established" (United States v. Prioneer American Insurance Co., supra). In the motion at bar, the lienor is the City of New York, the property is damage parcel 1 and the amount of the lien is the sum due on May 1, 1968 for unpaid real estate taxes, assessments, sewer rents, water charges and the interest thereon. The city's lien therefore has priority over the federal tax lien.

Accordingly, the cross-motion by judgment creditor Levi is denied and the motion of judgment creditor Mint and the cross-motion of judgment creditor Workmen's Compensation Board are granted to the extent hereinafter indicated.

The Comptroller of the City of New York is directed to cancel the warrant drawn to the order of W. A. Smith Realty Corp. The comptroller shall first deduct from the balance of the award, any sums due and still unpaid as of the vesting date for real estate taxes, assessments, sewer rents, and water charges.

The balance if any, shall to the extent of the availability of the funds, be paid in the following order of priorities: (1) Tax Lien of the United States of America, together with all accured interest and penalties; (2) Judgment of Benjamin A. Mint together with interest from the date of the judgment and sheriff's fees; (3) Workmen's Compensation Board judgment with interest from the date of the judgment.

Settle order with approval as to form by the corporation counsel.

 

 

[75-2 USTC ¶9741]United States of America, Plaintiff v. Raleigh Restaurant and the State of New York, Defendants

U. S. District Court, East. Dist. N. Y., 71 C 26, 398 FSupp 496, 8/20/75

[Code Secs. 6321 and 6323]

Lien for taxes: Refund of state license fee: Priority: State v. federal government.--Since the taxpayer owed a greater amount of state taxes than the amount of a refund of the fee paid for a state liquor license due to him upon cancellation of the license, the refund account was a barren fund under New York law. Therefore, there was no property interest of the taxpayer in the hands of the state in which a federal tax lien could attach.

David Trager, United States Attorney, Brooklyn, N. Y., Prosper K. Parkerton, Bedford Stuyvesant Community Legal Services Corp., Brooklyn, N. Y., William R. Morrow Jr., Department of Justice, Washington, D. C. 20530, for plaintiff. Anthony R. Wannick, Louis J. Lefkowitz, 2 World Trade Center, New York, N. Y., for defendants.

Memorandum and Order

BRAMWELL, District Judge:

This is a motion for summary judgment on the part of plaintiff, United States of America. Defendant, State of New York, has filed a cross-motion for summary judgment dismissing the complaint.

The facts are uncontested. In March, 1968, defendant, Raleigh Restaurant, Inc., which has never appeared in this action, was issued a liquor license by the State of New York. On September 10, 1968, Raleigh surrendered the license to the State Liquor Authority; pursuant to Section 127 of the New York Alcoholic Beverage Control Law, Raleigh requested a refund of $595.00. In October, 1968, the State Liquor Authority approved the refund. The State Comptroller was notified of the refund and in December, 1968, he used the entire $595.00 to partially offset a claim of the State against Raleigh for admittedly unpaid contributions to the Unemployment Insurance Fund.

Prior to the approval of the liquor license refund owing to Raleigh, the New York State Comptroller was served with a notice of levy issued on September 17, 1968 by the United States Internal Revenue Service, specifying that any properties of Raleigh held by the State of New York were to be turned over to the United States in order to partially satisfy outstanding federal tax liabilities.

After the State advised plaintiff that the liquor license refund had been used to offset State claims, the United States, in 1971, instituted the present action, seeking: first, to reduce to judgment the federal tax assessments made against defendant Raleigh, in the amount of $8,668.62 plus interest; and second, to foreclose the tax lien against the $595.00 refund owing to Raleigh which is in the possession of the State of New York.

Since defendant Raleigh has failed to appear, plaintiff requests that default judgment be entered pursuant to Rule 55(b)(2), Fed. R. Civ. P. On February 20, 1975, the default of defendant Raleigh was duly entered by the Clerk of the Eastern District United States Court, as provided by Rule 55(a). Default judgment is hereby granted to plaintiff for the amount owing to the United States. The attorney for the plaintiff is directed to submit an order and supporting affidavit within 20 days, evidencing a final accounting of the amount due, including interest as of the date of this order, for the approval of this court. Such amount, when approved, shall constitute the total indebtedness due from defendant Raleigh for federal tax liabilities. Costs shall not be taxed against defendant Raleigh.

With respect to the action against defendant, State of New York, both parties have moved for summary judgment pursuant to Rule 56, Fed. R. Civ. P. Neither party disputes the facts outlined above. The issue of law before this court involves the question of the priority of liens which attach to the taxpayer's property. The plaintiff's argument is that, by statute, ¹ the tax lien which was created against defendant-taxpayer Raleigh's property and which was served on the State Comptroller, takes priority over any claim against the taxpayer by the defendant, State of New York, and that, therefore, the liquor license refund should have been turned over to the United States.

The defendant argues that the federal tax lien is subordinate to the right of the State to offset its own tax claim of $2,144.65 by appropriating Raleigh's refund account for that purpose. It claims that since Raleigh owed taxes greater than the amount of its liquor license refund, the State Comptroller was under a duty to offset the claim before certifying the balance due to the liquor licensee. Accordingly, claims defendant, there was no balance due to Raleigh and, therefore, no property belonging to Raleigh in the custody of New York to which plaintiff's tax lien would attach.

In Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365 (1960), it was held that State law determines whether and to what extent a taxpayer has property interests to which a lien might attach. See also City of New York v. United States [60-2 USTC ¶9797], 283 F. 2d 829, 831 (2d Cir. 1960). In Strand v. Piser, 291 N. Y. 236, 52 N. E. 2d 111, 45 N. Y. S. 2d (1943), the New York Court of Appeals held that a liquor license refund becomes the property of the licensee on the date that the license is surrendered for cancellation. In that case, however, there were no taxes due to the State which invoked any right of offset.

Assuming that, under the Strand determination, taxpayer Raleigh did, in fact, obtain an interest in its refund account on the date it surrendered its license, the amount of that refund, or the extent of taxpayer's interest in that property, was still subject to the laws of the State. Aquilino v. United States, supra.

The New York Alcoholic Beverage Control Law §127 (McKinney 1970) provides that upon surrendering a liquor license for refund . . .

the liquor authority shall prepare an order for the payment of such refund, directed to the comptroller, to be paid him, on his audit, upon the surrender of the receipt theretofore given such person; provided, however, that if any taxes or penalties imposed by article eighteen of the tax law are unpaid by such person, the amount of such taxes and penalties shall be deducted from the amount of such refund. Any refunds due on the surrender and cancellation of licenses pursuant to the section shall be paid by the comptroller from moneys in his custody, derived from license fees received pursuant to this chapter,

. . .

(emphasis added)

Although the taxes under Article 18 relate to taxes on alcoholic beverages, the right of offset under §127 has been construed by the New York courts to include any taxes and penalties due to the State. Chemical Bank New York Trust Co. v. State, 27 App. Div. 2d 427, 279 N. Y. S. 2d 813 (3d Dep't 1967); Multer v. State, 178 Misc. 360, 34 N. Y. S. 2d 275 (Ct. of Claims 1942); Siegel v. State, 262 App. Div. 388, 28 N. Y. S. 2d 958 (3d Dept. 1941).

Since Raleigh owed a greater amount in taxes than the amount of its refund, its refund account became, under state law, a barren fund. Therefore, there was no property of Raleigh in the hands of defendant New York to which plaintiff's lien attached.

The plaintiff has cited United States v. Paddy Jordan's Restaurant, Inc., 33 AFTR 2d 74-1210, 74-1 USTC ¶9351 (S. D. N. Y. 1974), a case in which the right of offset was denied. That case, however, involved a deposit which accompanied an application for a liquor license denied by the state; §127 of the Alcoholic Beverages Control Law did not apply, as it does in the case of a refund.

In the instant case, the fee for the liquor license paid by Raleigh became the property of the State immediately. Brearton v. Morgan, 257 App. Div. 34, 12 N. Y. S. 2d 99 (3d Dep't 1939). That fee, or the refund due for unexpired time remaining on the period covered by the license was subject to the laws of the State; although the refund would become the property of the licensee on the date of surrender of the license, the final amount embodied in that refund, determined under State law, would be subject to the right of offset provided for in §127 of the Alcoholic Beverage Control Law. In the present case, therefore, the United States levied on an empty account since no funds remained after deductions were made pursuant to State Law.

Since the State of New York holds no property belonging to Raleigh, summary judgment is hereby granted in favor of defendant, State of New York, dismissing the claim against it. Costs shall not be taxed against plaintiff.

¹ 31 U. S. C. §191 establishes the priority of debts due to the United States. It provides:

Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.

 

 

[69-2 USTC ¶9729]Frank J. Farley, Treasurer of the County of Hudson, and County of Hudson, Petitioners-Respondents v. $168,400.97 and Frank S. Turbett, Jr., District Director of Internal Revenue, and United States of America, Claimants-Appellants

N. J. Supreme Court, No. A-3, 11/17/69, Aff'g N. J. Superior Ct., 68-1 USTC ¶9321

[Code Sec. 6323]

Lien for taxes: Priority: Gambling money forfeited to state: Illegal search and seizure.--A federal tax lien was not enforceable against $168,400 seized by county officials as contraband from illegal gambling activities. Although the federal tax lien had been perfected the day before the money was seized, the gambler who had received the money had no property interest in it at the time the federal tax lien was perfected. Under these circumstances, the money was contraband under state law and title to it vested in the county at the time of the commission of the wrongful act of gambling. Further, even assuming that the Government had standing to question the legality of the search that uncovered the money, and the search was, in fact, illegal, a state could not be deprived of property forfeited to it if it acquired possession of the property by an illegal search and seizure.

Sheldon A. Weiss, Isadore Glauberman, 921 Bergen Ave., Jersey City, N. J., William F. Kelly, Jr., 595 Newark Ave., Jersey City, N. J., for petitioners-respondents. David M. Satz, Jr., United States Attorney, Newark, N. J., Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Bennet N. Hollander, Department of Justice, Washington, D. C. 20530, for claimants-appellants.

WEINTRAUB, Circuit Judge:

This action involves competing claims of the County of Hudson and of the United States to the sum of $168,400.97. The County contends the moneys were forfeited to it by their use in the gambling activities of Joseph V. Moriarty. The United States claims it holds a lien upon the moneys for taxes assessed against Moriarty.

[Lower Court Action]

The County brought this proceeding to establish its title to the fund. The United States removed the matter to the United States District Court which, however, remanded it to the State court. State v. Moriarty, 268 F. Supp. 546 (N. J. D. C. 1967). The cause was then tried, resulting in a judgment for the County. [68-1 USTC ¶9321] 97 N. J. Super. 458 (Law Div. 1967). The Appellate Division affirmed, 102 N. J. Super. 579 (App. Div. 1968), and we granted the petition of the United States for certification, 53 N. J. 273 (1969).

[Gambler Arrested]

For many years Moriarty was a notorious "kingpin" in the "numbers racket" in and around Jersey City. His criminal record in that field dates from the 1930s. On March 2, 1962 he was sentenced to State Prison on a guilty plea to possession of lottery slips, and he remained in the State's custody until March 12, 1964, when he was delivered to federal authorities who held him until January 6, 1965.

While Moriarty was thus in custody, a chance event occurred which ultimately led to this litigation. On July 3, 1962 some workmen, renovating private garages at 127-131 Oxford Avenue, Jersey City, discovered $2,438,110 in currency and sundry papers in an old automobile. Those papers revealed Moriarty's operation of a gambling enterprise over an extended period. ¹

[Lien Date]

This discovery precipitated activity at federal and local levels. On July 5, the District Director of Internal Revenue made a jeopardy assessment against Moriarty for income taxes and interest in the sum of $3,422,792.66. It is agreed that the federal lien became effective on that date. On the following day the local police discovered and seized the moneys involved in the action before us, under the following circumstances.

[Money Found and Seized]

Since the papers found on July 3 related to a period which had ended sometime before the date of Moriarty's imprisonment, the police began a search for records of Moriarty's intervening operations and related cash. Moriarty having selected a private garage for the cache discovered on July 3, the police thought it likely that he used still another garage to house the records and the product of that further gambling activity. This assumption proved correct, for, peering into a private garage at 56 Oxford Avenue, stipulated by the parties to be "in close proximity to the garage in which the $2,438,110 had been found on July 3, 1962," the officers saw the familiar paraphernalia of a lottery operation. Later on the same day, armed with a search warrant obtained upon that showing, they entered the garage and seized the moneys here involved, together with sundry papers revealing gambling operations from December 14, 1961 to February 19, 1962, the day before Moriarty was taken into custody. This discovery led to a further indictment of Moriarty, and later he pled guilty to possession of lottery slips for the period of December 14, 1961 to July 6, 1962, the date when the police seized the moneys here involved.

There is no dispute that the moneys were used in the gambling operation and were contraband on that account. Rather, the question is whether the tax lien attached to the moneys before title passed to the County. The United States contends the forfeiture could have occured only when the moneys were seized by the police on July 6, which was one day after the date of the tax lien, while the County contends the forfeiture occurred at the moment the moneys were used for gambling, so that on the day of the tax assessment Moriarty had no property interest in the moneys to which the tax lien could attach. Upon this appeal the United States also urges, we think for the first time, that the Fourth Amendment bars the County's claim because the moneys were obtained by an unlawful search and seizure. We will treat the two issues in that order.

[State Law Controlling]

I. The federal statute provides for "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging" to the delinquent taxpayer, 26 U. S. C. A. §6321. Whether the taxpayer has "property" or "right to property" to which the tax lien may attach is controlled by State law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512, 4 L. ed. 2d 1365, 1368 (1960). The pivotal question, then, is whether, under our State law, the moneys were the property of Moriarty on the effective date of the tax lien or had already been forfeited to the County upon their use in his gambling operation.

[Forfeiture of Property]

There were two types of forfeiture under the English practice at the time of the American Revolution. They are described by Mr. Justice Story in The Palmyra, 12 Wheat. 1, 14, 6 L. ed. 531, 535 (1827), in these words:

"* * * It is well known, that at the common law, in many cases of felonies, the party forfeited his goods and chattels to the crown. The forfeiture did not, strictly speaking, attach in rem; but it was a part, or at least a consequence, of the judgment or conviction. It is plain from this statement that no right to the goods and chattels of the felon could be acquired by the crown by the mere commission of the offense; but the right attached only by the conviction of the offender. The necessary result was, that in every case where the crown sought to recover such goods and chattels, it was indispensable to establish its right by producing the record of the judgment of conviction. In the contemplation of the common law, the offender's right was not devested until the conviction. But this doctrine never was applied to seizures and forfeitures, created by statute, in rem, cognizable on the revenue side of the exchequer. The thing is here primarily considered as the offender, or rather the offense is attached primarily to the thing; and this, whether the offense be malum prohibitum, or malum in se. The same principle applies to procedings in rem, on seizures in the admiralty."

In Palmyra, the question was whether the statutory forfeiture of the offending article depended upon a conviction of the offending person. The Court held that it did not. The Court had no occasion to say when the forfeiture did occur, but other authorities laid down some precise rules.

With respect to the so-called "common law" forfeiture, i.e., the forfeiture which depended upon the owner's conviction of treason or felony, the common law held that "The forfeiture of lands has relation to the time of the fact committed, so as to avoid all subsequent sales and encumbrances; but the forfeiture of goods and chattels has no relation backwards; so that those only which a man has at the time of the conviction shall be forfeited." IV Blackstone, Commentaries, *388. This view of the common law forfeiture was accepted in United States v. Stowell, 133 U. S. 1, --, 33 L. ed. 555, 560 (1890). The doctrine of forfeiture upon conviction of treason or felony of course never obtained in our State, N. J. S. A. 2A:152-2, or elsewhere in this country, 36 Am. Jur. 2d, Forfeiture and Penalties §15, p. 622. We nonetheless refer to it because, although the forfeiture resulted from the commission of an offense rather than the misuse of the property forfeited, still the common law found that title to real property was forfeited as of the time of the criminal act rather than as of the date of conviction. The rule was otherwise as to personal property because of the practical considerations stated by Blackstone, at the reference just given:

"Therefore a traitor or felon may bona fide sell any of his chattels real or personal, for the sustenance of himself and family between the fact and conviction; for personal property is of so fluctuating a nature, that it passes through many hands in a short time; and no buyer could be safe, if he were liable to return the goods which he had fairly bought, provided any of the prior vendors have committed a treason or felony."

[Statutory Forfeiture]

But as to the so-called "statutory" forfeiture, i. e., the forfeiture of the very property used in violation of the law, the rule has been constant, whether the offending property by real or personal, that title may be forfeited as of the moment of the offending use. Unlike the "common law" forfeiture which embraced all of the individual's property and resulted from the individual's personal offense, the "statutory" forfeiture is limited to the offending property itself, "which is proceeded against, and, by resort to a legal fiction, held guilty and condemned as though it were conscious instead of inanimate and insentient." Various Items of Personal Property, etc. v. United States, 282 U. S. 577, 581, 75 L. ed. 558, 561 (1931). ²

Thus in United States v. 1960 Bags of Coffee, 8 Cranch 398, 3 L. ed. 602 (1814), which involved a statute forbidding the imporatation of certain articles, it was held that the statutory forfeiture occurred at once and therefore the title of the government was not cut off by a sale of the commodity to an innocent buyer. So in United States v. One Hundred Barrels Distilled Spirits, 81 U. S. 44, 20 L. ed. 815 (1872), in which the forfeiture ensued because liquor was moved with intent to defraud the United States of taxes, it was held that title vested immediately in the United States when the liquor was so moved and that the subsequent payment of the tax did not vacate the forfeiture, even though the property had been sold to an innocent buyer. The Court stated the rule in these words (81 U. S. at 56-57, 20 L. ed. at 816-817):

"Where the forfeiture is made absolute by statute the decree of condemnation when entered relates back to the time of the commission of the wrongful acts, and takes date from the wrongful acts and not from the date of the sentence or decree. * * * Many such adjudged cases are to be found in the reported decisions of this court, and it must be admitted that they establish the rule beyond all doubt, that the forfeiture becomes absolute at the commission of the prohibited acts, and that the title from that moment vests in the United States in all cases where the statute in terms denounces the forfeiture of the property as a penalty for a violation of law, without giving any alternative remedy, or prescribing any substitute for the forfeiture, or allowing any exceptions to its enforcement, or employing in the enactment any language showing a different intent; and that in all such cases it is not in the power of the offender or former owner to defeat the forfeiture by any subsequent transfer of the property, even to a bona fide purchaser for value, without notice of the wrongful acts done and committed by the former owner." (Emphasis added.)

The authorities just cited speak in terms of the relation-back of the judgment to the time of the forfeiting act. This does not mean that the State's title is merely "inchoate" up to the time of a judicial judgment within the meaning of decisions which found that certain liens authorized by State law depended for their substance upon later events and therefore were inferior to an intervening federal tax lien even though under State law the liens were fully effective as of their original filing dates. See United States v. Security Trust & Savings Bank of San Diego [50-2 USTC ¶9492], 340 U. S. 47, 95 L. ed. 53 (1950); United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 99 L. ed. 264 (1955); United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 10 L. ed. 2d 770 (1963); United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323, 16 L. ed. 2d 593 (1966). On the contrary, the proposition in the excerpt quoted above from One Hundred Barrels Distilled Spirits is unequivocal that "the forfeiture becomes absolute at the commission of the prohibited acts and that the title from that moment vests in the United States * * *." The earlier statement in the same excerpt that "the decree of condemnation when entered relates back to the time of the commission of the wrongful acts and not from the date of the sentence or decree," means only that the decree adjudges and confirms that title passed when the wrongful act was done.

This thesis clearly appears in the opinion of Chief Justice Marshall in United States v. Grundy, 3 Cranch 337, 351, 2 L. ed. 459 (1806). After stating that (3 Cranch at 350-351, 2 L. ed. at 463):

"Where a forfeiture is given by a statute, the rules of the common law may be dispensed with, and the thing forfeited may either vest immediately, or on the performanced of some particular act, as shall be the will of the legisture. This must depend upon the construction of the statute."

the Chief Justice said (3 Cranch at 352-353, 2 L. ed. at 464):

"If the property in the vessel was actually vested in the United States by the commission of the offense, then the judgment of a court, condemning the vessel, or declaring it to belong to the government, would, in fact, do nothing more than ascertain that the offense had been committed; it would not vest the thing more completely in the government, in point of right, than it was vested by the commission of the offense."

That title may pass at once upon the commission of the offending act was reiterated in United States v. Stowell, supra, 133 U. S. 1, 33 L. ed. 555, and Texas v. Donoghue, 302 U. S. 284, 82 L. ed. 264 (1937).

In short, then, when a statute provides for a forfeiture, the forfeiture takes place upon the occurrence of the forbidden act or omission unless the statute provides otherwise, and the sovereign's title is in no sense inchoate because procedural due process requires an opportunity to dispute the claim of forfeiture in a judicial proceeding. The judgment in such a proceeding simply resolves a title contest, as it does in other settings, as when the situs of ownership depends upon the construction of a will or a deed, or upon a relationship to a deceased, or upon adverse possession. The judgment which settles the dispute does not initiate the title; it serves only to confirm the title by dissipating claims against it.

[Government's Contention]

As we understand the argument before us, the United States agrees that property may be forfeited immediately upon its offensive use and thereupon nothing remains to which the federal tax lien may attach even though the tax is assessed prior to a judgment verifying the fact of forfeiture. Rather, the United States says our Legislature intended the forfeiture should not occur until the property is actually seized. Upon this premise, the United States contends that, prior to seizure, the State's right (i.e., to seize the property and thereby accomplish the forfeiture) was merely "inchoate" within the concept underlying the competing lien claim cases cited above. The United States urges that if Spagnuolo v. Bonnet, 16 N. J. 546 (1954), is read to hold that title vests at the time of the gambling use, it should be rejected. We read Spagnuolo so to hold and find upon a review of the subject that Spagnuolo correctly took that view.

[State Law]

The forfeiture of things used in gambling derives from L. 1878, c. 78, p. 137, which provided that:

"Whenever any furniture or implements made or used for the playing of the game of faro, roulette, rouge et noir, or any unlawful game, shall be seized or captured by the police, constabulary or other officers in this state, it shall be the duty of the prosecutor of the pleas in the county where such seizure is made, to have the same destroyed or rendered useless for the uses and purposes aforesaid, and it shall be unlawful to return the same to the person or persons owning the same, or to any person whatsoever."

That statute is now N. J. S. A. 2A:152-6. ³ It did not expressly say the offending article was forfeited but the fact of forfeiture was of course implicit in its terms.

In Kenny v. Wachenfeld, 14 N. J. Misc. 322, 184 A. 737 (Sup. Ct. 1936), the plaintiff sought to replevin cash bet with him as a bookmaker. In denying recovery, the former Supreme Court said (p. 323):

"It seems clear that since the money was earmarked and segregated, as part of a gambling operation, it could be as well seized as a gambling device. Because of the use, the money became contraband and the appellant [plaintiff] may not receive possession thereof."

Although the 1878 statute we have just quoted was not mentioned, it is plain that the court had its provisions in mind.

By L. 1941, c. 70, p. 156, the Legislature added provisions which now appear as N. J. S. A. 2A:152-7 through 11. The 1941 statute did not supersede the 1878 act. Rather, accepting and confirming the view that the 1878 statute forfeited moneys used in gambling, the Legislature by the 1941 act resolved the question whether the forfeited moneys belonged to the State or the county, ⁴ and decided the contraband should be the county's, no doubt because the county bears the dollar brunt of criminal prosecutions, see State v. Rush, 46 N. J. 399 (1966). The 1941 statute also provided a simplified procedure for the determination of claims to the moneys. Nothing in that measure suggests the further purpose of delaying the forfeiture until the moneys are actually seized.

[1941 Statute]

The first section of the 1941 statute, N. J. S. A. 2A:152-7, reads:

"Whenever any money, currency or cash shall be seized or captured by the police, constabulary or other officer in connection with any arrest for violation of or conspiracy to violate any gambling law of this state, the said money, currency or cash shall be deemed prima facie to be contraband of law as a gambling device, or as part of a gambling operation, and it shall be unlawful to return the said money, currency or cash to the person or persons claiming to own the same, or to any other person, except in the circumstances and manner hereinafter provided." (Emphasis added.)

It will be noted that the section speaks of moneys seized or captured "in connection with any arrest" for a gambling violation. In State v. Link, 14 N. J. 446 (1954), the gambling moneys were taken from a wall safe in Link's home pursuant to a search warrnat. Link had been arrested on an earlier date. It was urged that the moneys were not the property of the county because they were not seized "in connection with any arrest." The Court rejected that position. It found that the phrase "in connection with any arrest" did not require the seizure to coincide with the arrest and hence the prior arrest of Link satisfied that statutory language. The underlying thesis was that the 1941 statute did not create the forfeiture, but rather fashioned a procedure for litigating claims over the fund. The opinion closed with the observation that "if the money was contraband when it was seized, it still remained contraband despite the failure to arrest at the precise time the currency was impounded. Its legal status was not changed by such an omission." (14 N. J. at 454.)

Thus the 1941 statute formulated a procedure for resolving the claims to moneys and endeavored by its first section, quoted above, to establish an incidental rule of evidence that whatever moneys are seized "in connection with an arrest * * * shall be deemed prima facie to be contraband of law as a gambling device." But in providing for a procedure and the incidental rule of evidence, the Legislature did not intend thereby to limit the substantive reach of the 1878 statute to situations in which the gambling moneys are seized at the time of arrest or in connection with the arrest. Indeed, the 1941 statute was not intended to prescribe an exclusive procedure even with respect to articles seized at the time of arrest, and hence it was held in Farley v. Manning, 4 N. J. 571 (1950), that the title dispute could be resolved in an interpleader action. ⁵

[Spagnuolo Case]

This brings us to Spagnuolo v. Bonnet, supra, 16 N. J. 546, which the United States seeks to distinguish. There the gambling moneys were in fact seized prior to the jeopardy tax assessment by the federal government and hence the case did not turn upon whether the forfeiture occurred before or at the time of seizure. Rather the United States contended "that the County of Essex had nothing more than an inchoate lien or potential contingent property right in the money until the order of forfeiture * * *; that at most any right of the county to the money was purely contingent at least until * * * the date of Spagnuolo's conviction." (16 N. J. at 556). The Court rejected both propositions and held for the County.

The seizure having antedated the federal tax assessment, the County apparently referred to the date of seizure in the course of its argument that the forfeiture did not depend upon the judgment. The opinion refers several times to the seizure, dobtless because of the manner of argument. But the ultimate thesis was that the moneys were forfeited at the time of their use in gambling. After noting that the forfeiture was directed by the 1878 act (p. 556), and that the 1941 statute was simply a supplement which did not restrict the reach of that measure (pp. 557-559), Spagnuolo said (pp. 559-560):

"The trial court, on the proofs offered, declared the money to be contraband and entered the confirming judgment of forfeiture under the statute. He had no other alternative. Where a forfeiture is absolute under the statute, as it is here, the judgment of condemnation or forfeiture when entered relates back to the commission of the wrongful act and takes date from the wrongful acts, not from the date of sentence or decree. United States v. 1960 Bags of Coffee, 8 Cranch 398, 3 L. ed. 602 (1814); In re Henderson's Distilled Spirits, 14 Wall. 44, 81 U. S. 44, 20 L. ed. 815 (1872); United States v. Pacific Finance Corp., 110 F. 2d 732 (2d Cir. 1940), and the cases cited therein. Cf. Motlow v. State of Missouri, 295 U. S. 97, 55 S. Ct. 661, 79 L. ed. 1327 (1935); 51 Harv. L. Rev. 1112.

The established rule is that the forfeiture becomes absolute at the commission of the prohibited acts and the title from that moment vests in the state or government in all cases where the statute in terms denounces the forfeiture of the property as a penalty for a violation of the law, without giving any alternative remedy or providing any substitutes for forfeiture or allowing any exceptions to its enforcement, and that in all such cases it is not in the power of the offender or the former owner to defeat the forfeiture by any subsequent transfer of the property, even as to a bona fide purchaser for value, without notice of the wrongful acts done or committed by the former owner. The forfeiture is considered as directed against the thing itself, not merely the possessor's interest in it. In re Henderson's Distilled Spirits, supra."

Thus Spagnuolo concluded that the forfeiture occurred at the time the moneys were wrongfully used, and this because the Legislature did not express a purpose to delay it. We add that the reference in the excerpt from Spagnuolo to the concept of relation-back of the judgment meant only, as we have already said, that the judgment, in the words of the same excerpt, is the "confirming" judgment of forfeiture.

[No Forfeiture on Seizure]

Thus the rationale of Spagnuolo repels the proposition urged upon us here, that the Legislature intended the forfeiture to occur only upon seizure. Nor did Spagnuolo err in that regard. That the 1878 statute referred to a seizure does not suggest the forfeiture was to await that event. The statute was couched as a mandate upon the prosecutor with respect to the disposition of property seized and hence understandably referred to the seizure as the event which triggered the prosecutor's duty. The forfeiture itself was implicit in the statute, as we have already said.

We see no reason why the Legislature would want to delay the forfeiture until seizure or to make the forfeiture depend upon it. That construction was rejected in similar cases. So United States v. Stowell, supra, 133 U. S. at --, 33 L. ed. at 560, held the statute's use with reference to offending articles of the phrases "wherever found" and "found in the distillery," did not express an intent to delay the forfeiture to the time when the articles were found. Again, United States v. Pacific Finance Corp., 110 F. 2d 732 (2 Cir. 1940), held a statutory mandate that vehicles used for smuggling "shall be seized and forfeited" did not negate an intent to forfeit the vessel at the time of its illegal use. To the same effect is United States v. One 6.5 MM. Mannlicher-Carcano Military Rifle, etc., 250 F. Supp. 410 (N. D. Tex. 1966). But see Stout v. Green, 131 F. 2d 995 (9 Cir. 1942).

It is true, of course, that forfeited property, if not seized, may never reach the hands of the condemning sovereign. That is equally true of the federal tax lien which may touch things of which the United States may never learn. But that is no reason to assume that either legislature intended the sovereign's interest to arise only when the property is actually in its grasp.

[Illegal Search and Seizure]

II. The second point the United States advances is that the moneys were obtained by an illegal search and seizure and for that reason the Fourth Amendment bars their retention by the County.

The issue is not before us. It was not raised in the trial court or on appeal to the Appellate Division, or for that matter in the brief filed with us. The legality of the seizure was questioned only in connection with the unsound claim that the word "seized" in the State forfeiture statute (N. J. S. A. 2A:152-6) means "lawfully" seized and hence the statute does not forfeit contraband if its seizure is illegal.

[Issue Not Raised]

It would be unfair to the County to accept the Fourth Amendment issue at this state. There was in fact a search warrant and the supporting affidavit revealed an adequate basis for it. The United States refers to some testimony later given by the officer as to how he peered into the garage, and it argues that an illegal "entry" into the garage thereby occurred. But the total facts were not developed, and understandably so since the sole point being pressed, i. e., that our Legislature conditioned the forfeiture upon the legality of the seizure of the property, was untenable as a matter of law. We will not at this late hour permit an attach which was not in view when the record was made.

[Lack of Standing to Raise Issue]

We add nonetheless that if the challenge were accepted it fould fail even if we assumed the search and seizure somehow invaded Moriarty's Fourth Amendment right and assumed also, for the moment, that the federal doctrine barring the use as evidence of things illegally seized would also bar the sovereign's title to contraband so seized.

The cases presently hold that evidence illegally seized will be suppressed only upon the complaint of one whose rights were violated by the search. See Alderman v. United States, 394 U. S. 165, --, 22 L. ed. 2d 176, 185-187 (1969); United States v. One 1963 Cadillac Coupe de Ville Two-Door, 250 F. Supp. 183 (W. D. Mo. 1966); United States v. One 1953 Model Mercury Sedan Auto, 149 F. Supp. 657 (S. D. Ala. 1957); United States v. One 1952 Ford Victoria, 114 F. Supp. 458 (N. D. Cal. 1953); State v. One 1960 Mercury Station Wagon, 5 Conn. Cir. 1, 240 A. 2d 99 (Cir. Ct. App. Div. 1968).

The United States does not have the required standing. The Fourth Amendment protects the privacy of people from intrusion by the federal government. It would be hard to find that the United States is itself the intended beneficiary of a constitutional provision intended to restrain it, or that the United States is a person within the meaning of a provision designed to establish a right of privacy. And if the United States could claim the cover of the Fourth Amendment, still it had no right of privacy in Moriarty's garage. Nor, if we are correct in our conclusion under Point I, did the United States have any interest in the moneys themselves since they were the County's when the federal tax lien was sought to be levied. Nor could it be said that Moriarty held the moneys consensually for the United States. He was an antagonist of both the United States and the State of New Jersey. Both pursued him, and the Fourth Amendment stood between them and him. For all of those reasons the United States could hardly maintain its constitutional rights were insulted when the police officer looked into Moriarty's garage or entered it under the search warrant.

Still further, if somehow it had standing to question the seizure of the moneys and if the seizure were illegal, the United States could not prevail on its ultimate claim that a violation of the Fourth Amendment will deprive the County of its title to the moneys. At the oral argument before us the United States for the first time urged that One 1958 Plymonth Sedan v. Pennsylvania, 380 U. S. 693, 14 L. ed. 2d 170 (1965), held that contraband may not be retained if the sovereign obtained possession by a seizure violating the Fourth Amendment. That was not the law before One 1958 Plymonth Sedan. See United States v. Jeffers, 342 U. S. 48, 96 L. ed. 59, 65 (1951); Trupiano v. United States, 334 U. S. 699, 92 L. ed. 1663, 1672 (1947); United States v. Eight Boxes, etc., 105 F. 2d 896 (2 Cir. 1939); United States v. $1,058 in United States Currency, 323 F. 2d 211 (3 Cir. 1963); United States v. One 1956 Ford Tudor Sedan, 253 F. 2d 725 (4 Cir. 1958); Sanders v. United States, 201 F. 2d 158 (5 Cir. 1953); Grogan v. United States, 261 F. 2d 86 (5 Cir. 1963); United States v. One Bally "Barrel-O-Fun" Coinoperated Gaming Device, 224 F. Supp. 794 (M. D. Pa. 1963); United States v. Pauper Finance Corp., 110 F. 2d 732, 733 (2 Cir. 1940). But cf., Berkowitz v. United States, 340 F. 2d 168 (1 Cir. 1965). See Annotation, 8 A. L. R. 3d 473, 475 (1966). And we do not believe that One 1958 Plymouth Sedan holds the other way.

We heretofore read One 1958 Plymouth Sedan to hold only that evidence illegally seized could not be used in a forfeiture proceeding against the victim of the search, rather than to say that the State must return contraband to the culprit even though the fact of contraband is shown by other admissible evidence. State v. Sherry, 46 N. J. 172, 178 (1965). Doubt having since been expressed as to whether One 1958 Plymouth Sedan should be so read, see John Bacall Imports, Ltd. v. United States, 287 F. Supp. 916, 924 (C. D. Cal. 1968), and annotation cited above, 8 A. L. R. 3d at 474, we add a further statement in support of our interpretation of that case.

If in One 1958 Plymouth Sedan the Court meant that the illegal seizure of the automobile operated to prevent or undo the forfeiture, a simple statement to that effect would have disposed of the matter. Neither the issue nor the result was stated in such terms. The issue was clearly said to be whether the illegally seized contents of the vehicle could be used to prove that the vehicle had been improperly employed and hence forfeited. Thus the Court said (380 U. S. at 698, 14 L. ed. 2d at 173-174):

"In both the Boyd situation and here the essential question is whether evidence--in Boyd the books and records, here the results of the search of the car--the obtaining of which violates the Fourth Amendment may be relied upon to sustain a forfeiture. Boyd holds that it may not."

The Court then discussed United States v. Jeffers, supra, 342 U. S. 48, 96 L. ed. 59, and Trupiano v. United States, supra, 334 U. S. 699, 92 L. ed. 1663.

Presumably the government argued that under those cases illegally seized evidence, although not usable to obtain a conviction for crime, need not be returned to the defendant if it is contraband. The Court agreed that Jeffers and Trupiano so held, and without in anywise questioning the correctness of that holding, the Court pointed out that in those cases the articles were contraband on their face, so that the fact of contraband did not depend upon the use of illegally seized evidence. Far from saying that a forfeited article which is not per se contraband must be returned because it was illegally seized even though the forfeiture can be shown by other untainted proof, the Court expressly pointed out that Pennsylvania had no other evidence to show the illegal use of the vehicle. Thus, the opinion reads (380 U. S. at 699, 14 L. ed. 2d at 174):

"It is apparent that the nature of the property here, though termed contraband by Pennsylvania, is quite different. There is nothing even remotely criminal in possessing an automobile. It is only the alleged use to which this particular automobile was put that subjects Mr. McGonigle to its possible loss. And it is conceded here that the Commonwealth could not establish an illegal use without using the evidence resulting from the search which is challenged as having been in violation of the Constitution."

Hence we remain of the view that One 1958 Plymouth Sedan does not hold that a State or the United States is deprived of property which was forfeited to it if it acquired possession of that property by a search and seizure proscribed by the Fourth Amendment.

Nor will we on our own adopt the rule urged upon us. The Fourth Amendment does not call for the suppression or return of things obtained in violation of its terms. The exclusionary rule was judge-made, upon the belief that no other sanction could deter insolence in office. A majority of the States, including our own, were not persuaded to adopt that rule, Eleuteri v. Richman, 26 N. J. 506, 511 (1958). Doubts remain as to its wisdom. State v. Gerardo, 53 N. J. 261 (1969). We see no reason to go beyond that rule and to forfeit what is the State's property because of the manner whereby it obtained possession.

Such a doctrine would redound equally against the United States, for if an illegal search should bar a State from asserting its title, it should as well bar the United States from asserting its tax lien whenever the subject property is revealed by an infraction of the Constitution. And with the demise of the "silver platter" doctrine, Elkins v. United States, 364 U. S. 206, 4 L. ed. 2d 1669 (1960), both sovereigns would be barred no matter whose constabulary unlawfully unearthed the fund. We can see no value in that result. The beneficiary would be the guilty, and primarily parties to organized crime, who even now are too well insulated by current constitutional concepts. And so, here, the thesis the United States presses upon us would also defeat its claim to those moneys. The winner would be Mr. Moriarty.

The judgment is affirmed.

¹ The moneys thus found are involved in other proceedings in the United States District Court.

² In rejecting the contention that substantive due process prevented the forfeiture of innocent interests in property used illegally, the Supreme Court found some analogy to the ancient doctrine of deodand by which a personal chattel which was the immediate cause of the death of a human was forfeited. J. W. Goldsmith, Jr.-Grant Co. v. United States, 254 U. S. 505, 511, 65 L. ed. 376, 379 (1921).

³ Additional provisions added by amendment in 1951 do not aid the present inquiry and therefore need not be mentioned.

⁴ The title of the statute states expressly that it is a supplement. The statement of purpose annexed to the 1941 bill reads:

"Funds seized by law enforcement officials in gambling and gaming raids and arrests are customarily surrendered to the county treasurer. This act would provide a method to justly and lawfully dispose of such funds after the termination of the cases in which the seizure of said funds were involved, thus eliminating the present doubts, now existing, respecting the right to apply such funds to the use of the county, or to return such funds to the rightful owner, as the case may be."

⁵ We note that a forfeiture statute need not provide for procedural due process. In this State, the judiciary itself has the constitutional power to provide for the demands of procedural due process, whatever they may be. State v. American-Hawaiian Steamship Co., 29 N. J. Super. 116, 128-129 (Ch. Div. 1953.)

 

 

[68-1 USTC ¶9321]State of New Jersey, Plaintiff v. Joseph V. Moriarty, Defendant. Frank J. Farley, Treasurer of the County of Hudson, and County of Hudson, Petitioners v. $168,400.97, Respondent State of New Jersey, by Arthur J. Sills, Attorney General of New Jersey, Plaintiff v. Frank J. Farley, Treasurer of the County of Hudson, and County of Hudson, Defendants

Superior Court of N. J., Law Division, Hudson County, Docket No. L-32627-63, 409 F2d 904, 11/10/67

[1954 Code Sec. 6323]

Lien for taxes: Priorities: Gambling money forfeited to state.--A federal income tax lien was not enforceable against $168,400 seized by county officials as contraband from illegal gambling activities. Although the federal lien had been perfected the day before the money was seized, it was found that the gambler who had received the money had no property interest in it at the time the federal tax lien was perfected. He had been arrested for gambling activities some four months previously, had remained in state custody for three years thereafter, and had pleaded guilty to the charge of gambling. Under these circumstances, the money was contraband under state law and title to the same vested in the county at the time of the commission of the wrongful act of gambling. Since the gambler's activities ceased at the time of his arrest, title to the money vested in the county at least by that time and the money could not be reached by the federal tax lien perfected some four months later.

Isidore Glauberman, Sheldon A. Weiss, 921 Bergen Ave., Jersey City, N. J., William F. Kelly, Jr., Court House, Jersey City, N. J., for plaintiffs. David M. Satz, Jr., United States Attorney, Vincent J. Commissa, First Assistant United States Attorney, Federal Bldg., Newark, N. J., for defendants.

Opinion

[Issue]

ROSEN, Judge:

This is a proceeding on an order to show cause why moneys seized from a private garage in Jersey City, New Jersey and belonging to a convicted gambler should not be forfeited to the County of Hudson County as contraband. Pursuant to N. J. S 2A:152-9 the County seeks to obtain a formal decree or judgment declaring the moneys so seized forfeited to the County as property used in a criminal activity.

Before determining the issues involved in this controversy it is well to review the background of the previous litigation relating to the same subject matter.

History of the Proceedings

On February 13, 1964 the petitioners ¹ filed a complaint and affidavit in the Hudson County Court and pursuant to N. J. S. 2A:152-9 obtained an order to show cause returnable March 13, 1964 why $168,400.97 in currency seized on July 6, 1962 from a private garage in Jersey City, should not be forfeited to the County of Hudson as contraband because it was used by Joseph V. Moriarty, a convicted gambler, in his illegal gambling operations.

The complaint and affidavit alleged that: (1) on July 6, 1962 the sum of $168,400.97, as well as numerous articles of gambling paraphernalia, all belonging to Joseph V. Moriarty, were seized and taken from the said garage as a result of a raid conducted by the Prosecutor of Hudson County and members of the Jersey City Police Department; (2) the Hudson County Grand Jury thereafter indicted Moriarty for violating the State's gambling laws; 3) on June 3, 1963, Moriarty pleaded guilty to a count of that indictment charging him with violating N. J. S. 2A:121-3(b) (possession of lottery slips); (4) more than six months had elapsed from the entry of the plea to the commencement of the proceeding; (5) the subject currency was used by Moriarty in connection with his illegal gambling operation and was the proceeds thereof; and (6) that claims had been asserted to all or part of the moneys by the District Director of Internal Revenue, Mr. E. Richard Freeman (the owner of the garage at which the raid was conducted); and the City of Jersey City.

On February 14, 1964, the order to show cause, affidavit and complaint were duly served upon Moriarty by personal service at the State Prison in Trenton. The other claimants were served by certified mail, in accordance with the order to show cause.

Before the return date of said order to show cause, the State of New Jersey, by the Attorney General, filed an action against petitioners in the Superior Court, Chancery Division, asserting that the State was entitled to the money as "unclaimed" property. By order dated March 9, 1964, these two actions were consolidated. The order provided that the matter was to be heard in the Superior Court, Law Division.

Before the matter came on for hearing, the District Director filed a petition removing the consolidated actions to the United States District Court for the District of New Jersey. The District Director then filed an answer and a counterclaim in which judgment was sought that the moneys be surrendered to the United States in "response" to a levy made on May 29, 1963 pursuant to a lien arising on May 10, 1963 against the property of Moriarty for unpaid income taxes and interest. Thereafter, petitioners applied to the Federal District Court for an order remanding the proceedings to the state court on the grounds that the action was improvidently removed in the first place. By order dated April 5, 1967, petitioners' motion was granted and the proceedings were remanded to the Superior Court, Law Division.

At the pretrial conference, the court was advised that the City of Jersey City and Mr. Freeman, both of whom had based their claims on the contention that the money was "unclaimed," had voluntarily withdrawn from the case. At the hearing the State of New Jersey withdrew its claim that it was entitled to custody of the money under the Custodial Escheat Act, N. J. S. 2A:37-29, et seq., and, alternatively, that it had become the owner of the property under the common law doctrine of bona vacantia. Remaining in the litigation are the petitioners and the District Director of Internal Revenue and United States of America.

Findings of Fact

At or before the time for hearing, petitioners Joseph Stapleton, Treasurer of Hudson County and the County of Hudson, and claimants, the District Director of Internal Revenue and the United States of America, by their respective counsel, stipulated and agreed to many of the facts. In addition thereto, the court received and marked certain exhibits in evidence and heard testimony of several witnesses in open court. Based upon the stipulation, the exhibits, and the testimony adduced at the hearing, the court's findings of fact are as follows:

[Gambler Arrested]

1. Joseph V. Moriarty has a criminal record dating from the 1930's pertaining to his violation of the gambling laws of the State of New Jersey. By common repute, he was the kingpin of the "numbers racket" in and around Jersey City. ²

2. On July 28, 1960, Joseph V. Moriarty was arrested and subsequently indicted by the Hudson County Grand Jury for possession of lottery slips (Indictment No. 313-61). On January 16, 1962, he pleaded guilty to that indictment, and bail was continued pending sentencing.

3. On February 20, 1962, while he was free on bail, he was again arrested and charged with possession of lottery slips. His bail was immediately revoked and he was committed to the County Jail.

4. On March 2, 1962, he was sentenced to a two-to-three year term in the State Prison, pursuant to his aforesaid plea of guilty to Indictment No. 313-61.

5. Moriarty remained in custody continuously from February 20, 1962, throughout the rest of 1962, and for a considerable time thereafter. He was in the State's custody until March 12, 1964, when he was released to the United States Marshal and was in Federal custody until January 6, 1965.

[Money Found and Seized]

6. On July 3, 1962, several workmen who were renovating private garages at No. 127-131 Oxford Avenue in Jersey City discovered in an old car, the sum of $2,438,110 in currency, numerous articles of gambling paraphernalia as well as letters, papers, etc., belonging to Joseph V. Moriarty. The said currency was turned over to the federal authorities.

7. Thereafter, on July 6, 1962, members of the Jersey City Police Department forcibly entered garage No. 56 at No. 47-61 Oxford Avenue and recovered numerous shopping bags and a cardboard box containing lottery slips, other gambling paraphernalia, and $168,400.96 in currency, all of which was taken into custody as gambling moneys and equipment as shown by the return of a search warrant issued by the Assignment Judge of Hudson County.

8. Said garage No. 56 is in close proximity to the garage in which the $2,438,110 had been found on July 3, 1962, and the law enforcement officials (members of the Jersey City Police Department) discovered the existence of the above described gambling paraphernalia, including money, in garage No. 56 on July 6, 1962, as a direct result of a general investigation of the area triggered by the July 3, 1962 discovery.

9. On July 12, 1962, Joseph V. Moriarty was indicted by the Hudson County Grand Jury on a multi-count indictment charging him with violating the State's gambling laws (Indictment No. 999-61).

10. On June 3, 1963, Joseph V. Moriarty pleaded guilty to the 43rd count of that indictment, charging him with violation of N. J. S. 2A:121-3(b) (possession of lottery slips) on divers dates from December 14, 1961 to July 6, 1962, inclusive. The lottery slips confiscated from the garage on July 6, 1962 reflected bets taken by Joseph V. Moriarty on various dates between December 14, 1961 and February 19, 1962, inclusive.

From February 20, 1962 Joseph V. Moriarty was continuously in official custody, and his illegal gambling operation ceased on February 19, 1962.

11. Petitioners commenced the present action more than six months after the entry of the record of conviction pursuant to Joseph V. Moriarty's plea of guilty to the 43rd count of Indictment No. 999-61 on June 3, 1963.

[Government Tax Lien]

12. On July 5, 1962, the District Director of Internal Revenue made a jeopardy assessment against Joseph V. Moriarty for income taxes and interest due and owing from Moriarty in the amount of $3,422,792.66. On July 9, 1962 at 2:10 P.M., the District Director of Internal Revenue caused to be served on Hon. Lawrence A. Whipple, the then Prosecutor of Hudson County, a notice of levy on the property and rights to the property belonging to the taxpayer (Moriarty), pursuant to the aforesaid assessment.

The Prosecutor, by letter addressed to the District Director of Internal Revenue dated September 17, 1962, stated that "The actual funds belonging to above named [Moriarty] were never in my possession."

13. On the evening of July 6, 1962, pursuant to the instructions of the County Prosecutor, the aforesaid sum of $168,400.97 was placed in a safe deposit box at the branch office of the Hudson County National Bank located in the City of Bayonne, County of Hudson, for safekeeping until Monday, July 9, 1962 when it could be transferred to a deposit account in the branch office of said bank located at 40 Journal Square, Jersey City, County of Hudson.

14. On July 9, 1962, the aforesaid currency was transported, under the custody of the police officials, from the Bayonne branch of said bank to the branch office at 40 Journal Square, Jersey City. On July 10, 1962, said moneys were placed in a deposit account in said bank in the name of "Jersey City Police Department, William V. McLaughlin, Director of Police, Austin J. Conley, Chief of Police, as agent," bearing account No. 87312.

15. On April 22, 1963, the Hudson County Treasurer and the Hudson County Prosecutor filed an action in the Superior Court of New Jersey, Law Division, Hudson County, wherein they sought judgment ordering defendants, William V. McLaughlin and Austin J. Conley to instruct the defendant, Hudson County National Bank, to change the designation of the depositor of said account No. 87312 to "Frank J. Farley, Treasurer of Hudson County." Thereafter, defendants, William V. McLaughlin and Austin J. Conley, filed an answer wherein they denied that a "raid" was conducted and that the moneys were "seized" and alleged that the said moneys were "found." Attached to said Answer was an Affidavit executed by said Austin J. Conley, as Chief of Police of Jersey City. Thereafter, on May 1, 1963 a Stipulation of Dismissal without prejudice was filed in said action.

16. By letter dated July 10, 1963, said William V. McLaughlin and Austin J. Conley instructed the Hudson County National Bank to change the designation of the depositor of said account No. 87312 to "Frank J. Farley, Treasurer of the County of Hudson."

17. At the Grand Jury proceedings which resulted in the aforesaid Indictment No. 999-61, the subject currency was not exhibited to the Grand Jury, the currency being at that time in a vault in the Journal Square office of the Hudson County National Bank, or deposited in the account above referred to (Finding #14)

18. Herbert Zuckerman, Esq., prepared and filed on behalf of Joseph V. Moriarty an income tax return for the year 1962. In said return Mr. Moriarty reported $169,000. as his income for that year.

19. On or about October 20, 1964 Joseph V. Moriarty was served in prison by the District Director with a notice of deficiency assessment against him in the amount of $8,862,678.95 on account of non-payment of the 10% excise tax on gross wagers imposed by 26 U. S. C. Sec. 4401 together with the assessment and supporting schedules. The said notice asserted that Joseph V. Moriarty had been accepting wagers continuously from January 1, 1956 through February 19, 1962 inclusive.

20. On or about October 20, 1964 the District Director of Internal Revenue in writing advised Joseph V. Moriarty of a notice of deficiency assessment against him for non-payment of Federal Occupational Taxes on gambling, imposed under 26 U. S. C. Secs. 4411 and 4412, for the periods January 1, 1956 to June 30, 1962 inclusive.

21. On September 6, 1962 a levy for the sum of $771,802.55 was served by the District Director of Internal Revenue Service on the Hudson County National Bank, the Jersey City Police Department, Chief of Police Austin J. Conley, Director William V. McLaughlin, which levy represented a claimed tax obligation of Joseph V. Moriarty. On July 9, 1962 a notice of this levy had been served on the Prosecutor. (Finding #12)

Conclusions of Law

[Government Lien]

The Internal Revenue Service contends that the assessment of July 5, 1962 operates as a lien upon all of Moriarty's property, and consequently the Moriarty gambling money seized on July 6, 1962 by the local enforcement authorities was burdened with that lien.

The United States claims a valid lien for taxes pursuant to 26 U. S. C. sec. 6321 which provides:

"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."

The period of that lien is set forth in 26 U. S. C. sec. 6322:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time."

The lien attaches to the taxpayer's property interests at the time the assessment list is received by the district collector. U. S. v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3rd Cir. 1964), Spagnuolo v. Bonnet, 16 N. J. 546, 555 (1954).

The Supreme Court has sustained the priority of United States tax liens over liens under state law where the state lien may be viewed as inchoate when the tax lien is perfected. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Liverpool & London & Globe Insurance Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United States v. White Bear Brewing Co. [56-1 USTC ¶9440], 350 U. S. 1010 (1956); United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950).

[Issue]

Based upon the authorities cited, the question to be resolved is whether the gambling moneys belonged to Moriarty at the time the government perfected its lien claim. Stated another way, does the District Director have the right to enforce a federal income tax lien against gambling moneys which are contraband under state law?

It is well settled that the government's rights can arise no higher than or extend beyond the taxpayer's interest or property rights in the property sought to be levied upon. Central Surety & Insurance Co. v. Martin [58-2 USTC ¶9942], 164 F. Supp. 923, 927 (D. N. J. 1958), aff'd. [59-2 USTC ¶9736], 272 F. 2d 231, 234 (3d Cir. 1959); United States v. Winnett [48-1 USTC ¶9115], 165 F. 2d 149, 151 (9th Cir. 1947); Spagnuolo v. Bonnet, supra (16 N. J. at 560); Bankers Title & Abstract Co. v. Ferber Co. [54-2 USTC ¶9459], 15 N. J. 433, 441 (1954). A fortiori, when the District Director levies upon property or rights to property which do not belong to the delinquent taxpayer, the levy is void. Raffaele v. Granger [52-1 USTC ¶9321], 196 F. 2d 620 (3d Cir. 1952); Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925, 929 (9th Cir. 1957). The crucial inquiry, then, is whether Moriarty had any property rights in the subject currency to which the government's tax lien could attach.

[State Law Controlling]

In the application of a federal revenue act state law controls in determining the nature of the legal interest which the taxpayer has in the property. The United States Supreme Court in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-3 (1960) held that:

"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' or '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 long 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.' Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82, 84 L. ed 585, 589, 60 S. Ct. 424. Thus, as we held only two Terms ago, Section 3670 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . .' United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55, 2 L. ed. 2d 1135, 1140, 78 S. Ct. 1054."

There is a distinction between a common law or judicial forfeiture and a legislative or statutory forfeiture. A common law or judicial forfeiture does not operate or take effect until, by a proper judgment in a suit instituted for that purpose, the rights of the state or government have been established, but in a case of a statutory or legislative forfeiture, the forfeiture takes place at the commission of the offense. In the case of a legislative or statutory forfeiture the rights of the state, after judicial determination, date back to the time of the offense. There is a further distinction between the two types of forfeitures. In the common law type of forfeiture the actions are in personam for a money judgment against the defendant, while suits upon the legislative forfeitures are in rem, not against the owner or possessor of the property but against the property itself, which is treated as the real offender. In either event, the primary object of the proceeding is to obtain judicial declaration of the forfeiture. The common law forfeiture results in a money judgment against a defendant, while the legislative forfeiture results in a decree confirming title. In either situation, however, judicial proceedings or the special statutory equivalent thereof are essential to provide the due process without which the original owner cannot be deprived of his property. People v. Broad, 12 P. 2d 941, 942 (S. Ct. 1932) cert. denied 287 U. S. 661, People v. Grant, 127 P. 2d 19 (D. C. A. 1942), City of Bakersfield v. Miller, 46 Cal. Rptr. 661, 676 (D. C. A. 1965). In United States v. Stowell, 133 U. S. 1, 16-17 (1890) the court stated:

"By the settled doctrine of this court, whenever a statute enacts that upon the commission of a certain act specific property used in or connected with that act shall be forfeited, the forfeiture takes effect immediately upon the commission of the act; the right to the property then vests in the United States, although their title is not perfected until judicial condemnation; the forfeiture constitutes a statutory transfer of the right to the United States at the time the offense is committed; and the condemnation, when obtained, relates back to that time, and avoids all intermediate sales and alienations, even to purchasers in good faith." (Emphasis supplied)

See also: De Bonis v. United States, 103 F. Supp. 123, 126 (D. C. Pa. 1952); United States v. One 6.5 mm. Mannlicher-Carcano Military Rifle, Model 91-38, Serial No. C2766, with Appurtenances, and One .38 Special S&W Victory Model Revolver, Serial No. V510210, with Appurtenances, 250 F. Supp. 410, 415 (D. C. N. D. Tex. 1966); 23 Am. Jur. Forfeitures Sec. 9 p. 607.

[Title to Contraband]

The authority for seizure of gambling contraband in New Jersey is N. J. S. 2A:152-6. Although this statute does not expressly refer to money, it has been held that gambling moneys are subject to seizure and forfeiture under the statute. Spagnuolo v. Bonnet, 16 N. J. 546, 556-557 (1954), State v. Link, 14 N. J. 446, 452 1954), Kenny v. Wachenfeld, 14 N. J. Misc. 322 (Sup. Ct. 1936). The statute was enacted to discourage and prevent unlawful gambling. State v. Link, supra, 14 N. J. at p. 453.

Statutes enacted to prevent unlawful criminal acts should be considered as enacted for the public good and to suppress a public wrong and, therefore, although they impose penalties or forfeitures should not be construed, like penal laws generally, strictly in favor of defendant, but they are to be fairly and reasonably construed, so as to carry out the intention of the legislature. United States v. Stowell, 133 U. S. supra at p. 12.

[Spagnuolo Case]

Petitioners rely upon Spagnuolo v. Bonnet, supra, as authority for its thesis that the gambling moneys seized on July 6, 1962 are contraband and, therefore, title to the same was vested in the County of Hudson not later than February 19, 1962 more than four months before the government asserted its lien.

The facts in Spagnuolo reveal that, on March 2, 1951, the police confiscated $50,000 in cash from a safe in the bedroom of the Newark residence of Edward Spagnuolo, whom they suspected of running a lottery. They also confiscated number slips and other gambling paraphernalia found elsewhere in the bedroom. Spagnuolo was not present during the raid. However, he was subsequently arrested and indicted by the Essex County Grand Jury for violating R. S. 2:135-3 (now N. J. S. 2A:112-3). He pleaded non vult and was sentenced to prison on June 20, 1951. In the interim, the Internal Revenue Service perfected a lien for income taxes against the gambler. A jeopardy assessment against Spagnuolo was made on May 20, 1951 and on the following day a notice of lien and levy was served on the Essex County Sheriff, to whom the money had been turned over pending Spagnuolo's arrest and indictment.

Thereafter Spagnuolo's mother sued the County Sheriff, claiming that the money belonged to her rather than to the gambler. The Sheriff filed a counterclaim for interpleader, naming the gambler, the County Treasurer and the United States of America as parties interested in the fund in his possession.

The substantive claims of the County of Essex and the United States were asserted by way of answer and counterclaim to the interpleader. The County asserted that the money had been forfeited to it as gambling contraband, that the forfeiture took effect at the commission of the unlawful act, and, therefore, the United States' subsequent attempt to attach a tax lien to the fund was a nullity. The United States, on the other hand, asserted that its lien was entitled to "priority" because the County had nothing more than an "inchoate lien" until the entry of an order of forfeiture, or a least until Spagnuolo's conviction pursuant to his plea of non vult.

Edward Spagnuolo, the gambler, failed to answer or otherwise appear, and judgment by default was entered against him. After a trial, the court entered judgment awarding the fund to the County, holding: (1) that the money belonged to the gambler, not his mother; and (2) at the time the Government's tax lien arose, title to the money had already been forfeited to the County.

The mother and the United States appealed. The Supreme Court affirmed the judgment.

[State Supreme Court Decision]

As to the appeal of the United States, the Supreme Court first observed that seizure and confiscation of money used in connection with a gambling operation is authorized by and made pursuant to N. J. S. 2A:152-6, the "clear intention" of which is to provide for an "absolute seizure and immediate confiscation [of gambling paraphernalia, including money], together with a declaration that property so seized shall be considered contraband." (16 N. J. at 556). The Court then noted that N. J. S. 2A:152-7 through 11 L. 1941, c. 70) was enacted as a supplement to the "basic" statute (N. J. S. 2A:152-6) and the purpose of the supplement was merely to establish a proceeding in which, after conviction or acquittal of the offender, a claim of property to contraband moneys could be litigated in a summary manner. The Court held that the language of the supplement could not be intended "to have the effect of leaving the legal title to such money in the gambler or player," the intention of the Legislature being merely to "establish a rule of evidence, by a prima facie presumption to be used in the trial of any claim of property" to the funds in question. (Id., at 558-9).

The Court rejected the Government's contention that the County had nothing more than an "inchoate lien" prior to conviction, or prior to the entry of judgment of forfeiture, stating (16 N. J. at pp. 559-560):

"In the trial below the owner, by his default admitted that as far as his title and possession was concerned the money was contraband. . . . The trial court, on the proofs offered, declared the money to be contraband and entered the confirming judgment of forfeiture under the statute. He had no other alternative. Where a forfeiture is absolute under the statute, as it is here, the judgment of condemnation or forfeiture when entered relates back to the commission of the wrongful act and takes date from the wrongful acts not from the date of sentence or decree (citations omitted). (Emphasis supplied)

"The established rule is that the forfeiture becomes absolute at the commission of the prohibited acts and the title from that moment vests in the state or government in all cases where the statute in terms denounces the forfeiture of the property as a penalty for a violation of the law, . . . and that in all such cases it is not in the power of the offender or the former owner to defeat the forfeiture by any subsequent transfer of the property, even as to a bona fide purchaser for value, without notice of the wrongful acts done or committed by the former owner. The forfeiture is considered as directed against the thing itself, not merely the possessor's interest in it (citation omitted).

"Therefore, we must conclude that at the time the jeopardy assessment was attempted to be levied against the particular monies in this case, seized under the circumstances in which they were, title to the property was then in the County of Essex. At the most the federal lien could only attach to Edward Spagnuolo's inchoate right to sue for the return of the funds in the event of his acquittal and not to the confiscated funds themselves. The federal lien can rise no higher than the rights of the taxpayer (citation omitted).

* * *

"The title and possession of the County of Essex was not that of a creditor or a judgment creditor but a title and possession acquired by an exercise of sovereign power . . ."

[Application of Spagnuolo Case]

The District Director urges this court to distinguish the holding in Spagnuolo. It is true that in Spagnuolo the seizure of the gambling moneys occurred prior to the government's perfected lien, whereas in this case the lien was perfected on July 5, 1962 and the seizure took place on July 6, 1962. This factual distinction does not in any way impair the validity or application of the substantive law recognized by all authorities including Spagnuolo that the purpose of a forfeiture proceeding is to perfect the sovereign's title to the seized contraband. The sovereign's right to title and possession is determined by the absolute forfeiture provided by statute.

[Statutory Forfeiture]

N. J. S. 2A:152-6 creates a statutory or legislative forfeiture and not a common law or judicial forfeiture. It proceeds against the property and not the individual. An illustration of a common law forfeiture may be found in N. J. S. 1:3-10, which provides that:

"Failure of county treasurers and township clerks to distribute laws; forfeiture; recovery

A county treasurer or township clerk failing to perform any of the duties required of him by sections 1:3-8 and 1:3-9 of this title shall, for each offense, forfeit the sum of ten dollars, recoverable, for the use of the county, by an action at law in any court of competent jurisdiction, by the director of the board of chosen freeholders of the county wherein the treasurer or clerk may reside."

Title to the money under the above statute does not pass to the County until there is a judicial determination of the forfeiture. The statute does not automatically create the forfeiture. N. J. S. 2A:152-6 as judicially determined provides for an absolute forfeiture which takes effect from the date of the commission of the wrongful act. At the time of the wrongful acts (not later than February 19, 1962) the gambling moneys vested eo instanti in the County of Hudson and Moriarty had no property interest in the currency.

In light of all the evidence the court determines that the sum of $168,400.97 is the product of gambling and was used by Moriarty in connection with his illegal numbers operation; that the said currency was earmarked or segregated for gambling purposes. These conclusions are predicated upon the following:

1. Moriarty's prior criminal record.

2. As a result of a valid search warrant that the subject currency together with lottery slips and other gambling paraphernalia were found in the garage at 47-61 Oxford Avenue, Jersey City.

3. Moriarty's plea of guilty to Indictment # 999-61.

4. Moriarty received the money and held it for use in connection with his illegal numbers operation.

5. Moriarty by his default in this case has admitted "as far as his title and possession was concerned the money was contraband." (Spagnuolo v. Bonnet, supra, 16 N. J. at p. 559)

The return endorsed on the search warrant, (July 6, 1962) discloses that the money was taken from the garage by local law enforcement officials and confiscated as gambling contraband. On said date Moriarty was in official custody and incarcerated in the New Jersey State Prison. The court concludes that the requirements of N. J. S. 2A:152-7 has been fulfilled in that the subject currency was seized in connection with an arrest for violation of the gambling laws of this State. State v. Link, supra, 14 N. J. at pp. 452-454.

[Jurisdiction Question]

The District Director and the Government further contend that this court lacks jurisdiction to hear and determine this in rem forfeiture action. The touchstone of the contention is that the court has no actual or constructive possession of the res.

Chapter 70 Laws 1941 (N. J. S. 2A:152-7 to 11) is entitled "An act concerning criminal procedure, and supplementing subtitle fourteen of Title 2 of the Revised Statutes." As previously noted the substantive authority for seizure of gambling contraband is N. J. S. 2A:152-6 which had its genesis in L. 1898, c. 237, sec. 168, p. 923. It is clear that in adopting Chapter 70 of the Laws of 1941 that the Legislature intended to establish a procedural system that would ensure and guarantee due process. Thus viewed, it must be concluded that strict conformity with a procedural statute is not a condition to the validity of the forfeiture or to this court's jurisdiction to render an in rem judgment affecting title to the subject currency.

The facts disclose that the res does reside within the jurisdiction of this court. The subject currency has been determined to be contraband and seized in connection with an arrest by law enforcement authorities. On the evening of July 6, 1962 (the same date the moneys were seized), pursuant to the instructions of the County Prosecutor, the aforesaid sum of $168,400.97 was placed in a safe deposit box at the Hudson County National Bank in the City of Bayonne, County of Hudson for safekeeping until Monday July 9, 1962. On July 9, 1962 the subject currency was transported under the custody of the police officials from the Bayonne branch of said bank to the branch office at Journal Square. On July 10, 1962 the moneys were placed in a savings account is said bank in the name of the Jersey City Police Department, William V. McLaughlin, Director of Police, Austin J. Conley, Chief of Police, as agent.

On May 1, 1963 a stipulation of dismissal without prejudice was filed in the suit wherein the county officials sought judgment directing Jersey City officials to instruct the Hudson County National Bank to change the designation in the bank account to "Frank J. Farley, Treasurer of Hudson County". By letter dated July 10, 1963 the Jersey City Police officials instructed the Hudson County National Bank to change the designation of the depositor to "Frank J. Farley, Treasurer of the County of Hudson". The savings account passbook was physically delivered to the county treasurer. The passbook was marked in evidence and is in the actual possession of the court. The only reason this account was not transferred from William V. McLaughlin and Austin J. Conley to Mr. Farley was due to the notice of Moriarty's tax assessment served by the District Director on the Hudson County National Bank. The moneys, therefore, have been subject to the custody or control of law enforcement officials from July 6, 1962 until the filing of the complaint.

[Abandonment Issue]

The Government's argument that the letter dated September 17, 1962 from the Prosecutor to the District Director constitutes an "abandonment of the seizure" is without merit. In that letter the Prosecutor stated: "The actual funds belonging to above named [Moriarty] were never in my possession". This was not a waiver or abandonment of any supervision or duty which was required by law to be exercised by the Prosecutor. It was a statement of a known fact. On the contrary, on July 12, 1962 the Prosecutor wrote to the County Counsel Law Department directing their attention to the fact that the Hudson County Grand Jury on said date returned indictments against Joseph V. Moriarty for engaging in the lottery business. He also stated: "the above amount of money [$168,400.97] was seized as contraband by this office and members of the Jersey City Police Department" * * * [I]n the meantime, will you please advise the County Treasurer to take the necessary steps to open an account in the above named bank [Hudson County National Bank] * * * and leave it on deposit in said institution until the court decides what should be done with it". This letter (July 12, 1962) read in connection with the September 17, 1962 letter demonstrates that the government's position is erroneous. The acts of the county officials did not release the subject currency to the control and possession of the city officials.

[Second Jurisdiction Question]

The District Director and the government take the position that the court lacks jurisdiction because the bank is not a party to the action and that the court cannot properly order the bank to act with respect to the savings account. The court has not been requested nor will it order the bank to do anything. From the evidence it is apparent that the bank will comply with the request of William V. McLaughlin and Austin J. Conley, Agent, to transfer the savings account to the County Treasurer of the County of Hudson when this litigation is terminated. The court concludes that it has jurisdiction to hear and determine this matter in accordance with the provision of N. J. S. 2A:152-9.

[Final Jurisdiction Question]

The District Director's final thrust that this court has no jurisdiction to decide matters "affecting United States' tax lien," was rejected by the Federal District Court in holding that the proceedings by remanded to this Court. This contention is also contrary to the holding in United States v. Bleasby [58-2 USTC ¶9631], 257 F. 2d 278 (3d Cir. 1958). That case was the aftermath of State v. Link supra. After Link's conviction the County brought a forfeiture action under N. J. S. 2A:152-9. The District Director, having asserted a lien against the seized currency for Link's delinquent income taxes, was given notice of the proceedings, but chose not to participate. After the Supreme Court's affirmance of the Superior Court's judgment declaring the money forfeited to the County, the United States of America instituted an action against the County in the Federal District Court to enforce its lien. The District Court held in favor of the Government. On appeal, the Court of Appeals reversed, holding (1) that the State proceeding had been in rem; and (2) that, therefore, it was res judicata, in regard to the Government's claim and could not be collaterally attacked in a later independent suit. The Court stated (257 F. 2d at p. 281):

"In brief, the United States, as claimant of a tax lien on a fund, has had formal notice of a proceeding in a court with jurisdiction over that fund, to determine title to the res. Indeed, the United States was admonished to show cause why the fund should not be forfeited to the state. And, it is familiar and normal procedure for the United States to undertake to vindicate its tax liens in suits instituted in state courts by some other claimants of rights in the property." (Emphasis supplied)

Although admittedly dicta it is significant that the Court of Appeals expressed doubt as to the position taken by the United States and the District Director in a factual setting analogous to the instant case.

". . . [T]his case presents the special and unusual situation of the United States attempting to attach a tax lien to property actually in possession of the state after its seizure as contraband subject to forfeiture to the state. True, after seizure it still remained for the state to pursue the prescribed procedure for obtaining a formal decree of forfeiture. But this does not alter the fact that the United States has tried to impose a lien on property after it has passed into the actual possession of another government under sovereign claim of right to keep it in furtherance of the policy of its criminal laws. Thus, the United States is asserting an extraordinary power greater than and different from that involved in the cases above cited or any others upon which the United States relies. But we do not have to resolve the very real difficulties which this question presents, because this case can, and we think should be decided on another ground." (pp. 279-280).

Conclusion

For the foregoing reasons the court determines that the sum of $168,400.97 be forfeited to the sole use and gain of the County of Hudson.

¹ Subsequent to the commencement of this suit Frank J. Farley, Treasurer of the County of Hudson retired. Joseph Stapleton the present petitioner succeeded Mr. Farley as Treasurer of Hudson County.

² In United States v. Moriarty [64-1 USTC ¶15,548], 327 F. 2d 345 (3d Cir. 1964), Moriarty, in appealing a conviction for engaging in the business of accepting wagers without having paid the federal occupational tax, challenged the sufficiency of the affidavit upon which the search warrant was issued. In holding that there was probable cause, the Court of Appeals relied in part on Moriarty's prior criminal record showing him to be a notorious numbers operator, the Court stating that Moriarty had a "real background in the field" (p. 347), and that he was "old in the numbers racket" (p. 348).

 

 

[55-1 USTC ¶9192]Margaret B. Spagnuolo, Plaintiff-Appellant v. Joseph A. Bonnet, formerly Sheriff of Essex County, Neil G. Duffy, Sheriff of Essex County, John E. Cash, Treasurer of the County of Essex, and County of Essex, Defendants-Respondents, and United States of America, Intervenor-Appellant

In the Supreme Court of New Jersey, No. A 41, September Term, 1954, 109 A2d 623, November 29, 1954

On appeal from the Essex County Court, Law Division.

[1939 Code Sec. 3670--same as 1954 Code Sec. 6321]

Lien for taxes: Validity against third parties: Money seized as contraband.--The Government had no lien on the money seized in the arrest of taxpayer on charges of operating a lottery, since under the State law the money became contraband and its forfeiture absolute on the date of seizure which preceded the Collector's receipt of the assessment list. The claim of taxpayer's mother that the money belonged to her was dismissed for lack of proof.  Affirming the decision of the County Court, reported at 54-2 USTC ¶9533.

Walter D. Van Riper, 744 Broad Street, Newark, N. J., Van Riper & Belmont, for the plaintiff-appellant. George J. Rossi, Assistant United States Attorney, Federal Building, Newark, N. J., Raymond Del Tufo, Jr., United States Attorney, H. Brian Holland, Assistant Attorney General, Andrew D. Sharpe and F. A. Michels, Special Assistants to the Attorney General, for the intervenor-appellant. Marshall Crowley, 810 Broad Street, Newark, N. J., for the respondents.

OLIPHANT, Judge:

This case concerns the title to money seized by police in a raid on the headquarters of a lottery operation.

As the result of incriminating information obtained police officers on March 2, 1951, raided the home of one A. Edward Spagnuolo at 536 South 20th Street in Newark. After being admitted to the house by Mrs. Spagnuolo the officers were led to the bedroom occupied by herself and husband. In a dresser drawer were found lists of numbers sold, result slips, a list of agents, names of players and bill wrappers. In a small iron safe, in a corner of the bedroom, were found a list of some agents, a list of numbers sold and result slips. There was a small locked compartment in the safe for which Mrs. Spagnuolo produced the key. Upon it being opened $50,000 in cash was found, removed and taken to the office of the Sheriff of Essex County.

Upon being arrested Spagnuolo admitted that he, with others, had for sometime conducted a lottery. He was indicted on two counts for violation of R. S. 2:135-3 to which he pleaded "non-vult" and on June 20, 1951, was sentenced to the State Prison for a term of one to two years.

On March 19, 1951, the Commissioner of Internal Revenue made a jeopardy assessment against A. Edward Spagnuolo of additional income taxes in the amount of $85,664.04 with interest and penalty. On March 21, 1951, he gave notice of the assessment to Spagnuolo, filed a Notice of Lien in the Essex County Register of Deed's Office and served a Notice of Levy together with a Warrant of Distraint and Notice of Tax Lien on the Sheriff of Essex County who had possession of the seized $50,000. 26 U. S. C., sec. 3670, 3671, 3672.

Because of the levy and distraint by the Collector the Sheriff was compelled to retain the $50,000 in his possession although the usual procedure would have been to deposit the money with the County Treasurer subject to the supervision of the Prosecutor. R. S. 2:178-7.2, now N. J. S. 2A:152-8.

On January 28, 1952, the plaintiff here, who is the mother of A. Edward Spagnuolo, instituted suit against the Sheriff of Essex County claiming the $50,000 as her property. The Sheriff, not claiming the money in his own right, filed a counterclaim for interpleader and obtained an order adding as additional defendants the United States of America, the Collector of Internal Revenue, A. Edward Spagnuolo, Lillian Spagnuolo, his wife, John E. Cash, Treasurer of Essex County, and the County of Essex. Upon motion there was a dismissal as to the United States and the Collector and by the same order the United States was granted leave to intervene to assert its alleged lien, and thereupon it filed a petition in intervention by which it sought a judgment that the $50,000 was the property of A. Edward Spagnuolo on and after March 21, 1951, the date of its alleged lien for income taxes, and subject thereto.

Spagnuolo and his wife Lillian failed to answer the counterclaim for interpleader and at the time of the pre-trial conference judgment by default was entered against them.

Under the pre-trial order the factual issues to be tried were limited to the following: (1) Was the plaintiff the owner of the currency in question; (2) Whether or not the plaintiff is the owner of the currency, was it earmarked and segregated and being held as part of a gambling operation, namely, the lottery at 536 South 20th Street, Newark; (3) Whether the fund of $50,000 was the property of A. Edward Spagnuolo against whom the United States asserts a claim for unpaid income taxes; and the determination of the question of priority between the United States and the County of Essex, if it be determined that the money was the property of A. Edward Spagnuolo.

By consent of counsel the case [54-2 USTC ¶9533] was tried before the court without a jury and Judge Daniel A. Brennan, after hearing the testimony, adjudged that the $50,000 was not the property of the plaintiff but that of A. Edward Spagnuolo and that that money was employed by him in his gambling operations and was as such contraband of the law; that the money was received and held by Spagnuolo in those gambling operations, earmarked and segregated for gambling purposes; that it was contraband when seized and still remained contraband at the precise time it was seized and its legal status never changed. The judgment provided that the money be forfeited to the County of Essex and be paid over to the Treasure of that County. The judgment further sets forth that as of March 2, 1951, the date of the seizure of the money, the United States had no lien thereon and the relief sought by the United States was therefore denied.

The plaintiff and the United States of America appealed from the judgment entered in the Essex County Court to the Appellate Division of the Superior Court and before the case was heard there we certified it on our own motion. Rule 1:10-1(a).

[Appeal by Taxpayer's Mother]

We deal first with the appeal of the plaintiff Margaret B. Spagnuolo.

The pertinent statutory provisions relating to money seized in connection with an arrest for violation of a gambling law of this state are found in N. J. S. 2A:152-6 to 11 inclusive.

The trial court found that the $50,000 was not the property of the plaintiff but that of her son Edward and with that finding of fact, we are in entire accord. She had the burden of proof of overcoming the presumption of ownership in Edward by reason of his possession of the money. The possessor of personal property is prima facie the owner of it. Bordine v. Combs, 15 N. J. L. 412 (Sup. Ct. 1836); City Bank of Bayonne v. O'Mara, 88 N. J. L. 499 (Sup. Ct. 1916); Redmond v. N. J. Historical Society, 132 N. J. Eq. 464 (E. & A. 1942).

We need not make a complete analysis of the testimony adduced on behalf of the plaintiff but content ourselves with the observation that the story relating to the hoarding of this large sum of money by the plaintiff and its transfer by her to her daughter-in-law in a paper bag without the amount of it being stated and without it being even counted by either Edward or his wife was wholly improbable, unbelievable and as stated below "implausible to the point of fantasy".

The evidence in the case comes largely from the mouths of the Spagnuolos but "testimony to be believed must not only proceed from the mouth of a credible witness but must be credible in itself. It must be such as the common experience and observation of mankind can approve as probable in the circumstances * * *". In re Perrone, 5 N. J. 514, 521 (1950). When a finding of fact is amply supported by the evidence it will not be disturbed on appeal.

If the plaintiff was not the owner of the $50,000, as we hold, then she has no standing to complain that there was error below because it was not proven that the money in question was "earmarked and segregated as part of a gambling operation". Edward, who was found to be the owner, alone could raise this issue and judgment by his own default had been entered against him. The question is therefore now moot. This likewise question is therefore now moot. This likewise that it was "the duty of the defendants to establish by a preponderance of the believable evidence that the money was segregated as an integral part of the gambling operation". Both of these questions were only material if the plaintiff was the owner of the money.

[Between County and U. S.]

This brings us then to the problem of priority as between the County of Essex and the United States of America.

Title 26 U. S. Code, sec. 3670 (26 U. S. C. 1952 ed., sec. 3670) 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, penalty, additional amount, or addition to such tax, 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".

and Section 3671 provides:

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time".

Accordingly the lien of the Federal Government became effective March 20, 1951, the date on which the assessment list was received by the Collector of Internal Revenue.

The money was seized by the Sheriff on March 2, 1951, eighteen days prior to the effective date of the Government's lien.

The contention of the Government is that the County of Essex had nothing more than an inchoate lien or potential contingent property right in the money until the order of forfeiture which was dated May 5, 1954; that at most any right of the County to the money was purely contingent at least until June 20, 1951, the date of Spagnuolo's conviction.

The position of the County is that the money was contraband at the time of its seizure, prior to the effective date of the Government's lien, and that the judgment below merely declared a title in the County which had existed from the time of seizure.

An owner of property has no vested or constitutional right to use or allow the use of such property for purposes injurious to the public health or morals, and the State has the right in the exercise of its police power to provide for the seizure and destruction of property so used or intended to be used, without giving the custodian thereof notice or opportunity to be heard, and by authorizing it to be declared contraband. 47 Am. Jur. p. 531, sec. 51.

[State Statute Construed]

Where the matter is regulated by statute the question is one of statutory intention. The seizure in this case was unquestionably made under N. J. S. 2A:152-6, formerly R. S. 2:178-7 as amended by P. L. 1951, c. 174, which merely added a proviso authorizing the disposition of property seized to the State, County or Federal institutions rather than merely destroying it.

The statute makes it unlawful to return any property so seized to the person or persons owning the same or to any other person. It is the clear intention of this section to call for an absolute seizure and immediate confiscation together with a declaration that property so seized shall be considered contraband.

The seizure of money is justified where the crime charged is in violation of R. S. 2:135-3 and where the money is earmarked and segregated as part of a gambling operation it constitutes a gambling device and is contraband. Kenny v. Wachenfeld, 14 N. J. Misc. 322 (Sup. Ct. 1936); Krug v. Board of Chosen Freeholders, 3 N. J. Super. 22 (App. Div. 1949); Farley v. Manning, 4 N. J. 571 (1950); State v. Link, 14 N. J. 446, 452 (1954).

It can be conceded that where an article is not inherently contraband but becomes so because of the use to which it is put, due process requires notice and opportunity to be heard before a forfeiture is effectuated. 12 Am. Jur. p. 358, sec. 677.

Where property is inherently dangerous to the public health and morals it may be declared contraband and destroyed under the sovereign power of the state and the only question for review in a judicial proceeding is whether the officers making the seizure exceeded their authority under the applicable statute. But where property is not inherently dangerous to the public health and morals but becomes so because of the use to which it is put, due process requires notice and opportunity to be heard before the taking of the property as contraband results in an absolute forfeiture of all rights therein. The diversity of the various problems and the facades thereof and the forfeiture of rights in property declared by statute to be contraband are discussed in Berry & Ackley v. DeMaris, et al., 76 N. J. L. 301, 307 (Sup. Ct. 1908); 12 Am. Jur. 358, sec. 678 et. seq.

The argument of the United States in this case is predicated on certain language that was introduced into the law by P. L. 1941, c. 70, a supplement to the Criminal Procedure Act. Prior to its enactment it seems only one whose property was subjected to unreasonable search and seizure had an action to recover the property. See State v. Condon, 40 N. J. L. J. 293 (Oyer & Terminer 1917); Zaft v. Milton, 96 N. J. Eq. 576 ( Ch. 1924); Miller v. Atlantic City, 111 N. J. Eq. 260 ( Ch. 1932); Kenny v. Wachenfeld, supra; Burgess v. Drewen, 8 N. J. Misc. 179 ( Cir. Ct. 1930).

The supplement relates only to money seized and its purpose was to establish a proceeding by which a claim of property could be asserted against monies seized in a gambling raid and it permits the State to be sued on a claim of property by other persons not accused of the crime in which the property was seized. Section 2 of the Act makes the County Treasurer a custodial officer, not of money belonging to an individual but of money already seized and confiscated by the State, such custody being subject to the supervision of the Prosecutor of the Pleas of the county. The custody continues until the ultimate disposition of the charge or charges relating to the violation of the statutes on gambling. It then sets up alternative remedies by which the claim or claims of property may be asserted depending upon whether the trial of the gambling charges results in a conviction or an acquittal.

The 1941 supplement must be construed in pari materia with the basic section of the Act, R. S. 2:178-7 now N. J. S. 2A:152-6, to which it was a supplement. The basic section in effect declared that all property used for gambling was contraband and such property was construed to include all money earmarked and segregated as part of a gambling operation.

[Money as Contraband]

It is true that the statute as supplemented, declares "that said money, currency, or cash shall be deemed prima facie to be contraband of law as a gambling device, or as part of a gambling operation". This declaration of the statute was not and could not be intended to have the effect of leaving the legal title to such money in the gambler or player.

Money is the sine qua non of a gambling operation. To attempt to ascribe to the Legislature an intent to place money used in gambling in a different category for the purpose of seizure as contraband, from dice, roulette wheels, racing sheets, gambling tables, etc., based on a theory or an academic question as to where legal title to such money rests at a given moment, is an absurdity which we shall not impute to the Legislature.

The intention of the Legislature in making such a declaration is obvious. It was and is to establish a rule of evidence, by a prima facie presumption to be used in the trial of the claim of property created by the act. Such presumption places the burden upon the claimant of coming forward with evidence to overthrow it. Such a presumption is not required for the forfeiture of dice, roulette wheels, etc., because such instruments of gambling speak louder than mere words. Further for obvious reasons money cannot be destroyed and the State of New Jersey has not the constitutional power to destroy it. Such power is an incident of the federal power "to coin money, and regulate the value thereof, * * *". Article I, sec. 8, U. S. Const.; Ling Su Fan v. United States , 218 U. S. 302, 54 L. ed. 1049, 31 Sup. Ct. 21 (1910); 31 U. S. C. A. sec. 420 et. seq.

The moneys seized in this case are admittedly legal tender and the rule is that the taker, holder or finder, in good faith or by law, of money has a good title thereto against the whole world in the absence of proper and sufficient evidence to prove bad faith on his part. The County of Essex lawfully took possession of this contraband by virtue of the sovereign power of the State of New Jersey , and had good title to the money, from the date of the seizure to the confirming judgment of forfeiture, against the whole world including the owner, Edward Spagnuolo, against whom the United States asserts its lien.

In the trial below the owner, by his default, admitted that as far as his title and possession was concerned the money was contraband. The claimant, his mother, attempted to prove her title to the property and that the money was not used for gambling purposes. The trial court on the proofs offered declared the money to be contraband and entered the confirming judgment of forfeiture under the statute. He had no other alternative. Where a forfeiture is absolute under the statute, as it is here, the judgment of condemnation or forfeiture when entered relates back to the commission of the wrongful act and takes date from the wrongful acts, not from the date of sentence or decree. United States v. 1960 Bags of Coffee, 8 Cranch. 398, 3 L. ed. 603 (1814); United States v. 100 Barrels of Distilled Spirits, John Henderson, Claimant, 81 U. S. 44, 20 L. ed. 815 (1872); United States v. Pacific Finance Corp., 110 Fed. (2d) 732 (1940) and the cases cited therein. Cf. Motlow v. Missouri , 295 U. S. 97, 79 L. ed. 1327, 55 Sup. Ct. 661 (1935); 51 Harvard Law Review p. 1112.

[Forfeiture Absolute]

The established rule is that the forfeiture becomes absolute at the commission of the prohibited acts and the title from that moment vests in the state or government in all cases where the statute in terms denounces the forfeiture of the property as a penalty for a violation of the law, without giving any alternative remedy or providing any substitutes for forfeiture or allowing any exceptions to its enforcement, and that in all such cases it is not in the power of the offender or the former owner to defeat the forfeiture by any subsequent transfer of the property even as to a bona fide purchaser for value without notice of the wrongful acts done or committed by the former owner. The forfeiture is considered as directed against the thing itself, not merely the possessor's interest in it. United States v. 100 Barrels of Distilled Spirits, John Henderson, Claimant, supra.

Therefore, we must conclude that at the time the jeopardy assessment was attempted to be levied against the particular monies in this case, seized under the circumstances in which they were, title to the property was then in the County of Essex. At most the federal lien could only attach to Edward Spagnuolo's inchoate right to sue for the return of the funds in the event of his acquittal and not to the confiscated funds themselves. The federal lien can rise no higher than the rights of the taxpayer. Bankers Title & Abstract Co. v. Ferber Co., 15 N. J. 433, 441 (1954) [54-2 USTC ¶9459], and the authorities cited therein.

The title and possession of the County of Essex was not that of a creditor or a judgment creditor but a title and possession acquired by an exercise of sovereign power, and therefore the case of United States v. Security Trust & Savings Bank, 340 U. S. 47, 95 L. ed. 53, 71 Sup. Ct. 111 (1950) [50-2 USTC ¶9492] is not in point.

The case of Illinois v. Campbell, 329 U. S. 362, 91 L. ed. 348, 67 Sup. Ct. 340 (1946) involved the priority of state unemployment compensation liens and federal insurance contributions and unemployment compensation taxes and the taxpayer was insolvent, and the Federal Government's priority existed by the express provisions of 26 U. S. C. A. sec. 3466, which provides for the priority of payment of debts due the United States in cases of insolvent debtors and is likewise not in point.

The judgment below is affirmed.

HEHER, Judge, for modification.

I would modify the judgment to sustain the lien for income taxes asserted by the United States.

 

 

[65-1 USTC ¶9284]State of Florida and County of Dade, Petitioner v. Twenty-Six Thousand, Six Hundred Forty-Eight Dollars and Seventy-Four Cents ($26,648.74) in Currency and Coins of the United States, E. B. Leatherman, Clerk of the Circuit Court of Dade County, Florida, and the United States of America, Respondents

Fla. Circuit Court, Eleventh Judicial Circuit, Dade County, 62 L 1967, 12/23/64

[1954 Code Sec. 6321]

Tax lien: Priority: Monies confiscated in gambling raid.--Federal tax liens did not attach to monies properly seized by a Florida sheriff in a gambling raid since such monies were subject to confiscation and forfeiture to the State of Florida.

Richard E. Gerstein, State Attorney, Roy S. Wood, Assistant State Attorney, Courthouse, Miami, Fla., for State of Florida and County of Dade. Thomas C. Britton, 1626 Court House, Miami, Fla., for E. B. Leatherman. William A. Meadows, Jr., United States Attorney, Federal Bldg., Miami, Fla., for U. S. Angus M. Stephens, Jr., 805 Dade Federal Bldg., Miami, Fla., for I. Thompson.

Order and Final Judgment of Forfeiture

CANNON, Circuit Judge:

This cause coming on to a final hearing pursuant to notice and the parties having presented evidence and the Court having heard argument of counsel, the Court finds that the funds involved herein are not subject to the liens claimed by the Internal Revenue Service of the United States. The Court further finds that the monies were seized in a raid on a suspected gambling house made by the deputies of the Sheriff of Dade County, Florida, in the execution of a search warrant and were found in the said house which was the residence at the time of Isabell Thompson, and the monies were actually in her custody and possession. The said Isabell Thompson was arrested and charged in the Criminal Court of Record of Dade County with violation of the gambling laws of the State of Florida and convicted on one count of such charges as shown by the testimony of the deputy clerk of the Criminal Court of Record and the judgment of the Court, a certified copy of which has been received in evidence.

It appears that the agents of the Internal Revenue Service learned about the seizure of these funds and their deposit with E. B. Leatherman, Clerk of the Circuit Court of Dade County, from the deputies of the Dade County Sheriff who were involved in the raid on the said suspected gambling house, the residence of the said Isabell Thompson, and in the arrest of the said Isabell Thompson and the seizure of the said monies, and it was only several days after the said monies were found and seized and were already in the possession of the authorities of Dead County when the United States of America through the agents of the Internal Revenue Service made an effort to claim and attach the said funds.

The court finds that the said monies were used in connection with illegal gambling and properly seized by the deputies of the Sheriff of Dade County, Florida, properly deposited in the vault of the Clerk of the Circuit Court of Dade County for safekeeping and then by the Clerk duly retained in his possession to await a determination by proper order and judgment of a court of competent jurisdiction of the rights of the parties to such funds and his duty as to the disposition of them. The Court finds that the funds are subject to confiscation under the laws of the State of Florida and should be deposited in the Fine and Forfeiture Fund of Dade County.

Thereupon, it is

CONSIDERED, ORDERED AND ADJUDGED that the claim of The United States of America and its Internal Revenue Service against the said funds be, and it hereby is, denied, and it is further

ORERED AND ADJUDGED that the said monies in the amount of TWENTY-SIX THOUSAND SIX HUNDRED FORTY-EIGHT DOLLARS AND SEVENTY-FOUR CENTS ($26,648.74) be, and it hereby is, confiscated and forfeited to the State of Florida and the County of Dade subject to the payment of such costs out of said funds as the Court may hereafter direct on a proper claim therefor by the Clerk and other parties to this action who may have lawful claim for costs, which costs are found to be $355.75, and it is further

ORDERED AND ADJUDGED that the said funds less any costs that may be authorized as aforesaid be deposited in the Fine and Forfeiture Fund of Dade County, Florida.

 

 

[81-1 USTC ¶9173]Metropolitan Dade County, Plaintiff v. United States of America, et al., Defendants-Appellees v. State of Florida, Movant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, Unit B, No. 79-2038, 635 F2d 512, 1/30/81, Affirming an unreported DC decision

[Code Sec. 6321]

Lien for taxes: Property in custody of state: Currency seized in gambling raid: Taxpayer's interest in property.--Federal tax liens did not attach to currency seized by county police incident to several gambling arrests because the money had escheated to the state, terminating the taxpayer's interest in the currency.

Atlee W. Wampler, III, United States Attorney, Stephen M. Pave, Assistant United States Attorney, Miami, Florida 33132, William S. Estabrook, Karl Schmeidler, Gilbert E. Andrews, Crombie J. D. Garrett, Department of Justice, Alvarez LeCesne, Jr., Attorney, Tax Division, U. S. Department of Justice, Washington, D. C. 20530 for Defendants-Appellees. Jim Smith, Attorney General, Joseph C. Mellichamp, Assistant Attorney General, Tallahassee, Florida 32304, for Movant-Appellant, Philip T. Weinstein, Special Assistant Attorney General, 2250 S. W. Third Avenue, Miami, Florida 33129.

Before HILL, KRAVITCH and HATCHETT, Circuit Judges.

KRAVITCH, Circuit Judge:

In this case we are asked to determine whether confiscated funds seized by the state of Florida under the authority of a specific gambling statute are subject to an IRS tax levy. We hold that the funds had escheated to the state at the time of the IRS notice of levy and reverse the district court's award to the United States.

Facts. The dispute had its genesis on February 2, 1974, when Dade County police officers seized $31,733.90 incident to the arrest of several persons on gambling charges. The persons arrested (the taxpayers) were tried in state court for violation of specific Florida gambling statutes (F. S. §849.09(1)(a) and (b) (1975)). During the criminal trial, the judge ordered that the confiscated funds be held by the Property Custodian of the Dade County Public Safety Department pending further order of the court.

Meanwhile, on February 11, 1974, nine days after the arrest and seizure, the Internal Revenue Service made assessments against the taxpayers in the amount of $118,873.79 for wagering excise taxes. On February 22, 1974, the IRS served a notice of levy on the Dade County Public Safety Department, property Bureau, for the amount of $118,873.79.

In February 1975, the taxpayers were convicted in state court of the gambling charges. After exhausting their appeals, they filed a motion for return of seized property in the criminal division of the court in which they had been convicted. That court, on February 9, 1977, ordered that $7,646.50 ¹ of the seized currency was "contraband and an escheat to the state of Florida." ²

At the time of this ruling by the state court, two legal proceedings concerning ownership of the funds were pending. Dade County, which had custody of the funds, had filed an interpleader action in state court seeking to determine ownership of the funds, and the United States had brought an independent action in federal court against Dade County to require the county to pay the funds to the IRS. The United States then removed the state interpleader action to federal court, and on February 14, 1977, three days after the state court had declared the funds an escheat to the state of Florida, the federal district court ordered the funds paid into the registry of the court. The district court ultimately granted summary judgment for the IRS in the interpleader action. The state of Florida now appeals that order.

Discussion. Although the facts and the procedural history of the controversy are complex, the issue before this court is relatively straightforward. Certain propositions are not in dispute: a federal tax lien arose in favor of the United States upon all property and rights to property belonging to the taxpayers on February 11, 1974. To the extent the funds seized by the state of Florida belonged to the taxpayers on February 11, 1974, such funds passed to the state of Florida with the federal tax liens attaching. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 (1950); Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, 66 S. Ct. 108, 90 L. Ed. 56 (1945). If, on the other hand, the taxpayers had no property interest in the confiscated currency, a federal tax lien could not attach. Federal tax liens may attach only "to the property of the person liable to pay the tax." I. R. C. §6321. The controlling issue, therefore, is whether the taxpayers had a property interest in the seized currency at the time the IRS filed its levy.

Whether a taxpayer has an interest in property for purposes of federal taxation is a question of state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-14, 80 S. Ct. 1277, 1279-80, 4 L. Ed. 2d 1365 (1960). The parties agree that the relevant Florida law on this question is found in a single statute:

FLORIDA STATUTES §933.14(1) (1973)

§933.14 Return of Property Taken Under Search Warrant

(1) If it appears to the magistrate or judge before whom the warrant is returned that the property or papers taken are not the same as that described in the warrant, or that there is no probable cause for believing the existence of the grounds upon which the warrant was issued, or if it appears to the magistrate before whom any property is returned that the property was secured by an "unreasonable" search, the judge or magistrate may order a return of the property taken; provided, however, that in no instance shall contraband such as slot machines, gambling tables, lottery tickets, talley sheets, rundown sheets, or other gambling devices, paraphernalia and equipment, or narcotic drugs, obscene prints and literature be returned to anyone claiming an interest therein, it being the specific intent of the Legislature that no one has any property rights subject to be protected by any constitutional provision in such contraband; provided further, that the claimant of said contraband may upon sworn petition and proof submitted by him in the circuit court of the county where seized, show that said contraband articles so seized were held, used or possessed in a lawful manner, for a lawful purpose, and in a lawful place, the burden of proof in all sworn affidavit or complaint upon which the search warrant was issued or the testimony of the officers showing probable cause to search without a warrant or incident to a legal arrest, and the finding of such slot machines, gambling tables, lottery tickets, talley sheets, rundown sheets, scratch sheets, or other gambling devices, paraphernalia, and equipment, including money used in gambling or in furtherance of gambling, or narcotic drugs, obscene prints and literature, or any of them, shall constitute prima facie evidence of the illegal possession of such contraband and the burden shall be upon the claimant for the return thereof, to show that such contraband was lawfully acquired, possessed, held, and used.

The state relies on the following language of this statute: ". . . it [is] the specific intent of the Legislature that no one has any property rights subject to be protected by any constitutional provision in such contraband." If, as this language indicates, the taxpayers had no property rights in the seized currency, a federal tax lien could not attach.

The IRS concedes that under Florida law no one has property rights in seized contraband such as gambling devices, paraphernalia, and equipment. It contends, however, that Florida law treats this type of contraband differently from currency used for gambling purposes. Essentially, it argues that money is not contraband per se; rather, money is only considered contraband and an escheat to the state upon a court determination that it was used in gambling or in furtherance of gambling. Thus, the IRS concludes, because there had not yet been a court determination of forfeiture, the seized currency was the property of the taxpayers when the federal tax lien arose.

We cannot accept this argument. The parties have not directed us to any Florida appellate court cases, nor have we found any, that distinguish currency from contraband per se for purposes of §933.14. ³ Further, we cannot agree with the IRS that the language of the statute itself suggests such a distinction. Chapter 933 contains no general definition of the term "contraband"; section 933.14(1) simply lists the types of contraband covered by the statute. The phrase "money used in gambling or in furtherance of gambling" does not occur in the list of contraband in the first part of subsection (1); the phrase concerning money occurs in the list of contraband in the latter part of subsection (1), the portion of the statute which gives a claimant a right to show that the contraband articles "were held, used, or possessed in a lawful manner for a lawful purpose." The IRS urges us to find in this language a legislative intent to treat money differently from gambling paraphernalia.

Reading the statute as a whole, we find no indication of a legislative intent to treat money differently from other contraband. The fact that money used for gambling purposes may be recovered by the claimant upon a showing of lawful purpose is of no benefit to the IRS; all contraband under the statute may be so recovered. The unescapable intent of the Florida legislature is that all contraband, including money, escheats upon seizure. ⁴

In contending that the taxpayer retained a property interest in the currency after it was confiscated, the IRS relies on United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 (1950). In that case the Supreme Court held that a federal tax lien had priority over an attachment lien on property, where the federal tax lien was recorded after the date of the attachment lien but before the attaching creditor obtained judgment. The Court found that under California law an attachment lien is merely contingent or inchoate unless and until the creditor obtains a judgment. The IRS contends that the act of confiscation in this case is analogous to an attachment lien. Thus, it argues, confiscation did not immediately divest the taxpayers of their property rights in the currency; rather, the forfeiture was inchoate until the criminal court entered its order of escheature.

Again, however, the language of the statute refutes the argument of the IRS. Under the statute, the "owners" of seized contraband are not "divested" of any property rights; the legislature expressly stated that "no one has any property rights" in seized contraband. Section 933.14 provides a procedure whereby a claimant to seized contraband may recover such contraband if he can show that the "contraband was lawfully acquired, possessed, held, and used," but the burden is expressly placed on the claimant. We conclude that confiscation under §933.14 is not analogous to a "contingent or inchoate" attachment lien.

Likewise, the Florida forfeiture cases cited by the IRS are inapposite. Many Florida cases state that as a general rule forfeitures are not favored. See, e.g., Boyle v. State, 47 So. 2d 693 (Fla. 1950); General Motors Acceptance Corp. v. State, 152 Fla. 297, 11 So. 2d 482 (1943); City of Miami v. Miller, 148 Fla. 349, 4 So. 2d 369 (1941). None of these cases, however, interpert the statute at issue here. Section 933.14 is not couched in terms of forfeiture at all; as noted above, the statute specifically disclaims any property rights in contraband.

Conclusion. The currency at issue here had already been seized and thus had escheated to the state when the IRS filed its notice of levy. Consequently, a federal tax lien could not attach. Accordingly, we REVERSE.

¹ This figure is the actual amount in dispute in this case. The court found the remainder of the funds not to be contraband and therefore the property of the taxpayers.

² The IRS was not a party in this action, although an agent of the IRS was present at the hearing as, in the words of the IRS agent, "a friend of the court." The state contends that by failing to intervene in those proceedings, the IRS waived any rights in the currency. See United States v. Bleasby [58-2 USTC ¶9747], 257 F. 2d 278 (3d Cir. 1958). Because we decide this case on other grounds, we need not address this contention.

³ The state has referred us to one trial court opinion on point: State v. Twenty-Six Thousand, Six Hundred, Forty-Eight Dollars and Seventy-Four Cents [65-1 USTC ¶9284], 15 A. F. T. R. 2d 271 (1964), aff'd 179 So. 2d 890 (Fla. 3d DCA 1965). In that case the circuit court determined that funds seized from a gambling house, and upon which the IRS subsequently filed liens, were confiscated to the state. The claim of the IRS was accordingly denied.

⁴ The IRS has not challenged the constitutionality of §933.14.