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[2000-1 USTC 50,322] Marvin L. Barmes and Barbara J. Barmes, Plaintiffs/Counterclaim Defendants v. Internal Revenue Service, United States of America, Defendant/ /Counterclaim Plaintiff/Third-Party Plaintiff v. Sandbar Real Estate Trust, Sandbar Wholesale Trust, established under instruments dated 10/12/95, as alter egos, nominees and/or transferees of Marvin L. Barmes and Barbara J. Barmes, and James Rabold, Kim Hall Barmes, and Susan Thomas Barmes, co-trustees of the Sandbar Real Estate Trust and the Sandbar Wholesale Trust, as nominees, agents, constructive trustees, and/or transferees of Marvin L. Barmes and Barbara J. Barmes, Third-Party Defendants

U.S. District Court, So. Dist. Ind. , Terre Haute Div., TH 97-287-C-T/F, 3/8/2000.

Assessment, validity of: Identification of taxpayer: Characterization of business: Withholding taxes.--Employment tax assessments against a married couple that identified their gift shop as a partnership and named both spouses as taxpayers were valid. Although the taxpayers claimed that they intended to operate a sole proprietorship rather than a partnership and that only the husband operated the business, the IRS sent the assessments to the correct business address and included the correct employer identification number. Furthermore, the taxpayers frequently corresponded with the IRS regarding the tax liability of the business, failed to show that any confusion resulted from the purportedly incorrect information on the assessments, and referred to the business as a partnership on their withholding tax returns. Consequently, the characterization of the business as a partnership on the assessments was irrelevant to its liability for the taxes.

Tax liens, validity of: Partnership: Intent to form.--Tax liens for unpaid employment taxes of a business were not valid against the wife of the owner since the IRS failed to show that the couple operated a valid partnership. Her co-ownership of the business and her sharing of profits with her husband did not establish that the couple intended to form a partnership since such arrangements are common in marriages.

Tax liens, validity of: Partnership: Notice and demand: Proper notice: Information required.--Tax liens for unpaid employment taxes of a business were valid against the owner. Although notice of the assessment was issued to the business as a partnership rather than to him personally, he received the notice and it contained his name and the amount of tax owing. Further, he would have been equally responsible for the debt whether he was a sole proprietor or partner.

District court: Jurisdiction: Declaratory judgment: Quiet title.--Jurisdiction was lacking over married taxpayers' request for a declaratory judgment that tax liens against them for unpaid employment taxes were invalid. However, since they questioned the procedural regularity of the liens, the court assumed jurisdiction over their challenge as an action to quiet title.

Gerald A. Coraz, Assistant United States Attorney, Indianapolis, Ind. 46204, William M. Kostak, Department of Justice, Washington, D.C. 20530, for I.R.S.


TINDER, District Judge:

Who really owns and operates "Barbara's Gift Shop"? That question is at the heart of this tax dispute, and the matter is now before the court upon cross-motions for summary judgment. The plaintiffs, Marvin Barmes and Barbara Barmes, filed their motion for summary judgment on March 4, 1998. The defendant, the United States of America , filed its motion for summary judgment on October 19, 1998.


The business commonly known as "Barbara's Gift Shop" began its operations in 1972 in Vincennes , Indiana . Over the years, the business ran a gift shop, manufactured novelty items like pipes and clocks, and conducted sales through mail order catalogues. Though jointly owned by the plaintiffs--Marvin Barmes and his wife, Barbara--the business was far from the "mom and pop" operation its name suggests, employing around 80 people. Employers like Barbara's Gift Shop are required to withhold federal taxes from employee wages. See 26 U.S.C. 3102(a), 3402(a). When they do so, they hold the money in trust for the United States and must pay over the money by filing employee withholding tax returns on a quarterly basis. See 26 U.S.C. 7501(a). The IRS keeps track of such employers by assigning each an Employer Identification Number ("EIN"). The IRS assigned EIN 35-1305131 to Barbara's Gift Shop.

At first, income tax returns and IRS records indicated that Barbara's Gift Shop was run by Marvin Barmes as a sole proprietorship. But in 1984 and 1985, Mr. and Ms. Barmes filed income tax returns as a partnership on Form 1065, U.S. Partnership Return of Income, again identifying the business with EIN 35-1305131. After 1985, Mr. and Ms. Barmes filed a joint income tax return on Form 1040 with a Schedule C, Profit (or Loss) From Business or Profession. While the Barmeses' income tax returns indicated that the business was a sole proprietorship after 1985, the business continued to file quarterly employee withholding returns with the same EIN. Since 1984, IRS records have indicated that EIN 35-1305131 was assigned to "Marvin L and Barbara J Barmes PTR."

On October 12, 1995, ownership of the business was transferred to an entity called "Sandbar Wholesale Trust" and employees of Barbara's Gift Shop were ostensibly discharged. In 1996, Barbara's Gift Shop continued its operations under the ownership of the trust, though its workers were purportedly "independent contractors" rather than employees. By letter dated May 24, 1996, the IRS informed the Barmeses that "[b]ased upon your information we agree that you are no longer required to file" quarterly tax returns for employee withholding. Accordingly, the business did not timely file its quarterly withholding returns in 1996.

Meanwhile, the IRS was in the midst of a covert, informal investigation to determine whether the business still retained employees for withholding purposes. On December 9, 1996, the IRS sent notices of deficiency to the business for the first two withholding quarters of 1996. The plaintiffs responded on December 12, 1996, by co-signing a letter stating that "[f]or the entire year 1996 I have not been an employer and have no employees." That same day, the Barmeses also submitted employer's withholding federal tax returns for the quarterly periods of March 31 and June 30, 1996. Both returns showed no money due because of the Barmeses' position that the business had no employees. The returns also had a box checked indicating that withholding returns did not need to be filed in the future. The business was identified on the returns with the same EIN; the name of the business was listed as "Marvin L and Barbara J Barmes PTR."

The IRS usually evaluates a tax return after it is received. If the return is deemed satisfactory, the IRS enters an assessment for the amount of tax that the taxpayer has calculated as owing. If the IRS disagrees, it can enter a different assessment--but only after it sends a notice of deficiency to the taxpayer and affords him/her the opportunity to challenge its findings in Tax Court. Once it makes an assessment, the IRS generally has 60 days to issue a notice and demand for payment to the taxpayer, and ten years to collect the assessed amount. 26 U.S.C. 6303, 6502(a)(1). Refusal to pay the tax upon demand results in a lien in favor of the United States "upon all property and rights to property, whether real or personal," that the taxpayer owns. 26 U.S.C. 6321. Such a lien is commonly called a "secret lien" because it is unknown by anyone except the IRS and the taxpayer. Collection of the tax may then be made through administrative (e.g., levies) or judicial (e.g., suits to foreclose liens and reduce assessments to judgment) procedures. See 26 U.S.C. 6326, 7403.

In this case, the IRS disagreed with the plaintiffs' returns and sent a proposed assessment on February 21, 1997, against Barbara's Gift Shop for the first two quarters of 1996. On March 1, 1997, the plaintiffs both signed and sent a letter repeating that they had no employees and therefore had not withheld any money. Next, the IRS sent a series of assessment notices for each of the four 1996 quarterly tax periods, and for the Form 940 taxes for 1996. Form 940 is the employer's annual federal unemployment tax return. These notices were addressed to:




VINCENNES IN 47591-1234202

The IRS later sent final pre-levy notices to the business for these periods as well, which were also addressed like the assessment notices above. The IRS then filed notices of a federal tax lien with the County Recorder , Knox County , Indiana . The first tax lien notice was purportedly against "Martin L & Barbara J Barmes PTR, a Partnership," while the second listed the taxpayer as "Sandbar Real Estate Trust" as agent or alter ego of Marvin and/or Barbara Barmes.

On May 16, 1997, Mr. and Ms. Barmes filed an administrative claim for a refund from the four quarterly withholding periods of 1996 and from Form 940 taxes for 1996. In that claim, the plaintiffs asserted that Barbara's Gift Shop was not a withholding agent after its employees were discharged. The plaintiffs also submitted a money order for $400, which represented a partial payment under protest of the entire amount assessed. See Flora v. U.S. [60-1 USTC 9347], 362 U.S. 145, 162 (1960). By letter dated July 21, 1997, the IRS responded to the claim by saying it would contact the plaintiffs within 30 days. The IRS did not contact the plaintiffs again regarding their claim. In October 1997, the plaintiffs filed a supplement to their original claim, this time informing the IRS that it had wrongfully assessed taxes against a defunct partnership.

On July 17, 1997, the IRS issued a proposed assessment against the partnership for the first two quarterly withholding tax periods of 1997. Thereafter, the plaintiffs filed another administrative claim for a refund, tendered another $400 check, and directed that the amount be applied equally over the two quarterly periods. The plaintiffs asserted in the claim that they were entitled to a refund of $400 because the partnership was terminated and had no employees. The IRS denied the plaintiffs' claim. But on November 17, 1997, the IRS notified the Barmeses that--for reasons which remain mysterious--it had adjusted their account for the tax period March 31, 1997, to reflect no money due. The IRS further explained that it considered the second payment of $400 to be an overpayment that the IRS had applied to the Barmeses' tax debt from the assessment for March 31, 1996. Curious about the apparent abatement of the March 31, 1997 quarterly tax debt, the plaintiffs sent the IRS a letter explaining that the $400 payment was submitted under protest and that their administrative claim expressly directed the funds to be applied in equal amounts to each quarter at issue, March 31, 1997 and June 30, 1997. The IRS did not respond to that letter.

On November 2, 1997, the plaintiffs filed this action seeking: 1) a declaratory judgment that the liens stemming from the 1996 assessments are invalid; and 2) a refund for both $400 payments. The United States filed its counterclaims on January 26, 1998, seeking a judgment in the amount of the two unpaid assessments: 1) the first and second quarters of 1996 (totaling $255,936.64); and 2) the third and fourth quarters of 1996, plus federal unemployment taxes (totaling $341,083.63). 1 Before the court are the plaintiffs' motion for summary judgment as to all pending claims and the government's cross-motion for summary judgment on the issue of the procedural correctness of the tax assessments.


A grant of summary judgment is appropriate when the pleadings and other submissions to the court "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P.56(c). To determine whether a genuine issue of material fact exists, a court must construe the facts in a light most favorable to the non-moving party and draw all reasonable inferences in favor of that party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). But neither "the mere existence of some alleged factual dispute between the parties," Anderson, 477 U.S. at 247, nor the existence of "some metaphysical doubt as to the material facts," Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), is sufficient to defeat a motion for summary judgment. Instead, a genuine issue of fact "exists only when a reasonable jury could find for the party opposing the motion based on the record as a whole." Pipitone v. U.S. [99-1 USTC 50,600], 180 F.3d 859, 861 (7th Cir. 1999). When the parties submit cross-motions for summary judgment, the court is not required to grant judgment as a matter of law for one side or the other. Heublein, Inc. v. U.S. [93-2 USTC 50,397], 996 F.2d 1455, 1461 (2nd Cir. 1993). Instead, the court must evaluate each party's motion on its own merits, resolving factual uncertainties and drawing all reasonable inferences against the party whose motion is under consideration. Id. ; Buttitta v. City of Chicago , 803 F.Supp. 213, 217 (N.D.Ill. 1992), aff'd, 9 F.3d 1198 (7th Cir. 1993).

The Barmeses seek a refund and to nullify tax liens. Both claims concern the procedural correctness of the two tax assessments, because a proper assessment of tax debt is a sine qua non of a tax lien's validity. See Johnson v. U.S., By and Through Dept. of Treasury IRS [97-2 USTC 50,599], 123 F.3d 700, 702 (2nd Cir. 1997). The plaintiffs contend that the assessments are invalid because they have been assessed against a nonexistent partnership. 2The government maintains that a partnership did exist and, in the alternative, that the assessments are procedurally valid against the business regardless of whether it was operated as a partnership. Below, the court considers first the legitimacy of the assessments and then the legality of the liens.

A. The Validity of the Assessments

Tax assessments "shall be made by recording the liability of the taxpayer in the office of the Secretary [of the Treasury] in accordance with rules or regulations prescribed by the Secretary." 26 U.S.C.A. 6203. Treasury regulations provide that assessments must be made by providing the "identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. . . ." 26 C.F.R. 301.6203-1. The assessments at issue identified the taxpayer as:




VINCENNES IN 47591-1234202

According to the plaintiffs, that moniker is wrong: only Marvin Barmes ran the business, business accounts were in Marvin's name alone, and the Barmeses did not subjectively intend to have a partnership. The plaintiffs contend that the entity liable for the taxes was therefore incorrectly denominated on the assessments. How, the Barmeses ask, can taxes be assessed against a partnership that does not exist?

Although case law in the area is scarce, this court (through Chief Judge Sarah Evans Barker) considered a similar issue last year in U.S. v. Indianapolis Baptist Temple [99-2 USTC 50,676], 61 F.Supp.2d 836 (S.D.Ind. 1999). In Baptist Temple , the court affirmed the validity of employee withholding tax assessments against an unincorporated religious society even though the EIN listed on the assessment erroneously identified a defunct corporation. In so doing, the court noted that: 1) the relevant IRS inquiries and notices were sent to the correct address; 2) the taxpayer had ongoing correspondence with the IRS; 3) the incorrect identification number did not cause any confusion about what entity was actually being assessed; and 4) the corporation had been dissolved for years and the tax assessments clearly reflected liabilities arising out of the taxpayer's operations. Id. at 839. The court concluded that "the assessment at issue was against [the taxpayer] and [the taxpayer] knew it." Id.

Likewise, the notices of assessment in this case were sent to the correct address regardless of whether Barbara's Gift Shop was operated as a sole proprietorship or a partnership. Further, Mr. and Ms. Barmes frequently corresponded with the IRS, indicating that they were aware of the potential tax liability facing the business. Moreover, the plaintiffs have not pointed to any confusion arising from the fact that the assessments named "Marvin L and Barbara J Barmes PTR"; the tax assessments clearly reflect liabilities arising out of the operation of Barbara's Gift Shop. See Moore v. U.S. [93-2 USTC 50,495], 1993 WL 414711 (E.D.Cal. 1993) (finding assessment valid despite its use of incorrect taxpayer social security number where taxpayer was properly identified by name and address). If the Barmeses had considered the partnership defunct for years, they surely must have realized that the business was responsible for withholding taxes as a sole proprietorship. The record conclusively establishes that the assessments were against Barbara's Gift Shop, and its owners knew it.

Indeed, the business with the trade name "Barbara's Gift Shop" used EIN 35-1305131 and listed itself as being owned by "Marvin L & Barbara J Barmes PTR" on its 1996 quarterly withholding tax returns. The IRS assessments simply used the same information that the taxpayer had supplied on those returns. In making assessments, the IRS should be entitled to rely upon the information that the taxpayer supplies in its return. The Barmeses' position would require the IRS to divine the correct legal status of the taxpayer--from an investigation of the business' accounts and a journey through the cerebra of its owners--before making a tax assessment. That position is untenable. The taxes were correctly assessed against the employer who had been assigned EIN 35-1305131, and who was required to file quarterly withholding trust fund tax returns. The assessment is valid whether the business was actually run as a partnership or a sole proprietorship.

This would be the end of the court's inquiry if the Barmeses had only sued for a refund. But the plaintiffs also challenge the validity of the liens insofar as those liens might subject Mr. and Ms. Barmes to individual liability. The court therefore considers that issue below. 3

B. The Validity of the Liens

Even if the assessments were valid, the parties agree that the liens themselves are not valid against both Mr. and Ms. Barmes individually unless they are both responsible for the tax as general partners of a partnership. If Mr. and Ms. Barmes were partners when the liens issued, they are each individually liable. The court must therefore consider each spouse's liability.

1. Barbara Barmes

A partnership is "an association of two or more persons to carry on as co-owners a business for profit," I.C. 23-4-1-6(1), and the question of its existence is generally one of fact. See Soley v. VanKeppel, 656 N.E.2d 508, 513 (Ind.Ct.App. 1995). A partnership requires: 1) a contract for the purpose of sharing profits and losses that arise in a common enterprise; and 2) an intention to form a partnership. Watson v. Watson, 108 N.E.2d 893, 895 ( Ind. 1952). The intent required is merely the intent to do those things that constitute a partnership; such parties will be partners notwithstanding the label of their venture or their desire to avoid the liability attaching to partners. See Weinig v. Weinig 674 N.E.2d 991, 994 (Ind.Ct.App. 1996). But with respect to a husband and wife, co-ownership of property and the sharing of business profits do not demonstrate a partnership because those arrangements are common in marriages. See Bradford v. Bentonville Farm Supply, Inc., 510 N.E.2d 745, 747 (Ind.Ct.App. 1987). Thus, additional facts are necessary to establish a partnership between spouses. Johnson v. Wiley, 613 N.E.2d 446, 451 (Ind.Ct.App. 1993).

In support of their motion for summary judgment, the Barmeses have submitted a sworn declaration that they never intended to be partners or held themselves out as partners to other parties; that any bank financing was obtained solely in Marvin's name; and that business checking accounts have never been held as partnership accounts. The Barmeses also point out that their income tax returns have reported the business to be a sole proprietorship since 1986. The IRS relies upon the fact that the Barmeses filed joint income tax returns listing them as "co-owners" of the business and that the business' quarterly withholding returns identified the taxpayer with the EIN that identified "Marvin L and Barbara J Barmes PTR."

Neither the fact that IRS records continued to list the entity as a partnership, nor the fact that the Barmeses continued to file quarterly withholding returns using the same EIN, is probative of whether there was a partnership in fact. Barbara's Gift Shop would have had to pay employee withholding taxes irrespective of whether the business was run as a sole proprietorship or a partnership. It appears that therefore neither party paid very much attention to whether the label identifying the business was correct--the business simply used the EIN it had been assigned. Further, the fact that spouses co-owned a business or shared its profits does not create a partnership. Johnson, 613 N.E.2d at 45. The IRS has failed to submit evidence suggesting that Ms. Barmes actually helped run the business; that she is her husband's wife is not enough. Id. Because the business was a sole proprietorship run by Marvin Barmes in 1996 and 1997, 4 the liens are not valid against Ms. Barmes.

2. Marvin Barmes

What remains is the question of whether the liens are valid against Mr. Barmes individually as sole proprietor of Barbara's Gift Shop. After the IRS makes an assessment, it must issue a notice and demand for payment to the taxpayer within 60 days. 26 U.S.C. 6303. If the IRS does so, the failure to pay results in a secret lien in favor of the government. 26 U.S.C. 6321. Mr. Barmes argues that he did not receive proper notice because the notice issued by the IRS was to the partnership rather than to him personally.

Section 6303 requires that the IRS provide notice to every person liable for the unpaid tax by stating the amount due and demanding payment of that amount. "Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person's last known address." 26 U.S.C. 6303. The IRS sent notices to:




VINCENNES IN 47591-1234202

Those notices contained Mr. Barmes' name, stated the amount of tax owing, and reached Mr. Barmes at the address of his business. Therefore, the formal requirements of the statute have been met. To be sure, Mr. Barmes had actual notice of the assessment. Further, he would have been responsible for the debt whether as a general partner or as a sole proprietor, so it is difficult to see how the IRS's erroneous assumption that the business was run as a partnership could have affected whether Mr. Barmes had proper notice. Indeed, Mr. Barmes filed a claim for a refund following receipt of the notices, first contending that the business did not have any employees and later adding the argument that the assessment had been made against a nonexistent partnership. Since Mr. Barmes received proper notice of a legal assessment, the liens are likewise valid against him.


For the reasons set for above, the plaintiffs' motion for summary judgment is hereby GRANTED in favor of Barbara Barmes but DENIED with respect to Marvin Barmes. The United States ' motion for summary judgment on the issue of the procedural correctness of the tax assessments is hereby GRANTED.

Pursuant to Federal Rule of Civil Procedure 54(b), this is not a final judgment.

SO ORDERED this 8th day of March, 2000.

1 The government has also filed some third-party claims against the trust and its four principals, who are Marvin and Barbara Barmes' children. The viability of the third-party claims are not before the court at this time.

2 Partnerships are employers for the purposes of the provisions which require employers to collect and withhold income, social security and Federal Insurance Contribution Act benefits. 26 C.F.R. 31.3401(d)-1(c). As an employer, a partnership is liable for collection and payment of federal employment taxes. See 26 C.F.R. 31.3403-1.

3 The doctrine of sovereign immunity prohibits this court from hearing suits against the United States unless immunity is waived by an act of Congress where the court's jurisdiction is "unequivocally expressed" in the statutory text. See U.S. v. Idaho , ex rel. Director, Idaho Dept. of Water Resources, 508 U.S. 1, 6 (1993). In the plaintiffs' complaint, only 26 U.S.C. 7422(a) is cited as waiving the government's sovereign immunity. But 26 U.S.C. 7422(a) only waives the government's immunity in suits for tax refunds, not declaratory judgment actions. There is a further jurisdictional hurdle: the Declaratory Judgment Act generally prohibits declaratory relief with respect to federal tax matters. See 28 U.S.C. 2201. One exception to that principle is where a litigant seeks to quiet title to "real or personal property on which the United States has or claims a mortgage or other lien." 28 U.S.C. 2410. Although section 2410 does not allow taxpayers to dispute the accuracy or validity of tax assessments, the statute does provide a jurisdictional basis to challenge the procedural regularity of federal tax liens using a declaratory judgment. See Angel v. U.S., 1992 WL 367667*1 (7th Cir. 1992) (citing cases). Accordingly, this court has subject matter jurisdiction over the plaintiffs' declaratory judgment claim.

4 The IRS also argues that Mr. and Ms. Barmes may be jointly liable for the lien under the doctrine of partnership by estoppel since they filed income tax returns identifying Barbara's Gift Shop as a partnership in 1984 and 1985, as well as quarterly withholding returns suggesting that Ms. Barmes was a partner. Indiana 's adopted version of the Uniform Partnership Act reads in pertinent part:

Partner by estoppel.--(1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him or any one, as a partner in an existing partnership or with one (1) or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made.

IC 23-4-1-16. The IRS plainly has not extended any credit to the plaintiffs due to any representation that the Barmeses were partners. Therefore, the doctrine of partnership by estoppel does not apply.



[98-1 USTC 50,180] In re Joseph Gerard Wethington, Debtor. Joseph Gerard Wethington, Plaintiff v. United States of America , Defendant

U.S. Bankruptcy Court, Dist. Minn., Third Div., 96-34812, 11/6/97, 219 BR 529

[Code Secs. 6321 , 6323 and 6325 ]

Bankruptcy: Tax liens: Avoidance by debtor: Standing: Assets: Partnership: Partnership interest: Request for discharge.--

A debtor in a Chapter 13 bankruptcy proceeding lacked standing to exercise the lien avoidance remedies provided by 11 U.S.C. 545(2) against the government. Also, that remedy did not lie in conjunction with Code Sec. 6323 so as to allow the debtor to avoid the liens that attached to his assets upon the filing of a notice of lien. Even if the remedy were available, it would be limited to divesting the liens against specific assets only. In addition, the liens did not attach to the debtor's partnership, but they did attach to his interest as a partner in the entity. Finally, since the debtor had not filed an administrative request for discharge as to any of his assets, the government was not obligated to release or discharge his property from its liens, and he was not entitled to an adjudication that certain assets were exempt from lien or levy.

Kenneth E. Keate, Keate Law Office, 1102 Grand Ave., St. Paul, Minn., for plaintiff. Lawrence A. Casper , Department of Justice, Washington , D.C. 20530 , for U.S.


KISHEL, Bankruptcy Judge:

This adversary proceeding came on before the Court on November 4, 1997, for hearing on the Defendant's motion for summary judgment. The Defendant appeared by Lawrence A. Casper, Trial Attorney, Tax Division, United States Department of Justice. The Plaintiff appeared by his attorney, Kenneth E. Keate. Upon the moving documents, the "Application to Extend Time to File Response" filed by counsel for the Plaintiff, and the arguments of counsel, the Court recited Findings of Fact and Conclusions of Law on the record in disposition of the motion, pursuant to FED. R. CIV. P. 52(a) and FED. R. BANKR. P. 7052. Upon those Findings of Fact and Conclusions of Law, and on the authority of In re Ceresota Mill LP, 211 B.R. 315 (Bankr. 8th Cir. 1997) and In re Janssen [97-2 USTC 50,860], 213 B.R. 558, No. 97-6010 (Bankr. 8th Cir. October 24, 1997),


1. The Plaintiff's request for an extension of the deadline for the service and filing of a response to the Defendant's motion for summary judgment is denied, for failure to demonstrate "excusable neglect" within the contemplation of FED. R. BANKR. P. 9006(b)(1).

2. The Defendant's motion for summary judgment is granted.

3. The Plaintiff, as a debtor in a case under Chapter 13 before this Court, lacks standing to exercise the lien avoidance remedies of 11 U.S.C. 545(2) as against the Defendant.

4. In any event, the lien avoidance remedy of 11 U.S.C. 545(2) does not lie in conjunction with 26 U.S.C. 6323 so as to allow the Plaintiff to avoid the lien that attached to any and all of the Plaintiff's assets as a result of the Defendant's filing of a notice of lien pursuant to 26 U.S.C. 6323(a).

5. Even if lien avoidance under 11 U.S.C. 545(2) lay in favor of the Plaintiff, its application would be limited to divesting the Defendant's lien against assets he describes as "Deluxe Corporation stock" and "cash on hand."

6. Though the Defendant's filed liens pursuant to 26 U.S.C. 6323(a) did not attach to the assets of the entity the Plaintiff describes as "the Wethington Partnership" as such, they did attach to his interest as a partner in that partnership.

7. The Plaintiff not having filed an administrative request for discharge pursuant to 26 U.S.C. 6325(b) as to any of his assets, the Defendant had no obligation to release that property from its filed liens pursuant to 26 U.S.C. 6325(b)(3) or to discharge the property pursuant to 26 U.S.C. 6325(b)(2)(B). As a result, the Plaintiff is not entitled to an adjudication that certain of his assets were exempt from lien or levy based upon their fair market valuation, or that he holds those assets free and clear of lien or levy in favor of the Defendant as a result of any such exemption.




[88-1 USTC 9333] Farrow, Schildhause & Wilson, et al., Plaintiffs v. Kings Professional Basketball Club, et al., Defendants Harold R. Farrow, et al., Plaintiffs v. Omer L. Rains, et al., Defendants

U.S. District Court, East. Dist. Calif., Civ. S-86-1012 RAR, Civ. S-86-1459 RAR, 2/24/88

[Code Secs. 6321 and 6323 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Partnerships: Ownership of property: Summary judgment.--An IRS motion for reconsideration of a court order denying its original motion for summary judgment was granted and summary judgment was entered in favor of the IRS. For purposes of the execution of a tax levy, it was irrelevant whether a receivable owned by a law partnership's client was owned by the law partnership, which owed federal withholding taxes to the government, or by the former general partner of the law firm who did the actual legal work for the client. In either event, the levy attached to the receivable because a levy against partnership property attaches also to the property of the general partners. It was irrelevant that the IRS never levied or assessed tax liabilities against the general partner individually. Since it was shown that the "genuine issue of fact" regarding ownership of the receivable was actually immaterial and this is what provided the basis for denial of the IRS' original motion for summary judgment, the motion for reconsideration was granted and summary judgment was granted in favor of the IRS in the amount of the assessment plus interest and penalties.


RAMIREZ, District Judge:

Previously pending on this court's law and motion calendar for February 22, 1988 was a motion for reconsideration brought by defendant-in-interpleader INTERNAL REVENUE SERVICE. Opposition and reply briefing was timely filed. E.D. Cal. L.R. 230(c). A review of the record convinced the court that oral argument would not be of material assistance. Accordingly, the court ordered the matter submitted on the moving papers. E.D. Cal. L.R. 230(h).


The complex factual background of this action is detailed in the court's order of October 27, 1986 and is incorporated by reference as though set forth herein. For purposes of the present motion, the court emphasizes the following pertinent and undisputed facts:

(1) Defendant-in-interpleader OMER RAINS was a partner in the law firm of FARROW, SCHILDHAUSE & RAINS (FS&R) from December 1, 1982 through February 24, 1986 (Response to Request for Admission No. 1).

(2) In June of 1985, FS&R contracted with the KINGS PROFESSIONAL BASKETBALL CLUB (Kings) for the performance of certain legal work. Omer Rains was the partner who handled these particular legal tasks on behalf of FS&R. The legal work was completed by the time of Rains' withdrawal from the firm on February 24, 1986. (Declaration of Donald Heller).

(3) The FS&R partnership became delinquent in paying its federal withholding and FICA contributions for the fourth quarter of 1985 and the first quarter of 1986. On March 24, 1986 and June 30, 1986, defendant-in-interpleader INTERNAL REVENUE SERVICE (IRS) produced its first assessments for these quarters. Including interest through November 18, 1987, the assessments total $67,254.24. (Certificate of Assessments and Payments, Form 4340; IRS Exhibit F).

(4) On July 2, 1986, a Notice of Levy was served on the Kings. This levy states that all property in the possession of the Kings belonging to FS&R are levied upon for the payment of a tax liability. (Notice of Levy; IRS Exhibit G).

(5) The Kings has admitted that it owes approximately $84,000 for the legal work performed by Omer Rains while he was a partner with FS&R. (Kings Motion for Interpleader).

Based on these facts, the IRS contends that the account receivable from the Kings is subject to the tax levy served to collect the unpaid tax liability of FS&R. Other than this execution of its levy, the IRS has no other interest in the underlying action. Thus, the predicates for federal jurisdiction are 28 U.S.C. 1442 (federal officers sued or prosecuted) and 28 U.S.C. 2410 (actions affecting property on which the United States has a lien).

On December 21, 1987, the IRS' motion for summary judgment came before the court for hearing. At that time, the IRS argued that the receivable from the Kings at all pertinent times was owned by FS&R. In opposition thereto, however, Rains presented evidence tending to show that ownership of the receivable was orally transferred to him on February 24, 1986. (Declaration of Rains; Rains Exhibits B, C, D, and E). Determining that a genuine issue of fact was raised with regard to the ownership of the receivable, the court orally denied the IRS' motion for summary judgment.


By the present motion, the IRS seeks reconsideration of the court's order denying its motion for summary judgment. For purposes of the present motion, the IRS assumes, arguendo, that ownership of the receivable was orally transferred to Omer Rains on February 24, 1986. Regardless, the IRS contends that a levy upon a custodian of property of the partnership reaches such property even after transfer of the property from the partnership to an individual partner. Therefore, the IRS concludes, the receivable, even if transferred to Rains, is nevertheless subject to the tax levy served upon the Kings to collect the unpaid tax liability of FS&R.

Pursuant to 26 U.S.C. 6323 , a tax lien arises upon "all property and rights to property" of one who neglects or refuses to pay federal tax after demand therefor. The tax lien attaches to all property then in existence, as well as after-acquired property. Glass City Bank v. United States [45-2 USTC 9449 ], 326 U.S. 265, 267 (1945); Seaboard Surety Co. v. United States [62-2 USTC 9653 ], 306 F.2d 855 (9th Cir. 1962). In discussing the phrase "all property and rights to property", the Supreme Court has held that "stronger language could hardly have been selected to reveal a purpose to collect federal taxes." Glass City Bank, 326 U.S. at 267.

Under basic principles of common law, a general partner is liable for all debts of the partnership. F.P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC 9726 ], 297 F.2d 692, 696 (9th Cir. 1962). 1 Therefore, it has universally been held that a federal tax lien for unpaid taxes of the partnership attaches as well to the property of the general partners. Lidberg v. United States [74-1 USTC 9287 ], 375 F. Supp. 631, 633 (D. Minn. 1974) ("Liens for taxes incurred by a partnership or a joint venture attach not only to partnership property, but also to property individually owned by the partners or joint venturers."); In re Robby's Pancake House of Florida, Inc., 24 Bankr. Rptr. 989, 997 (Bankr. Tenn. 1982) ("Since R.K. Walker is liable for the payment of this tax against the partnership, a lien arose against his property as of the date of the assessment."); see also, Young v. Riddell [60-2 USTC 15,322 ], 283 F.2d 909, 910 (9th Cir. 1960). ("Having been found a general partnership, appellant is personally liable for the debts and liabilities of the partnership, including its tax liabilities."). Based on this authority, the IRS concludes that its tax levy, concerning the property of FS&R, encompasses the property of Rains as a general partner.

In opposition, Rains simply points out that the IRS never levied or assessed tax liabilities against him individually. This statement merely begs the point. As discussed above, tax liens arise upon "all property and rights to property" of the partnership, which includes the property of the general partners. Therefore, a levy against partnership property attaches also to the property of the general partners. Lindberg, 375 F. Supp. at 633; In re Bobby's, 24 Bankr. Rptr. at 997. The general partner need not actually be named in the assessment or levy against the partnership. Id.

Consequently, for purposes of the execution of the IRS levy, it matters not whether the Kings receivable was or is owned by FS&R or Rains. In either event, the levy attaches to the receivable. Therefore, having demonstrated that the "genuine issue of fact" regarding ownership is actually immaterial, the IRS' motion for reconsideration shall be granted and summary judgment entered in favor of the IRS.

Having by this order granted judgment for the federal party, the court, sua sponte, considers whether it should exercise jurisdiction over the remaining pendent state law claims. As a general rule, when the claims providing a predicate for federal jurisdiction are dismissed before trial, the pendent state law claims should also be dismissed. United Mine Workers v. Gibbs, 383 U.S. 715 (1966); Jones v. Community Redevelopment Agency, 733 F.2d 646 (1984). Accordingly, the court, in its discretion, shall dismiss all pendent state law claims without prejudice.

For the foregoing reasons, and good cause appearing therefor,

IT IS HEREBY ORDERED that the hearing scheduled in this matter for February 22, 1988 is VACATED.

IT IS FURTHER ORDERED that the motion for reconsideration brought by defendant-in-interpleader INTERNAL REVENUE SERVICE (IRS) is hereby GRANTED. Accordingly, summary judgment is hereby GRANTED in favor of the IRS in the sum of $67,254.24, plus legal penalties and interest accruing since November 18, 1978, said judgment to be satisfied from the interpleader funds.

IT IS FURTHER ORDERED that all remaining state law claims are, sua sponte, DISMISSED without prejudice.


1 At one time, Rains asserted an argument that he was a limited, as opposed to a general, partner. Rains now appears to have abandoned this argument. In any event, it is clear that Rains cannot be considered a limited partner of FS&R. Not only was no certificate of limited partnership filed on behalf of FS&R, as required by Cal. Corp. Code 1521(a), but the name of the partnership contained Rains' name, a circumstance prohibited for limited partners by Cal. Corp. Code 1561 2. Failure to substantially comply with the limited partnership provisions confers general partnership status on the entity. Tiburon National Bank v. Wagner, 265 Cal.App. 2d 868, 875, 71 Cal. Rptr. 832 (1968).



[57-1 USTC 9330]Wm. P. Stuart, Collector of Internal Revenue for the District of Arizona, Appellant v. J. E. Willis and King-Hoover Construction Co., Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 14,960, 244 F2d 925, 1/16/57, Aff'g Dist. Ct., 55-2 USTC 9570

[1954 Code Sec. 7422]

Jurisdiction of District Court: Grounds in refund claim.--The District Court properly assumed jurisdiction of a suit to recover funds of a joint venture which were levied upon for taxes due from one of the participants in the joint venture. It was clearly shown by the schedules filed with the refund claim that the Government had levied upon payments due from the United States to the joint venturers for accrued and impending taxes of one of them, and there was no variance in the complaint.

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

Lien for taxes: Validity against third parties.--Where one partner in a joint venture assigned to the other its interest in the funds due from the Government under a Government construction contract, the United States cannot levy upon the amount due under the contract for payroll taxes due from the assignor on other projects not connected with the joint venture. Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Fred E. Youngman, Davis W. Morton, Department of Justice, Washington, D. C., Jack D. H. Hays, United States Attorney, Robert S. Murless, Assistant United States Attorney, Phoenix, Ariz., for appellant. Andersen and Ray, H. Verlan Anderson, Kenneth C. Chatwin, Phoenix , Ariz. , for appellee.

Before STEPHENS, FEE and BARNES, Circuit Judges.

[Lien for Taxes]

FEE, Circuit Judge:

This is an appeal from the judgment of the District Court [55-2 USTC 9570] permitting recovery by appellees against the Collector of Internal Revenue for taxes found by the trial court to be improperly collected.

John E. and Edith P. Willis 1 and the King-Hoover Construction Company, Harry C. King and Claude E. Hoover entered into a contract on November 16, 1950, which recited that the parties became joint venturers. King-Hoover, a corporation, was in a preferred position to obtain a construction contract with the government. However, sufficient funds to finance the venture were lacking. By the contract above mentioned, Willis was to provide $50,000.00 additional financing for the construction project. As consideration, the corporation and King and Hoover guaranteed the return of this amount of capital, together with a profit, from funds held back by the government. This profit was to be interest at eight per cent per annum for the time the money was in use or twenty-five per cent of the net profits of the venture if that sum exceeded the agreed interest. Further, Lowell Monsees was by the contract appointed agent of Willis, to have joint control of all funds going into the project and to countersign all checks. King-Hoover bid on and obtained the contract from the Navajo Ordnance Depot for Railroad Rehabilitation. Willis advanced $57,800.00 to keep the job going.

On June 16, 1951, the Willises, 2 in order further to insure themselves against loss of their investment, obtained from King-Hoover a formal assignment of all sums due or to become due under this contract. There was not at any time due to the government payroll taxes exceeding $3,610.95 during the course of this contract.

On or about November 6, 1951, the contract for the railroad rehabilitation job was successfully completed, and there was due and owing from the federal government thereon $12,278.18.

[Extent of Joint Venturers' Liability]

However, King-Hoover Construction Company had become indebted to the Collector for payroll taxes on other jobs which it was doing and which were not in any way connected with the job which was financed and performed by the joint venturers. The Collector filed liens upon the railroad rehabilitation job on July 13, August 28, October 5 and 19, 1951, totaling $12,278.18. 3 Of this sum, $3,610.95 only was due on the railroad rehabilitation project. Of the total sum levied, $8,667.23 consisted of taxes not due from the railroad rehabilitation project. Specifically, $5,489.49 of this sum was for Federal Unemployment taxes for the year 1951 on King-Hoover Construction Company alone. Such latter item was not due on October 5, 1951, the date of the collection letter therefor; November 6, 1951, the date of payment, or from any one or at all until January, 1952.

The joint venturers filed a claim for refund of the over-taxation which the Collector had applied to payment of the separate liability of King-Hoover Construction Company. Upon denial thereof, suit was filed in the District Court by the joint venturers. The trial court heard evidence at the trial and entered findings of fact, conclusions of law and judgment for plaintiffs. From this judgment, appeal is prosecuted.

[District Court's Jurisdiction]

The Collector contends that the trial court was without jurisdiction because grounds of recovery upon which the action was based were not set out in the refund claim; that there was no joint venture; that the assignment was not binding on the United States; that Willis had no lien upon the proceeds of the government contract prior and superior to that of the United States. It is claimed also that the trial court erred in allowing interest on the judgment.

The contention of the government that there was no jurisdiction in the District Court seems based upon an illogical distortion. The matter was not brought to the attention of the trial court, but this Court must consider it. The contention is that Willis was not a taxpayer and therefore the complaint and the judgment were invalid because these documents varied from the claim for refund, which was based upon the premise that the two were joint venturers who had paid a tax upon the joint payroll of the railroad construction job. It was clearly shown by the schedules filed with the claim of refund that the government agents had levied upon payments due from the United States to the joint venturers for accrued and impending taxes of one of the venturers--King-Hoover. But there is no variance in the complaint. There the joint venture and the supposed illegal levy are likewise alleged. The fault, according to the brief of the Collector, is in the fact that it is also alleged that the whole sum due the joint venturers had been assigned to one of them, Willis, and that the judgment of the District Court ran in his favor alone. In this there was no inconsistency. The joint venturers still filed the action as taxpayers. The basis of the claim of the complaint and the judgment was that the Collector could not levy on payments due the joint venturers for a tax liability of one of them alone.

[Joint Venturers]

The chief contention of the Collector seems to be that Willis and King-Hoover were not joint venturers. This was, of course, a pure question of fact. The District Court expressly found as a fact that these parties acted in that capacity. Likewise, it drew the same legal conclusion from the written instrument signed by all these parties on November 16, 1950. By its terms and intent, this instrument expressly postulated a joint adventure of Willis and the King-Hoover corporation and King and Hoover as individuals. It was conditioned upon King-Hoover alone obtaining the railroad construction contract with the United States . But the fact, that the contract, number DA-02-002-AVI-30, Navajo Ordnance Depot, Bellmont, Arizona, was entered between the United States and King-Hoover, as parties, did not affect the prior arrangement between Willis and the corporation.

There is no doubt King-Hoover used its own employees and building equipment on this job. It kept the books. Nowhere was a capital account set up for Willis. It made all payroll returns on this contract to the United States and the State of Arizona . Apparently no partnership income tax return was filed. There is no doubt that the contract between the parties described as joint venturers provided that there was to be a bond on the job. The profits, if any, were to be computed according to accepted accounting practices, and any extensions or additions to the contract were to be governed thereby. The money put up by Willis was to be used exclusively on this railroad construction project, and his agent was to have joint control over all funds used and to countersign all checks. Willis would have lost the money which he put up if the bonding company had taken over and completed the project. As a result, Willis contributed $7,799.97 more than he was required to in order that King-Hoover could complete the job. The evidence is clear that there was in fact a joint undertaking. Willis contributed the moneys, both that were called for in the agreement and by the subsequent advances. King-Hoover contributed the services. Both the construction company and Willis were to have an interest and a share in the prospective profits. The provision that Willis was guaranteed a certain minimum share in the profits could have no effect upon the problem of joint venture. If weight is given to all the facts, the trial court did not make a finding which was "clearly erroneous" upon the voluminous evidence when it stated:

"That the plaintiffs above named were partners in a joint venture organization doing business as and under the name and style of King-Hoover Construction Company and J. E. Willis, by reasons of the terms of that certain contract in writing dated the 16th day of November, 1950."

If the written contract alone were considered, a joint venture was established thereby.

"A joint venture as defined by the Internal Revenue Code is a partnership '* * * through or by means of which any business, financial operation, or venture is carried, and which is not, within the meaning of this title, a trust or estate or corporation'. I. R. C. (1939) Sec. 3797(a)(2)."

If attention be now directed toward the alleged variance, it proves evanescent. Willis and King-Hoover were taxpayers. These parties jointly had a right to file claim of refund and action for recovery from the Collector. The mere fact that, by virtue of the original contract of joint venture or the subsequent assignment, Willis was entitled to all the funds recovered is of no consequence. No estoppel could be set up by the Collector based upon the fact that the government contract was with King-Hoover alone. In the event Willis were an entire stranger to the transaction and had had his money seized by the Collector, Willis could have brought action and recovered against Stuart, if the funds were still in possession of the latter. 4

But the court found him to be a joint adventurer, and upon this the case is based. In a widely cited case, the facts of which are almost parallel to the cause at bar, 5 it was held that, when the United States had paid the remaining money due to the joint adventurer who signed the contract with the government, but who had paid out only a small amount of the money needed to perform the contract, his co-adventurers were entitled to recover the money so paid as they had done all the work to be done and put up all the money save $100.00, necessary to complete the job. This case also indicates that the statute prohibiting assignments of government contracts has no relevancy in this situation. And we so decide. It was therefore proper to enter a judgment in favor of Willis for the whole recovery.

But it is said the Collector had a right to treat the money withheld on a contract with King-Hoover as funds of the latter, irrespective of the fact that it is now established as a fact that actually these belonged to the joint adventure.

No statute gives to the United States the right to hold back these payments in order to satisfy extralateral obligations of the contractor. Indeed, the whole policy of legislation has been to allocate the payments to the completion of the project strictly according to the time and technical requirements of the contract and to the payment of labor and material claims against the work. In fact, it may be generally stated as a principle of our federal tax law that the power of the Collector never extends beyond the rights of the taxpayer upon whose property the levy is sought. 6 The Collector has rights "no higher than those of the taxpayer whose right to property is sought to be levied on." 7 It is one of the principles which must necessarily be observed in the law of taxation as in other fields that the rights and property of third persons must be respected. This is a broad guarantee and it covers many fields with which we are not presently concerned. 8 Specifically applied, however, it requires that the property of a third person is immune from seizure to enforce the liability of the person owing the tax. 9 If we carry out this principle, the interest of King-Hoover in the funds withheld could, of course, have been levied upon for payroll taxes incurred in its independent operations. The joint adventurers were also liable for all debts and obligations incurred in the performance of the government contract. The materialmen and laborers working on that job had the moral and legal right to the distribution of money earned upon the particular project. It could not be diverted to pay liabilities incurred by one of the joint adventurers in some other locality. The government agents had no more right to divert it than did other creditors. The fact that the joint adventurers, and particularly Willis, had paid the labor and material accounts on this project and needed the retained funds to reimbuse themselves therefor is a strong supporting argument. But the principle is paramount. Agents of the government can neither seize nor withhold funds belonging to one party to pay obligations owed by another even to the United States.

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. 10 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.


1 While both Mr. and Mrs. Willis were parties to the joint venture agreement, they will be referred to collectively, for convenience sake, as "Willis."

2 Similarly, both Mr. and Mrs. Willis were the assignees named in this instrument, but will otherwise be referred to collectively as "Willis."

3 These figures and dates are extracted from a schedule presented at page 19 of the brief of appellee.

4 Stuart v. Chinese Chamber of Commerce of Phoenix, 9 Cir., 168 Fed. (2d) 709 [48-2 USTC 9315].

5 Hobbs v. McLean, 117 U. S. 567.

6 United States v. Winnett, 9 Cir., 165 Fed. (2d) 149, 151 [48-1 USTC 9115].

7 F. H. McGraw & Co. v. Sherman Plastering Co., 60 Fed. Supp. 504, 512.

8 See Local 174, International Brotherhood of Teamsters v. United States, 9 Cir., #14,746, filed November 8, 1956 [56-2 USTC 10,056].

9 Raffaele v. Granger, 3 Cir., 196 Fed. (2d) 620 [52-1 USTC 9321]; Brinker Supply Co. v. Dougherty, 134 Fed. Supp. 384 [55-2 USTC 9605]. See also 9 Mertens, Law of Federal Income Taxation, 49,163.

10 Internal Revenue Code of 1939, 3692, 26 U. S. C. A. 3692.



[70-1 USTC 9144]United States of America, Plaintiff v. Jack W. Woodard; Jack Woodard and Company, a Limited Partnership; Dorothy M. Woodard; Jesse W. Williams; Western Oil Company; Sherry S. Woodard; and Southland Life Insurance Company, Defendants

U. S. District Court, Dist. N. Mex., No. 7076 Civil, 10/28/69

[Code Secs. 6321 and 6323]

Lien for taxes: Validity of lien: Property subject to lien: Priorities: Mortgaged property: Partnership interest.--The claim for payment of excise taxes, penalties, and interest entitles the United States to a foreclosure of its tax liens against the taxpayer's real property with the proceeds of the sale to be applied as follows: (1) to the expense of sale; (2) to the mortgagee in the amount of the mortgage plus interest; (3) the balance to the United States to be applied in partial payment of taxes. The community property interest of the taxpayer's former wife, an asset of a limited partnership in which the taxpayer was a managing partner, is subject to debts of the limited partnership, including the taxes due the United States.

Victor R. Ortega, United States Attorney, Jack M. Love, Assistant United States Attorney, Albuquerque, N. Mex., John R. Gauntt, Department of Justice, Washington, D. C. 20530, for plaintiff. Lipscomb, Fisk, Cox and Ehrlich, El Paso Nat'l Bk. Bldg., El Paso, Tex., Jackson G. Akin, Rodey, Dickason, Sloan, Akin & Robb, P. O. Box 1888, Albuquerque, N. Mex., for Southland Life Ins. Co.; Towner Leeper, 732 Southwest Center, El Paso, Tex., Lawson Stiff, Simms Bldg., Albuquerque, N. Mex., for D. Woodard; John P. Dwyer, 606 Bank of New Mexico Bldg., Albuquerque, N. Mex., for J. and S. Woodard, Woodard and Co.; defendants.

The Court's Findings of Fact and Conclusions of Law

Findings of Fact

PAYNE, District Judge:

The following shall constitute the Findings of Fact and Conclusions of Law of the Court in the above-styled cause.

1. Defendant, Jack Woodard and Company, is a limited partnership organized under the laws of New Mexico, in which a 60 per cent interest is owned by the defendant, Jack W. Woodard, as a general partner, and in which a 40 per cent interest is owned by the defendant, Dorothy M. Woodard, as a limited partner.

[Western Oil Company]

2. Defendant, Western Oil Company, is a partnership organized under the laws of New Mexico in which a 50 per cent interest is owned by defendant, Jack Woodard and Company, and the other 50 per cent interest is owned by Defendant, Jesse W. Williams.

3. Defendant, Western Oil Company, a New Mexico partnership, owns certain real property as set forth in the complaint.

[Assessment of Taxes]

4. Federal taxes were assessed as follows:

(a) On June 22, 1962, a delegate of the Secretary of the Treasury made an assessment of an excise tax liability against the taxpayer, Jack W. Woodard, for the taxable periods of April 1, 1959, to December 31, 1960, in the amount of $77,737.34 in taxes, $35,569.11 in penalties and $9,048.38 in interest. On June 26, 1962, he served notice of this assessment on the taxpayer and made demand on the taxpayer for payment of this assessment. Notices of tax lien with respect to this assessment were filed in Bernalillo County, New Mexico; Dona Ana County, New Mexico; and Quay County, New Mexico, on August 21, 1962; in McKinley County, New Mexico, on August 22, 1962; in Navajo County, Arizona, and Torrance County New Mexico, on August 23, 1962; In Reeves County, New Mexico, on August 24, 1962; and in Brewster County, Texas, on August 28, 1962.

(b) On the dates indicated below, a delegate of the Secretary of the Treasury made assessments of excise taxes, penalties and interest against the defendant, Jack Woodard and Company, a limited partnership, for the periods and in the amounts indicated below, gave notice and demand and filed notice of lien on the dates and in the amounts indicated below.

Period                  Date of         Date of Notice                 Amount           Date Notice

of Tax               Assessment             and Demand               Assessed         of Lien Filed


3/31/61 ....            5/12/61                5/16/61          $15,029.92(T)              [TEH] 1 


                                                                     29.61(I)              [TEH] 2 


                                                                                           [TEH] 3 


                                                                                           [TEH] 4 


                                                                                           [TEH] 5 

6/30/63 ...             8/12/65                8/12/65            3,168.24(T)




6/30/66 ....             8/3/66                 8/3/66            7,972.81(T)



9/30/66 ....            12/9/66                12/9/66            2,200.89(T)


"T" Indicates amount of tax.

"P" Indicates amount of penalty.

"I" Indicates amount of interest.

1 Indicates date notice of lien filed in Ward County, Texas.

2 Indicates date notice of lien filed in Bernalillo County, New Mexico.

3 Indicates date notice of lien filed in Torrance County, New Mexico.

4 Indicates date notice of lien filed in Navajo County, Arizona.

5 Indicates date notice of lien filed in Dona Ana County, New Mexico.

5. Federal taxes and due and owing from Jack W. Woodard, individually and from Jack Woodard and Company, respectively, in the amounts shown in the pretrial order with adjustments for payments and credits subsequent to September 30, 1967, and as modified by the determination of this Court on the issues concerning the allocation of credits. Payments from Western Oil, subsequent to September 30, 1967, should be determined by the parties and credited to the tax liability of Jack Woodard and Company (Stipulation 3, Record 16). The Internal Revenue Service received $480.00 on June 5, 1963, from Western Oil which was erroneously credited to the excise tax liability of Jack Woodard personally and should be credited to the tax liability of Jack Woodard and Company (Stipulation 1, Record 13-14).

[Real Property]

6. Defendant, Jack W. Woodard, has title to real property in Dona Ana County, New Mexico, described in paragraph X of the complaint subject to a first mortgage of defendant, Southland Life Insurance Company.

7. There is no evidence in the record as to homestead rights claimed by defendants, Jack W. Woodard and Sherry S. Woodard, attaching to the real property referred to in the preceding paragraph.

8. The amount due on the mortgage of defendant, Southland Life Insurance Company, on the real property of defendant, Jack W. Woodard, in Dona Ana County, New Mexico, is in the amount of $10,386, plus interest at the rate of 51/4 per cent from April 1, 1969.

9. Defendants, Jack W. Woodard and Dorothy M. Woodard, were formerly husband and wife and were divorced on January 10, 1961, pursuant to a decree of the District Court of Dona Ana County, New Mexico, No. 16065.

10. On December 9, 1960, an agreement was made between defendants, Jack W. Woodard and Dorothy M. Woodard, for a division of the community property, including the former community property interest of Jack W. Woodard and Dorothy M. Woodard in the Western Oil Company partnership.

[Formation of Partnership]

11. On December 9, 1960, defendants, Dorothy M. Woodard and Jack W. Woodard, formed a limited partnership, Jack Woodard and Company.

12. Included in the property transferred to the limited partnership by defendant, Dorothy M. Woodard, was her former community property interest in the partnership known as Western Oil Company.

13. Dorothy M. Woodard is not now and never has been a general partner in Western Oil Company.

14. Jack Woodard and Company had an interest in property in Alpine, Texas, for which $1,250.66 and $1,066.66 were paid to the Internal Revenue Service and erroneously credited against the tax liability of Jack Woodard personally, rather than the tax liability of Jack Woodard and Company.

15. Jack Woodard and Company owned an interest in property in Monahans, Texas, for which $13,000.00 was paid to the Internal Revenue Service on June 20, 1963. The Service erroneously credited $8,433.97 of this amount of the tax liability of Jack Woodard personally rather than to the tax liability of Jack Woodard and Company.

16. Dorothy Woodard personally owes no taxes.

Conclusions of Law

1. This Court has jurisdiction over the parties to this suit and over the subject matter.

2. The depositions taken before trial of Dorothy Woodard and of Jack Woodard offered by the Government are admitted into evidence and shall constitute a part of the record.

3. The plaintiff's objection to defendant's exhibit 15, a document identified by Mr. Billy M. Williams as a part of an application made by Jack Woodard for a Small Business Administration loan, is sustained as this exhibit is not relevant to prove or disprove any issue in this case.

4. The plaintiff's objection to defendant's exhibit 8, an agreement between Elmo Warnaca and Jack Woodard, has been withdrawn and this exhibit is admitted.

[Homestead Rights]

5. The claim of the United States for taxes from defendant, Jack W. Woodard, is entitled to priority over any claim or contention of defendants, Jack W. Woodard and Sherry S. Woodard that they have homestead rights to the real property referred to in the complaint in Dona Ana County, New Mexico.

[Priority of Mortgage]

6. The claim of defendant, Southland Insurance Company, to a mortgage on the real property described in the complaint in Dona Ana County, New Mexico, is entitled to priority over the tax liens of the United States and all other claims to this property.

7. The United States is entitled to a foreclosure of its tax liens against defendant, Jack W. Woodard, attaching to the real property described in the complaint in Dona Ana County, New Mexico, and to have this property sold free and clear of all liens and claims with the proceeds of sale to be applied as follows:

1. To the expenses of sale.

2. To the mortgagee, defendant Southland Insurance Company, in the amount of $10,386.00 plus interest at 51/4 per cent from April 1, 1969.

3. Balance to defendant, United States, for application in partial payment of the taxes due from defendant, Jack W. Woodard, individually.

[Community Property Interest]

8. The former community property interest of defendant, Dorothy M. Woodard, in the Western Oil Company, is an asset of the limited partnership, defendant, Jack Woodard and Company, and is subject to debts of the limited partnership, including the taxes due from the United States.

9. The plaintiff is entitled to a foreclosure of its tax liens against property of the limited partnership, Jack Woodard and Company, and to have a sale of the 50 per cent interest of Jack Woodard and Company in the partnership known as Western Oil Company, if an unpaid balance remains on the tax liability of Jack Woodard and Company after a corrected allocation of credits has been made in accordance with the determination of this Court. However, if no unpaid balance remains on the tax liability of Jack Woodard and Company, plaintiff is entitled to sell only Jack Woodard's 60 per cent interest in the limited partnership, Jack Woodard and Company.

10. Defendant, Jack W. Woodard, as a general partner of Jack Woodard and Company, is personally liable for taxes due from that entity.

11. The plaintiff is entitled to a deficiency judgment against defendant, Jack W. Woodard, in any amount that may be outstanding after the liquidation of the assets of defendant, Jack Woodard and Company, and of the real property of Jack W. Woodard foreclosed upon in this proceeding.

12. Upon liquidation of the assets of Jack Woodard and Company, if any assets remain after payment of the tax liabilities of the limited partnership, Dorothy Woodard is entitled to a forty per cent interest therein, free of all federal tax obligations.

All requested findings and conclusions not granted herein are hereby denied.



[67-1 USTC 9453]In the Matter of Charles W. Beers, Bankrupt Frank H. Lang, Jr., Trustee of the Estate of Charles W. Beers, Bankrupt, Petitioner v. John Kappos; William B. Hildenbrand; C. A. Weber; Midland Savings & Loan Association; U. S. Treasury Department, Department of Internal Revenue, Respondents

U. S. District Court, East. Dist. Calif., No. 19884 In Bankruptcy, 3/27/67

[1954 Code Sec. 6321]

Lien for taxes: Partnership property v. bankrupt partner's property: Dissolution of partnership: California.--A dissolved partnership did not terminate under California law because the existence of unpaid obligations, including those due the United States, prevented the completion of the winding up of the partnership's affairs. Accordingly, the federal government was entitled to $1,517.91 for unpaid withholding and FICA taxes in the hands of a partner's trustee in bankruptcy since that sum constituted an asset of the partnership on the date of its dissolution, not an asset of the estate of the bankrupt partner.

Richard T. Ford, Second Bank Bldg., Fresno, Calif., for petitioners. John P. Hyland, United States Attorney, Arthur M. Greenwald, Special Assistant United States Attorney, 808 U. S. Courthouse, Los Angeles, Calif., for respondents.

FRANSON, Referee:

Frank H. Lang, Jr., Trustee for the Bankrupt, Charles W. Beers, having filed with this Court a Petition for Order to Show Cause to Determine the Nature, Extent and Right to Participate in Funds in Possession of the Trustee and this Court having issued said Order to Show Cause directing the respondents to appear and show cause and establish their respective rights to participate in the fund of $1,517.91 in the possession of the Trustee, this matter came on for hearing before this Court on January 17, 1967.

The Trustee appeared by and through his counsel of record, Richard T. Ford.

The respondent, United States Treasury Department, Internal Revenue Service, appeared by and through its counsel of record, John P. Hyland, United States Attorney and Arthur M. Greenwald, Special Assistant to the United States Attorney.

The respondents John Kappos, William B. Hildenbrand and Midland Savings & Loan Association did not appear. Upon the establishment of proof of service, their defaults were entered. No proof of service was established as to C. A. Weber.

The Court having considered the pleadings and memoranda of the parties and the evidence and oral arguments of counsel now makes the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. The cash sum of $1,517.91 was acquired by the Department of Employment, State of California, during the months of September and October, 1965, from a California partnership consisting of Charles W. Beers and Charles A. Weber, dba Desert Inn, (hereafter referred to as the Beers/Weber partnership) in satisfaction of certain alleged unpaid taxes.

2. Subsequently, the Department of Employment, State of California determined that said sum of $1,517.91 constituted an overpayment of taxes paid to the State of California to which it had no right, title or interest.

3. During the calendar year 1955 [1965], the Beers/Weber partnership became indebted to the United States Treasury Department, Internal Revenue Service, for unpaid withholding and FICA taxes applicable to the first quarter, 1965, of which the sum of $3,859.69 plus statutory additions presently remains unsatisfied.

4. The sum of $1,517.91 constituted an asset of the Beers/Weber partnership on the date of the dissolution of said partnership.

5. The Beers/Weber partnership was dissolved without disposing of the sum of $1,517.91.

6. Having knowledge of various adverse claims to said sum of $1,517.91, including certain claims of the United States Treasury Department, Internal Revenue Service, for unpaid employment taxes, the Department of Employment, State of California and the Trustee of the Bankrupt, Beers, filed with this Court on October 13, 1966, a Stipulation For Turnover Order wherein it was agreed and stipulated that the Department of Employment, State of California claim no interest in the sum of $1,517.91 and would remit said sum to the Trustee to be held by him until a subsequent order of this Court appropriately disburse said sum.

7. Pursuant to the Stipulation and Turnover Order, the sum of $1,517.91 was deposited with the Trustee, who presently has said sum in his possession.

8. The Trustee and his attorney of record performed no services which either created or preserved the sum of $1,517.91 for the United States Treasury Department, Internal Revenue Service.

9. Any conclusion of law deemed as or properly constituting a finding of fact is hereby adopted as a finding of fact.

Conclusions of Law

1. Section 15030 of the California Corporations Code provides as follows:

"EFFECTIVE DISSOLUTION. On dissolution the partnership is not terminated, but continues until the winding up of the partnership affairs is completed."

2. The Beers/Weber partnership did not terminate as the existence of unpaid obligations, including those due to the United States Treasury Department, Internal Revenue Service, prevented the completion of the winding up of the partnership's affairs. Sausser v. Barrack, 123 C. A. 2d Supp. 948; 268 P. 2d 231, 232 (1954) citing Yahr-Donen Corp. v. Crocker, 80 Cal. App. 675, 182 P. 2d 209.

3. As the dissolution of the Beers/Weber partnership did not terminate the partnership within the meaning of Section 15030 of the California Corporations Code, the sum of $1,517.91 constitutes a Beers/Weber partnership asset and not an asset of the estate of the Bankrupt, Beers.

4. No equitable charge exists on the sum of $1,517.91.

5. Any finding of fact deemed as or properly constituting a conclusion of law is hereby adopted as a conclusion of law.

Order on Order to Show Cause

In accordance with the Findings of Fact and Conclusions of Law, IT IS HEREBY ADJUDGED AND DECREED that the Trustee, Frank H. Lang, Jr., pay to the United States Treasury Department, Internal Revenue Service, the sum of $1,517.91 to be applied against the existing tax liabilities of the partnership consisting of Charles W. Beers and Charles A. Weber.



[55-2 USTC 9704]Insurance Company of North America and Birmingham Fire Insurance Company of Pennsylvania v. M. V. Putney, Louis Carreras et al.

In the United States District Court for the Eastern District of Virginia, Richmond Division, Civil Action No. 1778, 136 FSupp 894, October 12, 1955

[1939 Code Sec. 3670--substantially unchanged in 1954 Code Sec. 6321]

Lien for taxes: Property subject to lien: Interest in partnership.--Taxpayer was the surviving partner of the Auto Parts Warehouse. The stock in trade of the company was insured in the name of the partners and was destroyed by fire. The goods were held by the insured on consignment. The proceeds are claimed by both the consignor and the government under its lien for taxes against Carreras, taxpayer and surviving partner. The Court held that the consignor must prevail as beneficiary of an equitable trust, to the extent of 80 per cent of the proceeds, which it would have received upon sale of the goods, 20 per cent being retained as commission by the consignee. The government, accordingly, was given priority to 20 percent of the proceeds.

[1939 Code Sec. 3670--substantially unchanged in 1954 Code Sec. 6321]

Lien for taxes: Property subject to lien: Interest in partnership.--Taxpayer, as surviving member of the partnership, was also entitled to the proceeds of a policy covering machinery destroyed by the fire. Both the government and a judgment creditor of Royal Auto Parts, Inc., claimed the proceeds of this policy. The government's claim was given priority over the judgment creditor's claim, which was based on the contention that it had contributed the machinery to the partnership, rather than taxpayer. The Court found that the title to the machinery was in the partnership, and that owner of the machinery was, therefore, taxpayer as surviving partner, rather than Royal Auto Parts, Inc.

Alexander H. Sands, Jr., American Building, Richmond, Va., for plaintiffs. Gordon Lewis, A. Fleet Dillard, both of Tappahannock, Va., Dabney Overton, Warsaw, Va., for defendant.



HUTCHESON, District Judge:

This case involves the proceeds of two fire insurance policies, one payable to M. V. Putney and Louis Carreras, trading as Auto Parts Warehouse, and the other payable to Auto Parts Warehouse. The insurance companies filed interpleader proceedings in which the proceeds of the policies were deposited with the Court. The various parties interested whose rights are to be determined are the partnership trading as Auto Parts Warehouse, of which Louis Carreras was the sole owner at the time of the loss, having acquired the interest of his partner; Royal Auto Parts, Incorporated, the alleged owner of certain equipment, which corporation was controlled and in effect owned by Carreras; a judgment creditor of that corporation; the United States, by whom tax liens against Carreras were filed prior to the date of loss; Phillip Levin, Rubin Levin and Louis Levin, trading as Philadelphia Auto Parts Manufacturing Company, of Philadelphia, Pennsylvania; and Michael Cardone, John Cardone, Daniel Cardone, Nicholas Cardone and Anthony Cardone, trading as Automotive Unit Exchange, also of Philadelphia, Pennsylvania, who claim an interest as consignors of certain stock in trade held by the partnership destroyed by fire.


In order to fix the rights of the respective parties there are two separate issues to be decided. A determination of those issues will dispose of the controversy so far as the respective parties are concerned.

1. As between the consignors of the insured goods and the Government (tax lien creditor of the insured), who should receive the proceeds of the Birmingham policy of $9,887.50.

2. As between the judgment creditor of the Royal Auto Parts, Incorporated, and the Government (tax lien creditor of Carreras, partner in the Carreras and Putney partnership, trading as Auto Parts Warehouse), who is entitled to the proceeds of the policy of $1500.00 with the Insurance Company of North America.

[Birmingham Policy]

The Birmingham policy was issued January 8, 1952, payable to Putney and Carreras, trading as Auto Parts Warehouse. This policy covered the interest of the insured in all stock in trade in the named werehouse. Fire destroyed the warehouse and all goods stored therein on July 1, 1952. Actually the goods destroyed were in the hands of insured on consignment. However, the insurance company elected to pay the full amount rather than only the interest of the insured. The agreement of consignment, later reduced to writing, was rather loose in its terms. One of the terms was to the effect that the consigned goods be covered by insurance. There was not reference as to how or in whose name the goods were to be insured.

[Equitable Trust]

The Government contends in the light of the loose terms that the contract between consignor and consignee (now Carreras) as to the insurance was one to indemnify the consignee in case of fire and the resulting liability to the consignee in favor of the consignor. Thus the actual insurance contract would be one of re-insurance as to the consignee and the insurance company would have no privity with the consignor. In the absence of the Government's claim, as between Carreras and the consignors, who would prevail? It seems clear that the consignors would prevail as the beneficiaries of an equitable trust. Therefore it would be inequitable to allow the Government claiming through the insured to prevail over the consignors. Granting the Government's view of the situation to be correct, the equitable trust which was created would overcome any rights of the Government arising out of the contract to re-insure. Therefore, the consignors are entitled to priority over the Government as to their proportion of the insurance money. The loss was figured on the retail price of the goods. The agreement between consignor and consignee was to the effect that the consignee would get 20% of the retail price as commissions. Consequently, the Government is entitled to the 20% due the consignee and the balance of the 80% should go to the two consignors prorata of their respective shares in the goods destroyed.

[North America Policy]

The Insurance Company of North America policy was issued May 7, 1955, payable to Auto Parts Warehouse. The policy was to cover the machinery used by the partnership. The partnership arrangement of Carreras and Putney was first contemplated prior to January 1, 1951. At that time the plan was to the effect that the partnership would be between Royal Auto Parts, Incorporated, and Putney. However, this was abandoned and Carreras and Putney became partners. Under the original plan the corporation as its contribution was to put up the necessary machinery. Under the actual arrangement set up the machinery was Carreras' contribution to the partnership as there is no evidence of any other type of contribution. There was alleged rent paid from the partnership to the corporation for the machinery. This was a bookkeeping transaction and amounted only to the depreciation claimed on the machinery by the corporation. On May 7, 1951, the present policy was taken out and the partnership, not the corporation, was named the insured. This policy issued some five months subsequent to the decision that the corporation would not participate in the partnership. Thus in the light of the nominal rent and the insurance policy of May 7, 1951, I must conclude that the machinery was in fact Carreras' contribution to the partnership.

[Title in Partnership]

Title is an illusory thing and often must be shown by the intentions of the parties. The actions in this case seem, regardless of the entries on the books of the corporation, to manifest as intention for the machinery to be Carreras' contribution to the partnership and thus title would be in the partnership. Title being in the partnership and the partnership being the insured on the policy, it follows that the Government must prevail.

The tax lien attached against assets of Carreras acquired at any time during the year 1951. Consequently, that lien became fixed as to the machinery when the machinery became an asset of Carreras as owner of the partnership. It likewise became fixed as to the proceeds from the insurance policy at the time such proceeds or claim thereto vested in Carreras, as surviving member of the partnership.

Counsel are requested to submit draft of proposed order providing that the consignors recover 80% of the proceeds of the Birmingham policy and that the United States recover 20% of the proceeds of the Birmingham policy and the entire proceeds of the North American policy.



[56-2 USTC 9832]United States of America, Plaintiff-Appellee v. Isreael Balanovski, Samuel Bernardo Horenstein, Compania Argentina de Intercambio Comercial, I. Balanovski & Cia. (sometimes called "CADIC"), a co-partnership, Defendants-Appellants

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 23853, 236 F2d 298, 8/14/56, Affirming in part and reversing in part District Court, 55-1 USTC 9302, 131 Fed. Supp. 898

[1939 Code Secs. 211(a)(1)(A) and 211(b)--substantially unchanged by 1954 Code Secs. 871(a) and (c) respectively]

Tax on nonresident alien individuals: When partnership engaged in business: Income from sources within U. S.: Place of sale.--A foreign partnership, whose 80% co-partner extensively negotiates purchases in the U. S., inspects merchandise, maintains an office and bank account, and generally does all things to complete sale transactions, is engaged in business in the U. S., so that the entire partnership profits are taxable to the partners. Sales were completed in the U. S. where all things necessary to passage of beneficial interest were done here.

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

Lien for taxes: Foreign partnership funds in U. S.--The action permitted by 1939 Code Sec. 3670 is a sufficient grant of jurisdiction to enable the Government to reach, by lien, a partner's interest in a partnership bank accountMaurice N. Nessen, Assistant United States Attorney, S. D. N. Y., New York City (Paul W. Williams, United States Attorney, Arthur B. Kramer, Assistant United States Attorney, New York City, on brief), for plaintiff-appellee. Donald L. Stumpf, New York City (Sandow Holman, New York City, on brief), for defendants-appellants.

Before: CLARK, Chief Judge, and HINCKS and WATERMAN, Circuit Judges.

CLARK, Chief Judge:

This is an appeal by defendants and a cross-appeal by the United States of America from a decision of Judge Palmieri, sitting without a jury, adjudging defendant-taxpayers liable for almost $1,000,000 in income taxes and interest for the year 1947, and directing two New York banks to pay over funds belonging to the defendant partnership in part payment of the judgment. D. C. S. D. N. Y., 131 Fed. Supp. 898 [55-1 USTC 9302]. In our view the recovery granted was insufficient, and we are therefore reversing on the appeal of the United States only.

[Taxpayers' Method of Operation]

Defendants Balanovski and Horenstein were copartners in the Argentine partnership, Compania Argentina de Intercambio Comercial (CADIC), Balanovski having an 80 per cent interest and Horenstein, a 20 per cent interest. Balanovski, an Argentinian citizen, came to the United States on or about December 20, 1946, and remained in this country for approximately ten months, except for an absence of a few weeks in the spring of 1947 when he returned to Argentina. His purpose in coming here was the transaction of partnership business; and while here, he made extensive purchases and sales of trucks and other equipment resulting in a profit to the partnership of some $7,763,702.20.

His usual mode of operation in the United States was to contract American suppliers and obtain offers for the sale of equipment. He then communicated the offers to his father-in-law, Horenstein, in Argentina. Horenstein, in turn, submitted them at a markup to an agency of the Argentine Government, Instituto Argentino de Promocion del Intercambio (IAPI), which was interested in purchasing such equipment. If IAPI accepted an offer, Horenstein would notify Balanovski and the latter would accept the corresponding original offer of the American supplier. In the meantime IAPI would cause a letter of credit in favor of Balanovski to be opened with a New York bank. Acting under the terms of the letter of credit Balanovski would assign a portion of it, equal to CADIC's purchase price, to the United States supplier. The supplier could then draw on the New York bank against the letter of credit by sight draft for 100 per cent invoice value accompanied by (1) a commercial invoice billing Balanovski, (2) an inspection certificate, (3) a nonnegotiable warehouse or docket receipt issued in the name of the New York bank for the account of IAPI's Argentine agent, and (4) an insurance policy covering all risks to the merchandise up to delivery F. O. B. New York City. Then, if the purchase was one on which CADIC was to receive a so-called quantity discount or commission, the supplier would pay Balanovski the amount of the discount. These discounts, paid after delivery of the goods and full payment to the suppliers, amounted to $858,595.90, constituting funds which were delivered in the United States.

[How Taxpayers Were Paid]

After the supplier had received payment, Balanovski would draw on the New York bank for the unassigned portion of the letter of credit, less 1 per cent of the face amount, by submitting a sight draft accompanied by (1) a commercial invoice billing IAPI, (2) an undertaking to ship before a certain date, and (3) an insurance policy covering all risks to the merchandise up to delivery F. A. S. United States Sea Port. The bank would then deliver the nonnegotiable warehouse receipt that it had received from the supplier to Balanovski on trust receipt and his undertaking to deliver a full set of shipping documents, including a clean on board bill of lading issued to the order of IAPI's Argentine agent, with instructions to notify IAPI. It would also notify the warehouse that Balanovski was authorized to withdraw the merchandise. Upon delivery of these shipping documents to the New York bank Balanovski would receive the remaining 1 per cent due under the terms of the letter of credit. Although Balanovski arranged for shipping the goods to Argentina, IAPI paid shipping expenses and made its own arrangement there for marine insurance. The New York bank would forward the bill of lading, Balanovski's invoice billing IAPI, and the other documents required by the letter of credit (not including the supplier's invoice billing Balanovski) to IAPI's agent in Argentina.

[Twenty-four 1947 Transactions]

Twenty-four transactions following substantially this pattern took place during 1947. Other transactions were also effected which conformed to a substantially similar pattern, except that CADIC engaged the services of others to facilitate the acquisition of goods and their shipment to Argentina. And other offers were sent to Argentina, for which no letters of credit were opened. Several letters of credit were opened which remained either in whole or in part unused. In every instance of a completed transaction Balanovski was paid American money in New York, and in every instance he deposited it in his own name with New York banks. Balanovski never ordered material from a supplier for which he did not have an order and letter of credit from IAPI.

[United States Employment]

Balanovski's activities on behalf of CADIC in the United States were numerous and varied and required the exercise of initiative, judgment, and executive responsibility. They far transcended the routine or merely clerical. Thus he conferred and bargained with American bankers. He inspected goods and made trips out of New York State in order to buy and inspect the equipment in which he was trading. He made sure the goods were placed in warehouses and aboard ship. He tried to insure that CADIC would not repeat the errors in supplying inferior equipment that had been made by some of its competitors. And while here he attempted "to develop" "other business" for CADIC.

[Domestic Offices]

Throughout his stay in the United States Balanovski employed a Miss Alice Devine as a secretary. She used, and he used, the Hotel New Weston in New York City as an office. His address on the documents involved in the transactions was given as the Hotel New Weston. His supplier contacted him there, and that was the place where his letters were typed and his business appointments arranged and kept. Later Miss Devine opened an office on Rector Street in New York City, which he also used. When he returned to Argentina for a brief time in 1947 he left a power of attorney with Miss Devine. This gave her wide latitude in arranging for shipment of goods and in signing his name to all sorts of documents, including checks. When he left for Argentina again at the end of his 10-month stay, he left with Miss Devine the same power of attorney, 1 which she used throughout the balance of 1947 to arrange for and complete the shipment of goods and bank the profits.

[Deficiency Assessments]

When Balanovski left the United States in October 1947 he filed a departing alien income tax return, on which he reported no income. In March 1948 the Commissioner of Internal Revenue assessed $2,122,393.91 as taxes due on income for the period during which Balanovski was in the United States. In May 1953 the Commissioner made a jeopardy assessment against Balanovski in the amount of $3,954,422.41 and gave him notice of it. At the same time a similar jeopardy assessment, followed by a timely notice of deficiency, was made against Horenstein in the amount of $1,672,209.90, representing his alleged share of CADIC's profits on the above-described sales of United States goods.

The government brought the present action to foreclose a federal tax lien on $511,655.58 and $42,529.49--amounts of partnership funds held in two United States banks--and to obtain personal judgments against Balanovski and Horenstein in the sums of $6,722,625.54 (of which $5,050,415.64 is now sought on appeal) and $1,672,209.90 respectively. Balanovski and Horenstein were served with process by mail in Argentina pursuant to 28 U. S. C. 1655; and Miss Devine, the purported agent of Balanovski, was personally served in New York. Defendants then appeared by their attorneys and proceeded to defend the action.

Jurisdiction of the District Court

Defendants challenge the court's jurisdiction (1) quasi-in-rem, because the assets levied upon were the property of the partnership, rather than of the individual taxpayers, and (2) in personam, because the defendants were not personally served with process and they contend that Miss Devine was not Balanovski's agent "authorized by appointment or by law to receive service of process" under F. R. C. P., rule 4(d)(1).

[Quasi-in-Rem Jurisdiction]

Quasi-in-rem jurisdiction in this case is based on enforcement of a tax lien under 3670 and 3678(a) of the Internal Revenue Code of 1939. These sections permit an action quasi-in-rem against named defendants to recover any "property owned by the delinquent, or in which he has any right, title, or interest." This grant of jurisdiction is sufficient to reach a partner's interest in partnership property. See Kamen Soap Products Co. v. C. I. R., 2 Cir., 230 Fed. (2d) 565 [56-1 USTC 9360]; N. Y. Partnership Law 50-52; United States v. Dallas Nat. Bank, 5 Cir., 152 Fed. (2d) 582 [46-1 USTC 9117]; United States v. Dickerson, D. C. E. D. Mo., 101 Fed. Supp. 262 [51-2 USTC 9453]. Cf. United States v. Kensington Shipyard & Drydock Corp., 3 Cir., 169 Fed. (2d) 9, 12 [48-2 USTC 9392]. Whether the government can gain execution on any portion of the partnership assets is not a question of jurisdiction, but one of execution and of priority among the government, partnership creditors, and other partners. In any event, the assets here reached are partnership profits which are presumably not burdened by the claims of creditors.

[Personal Jurisdiction]

Since the defendants appeared and defended on the merits, the court acquired power to render a judgment in personam conditional only upon the validity of the original quasi-in-rem jurisdiction. The parties cannot complain of inconvenience, since they have come into the jurisdiction. They have had their day in court on the issues which would settle both the right to the funds and personal liability; there is no constitutional problem. See Blume, Actions Quasi in Rem under Section 1655, Title 28, U. S. C., 50 Mich. L. Rev. 1, 22. If the parties or if other assets are found in the United States, a rule against personal jurisdiction will only bring on further litigation, which the taxpayers will lose on the merits by collateral estoppel or state decisis. Thus a rule against personal jurisdiction would be merely a mandate for further fruitless litigation. While this point has provoked some conflict, we regard the cases so agreeing as stating the better rule. Anderson v. Benson, D. C. Neb., 117 Fed. Supp. 765; Grant v. Kellogg Co., D. C. S. D. N. Y., 3 F. R. D. 229, Bede Steam Shipping Co. v. New York Trust Co., D. C. S. D. N. Y., 54 Fed. (2d) 658; Campbell v. Murdock, D. C. N. D. Ohio, 90 Fed. Supp. 297; 2 Moore's Federal Practice 12.13 (2d Ed. 1948). For the contrary view see Salmon Falls Mfg. Co. v. Midland Title & Rubber Co., 6 Cir., 285 Fed. 214; McQuillen v. National Cash Register Co., 4 Cir., 112 Fed. (2d) 877, certiorari denied 311 U. S. 695, rehearing denied 311 U. S. 729; Proctor v. The Sagamore Big Game Club, D. C. W. D. Pa., 128 Fed. Supp. 885; cf. Fahey v. O'Melveny & Myers, 9 Cir., 200 Fed. (2d) 420. F. R. 12(b), permitting the filing of objections to jurisdiction and on the merits at the same time, does not compel a contrary result; the purpose of that rule is to permit a party to challenge jurisdiction along with his other defenses and without going through the hoary ritual of entering a special appearance. There is no indication that the rule was intended to be so tortuously construed in circumstances like the present to promote unnecessary litigation.

[Service of Process on Agent]

It also seems probable that under F. R. 4(d)(1) personal jurisdiction over Balanovski and probably also over Horenstein was acquired by service of process on their agent Miss Devine. The power of attorney granted to Miss Devine by Balanovski at his departure was broad and sweeping in its terms, and an implied actual appointment to receive service of process may be readily spelled out therefrom. Cf. Cohen v. Physical Culture Shoe Co., Division of Orthopedic Shoes, D. C. S. D. N. Y., 28 Fed. Supp. 679, 680; Fleming v. Malouf, D. C. W. D. N. Y., 7 F. R. D. 56; Szabo v. Keeshin Motor Exp. Co., D. C. N. D. Ohio, 10 F. R. D. 275; Morfessis v. Marvins Credit, Inc., D. C. Mun. Ct. App., 77 A. 2d 178; Osterling v. Commonwealth Trust Co. of Pittsburgh, D. C. W. D. Pa., 35 Fed. Supp. 704, affirmed 3 Cir., 115 Fed. (2d) 809. In fact Miss Devine filed a federal income tax return for Balanovski after his departure in which she described herself as his "agent." Since the applicable Regulations 2 apparently render her responsible for the filing of Balanovski's tax returns and the payment of his tax out of the funds which flowed through her hands and since she actually filed a return for Balanovski, she may be responsible for any taxes found owing on that return. All these circumstances, it seems, may result in her authorization by operation of law (in addition to her appointment in fact) to receive service of process for Balanovski in this action to collect taxes owed by him. The district court therefore has jurisdiction of this action.

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