Property Seized During Arrest

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United States of America , Plaintiff-Appellee v. Lloyd Ferrell Wingfield, Defendant-Appellee, County of Boulder , Colorado , Appellant

(CA-10), U.S. Court of Appeals, 10th Circuit, 84-2197, 6/15/87, 822 F2d 1466, Affirming an unreported District Court decision

[Code Secs. 6321 , 6323 and 7426 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Property subject to lien: Property seized during arrest: Priority: Jurisdiction: Conflict of law: Suit by nontaxpayer.--A District Court properly exercised its ancillary jurisdiction in adjudicating the conflicting claims of the IRS and a county government to a large sum of money seized during a taxpayer's arrest on narcotics charges, and it did not err in finding that the IRS's federal tax lien attached prior to a State forfeiture provision. The funds, which were confiscated by the local law enforcement officials, were in the custody and control of the local federal District Court in the aftermath of the taxpayer's trial on federal criminal charges. The taxpayer who, under State law, could recover any of the money lawfully acquired possessed a sufficient, if limited, property interest in the seized funds for the federal tax lien to attach. Since the tax lien attached prior to a State court's determination that the money was forfeited to the State under its public nuisance laws, the IRS claim to the funds was entitled to priority. The subsequent State forfeiture decree could not supplant the previously filed federal tax lien.

Robert N. Miller, United States Attorney, Denver , Colo. 80294 . Francis M. Allegra, Michael L. Paup, Carleton D. Powell, Glenn L. Archer, Jr., Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. William D. Meyer, Hutchinson, Black, Hill, Buchanan & Cook, 1215 Spruce St., Boulder, Colo. 80306, for appellant.

Before HOLLOWAY, Chief Judge, and BARRETT and MCKAY, Circuit Judges.

HOLLOWAY, Chief Judge:

This case presents a series of tangled jurisdictional questions involving the district court's subject matter jurisdiction of this case and its jurisdiction as to the Government. The underlying merits involve the status of a federal tax lien on contents of property seized and forfeited pursuant to a Colorado statute as a public nuisance because of use for unlawful activities involving controlled substances. The Government says the contents passed to Boulder County after the tax lien attached. The County of Boulder disagrees and claims the property for itself, clear of the tax lien. The district court agreed with the Government. We affirm.

I

FACTUAL BACKGROUND

On November 5, 1982, Lloyd Ferrell Wingfield was arrested at his home by FBI agents pursuant to a federal arrest warrant charging him with unlawful flight to avoid prosecution. The arresting FBI agents were accompanied by an officer of the Boulder Police Department. At the time of the arrest, the Boulder Police Officer observed marijuana in Wingfield's residence. The officer obtained a state warrant authorizing a search of the premises. Execution of the search warrant by federal and county agents and officers resulted in the seizure of the following items, inter alia: (1) eighteen grams of cocaine; (2) approximately $89,676.00 in United States currency; (3) a personal check in the amount of $688.00; and (4) various foreign currency, mint proof sets, and bars of Englehart silver, collectively valued at approximately $35,000.

On November 8, 1982, the Government filed a complaint charging Wingfield with possession of a controlled substance with the intent to distribute. On the same date, the District Attorney for Boulder County filed a civil action against Wingfield in the District Court for Boulder County pursuant to the Colorado Abatement of Public Nuisance Statute, Colo. Rev. Stat. §16 -13-307. The following day local authorities released the seized items for use as evidence in the federal criminal case. It is that case against Wingfield which produces the appeal now before us.

On November 16, 1982, the State court granted Boulder County 's temporary restraining order against the seized items, finding that the seized items had been used in conducting, maintaining, aiding and abetting a public nuisance. The State court further ordered pursuant to §16 -13-308 that no person take any action to encumber, transfer, or assert a right of immediate possession to the seized items.

On January 13, 1983, the Internal Revenue Service (IRS) assessed income tax deficiencies against Wingfield for federal income taxes and on January 19 filed notices of federal tax liens with the Clerk and Recorder of Boulder County. After a trial to the court on written stipulation Wingfield was convicted on February 11, 1983, on the federal criminal charge.

On May 17, 1983, the State court issued an order effective nunc pro tunc to the date of seizure of the property (November 5, 1982), finding that the items seized by federal and state agents in Wingfield's home on November 5, 1982, were seized from premises which constituted a class I public nuisance and thus were forfeited to the county. Furthermore, the court held that there was no evidence which would entitle Wingfield to redelivery of the seized items. Wingfield appealed the State court's decision.

On September 1, 1983, after various conflicting claims to the seized items had been asserted, the federal district court ordered that the funds be deposited with the Clerk of that court. The court further ordered that notice be sent to the IRS, the United States Attorney's Office, and the County of Boulder "so that claims can be presented and disposition effectuated." I R. 32.

Thereafter Wingfield, the IRS, and the County of Boulder filed claims to the seized items. After a hearing the district court held that the State forfeiture decree could not supplant a previously filed federal tax lien, finding that a "State statute cannot subvert the primary authority of the federal government to collect its taxes under these circumstances." III R. 14. The court ordered the clerk of the court to satisfy the claim of the IRS and, if any proceeds remained, to satisfy the claim of Boulder County . The claimant Wingfield was held not entitled to any of the funds.

On February 28, 1985, the Colorado Court of Appeals affirmed in part and reversed in part the forfeiture judgment of the Boulder County District Court. Colorado v. Lot 23, 707 P.2d 1001 (Colo. Ct. App. 1985). The court affirmed the State district court's judgment of forfeiture except as to the Englehart silver bars found in buckets, the Canadian mint sets found in buckets, and the Canadian currency found in a glass pitcher. Id. at 1004-05. As to these items Wingfield's rights to ownership were restored.

On May 8, 1987, the Supreme Court of Colorado affirmed in part and reversed in part the Colorado Court of Appeals decision ordering the reinstatement of the district court's forfeiture order. Colorado v. Lot 23, 735 P.2d 184 ( Colo. 1987). The Colorado Supreme Court held that the Colorado Court of Appeals had misconstrued the proper burden of proof that the State must necessarily carry in abatement of public nuisance cases. The proper standard was whether the State has proved by a preponderance of the evidence that the items seized were used in the criminal activity. Id. at 12. The court answered in the affirmative, stating that all of the seized property was properly forfeited to the State. ¹

II

JURISDICTION

A.

Ancillary Jurisdiction

Initially we must confront the jurisdictional questions generated by the complex procedural posture of the case. The case began as a federal criminal prosecution for possession with intent to distribute a controlled substance. The defendant in the criminal case was Wingfield. In the instant appeal, the controversy centers on a dispute between the IRS and the County of Boulder concerning rights to items seized at Wingfield's residence. These items were held by the district court as possible evidence in the criminal trial. The court concluded that it had the authority to resolve conflicting claims to the seized items as a matter of ancillary jurisdiction. The County of Boulder contends that the district court could not properly exercise ancillary jurisdiction in the circumstances.

Ancillary jurisdiction rests on the premise that a federal court acquires jurisdiction of a case or controversy in its entirety. Jenkins v. Weinshienk, 670 F.2d 915, 918 (10th Cir. 1982). The district courts have jurisdiction to enter orders ancillary to a criminal proceeding concerning disposition of materials legally seized in connection with the criminal investigation of a case. See, e.g., United States v. Rangel, 608 F.2d 120, 121 (5th Cir. 1979) (and cases cited therein). The interests of judicial efficiency dictate that the conflicting claims to property seized as evidence should be resolved by the criminal court. United States v. LaFatch, 565 F.2d 81, 83 (6th Cir. 1977), cert. denied, 435 U.S. 971 (1978).

In Herzfeld v. United States District Court for the District of Colorado, 699 F.2d 503 (10th Cir.), cert. denied, 464 U.S. 815 (1983), we held proper the district court's exercise of ancillary jurisdiction to appoint a receiver in a criminal case to effectuate a disposition of property to accomplish restitution by the defendant. There the court observed:

A criminal proceeding in a United States district court is not in a separate compartment with the court exercising only a limited portion of its authority as the appellants argue. The federal courts obviously are of limited jurisdiction but the extent of the authority of the district courts in these circumstances is not limited or governed by whether the proceeding is criminal or civil.

Id. at 506.

Here the seized property was to be used as evidence in a federal criminal case. The property was in the custody and control of the federal district court. It is this court which must determine the proper distribution of funds currently in its possession. We conclude that the district court does have the jurisdiction to enter an order concerning disposition of seized property in its control. Although the defendant was convicted on his plea of guilty, the district court had before it the facts and circumstances of the case. Cf. United States v. Ortega, 450 F.Supp. 211, 212 (S.D.N.Y. 1978). It would result in a needless waste of judicial resources not to exercise ancillary jurisdiction here. Moreover, the existence of adequate civil remedies neither discharges the court's duties nor disturbs its jurisdiction. See United States v. Wilson , 540 F.2d 1100, 1104 (D.C. Cir. 1976).

Thus the court's ancillary jurisdiction was properly exercised to dispose of the claims to the property in the custody of the court.

B.

Appellate Jurisdiction

The Government argues that this court lacks appellate jurisdiction over this matter. It also says that the present action is barred by the doctrine of sovereign immunity. Moreover, the Government contends that the district court exercised in rem jurisdiction over the seized property and that such jurisdiction ceased to be valid on the distribution of the res to the Government. It further argues that it was incumbent upon Boulder County to obtain a stay of the district court's order if it desired to preserve jurisdiction for an appeal.

The Government's argument that the action is barred by the doctrine of sovereign immunity is without merit. In considering suits against the federal government, we must determine whether a valid waiver of soverign immunity exists. If not, the Government is immune from suit and we lack subject matter jurisdiction. United States v. Mitchell, 455 U.S. 535, 538 (1980); United States v. Sherwood, 312 U.S. 584, 586-88 (1941).

Internal Revenue Code §7426(a)(1) provides:

Wrongful Levy.--If a levy has been made on property . . ., any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

Section 7426 permits a third party to bring an action challenging the lawfulness of governmental levies made against property in which he claims an interest. Interfirst Bank Dallas, N.A. v. United States [85-2 USTC ¶9635 ], 769 F.2d 299, 304 (5th Cir. 1985), cert. denied, -- U.S. --, 106 S. Ct. 1458 (1986); see Crow v. Wyoming Timber Products Co. [70-2 USTC ¶9561 ], 424 F.2d 93, 96 (10th Cir. 1970) (dictum). Congress has specifically waived sovereign immunity for actions under §7426 through the enactment of 28 U.S.C. §1346(e). Thus to the extent that a party claiming an interest in property is aggrieved by the pendency of an existing lien, sovereign immunity is waived. See Three M Investments, Inc. v. United States [86-1 USTC ¶9185 ], 781 F.2d 352, 354 (10th Cir. 1986). This conclusion does not change merely because the district court exercised ancillary jurisdiction. Ancillary jurisdiction permits the district court to exercise the full range of its civil and criminal jurisdiction.

One of the essentials of in rem jurisdiction is that the property be within the court's jurisdiction at the time of suit. 4 C. Wright & A. Miller, Federal Practice & Procedure §1070, at 270 (1969). Release or removal of the res from the control of the court ends its jurisdiction. Generally, the only exceptions to the rule are when the res is released accidentally, fraudulently, or improperly. See United States v. $54,480.05 United States Currency and Other Coins, 722 F.2d 1457, 1458 (9th Cir. 1984).

The Government's analysis fails to consider the fact that in rem and in personam jurisdiction may co-exist. See Inland Credit Corp. v. M/T Bow Egret, 552 F.2d 1148, 1152 (5th Cir. 1977). Here both apply. The district court still has jurisdiction under I.R.C. §7426(b) to enter a judgment in personam against the Government. Section 7426(b) grants the district court the jurisdiction to order the Government to return the seized property or its equivalent, i.e., a money judgment. Moreover while the Government attorney could not waive any immunity of the United States , we note that our interpretation of §7426(b) is consistent with representations made to the district judge:

MR. GOOD (Counsel for the County): Judge, I am curious, is there any--if I can ask for a brief stay of the order until we see if we might be taking some kind of further action before this Court releases the funds to the I.R.S.

MR. SNOW (Counsel for Wingfield): Judge, excuse me, if I may speak to that. We're being assessed interest on a daily basis, Mr. Wingfield is, for that. We would suffer from the stay. We would ask that the order be immediately imposed.

MR. GUTHRIE (Counsel for the IRS): Besides that, Your Honor, we have a deep pocket. We'll have the money. If they bring a successful lawsuit, we'll have enough money to give it back.

THE COURT: Well, I'm not going to make any comments about political parties going into greater debt, but I'll accept that. Okay, the claim is denied. The assurance of the federal government is that you can collect from them if you are successful in that.

III R. 14-15 (emphasis added). It was upon this assurance by the Government that the district court denied the motion for a stay.

In sum, the case is not moot nor is jurisdiction destroyed because of distribution of the property to the Government. The power to order restitution by payment of an equivalent value remains.

C.

Comity

Boulder County further argues that the district court should have returned the property to the State district court under the general principles of comity because the State court was the first court to have possession of the seized funds and because the Government had actual notice of the State court proceedings and failed to intervene, citing United States v. Hunt [75-1 USTC ¶9327 ], 513 F.2d 129 (10th Cir. 1975).

Hunt is inapposite. There the IRS intentionally by-passed a State court proceeding following actual notice by initiating a unilateral action in federal district court when the funds in question were in the sole possession of the State district court. Here the State court did not have control or possession of the seized property, nor did the Government initiate the suit. Rather, the property was in the custody and control of the federal district court as possible evidence in a federal criminal case, and the Government, along with Boulder County and Wingfield, asserted claims to the property after Wingfield's conviction. Although we recognized the importance of "[t]he promotion of proper Federal-State relations in the interest of sound judicial administration and in further recognition of the principles of comity," id. at 138-39, we believe these interests would not have been promoted by the district court's refusal to adjudicate the claims to the seized property in its control.

We conclude that the district court did not err in exercising ancillary jurisdiction under Herzfeld and like principles to adjudicate the conflicting claims to the property in its custody or in deciding not to transfer the property to the State court.

III

CLAIMS OF OWNERSHIP

The controlling question is whether Wingfield had a property interest in the seized property sufficient for the federal tax lien to attach at the time the IRS assessed the tax lien and filed notices thereof. If Wingfield did have such a property interest in the seized property, then the federal tax liens attached and the IRS' claim has priority. If, on the other hand, the taxpayer-defendant had no such property interest in the seized property, then the federal tax lien could not attach.

A federal tax lien may attach only to the property of the person liable to pay the tax. I.R.C. §6321 ; see also 13 Mertens Law of Federal Income Taxation §54.52, at 208. Section 6321 provides that a federal tax lien shall be applicable to "all property and rights to the property, whether real or personal, belonging to such person." (Emphasis added). A federal tax lien is wholly a creature of federal law. Therefore the consequences of the lien that attach to property interests are matters of federal law. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983) (and cases cited therein); see also Hunt, 513 F.2d at 133. However the Internal Revenue Code "creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . . ." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958); see also 13 Mertens, supra §54.52, at 207. Property and rights to property exist under state law; priority of federal liens depends on federal law. See Rodgers, 461 U.S. at 683; Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14 (1960); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516 ], 790 F.2d 354, 356 (3d Cir. 1986) (under Pennsylvania law, state liquor license did not constitute property but it had sufficient indicia of property to be subjected to federal tax lien).

Federal law governs the priority of a tax lien against other claims to property. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444 ], 384 U.S. 323, 328 (1966). Where Congress has not prescribed a different priority rule, see I.R.C. §6323 , the basic rule is "first in time is first in right." See United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86, (1954). Therefore, a tax lien is junior to only those liens that not only attached to the asset, but also became sufficiently choate before the tax lien arose. See id. And choateness of a competing interest is also a matter of federal law. See United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88-89 (1963).

With respect to the property interest in question here, the Supreme Court of Colorado has responded to the following question certified to it by the federal district court:

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

United States v. Wilkinson [85-2 USTC ¶9825 ], 628 F.Supp. 29, 30 (D. Colo. 1985). The Colorado Court answered the question as follows:

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

United States v. Wilkinson (In re Interrogatories of the U.S. District Court), 686 P.2d 790, 790-91 ( Colo. 1984).

It is thus arguable that Wingfield ceased to have any interest in the seized property as of November 5, 1982, the date of the seizure, and well before January 19, 1983, the date the IRS filed notices of the federal tax liens. The tax lien would thus be unenforceable because it was a lien against nothing, as was reasoned in the Wilkinson case. See 628 F.Supp. at 31.

We are not convinced that we should apply the reasoning in the Wilkinson opinion, see [85-2 USTC ¶9825 ] 628 F.Supp 29, which supports the position of the County of Boulder . We adopt instead the analysis of the district court here and as explicated in Eggleston v. Colorado [86-2 USTC ¶9552 ], 636 F.Supp. 1312, 1322 (D. Colo. 1986), which upholds the Government's position.

Insofar as the Colorado Supreme Court's decision determines the nature of items forfeited pursuant to the abatement statute as property interests, it is binding on this court. However, it remains a question of federal law for us to decide whether the interest was subjected to a federal tax lien and the priority of the lien. 21 West Lancaster Corp., 790 F.2d at 358. Two cases have addressed situations analogous to the case before us. In Metropolitan Dade Co. v. United States [81-1 USTC ¶9173 ], 635 F.2d 512 (5th Cir. 1981), the Fifth Circuit was called upon to determine whether a delinquent taxpayer had a property interest in confiscated funds seized by the State of Florida under the authority of a specific gambling statute. Relying on language of the statute that "no one has any property rights subject to be protected by any constitutional provision in such contraband," ² the court held that it was the "unescapable intent of the Florida legislature . . . that all contraband, including money, escheats upon seizure." ³ Moreover, in rejecting the Government's argument that the taxpayer retained a property interest in the seized contraband, the court held that "[u]nder the statute, the 'owners' of seized contraband are not 'divested' of any property rights; the legislature expressly stated that 'no one has any property rights' in seized contraband." 635 F.2d at 515. Although the Florida law provided a means for a claimant to recover seized property if he could show that the property was lawfully acquired, the court nevertheless concluded that the confiscation was not analogous to an inchoate attachment lien. Id. ⁴

In Rodriguez v. Escambron Development Corp. [84-2 USTC ¶9355], 740 F.2d 92 (1st Cir. 1984), the First Circuit considered whether title to Puerto Rican land acquired by civil law "acquisitive prescription" was subject to a federal tax lien against the prior record owners of the land. The plaintiffs argued that when the thirty-year period for adverse possession in Puerto Rico ran in 1975, the doctrine of relation back made them owners of the land from the time when they first took possession in 1945. Id. at 94-95. Under the civil law concept in Puerto Rico , "[w]hen prescription is completed the possessor is deemed to be owner, not merely from the last day of the delay, but retroactively from the moment when the prescription began to run." Id. at 94 (quoting I M. Planiol & G. Ripert, Treatise on the Civil Law 599 n.2708 (La. State Law Inst. trans. 1959)). Thus the plaintiffs argued that the Government's tax lien which arose in 1963 was ineffective because through the application of the relation back doctrine they, not the delinquent taxpayers, were the owners of the land at the time.

The First Circuit rejected this argument concluding "that, under the federal tax laws, the government's tax lien passed along with ownership of the attached land." Id. at 100. Of particular import to the court was the fact that the right to ownership of the land was never extinguished; rather, the right passed from the taxpayers to the plaintiffs. Id. at 99. Thus the court distinguished those cases where the attached property right ceased to exist, leaving nothing against which the Government could assert its interests.

Our case more closely resembles Rodriguez than Metropolitan Dade. The Supreme Court of Colorado did state that "a person is divested of all rights and interests in property upon its seizure under the Colorado Abatement of Public Nuisance statute. . . ." Wilkinson, 686 P.2d at 790. Nevertheless examination of the Colorado procedure shows that mere seizure of property does not result in retroactive divestment of the owner's rights in that property. Under Wilkinson, a person is divested of rights in property at the time of seizure, but this is dependent on a final order being entered. 686 P.2d at 792, 794. Thus the "owner" of seized property under Colorado law retains some interest in the property, even though he may not have the right to possession. See Eggleston, 636 F.Supp. at 1322. As noted below, until entry of the final forfeiture order the owner still had a right to recover his property if it was not found to be subject to forfeiture.

We feel a further comparison to Rodriguez is persuasive. It is true that in the instant case the seizure of Wingfield's property was an act on which forfeiture and ultimate title for the County can be established. However, this is close, we feel, to the facts in Rodriguez. There the taking of possession at the start of the period by the adverse possessors also was an act on which their rights could be established on completion of the required possession. Nevertheless the intervening tax lien prevailed because the final completion of the prescription period had to occur before the adverse possessors' rights were established.

Thus at the instant tax lien attached to the seized property here, absent the use of the doctrine of relation back as it is explained in United States v. Stowell, 133 U.S. 1, 16-17 (1890), the taxpayer Wingfield had a cognizable interest in the seized property. This must be so because if the final judgment of forfeiture by the Colorado State court had not been entered, Wingfield would have been entitled to the return of the seized property. ⁵ Here we cannot agree that before the final judgment of forfeiture was entered, the taxpayer had no property interest sufficient for the federal tax lien to attach. Not until that final judgment was entered was he divested of that interest in favor of the County. Here Wingfield had an interest in the seized property sufficient for the tax lien to attach until the final judgment was entered. ⁶

Only through the use of the relation back doctrine can Boulder County argue that Wingfield had no property interest as of the date of seizure. ⁷ The district court reasoned that the doctrine of relation back under state law cannot be held to subvert the constitutional power to lay and collect taxes. Eggleston, 636 F.Supp. at 1323. We agree. Relation back cannot "operate to destroy the realities of the situation." United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 50 (1950). "The State's characterization of its liens, while good for all state purposes, does not necessarily bind this Court." United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955).

Here after seizure, but while Wingfield retained an interest in the property until a final forfeiture judgment, the tax lien attached. We therefore hold that as a matter of federal law governing priorities, the Government's tax lien had attached to the seized property of Wingfield before it passed to Boulder County and has priority over the County's claim.

IV

ESTOPPEL AND WAIVER

Boulder County further argues that the Government should be estopped from pressing its right to the funds because of governmental assurances that it would waive its claim. We disagree.

Estoppel is an equitable doctrine invoked to avoid injustice in particular cases. The Supreme Court has left open the question whether estoppel can never be applied against the Government. See Heckler v. Community Health Services, 467 U.S. 51, 60, 66 (1984). If estoppel were to be applied against the Government, we have specified these requirements: (1) the party to be estopped must know the facts; (2) he must intend that his conduct will be acted upon or must so act that the party asserting the estoppel has the right to believe that it was so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former's conduct to his injury. Lurch v. United States , 719 F.2d 333, 341 (10th Cir. 1983). We have also said that there is an additional consideration of public policy when a party seeks to estop the Government; if the Government is unable to enforce the law because of estoppel, the interest of the citizenry as a whole in obedience to the rule of law is undermined. Che-Li Shen v. Immigration and Naturalization Service, 749 F.2d 1469, 1473-74 (10th Cir. 1984).

Here we are not convinced that Boulder County reasonably relied to its detriment on any assurances by the IRS that it would waive its claims to the seized property. The County has not lost any rights, or changed its status, because of reliance on claimed assurances. See Heckler, 467 U.S. at 61-62. The conduct of the IRS did not cause Boulder County to take or fail to take action that the County could not correct at any time. See Schweiker v. Hansen, 450 U.S. 785, 789 (1981) (per curiam). Boulder County was able to present its argument forcefully and its counsel has provided able representation. Because of our conclusion that the County has failed to show that it reasonably relied to its detriment on assurances made by the IRS that it would waive its claim, we need not address the additional public policy considerations when a party seeks to estop the Government.

We hold that Boulder County is not entitled to prevail on the basis of the claimed estoppel. ⁸

V

CONCLUSION

We hold that the district court's exercise of ancillary jurisdiction was proper. Moreover, Wingfield had an interest in the seized property sufficient for the tax lien to attach before the final order of forfeiture. Finally, the court's order that the Clerk of the Court satisfy the claim of the IRS and, if any proceeds remained, to satisfy the claim of the County of Boulder was not in error. Accordingly the judgment is

AFFIRMED.

¹ The United States was never made a party to the state forfeiture proceedings. Moreover, the State forfeiture proceedings did not address the validity and priority of the federal tax lien, the issue before us; rather, the precise issue before the State courts was whether Wingfield's residence constituted a class I public nuisance, and, if so, whether all the seized property was subject to forfeiture.

² 635 F.2d at 514.

³ 635 F.2d at 515 (footnote omitted).

⁴ We express no opinion as to whether a tax lien could attach to the taxpayer-claimant's interest (his right to recover the property) under statutes similar to that of Florida . As noted, that claimant has a right to recover his property if he carries the burden of showing the property was lawfully acquired. For reasons expressed below, we find the instant case is distinguishable from Metropolitan Dade and the Florida procedure.

⁵ The Colorado Court of Appeals has recognized this fact in the direct appeal in Wingfield's state forfeiture proceeding. See Colorado v. Lot 23, 707 P.2d 1001 (Colo. Ct. App. 1985), aff'd in part and rev'd in part, 735 P.2d 184 ( Colo. 1987). There the court found that of the property seized from Wingfield, the silver bars, the Canadian mint sets, and the currency found in the glass pitcher were not sufficiently shown to be "connected in any way with the drugs [seized] or other criminal activity," id. at 1004, and were ordered returned to Wingfield.

⁶ Boulder County also argues that under Colo. Rev. Stat. §16 -13-303(3) Wingfield had no property interest in the seized property. Section 16 -13-303(3) provides that "no property rights shall exist" in the proceeds from the sale of drugs. Section 16 -13-303(3) is analogous to the Florida provision confronted by the court in Metropolitan Dade. Both the Colorado provision and the Florida provision characterize the proceeds from the sale of drugs as something in which no property rights may be held.

Here, however, the property was seized pursuant to §16 -13-303(1). Thus the funds were seized and forfeited because they were found to be contents of a building that was adjudged a class I public nuisance. There has never been a court finding that the property was proceeds from the sale of drugs. Moreover, this argument was not presented to the district court.

⁷ The opinion of the Supreme Court of Colorado in Wilkinson, 686 P.2d at 792, illustrates the reliance on relation back to establish the interest acquired by forfeiture "at the time of seizure."

The trial court's order concerning the forfeiture of the property at issue here was entered nunc pro tunc to the date of seizure. This order reflects its finding that personal property seized pursuant to sections 16 -13-303(2) and -308(1) is forfeit at the time of seizure.

⁸ We further note that the district court held that it is "very clear that where federal taxes are due, particularly where they are due as a result of obtaining monies or profits from a criminal enterprise, that the United States government is not free to waive its rights to funds . . . ." III R. 14. Section 7122(a) provides discretionary authority to the Secretary of the Treasury to compromise any civil or criminal case arising under the internal revenue laws before the case is referred to the Department of Justice for defense or prosecution. After the case has been referred to the Department of Justice, only the Attorney General or his delegate may compromise the case. See I.R.C. §7122(a) ; see also 3 Mertens (Code Commentary), supra §7122 :1, at 74-3 to 74-4.

Even assuming, arguendo, that IRS attorneys represented that the IRS would waive any claim to the seized property, the IRS attorneys were not shown to have authority to compromise or waive a claim of the United States in these circumstances. See I.R.C. §7122(a) ; 26 C.F.R. §301.7122(a) . Agents of the Government "who have no authority at all to dispose of Government property cannot by their conduct cause the Government to lose its valuable rights by their acquiesence, laches, or failure to act." United States v. California, 332 U.S. 19, 40 (1947); see also California ex rel. State Lands Comm'n v. United States, 457 U.S. 273, 276 n.4 (1982). Moreover, compromises are required to be in writing. See 26 C.F.R. §301.7122(d) ; see also 3 Mertens (Code Commentary) supra, §7122 :3, at 74-5 to 74-6. Here no written waiver is said to have been made; rather, Boulder County relies exclusively on alleged oral assurances by IRS attorneys. III R. 7.

 

 

 

William Kenneth Katsaris, Sheriff of Leon County , Florida , Plaintiff v. The United States of America , Leon County , a political subdivision of the State of Florida , Jose Luis Acosta, and Luis Fulgencio Bosch, Defendants

U. S. District Court, No. Dist. Fla., Tallahassee Div., TCA 79-0946, 499 FSupp 282, 9/15/80

[Code Sec. 6323]

Lien for taxes: Priority against third parties: Abandoned property: Money.--A lien for taxes had priority over the claim of a county government in $4,435 seized by local authorities from a taxpayer during a drug arrest and held in the custody of the county sheriff. Although the taxpayer abandoned $220,031.10 also in his possession at the time he was arrested to avoid strengthening the case against him on drug charges, he did not abandon the lesser sum and the lien attached to it because the taxpayer owned the money. The cause was remanded to state court for a determination of the application of Florida law to the question of who was entitled to the balance of the money seized.

Jack M. Skelding, Jr., P. O. Box 669 , Tallahassee , Fla. 32302 , for plaintiff. Clinton Ashmore, Assistant United States Attorney, Tallahassee, Fla. 32302, Roger M. Moore, Steven Shairo, Department of Justice, Washington, D. C. 20530, F. E. Steinmeyer, III, 122 South Calhoun St., Tallahassee, Fla. 32301, for defendants.

Memorandum Opinion and Final Order

HIGBY, District Judge:

Money, money, who gets the money is the name of the interpleader ¹ game. Here it's the locals, Leon County , versus the Feds, the Internal Revenue Service. ² Both claim a right to $224,609.10 presently in the possession of Plaintiff , Leon County Sheriff Kenneth Katsaris. Leon County claims entitlement to the money under Section 925.06, Florida Statutes (Supp. 1978), which provides for the sale or destruction of unclaimed personal property in criminal proceedings. The Service claims the money by virtue of a tax lien against Acosta entered July 31, 1978. ³ It argues the money was Acosta's and is therefore subject to the lien against Acosta. Leon County claims the money is abandoned property. Katsaris asks for his costs in this proceeding if Leon County prevails.

Katsaris obtained the money July 22, 1978, when Acosta and Bosch were arrested during an aborted drug deal involving 7,000 pounds of marijuana. They were arrested in their motel room in the Dutch Kitchen Motel in Tallahassee , Florida . Investigators from the Leon County Sheriff's Office seized two automatic pistols, aummunition, $100,021.10 in the proverbial brown paper bag, $4,435.00 from Acosta's wallet, $143.00 from Bosch's wallet, and $120,010.00 innovatively stashed in a plastic bag. All these items were in the motel room at the time of arrest but not when Acosta and Bosch checked in.

When they were arrested Acosta and Bosch denied all knowledge and ownership of everything found in the room except the money in their wallets. In an affidavit signed on September 29, 1978, Acosta swore the $220,031.10 found in the brown bag and the plastic bag was not his. It was entrusted to him, he said, by investors who wanted him to purchase land for them in North Florida . Acosta's statement acknowledged his ownership of the $4,435.00 found in his wallet. It also stated Bosch owned the $143.00 found in his wallet. Since their arrest neither individual has made any effort to obtain the money.

A federal tax lien is almighty and attached on July 31, 1978, to Acosta's ownership interest in anything in the universe including this money. Phelps v. United States [75-1 USTC ¶9467], 421 U. S. 330, 44 L. Ed. 2d 201 (1975). For determining the United States ' interest in the money the determinative fact is the extent of Acosta's ownership of the money. See, United States v. Mayor and City Council of Baltimore [78-1 USTC ¶16,279], 564 F. 2d 1066 (4th Cir. 1977); United States v. Burgo [49-1 USTC ¶9307], 175 F. 2d 196 (3d Cir. 1949); Central Surety & Insurance Corp. v. Martin Infante Co. [59-2 USTC ¶9736], 272 F. 2d 231 (3d Cir. 1959). Florida 's law determines Acosta's interest in the money. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 4 L. Ed. 2d 1365 (1960). The money in Acosta's wallet and the bags was plainly Acosta's when he was arrested. His story of land investors is incredible. Circumstances, including several trips to the farm where the marijuana was found, show Acosta was a drug dealer and the money was his for use in the ill-fated dope deal.

Leon County argues Acosta had abandoned all ownership in the money before the tax lien attached. Abandonment is a question of ultimate fact. U. S. v. Alden, 576 F. 2d 772 (8th Cir. 1978), cert. den., 439 U. S. 855, 58 L. Ed. 2d 161 (1978). It "is the relinquishment of a right or of property with the intention of not reclaiming it or reassuming its ownership or enjoyment." Ellis v. Brown, 177 F. 2d 677, 679 (6th Cir. 1949). See, also, 1 Fla. Jur. 2d, Abandoned Prop., §1 (1977); 1 Am. Jur. 2d, Abandoned, Lost, Etc., Prop., §§ 1, 5, 12 (1962); Black's Law Dictionary (5th Ed. 1979) at 2. Cf., The No. 105, 97 F. 2d 425 (5th Cir. 1938), (discussing the analogous but not identical maritime law concept derelication). Both intent to abandon and an external act effecting the intent must be proven. See, Linscomb v. Goodyear Tire and Rubber Co., 199 F. 2d 431 (8th Cir. 1952); 1 Fla. Jur. 2d, Abandoned Property, §2 (1977); 1 Am. Jur. 2d, Abandoned, Lost, Etc., Prop., §§ 15, 16, 17 (1962).

The facts here show Acosta abandoned all interest in the $220,031.10 in the bags immediately after his arrest. He stated his intention. And his failure to take any step to recover the money demonstrates his sincerity. Although people do not ordinarily abandon money, Acosta had good reason. Admitted ownership of the money would have been persuasive evidence against him in the drug prosecution. Quite understandably he chose to abandon the money rather than strengthen the case against him. When he was arrested he abandoned the money preferring to concentrate on maintaining his freedom.

The $4,435.00 in his wallet Acosta did not abandon. He never denied ownership of it. Thus the evidence of his intent to relinquish all interest was not as strongly shown as of the date of the tax lien. The lien attached to the $4,435.00 on July 31, 1978. It did not attach to the $220,031.10 because on July 31, 1978, the money was not Acosta's; he had abandoned it.

These findings resolve the Service's claim in these proceedings. Leon County 's claim to the $220,031.10 and Bosch's $143.00 remain for disposal. Katsaris has requested award of costs. That too remains for disposition. But Katsaris has stipulated he cannot recover costs from the money taken by the IRS. His cost recovery will occur only if Leon County prevails.

Leon County 's claim relies upon Section 925.06, Florida Statutes (Supp. 1978). That statute is ambiguous and has not been definitively interpreted by a Florida court. Its application to the funds here may be questioned because it refers to "property in the custody of the court." Katsaris was ordered by the circuit court to hold the funds. They may or may not qualify as in the custody of the court. If they are in the custody of the court, the proper procedure for disposition remains debatable. Public notice, not given in this case, is required before abandoned property is sold. Notice is not specifically required if the law enforcement department involved uses the property. Given the peculiar nature of this property, which procedure should be followed is unclear. These are all matters of state law better handled by state courts. See, Aquilino v. United States , supra. Jurisdiction over this case was founded solely upon the United States ' claim. This order disposes of its claim. There is no reason to continue exercising jurisdiction. Resolution of the remaining issues is better left in the able hands of the Leon County judiciary, from whence this case emanated.

Therefore, it is ordered and adjudged that:

1. Plaintiff shall pay over to the United States $4,435.00 and any interest earned on that money which was taken from Acosta's wallet.

2. This cause is remanded to the Circuit Court of the Second Judicial Circuit, in and for Leon County .

¹ Fed. R. Civ. P. 22; 28 U. S. C. §2361.

² There are two other Defendants. One, Jose Luis Acosta, has not responded. The other, Luis Fulgencio Bosch, was never served; apparently the parties are willing to risk a judgment subject to collateral attack.

³ The lien arose after Acosta did not pay a jeopardy assessment made pursuant to 26, United States Code Section 6861. See, 26 U. S. C. §6321. On August 1, 1978, the Service levied under 26 U. S. C. §6331 on the funds held by Sheriff Katsaris.

 

 

 

City of Chicago, a municipal corporation, Plaintiff v. The United States of America--United States Treasury Department, Aultee Warr and Edward V. Hanrahan, State's Attorney of Cook County, Defendants

U. S. District Court, No. Dist. Ill. , East. Div., 72-C-2124, 372 FSupp 178, 3/14/74

[Code Sec. 6321]

Lien for taxes: Priority over county: Contraband: Gambling funds seized.--The United States had prior claim to $6,624.38 seized by the Sheriff of Cook County, Illinois in a gambling raid, because the county failed to hold a forfeiture hearing within 30 days after the funds were seized from a taxpayer who owed the government $7,000 and also because the county failed to show that the amount seized was actually contraband.

Bernard Carey, State's Attorney, Catherine M. Ryan, Assistant State 's Attorney, Cook County , Ill. , for plaintiff. Robert E. Sevila, Department of Justice, Washington, D. C. 20530, Jack M. Wesoky, Assistant United States Attorney, Chicago, Ill., for defendants.

Memorandum Opinion

AUSTIN, District Judge:

This is an interpleader action brought by the City of Chicago to determine whether the United States or Cook County has the superior claim to money which originally belonged to Aultee Warr. ¹ Plaintiff has deposited the amount in controversy ($6,624.38) with the Clerk of the Court, pursuant to F. R. Civ. P. 67. The subject of this opinion is resolution of the questions raised by the cross motions for summary judgment by the United States and Cook County . No affidavits were filed with either motion.

[Facts]

I. The fundamental facts in this case are not in dispute:

Defendant Aultee Warr was arrested on May 14, 1970 in Chicago on charges of gambling and failure to register syndicated gambling. At that time, the arresting officers also seized $6,624.38, which was held by the Chicago Police Department. Warr subsequently entered a plea of guilty to the charge of gambling and the trial judge imposed a fine. However, the Court made no determination as to whether the money seized at Warr's arrest was contraband (i. e., integrally related to his gambling activities). Moreover, there is no evidence submitted at this time that the money is indeed contraband.

Between 1970 and 1972, the Internal Revenue Service took the following action on behalf of the United States: it assessed Warr $7,000.00 for unpaid federal income taxes; it filed a notice of a tax lien with the Cook County Recorder of Deeds; and it served a notice of levy on the Chicago Police Department for the $6,624.38 it held in order to satisfy part of Warr's tax liability.

In view of the action taken by the Internal Revenue Service, the City of Chicago instituted this action for an adjudication of the respective rights of Cook County , the United States and Aultee Warr in the cash it held. Warr, although served with process, has filed neither an appearance nor a responsive pleading.

[Issue]

Thus, the question presented for decision here is whether the United States has a superior claim to that of Cook County in the money confiscated from Warr in the gambling raid. For the following reasons, the question is resolved in the affirmative.

[Property Interest]

II. The claim of the United States is derived from 26 U. S. C. §6321, which provides, in pertinent part:

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

Thus, the claim of the United States rests upon the premise that Warr, the taxpayer, presently has a property interest in the seized money. Whether he possesses that interest is, of course, a matter to be determined by state law. Acquilino v. United States , 363 U. S. 509, 512-13 (1960).

Cook County , on the other hand, contends that under Illinois law it, not Warr, holds title to the money. This claim is founded on the argument that the money is contraband and that by statute ² and under common law ³ Warr forfeited to the State all property rights in the money the moment it became contraband. Accordingly, Cook County contends that Warr has no property interest in the money upon which the United States may exercise its claim for unpaid taxes.

However, there are two fatal flaws to the position of Cook County , either of which leads to the conclusion that Warr still holds title to the money; and therefore, the United States has a prior claim to it.

A. The Procedural Flaw

In the first place, Cook County failed to comply with the forfeiture procedure which is set forth in 38 Ill. Rev. Stat. §28-5(c). ⁴ Basically, section 28-5(c) requires that, in order for title to property seized in connection with gambling activities to vest in the County, the Court that entered judgment on the gambling charges against the property owner must first conduct a forfeiture hearing at which evidence as to whether the property is actually contraband (i. e., integrally related to the gambling activities), shall be presented. Not only does the State's Attorney bear the burden of proof in such a proceeding, but also, and more important in the present case, he bears the burden of instituting the proceeding itself by filing a written petition requesting forfeiture. Moreover, he must file the forfeiture petition in time for the hearing thereon to be held within 30 days after entry of judgment on the criminal charges.

[Claim of Forfeiture Barred]

It is undisputed in this case that the State's Attorney failed to timely file a forfeiture petition. Indeed, there is no indication that such a petition was ever filed. Under the statute it is clear that failure to comply with the 30-day requirement forever bars the contention of Cook County that the money in question here was contraband; and therefore, the claim that the money was forfeited to the County is likewise barred.

This conclusion comports with the obvious and sound policy enunciated by the state legislature when it enacted section 28-5(c). That policy is to protect the title to property from stale claims so that the security of property rights in this State is ensured. It is manifestly clear that the primary purpose of the 30-day limitation for conducting a forfeiture hearing is to protect the rights of property owners, whether they be felons or law-abiding citizens, from three year old claims like the one involved here. And this Court cannot and will not delve into the substantive issue of whether the 30-day period is too short or too long. That is exclusively within the province of the legislative branch of government.

The conclusion that the claim of Cook County is barred by the 30-day requirement is further supported by the decision in People ex rel. Ward v. 1963 Cadillac Coupe, 38 Ill. 2d 339 (1967). There, the Court held that the failure of the State's Attorney to comply with a statutory mandate that he "forthwith bring an action for forfeiture" of an automobile, after he was given notice by the sheriff that it had been seized in connection with gambling activities, acts as a statutory bar to asserting such forfeiture in the future. The Court specifically held that a delay of 31/2 months before instituting forfeiture proceedings could scarcely be thought consistent with the statutory command. Id. at 348.

Although a different statute was involved in 1963 Cadillac Coupe, the same reasoning utilized there applies here: The failure of the State's Attorney to institute forfeiture proceedings, and the attending failure of the State Court to conduct a forfeiture hearing within the time prescribed by the forfeiture statute, acts as a perpetual bar to asserting the claim of the County to title in the property in question. 38 Ill. Rev. Stat. §28-5(c) requires the State's Attorney to institute forfeiture proceedings so that the issue of whether the property in question is contraband will be adjudicated by the Court within 30 days of entry of its judgment on the gambling charges against the property owner. This was not done in the instant litigation; and therefore the County is barred from asserting that the $6,624.38 was contraband at the time it was seized from Aultee Warr. Under section 28-5(c), the money cannot be forfeited unless it is first held to be contraband. Since such a holding is now impossible, the money cannot be forfeited. Accordingly, Cook County has no claim to it. Rather, the United States , as holder of a tax lien upon the money, has the superior claim.

B. The Substantive Flaw

As previously noted, money is not contraband per se; rather, it becomes such when it constitutes a functional integral part of a gambling operation. 38 Ill. Rev. Stat. §28-5(b). See also People v. Moore, 410 Ill. 241, 250 (1951); Dufauchard v. Ward, 51 Ill. App. 2d 42, 46 (1964). Even if the issue of whether the money in the present case is contraband can still be raised by the County, and assuming without deciding that this Court has jurisdiction of the subject matter of that issue, it is crystal clear that Cook County cannot prevail here. For it has not presented the Court with any affidavits or other evidence of the facts surrounding the seizure of the money; nor has it presented any evidence as to the connection that the money had with Warr's gambling operations. ⁵ In the absence of such evidence, it must be presumed that title to the property remained in Warr.

Thus, it must be concluded that the money has not been shown to be contraband, and that therefore it cannot be deemed forfeited to the County. Accordingly, the claim of the United States , as holder of the tax lien on the money, is superior to that of the County.

[Conclusion]

IV. The Court holds today that the claim of the United States to the $6,624.38 in question is superior to that of Cook County for two independent reasons: (1) the County failed to fulfill the procedural requirements for acquiring title to the money; and (2) even if it were not necessary to comply with those requirements, the County failed to present sufficient evidence that the money is contraband. Accordingly, the motion of the United States for entry of summary judgment in its favor is granted; and the corresponding motion of Cook County is denied. Judgment by default is entered against the defendant Aultee Warr.

¹ Originally brought in the Circuit of Cook County, the action was removed here by the United States pursuant to 28 U. S. C. §1444.

² The statute relied upon here is 38 Ill. Rev. Stat. §28-5(b), which provides in pertinent part:

"Any money or other thing of value integrally related to acts of gambling shall be seized and forfeited as contraband to the county wherein such seizure occurs."

³ Cook County points in particular to the language in Glennon v. Britton, 155 Ill. 232 (1895):

"The theory is, in respect of such property, [contraband] that no one is longer the owner of it. The moment it is used and applied in the unlawful business it becomes liable to forfeiture and though the claimant may appear and claim it, he has no greater rights in property so used than has any other person." 155 Ill. at 244-45.

See also People v. Moore, 410 Ill. 241, 247-50 (1951) (although money is not contraband per se, it becomes such when it constitutes a functional integral part of a gambling operation; and if property is actually contraband, no one can assert a legal ownership or right to possession that will be respected by any court); and Dufauchard v. Ward, 51 Ill. App. 2d 42, 46 (1964).

⁴ 38 Ill. Rev. Stat. §28-5(c) provides, in pertinent part:

"If, within 60 days after any seizure pursuant to subparagraph (b) of this Section [see n. 2, supra], a person having any property interest in the seized property is charged with an offense, the court which renders judgment upon such charge shall, within 30 days after such judgment, conduct a forfeiture hearing to determine whether such property was contraband at the time of seizure. Such hearing shall be commenced by a written petition by the State, . . . and a request for forfeiture . . .. If the Court determines that the seized property was contraband at the time of seizure, an order of forfeiture and disposition of the seized property shall be entered: . . . money . . . shall be received by the State's Attorney and . . . shall be deposited in the general fund of the County wherein such seizure occurred."

⁵ The most that Cook County can say on this point is:

"In the instant case, the $6,624,38 was seized in what Aultee Warr admitted was a gambling operation on May 14, 1970 and is, as a matter of law, forfeited as of that date." Memorandum in Support of Cook County Motion at 4.

Coupling the mere fact that Warr entered a plea of guilty to the gambling charges with the additional fact that money was seized at the time of his arrest is not enough to prove by a preponderance of the evidence that that money was integrally related to Warr's acts of gambling.

 

 

United States of America v. John Clinton; Margaret Clinton; State of New York Tax Commission; et al., Defendants

U. S. District Court, So. Dist. N. Y., Civ. 121-374, 260 FSupp 84, 8/24/66

[1954 Code Sec. 6323]

Liens: Priority: State tax lien: Attorney's inchoate lien.--A federal income tax lien, having been filed prior to the New York State Tax Commission's lien for state taxes and also prior to the inchoate lien of the taxpayer's attorney for services rendered in connection with a criminal matter, had a superior right to a fund seized by the City of New York as proceeds allegedly arising from the illegal activities of the taxpayer. The Court found that the trial evidence established that the money in the fund was not the proceeds of illegal activities and, therefore, was not forfeited to the City of New York . The fund was held to be the property of the taxpayer and subject to the federal tax lien.

Robert M. Morganthau, United States Attorney, New York , N. Y., for plaintiff. Eugene A. Leiman, 155 Leonard St., New York, N. Y., John A. McAvinue Jr., 253 Broadway, New York, N. Y., Louis J. Lefkowitz, Attorney General, Albany, N. Y., Peter Campbell Brown, Municipal Bldg., New York, N. Y., Matthew H. Brandenburg, 160 Broadway, New York, N. Y., for defendants.

[Nature of Action]

CANNELLA, District Judge:

This action was instituted on June 24, 1957 to foreclose a lien for unpaid taxes, due and owing from John and Margaret Clinton, against a fund in the amount of $23,545.17 held by the Police Property Clerk of the City of New York. The plaintiff claims the sum of $11,825.47 plus interest and penalties out of the fund. Judgment is hereby rendered for the plaintiff against all the defendants and it is ordered that defendant Rosetti, the Police Property Clerk, pay over to the United States Government out of the fund in question, an amount sufficient to pay the principal, interest and penalties due on account of the plaintiff's lien. It is further ordered that any sum remaining out of the fund after satisfaction of the plaintiff's lien is to be paid over to the defendant, State of New York Tax Commission, which has a claim for unpaid taxes against defendant John Clinton.

This court has jurisdiction in this case by virtue of 26 U. S. C. §7403, which provides for the bringing of a civil action to enforce a lien or to subject property to the payment of taxes due.

This case was tried non-jury by the court on January 20, 1966.

[Fund Seized by Police]

The court finds from the evidence adduced and the undisputed facts that on February 26, 1957, the defendant John Clinton was arrested by the New York City Police. Pursuant to a search warrant the police recovered monies, bank books and records leading to safe deposit boxes, whether in Clinton's name or someone elses, and as a result seized $313.00 from the person of John Clinton; $950.00 from the home of Rocco Monfredo; $14,500.00 from a safety box in the Long Island City Savings Bank in the name of John and Margaret Murray; and $8100.00 from a safety box in the Chase Manhattan Bank, in the name of Frank Vitarelli. The total fund of $23,863.00 was deposited with defendant Thomas E. Rosetti, Police Property Clerk, on March 11, 1957.

On March 24, 1957, John Clinton was indicted for violation of Section 580 of the New York Penal Law and Sections 340 and 357 of the Banking Laws of New York. On April 25, 1957, he pleaded guilty to two counts of the indictment, both of which were misdemeanors.

[Federal Lien Filed]

On March 28, 1957, an assessment for unpaid taxes was made by the District Director of Internal Revenue against John and Margaret Clinton. Notice of lien was duly filed with the Registrar of the City of New York, New York County, on March 29, 1957. A notice of levy was served upon the Police Property Clerk on March 29, 1957. On May 17, 1965, on the basis of the above mentioned assessment, a judgment was entered in the amount of $11,825.47, plus interest and penalties in the Tax Court. ¹ The amount represents the taxes owing and due to the plaintiff from defendants John and Margaret Clinton.

[Other Liens Filed]

The New York State Tax Commission assessed unpaid taxes against defendant John Clinton in the amount of $55,190.50, plus interest and filed a warrant for such state taxes with the Clerk of the County of New York on April 1, 1957. The Commission thus also claims a lien on the fund in the possession of the Police Property Clerk.

On April 8, 1957, Matthew H. Brandenburg, who was retained as counsel by the Clintons, served notice of attorney's lien on the Police Property Clerk.

[Title to Seized Fund]

The Police Property Clerk refused to honor the levy served on him by the plaintiff. It was the Property Clerk's position that the money composing the fund was used in illegal activities and thus defendant John Clinton has no property in such fund, under New York law. He also claims that under Section 435-40 of the Administrative Code of the City of New York, title to the fund properly vests in the Police Property Clerk. It is the Property Clerk's further contention that the search warrant under which the fund was seized was validly issued and the seizure was lawful in every way.

The plaintiff takes the position that the Property Clerk has no claim to said funds since his claim must rest on Section 435-40 of the Administrative Code of the City of New York, which is allegedly unconstitutional as a deprivation of the right to property without due process of law under the Fifth and Fourteenth Amendments to the United States Constitution. The plaintiff further contends that the fund properly belongs to defendant John Clinton and is not the proceeds of illegal activity on the part of John Clinton.

The position of defendants John and Margaret Clinton is that the search warrant was improperly issued and executed and the Police Property Clerk has no claim to the fund in question since it was obtained through illegal search and seizure in violation of the Fourth and Fourteenth Amendments to the United States Constitution. They further contend, as does the plaintiff that the fund is theirs and not the proceeds of illegal activity, and that Section 435-40 of the Administrative Code of the City of New York is unconstitutional.

A pivotal issue in this case is whether or not the fund held by the Police Property Clerk belongs to defendant John Clinton. For the plaintiff's federal tax lien to attach, it is necessary that the funds belong to defendant John Clinton. ² 26 U. S. C. §6331(a).

[Taxpayer as Owner]

As to the $313.00 taken from the person of defendant John Clinton, there arises a presumption that this money belongs to him. The burden is on the Police Property Clerk to rebut that presumption. United States v. Leuci [58-1USTC ¶9480], 160 F. Supp. 715 (E. D. N. Y. 1958);Norris v. Camp, 144 F. 2d 1 (10th Cir. 1944). The Police Property Clerk introduced no evidence during the trial which rebutted the presumption. Therefore, as to the $313.00, this court finds that it belongs to defendant John Clinton.

As to the money taken from Rocco Monfredo and from the safety deposit boxes in names other than that of defendant John Clinton, the plaintiff has the burden of proof by the fair preponderance of the credible evidence that the money belonged to John Clinton. This court finds that, through the testimony elicited at the trial from the witnesses and from other evidence introduced during the trial, the plaintiff has sustained its burden. For example, the plaintiff established that the bankbooks and other indicia of ownership were in the possession of John Clinton. The court also believes that the testimony given by defendants John and Margaret Clinton as to the ownership of the fund, is true.

Therefore it is the finding of this court that the entire fund in the possession of the Police Property Clerk is owned by John Clinton.

The Police Property Clerk argued that even if defendant John Clinton owned the money at one time, he now has no property right in it.

Questions of title to property and rights to property are governed by state law, whereas questions as to the creation and enforcement of federal tax liens are controlled by federal statutes. United States v. Leuci, supra. See also the opinion of Bryan, J., on the motion for summary judgment in the instant case (Clinton [64-2 USTC ¶9617]) which was rendered on October 23, 1963; United States v. Ortiz[56-1 USTC ¶9387], 140 F. Supp. 355 (S. D. N. Y. 1956). It is clearly the law of New York that a wrongdoer obtains no interest in property illegally obtained.Hofferman v. Simmons, 290 N. Y. 449, 49 N. E. 2d 523 (1943). See also United States v. Ortiz, supra; United States v. Pagan [55-2 USTC ¶9600], 140 F. Supp. 711 (S. D. N. Y. 1955).

Section 435-40(b) of the Administrative Code of the City of New York, in essence, provides that all property or money suspected of having been unlawfully obtained or of being the proceeds of crime or suspected of having been used for the commission of a crime or in furtherance of a crime, shall be given into the custody of and kept by the Police Property Clerk. Section 435-40(f) provides that a claimant of such fund in the possession of the Police Property Clerk "shall establish that he has a lawful title or property right in such property or money and lawfully obtained possession thereof and that such property or money was held and used in a lawful manner." This court finds that although there was some justification underlying the suspicion at the time the money was seized, that the money was unlawfully obtained, the evidence adduced during the course of the trial establishes to this court's satisfaction that defendant John Clinton has a lawful property right in such fund and that such fund is not the proceeds of illegal activities.

Therefore the Police Property Clerk has no right to detain the fund.

[Priority of Liens]

Having determined this, it is now necessary to consider the validity and priorities of the liens claimed by the plaintiff and defendants Brandenburg and the State of New York Tax Commission. This court finds that plaintiff and defendant State of New York Tax Commission have valid and subsisting liens. ³ It should be noted at this point that the Tax Commission concedes that the plaintiff's lien is superior to its own.

Although it is doubtful if defendant Brandenburg has a valid attorney's charging lien at all under state law, as will be discussed later, this court assumes it to be valid for the purposes of the following discussion on the priority of a federal tax lien. "The priority of a federal tax lien provided by 26 U. S. C. §6321 as against liens created under state law is governed by the common-law rule--'the first in time is the first in right.'" United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 87 (1963). See United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). The characterization by states of their liens, while good for all state purposes, does not necessarily bind the federal courts. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Pay-o-Matic [58-2 USTC 9533], 162 F. Supp. 154 (S. D. N. Y.), aff'd sub nom. United States v. Goldstein [58-1 USTC ¶9478], 256 F. 2d 581 (2d Cir.), cert. denied, 358 U. S. 830 (1958).

It must be kept in mind, however, that a choate state-created lien will take priority over later federal tax liens. United States v. New Britain, supra. Inchoate liens, of course, will not. United States v. Liverpool & London Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955). See United States v. Pioneer American Ins. Co., supra. The federal test is that liens are "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain, supra at 84. United States v. Pioneer American Ins. Co., supra at 89.

There is no doubt that under the idea first in right, first in time, the plaintiff's lien would be prior to that of defendant Brandenburg, since plaintiff filed notice of lien on March 29, 1957, while defendant Brandenburg did not do so until April 8, 1957.

[Attorney's Lien Was Inchoate]

However, it is also necessary to consider the question of whether the defendant Brandenburg's charging lien was choate at the time that the plaintiff filed notice of lien on March 29, 1957. Even assuming that the identity of the lienholder and the property subject to the lien was definite at the time the plaintiff filed its notice of lien, this court finds, (despite the fact defendant Brandenburg mentioned the retainer sum of $7,500.00 in his answer) that the amount of the lien for attorney's fees was undetermined and indefinite when notice of the federal tax lien was filed on March 29, 1957. The charging lien of defendant Brandenburg was inchoate on March 29, 1957, since the fair value of his services could not be determined as of that date and therefore the plaintiff's lien has priority over that of defendant Brandenburg.

[No Charging Lien]

The last matter for the court to discuss is whether defendant Brandenburg or defendant State of New York Tax Commission has a superior interest in the fund remaining after satisfaction of the plaintiff's lien. Defendant Brandenburg claims that under the New York Judiciary Law §475 a charging lien in his favor arose as soon as he began to render services for the defendant John Clinton. Judiciary Law §475 reads in part:

From the commencement of an action, special or other proceeding in any court . . . or the service of an answer containing counterclaim, the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come . . ..

In the present case defendant Brandenburg's claim arises from services rendered in relation to a criminal matter in which he represented John Clinton who eventually pleaded guilty.

It is clear to this court that under the facts present, defendant would not be entitled to any charging lien on the basis of Judiciary Law §475. There was, of course, no cause of action, claim or counterclaim of his client to which a lien could attach. Also, the fund in question in this case was obviously not the result of Brandenburg's efforts in the criminal matter on behalf of a defendant.

An attorney who represents a defendant cannot have a charging lien in the absence of a counterclaim. National Exhibition Co. v. Crane, 167 N. Y. 505, 60 N. E. 768 (1901); Manusse v. Mattia, 10 N. Y. S. 2d 495 (Sup. Ct. 1939). In the Manusse case, an attorney who represented a defendant in criminal proceedings moved for a lien seemingly for his services in the criminal proceeding. The court held that he could not have a charging lien under the facts present in the case.

Thus, under New York law, defendant Brandenburg is not entitled to a charging lien at all in the present case. This being so defendant Brandenburg has no right whatsoever in the fund held by the Police Property Clerk and therefore the Tax Commission has a right to that portion of the fund remaining after satisfaction of plaintiff's lien.

Even assuming that defendant Brandenburg had a right to such a lien, it could not arise pursuant to Judiciary Law §475 under which the lien would arise upon commencement of an action or service of an answer containing a counterclaim. This being true, if Brandenburg did have a lien, it would not arise until the filing of notice of lien which occurred after the filing of the State of New York Tax Commission which would therefore give the Commission priority.

In any event, the plaintiff is entitled to $11,825.47 plus interest and penalties out of the fund held by the Police Property Clerk and defendant State of New York Tax Commission is entitled to anything remaining after satisfaction of the plaintiff's lien.

In view of the above decision, it is not necessary for this court to determine whether or not Section 435-40 of the Administrative Code of the City of New York is constitutional, nor to determine whether or not the search warrant was properly issued and whether consequent search and seizure was illegal.

Submit order.

¹ Defendants John and Margaret Clinton consented to the entry of judgment on account of unpaid taxes for the years 1949 through 1955 inclusive, in the amount of $11,825.47.

² The lien for federal taxes is imposed by 26 U. S. C. §6321.

³ The lien for state taxes arises under Section 380 of the New York State Tax Law.

 

 

 

United States of America, Plaintiff v. Frank Leuci, as Property Clerk of the Police Department of The City of New York, Defendant

U. S. District Court, East. Dist. N. Y., Civil No. 14118, 160 FSupp 715, 4/9/58

[1954 Code Sec. 6321]

Lien for taxes: Money in possession of Police Property Clerk: Gambling v. other income.--By virtue of its tax lien, the Federal Government was entitled to money taken from a delinquent taxpayer's automobile by police when they discovered gambling apparatus in the vehicle. Although the taxpayer was later convicted of hiring a room to be used for gambling, there was no proof that the money held by the police was illegally acquired gambling money to which the delinquent taxpayer had no title.

Cornelius W. Wickersham, Jr., United States Attorney (Lawrence G. Nusbaum, Jr., Assistant United States Attorney, of Counsel), for plaintiff. Peter Campbell Brown, Corporation Counsel for the City of New York, Nathan B. Silverstein, Assistant Corporation Counsel, for defendant.

BRUCHHAUSEN, District Judge:

The plaintiff brings this action against the defendant, as property clerk of the Police Department, to recover a sum of money, taken by a police officer from the possession of one, David Leigh. The plaintiff claims that the money was the property of Leigh and that it is entitled thereto by virtue of a tax lien against his property.

The principal defense is that this fund is gambling money and that gambling money does not belong to the gambler.

[Facts]

The Court makes the following findings of fact:

1. That David Leigh was the owner of a 1948 Cadillac Sedan, registered in his name.

2. That on October 10, 1952, police officers, incidental to the lawful arrest of David Leigh, took possession of the automobile and its contents and thereafter turned over the same to the defendant and that he has ever since retained possession thereof.

3. That on October 21, 1952, the plaintiff duly obtained a tax lien in the sum of $5,662.01 upon all property belonging to said David Leigh.

4. That at the time of such seizure the said automobile was unoccupied and locked and that Leigh was arrested immediately after he parked and left the vehicle.

5. That the police officers on searching the vehicle found a large white envelope, above the sun visor, containing three slips of paper, records of policy collections and the identity of the collectors and a small notebook, with five written pages of policy collections, due to collectors.

6. That in the locked trunk of the car were found thirty-nine articles of wearing apparel, tools, household furnishings and toilet articles, none of which are claimed to be gambling equipment, but that in addition thereto there were found seventeen articles of gambling equipment consisting of a cigar box with 318 dice, 33 decks of playing cards, card tables, card cloths, leather cup for shaking dice, a micrometer for measuring dice, calipers, magnets, magnifying glass, plastic numbers and several adding machines.

7. That in the same trunk was found a canvas bag, containing the sum of $3,718.46 in cash, which is the subject of this action.

8. That included in that sum was one hundred forty-one single dollars; four hundred and twenty-five, 25 cent coins; four hundred fifty-eight, 5 cent coins and thirty-six, 50 cent coins.

9. That at the time of his arrest, Leigh was unemployed.

10. That he was charged and found guilty of possessing policy slips and of hiring and allowing to be used a certain room, table, establishment and apparatus for the purpose of gambling.

11. That he had prior convictions, i.e., in 1937, possessing counterfeit money and in 1948, 1950 and 1951, policy offenses.

[Issue]

The issue is whether the said money belonged to or was the property of David Leigh. The defendant's contention is that it was gambling money and as such, under the law, did not belong to him.

It is not disputed that the assessment list against Leigh was received by the Collector and that 26 U. S. C. A. 6322 provides that the lien arises at the time of such receipt. However, such lien may only attach to property "belonging to" Leigh, the delinquent taxpayer, 26 U. S. C. A. 6321.

It is clear that the question of title to property is governed by State law, whereas the questions as to the circumstances under which a Federal tax lien is created and enforced is controlled by Federal statutes and their interpretation.

The sole support for the plaintiff's contention that Leigh was the owner of the money found in the bag is that he was in possession of it. This creates a presumption of ownership. In Norris v. Camp, 144 Fed. (2d) 1, the Court said:

"Proof of the possession of personal property is prima facie evidence of title. It raises a presumption of ownership which may be rebutted or overcome by evidence of ownership in another."

The defendant seeks to rebut such presumption by the claim that the money was produced by gambling and that a gambler may not acquire title thereto by committing such crime. Of course, if the defendant had established that the fund was taken in by Leigh through gambling, the contention should be sustained. In this connection, in the case of Hofferman v. Simmons, 290 N. Y. 453, the Court said:

"The law affords a professional gambler no protection at all as to the monies he takes in. * * * This court has said that the professional gambler is an 'outlaw' * * * and that one who wagered with such a gambler 'never parted with the title to his money.' * * * No one shall be permitted * * * to acquire property by his own crime. * * * He cannot vest himself with title by crime."

[Conclusion]

There is no evidence that the subject money was received from bettors. The mere possession by Leigh of gambling equipment does not warrant such finding. Leigh was not apprehended while actually engaged in gambling operations. The gambling conviction of Leigh pertained to the hiring of a room to be used for gambling.

The plaintiff is entitled to judgment in the sum of $3,718.46.

 

 

 

United States of America, Plaintiff v. John C. Glenn, Public Administrator of Queens County as Administrator of the Estate of William McFall, Deceased, and Thomas E. Rosetti, Defendants

U. S. District Court, So. Dist. N. Y., Civ. 100-159, 5/4/59

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

Lien for taxes: Property subject to lien: Money seized at time of arrest: Money in custody of police property custodian.--Money seized on the premises of an individual at the time of his arrest on a charge of marijuana possession and later turned over to N. Y. police property clerk was not subject to a lien for unpaid marijuana taxes assessed against the individual. Since, under New York law, a criminal has no right to property acquired by his crime, the Government could have no greater right.

Arthur H. Christy, United States Attorney, United States Court House, Foley Square, New York, N. Y. (Renee J. Ginsberg, Assistant United States Attorney, of counsel), for plaintiff. Charles H. Tenney, Corporation Counsel, Municipal Building, New York, N. Y. (George P. Hennessy, Nathan B. Silverstein, of counsel), for defendant, Thomas E. Rosetti. George W. Herz, 90-04 161st Street, Jamaica, N. Y., for Public Administrator.

Opinion

CLANCY, District Judge:

This is an action to foreclose a Federal tax lien on money in the sum of $1,703.00 held by the defendant, Thomas E. Rosetti, as Property Clerk of the New York City Police Department. The Government lien is based on unpaid marijuana taxes assessed against one William McFall of whose estate the defendant Public Administrator, John C. Glenn, is administrator.

Findings of Fact

1. On May 4, 1948 William McFall was arrested at his home in the Borough of Queens by police officers of New York City on a charge of possession of marijuana. On a table in the room of his apartment in which he was found, were eleven bags of marijuana and the sum of $450.00, and in another room of the apartment was a safe which was closed but not locked, in which the officers found the sum of $1,253.00. All the money and marijuana and some cocaine were seized and taken by the arresting officers. McFall afterwards pleaded guilty to the charge of possession of marijuana with intent to sell. The money eventually was delivered to the police property clerk, Mr. Rosetti, one of the defendants.

2. McFall had a history of convictions for violating the Narcotics Laws. There was no direct evidence submitted by either party that he had or had not any employment or other source of income though in its entirety the evidence would indicate that he had none. Earlier on the same night the police had pursued and arrested three men who had called at McFall's home and emerged with two paper bags which, at the time of their arrest, were found in the automobile in which they rode. The bags contained marijuana. It was on their information that the officers entered McFall's apartment. Upon arraignment in court these three men pleaded guilty to the charge of possession.

[Money Seized]

3. At the time of McFall's arrest there were, upon the table in addition to the $450.00, the cocaine and the marijuana, paring knives, cigarette paper and scales, all paraphernalia employed in the preparation of marijuana for sale and use. Three men were present in the room who told the arresting officers the purpose of their presence was the purchase of marijuana. One was from Harlem and the others were from out of town and all three were convicted of some charge not clearly stated. The amount of marijuana seized was apparently large and it is evident that McFall was conducting a wholesale business. McFall never claimed the money in the safe or sought its return though he lived four years after its seizure. Upon all these facts it is further found that the $1,253.00 in the safe was in McFall's possession and was derived from his illegal traffic in narcotics.

[Government's Right to Property]

4. But since when McFall was arrested apparently no marijuana was on the person or within the grasp of a visitor and especially since he was convicted of possession with intent to sell, it seems to the Court that the $450.00 cash on the table was, more probably, still the property of one of the visitors not yet accepted by McFall, then only tendered as the consideration of the sale he was about to effect by appropriating some of his stock to the transaction. It is found therefore that that money was not in McFall's possession. The decision of plaintiff's rights to the money in the safe which follows would, if we held otherwise, apply to the $450.00 in any event.

5. On April 25, 1949 there was assessed against McFall the intestate of the defendant Public Administrator, taxes in the sum of $54,402.50 plus penalty and interest as provided by law. The assessment list containing this assessment, was received by the Collector of Internal Revenue on May 4, 1949, a full year after the money left McFall's possession, and notice of this assessment and demand for payment were made upon the office of the defendant Property Clerk on or about that day.

Conclusions of Law

1. Upon its seizure McFall had no claim to nor any property right in the money in the safe.

2. The complaint is dismissed with costs to the defendant Rosetti.

[Public Policy]

In the latest decision of the New York Courts, on the rights of persons in the position of McFall, Carr v. Hoy, 2 N. Y. 2d 185, the Court stated that a criminal has no claim that he may assert in a New York State Court to any property or right to property derived from his criminal activities. The Courts will not hear such a claim as a matter of public policy. The Court of Appeals quoted an excerpt from the opinion in Riggs v. Palmer, 115 N. Y. 506, at 511: "No one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime. These maxims are dictated by public policy, have their foundation in universal law administered in all civilized countries, and have nowhere been superseded by statutes." The Government, under its lien, can have no better right than had McFall. U. S. v. Manufacturers Trust Co., 198 Fed. (2d) 366 [52-2 USTC ¶9417]. Since McFall had none when the tax claim of the plaintiff became a lien or since, the Government can have none now. The United States Attorney ignores the decision in U. S. v. Ortiz, 140 Fed. Supp. 355 [56-1 USTC ¶9387] and cites Welsh v. U. S., 220 Fed. (2d) 200 [55-1 USTC ¶9238]; Farley v. Manning, 4 N. J. 571, 73 Atl. (2d) 551 [50-2 USTC ¶9374]; and U. S. v. Willmann, 63 Fed. Supp. 535 [45-2 USTC ¶9444]. Nothing decided in any of these cases conflicts in any way with anything in this decision or with the decision in Ortiz. More important is the fact that none of them concerns itself with New York State Law which is decisive here. Burnet v. Coronado Oil & Gas Co., 285 U. S. 393, at 399 [3 USTC ¶925]; Fidelity & Deposit Co. v. New York City Housing Authority, 241 Fed. (2d) 142, at 144 [57-1 USTC ¶9410]; U. S. v. Bess, 357 U. S. 51 [58-2 USTC ¶9595].

 

 

 

United States of America, Plaintiff v. Angelo Ortiz and Thomas E. Rosetti, individually and as Property Clerk of the Police Department of the City of New York, Defendants

In the United States District Court for the Southern District of New York, Civ. 95-12, 140 FSupp 355, March 14, 1956

[1939 Code Secs. 3670, 3692-similar to 1954 Code Secs. 6321, 6331]

Lien for taxes: Property subject to lien: Unlawfully obtained money held by police.--At the time of his arrest for selling narcotics, $3,580.89 was taken from the defendant Ortiz and turned over to the Property Clerk of the New York City Police Department. Almost five months later, the Federal government acquired a lien against all the property of Ortiz in the amount of over $185,000 for marijuana transfer taxes. The court held that the Federal government was entitled to $1,080.89 of the money in police custody since Ortiz had obtained it from lawful sources, but that the government was not entitled to the remaining $2,500, because Ortiz had obtained it from unlawful sources (sale of narcotics) and had no property interest in the money so acquired since, under New York law, a wrongdoer obtains no property interest in money so acquired.

Paul W. Williams, United States Attorney for the Southern District of New York (Robert J. Ward, Assistant United States Attorney, of counsel), for plaintiff. Peter Campbell Brown, Corporation Counsel (George P. Hennessy, Nathan E. Silverstein, of counsel), for defendants.

Opinion

CASHIN, District Judge:

This is an action by the plaintiff, United States of America, to foreclose a federal tax lien on money in the sum of $3,580.89 held by the defendant, Thomas E. Rosetti, as Property Clerk of the New York City Police Department. The claim of the United States is based on unpaid marijuana transfer taxes due and owing by the defendant, Angelo Ortiz.

Findings of Fact

1. On December 8, 1949, $3,580.89 was lawfully taken by a New York City Police Officer from the defendant, Angelo Ortiz, at the time of his arrest for selling narcotics. The Police Officer turned over said money to the custody of the Property Clerk of the Police Department of the City of New York pursuant to Section 435-5.0 of the Administrative Code of the City of New York. The defendant Ortiz is in default.

2. On May 1, 1950, the Collector of Internal Revenue for the Third District of New York received an assessment list containing an assessment of $185,002.50 plus interest and penalty, for marijuana transfer taxes against the defendant Ortiz. On that date the United States of America acquired a lien against all the property belonging to the defendant Ortiz.

3. It was stipulated and agreed by the United States Government and the Corporation Counsel of the City of New York that the defendant Ortiz obtained $1,080.89 from lawful sources and $2,500.00 from unlawful sources, that is, proceeds of the sale of narcotics in violation of Section 1751 Penal Law of the State of New York.

Conclusions of Law

I. Judgment is awarded to plaintiff, United States of America, in the amount of $1,080.89.

* * *

Plaintiff's counsel apparently concedes the soundness of the holding in U. S. v. Pagan at al. (unreported case Judge Clancy S. D. N. Y. 1955 [55-2 USTC ¶9600]) but has endeavored to distinguish its facts from those in this case.

The basis of the alleged distinction is that in the Pagan case the unlawful money held by the Property Clerk was the proceeds of gambling, while in this case the unlawful money was the proceeds of marijuana sales.

We find no basis in law for the distinction. As a general rule property rights and ownership are determined by the laws of the State. Burnet v. Coronado Oil & Gas Co., 285 U. S. 393 (1930) [3 USTC ¶925]. Under the law of New York State a wrongdoer obtains no property interest in money so acquired. Hofferman v. Simmons, 290 N. Y. 449 (1943).

Nor do we think that the fact that the tax involved here was on marijuana, the unlawful sale of which gave the defendant Ortiz possession of the money, can be a basis of distinction. The Statute, Secs. 3670-71 Title 26 USCA (1939 Internal Revenue Code) which creates the lien which the Government seeks to enforce here, is the same as in the Pagan case. In accordance with that Statute the lien did not come into existence until the assessment list was received by the Collector. This was long after the defendant Ortiz had lost possession of the moneys.

 

 

 

United States of America, Plaintiff v. Arnold J. Willmann, Sheriff of St. Louis County, Missouri, Jack Bender, Ralph Bohan, Earl Schachter, Jack Grodsky, Herman Schachter, and Harry Schachter, alias E. B. McDonald, alias Harry McDonald, alias Brassie McDonald, Defendants, Sam Schachter, Intervenor

United States District Court, Eastern District of Missouri, Eastern Division, No. 3244, 63 FSupp 535, Filed June 29, 1945, [Priority of lien for unpaid income taxes.]

 

 

Hudson County Board of Chosen Freeholders, Appellant v. Morales, Jorge; Township of Secaucus; Internal Revenue Service; and Plaza National Bank, Appellees

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 77-2253, 581 F2d 379, 7/31/78, Affirming unreported District Court decision

[Code Sec. 7402--result unchanged by '76 Tax Reform Act--and 28 U.S.C. §1444]

District Court: Jurisdiction: Removal of action: Tax lien: Challenge to.--The District Court had jurisdiction over an action removed from the state court at the behest of the IRS, which claimed that money seized from a debtor at the time of his arrest was subject to a federal lien. The complaint challenged the validity of the lien and thus impinged directly on an interest of the United States in the property in question.

[Code Sec. 6321--result unchanged by '76 Tax Reform Act]

Tax liens: Property subject to: Contraband.--Money seized from a debtor by local authorities at the time of his arrest was subject to a federal lien and should not have been forfeited to the county. There was no evidence to link the money with the narcotics violation with which the debtor was charged.

M. J. Frank, Assistant County Counsel, & Harold J. Ruvoldt, 595 Newark Avenue, Jersey City, New Jersey, 07306, for appellant, M. Carr Ferguson, Assistant Attorney General, Michael J. Roach, Gilbert E. Andrews, Crombie J. D. Garrett, Department of Justice, Washington, D. C. 20530, for appellee.

Before ADAMS, HUNTER and WEIS, Circuit Judges.

Opinion of the Court

ADAMS, Circuit Judge:

This appeal is from a judgment by the district court rejecting the position of the Hudson County Board of Chosen Freeholders that a sum of money seized at the time of Jorge Morales' arrest was forfeited to it, ordering instead that a substantial portion of the money be paid to the United States in satisfaction of a lien for federal income taxes owed by Morales, and directing that the remainder be returned to Morales.

[Background]

I. Morales was arrested by the police of Secaucus, New Jersey, on February 1, 1974, and charged with violating New Jersey law by possessing a controlled dangerous substance and by possessing such substance with an intent to dispense it. At the time of Morales' arrest, the trunk of the vehicle he was driving was opened at the request of a police officer, and in it the officer observed a paper bag containing a sizeable sum of cash.

After seizing the money, which totaled $27,805, the Secaucus police placed it in an account in the Plaza National Bank of Secaucus. There it has been retained in a safety deposit box.

While Morales was detained at the police station after his arrest, the police engaged in a consent search of his apartment. That search revealed the presence of heroin, cocaine and marijuana. A Hudson County grand jury subsequently returned an indictment against Morales. Morales pleaded guilty to the count charging him with possession of a controlled dangerous substance with intent to dispense, and the other counts were dismissed.

Shortly after the money seized from Morales' vehicle had been placed in the bank, a notice of levy against it was served on the Secaucus policy by the Internal Revenue Service (IRS). The IRS sought the funds to satisfy federal income taxes claimed from Morales. In April of 1974, Morales filed a tax return for the year 1973, which resulted in an assessment for unpaid taxes for 1973 in the amount of $16,899.61. Thereafter, on May 28, 1974, the IRS served on the Secaucus police an updated notice of levy reflecting the newly-determined amount of tax liability.

On October 29, 1975, the Board of Chosen Freeholders of Hudson County filed a complaint in Hudson County Superior Court, Law Division, seeking a judgment that would "(d)eny the validity of the claimed lien by the Internal Revenue Service," declare "the money forfeited to the County of Hudson" and order "the Township of Secaucus and Plaza National Bank to remit said monies to the Treasurer of Hudson County." The theory of the complaint filed by Hudson County was that since Morales had committed a crime in violation of New Jersey law, the money seized at the time of his arrest was ipso facto forfeited to the County "wherein the offense took place, namely Hudson, and said forfeitute became effective at the time of the commission of the offenses involved." On this basis, the complaint asserted, "the Internal Revenue Service's attempt to levy is invalid, and the said sum of $27,805.00 together with any accrued interest belongs to the people and governmetn of Hudson County." Complaint at p. 2.

Acting for the IRS, the United States Attorney on November 28, 1975, filed a petition for removal of the suit to federal court. The petition stated that the action is "subject to removal pursuant to 28 U. S. C. §1444 in that the complaint appears to allege a claim to quiet title to personal property on which the United States claims a lien."

In a letter opinion dated March 29, 1976, the district court concluded that it had jurisdiction over the case. It noted that the United States was named as a party to the action by means of the designation of the IRS as a defendant, and that the complaint sought to quiet title to cash to which the United States asserted a tax lien. The district judge then determined that the IRS had a right to remove the suit to federal court under 28 U. S. C. §§ 1444 and 2410(a), since the action was one 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(a). In an order entered on May 6, 1976, the district court denied the County's petition for remand to the Superior Court.

The IRS filed an answer on May 25, 1976, in which it maintained, inter alia, that the court should dismiss the complaint, and asserted a counter-claim seeking enforcement of a lien for unpaid federal income taxes against the sum of cash held in the Plaza National Bank. Morales filed an answer seeking, inter alia, an order that the $27,805, less the sum of $16,899.61 due the United States, be returned to him.

An opinion by the district court dated March 3, 1977, reaffirmed its prior conclusions that it had jurisdiction pursuant to 28 U. S. C. §§ 1444 and 2410(a). The court also concluded that the $27,805 in Morales' possession at the time of his arrest was contraband, since it was derived from the sale of narcotics, and thus was forfeited to the County; that the money was not abandoned or unclaimed within the meaning of New Jersey law and therefore was not payable into the general municipal treasury; and that the federal tax lien, although proved to exist, did not attach to the $27,805 because that sum had been forfeited to the County.

Subsequently, the IRS filed a motion for the amendment of the district court's conclusions of law and for the entry of a new judgment. On May 19, 1977, the district court reversed its earlier decision on the merits, and ruled that the IRS' motion should be granted and a new judgment entered in its favor. The district relied on State of New Jersey v. Kaiser, 476 F. 2d 610 (3d Cir.), cert. denied 414 U. S. 856 (1973), where the issue was said to be whether money discovered as a result of a search had been employed as an element of the offense for which the defendant was convicted and thus was forfeited to the county, or whether it may have been an accumulation of profits from some other act, criminal or otherwise. On the basis of Kaiser, the district court determined as a matter of law that the money found in the trunk was "not an instrumentality of the crime for which defendant Morales was arrested and convicted--possession of a controlled dangerous substance and possession of a controlled dangerous substance with an intent to dispense." As a result, the court reasoned, the money must be awarded to the IRS pursuant to the tax lien and the remainder of it returned to Morales.

A final judgment directing the Plaza National Bank to pay the sum of the lien to the IRS, and the remainder to Morales, was entered on June 27, 1977. From the judgment, Hudson County now appeals.

[Removal Jurisdiction]

II. Before reaching the issue whether the district court erred in ascertaining that the money taken from Morales' vehicle was not forfeited to Hudson County and accordingly was subject to the federal tax lien, we must address the question whether the district court properly assumed jurisdiction over the action as a consequence of its removal to federal court.

The right to remove an action from state to federal court was unknown at common law and was not provided for in the federal Constitution, see C. Wright, Law of Federal Courts, §38 (2d ed.). Rather, it depends upon the expression of the will of Congress as articulated in the various removal statutes, see e.g., Finn v. American Fire & Cas. Co., 207 F. 2d 113, 115 (5th Cir. 1953), cert. denied, 347 U. S. 912 (1954). The particular enactment relied upon in the present case, 28 U. S. C. §1444, establishes that:

(a)ny action brought under section 2410 of this title against the United States in any State court may be removed by the United States to the district court of the United States for the district and division in which the action is pending.

Reference in §1444 to §2410 is significant since if an action against the United States falls outside the ambit of §2410, the federal government may not be taken to have waived its sovereign immunity from suit. Cf. Jacobs v. District Director of Internal Revenue, 217 F. Supp. 104, 106 (S. D. N. Y. 1963). Thus, §2410, while it does not of itself confer jurisdiction on district courts, is the basis for finding a waiver of sovereign immunity and consequently for allowing the action to go forward. See Remis v. United States [60-1 USTC ¶9183], 273 F. 2d 293, 294 (1st Cir. 1960).

Section 2410(a) provides that:

[u]nder the conditions prescribed in this section and section 1444 of this title for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter--

(1) to quiet title to,

(2) to foreclose a mortgage or other lien upon,

(3) to partition,

(4) to condemn, or

(5) of interpleader or in the nature of interpleader with respect to,

real or personal property on which the United States has or claims a mortgage or other lien.

Accordingly, the issue regarding jurisdiction turns on whether the matter raised in the complaint comes within one of the categories listed in §2410, and thereby concerns a subject as to which the United States has waived its sovereign immunity.

The two subsections of §2410(a) that might apply to this action are those denominated (1) and (2), pertaining respectively to actions "to quiet title," or "to foreclose a mortgage or other lien," upon "real or personal property on which the United States has or claims a mortgage or other lien." However, we do not believe that the second heading, "to foreclose a mortgage or other lien," in fact has any applicability to this action, for Hudson County's complaint speaks of the County's alleged entitlement to the money because it has been forfeited to it. Nothing is said about the creation of a lien in favor of the county when the cash was seized in connection with an arrest and the lodging of charges for violating New Jersey's statute dealing with controlled dangerous substances. Cf. Stapleton v. $2,438,110, 454 F. 2d 1210, 1219 (3d Cir.) (Adams, J., concurring), cert. denied 409 U. S. 894 (1972).

At oral argument, where the parties were requested to discuss the issue of jurisdiction, counsel for the IRS urged that jurisdiction properly may be assumed under that subsection of §2410 dealing with actions to "quiet title" to personal property as to which the IRS has or claims a lien. The basis of this position is that the federal government was a named defendant in the complaint originally filed in state court, and it asserts a lien with respect to the funds that are the subject of the complaint. Further plaintiff specially seeks an order that the money belongs to Hudson County, and not to the federal government. Hence, says the IRS, the action should be treated as one to quiet title as to personal property with respect to which the federal government asserts a lien.

We agree with the IRS that Aqua Bar & Lounge v. U. S. Dept. of Treasury [76-2 USTC ¶9554] 539 F. 2d 935 (3d Cir. 1976), supports the view that there is federal jurisdiction in the present case. In Aqua Bar, a taxpayer whose restaurant liquor license had been seized and sold by the federal government for non-payment of federal taxes brought an action against the United States and the purchaser of the license to have the seizure and sale declared null and void. This Court reversed the district court--which had found that there was no jurisdiction--on the ground that the action could be treated as one to quiet title to property regarding which the United States asserts a lien and thus came within the scope of §2410(a)(1). See 539 F. 2d at 937-38. Agua Bar stressed that even though the license was not real property but rather was personal property, that fact did not bar the assumption of jurisdiction, for "(a)lthough suits to quiet title have traditionally involved real property, this particular action is governed by federal rather than state law." Id. at 938. And the specific statute applicable, §2410, "by its very terms" contemplates "actions to quiet title to personalty on which the United States has or claims a lien." See Yannicelli v. Nash [72-2 USTC ¶9763], 354 F. Supp. 143, 150 (D. N. J. 1973); cf. Little River Farms, Inc. v. United States [71-1 USTC ¶9644], 328 F. Supp. 476, 479 (N. D. Ga. 1971).

In response, counsel for Hudson County noted that the federal government is not a party against which any specific relief is sought other than a declaration nullifying the claimed tax lien. However, that contention does not prevent the assumption of jurisdiction, for the complaint does explicitly challenge the validity of the government's tax lien, and thus impinges directly on an interest of the United States in the property in question--which is the sort of situation that §2410 was designed to reach, see Aqua Bar, supra. Also, in light of the governing statute, there appears to be no reason for distinguishing between the type of personal property involved here, a sum of money in a bank, from other forms of personal property, such as a liquor license, for the language of the statute speaks of "personal property" as such and not of given forms of it. Cf. Logan Planning Mill Co. v. Fidelity and Casualty Co. of N. Y. [63-1 USTC ¶9343], 212 F. Supp. 906, 913-14 (S. D. W. Va. 1962). Consequently, we have concluded that the district court did have jurisdiction in the present case under §§ 1444 and 2410(a)(1).

[Merits]

In proceeding to the merits, we note that the doctrine of forfeiture, on which Hudson County relies, is that one should not be allowed to retain the fruits of a specific criminal act for which he has been convicted. See State v. Sherry, 215 A. 2d 536, 538 (N. J. 1965). Our task, then, is to determine whether the district court erred in concluding that there was insufficient evidence for holding that the money seized from Morales' vehicle at the time of his arrest was not connected to the particular crime to which he pleaded guilty, namely, possession of a controlled dangerous substance with intent to dispense.

We do not believe that the district court committed reversible error in this regard. Although the record includes statements about Morales' narcotics activities, there was no proof adduced to link the funds seized with any given narcotics violation. Indeed, one of the officers who testified noted that the transaction which aroused the suspicion leading to the investigation and arrest in the first place turned out to be a conversation between Morales and his landlord, and had no demonstrated relationship with any dealings n narcotics. No witness was able to identify a single transgression with which the money seized was connected, or from which it was derived. Cf. State of New Jersey v. Kaiser, 476 F. 2d 610 (3rd Cir.), cert. denied 414 U. S. 856 (1973).

Thus, we hold that the district court did not err in its determination that the money in question should not be forfeited to Hudson County, and that instead it is subject to the outstanding federal tax lien. The order of the district court will be affirmed.

 

 

 

State of New Jersey, Plaintiff-Appellee v. Harry Joseph Kaiser and Harry J. Kaiser, as Administrator of the Estate of Susan Kaiser, Deceased, Defendants. United States of America, Intervenor-Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 72-1075, 476 F2d 610, 3/13/73, Reversing District Court, 71-2 USTC ¶9708, 338 F. Supp. 42

[Code Sec. 6321]

Tax liens: Property subject to: Money: Gambling raid: Seizure.--$265,000, seized during a search of premises suspected of being the site a gambling operation was an accumulation of profits and proceeds. It was not currently being used in a gambling operation. Thus, the money was not subject to forfeiture to the state but was property to which a federal tax lien could attach.

Albert S. Gross, Walter J. Dorgan, Gross, Demetrakis & Donohue, One Essex St., Hackensack, N. J., for plaintiff-appellee. Herbert J. Stern, United States Attorney, Newark, N. J., Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, Bennet N. Hollander, Thomas H. Boerschinger, Department of Justice, Washington, D. C. 20530, for defendants and intervenor-appellant.

Before VAN DUSEN and ADAMS, Circuit Judges, and BRODERICK, District Judge.

Opinion of the Court

PER CURIAM:

The conflicting claims of the United States and Bergen County, New Jersey to a large sum of money, seized during a search of premises suspected of being the site of a gambling operation, form the basis of this appeal. Central to the resolution of these competing claims is the determination whether that fund, to wit $265,000, represents an instrumentality of illegal activity and thus contraband, forfeitable to the state or county, or an accumulation of funds or profits derived from illegal activity, and thus subject to a lien asserted by the United States.

The facts giving rise to this controversy are fully explicated in the opinion of the district court and need only summarization at this point.

[Facts]

On July 14, 1960, a raid pursuant to a search warrant was conducted on a house in North Arlington, New Jersey. This house was occupied at that time by Harry Kaiser, Susan Kaiser and Edna Kaiser. The search of the first floor of the house uncovered numbers slips, gambling paraphernalia and a sum of cash totaling slightly more than $18,500. The second floor of the house contained two bedrooms. The search of one of the bedrooms produced $3,650 in a chest of drawers. Further search of that room revealed a fireproof steel strongbox. Because the Kaisers did not have a key for it, the police had to force open the box. When opened, the box was found to contain $265,000. Beyond this large sum of money, the search produced clothing and two prescriptions indicating that this bedroom had been occupied by one Joseph Moriarity. Later investigation revealed that Moriarity had in his possession keys which would open the strongbox.

Joseph V. Moriarity has an extensive record of involvement in illegal gambling. See Farley v. $168,400.97, 55 N. J. 31, 259 A. 2d 201 (1969). In August, 1947, a federal income tax delinquency was assessed against Moriarity and demand for payment made. In 1955, a judgment on this delinquency was entered. Thus, the Federal government has a lien on property belonging to Moriarity. And the claims of the Federal government exceed $265,000.

New Jersey has a statutory schema requiring forfeiture of certain seized contraband. N. J. Stat. Ann. §2A:152-6 provides that, when seized, "any furniture, implement, device or machine, made or used for the purpose of gambling" becomes the property of the county. It is the county's burden, however, to prove illegal use. Krug v. Board of Chosen Freeholders, 3 N. J. Super. 22, 65 A. 2d 542 (App. Div. 1949). N. J. Stat. Ann. §2A:152-7, enacted after 152-6, permits the assumption that if money is seized in connection with an arrest for violation of the gambling laws the money is prima facie contraband and forfeitable. Both statutes require, however, that there be an active employment of the money in a gambling operation. See Krug v. Board of Chosen Freeholder, supra.

[District Court Decision]

The district court, relying on Spagnuolo v. Bonnet, 16 N. J. 546, 109 A. 2d 623 (1954), stated its belief that the source of the money, not the present utilization of the sum, determines whether it is an element in a gambling enterprise for the purpose of the state forfeiture. Finding that the money was the product of a gambling enterprise, the district court determined that the money was forfeitable. Therefore, it reasoned, the money was not an asset of Moriarity's and hence not subject to the lien of the Federal government. Thus, the district court held that the state's claim to the money was to prevail.

The district court issued its opinion on October 15, 1971. On January 25, 1972, this Court decided the case of Stapleton v. $2,438,110. ¹ Stapleton also involved Moriarity, his tax lien, and money found belonging to him. In Stapleton, as here, there were competing claims for the money, the state claiming that the money was forfeitable under the state statutory arrangement, the Federal government asserting its rights under the tax lien. Implicit in the opinion of the Court and explicit in the concurring opinion of Judge Adams was the differentiation between funds seized which are actually in use in furtherance of a gambling operation and funds which have passed out of the operation and become accumulated profits. In holding that the funds in Stapleton were to go to the Federal government, that case makes clear that only funds actively used in a gambling operation are forfeitable to the state. ²

[Key Distinction]

The determination issue thus can be stated fairly simply. If the $265,000 is money that is being used as an element in a gambling operation revealed in the search, then, pursuant to the New Jersey statutes, the money is forfeitable to the state. If, however, the money is not an element in the enterprise but "an accumulation of profits or the product of gambling," following Stapleton, it is not subject to state forfeiture. If the money is forfeitable, the Federal lien does not attach because the fund cannot be deemed the property of Moriarity. On the other hand, if the sum is not forfeitable, then, assuming that the sum is Moriarity's, ³ it becomes subject to attachment by operation of the lien.

[Findings of Fact]

Our review of the findings of the district court indicates that the $265,000 was not actively used in a gambling operation but was an accumulation of profits or proceeds, of some enterprise, not necessarily the one revealed in the July 14, 1960 search. The numbers operation uncovered in the search of the Kaiser's house appeared to have receipts for the day totaling approximately $12,000. Uncontradicted expert testimony showed that the cash reserve, or "bank," necessary to support a numbers operation need be only one-half of the daily handle. Thus, the $265,000 clearly was not the "bank" of that operation. Indeed, the district court stated, "[I]t was accumulated out of the proceeds. . . . The fact that the $265,000 may not have been used in the daily operation and financing of the gambling business being conducted in the Kaiser residence would in no way affect the presumption that the money was the proceeds of a gambling operation."

Under our holding in Stapleton, these findings require that the fund be awarded to the United States under the lien against Moriarity rather than be forfeited to the state as contraband. Therefore, the judgment of the district court must be reversed.

The case will be remanded to the district court for the entry of a judgment in conformity with this opinion. Costs to be taxed to each side.

¹ 454 F. 2d 1210 (3d Cir.), cert. denied, 41 U. S. L. W. 3188 (U. S. Oct. 10, 1972).

² The Stapleton opinion made reference to the decision of the district court in this case. Although the opinion states that the money seized in this case was "proven to be a part of a current gambling operation" our review of the record and the opinion of the district court indicate the contrary, as will be discussed infra.

³ As the Kaisers have disclaimed any rights, title or interest in the $265,000, there can be no question but that the sum is Moriarity's.

 

 

 

Richard A. Simpson, United States Marshal for the Eastern District of Virginia, C. W. Glotzbach, District Director of Internal Revenue, and United States of America, Appellants v. John L. Thomas and Earl J. Butler, Appellees

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 7883, 271 F2d 450, 11/2/59, Reversing an unreported District Court decision

[1954 Code Sec. 6321]

Lien for taxes: Funds held by United States Marshal.--Money taken from the taxpayers incident to lawful arrest and held by the United States Marshal for safekeeping was subject to a federal tax lien and was not immune from levy.

George F. Lynch, Department of Justice, Washington, D. C. (Howard A. Heffron, Acting Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Joseph Kovner, Department of Justice, Washington, D. C., John M. Hollis, United States Attorney, Norfolk, Va., Joseph S. Bambacus, Assistant United States Attorney, State Planters Building, Richmond, Va., on brief), for appellants. R. R. Ryder, Suite 415, Mutual Building, Richmond, Va., for appellees.

Before SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.

HAYNSWORTH, Circuit Judge:

Thomas and Butler seek the return to them of money taken from them, incident to a lawful arrest, to be held by the United States Marshal for safekeeping. Their position is that their funds, thus in the hands of the United States Marshal, could not be subjected to a federal tax lien and was immune from levy by the United States in aid of the collection of its taxes. The District Court found that the funds in the hands of the United States Marshal for safekeeping were immune from the lien and the levy. He ordered their return to the claimants. We disagree.

[Money Held by Marshal for Safekeeping]

Thomas and Butler were arrested at different times for violations of the Internal Revenue laws. In each instance, the arrest was lawful. At the time of arrest, each was found to be in possession of a substantial amount of money, which was delivered to the United States Marshal for safekeeping during the incarceration of the owner. In each instance, a jeopardy assessment of taxes claimed to be due the United States on distilled spirits in the possession of the accused at the time of his arrest was regularly made. When Thomas and Butler, upon formal demand of payment of taxes claimed to be due, did not make payment, notices of the tax liens and the levy were regularly served upon the Marshal.

The Marshal responded to the demand of the District Director of Internal Revenue in the Thomas case by delivering over the money he held. In Butler's case, he still retains the money.

Thomas and Butler filed petitions, in the criminal proceedings pending against them, for an order directed to the District Director of Internal Revenue requiring him to show cause why the money should not be turned over to the petitioners. The order sought by the petitioners was signed and filed by the District Court. Thomas also filed a civil action against the District Director demanding the return of his money, while Butler filed a similar civil action against the Marshal. All of these cases were heard together. The District Court, being of the opinion that the moneys were in custodia legis and were not contraband, concluded that the claimants were entitled to be restored upon their release upon bond to all of the nonforfeitable property in their possession at the time of their arrest. He ordered the return to them of these moneys.

In reaching this conclusion, he was concerned that permitting summary collection of taxes claimed to be due in this manner could amount to an abuse of the criminal process.

[No Exemption for Property Held by Marshal]

Since the amount of the taxes claimed to be due from each man exceeded the amount of money held for him by the Marshal, we find no escape from the fact that the Marshal, who had notice of the lien and of the levy, could not lawfully return the money to the claimants without subjecting himself to personal liability to the United States. The tax lien, which arises under §6321 of the Internal Revenue Code of 1954 ¹ is broad and inclusive. There are specific exemptions, but there is no exemption of the property of a federal prisoner whether it be held for him by a United States Marshal or by others.

When a tax lien attaches to property, the United States becomes in a sense a co-owner with the taxpayer of the property to the extent of the lien. ² The taxpayer then ceases to have an unconditional right to obtain or retain possession of the property. The substantive rights of the United States and of the taxpayer are in no sense dependent upon the nature of the immediate custody of the property or the identity of the custodian. If it appeared that money in the possession of a marshal had been stolen, no good reason appears why the law should require its return to the thief upon his discharge from custody. Nor do we see any reason why the United States Marshal may not recognize the United States as the owner of an interest in property in his custody.

So far as we can find, it has been uniformly held that property held by a marshal, or other custodian, for safekeeping is subject to an otherwise valid tax lien for taxes claimed to be due from a prisoner from whom the property was obtained. ³ This conclusion has been reached though the seizure of the property was, itself, illegal, so that its suppression for use as evidence was required. ⁴

[No Abuse of Criminal Process]

There is no evidence in this case that either arrest was prompted by a desire to enforce a civil liability for taxes. Whether, under dissimilar circumstances, a particular arrest and seizure might be thought to be an abuse of the criminal process, we need not consider, for, in these particular cases, there is no suggestion of an abuse of process.

If retention of possession of the property was necessary to an exercise of the Court's powers or jurisdiction, doubtless the Marshal would be required to retain possession of it pending an order of the Court. In that situation resistance to the levy might be warranted, but denial of the validity of the lien could not be justified. Here, however, the property was held solely for safekeeping until return to the prisoners upon their release upon bond or acquittal. It was not intended for use as evidence, nor was the Marshal's possession otherwise in aid of the Court's jurisdiction or its processes.

There are appropriate procedures by which the taxpayers here, if they dispute the claim that they owed taxes in the amounts collected, may contest them. These proceedings are not appropriate for that purpose. If the action of Thomas against the District Director may be regarded as one for a refund of taxes paid, it cannot be now maintained because he has never filed a claim for refund.

Under these circumstances, we conclude that the Marshal properly recognized the validity of the tax lien, of which he had notice, that he could not have then lawfully returned the money to Thomas and Butler, and that the Court's order that these moneys be returned to Thomas and Butler must be reversed.

Reversed.

¹ 26 USCA §6321.

² United States v. City of Greenville, 4 Cir., 118 F. 2d 963 [41-1 USTC ¶9381].

³ Field v. United States, 5 Cir., 263 F. 2d 758; Welsh v. United States, C. A. D. C., 220 F. 2d 200 [55-1 USTC ¶9238]; United States v. City of New York, 2 Cir., 82 F. 2d 242 [36-1 USTC ¶9119]; United States v. Klein, S. D. N. Y., 163 F. Supp. 823 [58-2 USTC ¶9761]; United States v. Leuci, E. D. N. Y., 160 F. Supp. 715 [58-1 USTC ¶9480]; Weir v. Corbett, W. D. Wash., 158 F. Supp. 198 [58-1 USTC ¶9208]; United States v. Pagan, S. D. N. Y., 140 F. Supp. 711 [55-2 USTC ¶9600]; United States v. Ortiz, S. D. N. Y., 140 F. Supp. 355 [56-1 USTC ¶9387]; United States v. Willmann, E. D. Mo., 63 F. Supp. 535 [45-2 USTC ¶9444].

⁴ Field v. United States, 5 Cir., 263 F. 2d 758; Welsh v. United States , C. A. D. C., 220 F. 2d 200 [55-1 USTC ¶9238].