Partnerships
page1
[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.
MEMORANDUM
AND ORDER
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.
I.
BACKGROUND
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:
MARVIN
L & BARBARA J BARMES PTR
BARBARAS
GIFT SHOP
120 MAIN ST
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.
II.
ANALYSIS
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:
MARVIN
L & BARBARA J BARMES PTR
BARBARAS
GIFT SHOP
120 MAIN ST
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:
MARVIN
L & BARBARA J BARMES PTR
BARBARAS
GIFT SHOP
120 MAIN ST
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.
III. CONCLUSION
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.
ORDER
GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
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),
IT
IS HEREBY ORDERED, ADJUDGED, AND DECREED:
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.
LET
JUDGMENT BE ENTERED IN ACCORDANCE WITH TERMS 3 THROUGH 7 OF THIS ORDER.
[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.
Order
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).
BACKGROUND
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.
DISCUSSION
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.
IT
IS SO ORDERED.
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.
Affirmed.
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
5/21/61
3/31/61 .... 5/12/61 5/16/61 $15,029.92(T) [TEH] 1
7/14/61
29.61(I) [TEH] 2
7/17/61
[TEH] 3
7/20/61
[TEH] 4
9/21/65
[TEH] 5
6/30/63 ... 8/12/65 8/12/65 3,168.24(T)
792.06(P)
52.90(P)
386.43(I)
6/30/66 .... 8/3/66 8/3/66 7,972.81(T)
79.74(P)
3.95(I)
9/30/66 .... 12/9/66 12/9/66 2,200.89(T)
13.90(I)
"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.
Opinion
[Facts]
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.
[Issues]
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.
