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