Partnership Property

---

The Merits

The district court held that CADIC was not engaged in a trade or business within the United States within the meaning of §219 of the Internal Revenue Code of 1939, but that each of the partners was liable for certain taxes because Balanovski as an individual was so engaged in business and therefore taxable under §211(b), while Horenstein received "fixed or determinable annual or periodical gains, profits, and income" within the meaning of §211(a)(1)(A) and (c). We, on the contrary, hold that the partnership CADIC was engaged in business in the United States and that hence the two copartners were taxable for their share of its profits from sources within the United States. The applicable statutes are §§ 211(b), 212, and 219 of the Internal Revenue Code of 1939.

[Partnership Was in Business]

CADIC was actively and extensively engaged in business in the United States in 1947. Its 80 per cent partner, Balanovski, under whose hat 80 per cent of the business may be thought to reside, was in this country soliciting orders, inspecting merchandise, making purchases, and (as will later appear) completing sales. While maintaining regular contact with his home office, he was obviously making important business decisions. He maintained a bank account here for partnership funds. He operated from a New York office through which a major portion of CADIC's business was transacted. See C. I. R. v. Nubar, 4 Cir., 185 Fed. (2d) 584, 588 [50-2 USTC ¶9502], certiorari denied 341 U. S. 925; Fernand C. A. Adda, 10 T. C. 273, 277, 278 [CCH Dec. 16,244], affirmed per curiam Adda v. C. I. R., 4 Cir., 171 Fed. (2d) 457 [49-1 USTC ¶9109], certiorari denied 336 U. S. 952; Pinchot v. C. I. R., 2 Cir., 113 Fed. (2d) 718, 719 [40-2 USTC ¶9592]; Jan Casimir Lewenhaupt, 20 T. C. 151, 163 [CCH Dec. 19,606].

We cannot accept the view of the trial judge that, since Balanovski was a mere purchasing agent, his presence in this country was insufficient to justify a finding that CADIC was doing business in the United States . We need not consider the question whether, if Balanovski (an 80 per cent partner) were merely engaged in purchasing goods here, the partnership could be deemed to be engaged in business, since he was doing more than purchasing. Acting for CADIC he engaged in numberous transactions wherein he both purchased and sold goods in this country, earned his profits here, and participated in other activities pertaining to the transaction of business. Cases cited in support of the proposition that CADIC was not engaged in business here are quite distinguishable. Cf. The Linen Thread Co., Ltd., 14 T. C. 725 [CCH Dec. 17,620]; Jorge Pasquel, 12 TCM 1431 [12 TCM 1431, CCH Dec. 20,047(M)]; The Amalgamated Dental Co., Ltd., 6 T. C. 1009 [CCH Dec. 15,139]; European Naval Stores Co., S. A., 11 T. C. 127 [CCH Dec. 16,518]; R. J. Dorn & Co., 12 B. T. A. 1102 [CCH Dec. 4194].

[All Partnership Business Was Taxable]

As copartners of CADIC, Balanovski and Horenstein are taxable for the amount of partnership profits from sources within the United States under the statutory provisions cited above. The district court held them taxable only upon the "discounts" or "commissions" paid CADIC by the suppliers after completion of the sales transactions, not upon the total profits of the sales. This solution of the problem is in seeming conflict with the usual rule that discounts received as inducements for quality purchasing are considered as reducing the purchasers' cost for tax purposes. See C. I. R. v. Bullock's, 9 Cir., 81 Fed. (2d) 1002 [36-1 USTC ¶9135]. Further, isolation of the discount from the sales transaction is not in accord with preferred accounting technique. See, e.g., Paton, Essentials of Accounting 264-266 (Rev. Ed. 1949). But see Finney, General Accounting 247-250 (1946). Isolation of the discount for tax purposes would be more appropriate if the court considered the partnership as a broker receiving commissions, rather than as a vendor. Cf. Simon v. C. I. R., 2 Cir., 176 Fed. (2d) 230 [49-2 USTC ¶9324]. See Note, 69 Harv. L. Rev. 567, 568-569. But we need not consider whether the circumstances here justified the segregation for tax purposes of the discounts from the remainder of the sales profits--see G. A. Stafford & Co. v. Pedrick, D. C. S. D. N. Y., 78 Fed. Supp. 89 [48-1 USTC ¶5925], affirmed 2 Cir., 171 Fed. (2d) 42 [48-2 USTC ¶5928]--for we hold the total profits on these transactions, including the discounts, to be taxable in full.

[Place of Sale Derivitive of Income]

Under §119(a)(6) and (e) ³ of the 1939 Code, a nonresident alien engaged in business here derives income from the sale of personal property in "the country in which [the goods are] sold." By the overwhelming weight of authority, goods are deemed "sold" within the statutory meaning when the seller performs the last act demanded of him to transfer ownership, and title passes to the buyer. See East Coast Oil Co., S. A., 31 B. T. A. 558 [CCH Dec. 8775], affirmed C. I. R. v. East Coast Oil Co., S. A., 5 Cir., 85 Fed. (2d) 322 [36-2 USTC ¶9445], certiorari denied Helvering v. East Coast Oil Co., S. A., 299 U. S. 608; Amtorg Trading Corp. v. Higgins, 2 Cir., 150 Fed. (2d) 536, 539 [45-2 USTC ¶9339]; G. A. Stafford & Co. v. Pedrick, supra, D. C. S. D. N. Y., 78 Fed. Supp. 89 [48-1 USTC ¶5925], affirmed without reaching the point, 2 Cir., 171 Fed. (2d) 42 [48-2 USTC ¶5928]; Ronrico Corp., 44 B. T. A. 1130, 1136 [CCH Dec. 12,022]; The Exolon Co., 45 B. T. A. 844 [CCH Dec. 12,188]; Askania Werke, A. G., 33 B. T. A. 875 [CCH Dec. 9196], remanded for evidence, Askania Werke, A. G. v. Helvering, D. C. Cir., 96 Fed. (2d) 717 [38-1 USTC ¶9232]; Elston Co., Ltd., 42 B. T. A. 208 [CCH Dec. 11,233]; Hazleton Corp., 36 B. T. A. 908 [CCH Dec. 9813]; Tootal Broadhurst Lee Co., Ltd., 9 B. T. A. 321 [CCH Dec. 3125]; Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 279 U. S. 306, 309; American Land & Investment Co. v. C. I. R., 4 Cir., 40 Fed. (2d) 336 [2 USTC ¶526]; Ardbern Co., 41 B. T. A. 910 [CCH Dec. 11,072], affirmed on the point, Ardbern Co. v. C. I. R., 4 Cir., 120 Fed. (2d) 424 [41-2 USTC ¶9533]; Briskey Co., 29 B. T. A. 987 [CCH Dec. 8400], affirmed C. I. R. v. Briskey Co., 3 Cir., 78 Fed. (2d) 816 [35-2 USTC ¶9503]; Sabatini v. C. I. R., 2 Cir., 98 Fed. (2d) 753, 755 [38-2 USTC ¶9470]. ⁴

Here, by deliberate act of the parties, title, or at least beneficial ownership, passed to IAPI in the United States . Under the letters of credit, Balanovski, was paid in the United States and CADIC's last act to complete performance was done here. When Balanovski presented evidence of shipment--the clean ocean bill of lading made out to the account of an Argentine bank with the directive "Notify IAPI"--he had completed CADIC's work and he received the final 1 per cent of IAPI's contract price.

[Title Passed in U. S.]

The time when title to goods passes depends, of course, upon the intention of the parties. Amtorg Trading Corp. v. Higgins, supra, 2 Cir., 150 Fed. (2d) 536 [45-2 USTC ¶9339]; 1 Williston on Sales §259 (Rev. Ed. 1948); Uniform Sales Act §18; N. Y. Pers. Prop. Law §99. When documents of title, such as a bill of lading, are given up, the presumption is that the seller has given up title, together with the documents. See N. Y. Pers. Prop. Law §§ 115, 156, 219; 2 Williston on Sales §405 (Rev. Ed. 1948). In F. O. B. and F. A. S. contracts there is a presumption that title passes from the seller just as soon as the goods are delivered to the carrier "free on board" or "free alongside" the ship, as the case may be. See Amtorg Trading Corp. v. Higgins, supra, 2 Cir., 150 Fed. (2d) 536 [45-2 USTC ¶9339]; Standard Casing Co. v. California Casing Co., 233 N. Y. 413, 135 N. E. 834; Nelson Bros. Coal Co. v. Perry-man-Burns Coal Co., 2 Cir., 48 Fed. (2d) 99; 2 Williston on Sales §§ 280b, 280h (Rev. Ed. 1948); N. Y. Pers. Prop. Law §100, Rule 5. Both of these presumptions, which would tend to establish that title passed from CADIC to LAPI in the United States , are not altered by the use of a letter of credit. See Briskey Co., supra, 29 B. T. A. 987, 991 [CCH Dec. 8400], affirmed C. I. R. v. Briskey Co., 3 Cir., 78 Fed. (2d) 816 [35-2 USTC ¶9503]. Nor need we here consider whether more than "beneficial" title passed immediately to IAPI or whether a "security" or "legal" title rested with the intermediary bank. See McCurdy, Commercial Letters of Credit, 35 Harv. L. Rev. 715, 736; Thayer, C. I. F. Contracts in International Commerce, 53 Harv. L. Rev. 792, 821.

All the available evidence confirms, rather than rebuts, these presumptions of passage of title in the United States . All risk of loss passed before the ocean voyage. IAPI took out the marine insurance. CADIC performed all acts to complete the transaction, retained no control of the goods, and there was no possibility of withdrawal.

[ Lower Court Misconception]

Judge Palmieri apparently did not contest that title to the goods passed in the United States . But he applied a test based upon the "substance of the transaction" to hold that Agrentina was the place where the income-producing contracts were negotiated and concluded, the place of the buyer's business, and the destination of the goods. This led him to conclude that Argentina , rather than the United States , was the place of sale. The judge further buttressed this result by observing that IAPI, rather than CADIC, had insisted upon the passing of title in the United States .

[Some History of "Passage of Title" Test]

Although the "passage of title" rule may be subject to criticism on the grounds that it may impose inequitable tax burdens upon taxpayers engaged in substantially similar transactions, such as upon exporters whose customers require that property in the goods pass in the United States--see Hearings before the House Committee on Ways and Means on Forty Topics Pertaining to the General Revision of the Internal Revenue Code, 83d Cong., 1st Sess., pt. 2, at 1458 (1953)--no suitable substitute test providing an adequate degree of certainty for taxpayers has been proposed. Vague "contracts" or "substance of the transaction" criteria would make it more difficult for corporations engaged in Western Hemisphere trade to plan their operations so as to receive the special deduction granted them if they derive at least 95 per cent of their income from sources outside the United States . Int. Rev. Code of 1954, §§ 921, 922; see also §941. See Note, supra, 69 Harv. L. Rev. 567.

Careful study was given this problem by the experts working on the Income Tax Project of the American Law Institute. They did give consideration to an alternative test of "place of destination." But this was open to criticism on the ground that it unduly favored exporters. See Surrey & Warren, The Income Tax Project of the American Law Institute, 66 Harv. L. Rev. 1161, 1196-1198. After much deliberation the American Law Institute has retained the "title passage" rule in its 1954 draft of a model Internal Revenue Code. See American Law Institute, Federal Income Tax Statute, February 1954 Draft, vol. 2, §X906(c), and see comment at p. 483. Further, in substantially reenacting §119(e)(2) of the 1939 Code, Congress did not further define "the place of sale," thus apparently accepting the prevailing "passage of title" test. See Int. Rev. Code of 1954, §§ 861(a)(6), 862(a)(6).

Of course this test may present problems, as where passage of title is formally delayed to avoid taxes. ⁵ Hence it is not necessary, nor is it desirable, to require rigid adherence to this test under all circumstances. But the rule does provide for a certainty and ease of application desirable in international trade. ⁶ Where, as here, it appears to accord with the economic realities (since these profits flowed from transactions engineered in major part within the United States ), we see no reason to depart from it. ⁷ Hence we hold that the partners are liable for taxes on the entire profits of the partnership sales amounting to $7,763,702.20.

[Decision]

On the appeal of the defendant taxpayers the decision below is affirmed. On the appeal of the United States of America the judgment of the district court is reversed and the action is remanded for the entry of a judgment of recovery based upon a computation of taxes due in accordance with this opinion.

¹ The power of attorney consisted of 13 paragraphs covering such topics as "Endorsement for Deposit," "Signing checks and settling accounts," "Acceptances," "Procuring Discounts," "Sale of securities," "Borrowing and giving security," "Letters of Credit," and "Contracts."

One of these paragraphs read as follows:

"(General authority and substitution)--Give unto said attorney(s) full power and authority to do and to perform every act whatsoever requisite and convenient to be done in the premises as fully as I might do if personally present with full power of substitution and revocation, hereby ratifying all that my said attorney(s) or the substitute(s) shall do or cause to be done by virtue hereof;"

² See Treas. Reg. 118, §§ 39.217-2(b)(2), 39.51-2.

³ Internal Revenue Code of 1939:

"§119. Income from sources within United States .

"(a) Gross income from sources in United States . The following items of gross income shall be treated as income from sources within the United States :

* * *

"(6) Sale of personal property. For gains, profits, and income from the sale of personal property, see subsection (e).

* * *

"(e) Income from sources partly within and partly without United States . Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. * * * Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold, * * *."

⁴ In 1947 the Bureau of Internal Revenue in G. C. M. 25131, 1947-2 Cum. Bull. 85 [1947 CCH ¶6267], acceded to the "title passage" test as universally adopted by the courts, and revoked G. C. M. 8594, IX-2 Cum. Bull. 354 (1930) [1930 CCH ¶6399], which had invoked a "place of contract" rule. Taxpayers here apparently do not claim reliance upon the latter ruling; nor would they have been entitled to rely upon it.

G. C. M. 25131 [1947 CCH ¶6267], in addition to laying down the "passage of title" rule, provides in part as follows: "In any case in which the sales transaction is arranged in a particular manner for the primary purpose of tax avoidance, the foregoing rules will not be applied. (See Kaspare Cohn, Inc. v. Commissioner, 35 B. T. A. 646 [CCH Dec. 9604].) In such cases, all factors of the transaction, such as negotiations, the execution of the agreement, the location of the property, and the place of payment, will be considered, and the sale will be treated as having been consummated at the place where the substance of the sale occurred."

⁵ See Dean & Leake, How To Arrange Foreign Sales So Title Will Pass "Outside the U. S. " for Tax Purposes, 94 J. Accountancy 457.

⁶ Treas. Reg. 111, §29.119-8, promulgated under §119(e) of the Internal Revenue Code of 1939, provides that "the 'country in which sold' ordinarily means the place where the property is marketed."

The meaning of this definition is obscure, but surely we cannot construe it to mean the place of ultimate destination of the goods. Not only would such a construction be at variance with the decided cases, but it would make avoidance of American taxes not only simple but practically automatic.

⁷ For discussions supporting the view taken in this opinion, see Note, 69 Harv. L. Rev. 567; 3 J. Taxation 43. On the general aspects of the problem, see 3 J. Taxation 113; 5 J. Taxation 111.

 

 

[73-1 USTC ¶9382]Economy Plumbing & Heating Co., Inc., et al. v. The United States

U. S. Court of Claims, No. 226-65, 470 F2d 585, 12/12/72, Original decision at Court of Claims, 72-1 USTC ¶9344, 456 F. 2d 713

[Code Secs. 6611 and 7426(g)(1)]

Interest on overpayment of tax: Misapplication of funds for payment of tax: Recovery of contract funds v. refund of overpaid tax: Taxpayer status: Effect of filing claim for refund: Equity: Wrongful levy of property by IRS.--Funds due joint venture as an equitable adjustment on a government contract were wrongfully withheld by the government to satisfy tax liens against one of the venture members. The joint venture was not entitled to interest on the amount wrongfully withheld and repaid because it constituted recovery of contract funds, not refund of overpaid taxes. Interest cannot be allowed on a contract claim against the U. S. unless the contract provides for interest, which was not the case here. The filing of claims for refund was irrelevant since the joint venture was not the taxpayer. Neither was Code Sec. 7426 applicable since it was enacted subsequent to government misapplication of the funds.

One dissent.

Raymond E. Saunders, A. Charles Lawrence, Gilbert A. Cunco, 209 S. LaSalle St., Chicago, Ill., for plaintiff and Transamerica Ins. Co. Scott P. Crampton, Assistant Attorney General, Mark Segal, Department of Justice, Washington, D. C. 20530, for defendant.

Before COWEN, Chief Judge, DAVIS , SKELTON, NICHOLS, KASHIWA , KUNZIG, and BENNETT, Judges.

On Plaintiffs' Motion for Amendment of Opinion and Judgment

SKELTON, Judge, delivered the opinion of the court:

This suit was originally filed for the recovery of $477,587.66 representing a portion of an equitable adjustment on a contract entered into between Lieb Bros., Inc. (Lieb) and Economy Plumbing and Heating Co., Inc. (Economy) as joint venturers, and the United States for the construction of dormitories, mess halls, and other facilities at Scott Air Force Base near Belleville, Illinois, for the sum of $13,484,275.50. The work was reduced by a partial termination order, and was completed and accepted. In the meantime, Lieb was adjudged a bankrupt and is now insolvent. Its receiver did not participate in the appeal of this case and is not before the court. However, Transamerica Insurance Company (Transamerica), a surety and third-party plaintiff, intervened, because it acted as the surety on the performance and payment bonds of the contract.

In May 1960, the Corps of Engineers awarded the sum of $544,848.33 to the joint venture on its termination claim. The joint venture appealed to the Armed Services Board of Contract Appeals (ASBCA). In the meantime, the Internal Revenue Service (IRS) had asserted tax liens against Lieb. On November 18, 1960, without any notice to Economy or Transamerica, the General Accounting Office (GAO) paid $477,587.66 of the award to the IRS to satisfy the tax liens against Lieb. Of this amount, the sum of $4,576.80 was applied to unpaid payroll taxes, together with interest and penalty, owed by the joint venture in the performance of the contract. The remaining $473,010.86 was applied by the IRS to payroll and income taxes and interest and penalties owed by Lieb on other construction jobs it had performed which had no connection with the contract of the joint venture.

Economy and Transamerica (plaintiffs) filed timely income tax refund claims with the IRS for the $477,587.66. More than six months elapsed after the filing of such claims without any action having been taken by the IRS, so the plaintiff Economy filed this suit on July 8, 1965, and Transamerica intervened on May 2, 1966. After a trial in this court, our Trial Commissioner Mastin G. White, handed down a memorandum opinion on November 15, 1971, in which he recommended that plaintiffs be awarded judgment against the United States for the sum of $473,010.86. Nothing was said about interest. Thereafter, on February 3, 1972, the parties filed a joint motion for judgment under Rule 141(b) in which they asked that the opinion of the trial commissioner be adopted in which he had found that the plaintiffs were entitled to judgment against the United States for $473,010.86, "together with interest as provided by law." Pursuant to this joint motion, the court entered a per curiam opinion on March 17, 1972, approving and adopting the memorandum opinion of the trial commissioner and awarded plaintiffs a judgment against the United States for said sum of $473,010.86. The judgment did not provide for interest. See Economy Plumbing & Heating Co. v. United States [72-1 USTC ¶9344], 197 Ct. Cl. 839, 456 F. 2d 713 (1972).

On April 13, 1972, plaintiffs filed a motion requesting that the opinion and judgment of the court be amended by awarding plaintiffs interest at the rate of six percent per annum from November 18, 1960, on the principal sum of $473,010.86. The defendant has contested this motion. The case is before us on such motion.

[Issue]

The sole question before us is whether or not plaintiffs are entitled to interest on their judgment from the time the amount thereof was paid by GAO to the IRS to satisfy Lieb's tax lien.

It is important to note that when plaintiffs filed this suit they sought recovery of funds due them as a equitable adjustment on the contract which they alleged had been wrongfully withheld by the government. The suit was clearly one to recover funds due under a contract.

In our per curiam opinion in this case mentioned above, we adopted the statement of our trial commissioner as follows:

* * * This is an action for the recovery of $473,010.86, representing a portion of an equitable adjustment under contract No. DA-11-032-ENG-1232 ("the contract") that was--according to allegations in the petition--wrongfully withheld by the defendant. [Footnote omitted.] [ Id. at 841, 456 F. 2d at 714.]

[Recovery for Contract Funds]

The suit as filed was a contract action and not a suit for a refund of overpaid taxes. As stated above, we entered judgment in favor of the plaintiffs for the amount due them under the contract as an equitable adjustment. Now the plaintiffs seek to change the whole theory of the case by claiming the suit was by taxpayers seeking a refund of overpaid taxes. The reason for this change in theory and tactics is clear. The plaintiffs want to collect interest on their judgment for the past 11 years and they well know that interest cannot be allowed on a contract claim against the United States unless the contract provides for interest, which is not the case here. See 28 U. S. C. §2516(a) (1964).

The plaintiffs seek to bridge this obstacle by now contending that even though they were not originally taxpayers entitled to a refund of overpaid taxes, they became taxpayers when the government wrongfully applied their funds to the payment of Lieb's taxes. They contend further that when the government took this action, the funds so applied because overpayments of taxes by the plaintiffs, for which they filed claims for refunds, and that our judgment in their favor constituted a refund of their overpaid taxes. Consequently, they argue that they are entitled to interest on such amount. The plaintiffs say that the provisions of 28 U. S. C. §2411(a) and Section 6611 of the Internal Revenue Code ¹ entitle them to interest, especially since these laws provide for six percent interest on "any overpayment in respect of any internal revenue tax." They urge the proposition that this language fits their situation because the application of their funds to Lieb's taxes was an "overpayment in respect of [an] internal revenue tax."

The defendant contended in its answer and still argues that this suit was not one brought by a taxpayer suing for a refund of its taxes, and denies that this suit arose under revenue laws requiring the filing of a claim for refund. It says that the plaintiffs are not taxpayers in this case, but that Lieb was the taxpayer. Defendant says further that plaintiffs never overpaid their taxes and their recovery of contract funds in this case was not a refund of overpaid taxes. Consequently, defendant contends that plaintiffs cannot recover interest on their judgment, because no statute authorizes it and the contract contains no provision for interest, citing Rosenman v. United States [45-1 USTC ¶10,165], 323 U. S. 658 (1945).

We agree with the defendant that the plaintiffs are not taxpayers in this case with respect to these funds within the meaning of the revenue laws. Lieb was the taxpayer and it is not a party to this action. While it is true that there was a misapplication of plaintiffs' funds to the payment of Lieb's taxes, this wrongful act did not result in plaintiffs becoming taxpayers to the extent of the misapplied funds. Enither was there any overpayment of plaintiffs' taxes. In fact, the only taxes of the plaintiffs that were paid out of the contract award was the $4,576.80 applied on the payroll taxes of the joint venture which was not contested by the plaintiffs and is not involved in this case. The filing of the claims for refund by the plaintiffs did not help them, because the claims were unnecessary and of no consequence since plaintiffs were not taxpayers who had overpaid their taxes.

In support of the foregoing conclusions, we wish to point out and emphasize that Congress has established a well-defined and comprehensive administrative system for the recovery of overpaid taxes by taxpayers. All taxpayers who have overpaid their taxes are within this system and must follow the appropriate procedures and regulations, including the timely filing of claims for refunds for overpayment of taxes, if they are to have the benefits of the system. On the other hand, persons who are not taxpayers are not within the system and can obtain no benefit by following the procedures prescribed for taxpayers, such as the filing of claims for refunds. For example, there have been many cases where parties have sued to enjoin the assessment or collection of their moneys to pay the taxes of another, notwithstanding Section 263 of the Internal Revenue Code of 1939 (26 U. S. C. §3653 (1952 ed.)) that provided that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." ² The courts have allowed these suits because the parties filing the suits were not taxpayers and were outside the revenue system of which the above statute is a part. See Long v. Rasmussen, 281 F. 236 (D. Mont. 1922); Rothensies v. Ullman [40-1 USTC ¶9308], 110 F. 2d 590 (3d Cir. 1940); Raffaele v. Granger [52-1 USTC ¶9321], 196 F. 2d 620 (3rd Cir. 1952); and Bullock v. Latham [65-2 USTC ¶9640], 306 F. 2d 45 (2d Cir. 1962). In Long v. Rasmussen, the court said:

* * * They [the revenue laws] relate to taxpayers, and not to nontaxpayers. The latter are without their scope. No procedure is prescribed for nontaxpayers, and no attempt is made to annul any of their rights and remedies in due course of law. * * * [ Id. at 238.]

In other cases suits have been filed by nontaxpayers whose property has already been taken to pay the taxes of others, without filing claims for refund, and such suits have been allowed against the Collector or District Director of Internal Revenue in actions similar to the old action in assumpsit for money had and received, even though lacking in statutory authority. See Stuart v. Chinese Chamber of Commerce [48-2 USTC ¶9315], 168 F. 2d 709 (9th Cir. 1948); Rutledge v. Riddell [60-2 USTC ¶9665], 186 F. Supp. 552 (S. D. Cal. 1960); Oil City Nat'l Bank v. Dudley [61-2 USTC ¶9738], 198 F. Supp. 849 (W. D. Pa. 1961), In Stuart v. Chinese Chamber of Commerce, supra, the court said:

Under the circumstances here recited it is obvious the appellees [whose property had been seized by the IRS to pay the taxes of another] are not taxpayers in the strict sense of the word, and therefore they do not come within the orbit of the income tax laws here invoked. * * *

* * *

The appellees could not have maintained a suit for refund as could a taxpayer from whom a tax had been illegally collected; their only recourse was to bring suit to recover possession of the property of which they claimed to be owners. * * * [ Id. at 742.]

The above quotation fits our case like a glove. Our plaintiffs are not taxpayers and could not sue for a tax refund as a taxpayer could. All they could do was to sue to recover their property, which was the funds due them as an equitable adjustment under the contract, and this is exactly what they have done.

The above cases are illustrative of the proposition that a nontaxpayer is outside the administrative system set up for the collection of a refund of overpaid taxes, and is not required to file a claim for refund to recover money taken from him to pay the taxes of another. The case of Kirkendall v. United States [40-1 USTC ¶9283], 90 Ct. Cl. 606, 31 F. Supp. 766 (1940) is squarely in point. There a third party (Kirkendall) sued to recover money that had been taken from him to pay the taxes of another. We held that there was an implied contract on the part of the government to make restitution of the money, and that no claim for refund was necessary because the plaintiff was not a taxpayer. Of particular importance in the case before us is the fact that in Kirkendall the court did not allow interest on the judgment of restitution. The only difference between that case and the case before us is that in our case the plaintiffs filed claims for alleged refund, whereas, in Kirkendall no claim was filed. In both cases the plaintiffs were nontaxpayers. We do not think the filing of claims for refunds in the present case makes any difference. The plaintiffs here were outside the administrative system established for the filing of claims for refunds of overpaid taxes and were not required to file them. The fact that they did file such claims did not entitle them to any of the rights or benefits of the tax refund administrative system. It follows logically that a nontaxpayer cannot overpay taxes and consequently there is no overpayment for him to claim by way of refund.

We think the Kirkendall case was properly decided and is dispositive of the present case. The payment of Lieb's taxes with the money due plaintiffs under the contract did not convert such contract funds into an overpayment of their taxes nor make taxpayers of the plaintiffs. Neither did the mere filing of claims for refunds make plaintiffs taxpayers when none of the requisites of the status of taxpayers were present. ³ The fact that plaintiffs filed such claims did not convert them into claims for overpayment of taxes. We so held in the case of Ray v. United States, 197 Ct. Cl. 1, 453 F. 2d 754 (1972), when we said:

The mere fact that plaintiff submitted claims for refunds with the Internal Revenue Service * * * does not convert his claim into one for overpayment of taxes. [ Id. at 9, 453 F. 2d at 758.]

In the Ray case, the plaintiff was retired by the Air Force on a longevity basis and during his period of retirement based on length of service the Air Force withheld a portion of his retirement payments and paid them to the IRS who applied them to plaintiff's income taxes. After a time the plaintiff applied to the Air Force Board for the Correction of Military Records to change his retirement from a longevity basis to one based on disability. This was done and the Air Force paid him the difference between active duty pay and retirement pay, but did not pay him the amounts withheld and paid on his income tax. The Finance Center advised him to inquire of the IRS for possible tax refund. The plaintiff then filed claims for refund of income taxes with the IRS, who refunded such funds for three years but denied a refund for five other years on the ground they were time barred. The plaintiff then filed suit in this court for the five year payments that had been withheld by the Air Force. Although plaintiff had filed claims for refund with the IRS, and although he was a taxpayer, we held that his suit was not a suit for refund of taxes, but one against the Air Force for unpaid retirement benefits. We said:

* * * It is the Air Force which erroneously withheld from his retirement pay amounts approximately equal to his supposed tax liability, not the IRS. * * * It is the Air Force, then, which is liable to plaintiff for the monies it erroneously exposed to taxation. * * * [ Id. at 8, 453 F. 2d at 757.]

* * *

* * * It is simply a matter of correcting the pay account between the serviceman and the United States . * * * [ Id. at 9, 453 F. 2d at 758.]

In that case, we entered judgment for the plaintiff on the theory that his suit was not one for the recovery of a tax refund but one to recover retirement pay from the Air Force. In that connection, the court held further:

* * * Since this is not a claim for refund of taxes paid, but for "pecuniary benefits" wrongfully denied, cases cited by defendant are not in point. * * * Here, since plaintiff is not claiming under the Code, he need not preserve his claim according to its provisions.

* * *

* * * Here the Board involved his changed plaintiff's retirement status and plaintiff can therefore say, * * * that his right is independent of the tax laws. [ Id. at 9-10, 453 F. 2d at 758.]

In that case we held that proof of status is required to recover an overpayment of taxes under the Internal Revenue Code, saying:

* * * Proof of status is the admitted condition precedent for recovery of overpayment of taxes under the Internal Revenue Code §6511, * * *. [Id, at 8, 453 F. 2d at 757.]

We have considered the Ray case in detail (although it is distinguishable as to some of the facts in our case), because it is a recent decision of our court and many of the questions there decided strongly support the conclusions reached in the present case. We refer to the following:

1. In that case we held that proof of status (i. e., that of a taxpayer who had overpaid his income taxes), was a condition precedent to recovery under the Internal Revenue Code. Here the plaintiffs fail that test because they were not taxpayers and had not overpaid their income taxes.

2. The mere fact that a claimant files a claim for refund does not convert his claim into one for overpayment of income tax. That is the situation here.

3. There, although plaintiff's retirement payments were delivered to the IRS, his claim for such payments in this court was not a claim for refund of taxes, but a claim against the Air Force. Here, in like manner, the claim of plaintiffs was not one for a refund of overpayment of income tax, but a claim for contract funds delivered by the Corps of Engineers and the GAO to the IRS.

4. There, the Air Force owed plaintiff the money, not the IRS. Here the Corps of Engineers owed the plaintiffs the contract money, not the IRS.

5. There, the plaintiff was not claiming under the Internal Revenue Code. Here, the plaintiffs were not suing under the Code when they filed suit, but were seeking the funds due them under the contract.

6. There, the plaintiff was a taxpayer and the withheld payments had been applied to his income tax. He had filed a claim for refund and conceivably could have argued that he was seeking a refund of overpaid taxes under the Code. We held that was not the case. Here, the case is much stronger for the government because the plaintiffs were not taxpayers and had not overpaid their taxes and were not seeking recovery under the Code. This is the most important distinction between the two cases.

In the Ray case, the plaintiff waived any claim for interest. This is understandable because there is no authority for awarding him interest on a recovery of retirement payments from the Air Force. Nevertheless, our decision in that case on other questions show beyond doubt that plaintiffs are not entitled to interest in the present case.

We do not think that the provisions of 28 U. S. C. §2411(a) and Section 6611 of the Internal Revenue Code providing for interest at the rate of six percent per annum upon "any overpayment in respect of any internal revenue tax" quoted above, which is relied upon by the plaintiffs, has any application to this case. We interpret those statutes as applying only to taxpayers who have overpaid their taxes, have filed a timely claim for refund, and are within the administrative system providing for the recovery of overpaid taxes and are entitled to its benefits. The plaintiffs have none of these prerequisites, except they did file claims for alleged refunds.

The plaintiffs cite and rely heavily upon the case of Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925 (9th Cir. 1957). In that case the government levied upon, seized, and applied the funds of a joint venture, composed of two parties, due under a completed government contract, to the tax liability of one of the joint venturers that had accrued on other jobs not related to the joint venture contract. Both joint venturers filed claims for refund and later sued the District Collector of the Internal Revenue Service. The trial court held the levy to be void and awarded the joint venturers judgment for the misapplied funds, plus interest at six percent from the date of the misapplication of the funds by the government. The judgment was affirmed by the Ninth Circuit Court of Appeals. A careful reading of the decisions of the trial and appellate courts in that case reveals that there was no discussion or treatment of the interest issue nor any showing whatsoever that justified the awarding of interest from the date of payment to those plaintiffs under the Internal Revenue Code or other laws of the United States. The only mention of interest by the circuit court in its opinion was its comment that "it is claimed also that the trial court erred in allowing interest on the judgment." Since nothing more was said about interest in the court's opinion, it would appear that the court either (1) allowed interest from the date of the misapplication of the funds, as the trial court had done, on the theory that the suit of plaintiffs was one for the refund of their overpaid taxes, in which case the action of the court was contrary to the above-cited authorities, or (2) the court allowed interest on the judgment of the trial court only from the date of the judgment, under 28 U. S. C. §2411(b) (1964), which authorizes interest at the rate of 4 percent per annum on a judgment in a district court against the United States on a claim under 28 U. S. C. §1346, which is not under the internal revenue laws. The granting of interest prior to judgment under Section 1346 is improper. See Eastern Serv. Management Co. v. United States , 363 F. 2d 729 (4th Cir. 1966). There the court held:

The granting of interest prior to the judgment is incorrect, 28 U. S. C. A. §2411(b) and 31 U. S. C. A. §724a. [ Id. at 733.]

Title 31 U. S. C. §724a provides that a judgment of a district court against the United States for less than $100,000 to which provisions of Section 2411(b) apply, shall bear interest only when the judgment is final after appeal and then only from the date of the filing of the transcript with the GAO to the date of the mandate of affirmance. When such a judgment is rendered by the Court of Claims, interest thereon shall be payable in accordance with Title 28 U. S. C. §2516(b) from the date of the filing of the transcript with the GAO. ⁴

These authorities appear to be conclusive that interest cannot be allowed prior to judgment on a claim against the United States, except on overpayment of income tax claims as authorized by Title 28 U. S. C. 2411(a) or unless provided for in a statute or contract as provided in Title 28 U. S. C. §2516(a). None of these excepted situations exist in the present case.

At any rate, it appears that the court in Stuart v. Willis, supra, did not consider the interest question in depth as we have done, and we decline to follow its decision with regard to interest.

[Wrongful Levy on Property by IRS]

The plaintiffs also contend that we should allow interest in this case because of the enactment of the Federal Tax Lien Act of 1966 which provides in Sections 7426(b)(2)(B) and 7426(g)(1) of the Internal Revenue Code ⁵ that interest shall be allowed where property is wrongfully levied upon and taken by the IRS. The plaintiffs then cite 28 U. S. C. §2516(a) to show that this court has jurisdiction to award interest where an Act of Congress expressly provides for its payment. The defendant counters this argument by saying that Section 7426 only authorizes suits to be brought in the district courts, citing the following language of technical explanation of 1966-2 Cum. Bull. 869:

Section 7426. Civil actions by persons other than taxpayers.

(a) Actions permitted.

* * * Section 202 of the bill grants U. S. district courts original jurisdiction over actions brought under section 7426 * * *.

Defendant also cites H. R. Rep. No. 1884, 89th Cong., 2d Sess. 28 (1966-2 Cum. Bull. 815, 834), which states:

The bill makes provisions for three new types of actions all of which may be brought only in Federal district courts.

We do not have to decide this jurisdictional issue, as we do not believe Section 7426 applies to this case because it was not enacted until 1966, whereas the government misapplied plaintiffs' money on November 18, 1960. Consequently, the statute was not in effect at the time the events in this case occurred.

However, the fact that the plaintiffs seek to recover under Section 7426 has an important bearing on another aspect of this case. The heading or caption of the section is as follows:

§7426 Civil actions by persons other than taxpayers. [Emphasis supplied.]

The action of the plaintiffs in saying this section applies to them is a clear indication that they are not "taxpayers" and that they do not regard themselves as taxpayers within the meaning of the Internal Revenue Code. This lends support to our interpretation of the meaning of the term "taxpayer" in this case as expressed in footnote 3, supra. Section 7426 is further significant in the instant case, because it shows that at the time it was enacted in 1966, Congress considered that persons in the position of the plaintiffs were not taxpayers within the meaning of the IRS. This is shown not only by the caption of the section, but also by its provisions wherein persons who are, not taxpayers and are described as any person "other than the person against whom is assessed the tax out of which such [wrongful] levy arose." That is precisely the situation of the plaintiffs, as no tax has been assessed against them, but was assessed against Lieb. Therefore, Congress has, in effect, described plaintiffs as nontaxpayers, and apparently plaintiffs have agreed that this description is correct. We also agree.

Plaintiffs argue that interest should be awarded to them because defendant signed a joint motion with them to the court requesting the adoption of the trial commissioner's opinion which provided for a judgment in favor of the plaintiffs for $473,010.86, "together with interest as provided by law." The defendant says that it has contended from the beginning that this is not a tax refund suit, but a suit to recover contract funds due plaintiffs as an equitable adjustment and that there is no law that allows interest on a recovery of that kind. Consequently, argues defendant, the phrase "interest as provided by law" in the joint motion was not an agreement to pay interest and did not confer any right upon the plaintiffs to receive interest. We agree with the defendant.

Finally, the plaintiffs say that since the government had their money for over 11 years, it is right and just for the government to have to pay interest. We agree that equity and justice is on the side of the plaintiffs, but unfortunately interest cannot be collected from the government on that basis. The Supreme Court said in United States v. N. Y. Rayon Importing Co., 329 U. S. 654 (1947):

* * * Had Congress desired to permit the recovery of interest in situations where the Court of Claims felt it just or equitable, it could have so provided. The absence of such a provision is conclusive evidence that the court lacks any power of that nature. * * * [ Id. at 660.]

See also, United States v. Thayer-West Point Hotel Co., 329 U. S. 585 (1947).

We hold that the plaintiffs are not entitled to interest on their claim from the date of the misapplication of their funds (November 18, 1960), until paid.

Accordingly, the motion of plaintiffs to amend the opinion and judgment of the court so as to provide for interest is denied.

¹ §2411. Interest.

(a) In any judgment of any court rendered (whether against the United States, a collector or deputy collector of internal revenue, a former collector or deputy collector, or the personal representative in case of death) for any overpayment in respect of any internal revenue tax, interest shall be allowed at the rate of 6 per centum per annum upon the amount of the overpayment, from the date of the payment or collection thereof to a date preceding the date of the refund check by not more than thirty days, * * *

§6611. Interest on overpayments:

(a) Rate.

Interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax at the rate of 6 percent per annum.

(b) Period.

Such interest shall be allowed and paid as follows:

* * *

(2) Refunds.

In the case of a refund, from the date of the overpayment to a date (to be determined by the Secretary or his delegate) preceding the date of the refund check or not more than 30 days. * * *

² Amended November 2, 1966, by Pub. L. 89, 719, Title L. §110(e), 80 Stat. 1144. See 26 U. S. C. A. 7421 and footnote.

³ The term "taxpayer" in this opinion is used in the strict or narrow sense contemplated by the Internal Revenue Code and means a person who pays, overpays, or is subject to pay his own personal income tax. (See Section 7701(a)(14) of the Internal Revenue Code of 1954.) A "nontaxpayer" is a person who does not possess the foregoing requisites of a taxpayer.

⁴ 28 U. S. C. §2516(b) provides in part as follows:

(b) Interest on judgments against the United States affirmed by the Supreme Court after review on petition of the United States shall be paid at the rate of four percent per annum from the date of the filing of the transcript of the judgment in the Treasury Department to the date of the mandate of affirmance * * * (June 25, 1948, ch. 646, 62 Stat. 978: Sept. 3, 1954, ch. 1263, §57, 68 Stat. 1248.)

⁵ Section 110(a), Federal Tax Lien Act of 1966, Pub. L. 89-719, 80 Stat. 1125.

NICHOLS, Judge, dissenting:

Respectfully, I feel obliged to dissent from Judge Skelton's able and exhaustive opinion, and will try to state the reasons why, though briefly, without extended analysis. There is no need to state the facts, which the majority opinion does correctly.

I agree the Federal Tax Lien Act of 1966, P. L. 89-719, 80 Stat. 1125, does not, help this plaintiff and I do not consider it further.

I see no reason why a claimant may not, put on the hat of a taxpayer, or reject it, as he chooses, in a situation such as we have here. He can make his choice according to his position. He may file a claim for refund and, if it is timely, he may recover lawful interest. Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925 (9th Cir. 1957). If it is not timely, he may proceed down whatever other avenue to relief the law provides, sacrificing interest. The principal amount recovered would not necessarily be the same, since a claim for refund calls for a determination whether a person has overpaid his taxes, generally, and if so, in what amount. United States v. Memphis Cotton Oil Co. [3 USTC ¶1025], 288 U. S. 62 (1933), and see below.

The Internal Revenue Service determined administratively that the fund here involved belonged to Lieb, a bankrupt and delinquent taxpayer. Under the applicable part of the 1954 Code, 26 U. S. C. §6321 and §6331(a) they had to make such a determination to have a color of right to levy. I see no reason why a person making claim to the fund is not challenging a tax decision of the IRS like any other taxpayer. Simply as a matter of semantics it would seem no one has better right to call himself a taxpayer, than one whose property has been seized to pay a tax. A purely tortious seizure, not made under color of the Internal Revenue laws, would present a different case, with which I do not deal.

The dictum the court quotes from Stuart v. Chinese Chamber of Commerce [48-2 USTC ¶9315], 168 F. 2d 709 (9th Cir. 1948), is really the strongest authority the majority view has. As the court says, there is a similar dictum in Kirkendall v. United States [40-1 USTC ¶9283], 90 Ct. Cl. 606, 31 F. Supp. 766 (1940). It is in each case only dictum, however, because the owners of the property illegally seized had not filed timely claims for refund, and whatever remedy they had under the Internal Revenue laws was not before the court. The two District Court cases cited after Stuart contain nothing to conflict with my conclusions. Long v. Rasmussen, 281 F. 236 (D. Mont. 1922), and the cases following it, cited by the court, deal with the award of injunctive and other extraordinary relief to persons whose property is seized or distrained to satisfy the tax debt of another; remedies not allowed to "taxpayers" contesting taxes. They do not hold that such a person may not put on the hat handed him and proceed as "taxpayer," if he is willing to conform to the limitations and provisos of the Code, including application for refund.

The majority misreads Ray v. United States, 197 Ct. Cl. 1, 453 F. 2d 754 (1972). We did not hold that Colonel Ray had to proceed outside the Internal Revenue laws. He had, in fact, filed claims for refund within them, and received refunds, with interest, for open years. The source of his necessity to sue here was that for earlier years, the time to file refund claims had expired. As to open years, we considered he had an election. The best proof of this is that we cited and quoted from Prince v. United States [54-1 USTC ¶9264], 127 Ct. Cl. 612, 119 F. Supp. 421 (1954). That was a case almost identical with Ray's, but for the fact that Prince's claims for refund had been timely. We held that he was entitled to recover, with interest according to law. Thus it is clear that a person in Colonel Ray's position, and Prince's, as to years not barred, has an election to direct his claim against the IRS, with concomitant interest, or without interest against the agency that withheld a portion of his retirement pay to satisfy taxes not due. Besides the longer period of limitations, there was another advantage concomitant to the latter choice. Defendant argued that we could not simply award the funds withheld, because some of them may have been applied to satisfy other and still valid tax obligations. We answered that along the avenue Colonel Ray had chosen, we were not obligated to redetermine his taxes. Defendant would be relegated to its remedies under tax benefit rules. Clearly, the refund claims for the open years called on the IRS to redetermine Colonel Ray's taxes, and presumably it did.

If Ray and Prince enjoyed an election, why not plaintiff here? The real difference between the Ray and Prince cases, and the case at bar is that Ray and Prince were "taxpayers" not just as we all are, but in the more restricted sense that the funds in dispute had been withheld to pay taxes that, if anyone's, were theirs, whereas, in this case we now know that in that limited sense, plaintiff here was not a "taxpayer".

I stress "we now know", Lieb, the "taxpayer" whose tax liability the IRS sought to enforce, was the sole signatory of the contract under which the equitable adjustment here involved came into being. Naturally the IRS thought Lieb, the "taxpayer" was owner of the fund. It took a trial and adjudication here to disabuse it of that notion. Our commission found, with our approval, that the owner of the fund was really a joint venture, of which Economy was a member. Antecedently considered, whether the suit was brought as by a "taxpayer" under the Internal Revenue Code or by a government contractor would have appeared most doubtful. There does not seem to be any reason in the nature of things why Congress should have intended to achieve a wholly different result depending on whether money has been withheld for taxes from a tax exempt person (Prince) or (as here) seized to collect taxes from one other than the owner. If, in either case, the IRS can give the money back--as I am sure it could and would have, if satisfied Lieb was not the owner--it is reasonable to begin by asking the IRS to do so, i. e., filing a claim for refund. The fine distinction drawn by the majority would have created practical difficulties at the working level, but for the statutory relief now available. Over the years, as in Kirkendall and in the Ray case, defendant has persisted in the defense that persons in the instant situations are "taxpayers", therefore cannot recover absent claims for refund. I would now at last concede them the premise, even though I think the conclusion does not follow.

The literal language of the pertinent statutes does not help the court, the "taxpayer", "nontaxpayer" dichotomy not being found therein. 26 U. S. C. §6611 allows interest upon "any overpayment in respect of any internal revenue tax." By 26 U. S. C. §6401(c) "an amount paid as tax shall not be considered not to constitute an overpayment solely by reason of the fact that there was no tax liability in respect of which such amount was paid." By 28 U. S. C. §2411(a) a judgment for "any overpayment in respect of any internal revenue tax" may include interest on the amount of the overpayment. We note that at one time the law expressly provided that courts could award interest for "any internal revenue tax erroneously or illegally assessed or collected, or for any penalty collected without authority or any sum which was excessive or in any manner wrongfully collected, under the internal revenue laws." [Emphasis supplied.] Revenue Act of 1921, 42 Stat. 227, 316. If the disappearance of the emphasized language has any significance respecting the instant controversy, the parties no doubt would have so advised. It would appear the present §6401(c) was broadly written to provide an effective substitute accomplishing the same ends.

Finally, it is unavoidable that the decision today places us in conflict with the Ninth Circuit's Stuart v. Willis, supra. This court makes the untenable suggestion that maybe the Ninth Circuit awarded interest only from the date of judgment. The plaintiff has furnished us a copy of the trial court's findings of fact, conclusion of law, and judgment, unreported, but of unchallenged authenticity, certified by the clerk. The judgment, dated June 8, 1955, recites that it awards interest at 6% from November 6, 1951, apparently the date of the levy, as plaintiff had filed its claim for refund on December 26, 1951. The Ninth Circuit panel recites that the defendant Collector claims this award of interest was error (p. 927) and it affirms, discussing other issues but not this one.

DAVIS, Judge, joins in the foregoing dissenting opinion.

 

 

[72-1 USTC ¶9344]Economy Plumbing & Heating Co., Inc., et al. v. the United States

U. S. Court of Claims, No. 226-65, 197 CtCls 839, 456 F2d 713, 3/17/72

[Code Secs. 6321 and 6331 and Related Statute 3466]

Lien for taxes: Property rights: Joint venture: Amount due under government contract: Separate tax liability.--The Government's tax lien in regard to proceeds arising from an equitable adjustment of a contract belonging to a joint venture attached only to that amount equal to the tax indebtedness of the joint venture in regard to payroll taxes that arose out of the performance of the contract. The lien did not attach to the balance to satisfy one of the joint venturer's individual tax liability since the amount of the equitable adjustment was a property right belonging to the joint venture. Since the unpaid debts and obligations of the joint venture exceeded the amount of the equitable adjustment, the equitable adjustment did not include any surplus that could be allocated between the joint venturers as their respective individual shares. Thus, no part of the equitable adjustment was available for application in satisfaction of the separate tax obligation of one of the joint venturers that were unrelated to the contract.

A. Charles Lawrence, for plaintiff and Transamerica Ins. Co. Mark Segal, Scott P. Crampton, Assistant Attorney General, Department of Justice, Washington, D. C. 20530, for defendant.

Before COWEN, Chief Judge, DAVIS , COLLINS, SKELTON, NICHOLS, KASHIWA , and KUNZIG, Judges.

Opinion

PER CURIAM:

This case was referred to Trial Commissioner Mastin G. White with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on November 15, 1971. On February 3, 1972, a joint motion for judgment under Rule 141(b) was filed by counsel for plaintiff, the intervening or third-party plaintiff (Transamerica Insurance Company) and defendant, wherein it is stated that no intention to except to the commissioner's report is on file, that no party desires to except and that "the parties respectfully request that the Court adopt the Commissioner's findings of fact, opinion, and recommendation for the conclusion of law as the basis for the judgment in this case."

Since the court agrees with the commissioner's opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case without oral argument. Therefore, it is concluded that plaintiff and Transamerica Insurance Company, third-party plaintiff, are entitled to recover and judgment is entered for them in the sum of $473,010.86. It is further concluded that the third-party petition of Andrew B. Crummy, receiver for Lieb Bros., Inc., be and the same is dismissed for failure to prosecute the claim set out therein.

Opinion of Commissioner

WHITE, Commissioner:

This is an action for the recovery of $473,010.86, ¹ representing a portion of an equitable adjustment under contract No. DA-11-032-ENG-1232 ("the contract") that was--according to allegations in the petition--wrongfully withheld by the defendant.

It is my opinion that a recovery is warranted.

The contract was entered into as of October 4, 1951. The formal signatories to the contract were the defendant (represented by a contracting officer of the Chicago District, Corps of Engineers, Department of the Army) and Lieb Bros., Inc. ("Lieb"), a New Jersey corporation (represented by its president).

The contract provided for the construction of additional dormitories, mess halls, and appurtenant outside facilities at Scott Air Force Base near Belleville , Illinois . The contractor was to be paid $13,484,275.50 as the original contract price. The work, as reduced by a partial termination order, was completed in the spring of 1953 and was accepted by the Corps of Engineers ("the Corps") as of May 27, 1953.

At the end of September 1955, Lieb filed a petition in bankruptcy under Chapter XI of the Bankruptcy Act. Lieb is now insolvent.

On November 18, 1960, the sum of $477,587.66, out of a total equitable adjustment of $544,848.33 awarded by the contracting officer under the provisions of the contract, was paid by the General Accounting Office to the Internal Revenue Service in order to cover payroll taxes and income taxes, together with interest and penalties thereon, which Lieb allegedly owed the defendant. Of the total tax indebtedness claimed against Lieb, only $4,576.80 involved payroll taxes, together with interest and penalties thereon, that arose out of the performance of the contract. The remainder of $473,010.86 was applied by the Internal Revenue Service in satisfaction of tax obligations on the part of Lieb that were unrelated to the contract.

The present action for the recovery of the $473,010.86 which the Internal Revenue Service applied in satisfaction of Lieb's separate tax obligations that were unrelated to the contract was first instituted by Economy Plumbing & Heating Co., Inc. ("Economy"). ² In its petition, Economy alleged that it was a joint venturer with Lieb in the performance of the contract, that Lieb was insolvent and in receivership, and that Economy, as the solvent joint venturer, was suing on behalf of the joint venture for money to be applied in satisfaction of the debts and obligations of the joint venture. In this connection, the evidence in the record shows that the unpaid principal amounts of the outstanding debts and obligations of the joint venture, relating to the performance of the contract, exceed $2,000,000.

On motions filed by the defendant under former Rule 23(a)(1)--now Rule 41(a)(1)--notices were issued to certain third parties, and they filed petitions as third-party plaintiffs. One of the third-party plaintiffs is Andrew B. Crummy, receiver for Lieb. Although the customary notices were sent to Mr. Crummy, he did not participate in the trial and did not submit any requested findings or brief to the commissioner after the trial. The other third-party plaintiff is Transamerica Insurance Company ("Transamerica"), successor by merger of American Surety Company of New York , which acted as surety on the performance and payment bonds required under the contract.

Economy and Transamerica have been represented by the same counsel throughout the court proceedings, beginning with the filing of Transamerica's petition as a third-party plaintiff.

The propriety of the defendant's action in applying $473,010.86 of the proceeds under the contract in order to satisfy Lieb's separate tax obligations that were unrelated to the contract depends upon whether the $473,010.86 belonged to Lieb. In this connection, Section 6321 of the Internal Revenue Code of 1954 (26 U. S. C. §6321) provides in part as follows:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. [Emphasis supplied.]

Also, Section 6331(a) of the 1954 Code (26 U. S. C. §6331(a)) provides in part as follows:

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax * * * by levy upon all property and rights to property * * * belonging to such person * * *. [Emphasis supplied.]

Economy and Transamerica contend that the $473,010.86 in controversy represented a property right "belonging to" the Lieb-Economy joint venture, and not to Lieb alone, whereas the defendant contends that the $473,010.86 represented a property right "belonging to" Lieb alone.

It has long been the settled rule "that the interest of each partner in the partnership property is his share in the surplus, after the partnership debts are paid; and that surplus only is liable for the separate debts of such partner." United States v. Hack, 33 U. S. (8 Pet.) 271, 275 (1834). Thus, in a situation where a partner owes an individual tax, the Government's tax lien with respect to partnership property extends only to the interest of the particular partner in the surplus of the partnership property. United States v. Kaufman [1 USTC ¶116], 267 U. S. 408, 414 (925).

Economy and Lieb were, in actuality, partners with respect to the performance of the contract, although only Lieb signed the contract as a formal party to it. Economy became involved with Lieb in the undertaking soon after the Corps issued its invitation for bids on the contract. On the basis of its extensive contracting experience in the Illinois area, Economy rendered assistance along various lines in connection with the preparation of a bid to be submitted by Lieb, e.g., labor relations, negotiations with prospective subcontractors, acquisition of payment and performance bonds, and obtaining the necessary financial backing. Then, after bids had been submitted, and while the Corps was negotiating with Lieb and other bidders, Lieb and Economy agreed that they would perform the contract as joint venturers if Lieb was successful in obtaining the job.

After the contracting officer for the Corps informed Lieb that its bid had been accepted, Lieb and Economy, as previously agreed, executed a written agreement for the performance of the contract as joint venturers. Under the agreement, the project engineer in charge of the work was to be answerable and responsible to both Lieb and Economy, all top-level decisions were to be made jointly by Lieb and Economy, and all checks, vouchers, notes, and other instruments were to be countersigned by both Lieb and Economy. The net profits or losses, as the case might be, resulting from the performance of the contract were to be shared by Lieb and Economy on a 65-35 basis.

The contract was performed by Lieb and Economy as joint venturers. They participated together in all phases of such performance: financing, management, selection of personnel, selection of and dealings with subcontractors, dealings with the Corps, and dealings with labor unions.

Furthermore, at about the time when the contracting officer informed Lieb that its bid on the contract was accepted, Lieb and Economy notified the Corps that the contract was to be performed by Lieb and Economy as a joint venture, with Lieb having a 65 percent interest and Economy having a 35 percent interest in the job. Thus, the Corps was fully aware throughout the performance of the contract that the work was being done by Lieb and Economy as a joint venture.

The circumstance that Economy was not a formal signatory to the contract is not controlling with respect to the disposition of the present case. In this connection, the case of Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925 (9th Cir., 1957), is especially significant. In that case, John E. and Edith P. Willis entered into a joint venture with King-Hoover Construction Company "(King-Hoover"), a corporation. King-Hoover was in a preferred position to obtain a certain construction contract with the Government, and the corporation did bid on and obtain the contract in its name. Later, when the job was successfully completed by the joint venture, the Government owed $12,278.18 on the job.

King-Hoover was indebted to the Government for payroll taxes, and the entire amount of $12,278.18 mentioned in the preceding paragraph was applied by the Government in satisfaction of King-Hoover's tax obligations. The tax indebtedness in connection with the joint venture's project amounted only to $3,610.95. Thus, the sum of $8,667.23, out of the $12,278.18 due on the construction contract, was applied by the Government in satisfaction of King-Hoover's taxes that were unrelated to the joint venture's project. The joint venture filed suit for the recovery of the amount that had been applied to the payment of King-Hoover's separate tax obligations.

In holding that the joint venture was entitled to recover, the court stated in part as follows (244 F. 2d at p. 929):

There is no statute which permits the Collector to effect a tax liability to the United States against payments due on such a job to King-Hoover from the United States , even though the contract is in the name of King-Hoover alone. He is required to proceed by levy against the property of a taxpayer. There is no statute which permits the Collector to levy upon the property of a partnership for the outside liabilities of the partner. Since the Collector levied upon the property of the taxpayers, Willis and King-Hoover, to liquidate a tax liability of King-Hoover alone, the levy was void.

In the present case, therefore, the equitable adjustment in the amount of $544,848.33 which the contracting officer awarded under the provisions of the contract was a property right "belonging to" the Lieb-Economy joint venture that performed the contract. As the unpaid debts and obligations of the joint venture greatly exceeded the amount of the equitable adjustment, the equitable adjustment did not include any surplus that could be allocated between Lieb and Economy as their respective individual shares. Consequently, no part of the equitable adjustment was available for application in satisfaction of separate tax obligations on the part of Lieb that were unrelated to the contract.

It necessarily follows that the defendant acted without lawful authority when it applied a portion--i. e., $473,010.86--of the equitable adjustment in satisfaction of Lieb's separate obligations that were unrelated to the contract. Economy and Transamerica are entitled to recover the $473,010.86 in order that this money may be available for the payment of the joint venture's outstanding debts and obligations, at least in part.

The third-party petition of Andrew B. Crummy, receiver for Lieb, should be dismissed because of his failure to prosecute the claim asserted in such petition.

["Findings of Fact" and "Conclusion of Law" omitted.--]

¹ The original petition asked for a judgment in the amount of $477,587.66, but the requested findings of fact that were submitted on behalf of the plaintiff and Transamerica Insurance Company, third-party plaintiff, reduced the demand to $473,010.86.

² While the litigation was in progress, Economy's name was changed to Economy Mechanical Industries, Inc.

 

 

[74-1 USTC ¶9287]Carl L. Lidberg, Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. Minn., Fourth Div., No. 4-73-Civil 165, 375 FSupp 631, 2/20/74

[Code Sec. 6331]

Levy: Propriety: Joint venturer's share of assets.--The government did not err in levying on the personal share of the assets of one joint venturer to satisfy its lien against the venture for 1966 taxes. It was not required to levy on the overall assets of the venture. Joint venturers are jointly and severally liable for any liens against their property.

Solomon Wasserman, Wasserman & Lewis, 512 Nicollet Mall Bldg., Minneapolis , Minn. , for plaintiff. John M. Lee, Assistant United States Attorney, Minneapolis , Minn. , for defendant.

Memorandum Findings of Fact, and Conclusions of Law, and Order

LARSON, District Judge:

The parties have filed a stipulation of facts.

In October 1966 Wilbur Milton and family formed A & H Machinery Erectors, Inc. (hereinafter A & H), a Minnesota corporation, to perform millwright work and related activities and to continue work in process by Milton . From August 1966 until early in January 1967, Carl Lidberg (hereinafter the taxpayer) worked with Milton and then A & H on these jobs.

The taxpayer subsequently brought an action in Hennepin County District Court in the State of Minnesota for an accounting against A & H and Milton. Finding that A & H was a mere alter ego of Milton and that a joint venture relationship existed between Milton and the taxpayer from August 1966 through the first week of January 1967, the Court on October 16, 1969, entered a judgment for the taxpayer for $35,891.92 plus interest against A & H and Milton. Each of them was declared to be jointly and severally liable for this amount.

In connection with this action, certificates of deposit in the amount of $76,050.20 were established in a local bank in the names of the taxpayer and an agent of A & H, Milton, and Milton 's wife. Pursuant to the State Court judgment, the taxpayer had a property interest of $35,891.92 in these funds.

The joint venture had failed to collect and pay over Federal withholding taxes and Federal Insurance Contribution taxes for the final two quarters of 1966 in the amounts of $2,568.73 and $13,856.24, respectively. Jeopardy assessments in these amounts were made on November 12, 1969, against the taxpayer, Milton, and A & H. Notice of this assessment in the amount of $16,404.97 plus interest from the date of assessment was filed the following day. The taxpayer, Milton, and A & H were at all pertinent times jointly and severally liable for these taxes.

In a separate action, the United States subsequently obtained a tax judgment against Milton, A & H, and a related company in the amount of $88,131.76 plus interest. United States v. Milton [71-2 USTC ¶9503], No. 4-69-Civ. 237 (D. Minn. 1971). The bank that had the certificates of deposit from the State Court action was ordered to pay the taxpayer $35,891.92 plus interest, representing his property interest in the funds. The bank also was ordered to pay a portion of the funds, $7,489.10 plus interest, to an intervenor and to charge this amount to the taxpayer's ownership interest.

The remainder of the funds in the bank was ordered to be foreclosed pursuant to these separate tax liens against Milton and A & H. A deficiency judgment for the balance of the $88,131.76 (plus interest) owed by Milton and A & H was also entered.

The Government then levied and collected §37,542.43 out of the certificates of deposit in partial satisfaction of the separate liabilities of Milton and A & H. With respect to the 1966 tax obligations owed jointly and severally by the taxpayer, Milton, and A & H, the Government levied $17,805.98 on the portion of the certificates in which the taxpayer had obtained a property interest pursuant to the State Court judgment.

The taxpayer filed timely claims for refund in the amount of the levy against his share of the funds on July 12, 1971. The claims were disallowed in full by the District Director of Internal Revenue on March 29, 1972.

The taxpayer then brought this action seeking refund of the $17,805.98. The Court has jurisdiction under 28 U. S. C. §1346(a)(1).

[Issue and Contentions]

The issue is whether the Government erred in levying on the taxpayer's share of the funds in satisfaction of the liens for the 1966 taxes. The taxpayer contends that the levy for this obligation should have been made on the overall assets of the joint venture, rather than on his personal share of those assets.

He maintains that after subtracting the intervenor's judgment from his share, the Government should have levied on the balance of $69,571.10 remaining in the certificates. This would have left nearly $52,000 from which he could now extract his remaining interest ($35,891.92 less the intervenor's share properly subtracted from his interest). As it is, the taxpayer has ended up with about $10,000 as a result of the Government having levied all of the 1966 tax liability from his share.

The taxpayer rests his argument upon the fundamental principle of partnership law that unless partnership assets are insufficient, creditors of the partnership must first look to joint or partnership property before levying on the individual property of the partners. 68 C. J. S., Partnership, §195b (1950). Since the parties agree that applicable law equates the treatment of a joint venture with a partnership, 26 U. S. C. §761; M. S. A. §323.02 subd. 8, the taxpayer contends that this rule compels the Government to levy on the overall assets of the joint venture, the sum remaining after subtraction of the intervenor's judgment. As the taxpayer points out, this amount was sufficient, at one time, to cover the liability for the jeopardy assessments here in question without necessitating resort to the taxpayer's personal share of the funds.

[Nature of Liability]

The Court considers this argument unsound. The Government concedes, as it must, the validity of the elementary principle relied upon by the taxpayer. See, e.g., Application of Camhi, 208 N. Y. S. 2d 162, 165, 215 Misc. 2d 406 (1960); Casey v. Grantham, 239 N. C. 121, 126, 79 S. E. 2d 75 (1954). Derived from the equitable principle of the marshaling of assets, 68 C. J. S., Partnership, supra, §185, this also apparently is the law in Minnesota . C. f. 14 Dunnell's Minnesota Digest, Partnership, §7384 (3rd ed. 1954). At least, the parties treat it as such, and the enactment of the Uniform Partnership Act in this State and elsewhere has not altered this fundamental tenet. 60 A. Jur. 2d, Partnership, §307 (1972).

But this principle is inapplicable to the case at hand. Section 6321 of the Internal Revenue Code of 1954, 26 U. S. C. §6321, provides for a lien "upon all property and rights to property, whether real or personal, belonging to . . ." each person liable under the Federal tax laws. Liens for taxes incurred by a partnership or joint venture attach not only to joint or partnership property, but also to property individually owned by the partners or joint venturers. Underwood v. United States [41-1 USTC ¶9296], 118 F. 2d 760, 761 (5th Cir. 1940); United States v. Ross, 176 F. Supp. 932, 935 (D. Neb. 1959) In re Crockett [57-1 USTC ¶9559], 150 F. Supp. 352, 354 (N. D. Cal. 1957). See also M. S. A. §323.14(1). Since the taxpayer, Milton, and A & H were jointly and severally liable for the taxes in question, the Government could have levied on any of their individual property interests.

Had it followed the procedures demanded by the taxpayer, it would have had a larger outstanding deficiency judgment on the other unrelated taxes owed by Milton and A & H. By choosing to levy on the taxpayer's separate interest in the certificates of deposit, the Government realized in excess of $14,000 more than had it levied on the overall assets in the certificates.

Maximizing its revenue collection in this manner definitely worked to the disadvantage of the taxpayer. But since he was jointly and severally liable with the others for the 1966 taxes, the lien encumbered all of his individual property under 26 U. S. C. §6321. Levying on that property, therefore, was permissible under §6331.

His remedy, if any, may be by way of indemnification or contribution from Milton and A & H. See M. S. A. §323.17(2); 68 C. J. S. Partnership, supra, §116.

Accordingly, IT IS ORDERED:

That the taxpayer's suit for refund be, and it hereby is, denied.

Judgment will be entered for the defendant.