Annotations- Evidence of
Debts
6332 Annotations: Evidence
of Debt- Levy
Penalty
for Failure to Surrender Property: Evidence of Debt
[52-2 USTC ¶9507]In the Matter of
Mutual Carrier Co., Inc., Bankrupt
In
the United States District Court for the District of Connecticut, In
Bankruptcy No. 25140, August 27, 1952
Distraint for unpaid taxes: Accounts receivable of a bankrupt.--In
an attempt to collect delinquent taxes owed by a bankrupt, Collector,
prior to bankruptcy, seized certain books and records of the bankrupt,
and notified various debtors of the seizure and directed that payment of
the accounts be made to the Collector. The trustee in bankruptcy
contended that accounts receivable did not constitute property
susceptible to distraint by the Collector and that the distraint was a
nullity as against the trustee. The Court held that the term
"evidences of debts" in section 3690 of the Code included
accounts receivable and hence the latter were subject to distraint by
the Collector, and further that the Collector's seizure of the books and
notification to the debtors prior to bankruptcy constituted a distraint
valid against the trustee in bankruptcy.
Gordon &
Perell, Esqs.,
255 Bedford Street
,
Stamford
,
Connecticut
, for petitioners. Nevas, Nevas & Robinson, Esqs.,
44 North Main Street
,
South Norwalk
,
Connecticut
, for bankrupt, Mutual Carrier Company, Inc. Joseph K. Sherman,
303 Main Street
,
Stamford
,
Connecticut
was trustee in bankruptcy.
Memorandum
and Order on Trustee's Petition for Turnover Order and Injunction
Against Collector of Internal Revenue
TREVETHAN,
Referee in Bankruptcy:
At a duly
noticed hearing, at which the trustee in bankruptcy and Collector of
Internal Revenue appeared and were heard, it was stipulated that the
only matter to be determined by the court on the trustee's petition was
the question of the legality of the Collector's distraint of accounts
receivable of the bankrupt. Prior to bankruptcy, the Collector seized
certain books and records of the bankrupt which contained various
accounts receivable of the bankrupt and notified the various debtors of
the seizure and directed that payment thereof be made to the Collector.
The Collector purported to act under the distraint provisions of the
Internal Revenue Code (sec. 3690 et seq) in endeavoring to collect
delinquent taxes owed by the bankrupt. The trustee in bankruptcy
contends that accounts receivable do not constitute property that is
susceptible to distraint by the Collector under the Internal Revenue
Code and that the Collector's purported distraint thereof was a nullity
as against the trustee.
["Goods,
Chattels, or Effects"]
Section 3690
of the Internal Revenue Code provides that the Collector can collect
delinquent taxes by distraint and sale of the "goods, chattels, or
effects, including stocks, securities, bank accounts and evidence of
debt" of the delinquent taxpayer. Section 3691 of the Code sets
forth the property that is exempt from distraint but does not list
accounts receivable as exempt. Section 3711 of the Code provides that on
distraint by the Collector of any property, or rights of property, all
persons and officers of companies or corporations are required "to
exhibit all books containing evidence or statements relating to the
subject of distraint, or the property or rights of property liable to
distraint for the tax due."
In the case of
United States v. Aetna Insurance Company, 46 Fed. Supp. 30 [42-1
USTC ¶9266], concerned with the efforts of the Collector to seize the
bankrupt's rights under a policy of insurance, the court did observe
that, in its opinion, Section 3690 of the Code only provided for the
distraint of tangible personal property plus the particular types of
intangible personal property specifically mentioned in the inclusive
phrase of that section. However, in the case of United States v. Long
Island Truck Co., (CCA-2nd) 115 Fed. (2d) 983, involving distraint
of an indebtedness owed to the taxpayer, the court concluded that it was
reasonably clear that, under the provisions of Section 3690 of the Code,
the accrued indebtedness of a third party to a taxpayer is subject to
distraint.
Upon authority
alone it would appear that this court is controlled by the decision in
the Long Island Truck Co. case. But there is further support for
the Collector's position. Although "goods and chattels"
admittedly refer only to tangible personal property, the word
"effects" is of more extensive import and connotes all kinds
of personal property (BALLENTINE, Law Dictionary, 1930; Words and
Phrases, 5th Ser., Vol. 2). That the word "effects" has such
broad meaning under Section 3690 was so concluded by the court in Cannon
v. Nichols, (CCA-10th) 80 Fed. (2d) 934 [35-2 USTC ¶9672], where it
rejected the contention that Congress intended to exempt all intangible
personal property except that itemized in the inclusive phrase and held
that Congress intended to subject to distraint all of the taxpayer's
personal property, except that specifically exempt under Section 3691,
and that the inclusive phrase of Section 3690 was merely to point out
certain of the types of intangibles included within the meaning of
"goods, chattels, or effects."
["Evidence
of Debt"]
Further, it is
not unreasonable to conclude that the term "evidences of
debt", as used in the inclusive phrase of Section 3690, includes
accounts receivable. Accounts receivable are evidenced by appropriate
entries made in the usual course of business in the books of account of
a business concern, and such entries in books of account are admissible
evidence in legal proceedings to establish the existence of the facts
stated therein. Thus, books of account containing itemization of a
concern's accounts receivable are legal evidence to prove existence of
the debts receited therein and, in view thereof, it is not clear how
such books of account and that which they evidence can be held to be
without the meaning of the phrase "evidences of debt." This
conclusion appears to be buttressed by the provisions of Section 3711 of
the Code requiring, in aid of distraint, production of "all books
containing evidence or statements relating to the subject of
distraint." Clearly, all other things being equal, no tortured
construction is compelled to arrive at the conclusion that this section
was geared to effecting production of books of account containing
evidence of accrued accounts receivable.
In view of all
of the foregoing, it is concluded that accrued accounts receivable are
subject to distraint by the Collector under the provisions of the
Internal Revenue Code. Further, although no real issue is made of this
point by the trustee, it is also determined that the Collector's
possession of the bankrupt's books reflecting its accounts receivable
and his notification of seizure thereof to the debtors, to the extent
that both of these acts were accomplished prior to bankruptcy,
constitute a distraint by the Collector valid against the trustee in
bankruptcy. Accordingly, it is
ORDERED that
the petition of the trustee in bankruptcy is denied as to accrued
accounts receivable of the bankrupt contained in books of account seized
prior to bankruptcy by the Collector and to the extent that the debtors
shown therein were notified of the Collector's distraint prior to
bankruptcy.
[75-2 USTC ¶9666]
United States of America
v. George J. Moss.
U.
S. District Court,
Dist.
Md.
, Civil No. 73-1157-Y, 8/5/75
[Code Sec. 6332]
Surrender of property subject to levy: Evidence of debt.--The
defendant was found to be indebted to the corporate taxpayer and thus
this indebtedness could be levied upon to satisfy tax liabilities owed
by the corporation. The court found that, under
Maryland
law, the fact that the corporation might be obligated to the taxpayer
(evidenced by debentures) did not set off the taxpayer's indebtedness to
the corporation. There had been no prior judicial attachment of the
corporation's debt, and the right to set off mutual debts is not
self-executing. The court also rejected the taxpayer's argument that he
and the corporation intended to work a cancellation of the two debts
because the taxpayer, as both debtor and the chief corporate officer,
was in a unique position to cancel the indebtedness but had never done
so. Finally, the court rejected the taxpayer's argument that he had
subjectively cancelled the debts without creating any objective
memorial. The court determined that, having set up an escrow arrangement
involving a half million dollars, he would not relieve himself of such a
significant obligation without creating some objective evidence of his
intent. Thus, the taxpayer had failed to prove that he had discharged
his indebtedness to the corporation prior to the government's demand for
the surrender of the right to property.
Memorandum Opinion and Order
YOUNG,
District Judge:
Where a
taxpayer fails to pay an established federal tax liability, 26
U. S.
C. §6332 permits the
United States
to obtain satisfaction of that liability by levying, to the extent of
the liability, upon "property or rights to property" of the
taxpayer which are in the hands of third parties. If demand for
satisfaction is made by the United States on such a third party and that
party fails or refuses to surrender the property or right to property
demanded, then 26 U. S. C. §6332(c) makes him liable 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 taxes for the collection
of which such levy has been made, together with costs and interest on
such sum at the rate of 6 percent per annum from the date of such
levy."
The United
States alleges that the defendant is such a third party and brings this
civil action against him seeking $277,374.70 plus interest, an amount
equal to taxes said to be due and owing from the North Washington Land
Co., Inc. (hereinafter referred to as the Taxpayer), to which the
defendant is allegedly indebted in the amount of $513,485.10. The
defendant maintains that he has no obligation to honor the demand for
payment made by the
United States
because there was no such indebtedness between himself and the Taxpayer.
This Court has jurisdiction over the action by virtue of 28
U. S.
C. §§ 1340 and 1345. Following a trial this memorandum constitutes the
findings of fact and conclusions of law in accordance with the
provisions of Fed. R. Civ. P. 52(a), whether or not specifically so
designated.
Findings
of Fact
The parties
have stipulated to all of the material facts in this case either in the
pretrial order or during the course of the trial itself. The Court finds
these facts to be as follows:
1. The North
Washington Land Co. (Taxpayer) was a
Maryland
corporation which lost its corporate charter in May of 1965.
2. The
defendant is, and at all relevant times has been a
Maryland
resident.
3. The
defendant was "chief officer" and sole stockholder of the
Taxpayer corporation from 1957 until its charter was forfeited.
4. Beginning
in 1957, the Taxpayer corporation made a series of loans to the
defendant which totalled $513,485.10, the loans being carried in the
Taxpayer's books and annual reports prepared by certified public
accountants.
5. On January
29, 1960, the defendant executed a document styled as a "collateral
note" in favor of a predecessor corporation of the Taxpayer which,
on its face, obligated the defendant to pay to the order of the
Taxpayer's predecessor $500,000.00 thirty days after demand. The
executed document declared that it was secured by debentures bearing a
face value totalling $500,000.00, issued by the Taxpayer's predecessor
corporation.
6. The
executed document, and the debentures referred to therein, were
delivered to an escrow agent, one Stanley Wilen, shortly after the
document was executed, and they have been in his possession since that
time.
7. At no time
since the document was executed has demand been made upon it, nor have
the debentures ever been physically marked to indicate that they have
been in any way cancelled, nor are there extant any other writings to
indicate agreement between the taxpayer and the defendant different from
or supplemental to whatever understanding is reflected in the
"collateral note" and accompanying debentures.
8. As the
result of assessments made on the Taxpayer by a delegate of the
Secretary of the Treasury on June 10 and July 8, 1966, there is
presently due and owing to the
United States
the sum of $277,374.70 for unpaid income taxes.
9. On June 26,
1967, a notice of levy, Form 668-A, was served upon the defendant by a
duly authorized representative of the District Director of Internal
Revenue. The notice informed the defendant that there was due and owing
to the United States from the Taxpayer the amount of $277,374.70, that
demand had been made upon the Taxpayer for payment, that payment had not
been made, and that all property and rights to property belonging to the
Taxpayer then in the defendant's possession were thereby levied upon in
satisfaction of that liability.
10. A Final
Demand for compliance with the levy was served upon the defendant on
July 19, 1967.
11. Defendant
has not honored the plaintiff's levy.
Conclusions
of Law
There are only
two defenses available to a defendant against whom suit is brought by
the
United States
acting in accordance with the provisions of section 6332. The defendant
is not liable to the
United States
if he fails to comply with the demand made upon him where he is not in
possession of property or a right to property belonging to the Taxpayer.
He may also refuse to comply if the property or right to property sought
is subject to prior judicial attachment or execution. See United
States v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366,
369 (2d Cir. 1952). It is the first defense which the defendant offers
here.
At the outset,
it should be noted that an indebtedness in a right to property of the
Taxpayer's which can be reached by the
United States
under the provisions of section 6332. See United States v. Long
Island Drug Co. [41-1 USTC ¶9140], 115 F. 2d 983, 985-86 (2d Cir.
1940). There is no question that, at least before the time the
"collateral note" was executed, the defendant was indebted to
the Taxpayer in the amount stipulated. The only question, then, is
whether the defendant was indebted to the Taxpayer at the time the
United States
made its demand on the defendant pursuant to section 6332.
There are, in
effect, three strings to the defendant's bow. He argues first that the
existence of an indebtedness running from the Taxpayer to him, as
evidenced by the debentures he held, "off-set" the
indebtedness which ran from him to the Taxpayer. His second argument
concerns the "collateral note" and the subsequent escrow
arrangement. The defendant maintains that, as a layman unlearned in the
arcane ways of law and accounting, he understood that the escrow
arrangement effectively cancelled his debt to the Taxpayer and the
Taxpayer's debt to him. The defendant's third argument is a slight
variation on the same theme. He argues that, given the press of other
affairs and the fact that the Taxpayer corporation became worthless, to
all intents and purposes, in the latter part of 1960, while wearing his
hat as a sole stockholder and chief officer of the Taxpayer corporation,
he tacitly agreed with himself, while then wearing his hat as debtor to
the corporation, to wash his debt to the corporation with the
corporation's debt to him, ending his indebtedness to the corporation
for the loans it had made to him.
The basic
proposition advanced by the defendant in support of his first argument
is that where a third party, sued by the taxpayer, could have prevailed
upon a counterclaim for a debt owed him by the taxpayer, thereby
cancelling any judgment which would otherwise be entered in favor of the
Taxpayer, the Court will, in effect, recognize that potential
counterclaim and disallow the Government's section 6332 claim. The
defendant cites three federal district court opinions in support of this
theory. See United States v. Akron Mechanical Contractors, Inc.
[70-1 USTC ¶9220], 308 F. Supp. 496 (D. Md. 1970); Monroe Banking
and Trust Co. v. Allen [68-2 USTC ¶9526], 286 F. Supp. 201 (N. D.
Miss. 1968); United States v. Raley Constr'n Co. [62-2 USTC ¶9706],
210 F. Supp. 54 (N. D. Miss. 1962).
In examining
this proposition, two points must be kept in mind. If there was a debt
owed by the third party to the Taxpayer in existence at the time when
section 6332 demand was made upon the third party, the only defense
available to the defendant third party is a contention that the debt is
subject to prior judicial attachment or execution. See United States
v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366, 369
(2d Cir. 1952). There is no such contention made here, and, therefore,
the defendant's only defense is that he was not indebted to the
Taxpayer. The second point is that in deciding whether or not there was
such a debt at the time demand was made, the Court must look to state
law. See Aquilino v. United States [60-2 USTC ¶9538], 363
U. S.
509, 512-13 (1960).
All three of
the cases cited by the defendant deal with the existence of a debt at
the time demand was made, with the existence or non-existence of such
debt turning on the law of the appropriate state in each case. All three
involve contracts relating to payment arrangements between general and
subcontractors. While the holdings in Monroe and Raley are
not completely clear, the most reasonable explanation of these cases
would appear to require a conclusion that, under Mississippi law, where
the contract obligation to make payment to a subcontractor is off-set by
obligations of the sub to the general, there is an automatic off-setting
of the mutual debt, cancelling all obligations without requiring any
judicial stamp of approval. See 286 F. Supp. at 211; 210 F. Supp.
at 56-57. Whatever the peculiarities of Mississippi law, however, that
body of law has no bearing on interpreting the law of the State of
Maryland, the law applicable in the instant case. The
Akron
case, on the other hand, does involve
Maryland
law.
Akron
was a subcontractor which delivered certain materials to the job site
for work under its subcontract. The general contractor was billed and
made payments under the contract monthly. Following a dispute with the
general, the subcontract was terminated. A few days later, the
United States
levied upon materials left at the job site and proceeds of the contract
due the sub, in order to realize amounts due from the sub as back taxes.
With regard to both the materials and the proceeds, this Court held
that, under
Maryland
law, the contract itself determined the parties' respective property
rights. See 308 F. Supp. at 498. Interpreting the contract, the
Court held that
Akron
's property rights in the materials passed to the general when the
contract was terminated and that, insofar as monies due under the
contract were concerned, the sub was not entitled to any payment until
work under the contract was completed. Even then, payment was contingent
on the sum due the sub exceeding the general's expenses in completing
the contract work. Since, in
Akron
, the general's expenses exceeded the amount due the sub, the
contract itself eliminated any obligation on the part of the general to
pay the sub. Properly understood,
Akron
sheds no light on the defendant's theory that potentially off-setting
liabilities, in and of themselves, work an automatic cancellation of
indebtedness in
Maryland
.
Maryland
law clearly runs contrary to the defendant's position. As this Court
noted in St. Paul Fire and Marine Insurance Co. v. Citizens Bank and
Trust Co. of Maryland, Civil No. 71-299-HM (Oct. 12, 1973), the
right to set off mutual debts in
Maryland
"is not self-executing." The Court of Appeals of Maryland
dealt with this problem in Barrier v. Marine Midland Trust Co.,
263 Md. 596, 284 A. 2d 418 (1971). Maryland's highest court there cited
with approval the holding set forth in Lane v. Volunteer Co-operative
Bank, 307 Mass. 508, 30 N. E. 2d 821 (1940) that "set-off is an
incident of judicial proceedings in which both parties become actors and
is accomplished only by judicial action." See 263
Md.
at 607, 284 A. 2d at 424 (emphasis added). Since it is not contended
that such a judicial set-off has occurred here, this Court will not
assume what the outcome of any such proceeding might have been. Under
Maryland
law, the mere existence of debts which, after appropriate legal
proceedings, might have cancelled each other out, does not, in and of
itself, change the character of those obligations prior to an
adjudication.
The
defendant's second and third arguments are so closely related that they
may be discussed together. The thrust of both is that the defendant, as
both debtor and corporation, intended, by mutual agreement, to work a
cancellation of the two debts. The second argument would have this Court
construe the escrow arrangement not in terms of the writing itself but
as the misdirected effort of a man unlearned in the mysteries of law and
accounting. That argument simply will not wash. Whatever he may have
been, the defendant was no ingenue in the ways of real estate financing.
Such a man does not need a string of initials after his name to realize
that a document characterized as a "collateral note" payable
30 days after demand and accompanied by debentures which that note
styles as "security" does not discharge the underlying
obligation for which the note is given. Had the defendant wanted to
discharge his obligation to the corporation by cancelling an appropriate
number of debentures, he, as sole stockholder and chief officer, was in
a unique position to do so. He did not. Instead he chose to keep his
options open by setting up the escrow arrangement, securing his debt
while retaining title to the debentures. However much the defendant may
now regret having lift that door open, the decision was his to make. In
light of his background, he will not now be heard to complain that he
did not know what he was doing.
In his third
argument, the defendant attempts to use the identity of his position as
controlling element for the corporation and his role as debtor to his
own advantage. He would have this Court find that the defendant, wearing
one hat, tacitly agreed with the Taxpayer-defendant, wearing his other
hat, that, in view of the corporation's economic demise, though the
"meaning less cancelled, though the "meaningless gesture"
of creating some objective memorial to that decision would not be made.
The Court is not moved by such an argument. The defendant is, and was, a
man of affairs. He can be charged with knowing that signing a note and
entering an escrow agreement involving hundreds of thousands of dollars
is not a mere technicality. He does not contest that he had incurred
debts to the Taxpayer corporation totalling more than half of a million
dollars. This Court is not prepared to find that a man of affairs,
deciding to relieve himself of so significant an obligation, would do so
without creating some objective evidence of his intent. The
"collateral note" clearly does not constitute such evidence,
nor is there any other manifestation of such an intent which this Court
is prepared to credit. Neither of the defendant's last two arguments,
then, will support a conclusion that under
Maryland
law, the defendant had discharged his indebtedness prior to the section
6332 demand of the
United States
.
The defendant
being found to be indebted to the Taxpayer in the amount of $513,485.10
at the time demand was made upon him by the United States, pursuant to
26 U. S. C. §6332, and no other defense being available to him, it is
this 28th day of April, 1975, by the United States District Court for
the District of Maryland, ORDERED:
That Judgment
be entered in favor of the Plaintiff, the United States of America, in
the amount of $277,374.70, such sum being the amount due and owing the
United States by the Taxpayer, together with costs and interest on such
sum at the rate of six percent per annum from the date of levy, in
accordance with the provisions of 26 U. S. C. §6332.
[80-1 USTC ¶9172]
United States of America
, Plaintiff-Appellee v. Morris Weintraub, Defendant-Appellant
(CA-6),
U. S. Court of Appeals, 6th Circuit, No. 77-3273, 613 F2d 612, 12/19/79,
Aff'g District Court, 77-2 USTC ¶9576
[Code Secs. 6332(c) and 6502]
Levies: Enforcement of: Personal liability: Indebtedness: Laches:
Statute of limitations.--The taxpayer was personally liable for
failing to honor a levy upon the property of a third party that was in
his possession on the date of levy (May 3, 1963). The taxpayer did not
prove that he had satisfied his indebtedness to the third party prior to
that date. Nor was this action time-barred merely because it was not
brought until 1976. There is no equitable or actual statute of
limitations on suits to enforce personal liability arising from a levy.
The six-year limitations period on suits to collect tax applies only to
actions against the person who is actually indebted to the government.
One judge
concurred and one dissented.
Griffin Bell,
Attorney General, Myron C. Baum, Gilbert Andrews, Donald Anderson,
Crombie J. D. Garrett, Michael Roach, Department of Justice, Washington,
D. C. 20530, Gerald F. Kaminski, Assistant United States Attorney,
Cincinnati, Ohio 45202, for plaintiff-appellee. William C. Oldfield,
Cobb, Combs & Oldfield, 211 East Fourth St., Covington, Ky. 41011,
for defendant-appellant.
Before
CELEBREZZE, KEITH and MERRITT, Circuit Judges.
CELEBREZZE,
Circuit Judge:
This appeal
concerns the rule nullum tempus occurrit reqi--the sovereign is
exempt from the consequences of laches and the operation of statutes of
limitations. The rule is of ancient origin and, while its original
rationale of royal prerogative no longer holds sway, the maxim remains
vital based upon the public policy of preserving public rights and
revenues from the neglect of public officers. This principle causes us
to affirm a civil tax judgment in favor of the
United States
in the face of an argument that the action was time-barred.
[Facts]
I. The facts
involved in this cause are somewhat complicated but can be fairly
distilled as follows: Defendant-appellant, Morris Weintraub, is a
Kentucky
attorney. In 1959 appellant and his brother, Erving Weintraub, obtained
interests in two parcels of real estate in
Arizona
, which they hoped to resell at a profit. 1 They had
difficulty making the scheduled payments for this land. Among other
means employed to shore up their financing, in 1960 appellant and his
brother borrowed $135,000 from Frank Andrews, a client of appellant, and
made a required payment. 2
Loans had
previously been received from two other individuals, Messrs. Chalfen and
Hecht, who secured their loans by having partial interests in both
parcels assigned to them. 3 Despite
several extensions of time appellant and his brother were still unable
to make the payments on the parcels or otherwise dispose of them, so in
1961 further loans were obtained from Chalfen and Hecht. 4 In exchange
Chalfen and Hecht obtained a complete assignment of all interests in
both parcels. 5 Other than a
payment in 1961 on the note to Andrews, 6 no other
payments were made by appellant or his brother. In May 1962 appellant
and his brother were sued in
Arizona
state court by Chalfen and Hecht. Pursuant to the settlement of that
lawsuit in November 1962, appellant and his brother executed a deed and
assignment of all their interests in the two real estate parcels to
Chalfen and Hecht. 7
On May 2,
1963, the Internal Revenue Service (IRS) assessed wagering taxes in the
amount of $688,734 against Frank Andrews. On May 3, 1963, the IRS served
appellant with a notice of levy on the property of Andrews (and others),
pursuant to Internal Revenue Code §6332, 8 which
requires third persons in possession of a taxpayer's property or
property rights subject to levy upon which a levy has been made to
surrender such to the IRS. Appellant replied in August 1963 to the final
demand for surrender of the amount he owed to Andrews by writing on the
final demand: "Nothing due or owed by me to Any of above at time of
service on 5/2/63 or now." (App. 695).
The next
action taken against appellant was in April 1964, when appellant was
indicted for willfully failing to honor the notice of levy and two
counts of making false statements to the IRS. Appellant was acquitted on
all three counts after trial in September 1965.
No further
action was taken by the IRS vis-a-vis appellant until the filing of the
complaint in the instant case in January 1976. This action was brought
pursuant to §6332(c) to enforce the personal liability of appellant for
failure to honor the notice of levy served upon him in May 1963. 9 Appellant
moved for summary judgment in the district court arguing, inter alia,
that the suit was barred by laches and the statute of limitations. This
motion was denied without opinion. At trial, the sole issue for the jury
to determine was whether appellant was, in fact, indebted to Andrews on
May 3, 1963, when he was served with the notice of levy. The jury found
that appellant was so indebted 10 and found
in favor of the government in the amount of $120,760. 11 See 77-2
USTC ¶9576 (S. D. Ohio 1977).
Appellant's
defense at trial was simply that he was not indebted to Andrews on May
3, 1963, and thus was not then in possession of any of Andrews' property
or property rights. This would have absolved appellant of liability for
refusal to honor the notice of levy. He admitted that he received the
$135,000 loan from Andrews in 1960. But he contended that he had
satisfied that debt in May 1962 by transferring to Andrews a 77%
interest in the two
Arizona
land parcels. As evidence of this appellant pointed to two documents
dated May 1962. The first was labelled "Assignment" and
purported to transfer the 77% interest from appellant and his brother to
Andrews. The second was labelled "Agreement and Assignment"
and purported to embody an agreement between appellant, his brother and
Andrews that Andrews would accept the 77% interest in the
Arizona
land in satisfaction of the $135,000 loan.
The government
successfully argued, however, that these documents were not what they
purported to be. The "Assignment," which had a place for both
appellant's and his brother's signatures, was signed only by appellant
in May 1962. (App. 548). The "Agreement and Assignment," which
had a place for appellant's, his brother's and Andrews' signature, was
signed only by appellant and Andrews in May 1962 12 (App.
549-50). Thus, the documents were ineffective to transfer any interest
in the realty to Andrews in May 1962 since the necessary signature of
appellant's brother was missing on each. 13 While
appellant's brother did eventually sign copies of both documents, (App.
488-90), it is conceded by appellant that this did not occur until May
or June 1963, after the notice of levy had been served on appellant, and
that the documents were back-dated to May 1962 by appellant's brother at
appellant's request. 14 Thus, the
documents were still ineffectual to transfer any interest to Andrews in
May 1962 or anytime before May 3, 1963. 15
Other evidence
submitted by the government attested to the ersatz nature of the
"Assignment" and "Agreement and Assignment." In a
letter to Chalfen in April 1963, eleven months after appellant allegedly
satisfied his debt to Andrews, appellant wrote: "As you know, I
borrowed $135,000 from Frank Andrews and if it takes the rest of my life
to repay him, I will just have to do it." (App. 687). And in May
1963, just after the notice of levy was served on appellant, he wrote
the following to his brother:
Here are 3
things:
1.
* * *
2.
NOTICE OF LEVY served on my Friday. However, you will recall that
Andrews notified us he had transferred the note to MIKE MAZZARO, a
relative of his who lives near
Pittsburgh
. That was some time ago . . . you can't recall, but it was done. This
in case an IRS agent happens to call on you. In other words Andrews has
no further interest in the note--his relative Mazzaro owns it. I inform
you because they may serve you as the note was signed by both of us, so
you will know. I was afraid of this right along as I kept telling you.
But I think it is O. K.
3.
NOTICE OF FEDERAL TAX LIEN, etc. which you will note the original is
being filed in
Maricopa
County
, but I talked to you on phone about this. RETURN THESE AT ONCE TO ME.
AT ONCE. TEAR UP THESE NOTES, PLEASE . . . as soon as you read them . .
. don't leave lay around house.
*
* *
Erv,
please, get me back those papers from Bellemack-if he has them. He
indicates you have. You think I have been handing you a line, but you
can see that what I have been telling you is so . . . return these
enclosed to me, and then get those papers and mail back to me
separately, or if will be there Friday, have ready for me and I will
take back with me . . .
THIS IS
SERIOUS. . . .
TEAR THIS UP
WHEN FINISHED
READING
.
(App.
692-93. Errors in Original.) 16
Appellant's instructions to have this communication munication destroyed
obviously were not followed and equally obvious is the letter's import.
Other documentary evidence submitted by the government also was
inconsistent with appellant's contention that he had satisfied his debt
to Andrews by May 3, 1963. 17
The government
further argued at trial that the alleged May 1962 assignment of the land
to Andrews was impossible because appellant had no interest in either
parcel at that time which he could have assigned. Both parcels had been
completely assigned to Chalfen and Hecht by 1961. While appellant argued
that these assignments were in the nature of a security interest or
mortgage to secure Chalfen's and Hecht's loans, the government pointed
to documentary evidence which indicated that the transfer to them was
absolute and in satisfaction of their loans. (App. 635; 637; 656). This
was confirmed by the settlement of the 1962 lawsuit which yielded a
complete transfer by appellant and his brother of all interests in the
two parcels to Chalfen and Hecht. 18 (App.
666-70). Indeed, it is implausible that appellant and his brother
actually transferred a 77% interest in the real estate to Andrews in May
1962 in light of their settlement agreement in November 1962 to transfer
a 100% interest in the same real estate to Chalfen and Hecht.
We find there
was substantial evidence to support the jury's verdict. The evidence
more than sufficed to allow the jury to conclude that appellant was
indebted to Andrews on May 3, 1963. Appellant's contention that the
verdict was "contrary to and not supported by the evidence" is
wholly without merit. 19
[Statute
of Limitations]
II. The
principal contention raised by appellant before this court is that this
action was time-barred by both laches and the statute of limitations. We
find no merit to either branch of this claim.
The rule that
the government is exempt from the consequences of its laches and from
the operation of statutes of limitations--Nullum temput occurrit
regi--had its genesis in English common law notions of prerogative
of the Crown. The principle is well established in this country, but
based upon the important public policy of preserving public rights and
revenues from the negligence of public officers. Guaranty Trust Co.
v.
United States
, 304
U. S.
126, 132-33 (1938). 20
Despite
overwhelming authority to the contrary, appellant argues that this is a
case in which the sovereign should be barred by laches. He notes the
almost eleven year delay between his acquittal on the criminal charges
in 1965 and the filing of this action in 1976--and the almost thirteen
year delay since service of the notice of levy in 1963. Appellant claims
that during this delay he destroyed most of his records concerning this
matter. Appellant's brother, who has since died, was in failing health
at the time of trial and remembered little of what happened. The IRS
special agent who worked on appellant's criminal case, appellant's
attorney in the criminal case, appellant's brother's wife and,
importantly, Andrews had all died by the time this action was commenced.
Appellant
argues that the Supreme Court's decision in Costello v. United
States, 365
U. S.
265 (1961), leaves open the door to making a laches argument ever so
slightly. In Costello the Court noted cases that had
"applied the principle that laches is not a defense against the
sovereign" and stated "[t]his Court has consistently adhered
to this principle."
Id.
at 281. But because the Court had never so held in the type of case at
issue there (denaturalization), it went on to say that even if laches
applied the petitioner had failed to prove the elements of the defense.
Id.
at 282. Appellant contends that the fact that the Court at least
considered laches in Costello suggests that in a proper case it
could be a defense against the sovereign.
We disagree
with this reading of Costello. The language quoted above admits
to no exceptions to the rule that laches cannot defeat the government.
This rule is of such long standing that we do not believe the Supreme
Court would carve out an exception to it without expressly saying so.
The fact that the Court did analyze, and reject, the laches argument in Costello
was more in the nature of an alternative holding which did not detract
from the primary holding that laches was inapplicable.
Moreover, even
if we were to agree that Costello left the door slightly open to
a laches defense here, as in Costello the crack is not wide
enough to allow appellant inside. "Laches requires proof of (1)
lack of diligence by the party against whom the defense is asserted, and
(2) prejudice to the party asserting the defense."
Id.
There is no question that it would have been preferable, from all
viewpoints, for the government to have filed this action sooner than it
did. But it cannot be said that there was a lack of diligence by the IRS
sufficient for a laches defense inasmuch as the IRS was attempting
between 1963 and 1976 to collect from Andrews the taxes he owed, upon
which appellant's liability was predicated. 21 Indeed, it
was completely reasonable for the IRS to proceed initially against
Andrews since collection from him could have obviated this proceeding.
And the prejudice appellant argues he has suffered is speculative, at
best, and certainly was no greater than the prejudice to the government
in trying its case. See id. at 282-83. This case was based almost
entirely upon documentary evidence and, to a lesser extent, appellant's
credibility, neither of which were greatly affected by the lapse of
time. Finally, laches is an equitable defense and, putting to one side
the fact that this is a legal action for damages, it can certainly be
raised only by one who comes into equity with clean hands. 22 The letter
noted above sent by appellant to his brother, containing instructions on
defrauding the IRS, was more than enough to soil appellant's hands.
Appellant next
argues that this case is barred by the statute of limitations. While the
general rule stated above is that the sovereign is exempt from the
operation of statutes of limitations, an exception to that general rule
exists when the sovereign (through the legislature) expressly imposes a
limitation period upon itself. Guaranty Trust, supra, 304
U. S.
at 133; United States v. Frank B. Killian Co., 269 F. 2d 491, 494
(6th Cir. 1959). 23 Thus, the
issue at hand is whether Congress has imposed a statutory limitation
period on suits to enforce the personal liability imposed by §6332 on
persons who refuse to honor a notice of levy. We find no such limitation
applicable to §6332.
The only
statute urged by appellant as applicable is Internal Revenue Code §6502.
24 This
section requires that the IRS commence action to collect a tax, either
by levy or proceeding in court, within six years after the assessment of
the tax. Section 6502 only concerns actions against taxpayers, however,
and not actions under §6332 against third parties in possession of a
taxpayer's property or property rights.
Appellant has
cited absolutely no authority in support of his contention that the six
year limitation of §6502 applies to §6332 and we have found none. 25 While we
have found no case expressly holding that §6502 is not applicable to §6332,
there is substantial authority which points to the conclusion that it is
not.
First, for a
statute of limitations to apply to the sovereign it must be expressly
indicated in the statute. Guaranty Trust, supra, 304
U. S.
at 133, Frank B. Killian Co., supra, 269 F. 2d at 494. There is
no express mention of §6332 in §6502 nor is the type of action brought
under §6332 even implicitly described in the language of §6502. By its
own terms, the limitation of §6502 applies only to actions to collect a
tax. The instant case, under §6332, is not to collect a tax (although
that is the intended indirect consequence of the suit), but rather is to
enforce the personal liability for failure to surrender property after
receiving a notice of levy. 26
Second, this
court and others have held that a person served with a notice of levy
under §6332 (or its predecessor) has only two possible defenses: (1) he
is not in possession of property or a property right of the taxpayer; 27 or (2) the
property is subject to prior judicial attachment or execution. 28 Commonwealth
Bank v.
United States
[40-2 USTC ¶9769], 115 F. 2d 327, 330 (6th Cir. 1940). See United
States v. Sterling Nat'l Bank & Trust Co. [74-1 USTC ¶9336],
494 F. 2d 919, 921 (2d Cir. 1974) (citing cases); United States v.
Trans-World Bank [74-2 USTC ¶9362], 382 F. Supp. 1100, 1105 (C. D.
Cal. 1974) (citing cases); United States v. Polan Indus., Inc.
[61-2 USTC ¶9598], 196 F. Supp. 333 (S. D. W. Va. 1961); United
States v. American Exchange Irving Trust Co. [2 USTC ¶577], 43 F.
2d 829 (S. D. N. Y. 1930). See also United States v. Diamond
[56-2 USTC ¶9686], 142 F. Supp. 441, 444 (S. D. N. Y. 1956). This
indicates that the statute of limitations is not a defense to a
§6332 suit. 29 While not
analyzing the predecessor of §6502, this was the precise holding of the
American Exchange case.
Third, a
review of the cases decided under §6502 and its predecessor reveals
that they uniformly concern actions against taxpayers and not third
parties like appellant. And it is significant that these cases
consistently hold that the only limitation of §6502 is that the levy be
made or proceeding in court begun aginst the taxpayer within six years
of the assessment. There is no time limit whatsoever on an action
against the taxpayer to enforce a timely levy or judgment obtained in a
timely filed court proceeding. 30 Thus, even
if §6502 could somehow be construed to apply to §6332, its sole
limitation period has been complied with by virtue of the timely levy
against Andrews. 31 There is no
limitation in §6502 for enforcement actions, like the instant case,
once the liability has been established, which occurred here by service
of the notice of levy on appellant. 32
Fourth, a
review of the cases decided under §6332 demonstrates that the
procedures contemplated by §6332 are consistent with there being no
limitation period on actions to enforce a notice of levy. When a third
party, like appellant, in possession of the property of a taxpayer is
served with a notice of levy on the taxpayer's property, the appropriate
procedure is that the third party immediately surrender the property to
the IRS. 33 See Flores
v. United States [77-1 USTC ¶9380], 551 F. 2d 1169, 1174 (9th Cir.
1977) (". . . the purpose of the statute [§6332] is a coercive one
which seeks to foster swift tender of property which has been levied
upon."); Determan v. Jenkins [53-1 USTC ¶9290], 111 F.
Supp. 604 (N. D. Ga. 1953); United States v. American Exchange Irving
Trust Co. [2 USTC ¶577], 43 F. 2d 829 (S. D. N. Y. 1930). See
generally, Treas. Reg. §301.6332-1(c). This is in accord with the
principle that service of the notice of levy reduces the property or
property right (such as the intangible debt in the instant case) to the
constructive possession of the
United States
. See In re Cherry Valley Homes, Inc. [58-2 USTC ¶9581], 255 F.
2d 706, 707 (3d Cir.), cert. den., 358
U. S.
864 (1958) (citing cases). See also Phelps v. United States
[75-1 USTC ¶9467], 421
U. S.
330, 334, 337 (1975). Since the notice of levy served on appellant
reduced the debt owed to Andrews to the constructive possession of the
United States, it would make no sense to impose a time limit upon
bringing an action to enforce the notice of levy, which appellant
wrongfully failed to honor, to reduce the property right to the actual
possession of the United States.
The
appropriate remedy for one in appellant's position, upon whom a notice
of levy has been served which he believes to be wrongful is to surrender
the property and bring an action against the government pursuant to
Internal Revenue Code §7426. 34 Such a
lawsuit is the appropriate vehicle for one other than a taxpayer who
wishes to contest the propriety of a levy on property in which he claims
an interest. Such relief is applicable to proceedings under §6332.
Treas. Reg. §304.6332-1(c). While this statutory remedy under §7426
has been available only since 1966, 35 before then
appellant had available an equivalent judicially-created remedy in which
he could have contested the propriety of the notice of levy. Bullock
v. Lathm [62-2 USTC ¶9640], 306 F. 2d 45 (2d Cir. 1962); Seattle
Ass'n of Credit Men v. United States [57-1 USTC ¶9402], 240 F. 2d
906 (9th Cir. 1957); Long v. Rasmussen, 281 F. 236, 238 (9th Cir.
1922). See Glenn v. American Surety Co. [47-1 USTC ¶9220], 160
F. 2d 977, 981 (6th Cir. 1947). The ultimate issue which would have been
decided in any lawsuit, viz., whether appellant owed Andrews
anything on May 3, 1963, is the same issue that was decided in this
cause.
The judgment
of the district court is affirmed.
1 One parcel
was in the name of appellant and his wife, but it was understood that
appellant's brother had a one-third interest in it.
2 The loan was
evidenced by a note signed by appellant and his brother bearing six
percent interest. The note recited that it was secured by the
Arizona
real estate, (App. 659), but it does not appear that Andrews ever
recorded any such "security interest," (App. 696-97). See note
3, infra.
3 One parcel
had been purchased under an Agreement of Trust and the other under an
installment contract, with the latter parcel eventually assigned to
another trust. Thus, the interests in the real estate were often
"assigned" rather than "conveyed." The interests
could be redeemed from the trusts by repayment of the loans.
4 The loans
took the form of Chalfen and Hecht making the payments appellant and his
brother were required but unable to make.
5 There is a
dispute as to whether this assignment was "absolute" or more
like a "security interest." See note 18, infra, and
accompanying text.
6 This payment
reduced the principal balance on the note to $120,760.
7 The judgment
entry provided that "Chalfen is the absolute owner in fee simple,
subject only to the equities of . . . Hecht [and others]," of both
parcels. Appellant and his brother had an option to repurchase the land
until March 10, 1963, which option was never exercised. (App. 678-83).
8
I.
R. C. §6332 provides:
(a)
Requirement.--Except as otherwise provided in subsection (b), 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, 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.
(b) Special
rule for life insurance and endowment contracts.--
(1) In
general.--A levy on an organization with respect to a life insurance
or endowment contract issued by such organization shall, without
necessity for the surrender of the contract document, constitute a
demand by the Secretary or his delegate for payment of the amount
described in paragraph (2) and the exercise of the right of the person
against whom the tax is assessed to the advance of such amount. Such
organization shall pay over such amount 90 days after service of notice
of levy. Such notice shall include a certification by the Secretary or
his delegate that a copy of such notice has been mailed to the person
against whom the tax is assessed at his last known address.
(2)
Satisfactory of levy.--Such levy shall be deemed to be satisfied if
such organization pays over to the Secretary or his delegate the amount
which the person against whom the tax is assessed could have had
advanced to him by such organization on the date prescribed in paragraph
(1) for the satisfaction of such levy, increased by the amount of any
advance (including contractual interest thereon) made to such person on
or after the date such organization had actual notice or knowledge
(within the meaning of section 6323(i)(1)) of the existence of the lien
with respect to which such levy is made, other than an advance
(including contractual interest thereon) made automatically to maintain
such contract in force under an agreement entered into before such
organization had such notice or knowledge.
(3)
Enforcement proceedings.--The satisfaction of a levy under paragraph
(2) shall be without prejudice to any civil action for the enforcement
of any lien imposed by this title with respect to such contract.
(c)
Enforcement of levy.--
(1) Extent
of personal liability.--Any person who fails or refuses to surrender
any property or rights to property, subject to levy, upon demand by the
Secretary, 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 taxes for the collection of
which such levy has been made, together with costs and interest on such
sum at an annual rate established under section 6621 from the date of
such levy (or, in the case of a levy described in section 6331(d)(3),
from the date such person would otherwise have been obligated to pay
over such amounts to the taxpayer). Any amount (other than costs)
recovered under this paragraph shall be credited against the tax
liability for the collection of which such levy was made.
(2) Penalty
for violation.--In addition to the personal liability imposed by
paragraph (1), if any person required to surrender property or rights to
property fails or refuses to surrender such property or rights to
property without reasonable cause, such person shall be liable for a
penalty equal to 50 percent of the amount recoverable under paragraph
(1). No part of such penalty shall be credited against the tax liability
for the collection of which such levy was made.
(d) Effect
of honoring levy.--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 who, upon demand by the Secretary or his delegate,
surrenders such property or rights to property (or discharges such
obligation) to the Secretary or his delegate (or who pays a liability
under subsection (c)(1)) shall be discharged from any obligation or
liability to the delinquent taxpayer with respect to such property or
rights to property arising from such surrender or payment. In the case
of a levy which is satisfied pursuant to subsection (b), such
organization shall also be discharged from any obligation or liability
to any beneficiary arising from such surrender or payment.
(e) Person
defined.--The term "person," as used in subsection (a),
includes an officer or employee of a corporation or a member or employee
of a partnership, which as such officer, employee, or member is under a
duty to surrender the property or rights to property, or to discharge
the obligation.
Subsections
(b), (c)(2) and (d) were added to §6332 by the Federal Tax Lien Act of
1966, P. L. 89-719, 80 Stat. 1125. Subsection (c)(1) was slightly
modified subsequently in a way not material to the instant case. P. L.
93-625, 88 Stat. 2115; P. L. 94-455, 90 Stat. 1710.
9 "The
proceeding authorized is not an action in rem, nor is it a suit for the
collection of a tax. It is a suit to enforce personal liability for
failure to surrender property belonging to a delinquent taxpayer." Commonwealth
Bank v.
United States
, 115 F. 2d 327, 330-31 (6th Cir. 1940).
See generally United
States v. Euclid Nat'l Bank, 510 F. 2d 461 (6th Cir. 1975).
10 There is no
merit to appellant's argument that he was denied due process because the
jury deliberated only 150 minutes. He has cited no authority in favor of
such a proposition, nor do we know of any.
11 This was
the principal balance on the note as of May 3, 1963. See note 6, supra.
It is unexplained why the judgment did not include accrued but unpaid
interest on the note or statutory interest from the date of levy. See §6332(c)(1).
12 The
government has suggested that Andrews never signed this document, or at
least not in May 1962. The government concedes that appellant probably
signed this or a related document in May 1962. See note 15, infra.
13 Any fair
reading of the documents indicates appellant's brother's signature was
necessary. In the alternative, the jury would have been entitled to
conclude that Andrews never signed the "Agreement and
Assignment" or even that appellant did not sign it in May 1962. See
note 12, supra.
14 There is no
merit to appellant's contention that the district court erred in
excluding these back-dated versions of the documents. The district court
acted within its discretion in excluding these doctored, potentially
confusing exhibits.
15 Moreover,
there was no provision on either document for appellant's wife to sign
even though she was partial record owner of one parcel. See note 1, supra.
It does appear that appellant and his wife both signed
"Applications to Assign" one parcel in May 1962 but there was
no indication that these documents were ever delivered, filed or
otherwise utilized. (App. 698-99).
16 There was
some suggestion in appellant's testimony that he concocted the story
about Andrews' transferring the note to Mazzaro in order to delude
appellant's brother's wife and that the instructions to destroy the note
were put in at his brother's request. (App. 258-64). The jury was
entitled to disbelieve this implausible explanation.
17 For
example, in June 1962 Andrews wrote to the trustee of the trusts
containing the real estate parcels: "I hereby absolutely and
irrevocably waive and release any and all right, title, interest, lien,
claim or demand that I may now have or that may arise hereafter against
those [parcels.]" (App. 696-97).
18 Appellant
and his brother did retain an option to repurchase the land, which
option eventually expired. See note 7, supra.
19 The
resolution of this case turned in substantial part on appellant's
credibility, which was solely within the province of the jury. The
government's brief points to two examples of deceit by appellant which
could have graphically demonstrated to the jury that appellant was not
very credible. (
U. S.
Br.
at 30-31).
20 This is to
be distinguished from "a case relating to the application of the
law merchant as to the transfer of negotiable paper [and] the incurring
by the
United States
of certain responsibilities by becoming a party to such paper." United
States v. Summerlin [40-2 USTC ¶9633], 310
U. S.
414, 416 (1940). See also Clearfield Trust Co. v. United States,
318
U. S.
363, 369 (1943).
21 The IRS
also sought, unsuccessfully, to collect Andrews' tax liabilities from
Mazzaro. See note 16, supra, and accompanying text.
22 Laches is
purely an equitable doctrine. See generally 27 Am. Jur. 2d Equity
§153. A venerable equitable maxim is that "He who comes into
equity must come with clean hands." See 30 C. J. S. Equity
§93. The clean hands maxim is typically employed by a defendant against
a plaintiff who seeks equitable relief, but it applies equally to a
defendant who seeks equitable relief from the chancellor. See id.
§96. While it is not normally employed against a defendant merely
brought to court by the suit of another, insofar as appellant seeks to
invoke the powers of the chancellor to bar the government's claim due to
laches, we believe the clean hands maxim should apply to him. See id.
23 It is true
today, as when Mr. Justice Gray wrote for the Court in
United States
v.
Nashville
, etc. R. Co., 1886, 118 U. S. 120, 6 S. Ct. 1006, 30 L. Ed. 81,
"that the United States, asserting rights vested in them as a
sovereign government, are not bound by any statute of limitations,
unless congress has clearly manifested its intention that they should be
so bound." 118 U. S. at page 125, 6 S. Ct. at page 1008; see: Board
of Com'rs of Jackson County v. United States, 1939, 308 U. S. 343,
351, 60 S. Ct. 285, 84 L. Ed. 313; Guaranty Trust Co. of New York v.
United States, 1938, 304 U. S. 126, 132-133, 58 S. Ct. 785, 82 L.
Ed. 1224.
United States
v. Frank B. Killian Co.,
269 F. 2d at 494.
24
I.
R. C. §6502 provides:
(a) Length
of period.--Where the assessment of any tax imposed by this title
has been made within the period of limitation properly applicable
thereto, such tax may be collected by levy or by a proceeding in court,
but only if the levy is made or the proceeding begun--
(1) within 6
years after the assessment of the tax, or
(2) prior to
the expiration of any period for collection agreed upon in writing by
the Secretary or his delegate and the taxpayer before the expiration of
such 6-year period (or, if there is a release of levy under section 6343
after such 6-year period, then before such release).
The
period so agreed upon may be extended by subsequent agreement in writing
made before the expiration of the period previously agreed upon. The
period provided by this subsection during which a tax may be collected
by levy shall not be extended or curtailed by reason of a judgment
against the taxpayer.
(b) Date
when levy is considered made.--The date on which a levy on property
or rights to property is made shall be the date on which the notice of
seizure provided in section 6335(a) is given.
Subsection
(a) was modified slightly, in a manner not here relevant, by the Federal
Tax Lien Act of 1966, P. L. 89-719, 80 Stat. 1146.
25 The only
case cited by appellant, United States v. Home Beneficial Life Ins.
Co., 73-1 USTC ¶9345 (E. D. Tenn. 1973), was a case in which the
government sought to enforce a garden variety lien and there was no
mention in the opinion of §6332 or its provisions.
26 See note 9,
supra, and note 32, infra.
27 This
defense was resolved adversely to appellant by the jury.
28 This
defense was not raised by appellant. Section 6332(a) also contemplates a
similar defense that the property is not "subject to levy,"
which presumably refers to exempt property.
29 It is also
no defense that there was no valid levy against the taxpayer. That is a
matter for the taxpayer to raise. Commonwealth Bank v. United States
[74-2 USTC ¶9362], 115 F. 2d 327, 329 (6th Cir. 1940).
Compare
I.
R. C. §7426(c).
30 Moyer v.
Mathis [72-1 USTC ¶9342], 458 F. 2d 431, 434 (5th Cir. 1972)
(foreclosure suit twenty years after timely lien not time-barred); United
States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142, 1147 (9th Cir.
1970) (foreclosure suit six years after judgment in timely suit not
timebarred; tax liens are enforceable at any time); Plisco v. United
States [62-2 USTC ¶9572], 306 F. 2d 784, 786 n. 1 (D. C. Cir.
1962), cert. den. 371 U. S. 948 (1963) (§6502 requires only levy
or suit within six years of assessment and does not limit means for
enforcing assessment); Hector v. United States [58-1 USTC ¶9372],
255 F. 2d 84 (5th Cir. 1958) (suit filed within six years of assessment
tolls limitation period indefinitely); United States v. Ettelson
[47-1 USTC ¶9137], 159 F. 2d 193, 196 (7th Cir. 1947) (claim filed in
probate court within six years of assessment sufficient to tool
limitation period and judgment could be enforced anytime
thereafter; there is no federal statutory provision as to period of
limitation on enforcing judgment); Investment & Securities Co. v.
United States [44-1 USTC ¶9210], 140 F. 2d 894, 896 (9th Cir. 1944)
(no federal statutory limitation on enforcing judgment in timely suit;
tax can be collected at any time); United States v. Mandel [75-1
USTC ¶9141], 337 F. Supp. 1274, 1276-77 (S. D. Fla. 1974) (follows Moyer);
United States v. American Cas. Co. [65-1 USTC ¶9167], 238 F. Supp.
36, 38-39 (W. D. Ky. 1964) (follows Ettelson);
United States
v.
Caldwell
[47-2 USTC ¶9363], 74 F. Supp. 114 (M. D. Tenn. 1947) (no time
limit on enforcing lien acquired in timely suit);
United States
v. First Nat'l Bank [44-1 USTC ¶9165], 54 F. Supp. 351 (N. D.
Ohio 1943) (same as Ettelson and American Cas.
Co.
).
31 Even if the
levy against Andrews were not timely, appellant could not raise that
issue. See note 29, supra.
32 The instant
case is to be distinguished from one against a third party pursuant to
I. R. C. §§ 6901, et seq., wherein the liability of the third
party is based upon being a transferee of the taxpayer. Transferee
liability applies to a third party who stands in the shoes of a taxpayer
and is imposed in a direct action to collect the tax due. In such a
case, the six year limit of §6502 applies to the transferee-third
party. United States v. Updike [24 USTC ¶533], 281
U. S.
489 (1930). But the instant case is not an action to collect a tax and
does not seek to impose transferee liability on appellant, so Updike
is inapposite. Hall v. United States [68-2 USTC ¶9665], 403 F.
2d 344 (5th Cir. 1968), cert. den. 394
U. S.
958 (1969); United States v. Oscar Frommel & Bro. [1931 CCH
¶9344], 50 F. 2d 73 (2d Cir.), cert. den. 284
U. S.
647 (1931).
33 Surrender
of the property to the IRS acts as a discharge of the liability to the
taxpayer. §6332(d). The same rule applied before the enactment of
subsection (d) in 1966. (See note 8, supra) United States v. Bowery
Savings Bank [61-2 USTC ¶9728], 297 F. 2d 380 (2d Cir. 1961); Hoye
v. United States, 277 F. 2d 116, 120 (9th Cir. 1960); United
States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, 121-22 (4th Cir.
1955).
34
I.
R. C. §7426 provides:
(a) Actions
permitted.--
(1)
Wrongful levy.--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 or his delegate.
(2) Surplus
proceeds.--If 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
junior to that of the United States and to be legally entitled to the
surplus proceeds of such sale may bring a civil action against the
United States in a district court of the United States.
(3)
Substituted sale proceeds.--If property has been sold pursuant to an
agreement described in section 6325(b)(3) (relating to substitution of
proceeds of a sale), any person who claims to be legally entitled to all
or any part of the amount held as a fund pursuant to such agreement may
bring a civil action against the United States in a district court of
the United States.
(b)
Adjudication.--The district court shall have jurisdiction to grant
only such of the following forms of relief as may be appropriate in the
circumstances:
(1)
Injunction.--If a levy or sale would irreparably injure rights in
property which the court determines to be superior to rights of the
United States
in such property, the court may grant an injunction to prohibit the
enforcement of such levy or to prohibit such sale.
(2)
Recovery of property.--If the court determines that such property
has been wrongfully levied upon, the court may--
(A) order the
return of specific property if the
United States
is in possession of such property;
(B) grant a
judgment for the amount of money levied upon; or
(C) grant a
judgment for an amount not exceeding the amount received by the
United States
from the sale of such property.
For
the purposes of subparagraph (C), if the property was declared purchased
by the United States at a sale pursuant to section 6335(e) (relating to
manner and conditions of sale), the United States shall be treated as
having received an amount equal to the minimum price determined pursuant
to such section or (if larger) the amount received by the United States
from the resale of such property.
(3) Surplus
proceeds.--If the court determines that the interest or lien of any
party to an action under this section was transferred to the proceeds of
a sale of such property, the court may grant a judgment in an amount
equal to all or any part of the amount of surplus proceeds of such sale.
(4)
Substituted sale proceeds.--If the court determines that a party has
an interest in or lien on the amount held as a fund pursuant to an
agreement described in section 6325(b)(3) (relating to substitution of
proceeds of sale), the court may grant a judgment in an amount equal to
all or any part of the amount of such fund.
(c)
Validity of assessment.--For purposes of an adjudication under this
section, the assessment of tax upon which the interest or lien of the
United States
is based shall be conclusively presumed to be valid.
(d)
Limitation on rights of action.--No action may be maintained against
any officer or employee of the
United States
(or former officer or employee) or his personal representative with
respect to any acts for which an action could be maintained under this
section.
(e)
Substitution of United States as party.--If an action, which could
be brought against the United States under this section, is improperly
brought against any officer or employee of the United States (or former
officer or employee) or his personal representative, the court shall
order, upon such terms as are just, that the pleadings be amended to
substitute the United States as a party for such officer or employee as
of the time such action was commenced upon proper service of process on
the United States.
(f)
Provision inapplicable.--The provisions of section 7422(a) (relating
to prohibition of suit prior to filing claim for refund) shall not apply
to actions under this section.
(g)
Interest.--Interest shall be allowed at an annual rate established
under section 6621--
(1) in the
case of a judgment pursuant to subsection (b)(2)(B), from the date the
Secretary receives the money wrongfully levied upon to the date of
payment of such judgment; and
(2) in the
case of a judgment pursuant to subsection (b)(2)(C), from the date of
the sale of the property wrongfully levied upon to the date of payment
of such judgment.
(h) Cross
reference.--
For period
of limitation, see section 6532(c).
An action
under §7426 would be predicated upon denial of IRS administrative
relief which is authorized under I. R. C. §6343. See Treas. Reg. §301.6332-1(c).
35 Section
7426 was added by the Federal Tax Lien Act of 1966. P. L. 89-719, 80
Stat. 1142. It was subsequently slightly modified in a way not here
relevant. P. L. 93-625, 88 Stat. 2115; P. L. 94-455, 90 Stat. 1834.
Section 6343, however, was a part of the 1954 Code.
Concurring
Opinion
KEITH, Circuit
Judge, concurring.
I concur in
part I and most of part II of Judge Celebrezze's well-done opinion.
It is with
reluctance that I vote to affirm. There is no reasonable excuse for the
government's long delay in proceeding to collect against the defendant.
Nonetheless, I must agree that established case law makes laches
unavailable here to halt the government's suit.
The statute of
limitations question is closer, however. I. R. C. §6502 provides a
six-year statute of limitations from the date of assessment to the levy
of "any tax." Judge Celebrezze states that the government
action in this case was not to collect a tax, "but rather is to
enforce the personal liability for failure to surrender property after
receiving a notice of levy." This is literally true. However, I
would construe §6502 as applying to third-party enforcement actions
under §6332. The plain language of §6502 states that "[any] tax
may be collected by levy or by a proceeding in court, but only if the
levy is made or the proceeding begun within six years after the
assessment of the tax. . . ." It should make no difference whether
collection of the tax is against the taxpayer himself or against a
third-party who has the taxpayer's property. In my view, the situation
under §6502 is analogous to that of a transferee taxpayer. In United
States v. Updike [2 USTC ¶533], 281
U. S.
489, 494 (1930), the Supreme Court held that the limitations period
applied to a transferee taxpayer in language which is fully applicable
here:
It
seems plain enough, without stopping to cite authority, that the present
suit, though not against the corporation but against its transferees to
subject assets in their hands to the payment of the tax, is in every
real sense a proceeding in court to collect a tax. The tax imposed upon
the corporation is the basis of the liability, whether sought to be
enforced directly against the corporation or by suit against its
transferees. The aim in the one case, as in the other, is to enforce a
tax liability. . . . Indeed, when used to connote payment of a tax, it
puts no undue strain upon the word "taxpayer" to bring within
its meaning that persons whose property, being impressed with a trust to
that end, is subjected to the burden. Certainly it would be hard to
convince such a person that he had not paid a tax.
In my view,
the six year limitations period should be deemed to run from the date of
assessment of the tax against a third party; the IRS should have no more
than six years to either seize the property or begin legal proceedings.
It is true that this suggested construction results in some anomaly in
that if the IRS obtains a judgment against the principal taxpayer, then
no statute of limitations bar exists on enforcement of the judgment. The
IRS can go after the taxpayer's property, almost wherever it is. This,
however, is an anomaly which currently exists regarding transferee
liability. See Hall v. United States [68-2 USTC ¶9665], 403 F.
2d 344 (5th Cir. 1968), cert. denied, 394
U. S.
958 (1969),
United States
v. Oscar, Frommel & Bro. [1931 CCH ¶9344], 50 F. 2d 73 (2d
Cir.), cert. denied, 284
U. S.
647 (1931).
On balance, I
think that construing the statute in this manner is a fair way to
harmonize the Internal Revenue Code and the multiplicitous fact
situations which arise: (1) property is in the hands of the
taxpayer--the IRS, by the express terms of §6502 has six years from
assessment to seize the taxpayer's property or file suit, (2) property
is in the hands of a transferee taxpayer--Updike mandates
compliance with §6502; (3) property is in the hands of a third party
such as the defendant, I don't think that the result should be
different; §6502 should apply as well.
Unfortunately,
as Judge Celebrezze notes, this suggested construction does not help the
defendant. The reason is that unlike real or personal property, the
property in this case was an intangible debt owed by a third party
(Weintraub) to the taxpayer. The government served a notice of
"demand" upon the defendant third party pursuant to §6322
requesting that he turn over to the government any money owed to
taxpayer Frank J. Andrews. There is no doubt that this
"demand" was made within six years of the initial assessment
against Andrews. The case law seems clear that the serving of this
"demand" was the equivalent of a seizure of the debt, and, as
Judge Celebrezze says, "reduces the property or property right . .
. to the constructive possession of the
United States
."
Were we
writing on a clean slate, I would prefer requiring the government to
bring suit within the six year limitations period, at least when dealing
with an intangible debt. When dealing with real or personal property,
the government can physically seize the property. However, as Judge
Hastie said in In re Cherry Valley Homes, Inc. [58-2 USTC ¶9581],
255 F. 2d 706, 707 (3d Cir.), cert. denied, 358
U. S.
864 (1958), ". . . the possessory concept of 'seizure' is not
strictly applicable to a debt. . . ." In such situations, I would
hold the mere serving of a notice of "demand" insufficient to
operate as a seizure and would require the government to file suit.
The case law,
however, clearly establishes that the opposite is true. The serving of
the notice of levy operates to reduce property or property rights to the
constructive possession of the government. This was the effective
holding of Miller v.
United States,
78
U. S.
268, 297 (1870) where the Court stated
that:
In
all cases where the garnishee is a debtor, or where the garnishment is
of stocks, it is effected by serving notice upon the debtor, or
corporation. . . . The service of an attachment, though it is but a
notice, binds the debt or the stock in the hands of the garnishee, from
the time of the service, and henceforward it is potentially in
"gremio legis."
Although §6332
uses the term "demand" instead of the term "levy,"
it is clear that a "demand" upon a third party operates as a
levy or seizure so far as property rights are concerned. This has the
effect of reducing the property or property rights to the constructive
possession of the
United States
. Phelps v. United States [75-1 USTC ¶9467], 421
U. S.
330, 335-37 (1975). See Am. Acceptance Corp. v. Glendora Better
Builders [77-1 USTC ¶9348], 550 F. 2d 1220, 1222-23 (9th Cir.
1977); Matter of Rowand Co., 414 F. Supp. 1155, 1156-57 (E. D.
Ark. 1976) (Henley J.).
Given this
authority, all that the government had to do to comply with the six year
statute of limitations was to serve a timely levy (demand) upon the
defendant debtor. There is no question that this was done. As Judge
Celebrezze points out, ante at pp. 15-16, the government could
then wait as long as it wished to bring the instant proceeding over
twelve years later, to enforce the constructive seizure of the debt
accomplished by the initial demand. In effect, the government was
collecting what it had constructively seized twelve years earlier. Judge
Merritt whimsically argues that this construction of the statute is
irrational. He is perhaps correct, but that is the law.
Dissenting
Opinion
MERRITT,
Circuit Judge, dissenting.
The
government's tax collection suit is time barred and should be dismissed.
The relevant
words of the applicable statute of limitations are simple:
Where the
assessment of any tax . . . has been made . . . such tax may be
collected . . . by a proceeding in court, but only if . . . the
proceeding [is] begun . . . within 6 years after the assessment of the
tax . . . 26
U. S.
C. §6502.
The facts are
also simple. Weintraub owed a debt to Andrews. Andrews owed money to the
IRS. The IRS assessed Andrews. Andrews did not pay the assessment. IRS
sought to collect the tax from Weintraub by a process of garnishment or
attachment of third party indebtedness allowed under §6332 of the tax
code. Upon receiving the garnishment, Weintraub reported to IRS that he
owed no debt to Andrews. Nothing happened for thirteen years. Then,
thirteen years later, IRS decided to sue Weintraub to collect on its
attachment of Weintraub's debt to Andrews.
The conclusion
should be obvious. A tax garnishment attached Weintraub's debt to
Andrews thirteen years before suit was filed. No "proceeding"
to collect was instituted for thirteen years. Nothing in the statute of
limitations excludes collection of garnishments or purports to limit its
application only to a "proceeding" to collect the tax directly
from the taxpayer who owes the money. The language of the statute says
simply the tax may be collected by a proceeding in court "within
6 years after the assessment."
The
consequences of a contrary conclusion are irrational. Under the Court's
interpretation, the estate of a garnishee in the hands of his great,
great grandchildren must still pay the IRS 100 years after the six-year
federal statute of limitations has run on the original tax bill, 100
years after the garnishment was answered and 100 years after the
applicable state statute of limitations has run on the original
indebtedness owed by the garnishee to the original creditor. The estate
of the original creditor, the taxpayer who owed the money to the
government in the first place, is free and clear because the six year
statute ran against him long ago, but the poor garnishee--who (let us
assume) religiously paid his own taxes all his life--remains forever
liable for the taxes of another.
The Court
reaches this anomalous result by holding that the statute, §6502,
"only concerns actions against taxpayers" and "not
actions . . . against third parties in possession of a taxpayer's
property or property rights," although it acknowledges that there
is "no case expressly holding that §6502 is not applicable."
No attempt is made to discuss the irrational consequences of this
conclusion. The Court does not even attempt to parse or analyze the
language of the statute in order to justify the conclusion. It simply
quotes "the rule nullum tempus occurrit regi"
("time does not run against the King") and combines it with a
wonderful legal fiction, the doctrine of "constructive
possession" of personal property. The Court says
since the
notice of levy served on appellant reduced the debt owed to Andrews by
the constructive possession of the
United States
, it would make no sense to impose a . . . bring an action . . . to
reduce the property right to the actual possession of the
United States
.
Not even the
common law during its darkest days of legal formalism and rigid
adherence to fiction and abstraction took the doctrine of
"constructive possession" this far. In the famous case of Pierson
v. Post, 3 Gaines 175, 2 Am. Dec. 264 (N. Y. 1805), the plaintiff
with his hounds was in hot pursuit of a fox, when the defendant
intervened and in the sight of plaintiff shot and carried the fox away.
The court put the question:
[W]ho would
keep a pack of hounds; or what gentelmen, at the sound of the horn and
at peak of day would mount his steed, and for hours together, 'sub
jove frigido' pursue the winding of this wily quadruped, if, just as
night came on, and his strategems and strength were nearly exhausted, a
saucy intruder, who had not shared in the honors or labors of the chase,
were permitted to come in at the death and bear away in triumph the
object of pursuit?
After
so sympathetically describing the plaintiff's plight and "poring
over Justinian, Fleta, Bracton, Puffendorph, Locke, Barbeyrac or
Blackstone," for enlightenment, the Court holds that the doctrine
of "constructive possession" does not apply because "the
case . . . is one of mere pursuit, and presents no circumstances or acts
which can bring it within the definition of occupancy [or control
announced] by Puffendorph." The Court concludes that "however
uncourteous or unkind the conduct of Pierson towards Post, in this
instance, may have been," a contrary holding "would prove a
fertile source of quarrels and litigation."
In the instant
case, the Court's conclusion means that "quarrels and
litigation" over tax claims with an omnipresent government will
never end, even in the lifetime of our children's children unto the
seventh generation. If the fox in Pierson v. Post was not in the
constructive possession of the pursuer, I do not see so many years later
why we should struggle with Shakespearean imagination to locate the
money Mr. Weintraub owed to Mr. Andrews in the "constructive
possession" of the government. Mr. Weintraub's fox was invisible,
an incorporeal hereditament. If it ever existed, it was killed and
skinned long ago. The trial has grown cold. The participants in the hunt
who have not already died have grown old and forgotten the facts. After
all these years, only the government's appetite for the chase remains.
But in my judgment, they should sound the horn in other fields and send
the hounds to follow trails which are not so stale, for lex
dilationes semper exhorret ("the law abhors delay"), 2
Coke Inst. 240, is a better rule than nullum tempus occurrit regi.
[93-1 USTC ¶50,057]
United States of America
, Plaintiff v. Barbara K. Speir, Defendant
U.S.
District Court, So. Dist. Ga., Savannah
Div., CV 491-246, 12/2/92
[Code Secs.
6332 and 6621 ]
Surrender of property: Evidence of debt: Interest: Accrual period.--The
wife of a delinquent taxpayer did not satisfy a balance owed on a
promissory note given to her husband as consideration for apartment
buildings that she purchased from him by providing his mother with a
rent-free apartment and by payment of certain debts owed by her husband.
The state (
Georgia
) equitable setoff statute could not be used because she failed to show
that she had an obligation to make the payments. The apartment
arrangement and payment of creditors were voluntary payments not subject
to equitable setoff. Thus, the government was entitled to the full value
of the promissory note to pay the husband's federal income tax
liability. Also, interest on the liability accrued from the date of the
levy until date of payment.
ORDER
AND MEMORANDUM
NANGLE,
District Judge:
This action
was brought to collect the balance owed on a promissory note given to a
delinquent taxpayer, Spence, by the defendant, his wife, for the sale of
certain realty. The issue presented at trial was whether the defendant
satisfied her debt to Spence by providing his mother with a rent-free
apartment and by paying approximately $6,024.26 on Spence's behalf prior
to a tax levy. After consideration of the pleadings, the testimony of
witnesses, and the exhibits at trial, the Court makes the following
findings of fact and conclusions of law.
Findings
of Fact
1. Defendant
Barbara K. Speir is the wife of taxpayer Barry Spence. Spence owes
federal income tax liability in excess of $100,000.00 as a result of his
1976 and 1977 tax returns.
2. On December
14, 1983, defendant executed a deed to secure debt and a promissory note
for $13,974.99 plus 10% interest payable to Spence as consideration for
apartment buildings purchased by defendant from him. The note was
payable in consecutive monthly installments of $184.68, beginning
February 1, 1984, and ending no later than February 1, 1994. The
defendant has never made any payments to Spence on the note. As of
December 1, 1992, the principal and interest accrued on the note
totalled $19,576.08. The loan value over its ten-year life is
$22,161.60.
3. Between
January 1984 and November 1991, defendant furnished her mother-in-law
with a rent-free apartment in the property that she bought from her
husband. Defendant claims that she had a verbal agreement with Spence to
furnish his mother with rent-free housing for the rest of his mother's
life, and that they intended for this arrangement to satisfy defendant's
obligation under the promissory note. Spence's mother lived in that
apartment for 88 months; given a fair rental value of $150.00 per month,
defendant estimated that she furnished $13,200.00 in free housing.
4. Between
1984 and 1988, defendant claims to have made a total of $6,024.26 in
payments to Spence's creditors. Pamela O'Quinn, a certified public
accountant, testified that she arrived at this amount while working on
past due tax returns for defendant.
a. Defendant
hired O'Quinn in July 1990 to prepare her tax returns for the years 1983
through 1989.
b. Since
defendant kept poor records, O'Quinn instructed defendant to go through
her checkbook and bank statements to analyze her checks and deposits.
c. On the
return work sheets, defendant separated checks written on behalf of her
husband. O'Quinn asked about, but did not review, defendant's
determination that checks were written on behalf of Spence. Payments
made on behalf of Spence were not reflected on defendant's returns since
defendant was married filing separately.
d. The 1983
and 1984 returns were audited by the I.R.S., but the agent agreed that
O'Quinn's suggested method was a plausible way of return preparation in
this instance.
5. On April 4,
1986, defendant executed a subordination agreement, which allowed Spence
to subordinate the deed to secure debt to any new loans.
6. In August
1986, the
United States
made an assessment for the taxes owed by Spence. By virtue of that
assessment, federal tax liens arose and attached to all property and
rights to property belonging to Spence on that date or acquired after
that date.
7. On October
24, 1986, Spence under oath presented a financial statement to the
Department of Justice indicating that the entire principal amount of the
loan remained outstanding.
8. The
United States
filed a Notice of Federal Tax Lien in
Bryan
County
,
Georgia
, in July 1987.
9. On May 25,
1989, Deborah Harper--a Revenue Officer in the Savannah, Georgia, office
of the Internal Revenue Service--served defendant with a Notice of Levy
to collect a portion of Spence's unpaid income tax liabilities.
a. Defendant
told Harper that she refused to pay any of Spence's liabilities since
she had previously paid off three $5,000.00 notes that Spence owed to
Pembroke State Bank.
b. Harper
investigated defendant's claim, and discovered that the three $5,000.00
notes had been paid off prior to the December 14, 1983, transaction.
c. At the time
Harper served the Notice of Levy, defendant never mentioned any
arrangement with Spence to provide a rent-free apartment to his mother
as payment in full for the promissory note.
10. Final
demand was made on June 27, 1989, but defendant has refused to honor the
levy.
11. The deed
to secure debt was duly canceled in the records of
Chatham
County
on November 12, 1991. This action appears to have been taken solely in
response to the
United States
' collection activities.
Conclusions
of Law
The issue
currently before the Court is whether defendant is entitled to equitably
setoff the provision of a rent-free apartment to her mother-in-law and
payment of certain debts owed by her husband from the amount due under
the December 14, 1983, promissory note. This Court has jurisdiction over
the present matter pursuant to 26 U.S.C. §7402 , 28 U.S.C. §1340, and 28 U.S.C. §1345.
A tax lien
arises in the following manner:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, 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 1, whether
real or personal, belonging to such person.
26
U.S.C. §6321 . The Secretary of the Treasury may
collect unpaid taxes by levy on any property belonging to the delinquent
taxpayer or upon which there is a tax lien. 26 U.S.C. §6331(a) . Any person in
possession of property or rights to property upon which a levy has been
made must surrender that property to the Secretary. 26 U.S.C. §6332(a) . In a levy
proceeding, the I.R.S. acquires whatever rights the taxpayer possessed. United
States v. Central Bank of Denver [88-1 USTC ¶9256 ],
843 F.2d 1300 (10th Cir. 1988).
If the
taxpayer's property is held by another, the I.R.S. customarily serves a
notice of levy upon the custodian. United States v. National Bank of
Commerce [85-2 USTC ¶9482 ],
472 U.S. 713 (1985). This notice not only gives the I.R.S. the right to
all property levied upon, it creates a "custodial
relationship" between the third party and the I.R.S. so that the
United States has constructive possession of the property.
Id.
at 720. If the custodian refuses to surrender property subject to levy,
she becomes personally liable to the
United States
for the value of the property. 26 U.S.C. §6332(d)(1)
. Two defenses are available to the holder of the property,
however: (1) the custodian is not in possession of or obligated with
respect to the taxpayer's property, or (2) the property is subject to
prior judicial attachment or execution. National Bank, 472
U.S.
at 721-722; see also, 26 U.S.C. §6332(a)
.
To determine
the nature of the taxpayer's interest in property held by third parties,
the Court must look to state law. United States v. Metropolitan Life
Ins. [89-1 USTC ¶9362 ],
874 F.2d 1497 (11th Cir. 1989); see also National Bank [85-2 USTC ¶9482 ],
472
U.S.
at 724, n. 8. If a delinquent taxpayer has rights in the property,
federal law determines whether the custodian must surrender that
property to the I.R.S. Id.
Defendant
relies on the first defense available to a custodian of the taxpayer's
property. She claims that she satisfied her debt to Spence by providing
her mother-in-law with a rent-free apartment from January 1984 to
November 1991 and by paying debts that Spence owed to certain creditors.
As a result, defendant argues that the value of these transfers should
be setoff from the debt that she owed to Spence pursuant to O.C.G.A. §23 -2-76 (1982). 2 See Pretrial
Order, ¶13, June 15, 1992.
Georgia
's equitable setoff statute provides no relief where one is a mere
volunteer. See O.C.G.A. §23 -2-33 (1982)
("Equity will not interfere to relieve against accidents or
mistakes of mere volunteers . . ."). No right to setoff exists
where one makes a voluntary payment. Ryder Truck Rental, Inc. v.
Insurance Co. of N. Am., 236 S.E.2d 146 (Ga. App. 1977) (voluntary
payment made where party settled verdict with a $21,000.00 payment but
had no judgment rendered against it and had no liability under insurance
contract where amount less than $25,000.00). A voluntary payment is
"one made by a mere volunteer who pays money to another while under
no legal obligation to do so or compelled to preserve some right or
property of his own thereby." Cloud v. Bagwell, 64 S.E.2d
921, 925 (Ga. App. 1951); see also Cochran v. Carpenter, 166
S.E.2d 615 (Ga. App. 1969) (son's payment characterized as voluntary
where mother paid bills of decedent from her checking account, checks
were returned and mother executed note to secure checks, and son
borrowed money to pay off mother's note). The key inquiry in the case at
bar is whether defendant had an obligation to provide rent-free housing
for her mother or to satisfy certain debts of her husband.
Defendant has
the burden of showing non-ownership by Spence as a defense. See Flores
v. United States [77-1 USTC ¶9380 ],
551 F.2d 1169, 1174 (9th Cir. 1977) (this result appropriate since
"purpose of the statute is a coercive one which seeks to foster
swift tender of property which has been levied upon"); United
States v. Badger [91-1
USTC ¶50,198 ], 930 F.2d 754 (9th Cir. 1991) (under 26
U.S.C. §6331 , inappropriate to put burden on
government to show that the property belongs to the taxpayer before it
can levy upon the property); United States v. Capital Sav. Ass'n
[83-2 USTC ¶9585 ],
576 F.Supp. 790 (N.D. Ind. 1983) (burden rests upon party opposing the
levy to show that taxpayer has no interest in property).
1. Provision
of rent-free housing to Spence's mother
Defendant
provided her mother-in-law with a rent-free apartment for 88 months. She
contends that she and Spence intended this arrangement to satisfy in
full her debt to him; although they planned to memorialize this verbal
agreement, they "never got around to it." Speir Aff., March
11, 1992. The evidence adduced at trial indicates that defendant's
provision of the apartment to her mother-in-law was merely a gift,
making equitable setoff inappropriate.
First, Deborah
Harper, a Revenue Officer, testified that defendant never mentioned this
arrangement when served with the Notice of Levy. Instead, defendant
stated that her reason for not paying the levy was payment of three
$5,000.00 notes on behalf of Spence. Harper subsequently determined that
those notes had been paid prior to the December 14, 1983, transaction
between defendant and Spence. The Court finds Harper's testimony highly
credible. 3 Defendant's
proffered explanation appears to be merely a post hoc justification.
Second,
defendant's and Spence's actions following the creation of the note
indicate that they did not intend for provision of a rent-free apartment
to Spence's mother to reduce the debt incurred on December 14, 1983. On
April 4, 1986, defendant allowed Spence to subordinate the deed to
secure debt to any new loans so that Spence could borrow additional
funds from Pembroke State Bank. In a financial statement submitted to
the Department of Justice on October 24, 1986, Spence indicated that
defendant owed him $14,000.00. 4 Both actions
are inconsistent with a debt that had been satisfied.
Defendant
provided a rent-free apartment to her mother-in-law with no legal
obligation to do so. Although philanthropic, this voluntary payment
cannot be setoff from debt that defendant owes to Spence.
2. Payments
made to Spence's creditors
Defendant next
argues that the Court should setoff from the amount due under the
promissory note payments made by defendant to Spence's creditors from
1983 to 1989. The defendant claims that she paid $6,024.26 on behalf of
Spence; she arrived at this figure during the 1990 preparation of her
1983 to 1989 tax returns. With the evidence presented at trial,
defendant failed to meet her burden of showing that these payments
reduced her obligation to Spence. Accordingly, equitable setoff is
inappropriate.
Pamela
O'Quinn, the C.P.A. who prepared defendant's 1983 through 1989 tax
returns, testified that defendant arrived at the $6,024.26 figure by
analyzing her checkbook and bank records to determine what checks had
been written on behalf of Spence. 5 O'Quinn
asked about, but did not review, checks that defendant determined had
been written on Spence's behalf. At trial, O'Quinn stated that she would
not have classified at least one check--a January 3, 1984, check for
regime fees paid on the apartments purchased by defendant from
Spence--as a payment made on Spence's behalf. Finally, O'Quinn testified
that defendant never discussed repayment of the December 14, 1983,
promissory note with her.
Defendant's
testimony proved to be damaging to her case. When asked by her attorney
about the apartment transaction, defendant stated that she did not sign
the promissory note because of a verbal agreement with Spence to provide
his mother with an apartment and to pay his debts to Ogeechee Net Shop. 6 Defendant
never testified that the $6,024.26 paid on behalf of Spence was pursuant
to an agreement to reduce her debt on the promissory note. In fact, the
only evidence that defendant presented on this issue was O'Quinn's
testimony on the manner in which this amount was determined.
Defendant
cannot setoff the $6,024.26 that she allegedly paid to Spence's
creditors from the amount due under the promissory note. O'Quinn's
testimony indicated that this amount was speculative and determined by
defendant without clear documentation. Additionally, defendant presented
absolutely no evidence that these payments were made pursuant to an
agreement to reduce the debt under the promissory note. Since all
testimony and evidence at trial indicated that these payments were
voluntary, her claim of equitable setoff is without merit.
3. The amount
to which the
United States
is entitled
The extent of
defendant's personal liability for failing to honor the levy is "a
sum equal to the value of the property or rights to property not
surrendered." 26 U.S.C. §6332(d)(1) . Interest on
this amount accrues pursuant to 26 U.S.C. §6621 from the date of the levy until the
date of payment.
Id.
Since payment of Spence's creditors and provision of rent-free housing
to Spence's mother were voluntary obligations undertaken by defendant,
she is not entitled to setoff any amount. Accordingly, the United States
is entitled to $19,576.08, the principal and interest currently due
under the obligation; future amounts as they come due 7; and
interest on this amount from the date of the levy until the date of
payment pursuant to 26 U.S.C. §6621 .
Conclusion
Defendant had
the burden of showing that Spence was no longer entitled to payment
under the promissory note. She relied on
Georgia
's equitable setoff statute in an attempt to demonstrate that her debt
to Spence had been satisfied by providing his mother with rent-free
housing and by paying certain debts of Spence. Although defendant argued
that these payments were made on behalf of Spence, she failed to show
that she had an obligation to make these payments. Accordingly, the
apartment arrangement and payment of creditors on behalf of Spence
amounted to nothing more than voluntary payments not subject to
equitable setoff. As a result, the
United States
is entitled to the full value of the promissory note in addition to
statutory interest.
IT IS HEREBY
ORDERED, ADJUDGED and DECREED that judgment be and is entered for the
United States
.
1 A property
interest subject to attachment by a federal tax lien is one that
"represents an economic asset in the sense that it has pecuniary
worth and is transferable, so that a claim can be enforced against
it." Little v. United States [83-1 USTC ¶9343 ],
704 F.2d 1100, 1106 (9th Cir. 1983).
2 O.C.G.A. §23 -2-76 provides as follows:
"Regarding a setoff, equity generally follows the law; but, if
there is an intervening equity not reached by the law or if the setoff
is of an equitable nature, equity shall take jurisdiction to enforce the
setoff."
3 Two factors
support Harper's reliability. First, when defendant was asked whether
she discussed the apartment arrangement with Harper, defendant testified
only that she was not sure. Second, Harper and defendant apparently had
a course of dealing prior to Harper's serving the Notice of Levy. Given
Spence's other tax problems, Harper assisted defendant with sale of
Spence's house to satisfy part of his tax liabilities. These previous
dealings indicate that defendant could have been candid with Harper.
4 This amount
reflects no reduction in the note. Spence probably chose to record
$14,000.00 on this statement since it is the nearest whole number to the
amount of the debt. If this assumption is incorrect, $14,000.00 does not
show a correct reduction of the debt. With consecutive monthly payments
beginning on February 1, 1984, defendant would have made approximately
32 payments before Spence completed this statement. At $184.68 per
month, defendant would have paid roughly $5,909.76. Alternatively,
defendant would have furnished approximately 33 months of housing at
$150.00 per month by this time to her mother-in-law; this arrangement
would have reduced the debt by $4,950.00. The total loan value over its
ten-year life was $22,161.60.
5 Defendant
hired O'Quinn in July 1990 to file her past due returns for the
preceding years.
6 By Order
dated August 10, 1992, the Court held that defendant's payment to
Ogeechee Net Shop occurred after the date of the levy, and accordingly
could not reduce her obligation to the
United States
. Although defendant argued at trial that some payments had been made to
Ogeechee Net Shop prior to the levy, the evidence offered in support of
her claim indicates otherwise. In a suit brought by the business in the
Magistrate Court of Bryan County, Georgia, judgment was rendered against
defendant on December 19, 1989, and the Fi.Fa. was not canceled until
March 12, 1990.
7
Approximately 14 payments remain on the note after December 1, 1992.
