Annotations- Levy and Demand

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6332 Annotations: Levy and Demand- Levy

 

Penalty for Failure to Surrender Property: Levy and Demand

 

47-1 USTC ¶9190] United States of America, Appellant v. LeRoy E. O'Dell, Appellee

(CA-6), United States Circuit Court of Appeals. Sixth Circuit, No. 10188, 160 F2d 304, Decided March 10, 1947

Appeal from the United States District Court for the Eastern District of Michigan, Southern Division.

Surrender of property subject to distraint: Levy as prerequisite for application of Code Sec. 3710.--Failure of the Government to levy upon funds in the hands of a trustee for the benefit of taxpayer's creditors precludes it from collecting, under Code Sec. 3710, excise taxes owed by taxpayer. Affirming a decision of the District Court.

Lee A. Jackson; Sewall Key, A. F. Prescott and Lee A. Jackson were on brief, Washington, D. C., for appellant. John Sklar; John C. Lehr and Morris Zwerdling were on brief, Detroit , Mich. , for appellee.

Before HICKS, ALLEN and MILLER, Circuit Judges.

ALLEN, Circuit Judge:

This is an action instituted by the Government under section 3710, I. R. C., to collect from a trustee for benefit of creditors of the Howie Company, an insolvent Michigan corporation, certain unpaid excise taxes which had theretofore been assessed against the Howie Company. The District Court dismissed the complaint, and this appeal was prosecuted.

[Facts]

The facts are stipulated, and show that on June 2, 1939, the Howie Company delivered to one William G. Starr, as trustee for the benefit of creditors, a trust chattel mortgage, together with all of its assets. The appellee, successor trustee, was later given possession and control of the assets, liquidated them, and placed the proceeds, $2,933.66, on deposit in a Detroit bank. On September 15, 1941, the Collector of Internal Revenue made demand in writing upon the appellee for payment of past due social security taxes amounting to $1,336.84. Four of the assessment lists for the various items of taxes claimed by the Collector, aggregating $386.11, had been received by him prior to the delivery of the trust mortgage. Three other items aggregating $711.98 were received by the Collector subsequent to the delivery of the mortgage. On September 9, 1941, the total taxes due the City of Detroit , the County of Wayne , and the State of Michigan , amounted to $3,858.45, and under sections 7.81, 7.91 and 7.44, Mich. Stat. Ann., and the charter of the City of Detroit , sections 1, 4a, 8 and 26, had become a lien upon the property of the taxpayer.

Section 3710, I. R. C., and other pertinent statutes are printed in the margin. ¹

[District Court Holding]

The Government asserts that under section 3466, R. S., 31 U. S. C., section 191, the excise taxes due must first be satisfied. Section 3466 applies here, for the Howie Company is indebted to the United States , and its estate is insufficient to pay all of its debts. The District Court held that the statutes did not authorize recovery because the funds was the property not of the taxpayer, but of the trustee, and also, relying upon In re Ever Krisp Food Products Co., 307 Mich. 182, held that the local liens were specific and perfected and prior to the federal tax claims. The Government contends that the Supreme Court of the United States, in United States v. Waddill, 323 U. S. 353 [45-1 USTC ¶9126], a case involving facts similar to those of the Ever Krisp case, held the federal lien to have priority, and that the judgment herein is therefore clearly erroneous. The Waddill case declared that a federal question was presented as to whether a state or local lien was specific and perfected, and the judgment of the Supreme Court of Virginia upholding a landlord's lien as against a federal claim for taxes was reversed. The Supreme Court in that case decided that the landlord's lien was not specific nor perfected, but the question of the applicability of section 3466, R. S., to prior specific and determined liens was reserved, as it had also been reserved in previous decisions. United States v. Texas , 314 U. S. 480. The Waddill case has been recently followed and applied in People of Illinois v. Campbell, Collector, -- U. S. -- (decided December 23, 1946).

Section 3466 does not create a lien, but establishes a priority. Beaston v. Bank, 37 U. S. 102; United States v. Fisher, 6 U. S. 358. Section 3670, however, does create a lien in favor of the Government which arises at the date when the assessment list is received by the Collector. Section 3671. As to the first four excise tax items listed in the stipulation, the assessment lists were received before the date of the delivery of the mortgage, and the lien of the Government as to $386.11 is clearly prior to possession of the assets by the trustee, although not prior to the attachment of a majority of the liens for local taxes, under Michigan law. But under this record the question of priority is not conclusive. The judgment was correct, not for the reasons stated by the District Court, but because of the failure of the Government to comply with the statutory requirements.

Section 3710 requires the surrender of property or rights to property (1) subject to distraint; (2) upon which a levy has been made; (3) unless such property is subject to an attachment or execution under judicial process. This section is new, having been enacted in 1926, Act of Feb. 26, 1926, section 1114(e) and (f), 44 St. L. 117; but the provision authorizing the Collector after failure or refusal of the taxpayer to pay taxes due, to levy upon his property or property rights (section 3692) dates from 1866. As pointed out in United States v. Metropolitan Life Ins. Co., 130 Fed. (2d) 149 [42-2 USTC ¶9609], 151 (C. C. A. 2), the procedure for distraint authorized under section 28 of the Revenue Act of 1864, 13 St. L., page 233, was in substance like that of Section 3692 except that nothing was said about a levy. In 1866 (14 Stat. 107, section 9) Congress, among other changes, provided that a levy was required to be made "upon all property and rights to property . . . belonging to" the taxpayer. The provision authorizing levy is unchanged in the statute applicable here (section 3692). Thus Congress enacted section 3710 with knowledge that for some sixty years levy had been authorized in these cases. In section 3710, which provides a method of forcing a third person to surrender property of the taxpayer for the payment of the taxes due, Congress not only required that the property surrendered should have been levied upon, but emphasized this provision by making the allowance for costs and interest contained in subsection (b) run "from the date of the levy." The property involved here falls within the classes of property subject to distraint, section 3690, and is not subject to an attachment or execution; but the record fails to show that levy has been made.

The stipulation covering levy is as follows:

That one Giles Kavanagh, the duly appointed, qualified and acting Collector of Internal Revenue for the District of Michigan, on September 8, 1941, as said Collector, gave written notice to the defendant LeRoy E. O'Dell that the tax assessment . . . totalling $1,336.84, including interest thereon, were unpaid and due and further notified the defendant that all property, rights to property, moneys, credits and/or bank deposits then in his possession or under his control and belonging to said Howie Company, and all sums of money owing from the defendant to said Howie Company, were seized and levied upon for the payment of said taxes, together with penalties and interest, and demand was then made upon the defendant for the sum of $1,336.84, or such lesser sum as he was then indebted to said Howie Company, to be applied in payment of said tax liabilities.

This paragraph describes a mere statement or notice of claim. Nothing alleged to have been done amounts to a levy, which requires that the property be brought into legal custody through seizure, actual or constructive, levy being "an absolute appropriation in law of the property levied upon." Yazoo & Mississippi Valley Rd. Co. v. Gomila, 132 U. S. 478; In re Weinger, Bergman & Co., 126 Fed. 875, 877; Smith v. Packard, 98 Fed. 793. Levy is not effected by mere notice. Hollister v. Goodale, 8 Conn. 332; Meyer v. Missouri Glass Co., 65 Ark. 286; Jones v. Howard, 99 Ga. 451.

Section 3692 does not prescribe any procedure for accomplishing a levy upon a bank account. The method followed in the cases is that of issuing warrants of distraint, making the bank a party, and serving with the notice of levy copy of the warrants of distraint and notice of lien. Cf. United States v. Commonwealth Bank, 115 Fed. (2d) 327 (C. C. A. 6) [40-2 USTC ¶9769]; United States v. Bank of United States , 5 Fed. Supp. 942, 944 [1934 CCH ¶9099]. No warrants of distraint were issued here.

The cases relied on by the Government as supporting recovery under section 3710 arise in the main out of situations where a bank has been sued, or joined as a party to an action claiming a bank deposit. No such procedure was followed in this case. Moreover, it does not appear that notice and demand were served upon the person liable to pay the taxes, namely, the Howie Company, in accordance with sections 3670 and 3690. This being the case, query, whether the property or rights to property were within the meaning of section 3710 "subject to distraint," for under section 3690 the right to collect the taxes by distraint and sale arises only after notice and demand.

[Conclusion]

It would not seem to require much exposition to demonstrate that when the sovereign establishes any priority in its favor, and imposes certain conditions upon the enforcement of that right, it is required to comply with the conditions which it has laid down. Since no levy was made upon the funds involved, one of the jurisdictional prerequisites for the application of section 3710 is lacking, and the complaint was rightly dismissed. Cf. United States v. Aetna Life Ins. Co., 46 Fed. Supp. 30, 37 [42-1 USTC ¶9266].

The judgment is affirmed.

¹ Section 3710, I. R. C.

"(a) Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process.

"(b) Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy."

Section 3670, I. R. C.

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

Section 3671, I. R. C.

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

Section 3672, I. R. C.

"(a) Such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until notice thereof has been filed by the collector--". . .

Section 3690, I. R. C.

"If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with such interest and other additional amounts as are required by law, by distraint and sale, in the manner provided in this subchapter, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid."

Section 3692, I. R. C.

"In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy."

Section 3466, R. S. (31 U. S. C., section 191).

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

 

[54-2 USTC ¶9627] United States of America , Plaintiff, v. Princess Anne Speedway, Inc., Jordan A. Pugh, III, Earl W. Johnson, Defendants

In the District Court of the United States for the Eastern District of Virginia, Norfolk Division, Civil Action No. 1767, September 28, 1954

[1939 Code Sec. 3710--same as 1954 Sec. 6332]

Distraint: Necessity for notice of levy and demand.--The United States did not use the proper form for final notice and demand prior to distraint. The District Court held that the failure of the government to levy upon funds in the hands of a creditor of taxpayer precluded it from collecting, under 1939 Code Sec. 3710, certain excise, withholding and social security taxes.

L. S. Parsons, Jr., United States Attorney, 307 Post Office and Court House Building, Norfolk, Virginia, for plaintiff. P. A. Agelasto, Jr., 502 Citizens Bank Building, Norfolk , Virginia , for defendants Jordan H. Pugh, III, et al.

Before HOFFMAN, District Judge.

Opinion from the Bench

(At the conclusion of the evidence and after the arguments of counsel, the Court gave the following oral opinion):

THE COURT: Civil Action No. 1767, in which the United States of America seeks to recover from Princess Anne Speedway, Inc., Jordan A. Pugh, III, and Earl W. Johnson certain taxes alleged to have been due by the corporation known as Princess Anne Speedway, Inc., it appears that the Court has heretofore entered judgment against Princess Anne Speedway, Inc., on the 20th day of May, 1954, same having been by default. Process was never served upon the defendant, Earl W. Johnson, sometimes referred to, I think, as W. Earl Johnson, and he, therefore, is not before the Court. This proceeding remains against Jordan A. Pugh, III, who is alleged by the Government to be the stakeholder of the sum of $800.00. It appears that the corporation known as Princess Anne Speedway, Inc., operated in a very loose manner ever since its incorporation and that it was the lessee from William F. Hudgins and others for certain property located in Princess Anne County, where stock car races and other similar events were held.

The Government asserts that taxes were legally assessed against the corporation during the month of August, 1951, and as the taxes assessed, if properly assessed during that month, exceed the amount involved in this controversy, it is immaterial to state the exact amounts. There apparently is no dispute but that the corporation known as Princess Anne Speedway was actually indebted to the Government for certain excise and withholding and social security taxes.

The Government has introduced in evidence certain assessment lists as Plaintiff's Exhibits 1-A to 4-A and an assessment certificate identified as Plaintiff's Exhibit 5. Attached to the assessment list is a certain form marked as Exhibit 1-B, designated as Form 17. It is the contention of the Government that this constitutes a notice and demand against the taxpayer, Princess Anne Speedway, Inc. Thereafter no steps were apparently taken by the Government to effect collection through distraint, levy, or notice of lien until the Government apparently learned that Ringling Brothers and Barnum Bailey Combined Shows contemplated holding a circus at the premises originally leased by the corporation from Hudgins and others. The evidence indicates that the circus was to be held on October 29 and 30, 1951.

In the interim period Ringling Brothers and Barnum Bailey Combined Shows entered into an agreement with W. Earl Johnson, evidenced by Defendants' Exhibit No. 1, which indicates that W. Earl Johnson was the owner and manager of the speedway and the circus had agreed to pay the sum of $800.00 to Mr. Johnson.

Apparently on the same date, September 28, 1951, the circus drew a draft payable to Johnson at the time of the circus performance, which is introduced in evidence as Defendants' Exhibit No. 2. This draft, on or about October 29, 1951, was endorsed by Mr. Johnson to the order of the defendant, Jordan A. Pugh, III. Mr. Pugh has recited that he thereafter received from Ringling Brothers a check in the sum of $800.00 and that, at the time of the receipt of this check, he was of the opinion the money was being paid to him to be held by him subject to litigation in any proceeding that might be instituted against either Mr. Pugh or Mr. Johnson. He did hold the money until 1953, at which time he correctly, I think, appropriated the money as a fee for services rendered to Mr. Johnson accrued prior to the time of the issuance of the check in question.

Introduced in evidence as Plaintiff's Exhibits 9, 10, 11, and 12 are certain papers entitled "Warrant for Distraint". It is apparent from these documents that they bear the facsimile signature of Stuart L. Crenshaw, then Collector of Internal Revenue. The question of the legality of these warrants for distraint comes before the Court. Not introduced in evidence, but read by the Court into the record, are certain regulations given to the deputy collectors of Internal Revenue in the field. These regulations indicate that in cases where there must be a distraint, the warrant for distraint should be returned to the Collector of Internal Revenue for his personal signature. This was admittedly not done in this case. Whether or not the personal signature of the Collector of Internal Revenue is actually required is not now passed upon by the Court, but from the information given in the regulations it would appear that the same is necessary.

It follows that any notice of levy or lien must be based upon the legality of the warrant for distraint. There is introduced in evidence in this case as Plaintiff's Exhibit No. 6 a notice of levy against Ringling Brothers and Barnum Bailey Combined Shows dated October 26, 1951. The warrant for distraint, of course, is addressed only to Princess Anne Speedway, Inc. There was a service by Deputy Collector McGee on the legal adjuster for the circus on October 28, 1951. Thereafter this notice of levy was released by Deputy O. J. Honeycutt on October 29, 1951, obviously pursuant to a conference that was had between the circus representatives, the office of the Collector of Internal Revenue, the defendant, Mr. Pugh, and Johnson.

At or about the time of the delivery of the check in the sum of $800.00 to Mr. Pugh, a levy was also placed in the hands of Mr. Pugh by Deputy Collector Duffey, and is introduced into evidence as Plaintiff's Exhibit No. 7. It is apparent that the Government never had actual or constructive control of the res in this particular matter, and there is strong doubt in the mind of the Court as to whether or not this levy had any effect whatsoever.

In the case of United States v. O'Dell, 160 Fed. (2d) [304], at page 307 [47-1 USTC ¶9190], it is said:

"Nothing alleged to have been done amounts to a levy, which requires that the property be brought into legal custody through seizure, actual or constructive, levy being 'an absolute appropriation in law of the property levied upon'. * * * Levy is not effected by mere notice."

There is dicta in the O'Dell case which would indicate that it is mandatory upon the Collector or his deputy to serve with a notice of levy copies of any warrants of distraint and notice of lien. This was not done in this case, and is explained by the deputies in charge that Mr. Pugh stated that the same was not necessary even though, according to Deputy Collector Duffey, I believe, the warrants for distraint were exhibited to Mr. Pugh. Whether they were exhibited or not, if the law requires that a copy of the warrant of distraint and notice of lien be actually served upon Mr. Pugh, the mere fact that he may have talked them out of it is of little consequence.

Under the circumstances as heretofore related in this case, and in view of the fact that it is admitted that no final notice and demand, which is Form 668-C as distinguished from Form 17 (which the Government contends was a final notice and demand), was served, it is the opinion of the Court that the plaintiff, the United States of America, cannot recover in this case, and judgment will be entered in favor of the defendant upon entry of a proper order.

[62-1 USTC ¶9384]J. Morton Rosenblum, Trustee, Appellant v. United States of America et al., Appellees

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 5899, 300 F2d 843, 4/4/62, Dismissing appeal from unreported District Court decision

[1954 Code Secs. 6331 and 6332]

Levy and distraint: Pre-bankruptcy notices of levy not accompanied by warrants: Action to impose personal liability on bankrupt's debtors: Appealability of order denying trustee's petition to intervene.--An order denying leave for a trustee in bankruptcy to intervene in an action brought by the United States to impose personal liability upon four debtors of the bankrupt for their failure to honor tax levies served upon them before bankruptcy was not appealable. The trustee did not have an absolute right to intervene since the government reduced its claims against the debtors to "possession" before bankruptcy. To reduce its claims to "possession", the government did not need to serve "warrants of distraint" in addition to its notices of levy.

Frederic T. Greenhalge, Pittsfield, N. H. (Booth, Wadleigh, Langdell, Starr & Peters, 95 Market St., Manchester, N. H., with him on brief), for appellant. John J. Gobel, Department of Justice, Washington 25, D. C. (Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington 25, D. C., William H. Craig, United States Attorney, Concord, N. H., with him on brief), for appellees.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

Opinion of the Court

WOODBURY, Chief Judge:

A trustee in bankruptcy has taken this appeal from an order of the United States District Court for the District of New Hampshire denying his petition for leave to intervene in an action brought by the United States under §6332(b) of Title 26 U. S. C. to impose personal liability upon four debtors of the bankrupt for their failure to honor federal tax levies duly served upon them prior to bankruptcy.

[Jurisdiction]

At the outset we are confronted with the question of our appellate jurisdiction, for not every order denying leave to intervene is appealable. Mr. Justice Murphy, speaking for the Court in Brotherhood of Railroad Trainmen v. Baltimore and Ohio Railroad Company, 331 U. S. 519, 524, 525 (1947), spelled out the applicable rule of appealability in detail. Summarizing his discussion he wrote:

"Our jurisdiction to consider an appeal from an order denying intervention thus depends upon the nature of the applicant's right to intervene. If the right is absolute, the order is appealable and we may judge it on its merits. But if the matter is one within the discretion of the trial court and if there is no abuse of discretion, the order is not appealable and we lack power to review it. In other words, our jurisdiction is identified by the necessary incidents of the right to intervene in each particular instance. We must therefore determine the question of our jurisdiction in this case by examining the character of the Brotherhood's right to intervene in the proceeding brought under §16(12) of the Interstate Commerce Act."

This rule was followed in Sutphen Estates, Inc. v. United States, 342 U. S. 19, 20 (1951). But see Cameron v. President and Fellows of Harvard College, 157 F. 2d 993, 997 (C. A. 1, 1946).

To determine our jurisdiction over this appeal we therefore turn to consideration of the "nature" or "character" of the trustee's right to intervene to see whether he has an absolute right or is only privileged to intervene in the discretion of the court below.

The trustee does not invoke the provisions of subsection (b) of Rule 24, Fed. R. Civ. P. dealing with permissive intervention. His only claim is of an absolute right to intervene under subsection (a)(3) of the above Rule quoted in the margin. ¹ Conceding, as he must, that the statutory lien of the United States for taxes can be asserted against intangible personal property such as debts, see United States v. Eiland [55-1 USTC ¶9487], 224 F. 2d 118, 121 (C. A. 4, 1955), and cases cited, he rests his assertion of an absolute right to intervene on the proposition that the Notices of Levy (Form 668-A) served by the United States on the four debtors of the bankrupt pursuant to §6331 of Title 26 U.S.C., did not reduce the government's claims against them to "possession" within the meaning of §67(c) of the Bankruptcy Act, 11 U.S.C. §107(c) quoted in material part in the margin below. ² Wherefore, the trustee says, the bankrupt's claims against the four debtors came into his possession as an officer of the bankruptcy court and that if the United States should prevail in its action and recover the claims he will be adversely affected in his official capacity because it will be impossible for him to distribute the proceeds of the claims in accordance with statutory priorities.

The decisive issue is a narrow one. It is whether the government, by simply serving the notices of levy authorized by §6331 of Title 26 U. S. C. upon debtors of a bankrupt, reduces its claims against the debtors to "possession" thereby preventing the trustee in bankruptcy from subordinating the government's claims against the debtors to the payment of the expenses of administering the bankrupt's estate and claims against the bankrupt for wages.

The trustee, in support of his contention that mere notice of levy is not enough but that in addition thereto a "warrant of distraint" must also be served upon a debtor in order to reduce the government's claim against the debtor to "possession," relies primarily upon two cases decided under §3692 of the Internal Revenue Code of 1939, United States v. O'Dell [47-1 USTC ¶9190], 160 F. 2d 304 (C. A. 6, 1947), and Givan v. Cripe [51-1 USTC ¶9169], 187 F. 2d 225 (C. A. 7, 1951). These cases, however, do not stand unquestioned. The late Chief Judge Parker, writing for his court in United States v. Eiland, supra at 121, disagreed with the O'Dell and Givan cases relied upon by the trustee and in a carefully reasoned opinion held that it was not necessary to serve a "warrant of distraint" upon a debtor in order to reduce the government's claim to "possession;" that under the 1939 Code notice of levy alone was enough to accomplish that end. Moreover, all of these cases were decided under the Internal Revenue Code of 1939 and split upon the meaning to be given to a specific reference to a "warrant" in its §3692 which we quote in material part in the margin, ³ whereas in the comparable provision of the Internal Revenue Code of 1954, with which we are here concerned, there is no reference whatever to a "warrant." Indeed, §6331(b) of the current code specifically provides under the subtitle "Seizure and sale of property" that: "The term 'levy' as used in this title includes the power of distraint and seizure by any means."

It seems clear to us that in the 1954 Code Congress resolved the problem under the 1939 Code which split the courts in the cases relied upon by the trustee and the court in the Eiland case. In short we agree with the rationale of Judge Foley in the recent case of United States v. Manufacturers National Bank [61-2 USTC ¶9701], 198 F. Supp. 157 (N. D. N. Y. 1961), the only case in point under the 1954 Code that we have found, and with his conclusion that the omission of any mention in §6331 of the present code, or in the regulations, of any form of warrant establishes that the effectiveness of federal tax liens does not depend upon service of a warrant of distraint. Our conclusion therefore is that the "nature" or "character" of the trustee's claim is such that he does not have an absolute right to intervene.

On the authority of Brotherhood of Railroad Trainmen v. Baltimore and Ohio Railroad Company, cited at the beginning of this opinion:

An order will be entered dismissing the appeal for lack of appellate jurisdiction.

¹ Intervention of Right. Upon timely application anyone shall be permitted to intervene in an action: . . . (3) when the applicant is so situated as to be adversely affected by a distribution or other disposition of property which is in the custody or subject to the control or disposition of the court or an officer thereof."

² "Where not enforced by sale before the filing of a petition initiating a proceeding under this title, and except where the estate of the bankrupt is solvent: . . . statutory liens, including liens for taxes or debts owing to the United States . . ., on personal property not accompanied by possession of such property, . . . shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 104 of this title . . .."

³ "In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, . . .." (italics added)

 

[86-1 USTC ¶9204] Irwin Schiff, plaintiff-appellant v. Simon & Schuster, Incorporated, defendant-appellee

(CA-2), U.S. Court of Appeals, 2nd Circuit, 85-7112, 12/31/85, 780 F2d 210, Affirming unreported District Court decision

[Code Sec. 6332 ]

Levy and distraint: Levy and demand.--The judgment of the district court dismissing an author's suit against his publishing company, claiming that it had honored an improperly perfected IRS levy and seeking damages for the publishing company's disbursement of funds to the IRS pursuant to the levy, was affirmed. The court dismissed as meritless the author's contentions that the IRS, by using a "Notice of Levy" form, rather than a "Levy" form, did not properly make a levy upon his property and, further, that the publishing company was entitled to disregard the notice of levy and was even barred from complying with its demand. Code Sec. 6331(b) states that "the term 'levy' includes the power of distraint and seizure by any means." Moreover, Treasury Reg. §301.6331-1(a)(1) expressly provides that a "levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights of property subject to levy."

Irwin Schiff, Hamden, Conn., pro se. Minna Schrag, Ronald S. Rauchberg, Proskauer Rose Goetz & Mendelsohn, 300 Park Ave.; New York, N.Y. 10022, for defendant-appellee. Alan H. Nevas, United States Attorney, New Haven, Conn., Glenn L. Archer, Jr., Assistant Attorney General, Michael L. Paul, William S. Estabrook, John A. Dudeck, Jr., Department of Justice, Washington, D.C. 20530, for amicus curiae.

Before FEINBERG, Chief Judge, MESKILL and NEWMAN, Circuit Judges.

NEWMAN, Circuit Judge:

This is an appeal in a somewhat ironic lawsuit. Some years ago Irwin Schiff, the appellant, wrote a book entitled How Anyone Can Stop Paying Income Taxes. Simon & Schuster, the appellee, decided to distribute the book, apparently giving more consideration to the book's potential for profit than to its message. The book produced royalties for its author. The Internal Revenue Service sought to levy upon those royalties to collect taxes owed by Schiff. Simon & Schuster honored the levy. Schiff then brought this suit against Simon & Schuster, claiming that it had honored an improperly perfected levy and was liable to him for the sums paid to the IRS. Some might say that Schiff was taking a chapter from his own book. Others might say that Simon & Schuster should have judged this book by its cover. The District Court said that Schiff's legal position had no merit. We say the District Court was correct, and we therefore affirm.

This case is a minor skirmish in Schiff's ongoing--and losing--battle against the IRS. Schiff has not filed tax returns since 1973; he has been convicted of income tax evasion and has sought without success to enjoin the IRS from collecting taxes assessed against him for tax years 1976, 1977, and 1978. In 1979, this Court described Schiff as "an extremist who reserve[s] the right to interpret the decisions of the Supreme Court as he read[s] them from his layman's point of view regardless of and oblivious to the interpretations of the judiciary." United States v. Schiff [80-1 USTC ¶9112 ], 612 F.2d 73, 75 (2d Cir. 1979)

Under the terms of the contract with Schiff, Simon & Schuster was to distribute the book and deliver the proceeds to him after deducting its own fees, charges and expenses. On May 26, 1983, the IRS served a notice of levy and an attested copy of a federal tax lien on Simon & Schuster for $197,044.19 in taxes due and owing by Schiff for the years 1976 through 1978. After an exchange of correspondence and the issuance of a second notice of levy on December 2, 1983, Simon & Schuster paid the IRS $34,974, and subsequently an additional $99,000, from appellant's share of his book's sale proceeds. On January 4, 1984, Schiff instituted this action, seeking damages from Simon & Schuster, the Commissioner of Internal Revenue, the Secretary of the Treasury, and two IRS officials. He claimed that by honoring the notices of levy, Simon & Schuster had committed fraud and breach of contract, and that Simon & Schuster had conspired with the federal government to deprive him of his constitutional rights. On April 6, 1984, appellant voluntarily dismissed his action against the federal defendants by stipulation. Subsequently, the District Court for the District of Connecticut (Warren W. Eginton, Judge) dismissed appellant's complaint against Simon & Schuster for failure to state a claim and then denied appellant's motion to amend the judgment. This appeal followed. ¹

DISCUSSION

 

The Internal Revenue Code requires that "any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate. . . ." 26 U.S.C. §6332(a) . Failure or refusal to surrender to the IRS property subject to levy creates personal liability for the amount not surrendered, plus costs and interest. Id. §6332(c)(1) . Compliance with the obligation to honor the levy extinguishes liability to the claimant of the property. Id. §6332(d) .

Only two circumstances justify non-compliance with a levy: Either the person levied upon is not in possession of the property or the property is subject to a prior judicial attachment or execution. United States v. Sterling National Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 919, 921 (2d Cir. 1974). Appellant does not contend that either of these circumstances existed in this case. The fact that appellant disputes the validity of the underlying tax assessment does not alter Simon & Schuster's obligation to honor the levy, see United States v. Augspurger [81-1 USTC ¶9404 ], 508 F.Supp. 327, 328-29 (W.D.N.Y. 1981).

Appellant contends that the IRS, by using a "Notice of Levy" form rather than a "Levy" form, did not properly make a levy upon his property; therefore, Schiff asserts, Simon & Schuster was entitled to disregard the notice of levy and was even barred from complying with its demands. This argument is absolutely meritless. Appellant ignores 26 U.S.C. §6331(b) , which states that "[t]he term 'levy' . . . includes the power of distraint and seizure by any means" (emphasis added). It is well established that a "[l]evy on property in the hands of a third party is made by serving a notice of levy on the third party." M. Saltzman, IRS Practice and Procedure ¶14.15 at 14-70 (1981). The Treasury Regulations expressly provide that a "[l]evy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights of property subject to levy. . . ." 26 C.F.R. §301.6331-1(a)(1) (emphasis added). Because these regulations have long been in effect without substantial change, they are "deemed to have received congressional approval and have the effect of law."

Helvering v. Winmill [38-2 USTC ¶9550 ], 305 U.S. 79, 83 (1938) (footnote omitted). Contrary to appellant's claims, the regulations are neither unreasonable nor plainly inconsistent with the terms of the statute; they must therefore be sustained. Commissioner v. South Texas Lumber Co. [48-1 USTC ¶5922 ], 333 U.S. 496, 501 (1948).

Without exception the case law supports the use of a notice of levy. E.g., United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 53 U.S.L.W. 4856, 4858 (U.S. June 26, 1985) ("In the situation where a taxpayer's property is held by another, a notice of levy upon the custodian is customarily served pursuant to section 6332(a) . This notice gives the IRS the right to all property levied upon. . . ."); Phelps v. United States [75-1 USTC ¶9467 ], 421 U.S. 330, 335 (1975) ("[t]he notice of levy and demand served on the assignee were an authorized means of collecting the taxes . . ."); St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282 ], 617 F.2d 1293, 1302 (8th Cir. 1980) ("[t]he usual and recognized means of distraint and seizure of property is a notice of levy"); United States v. Sterling National Bank & Trust Co., supra, 494 F.2d at 920 (IRS levied on bank account by serving notice of levy on bank). In sum, there is nothing to call into question the validity of either the notice of levy or Simon & Schuster's compliance with it.

We have considered all of appellant's remaining claims and find them to be equally without merit. The judgment of the District Court is affirmed.

¹ The appeal was previously dismissed without prejudice for appellant's failure to pay double costs and damages previously imposed by this Court as a sanction for a frivolous appeal in an earlier case. Schiff v. Simon & Schuster, Inc. [85-1 USTC ¶9313 ], 766 F.2d 61 (2d Cir. 1985) (per curiam). Upon Schiff's payment of the $2,758.40 owed to the Internal Revenue Service as an appellate sanction, the appeal was reinstated, and the views of the government were invited.

 

[58-1 USTC ¶9167] United States of America , Plaintiff v. Electriglas Corporation, et al., Defendant

U. S. District Court, Dist. N. J., Civil Action No. 720-54, 12/5/57

Surrender of property subject to levy: Penalty.--Warrants for distraint were levied upon property in possession of the defendant but belonging to and owned by one Daly. This property was in the form of a fee for services rendered in the reorganization proceeding of the defendant's predecessor. Taxes for 1944 and 1945 had been assessed against Daly. Failing to collect from Daly after two notices demanding payment and a warrant for distraint, the United States proceeded against Daly's property in the hands of the defendant. With the exception of two small payments, the defendant failed to honor the levy. Held, that the defendant unlawfully withheld from the United States the amount of the fee and disbursements awarded to Daly, and that the defendant is indebted to the United States for the amount of Daly's unpaid taxes plus interest.

Herman Scott, United States Attorney, Post Office, Newark , N. J., for plaintiff. Robert R. Daley, 11 Commerce St., Newark, N. J. (Electriglas Corp.), G. Tapley Taylor, pro se, 241 Main St., Hackensack, N. J., for defendant.

Findings of Fact

WORTENDYKE, District Judge:

1. On May 12, 1950 the Commissioner of Internal Revenue assessed additional 1943 taxes against Robert R. Daly in the amount of $756.29 together with interest in the amount of $279.40 and penalties in the amount of $223.24. It is admitted by the plaintiff United States of America that this assessment has been fully paid and satisfied. On the same date the said Commissioner of Internal Revenue also assessed additional 1944 and additional 1945 income taxes against the said Robert R. Daly. The additional taxes for the year 1944 were the amount of $2,810.51 together with interest in the amount of $869.68 and penalties in the amount of $1,152.31. The plaintiff United States of America proved that there was a principal balance due on the 1944 additional income tax assessment in the amount of $3,122.17. The additional 1945 income taxes assessed against Robert R. Daly amounted to $5,823.39 together with interest in the amount of $1,452.57 and penalties in the amount of $931.74. No part of this $8,207.70 has ever been paid.

2. A first notice demanding payment of the foregoing assessment was made upon Robert R. Daly on May 16, 1950. A second notice demanding payment of the said assessment was made on June 9, 1950.

3. The Collector of Internal Revenue at Newark , New Jersey issued warrants for distraint for the collection of the said assessment of May 12, 1950 against the said Robert R. Daly on July 19, 1950.

[Levy Against the Taxpayer's Property in Defendant's Hands]

4. On April 2, 1951 Robert R. Daly filed an application with the United States District Court wherein the said Robert R. Daly petitioned the Court for an allowance of a fee in a reorganization proceeding then pending before the said United States District Court entitled "Proceeding for Reorganization under Chapter X of the Bankruptcy Act of Appleman Art Glass Works, Inc.". Thereafter the matter of allowance of fees was referred by the Court to Referee William T. Cahill, who rendered his report on September 27, 1951, wherein he recommended that a fee be awarded to Robert R. Daly in the amount of $15,000.00 together with disbursements in the amount of $288.81. Thereafter by order dated October 31, 1951 Honorable William F. Smith, United States District Court Judge for the District of New Jersey, awarded a fee to the said Robert R. Daly in the said Appellman Art Glass Works, Inc. Chapter X Reorganization Proceeding of $8,500.00, together with disbursements in the amount of $288.81.

5. The defendant, Electriglas Corporation by its answer to the complaint herein has admitted that it is a corporation of the State of New Jersey and that on November 27, 1951 a Deputy Collector of Internal Revenue possessed with warrants for distraint levied upon the property, rights to property, moneys and credits then in possession of the defendant Electriglas Corporation belonging to and owned by Robert R. Daly, by serving a copy of the said warrants for distraint and a copy of a levy upon Richard H. Eck, secretary and treasurer of the said Electriglas Corporation. It was also admitted by the defendant that on January 14, 1952 a final notice and demand was served upon the defendant Electriglas Corporation whereby demand was again made upon the said Electriglas Corporation to pay over, surrender and deliver to the Deputy Collector of Internal Revenue all deposits, moneys, credits, property and rights to property then in possession of the defendant Electriglas Corporation belonging to and owned by the said Robert R. Daly.

6. The defendant Electriglas Corporation failed to honor the levy made upon them on November 27, 1951, with the exception of two checks recently paid to the District Director of Internal Revenue each in the amount of $105.76.

Conclusions of Law

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

2. Due and proper assessments for taxes were made by the Commissioner of Internal Revenue upon Robert R. Daly and due and proper notice was served upon him for the payment of the said taxes.

3. On November 27, 1951 the defendant Electriglas Corporation had in its possession property of Robert R. Daly, to wit: a fee awarded to him out of the reorganization proceeding of Appellman Art Glass Works, Inc., the former name of the defendant Electriglas Corporation.

4. The defendant Electriglas Corporation has unlawfully withheld from the plaintiff the amount of the fee and disbursements awarded to the said Robert R. Daly.

5. The defendant Electriglas Corporation is indebted to the United States of America in the sum of $8,788.81 less the sum of $211.52, plus interest from November 27, 1951.

 

[67-1 USTC ¶9111]United States of America, Plaintiff v. Wolf Cereal Processing Company, a corporation, Defendant

U. S. District Court, Dist. Colo., Civil Action No. 9531, 10/3/66

[1954 Code Sec. 6332]

Surrender of property subject to levy: Penalty.--A corporation which owed the delinquent taxpayer certain sums on its purchase of letters patent and had been served with notices of levy for taxpayer's unpaid taxes was held to be indebted to the United States in the amount due taxpayer at the time of service of levies plus interest.

Lawrence M. Henry, United States Attorney, David I. Shedroff, Assistant United States Attorney, Denver, Colo., William D. M. Holmes, Tax Division, Department of Justice, Washington, D. C. 20530, for plaintiff. Blakemore McCarty, 319 Exchange Nat'l Bank Bldg., Colorado Springs , Colo. , for defendant.

CHILSON, District Judge:

Proceedings

THE COURT: Well, the Court finds from the evidence that an Oreste Scalise and Wolf Cereal Processing Company, the defendant in this action, entered into an agreement dated January 1st, 1956, wherein Scalise sold to Wolf certain letters patent mentioned in paragraph numbered (1) in this agreement in the sum of $252,000.00, payable at $7,000.00 down and $7,000.00 a month for a period of 35 months, and additionally, Wolf agreed to pay Scalise by the agreement the sum of three cents per pound on all W. M. C. and B. A. P., being the products produced under the letters patent.

The agreement further provides that after the expiration of the three year period, the amount would be two cents per pound instead of three cents per pound.

The agreement provides that all such payments shall be due and payable monthly, and shall be computed on the basis of Wolf's monthly sales--the products produced under the letters patent.

It further appears from the evidence that there has been assessed against Scalise income deficiency Federal taxes for the years of 1957 and 1958 and 1959 in excess of some forty thousand dollars; that the United States in an attempt to collect the income taxes so assessed against Scalise, on April the 12th of 1962, served a Notice of Levy upon the defendant Wolf Cereal Processing Company demanding that all property or right to property belonging to Scalise and held by Wolf be turned over to the United States for application on the tax liability of Scalise and pursuant to this levy, the sum of $3,672.00 was remitted to the Internal Revenue Service, and that this sum represented the amount due and owing to Scalise by Wolf up to and including March 31st, 1962.

The evidence further discloses that on August the 22nd, 1962, and on April the 6th of 1966, similar Notices of Levy were served upon the defendant Wolf, and Wolf has failed to turn over or remit anything to the United States pursuant to the two Notices of Levy.

The evidence further discloses by way of stipulation of the parties that from April the 1st of 1962, to August 22nd, 1962, the defendant Wolf produced and sold W. M. C., one of the products involved in Exhibit 1.

Mr. Holmes, what was your computation of that amount?

MR. HOLMES: The amount owing--eight--

THE COURT: No, the amount of pounds.

MR. HOLMES: Through what date, sir?

THE COURT: From April the 1st of 1962 to August the 22nd of 1962.

MR. HOLMES: That would be 278,150.

THE COURT: Very well. Then for that period from April the 1st of 1962, to August 22nd, 1962, the defendant Wolf had produced and sold one of the products, W. M. C. mentioned in Exhibit 1, in the amount of 278,150 pounds.

For the period beginning August 23rd, 1962, through October 31st, 1962, Wolf produced and sold of that product--how many pounds--16,150 pounds.

The Court further finds from the evidence that no payment has been made by the defendant Wolf Cereal Processing Company to Scalise or to the United States of the two cents per pound provided in the agreement, Exhibit 1, and no demand has been made by Scalise or any one in his behalf for the payment of the two cents per pound on the products produced and sold on April the 1st of 1962, through October 31st of 1962.

From these facts the Court concludes, as a matter of law, that the defendant Wolf Cereal Processing Company was indebted to Scalise in the amount of $5,563.00 at the time of the service of the First Notice of Levy on August 22nd, 1962.

The Court further concludes that by virtue of the service of the Notice at that time that the defendant became indebted to the plaintiff in that amount on that date; that is, $5,563.00 on August the 22nd, 1962.

The Court also concludes from the facts heretofore found that on October 31st, 1962, the defendant was indebted to Scalise in the amount of $3,233.00, being two cents per pound on 161,650 pounds of W. M. C. produced and sold by the defendant for the period beginning August the 23rd of 1962, and ending November the 1st of 1962, and that by virtue of the service of the Notice of Levy upon the defendant on April the 6th of 1966, the plaintiff had become vested with the rights of Scalise to this sum of money, the Court having heretofore found that payment had never been made to Scalise or the plaintiff.

The Court further concludes, then, that the plaintiff is entitled to judgment in the amount of $8,796.00 plus interest as provided by law, and together with costs to be taxed by the Clerk on the filing of the bill of costs.

Now, gentlemen, the Court takes no great pride in its mathematical abilities. Do these amounts check with your computations, Mr. Holmes?

MR. HOLMES: Yes, it does.

THE COURT: Mr. McCarty?

MR. McCARTY: Yes.

THE COURT: Can you agree upon the interest?

MR. HOLMES: Your Honor, this would have to be computed, the exact amount, but this could be done shortly.

MR. McCARTY: I think we can agree on the mathematics. It would just be my contention that the last levy would run from the date it was served, that is, interest on it.

MR. HOLMES: That is correct.

MR. McCARTY: And not from October of '62.

THE COURT: Do you agree with that?

MR. HOLMES: The interest would run from the--the first interest would run from the--

THE COURT: The interest would run from the first day of the first levy, the $5,563.00, which the Court found due as of August the 22nd of 1962. The plaintiff is entitled to recover interest at the rate of what--six per cent per annum?

MR. HOLMES: Yes, sir.

MR. McCARTY: Yes, sir.

THE COURT: At the rate of six per cent per annum from that date to today, the amount to be computed by counsel, and the amount furnished to the Clerk of the Court for the entry of a proper form of judgment.

And as to the amount found due under the levy of April the 6th of 1966, interest--the plaintiff is entitled to interest at the rate of six per cent per annum on the sum of $3,233.00 from April the 6th of 1966. No interest shall be compounded. It shall be computed at a straight six per cent figure.

The principal plus the interest accrued to date will make the total judgment entered in favor of the plaintiff and against the defendant as of this date.

Now, gentlemen, doing this off-the-cuff, is there anything the Court overlooked, that the Court should find as to the matter of findings of fact for the benefit of either party? Mr. Holmes?

MR. HOLMES: No, sir.

MR. McCARTY: No, sir.

THE COURT: Very well. Gentlemen, do you suppose you can get together immediately after we recess and advise the Clerk of the total amount?

MR. HOLMES: Yes. Your Honor.

THE COURT: Mr. Clerk, you will have no trouble in preparing a judgment order, will you?

THE CLERK: No, sir.

THE COURT: Very well.

(Whereupon, the court was recessed at the hour of 11:00 o'clock a.m.)

Judgment

PURSUANT TO and in accordance with the Findings of Fact, Conclusions of Law, and Judgment delivered from the bench this date, wherein the Clerk was directed to prepare the Judgment; it is

ORDERED that the plaintiff, above-named, have and recover from the defendant, above-named, judgment in the sum of Ten Thousand, Two Hundred Sixty One and 66/100 ($10,261.66) Dollars; and further

ORDERED that the plaintiff have and recover from the defendant its costs to be taxed upon the filing of a Bill of Costs.

 

[47-1 USTC ¶9199] United States of America v. Wilson Industrial Bank, Wilson , North Carolina , and E.B. Pittman.

In the District Court of the United States for the Eastern District of North Carolina, Wilson Division., No. 214-Civil., 11/06/46

Surrender of property subject to distraint: Judgment.--The United States of America recovers from a bank et al. the sum of $1,767.47 plus interest on the grounds that that sum belongs to a taxpayer and levy and demand have been made under the provisions of Code Sec. 3710.

John H. Manning, U.S. Attorney, Raleigh , North Carolina , for plaintiff. Charles B. McLean, Wilson , North Carolina , for defendant.

Judgment

 

GILLIAM, D.J.:

THIS CAUSE coming on to be heard upon motion of John H. Manning, United States Attorney, for judgment by default for want of an answer or other plea, and it appearing to the Court that the complaint was filed in this cause on October 1, 1946, and summons was issued on the same day and served by the United States Marshal for the Eastern District of North Carolina by delivering a copy of said summons and complaint to the Wilson Industrial Bank of Wilson, North Carolina, and E.B. Pittman on October 4, 1946; that time for answering or filing other plea has expired and no answer or other plea has been filed in this cause and the complaint is taken for confessed;

It is, therefore, ORDERED, ADJUDGED, and DECREED that the plaintiff, United States of America, have and recover of Wilson Industrial Bank, Wilson, North Carolina, and E.B. Pittman the sum of One Thousand, Seven Hundred, Sixty-seven and 47/100 Dollars ($1,767.47), said amount being in their possession and belonging to taxpayer Mrs. Irene Whitley, by marriage Mrs. Irene Whitley White, trading as Whitley Jewelry Company, upon which a levy and demand for the surrender thereof had been duly made under the provisions of Section 3710 of the Internal Revenue Code,

It is further ORDERED, ADJUDGED, and DECREED that the plaintiff recover of the defendants Wilson Industrial Bank, Wilson, North Carolina, and E.B. Pittman interest on the sum of One Thousand, Seven Hundred, Sixty-seven and 47/100 Dollars ($1,767.47), from May 3, 1946, until paid, at the rate of six per cent per annum, and the costs of this action to be taxed by the Clerk.

 

[60-2 USTC ¶9563]In the Matter of Cal-Neva Lodge, Inc., a Nevada corporation, Debtor

U. S. District Court, Dist. Nev., No. 923, 186 FSupp 187, 6/27/60

[1939 Code Sec. 3710--Similar to 1954 Code Sec. 6332]

Distraint proceedings: Levy against secured debt prior to debtor's bankruptcy.--The levy by the United States of America against a secured debt owing to the taxpayer, rather than against the security itself, was valid and allowable in bankruptcy where the levy was made against the taxpayer's debtor before he became bankrupt.

Francis F. Quittner, 630 So. Spring St., Los Angeles 14, Calif. , Aaron Levinson, 9363 Wilshire Blvd. , Beverly Hills , Calif. , and R. K. Wittenberg, First National Bank Bldg., Reno , Nev. , for the debtor. Howard W. Babcock, United States Attorney, Post Office Bldg., Reno, Nev., and Leon Yudkin and Joseph O. Greaves, Office of Regional Counsel, Internal Revenue Service, Room 1075, Flood Bidg., 870 Market St., San Francisco 2, Calif., for the Internal Revenue Service.

Opinion and Order Sustaining the Levy of the United States of June 1, 1953.

ROSS, District Judge:

Collection of Federal taxes is governed by Federal law. State statutes cannot be invoked to frustrate that collection. It is well established that the law of the forum determines the nature, the form, and the extent of the remedy. As elsewhere, this principle obtains in the area of tax collection.

In the instant case, this Court is the forum. And in applying the remedy in aid of the collection of a Federal tax, this tribunal will be guided by the law of the forum, in other words, by Federal law.

1. Statement of the Case. On April 1, 1959, the Referee in Bankruptcy filed an opinion holding that the levy of the United States upon a secured obligation of Cal-Neva Lodge, Inc., owing to Elmer F. Remmer and Helen L. Remmer, should be denied, and further concluding that the sum of $7,764.53, representing interest at 6% from the date of the levy should be denied "for the reasons (sic) that the levy itself fails to constitute a lien against the debtor."

On April 18, 1959, the Referee filed "Findings of Fact, Conclusions of Law, and Order re Objections to Proof of Claim of District Director of Internal Revenue for the District of Nevada (hereinafter the Director) as Amended." The Referee's Order read as follows:

"That the amended claim of the District Director of Internal Revenue for the District of Nevada on file herein in the principal sum of $921,667.09 plus interest be, and the same is, hereby disallowed, save and except for the sum of $18,117.40, which said sum of $18,117.40 only is allowed as a claim entitled to priority pursuant to the provisions of Section 64a(4) of the Bankruptcy Act."

On May 26, 1959, the United States filed a Petition for Review of the Order of the Referee of April 18, 1959, complaining, among other things, that:

(a) The United States was not required to exhaust the security acquired by the Remmers on the Cal-Neva Lodge property before its claim in bankruptcy could be allowed.

(b) The order of the Referee in Bankruptcy is erroneous and contrary to law.

On February 10, 1960, the Referee filed his Certificate of Review, which contained the following statement:

"Since the filing of the said Petition for Review the . . . Director . . . has abandoned that portion of its Review (sic) relating to alleged income taxes calimed as owing by the Debtor herein to the United States by filing an amended claim eliminating all claims for income taxes and penalties and interest thereon. The only matter now in controversy relates to the effect of the levy by the United States on June 1, 1953, on the secured obligation of the Debtor then owing to the Remmers."

It is solely to the effect of the levy of June 1, 1953, therefore, that this opinion is directed.

2. Statement of Facts. Cal-Neva Lodge, Inc., hereinafter the debtor, accepts the statement of facts set out in the Referee's Opinion of March 31, 1959, and this Court does likewise.

On December 31, 1948, the debtor purchased the Cal-Neva Lodge, a property located in both Nevada and California , from Elmer F. Remmer and Helen L. Remmer. As part of the consideration, the debtor executed a first deed of trust on the Cal-Neva Lodge property to the Remmers. To evidence the amount of the purchase price remaining unpaid, the debtor issued a note in California , to the Remmers, the note bearing four (4%) percent interest.

Subsequently, the Remmers became involved in tax difficulties with the United States .

On June 1, 1953, the United States levied upon the secured obligation of the debtor, which was owing to the Remmers. At the time of the levy, the debtor owed the Remmers $198,333.34, plus accrued interest at 4% from December 31, 1948. In addition, the United States asserted a claim for interest at 6% from the date of the levy.

At this juncture, both parties and the Referee himself have fallen into a common error. All three assume that the claim of the United States was asserted pursuant to "Section 6332(b) of the Internal Revenue Code of 1954." But Section 6332(b) was enacted on August 16, 1954, and, according to 26 USCA 7851(6)(B), Section 6332, being part of Chapter 64 of Title 26, became effective "On and after January 1, 1955." As we have seen, the levy by the United States was made on June 1, 1953.

As a matter of law, the levy of the United States was made under the provisions of Section 3692 of the Internal Revenue Code of 1939, which was enacted on February 10, 1939, and which, except as to certain provisions not relevant here, took effect "on the day following the date of its enactment."

The section relating to the "Surrender of property subject to distraint," however, is 26 USCA 3710, which is part of the Internal Revenue Code of 1939. The pertinent portion of that section follows:

"Section 3710. Surrender of Property Subject to Distraint.

(a) Requirement. Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process. (b) Penalty for Violation. Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together, with costs and interest from the date of such levy."

After the levy, the debtor sold the Cal-Neva Lodge property to Park Lake Enterprises, Inc., which agreed to assume the secured obligation to the Remmers.

The United States previously, and originally, asserted that the debtor was indebted to it in the sum of $241,136.75, $198,333.34 as principal, and $35,038.88 as interest at 4%, plus $7,764.53 as interest at 6% per annum from the date of levy. As we have seen, the United States now has eliminated "all claims for income taxes and penalties and interest thereon."

3. Federal Tax Liens and the Provisions for Their Collection Are "Strictly Federal and Striclty Statutory." Both the debtor and the Referee in Bakruptcy make frequent references to California and Nevada law in support of their position that "there shall be only one action maintained for the recovery of any debt secured by a mortgage and that action shall be by foreclosure" and "In California, at least, even the right to recover on the note for any deficiency remaining after foreclosure is denied in the case of a purchase money mortgage," etc.

The problem before this Court is to be decided according to Federal and not State authority. The Ninth Court of Appeals, in Bank of Nevada v. United States, 9 Cir., 1957, 251 F. 2d 820, 824 [58-1 USTC ¶9228], certiorari denied, 1958, 356 U. S. 938, declared:

"The Supreme Court has repeatedly and emphatically stated that Federal tax liens and the provisions for their collection are strictly Federal and strictly statutory." (Many authorities cited and quoted)

Quoting the above language with approval, our Court of Appeals followed the Bank of Nevada decision in United States v. Christensen, 9 Cir., 1959, 269 F. 2d 624, 627 [59-1 USTC ¶9621].

This, then, is the climate in which this Court must assess the debtor's contentions.

4. The Statutory Prohibition Against the Collection of a Penalty in a Bankruptcy Case Is No Longer Relevant in This Proceeding. Despite the fact that, in the Referee's "Certificate on Review," filed on February 10, 1960, it was specifically stated that the United States had filed "an amended claim eniminating all claims for income taxes and penalties," etc., the debtor, in its "Reply Memorandum", filed more than two months later, insists that "the claim asserted against the Debtor by the United States under Section 6332(b) of the Internal Revenue Code must be disallowed in these proceedings as a penalty," etc.

Accordingly, in the present Opinion and Order, this Court will devote but little time to the "penalty" issue so earnestly raised by the debtor.

5. The Levy of the United States Upon the Debtor's Secured Obligation in Favor the Remmers Was Completely Effectual. In his opinion of April 1, 1959, the Referee ruled that "The claim of the United States against Ca-Neva Lodge, Inc., for monies allegedly owing (by?) Cal-Neva Lodge, Inc., to the Remmers is invalid for the reason that the Remmers themselves could not claim any liability on the note against Cal-Neva Lodge, Inc., but are required by the law of the State of California and Nevada to look to the security first for payment."

In addition, the debtor "bases its objection to the allowance of the amended Proof of Claim of the . . . Director . . . on dual grounds. Initially, . . . the attempted levy by the United States . . . was completely ineffectual. Secondly, . . . the claim asserted against the Debtor . . . must be disallowed . . . as a penalty," etc.

In the preceding section of this Opinion and Order, this Court has disposed of the debtor's second contention. Attention is therefore now addressed to the debtor's first objection. Namely: that the attempted levy by the United States was completely ineffectual.

At the outset, it should be borne in mind that it is a hornbook principle that "the law of the forum governs as to the nature, form, and extent of the remedy." (Italics supplied.) 15 CJS, Conflict of Laws, Section 9, Page 878; Section 22, Pages 948-952; 17 CJS, Contracts, Section 21, Pages 353-354.

It must be to Federal law, then, that we must look for guidance in determining the rights of the parties in the instant case.

The United States levied upon and seized the debt, not the security, which the debtor owed Remmer.

In United States v. Eiland, 4 Cir., 1955, 223 F. 2d 118, 121 [55-1 USTC ¶9487], Chief Judge Parker said:

"There can be no question, we think, but that the lien for taxes provided by the statute can be asserted against intangible property such as a debt. (Many cases cited) And we think it equally clear that the proper way to assert the lien is by levy and notice such as was served here."

The claim of the United States for a debt seized prior to bankruptcy, under 11 USCA 104(a)(5), is a priority claim.

In the case of In re Cherry Valley Homes, Inc., 3 Cir., 1958, 255 F. 2d 706, 707 [58-2 USTC ¶9581], certiorari denied, 1958, 358 U. S. 864, the Court used the following language:

"In legal contemplation and consequence, this levy effectively and exclusively appropriated the debt to the satisfaction of the tax claim six months before the Chapter X proceeding was instituted. (Cases cited.) Such a levy is treated in law like a seizure of corporeal property, taken into possession of a collector by way of distraint for taxes. (Authorities cited.) . . . By whatever name the appropriation shall be called, it seems clearly sufficient to establish a priority of right to satisfaction which the debtor's subsequent insolvency does not affect."

The remedy of the United States to enforce collection of taxes by the summary administrative method of distraint "is a special privilege it has which is analogous to, but in addition to, garnishment and other remedies of an ordinary creditor." (Cases cited.) United States v. Manufacturers Trust Co., 2 Cir., 1952, 198 F. 2d 366, 368 [52-2 USTC ¶9417].

Continuing, in the Manufacturers Trust decision, Judge Chase said:

"It (the Government's remedy) is a constitutionally valid expendient for the collection of taxes necessary to the very existence of government, (cases cited) and has been available by law since 1791." (Case cited.)

A claim by the United States under 11 USCA 104(a)(5), supra, based upon a levy upon a bankrupt prior to bankruptcy, is an allowable one. In the Cherry Valley Homes case, supra, 255 F. 2d at Page 707 [58-2 USTC ¶9581], the Court observed:

"Alternatively, as the government urges here, since the possessory concept of 'seizure' is not strictly applicable to a debt, it seems correct to say that the tax levy through process served upon the debtor at least accomplished an assignment of Tobin's claim against Cherry Valley to the United States by operation of law. This approach brings into decisive effect the provision of Revised Statutes, Section 3466, 31 U. S. C. A. Section 191, that 'whenever any person indebted to the United States is insolvent * * * the debts due to the United States shall be first satisfied.' This language has been applied to claims, originally between private parties, the benefit of which has in various ways been assigned or transferred to the United States . (Cases cited.) We think it applies here as well."

Such a claim is not a penalty in the instant case. Double liability is not sought. The debtor is merely required to render unto Caesar the things that are Caesar's. Cal-Neva must pay only what it otherwise would be required to pay to Remmer.

As was remarked in the Eiland case, supra, 223 F. 2d at Page 121 [55-1 USTC ¶9487]:

"The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. There is no necessity for adjudicating the amount of the tax under the statutory proceeding (cases cited); and, consequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt." ¹

Cal-Neva was indebted the Remmer at the time the United States levied on that debt. The obligation was due at that time. The debtor's failure to pay was a withholding of funds owing to the United States , for which the debtor must pay interest of 6% for electing not to pay the money at the time of the levy.

In United States v. Childs, 1924, 266 U. S. 304, 309-310 [1 USTC ¶103], the Supreme Court adverted to the distinction between interest and penalty, saying:

"The tax in this case is one on income; a burden imposed for the support of the Government. Interest is put upon it and so denominated, distinguished from the 5% as penalty, clearly intended to compensate the delay in payment of the tax--the detriment of its non-payment, to be continued during the time of its non-payment--compensation, not punishment."

Furthermore, the United States in this case has specifically eliminated all claims for income taxes and penalties and interest.

To summarize, the claim of the United States for money owing to the Remmers by the debtor Cal-Neva, which was levied upon prior to bankruptcy, is hereby allowed as a priority claim under 11 USCA 104(a)(5).

6. Conclusion. In view of the holding of this Court regarding the levy of the United States , infra, and the abandonment by the United States of all its other claims, the Order of the Referee in Bankruptcy dated April 18, 1959, is hereby set aside, and in its stead the following Order is substituted:

Order

The levy of the United States on June 1, 1953, upon the secured obligation of the debtor then owing to Elmer F. Remmer and Helen L. Remmer, in the amount of $198,333.34, plus accrued interest at 4% from December 31, 1948, plus interest at 6% from the date of the levy, was completely effectual, and it is hereby sustained.

It is so ORDERED.

¹ See also Columbian Nat. Life Ins. Co. v. Welch, 1 Cir. 1937, 88 F. 2d 333 [37-1 USTC ¶9131]; and Bank of Nevada v. United States , supra, 251 F. 2d at Page 828 [58-1 USTC ¶9228].

 

[53-2 USTC ¶9589]In the Matter of John W. Holdsworth and William Bauman, Individually and the partnership known as John W. Holdsworth & Co., composed of John W. Holdsworth and William Bauman, and John W. Holdsworth Incorporated, Bankrupts

In the United States District Court for the District of New Jersey, Bankruptcy No. 279-50, 113 FSupp 878, July 27, 1953

Lien for taxes: Validity against trustee in bankruptcy. Levy and distraint.--The referee in bankruptcy denied the petition of the trustee in bankruptcy for an adjudication that certain United States tax liens were invalid, an injunction against the enforcement of the tax liens by the Collector and a turnover order ordering certain debtors of the bankrupts to pay the debts to the trustee. A petition for review was filed by the trustee. The stipulation of facts did not contain essential facts showing whether the conditions precedent to the creation of the liens and the conditions of an effective levy and distraint were met. The referee's conclusions were therefore erroneous. The matter was remanded with instructions to grant a rehearing.

Feld & Breitner for trustee. United States Attorney for United States .

Opinion

SMITH, District Judge:

This proceeding originated with a petition filed by the Trustee in bankruptcy and an order to show cause entered thereon by the Referee in Bankruptcy. The prayers for relief were poorly drafted, but it sufficiently appears from the petition and the record now before the Court that the petitioner sought: first, an adjudication that certain tax liens in favor of the United States were invalid; second, an injunction against the enforcement of the tax liens by the Collector of Internal Revenue; and third, a turnover order requiring certain debtors of the Bankrupts to pay to the Trustee the debts allegedly due and payable. The Referee, after hearing, denied the relief sought. The proceeding is now before this Court on a petition for review filed by the Trustee.

The action of the Referee was obviously predicated upon the conclusions: first, that the tax liens in favor of the United States were existent and valid; and second, that a mere notice of "Levy," served upon each of three debtors of the Bankrupt, was tantamount to an effective levy upon the distraint of "all sums of money due" from the said debtors of the Bankrupts. These conclusions were based solely on the meager facts contained in a Stipulation of Facts, which was deficient; several essential facts were omitted from the stipulation and were not established by competent evidence. The facts before the Referee do not support his conclusions.

The pertinent provisions of the Internal Revenue Code, 26 U. S. C. A. 3670 and 3671, create a statutory lien for taxes in favor of the United States but only upon the fulfillment of the conditions therein prescribed. Section 3670 provides: "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, * * *, belonging to such person." Section 3671 provides: "Unless another date is specifically fixed by law, the LIEN SHALL ARISE AT THE TIME THE ASSESSMENT LIST WAS RECEIVED BY THE COLLECTOR * * *." (Emphasis by the Court.)

These provisions of the Code are unambiguous and must be literally construed. When these provisions are thus construed it is clear that the conditions precedent to the creation of the statutory lien are: first, the receipt by the Collector of Internal Revenue of an assessment list certified by the Commissioner of Internal Revenue in accordance with Sections 61, 3640 and 3641 of the Internal Revenue Code, Title 26 U. S. C. A.; and second, a demand for payment by the Collector of Internal Revenue, and the neglect or refusal of the taxpayer to pay. Cf. Detroit Bank v. United States, 317 U. S. 329, 335 [43-1 USTC ¶9224]; United States v. Reese, 131 Fed. (2d) 446, 467 [42-2 USTC ¶9763]; Citizens State Bank of Barstow, Tex. v. Vidal, 114 Fed. (2d) 380, 384 [40-2 USTC ¶9603]; MacKenzie v. United States, 109 Fed. (2d) 540, 541, 542 [40-1 USTC ¶9229]; Metropolitan Life Ins. Co. v. United States, 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771]; Filipowicz v. Rothensies, 43 Fed. Supp. 619, 623 [42-1 USTC ¶9300]. The lien arises only upon when the fulfillment of these conditions.

An examination of the record discloses no facts which will support a determination that the conditions prescribed by the Code were met, a determination essential to the conclusion that the tax liens were existent and valid. This conclusion of the Referee was therefore erroneous.

We may assume, although the record does not support the assumption, that the action taken by the Collector of Internal Revenue was pursuant to Sections 3690 and 3692 of the Internal Revenue Code, Title 26 U. S. C. A. Section 3690 provides: "If any person liable to pay any taxes NEGLECTS or REFUSES to pay the same WITHIN TEN DAYS NOTICE AND DEMAND, it shall be lawful for the collector * * * to collect the said taxes, * * *, by distraint and sale, in the manner provided in this subchapter, of the goods, chattels, or effects, including * * * evidences of debt, of the person delinquent as aforesaid." Section 3692 provides: "In case of NEGLECT or REFUSAL under Section 3690, the collector may levy, * * *, upon all property and rights to property, * * *, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, * * *." (Emphasis by the Court.) We note that these sections are not in pari materia with sections 3670 and 3671, supra.

The right of the Collector of Internal Revenue to proceed under these sections is conditioned upon: first, a notice to the taxpayer of his delinquency and a demand for payment; and second, the neglect or refusal of the taxpayer to pay "within ten days after notice and demand." The record is devoid of facts upon which to predicate a determination that these conditions were met, a determination essential to the conclusion that there was an effective levy and distraint. The conclusion that there was an effective levy and distraint is therefore erroneous.

It sufficiently appears from the Stipulation of Facts that a notice of "Levy" was served upon each of the three debtors of the Bankrupts, and that thereafter, pursuant to Section 3710(a) of the Code, Title 26 U. S. C. A., a formal "Final Notice and Demand" was served upon each of them. We assume, in the absence of any stipulation to the contrary, that no other or further action was taken. We are of the opinion that in the absence of a warrant of distraint a mere notice of levy is not tantamount to an effective levy upon and distraint of "all sums of money due" from the said debtors of the Bankrupts. United States v. O'Dell, 160 Fed. (2d) 304, 307 [47-1 USTC ¶9190]; Givan v. Cripe, 187 Fed. (2d) 225, 228 [51-1 USTC ¶9169]. An actual or construction seizure is essential to a valid levy and distraint; where, as here, the subject matter is an account receivable or chose in action, the seizure may be effected by a levy and the service of a warrant of distraint upon the debtor. Ibid. The reported cases would indicate that this was the usual practice followed by the Collector of Internal Revenue.

The record discloses that the three debtors of the Bankrupts were joined as parties to this proceeding but failed to enter an appearance or otherwise consent to the summary jurisdiction of the Court of Bankruptcy. We agree with the Referee's conclusion that under the circumstances they were not subject to the Court's summary jurisdiction. We would suggest, however, that if the debts are not disputed a multiplicity of actions might be avoided if the debtors would voluntarily enter their appearance in this proceeding. This would permit the determinatin of all the issues in a single action.

The matter will be remanded to the Referee in Bankruptcy with instructions to grant a rehearing. We direct the attention of the Referee in Bankruptcy to the applicable provisions of the Internal Revenue Code, supra, which are determination of the validity, scope and effect of both the liens and the distraints. We further direct his attention to the applicable provisions of the Bankruptcy Act, and particularly to Sections 67 and 70 thereof, 11 U. S. C. A. 107 and 110, which are determinative of the relative rights of the Trustee and the Collector of Internal Revenue. See Collier on Bankruptcy, Vol. 4, pages 155 to 224, inclusive.

We observe that this is another case in which there has been a regrettable waste of judicial time occasioned by the palpable inadequacy of the record made before the Referee in Bankruptcy. We have previously reminded attorneys that the issues which arise in the many collateral matters incident to the administration of a bankrupt estate should be fully and properly tried. A hearing before the Court of Bankruptcy is summary but it must be full and adequate if the issues raised are to be justly decided on the merits. Where, as here, the issues are submitted on a stipulation of facts, the facts should be fully and adequately stated, and, if not so stated, the stipulation of facts should be supplemented by competent and relevant evidence.

 

[89-1 USTC ¶9314] In re John Allen Samson. United States of America , Appellant v. John Allen Samson, Appellee

United States District Court, Dist. S.C., Charleston Div., Civ. 2:88-2177-1, 3/20/89, 100 BR 800, Reversing an unreported Bankruptcy Court decision

[Code Secs. 6331 and 6332 ]

Levy and distraint: Bankruptcy: Standing to challenge: Notice.--The IRS was entitled to funds in the possession of the bankruptcy trustee that were owed to the bankrupt's spouse, because the spouse was not entitled to notice of the levy or service of the motion. The court held that the spouse was not an appropriate party and had no standing to challenge the levy. It was therefore not necessary to give her notice of the motion directing compliance with the levy.
ORDER

HAWKINS, District Judge:

This matter comes before the court on appeal from a decision of the Honorable J. Bratton Davis, United States Bankruptcy Judge. On July 6, 1988, Judge Davis issued an order denying the government's motion for an order directing compliance with an Internal Revenue Service (IRS) levy. Judge Davis denied the government's motion on the ground that Local Bankruptcy Rule M-4 required the government to serve the bankrupt's wife, Trudy Samson, with a copy of the motion. The government has appealed and contends that Ms. Samson is not an "appropriate party" under the local bankruptcy rule because she has no standing to challenge the levy.

The facts as they appear at this time are as follows. The bankruptcy trustee, Kevin Campbell, sold certain real property belonging to John Allen and Trudy Samson in order to satisfy certain of Mr. Samson's debts. The trustee distributed those proceeds from the sale belonging to Mr. Samson, but he retained proceeds from the sale in the amount of $6,703.95 which proceeds are owing to Ms. Samson.

On April 29, 1982, a notice of federal tax lien naming John and Trudy Samson as taxpayer was filed with the register of mesne conveyances in Charleston County , South Carolina . This lien encumbered "all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue." On September 1, 1983, the IRS served the trustee with notice of levy against those proceeds. The notice of levy reflects that John and Trudy Samson owe the United States a total of $18,082.95 in taxes assessed on May 10, 1982, August 15, 1982 and August 22, 1982. Trudy Samson's whereabouts are unknown.

The government filed a motion in the bankruptcy court seeking to compel the trustee's compliance with the notice of levy. Judge Davis denied the motion based on Local Bankruptcy Rule M-4. That rule reads in pertinent part:

Upon the filing of a motion . . . the moving party simultaneously shall serve a copy of the motion . . . on all appropriate parties and shall file an affidavit or certificate of such service in the office of the clerk of th[is] court.

This local rule is proper pursuant to Bankruptcy Rule 9013 which provides:

A request for an order, except when application is authorized by these rules, shall be by written motion, unless made during a hearing. The motion shall state with particularity the grounds therefor, and shall set forth the relief of order sought. Every written motion other than one which may be considered ex parte shall be served by the moving party on the trustee or debtor in possession and on those entities specified by these rules or, if service is not required or the entities to be served are not specified by these rules, the moving party shall serve the entities the court directs.

Since the Local Rule is consistent with the Bankruptcy Rule, the question for this court on appeal is whether or not Trudy Samson was an appropriate party on whom Rule M-4 required service of the motion. The court agrees with the government that, if Ms. Samson has no standing to challenge the levy, she is not such an appropriate party.

The Internal Revenue Code provides as follows:

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

(b) . . . The term "levy" as used in this title includes the power of distraint and seizure by any means. . . .

26 U.S.C. §6331 . With respect to persons in possession of property subject to a levy, the Code provides:

(a) . . . [A]ny person in possession of . . . property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights . . . to the Secretary or his delegate, except such part of the property rights as is, at the time of such demand, subject to attachment or execution under any judicial process.

26 U.S.C. §6332 . Any third person honoring an IRS levy is immune from liability to the delinquent taxpayer with respect to the surrender. 26 U.S.C. §6332(d) .

Finally, and most importantly for purposes of this court's decision, neither the taxpayer nor a person in possession of the taxpayer's property may contemporaneously challenge an IRS seizure. Section 7421 precludes suits by the taxpayer for purposes of restraining the assessment or collection of any tax. Additionally, in United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 729 (1985), the Court recognized:

Congress . . . balanced the interest of the Government in the speedy collection of taxes against the interests of any claimants to the property, and reconciled those interests by permitting the IRS to levy on the assets at once, leaving ownership disputes to be resolved in a post-seizure administrative or judicial proceeding.

A taxpayer must be given notice of an assessment, 26 U.S.C. §6212 , but there is no requirement that the taxpayer be given notice of the actual seizure of the property. The government did attempt to notify Ms. Samson of the assessment. Since Trudy Samson was not entitled to notice of the seizure, and since she is precluded from comtemporaneously challenging that seizure, this court finds that the government did not need to serve her with the motion for an order directing compliance with the levy.

Finally, in In re Meter Maid Industries, Inc. [72-2 USTC ¶9574 ], 462 F.2d 436 (5th Cir. 1972), the court determined that the doctrine of custodia legis did not bar an IRS levy on funds in the possession of a bankruptcy trustee. In In re Meter Maid, the IRS levied on funds held by the trustee but owing to a claimant. The claimant was a delinquent taxpayer, and the Court of Appeals upheld the validity of the levy. The court reasoned:

[W]hen authority for the law's custody and for the Internal Revenue's levy derive from the same source, with no potential clash between jurisdictions, the doctrine against attachment does not prevail.

Id. at 438. This court finds the reasoning of the court in In re Meter Maid persuasive and, therefore, finds that the IRS levy in this case was proper.

It appears to the court that, pursuant to Judge Davis' order, the funds in question were remitted to the clerk of the bankruptcy court. Having determined that Trudy Samson was entitled to neither notice of the levy nor service of the government's motion, and having found that the levy was proper under the reasoning of In re Meter Maid, the court will remand the case to the bankruptcy court with instructions to order the clerk to release the funds held on behalf of Ms. Samson to the government. It is

ORDERED, that the decision of the Bankruptcy Court be, and the same is hereby, reversed. It is

ORDERED FURTHER, that this matter is remanded to the Bankruptcy Court with instructions to issue an order directing the clerk of that court to release the funds held on behalf of Ms. Samson to the government.

AND IT IS SO ORDERED.

[92-2 USTC ¶50,362] In re Frederick Petroleum Corporation, Debtor. Larry E. Staats, and SEOR, Inc., Plaintiffs v. United States of America, and Main Star Oil Company, Defendants

U.S. Bankruptcy Court, So. Dist. Ohio , East. Div., 2-85-00741, 4/20/92, 144 BR 758

[Code Secs. 6332 , 7402 and 7426 ]

Levy: Suits against the United States: Sovereign immunity.--

The trustee of a debtor's estate could not sue the United States under Code Sec. 6332 to collect a portion of money and property that was seized by the IRS from an oil company that owed the debtor $75,000. The United States did not waive its sovereign immunity to such claim. The exclusive remedy available against the United States is a wrongful levy action under Code Sec. 7426 . The court granted the United States' motion to dismiss the suit, and denied the trustee's motion to amend its complaint to set an additional theory of recovery for money damages under 11 USC 549 and 550 because the U.S. did not waive its sovereign immunity to suits for money damages under those provisions.

Larry E. Staats, 50 W. Broad St. , Columbus , Ohio 43215 , for plaintiff. James S. Huggins, Theisen, Brock, Frye, Erb & Leeper Co., L.P.A., 414 Second St., Marietta, Ohio 45750, for SEOR, Inc., D. Michael Crites, United States Attorney, Jeffery Hopkins, Assistant United States Attorney, Columbus, Ohio 43215, and Jonathan P. Welch, Department of Justice, Washington, D.C. 20530, for defendant. Robert Ellis, Ellis & Ellis, 328 Fourth St. , Marietta , Ohio 45750 , for Main Star Oil Co.

OPINION AND ORDER GRANTING MOTION OF THE UNITED STATES OF AMERICA TO DISMISS AND HOLDING IN ABEYANCE PLAINTIFFS' MOTION TO AMEND COMPLAINT

I. Preliminary Considerations

SELLERS, Bankruptcy Judge:

Before the Court are two motions. The first motion ("Motion to Dismiss") was filed July 11, 1991 by Defendant, the United States of America (" United States "), seeking dismissal of the original claim asserted against it in this adversary proceeding. The Motion to Dismiss is opposed by Plaintiffs, Larry E. Staats ("Trustee") and SEOR, Inc. ("SEOR") (together, "Plaintiffs"). A hearing on the Motion to Dismiss was held on October 1, 1991, at which time counsel for the United States and SEOR appeared. At the conclusion of that hearing, the Court took the Motion to Dismiss under advisement.

Subsequent to the October 1, 1991 hearing, Plaintiffs filed a motion ("Motion to Amend Complaint") seeking an order of the Court permitting them to amend their complaint to add an additional theory of recovery. The Motion to Amend Complaint is opposed by the United States .

For the reasons which follow, the Court will grant the United States ' Motion to Dismiss and will hold Plaintiffs' Motion to Amend Complaint in abeyance to await supplementation of Plaintiffs' arguments.

II. Facts

The essential facts, as alleged in Plaintiffs' original complaint ("Complaint"), are as follows:

The debtor, Frederick Petroleum Corporation, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on March 15, 1985 ("Petition Date"). The debtor's bankruptcy case was subsequently converted to one under Chapter 7 of the Bankruptcy Code. The Trustee is the duly-appointed trustee in the debtor's Chapter 7 case.

Prior to the Petition Date, the debtor sold crude oil to Defendant, Main Star Oil Company ("Main Star"). On the Petition Date, Main Star owed the debtor approximately $75,000 on account. Complaint at 6.

Prior to the conversion of the debtor's case to Chapter 7, this Court (Judge Grady L. Pettigrew) ordered Main Star to turn over "all cash proceeds and any other property received from or on behalf of Frederick Petroleum Corporation" ("Turnover Order"). Plaintiffs assert that Main Star has failed to comply with the Turnover Order. Complaint at Para . 8.

On or about March 15, 1989, the United States , through its agency the Internal Revenue Service ("IRS"), seized and levied upon Main Star's checking account at The Central Trust Company of Southeastern Ohio, N.A., in Marietta , Ohio , obtaining approximately $350,000. Complaint at Para . 12 and 13. Plaintiffs aver that $75,000 of the money seized in such levy was property of the debtor's estate. Complaint at Para . 13.

III. Issues

1. Whether the Court should dismiss Plaintiffs' original claim against the United States .

2. Whether the Court should grant Plaintiffs' request for permission to amend the Complaint to add an additional theory of recovery under 11 U.S.C. §549.

IV. Legal Discussion

A. The United States ' Motion To Dismiss.

The United States moves the Court pursuant to Fed. R. Civ. P. 12(b)(1) and (6), made applicable to this proceeding by Fed. R. Bankr. P. 7012(b), for dismissal of Plaintiffs' original claim under 26 U.S.C. §6332(a) for lack of subject matter jurisdiction and for failure to state a claim for which relief can be granted. In its Motion to Dismiss, the United States contends that it has not waived its sovereign immunity to such claim. The United States asserts that the exclusive remedy available to Plaintiffs is provided in 26 U.S.C. §7426 , ¹ a statute upon which Plaintiffs do not rely. ² The United States further argues that, unlike §7426 , the provisions of §6332 neither provide relief to Plaintiffs nor constitute a waiver of the United States ' sovereign immunity.

Relying upon the authority of a single decision, Plaintiffs contend that §6332 does indeed afford them a legal remedy. Plaintiffs further dispute the United States ' assertion that it is immune from suit under §6332 .

At the outset, the Court notes the well-established rule that "[t]he United States, as sovereign, is immune from suit save as it consents to be sued, . . . and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit." United States v. Sherwood, 312 U.S. 584, 586 (1941) (citations omitted). "It is elementary that when consent to sue the United States is granted, the precise terms, conditions, and qualifications of such consent must be scrupulously followed." Coleman v. United States Bureau of Indian Affairs, 715 F.2d 1156, 1161 (7th Cir. 1983) (citing Sherwood ).

Plaintiffs' claim against the United States is based upon 26 U.S.C. §6332(a) , ³ which provides:

Except as otherwise provided in subsection (b), ⁴ any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made, shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Plaintiffs assert that an interpretation of §6332(a) consistent with the holding in Securities and Exchange Commission v. Paige, 85-2 USTC ¶9588 (D.C. 1985) compels denial of the United States ' Motion to Dismiss. Because Plaintiffs' opposition to dismissal so heavily relies upon the Paige decision, the Court will briefly set forth its facts and holding.

In Paige, Mr. Paige engaged in an embezzlement scheme that resulted in his conversion of $5.9 million belonging to General Cinema Corporation ("GCC"). After an investigation into Paige's activities, the Securities and Exchange Commission ("SEC") instituted a civil action against Paige in the United States District Court for the District of Columbia . Early in that action, the district court entered an order requiring Paige to disgorge certain assets and place them in a court-ordered and court-supervised escrow account. The escrow assets had been purchased by Paige with the embezzled funds.

Later, the district court granted GCC's motion to intervene as a party plaintiff in the SEC's action against Paige. The district court also ordered the escrow assets transferred to GCC.

Before any of the escrow assets were transferred to GCC, however, the IRS levied upon the escrow account in an attempt to satisfy certain obligations owed by Paige to the IRS. The escrow agent then filed a request for instructions with the district court, asking whether he should obey the court's prior orders directing that the escrow assets be transferred to GCC or whether he should transfer the assets to the IRS pursuant to its notice of levy. The district court denied the escrow agent's request for instructions.

Presumably more than nine months after the IRS' notice of levy, GCC and the United States jointly moved the district court to determine proper ownership of the escrow assets. In addressing the United States ' argument that the proceedings were barred by the nine-month statute of limitations provided in §6532 , the district court stated at pages 89,506-07:

IRS next argues that the proceedings are barred by the statute of limitations provided in section 6532(c)(1) of the Internal Revenue Code. GCC [General Cinema Corporation], by this proceeding, is seeking enforcement of the Court's June 8, 1984 order that the escrow assets be transferred to GCC. At the time the Notice of Levy was served, the escrowed assets were in the constructive custody of the Court, having already been placed in an escrow account under the jurisdiction of this Court. The Court determines, therefore, that pursuant to Section 6332(a) of the Internal Revenue Code, because the escrowed assets were already in the constructive possession and actually under the jurisdiction of the Court, they were immune to levy. Therefore, the statute of limitations argument advanced by IRS must be rejected.

Focusing on this holding, Plaintiffs argue that §6332 affords them a remedy from which the United States is not immune. The Court disagrees.

Although the Court has found no case directly on point, numerous decisions have held that when a person other than the taxpayer claims an interest or rights in property upon which the IRS has levied, that person's exclusive remedy under the Internal Revenue Code against the United States is a wrongful levy action under 26 U.S.C. §7426 . ⁵ The Paige decision, as legal precedent, is of limited utility because it simply does not consider that issue. Moreover, the Court believes that there are additional reasons why Paige is either wrong or inapplicable.

First, it is unclear whether the motion brought in Paige to determine ownership of the escrow assets was made pursuant to §6332 . This Court has found no other case where a third party claiming an interest in property (even by court order or other judicial process) was permitted a remedy against the United States under §6332 . Clearly, §6332 , on its face, is a defense for the "person in possession of (or obligated with respect to) property or rights to property" to a demand of the IRS for surrender of property upon which levy has been made. The United States Supreme Court appears to view §6332 in such fashion. ⁶

Second, even if the motion in Paige were somehow brought pursuant to §6332 , the decision plainly states that such motion was jointly brought by both GCC and the United States . As a movant, the United States ' assertion of sovereign immunity in Paige is a little surprising, if not confusing.

Finally, to the extent the Paige decision purports to create a cause of action for third parties against the United States for wrongful levy, this Court believes it is wrong as a matter of policy. Section 7426 waives the sovereign immunity of the United States for such actions, but limits the relief that may be granted by the imposition of a nine-month statute of limitations. As stated by the Fifth Circuit Court of Appeals in United Sand and Gravel:

The obvious reason for a short statute of limitations is to resolve doubts concerning the status of the taxpayer's account swiftly. If someone else successfully claims property already credited against the taxpayer's tax liability, the United States must look to other assets of the taxpayer to satisfy the taxpayer's liability. I.R.C. §6532(c) protects the legitimate interest of the United States in requiring other claimants of the seized property to bring their claims quickly.

[80-2 USTC ¶9626 ], 624 F.2d at 739.

In consideration of the United States' need to resolve quickly those disputes over taxpayers' property, the Fifth Circuit Court of Appeals and other courts have held that §7426 is a third party's exclusive remedy against the United States for wrongful levy. Based upon the reasoning of those decisions, this Court believes that Plaintiffs are not entitled to a separate cause of action under §6332 .

B. Plaintiffs' Motion To Amend Complaint.

Pursuant to Fed. R. Civ. P. 15(a) and Fed. R. Bankr. P. 7015, Plaintiffs seek leave to file an amended complaint setting forth an additional theory of recovery against the United States based upon 11 U.S.C. §549. The Motion to Amend Complaint was filed October 9, 1991, a few days after the Court's hearing on the United States ' Motion to Dismiss.

The United States opposes the Motion to Amend Complaint asserting that the Court's granting of such motion will cause it prejudice. Specifically, the United States points out that the amendment was requested by Plaintiffs long after the court-ordered June 30, 1991 discovery cutoff date. The United States insists that if the Motion to Amend Complaint is granted, it will be denied an opportunity to conduct necessary discovery. Additionally, the United States argues that Plaintiffs' attempt to add an additional theory of recovery "is merely an attempt to avoid dismissal of their original claim, thereby negating the time and expense the United States incurred in relation to that motion." United States ' Opposition at 3.

Plaintiffs reply that the Motion to Amend Complaint seeks to add only an additional legal theory of recovery, which theory is based upon no new or additional facts. Plaintiffs argue that their memorandum in opposition to the Motion to Dismiss put the United States on notice of their intent to amend the Complaint. Plaintiffs further note that the United States has conducted no discovery to date.

The arguments of the parties must be considered in light of Fed. R. Civ. P. 15(a), which provides:

A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. A party shall plead in response to an amended pleading within the time remaining for response to the original pleading or within 10 days after service of the amended pleading, whichever period may be the longer, unless the court otherwise orders.

"Rule 15 is premised on the theory '[t]hat pleadings are not an end in themselves, but are only a means to proper presentation of a case; that at all times they are to assist, not deter, the disposition of litigation on the merits.' " Yoder v. T.E.L. Leasing, Inc. (In re Suburban Motor Freight, Inc. ), 114 B.R. 943, 950 (Bankr. S.D. Ohio 1990) (citations omitted).

With regard to motions to amend a complaint under Rule 15(a), the United States Supreme Court has stated:

Rule 15(a) declares that leave to amend 'shall be freely given when justice so requires;' this mandate is to be heeded (citation omitted). If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason--such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.--the leave sought should, as the rules require, be 'freely given.'

Foman v. Davis, 371 U.S. 178, 182 (1962).

Since Foman, the developing case law of the Sixth Circuit has evidenced a "liberality in allowing amendments to a complaint." Moore v. City of Paducah , 790 F.2d 557, 562 (6th Cir. 1986). The Sixth Circuit has stated that "delay alone is insufficient reason to deny a motion to amend." Estes v. Kentucky Util. Co., 636 F.2d 1131, 1134 (6th Cir. 1980). "Rather, the critical factors are notice and substantial prejudice." Estes at 1134, citing, Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479, 484 (6th Cir. 1973). "[T]here must be 'at least some significant showing of prejudice to the opponent' if the motion is to be denied." Janikowski v. Bendix Corp., 823 F.2d 945, 951 (6th Cir. 1987), citing, Moore at 562.

Perhaps most pertinent to this proceeding is the Sixth Circuit Court of Appeals' decision in Tefft v. Seward, 689 F.2d 637 (6th Cir. 1982). In Tefft, the court held that it was an abuse of discretion for the district court to deny the plaintiff's request to amend his complaint to add an additional theory of recovery. The plaintiff's request was contained in his memorandum in opposition to the defendants' summary judgment motion, which summary judgment motion was granted by the district court. In so holding, the Sixth Circuit found that the facts as set forth in the plaintiff's original complaint supported the plaintiff's new theory of recovery. Additionally, the court found that the amended cause of action was not so different as to cause prejudice to the defendants.

As in Tefft, the facts of the Complaint support Plaintiffs' additional claim. Moreover, the United States has shown no significant prejudice resulting from the amendment. Under such circumstances, the Court would normally grant the Motion to Amend Complaint. However, the Court has an additional concern in this preceding which prohibits it from now doing so.

Plaintiffs seek to amend their Complaint to add a claim against the United States under 11 U.S.C. §549. Presumably, Plaintiffs' request for relief on their §549 claim will include a request for the recovery of monetary damages. See 11 U.S.C. §550.

Since the filing of the Motion to Amend Complaint, the United States Supreme Court has rendered its decision in United States v. Nordic Village, Inc. [92-1 USTC ¶50,109 ], 112 Sup. Ct. 1011 (1992). In Nordic Village , a majority of the Supreme Court held that 11 U.S.C. §106(c) does not waive the United States ' sovereign immunity to suits for money damages under §§549 and 550.

Absent some other waiver of sovereign immunity by the United States , the Court does not see how Plaintiffs can be granted relief under a §549 claim. Where such an amendment would be futile under the law, denial of the Motion to Amend Complaint is proper. Foman at 182; Marx v. Centran Corp., 747 F.2d 1536, 1150 (6th Cir. 1984).

V. Conclusion

Based upon the foregoing, it is hereby

ORDERED, that the United States ' Motion to Dismiss is GRANTED. Plaintiffs' claim against the United States pursuant to 26 U.S.C. §6322(a) is dismissed; and it is further

ORDERED, that Plaintiffs' Motion to Amend Complaint shall be held in abeyance. Plaintiffs shall have twenty (20) days from the date of entry of this opinion and order to file any supplement to their Motion to Amend Complaint to argue why such motion should not be denied in light of the Supreme Court's holding in Nordic Village . The United States shall within twenty (20) days after service of any such supplement file its pleading in response thereto.

¹ Section 7426 of Title 26, United States Code, provides:

If a levy has been made on property or property has been sold pursuant to a levy, 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.

² It appears that this proceeding was commenced outside of the nine-month statute of limitations for actions against the United States under §7426 . See 26 U.S.C. §6532(c) .

³ Section 6332(a) was amended by P.L. 100-647 effective after June 30, 1989. The version of the statute set forth herein is the one in effect at the time of the IRS levy and seizure and the version upon which Plaintiffs rely. Plaintiffs' Memorandum Contra at 4.

⁴ Subsection (b) sets forth a special rule for life insurance and endowment contracts, which is not applicable to this case.

⁵ See United Sand and Gravel Contractors, Inc. v. United States [80-2 USTC ¶9626 ], 624 F.2d 733, 739 (5th Cir. 1980) ("When someone other than the taxpayer claims an interest in property or rights to property which the United States has levied upon, his exclusive remedy against the United States is a wrongful levy action under I.R.C. Section 7426 ."); Texas Commerce Bank v. United States [90-1 USTC ¶50,155 ], 896 F.2d 152, 156 (5th Cir. 1990) ("Section 7426(a)(1) . . . affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person's tax liability."); Rosenblum v. United States [77-1 USTC ¶9177 ], 549 F.2d 1140, 1144-45 (8th Cir.), cert. denied, 434 U.S. 818 (1977) (Section 7426 is the only jurisdictional basis for claims that IRS wrongfully seized property). See, also, Trust Company of Columbus [84-2 USTC ¶9614 ], 735 F.2d 447 (11th Cir. 1984), Morris v. United States [86-2 USTC ¶9728 ], 652 F.Supp. 120 (M.D. Fla. 1986), aff'd, [87-1 USTC ¶9241 ] 813 F.2d 343 (11th Cir. 1987); Haywood v. United States [86-2 USTC ¶9812 ], 642 F.Supp. 188 (D. Kan. 1986); Matter of U.S. Industrial Fabricators Inc., 758 F.Supp. 1065 (W.D.Pa. 1991).

⁶ In United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 721-22 (1985), the United States Supreme Court stated:

The courts have uniformly held that a bank served with an IRS notice of levy 'has only two defenses for a failure to comply with the demand.' . . . One defense is that the bank, in the words of §6332(a) , is neither 'in possession' nor 'obligated with respect' to property or rights to property belonging to the delinquent taxpayer. The other defense, again with reference to §6332(a) , is that the taxpayer's property is 'subject to a prior judicial attachment or execution.' (citations omitted).