Annotations- Bank Accounts Page3

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 [88-1 USTC ¶9159] United States of America , Plaintiff v. Marine Midland Bank, N.A., Defendant

U.S. District Court, West. Dist. N.Y., CIV-86-839C, 12/18/87, 675 FSupp 775

[Code Secs. 6321 , 6332 and 6502 --Result unchanged by the Tax Reform Act of 1986]

Banks and banking: Levy and distraint: Suits by U.S.: Bank accounts: Bank deposits: Assessment and levy: Assessment date: Taxpayer's property in possession of third party.--A bank could not use the statute of limitations defense in a suit to surrender a customer's property that was subject to a lien. Although an assessment and levy against the customer took place more than six years ago, subsequent action to collect the tax by enforcing the levy did not have to be commenced within the same six-year period. The bank's lack of knowledge of a Tax Collection Waiver, consented to by the customer, was irrelevant. Its motion for summary judgment barring enforcement of a tax levy was denied. Although the customer did not have the unqualified right to withdraw the full amounts contained in the reserve accounts, it did have a contingent interest in the property, and the bank was required to make payment in response to the notice of levy. The 50-percent penalty was not imposed on the bank because there was a legitimate question with regard to whether the customer's account was properly subject to levy.

Daniel F. Brown, Department of Justice, Washington , D.C. 20530 , for plaintiff. Paul K. Stecker, Phillips, Lytle, Hitchcock, Blaine & Huber, 3400 Marine Midland Center, Buffalo, N.Y. 14203, for defendant.

CURTIN, District Judge:

Defendant Marine Midland Bank, N.A. [Marine] now moves for summary judgment on the grounds that (1) the complaint of the plaintiff United States of America [United States] is barred by the six-year statute of limitations under 26 U.S.C. §6502 , and (2) plaintiff's complaint is legally without merit (Items 7 and 8). The United States opposes defendant's motion and moves for summary judgment on its own behalf (Items 9, 10, and 12). Plaintiff opposes (Item 11).

This action arises out of an Internal Revenue Service [I.R.S.] levy against property of a former Marine customer, Plattsburgh Homes, Inc. [ Plattsburgh ]. The levy was served on Marine in 1974, and this action was commenced in 1986. The government contends that the levy required Marine to pay the I.R.S. $64,766.96 from two Reserve Accounts maintained on Marine's books in the name of Plattsburgh , in addition to a penalty equal to 50 percent of that amount due to Marine's alleged refusal to honor the levy.

Marine says that Plattsburgh was a mobile home dealer from which Marine purchased retail installment contracts pursuant to a Midland Time Plan Mobile Home Dealer's Agreement [the Agreement]. Under the Agreement, when it purchased a retail installment contract, Marine would credit a percentage of the credit service charge shown in a contract to a Special Reserve Account established on Marine's books in Plattsburgh 's name. In some instances, Marine would also credit a percentage of the time balance shown in the contract to a separate Contingent Reserve Account.

Marine contends that Plattsburgh was not entitled to any payment from the Special Reserve Account unless and to the extent the balance of that account exceeded the Minimum Reserve, defined as 10 percent of the total of the unpaid balances of all the outstanding contracts Marine had purchased from Plattsburgh, plus the total of the unpaid balances of all such contracts in default. Because Marine was required to rebate the unearned portion of the credit service charge when a contract was prepaid, the prepayment of a contract would result in a debit to the Special Reserve Account. Marine states that prepayments and defaults would both reduce the amount Plattsburgh might expect to receive from the Special Reserve Account, and Plattsburgh could never be entitled to any of the amounts credited to the account if there was a significant number of prepayments or defaults. Likewise, Marine says that Plattsburgh would never receive an amount credited to the Contingent Reserve Account if the contract for which the credit was made went into default and proved uncollectible.

Given all of the above, Marine says that:

the balances in the Reserve Accounts did not represent cash deposited by or for Plattsburgh Homes; rather, they were bookkeeping entries reflecting amounts Plattsburgh Homes might be entitled to receive if all the contracts Marine purchased were repaid as scheduled.

Item 8, p.3 (emphasis in original); see also Item 7, Affidavit of John C. Allen [Allen Affidavit], ¶8.

Marine says that although the government served it with a notice of levy on October 21, 1974, Marine held no property belonging to Plattsburgh at that time. It argues that:

the balance in the Special Reserve Account at the time of the levy ($81,878.36) was less than the required Minimum Reserve ($139,584.50), and Plattsburgh Homes was entitled to no part of the $3,850.00 Contingent Reserve Account balance, so Marine owed nothing to Plattsburgh Homes. . . .

Id. at p.4. Subsequently, in early 1983, Marine paid to Plattsburgh balances from the Reserve Accounts totaling $50,839.55, because "[t]here were not outstanding contracts at that time, [and] Plattsburgh Homes was entitled to these balances." Allen Affidavit, ¶12. Marine notes that the government did not commence this action until nearly 12 years after the notice of levy.

It is the plaintiff United States ' position that its October 21, 1974, levy seized "all property and rights to property" of the taxpayer then in the possession of defendant Marine. It says that "property and rights to property" seized by this levy included not only any then-existing debt of the defendant to the taxpayer, but also its then-existing contractual obligations to the taxpayer, even though the ultimate value of those contractual obligations may not have been fixed on the date of the levy. Thus, in paying the balances in Plattsburgh's Special Reserve Account and Contingent Reserve Account under its contract with Plattsburgh on March 16, 1983, Marine failed to honor the United States' prior levy, for which it is entitled to recover in addition to interest and the 50 percent penalty pursuant to 26 U.S.C. §6332(c)(1) and (2) .

I. Statute of Limitations

Marine disagrees and makes three arguments in its papers. First, it argues that this action is barred by the six-year statute of limitations contained in Internal Revenue Code [I.R.C.] §6502 because it was not commenced until more than 12 years after the I.R.S. assessment against Plattsburgh. Marine contends that this delay is inexplicable because Marine advised I.R.S. of its position in January of 1975 (Item 7, Exh. D).

Defendant says that I.R.C. §6502 requires that the I.R.S. serve any levy or commence any proceeding to collect a tax within six years after the assessment against the taxpayer. Marine concedes that because the levy in this case was served within five months after the assessment, it was timely. However, it asserts that because the instant proceeding was not commenced within six years of the assessment, it was untimely.

Marine argues that the United States cannot argue that merely because a levy was served within six years of the assessment, a subsequent action to collect the tax by enforcing the levy need not be commenced within the same six-year period. Defendant says that such a reading of section 6502 would be at odds with its own plain language and would afford the government virtually unlimited time to sue, regardless of the expiration of Marine's six-year limitations period against the taxpayer. Marine claims that there are only two decisions anywhere in the country which address the application of section 6502 to levy enforcement actions. It says that these cases, United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612 (6th Cir.), cert. denied, 447 U.S. 905 (1979); United States v. Stephens [83-2 USTC ¶9704 ], 568 F.Supp. 1198 (N.D. Cal. 1983), both erroneously say that the I.R.S. need only serve the notice of levy within six years of the assessment. Marine says that these decisions are not binding on this court, and concludes:

The Code plainly requires that the Government commence any "proceeding" to collect a tax within six years after the assessment, and the statutory language permits no distinction between actions against taxpayers and their transferees on the one hand and actions against garnishees on the other. To allow the Government unlimited time in which to sue a garnishee who is secondarily liable, when it must sue the taxpayer who is primarily liable within six years, would be anomalous and inequitable. Finally, the doctrine of "constructive possession" notwithstanding, it is unrealistic to expect a bank to hold an account indefinitely in response to a notice of levy, all the while denying the customer access to his money, where the I.R.S. by all appearances has acquiesced in the bank's view, communicated clearly and unequivocally many years earlier, that the account was not subject to seizure.

Item 8, pp. 10-11.

The United States disagrees. It argues that there is no specific time on a federal tax assessment lien. Instead, it says that a lien, once valid, survives so long as the underlying liability for the tax is enforceable. United States v. Hodes [66-1 USTC ¶9232 ], 355 F.2d 746, 748 (2d Cir.), cert. denied, 384 U.S. 968 (1966); United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720-21 (1985). In fact, it argues that 26 U.S.C. §6332 , and not §6502 , applies here. Plaintiff says that even if this court were to find otherwise, it claims that the six-year limitations period under §6502 may be extended and that such an extension was consented to in this case.

Citing the Declaration of Daniel F. Brown and Exhibit 2 thereto (Item 9), the United States says that Plattsburgh consented to the extension of the period for the collection of the tax liabilities which were the subject of the October 21, 1974, levy until December 31, 1986, by a Tax Collection Waiver dated December 12, 1974. The present case was commenced on September 8, 1986.

Given the above, the United States says that even if defendant's reading of section 6502(a) were completely correct, the present failure to honor levy proceeding was timely commenced. The United States claims that it is no defense that Marine was unaware that Plattsburgh had extended the statute of limitations without defendant's knowledge. United States v. Hodes, supra, at 749-50. Even if no extension had been granted, the government says that the present action would be timely for the reasons set forth in the Weintraub and Stephens cases.

Defendant Marine argues in its Reply (Item 11) that Plattsburgh 's consent does not apply to it. Instead, it says that "a waiver of the statute of limitations by the taxpayer cannot affect the garnishee's right to invoke the statute of limitations if it, rather than the taxpayer, is sued" and that, in fact, the waiver form executed by Plattsburgh by its own terms only extended the government's time to collect the unpaid taxes " 'from the taxpayer.' " Id. at 2. It notes that, unlike the lien on real property involved in the Hodes case, which was a matter of public record, defendant had no opportunity to obtain notice of Plattsburgh 's waiver.

I find the government's arguments persuasive. As was persuasively set forth in the Weintraub case, the limitations period under 26 U.S.C. §6502 requires that the Internal Revenue Service commence its action to collect a tax from a taxpayer within six years of the assessment of the tax, but does not apply to section 6332 actions against third parties in possession of a taxpayer's property or property rights. 613 F.2d at 620. The Court of Appeals for the Sixth Circuit reasoned that, unlike suits against taxpayers, section 6332 actions like the instant case are not actions to collect tax but to enforce personal liability for failure to surrender property after receiving a notice of levy. Moreover, as the Weintraub court points out, there is no support for the view that the statute of limitations can be a defense to a section 6332 suit. Id. at 620-21. Finally, I find without merit Marine's view that this court's decision could be in any way altered on this issue because of defendant's lack of knowledge about the Tax Collection Waiver consented to by Plattsburgh in 1974. United States v. Hodes, supra.

Given the above, defendant's motion for summary judgment on this ground is denied. Plaintiff's motion is granted.

II. Possession of Property

Secondly, Marine argues that it was not required to make any payment in response to the notice of levy because Plattsburgh was not entitled to any payment from the Reserve Accounts at the time of the levy and it was uncertain whether Plattsburgh would ever be entitled to any such payment. As such, defendant says that it is plain that it held no property subject to levy. See United States v. Sterling National Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 919, 922 (2d Cir. 1974). It argues that all of the relevant case law is based on the principle that "the taxpayer's right to payment under a contract is subject to levy only where the taxpayer has an unqualified, non-contingent right to present or future income." Item 8, p.14. Apart from this analysis, Marine also claims that if it were required to pay the government the amount credited to the Reserve Accounts for that contract, its risk would be increased by that amount ex post facto. Id. at 15-16.

The United States disputes the defendant's position. While the government concedes that Plattsburgh could not have withdrawn any money from the Reserve Accounts maintained in its name by Marine on the date of the levy, it asserts that Marine still had possession of Plattsburgh 's property or rights to property on the date of the levy. The United States says that its levy:

seized all contract rights of Plattsburgh Homes, Inc. in its mobile home dealer's agreement with Marine, including its contractual right to receive any proceeds of the two reserve accounts created thereunder, after the completion of the purposes for which these two accounts had been created.

Item 10, p.8 (emphasis added).

The United States says that the terms of the Midland Time Plan Mobile Home Dealer's Agreement supports its view. It says that a review of the agreement makes plain that the purpose of the Reserve Accounts was to provide security to protect Marine in the event of defaults under retail installment contracts and/or in the event of a default by Plattsburgh on any of its contractual obligations to the defendant bank. The government agrues that, under the agreement, Marine is given a security interest in both the Reserve Accounts for any and all of its obligations and is given the right to set-off against the credit balance of either of the Reserve Accounts for any of the taxpayer's obligations. See Agreement, ¶8(h).

The United States says that this court must now determine whether, under state law, the taxpayer had any right to the proceeds contained in the two Reserve Accounts and, if so, whether this right constitutes "property" as a matter of federal law. United States v. National Bank of Commerce, supra at 727.

The government says that, under New York law, the Reserve Accounts created under the Agreement are classified as "special deposits" which were made for the specific purpose of providing collateral security to Marine. The government also says that it is well established that deposits made to a special account, in the absence of a special agreement to the contrary, if not used for the purpose of the special account, are to be returned to the depositor. E.g., Noah's Ark Auto Accessories, 64 Misc.2d 944, 316 N.Y.S.2d 663 ( Supp. Ct. 1970), aff'd, 37 A.D.2d 692, 323 N.Y.S.2d 408 (4th Dept. 1971 ).

Given the above, plaintiff says that, on the date of the levy, defendant Marine was in possession of all contract rights of taxpayer Plattsburgh under the parties' Agreement,

including its contractual right to have returned to it any amount credited to the special accounts in its name which was not actually used for the purpose of the account, i.e., providing collateral security to Marine.

Item 10, p. 11.

The United States says that Marine's argument that a contingent debt is not attachable is not persuasive. Citing ABKCO Industries, Inc. v. Apple Films, Inc., 39 N.Y.2d 670, 674-76, 385 N.Y.S.2d 511 (1976), and Fine Fashions, Inc. v. United States [64-1 USTC ¶9270 ], 328 F.2d 419, 421-22 (2d Cir. 1964), the government says a taxpayer retains a property interest which may be reached by a United States tax levy in funds held by a third part as collateral security. Even though the taxpayer could not reach these funds until the purpose for giving the collateral security was accomplished. Accordingly, the United States says that Marine was obligated to hold the Reserve Accounts as custodian for the United States . United States v. National Bank of Commerce, supra at 720-21; 26 U.S.C. §6332(c)(1) .

In Marine's reply (Item 11), it argues that the government misunderstands the facts of this case. Item 12, p. 13.

Again, I find the government's arguments persuasive. As was noted in the Second Circuit's decision in United States v. Sterling National Bank, supra, and the Supreme Court's National Bank of Commerce decision, in deciding whether or not defendant has possession of a taxpayer's property or rights or interests in property subject to government levy in a case like the present one, it must be determined what interest, if any, the taxpayer had in the funds in question because it is well established that the government can stand in no better position than the taxpayer whose property or right to property is being levied upon. Here, unlike the taxpayers in Sterling National Bank and National Bank of Commerce, it cannot be said that Plattsburgh had the unqualified rights to withdraw the full amounts contained in the reserve accounts. Instead, as both parties acknowledge, Plattsburgh 's right to access to these funds was, at the time of the levy, strictly limited by the terms of its Agreement with Marine.

Nevertheless, the National Bank of Commerce case makes clear that the statutory language appearing in 26 U.S.C. §§6321 , 6331(a) and 6332(a) is intended to be read broadly to reach every interest in property that a taxpayer might have, including, I believe, contingent interests like the one involved here. 472 U.S. at 719-20. The relevant case law in this area indicates, moreover, that the service of a notice of levy upon the custodian of a taxpayer's interest creates a custodial relationship between the person holding the property and the Internal Revenue Service so that the property comes into the constructive possession of the government. While this court concedes that the exact amount owed the government pursuant to government levy may not have been discoverable on October 21, 1974, the facts show that Marine knew the value of Plattsburgh 's interest in the Reserve Accounts in March of 1983, when it paid $50,839.55 to Plattsburgh , despite the outstanding levy. This amount should have been turned over to the Internal Revenue Service. Defendant's motion for summary judgment on this ground is denied. Plaintiff's motion is granted.

III. Statutory Penalties

Finally, Marine argues that even if this court were to find that it was liable for the section 6332(c)(1) taxable amount, it says that it should not be required to pay the 50 percent statutory penalty sought by the government because it did not withhold payment of the tax "without reasonable cause." 26 U.S.C. §6332(c)(2) ; see also United States v. Sterling National Bank & Trust Co., supra at 923.

The United States disagrees and says that Marine did not reasonably believe that it did not have property belonging to Plattsburgh which was the subject of a levy when it paid the balances of the Reserve Accounts to Plattsburgh on March 16, 1983. United States v. Augsburger [78-1 USTC ¶9339 ], 452 F.Supp. 659 (W.D.N.Y. 1978), motion on reconsideration denied [79-2 USTC ¶9622 ], 477 F.Supp. 94, 96 (W.D.N.Y. 1979).

Marine says that to the extent that the Augsburger decision supports the government's position that it should not be followed because it imposes a higher standard than that imposed in the Sterling National Bank case (Item 11). The United States disputes this view and says that the question of "reasonable cause" must turn on the facts of a particular case (Item 12).

Because I believe that there exists a rather novel question in this case regarding whether or not Marine possessed any property or rights to property belonging to Plattsburgh that were properly subject to federal tax levy, I believe that Marine's failure to pay such funds over to the federal government to be reasonable. United States v. Sterling National Bank & Trust Co., supra. Accordingly, I believe it would be improper to impose the section 6332(c)(2) 50 percent penalty against Marine in this case. Defendant's motion seeking this relief is granted. Plaintiff's motion is denied.

In summary, defendant's motion for summary judgment on statute of limitations grounds is denied. Defendant's motion for summary judgment pursuant to 26 U.S.C. §6502 is denied. Plaintiff's motion pursuant to 26 U.S.C. §6332(c)(1) is granted. However, this court declines to impose the section 6332(c)(2) statutory penalty against defendant in this case.

Plaintiff's counsel is directed to prepare a proposed judgment on notice to the defendant and present it to the court for settlement on December 28, 1987, at 9 a.m.

So ordered.

 

[86-1 USTC ¶9422] Augustus Martucci, et al., Plaintiffs v. United States of America , Defendant

U.S. District Court, Dist. Mass., 84-2690-K, 3/26/86

[Code Secs. 6331(a) and 6332(a) ]

Surrender of property subject to levy: Bank accounts: Trusts.--The taxpayers failed to demonstrate that nine savings accounts, the balances of which were paid to the IRS pursuant to a levy, were either irrevocable trusts or perfected gifts established for the benefit of the taxpayer's grandchildren. Absent any facts appearing on the record, the court concluded that the savings accounts were revocable trusts subject to the taxpayer's unlimited control in that the terms of her contract with the bank entitled her to make withdrawals from the accounts at any time. Moreover, a written document or statute limiting the taxpayer's state law right to control the savings accounts was absent. Also, the mere allegation that the taxpayer did not intend to make any withdrawals from those accounts, coupled with the fact that prior to the levy she had not made any withdrawal, did not establish that any trust that may have been created was irrevocable. As revocable trusts, the nine savings accounts were "property" of the taxpayers upon which the IRS could properly levy.

Memorandum and Order

KEETON, District Judge:

Plaintiffs filed this action to recover $17,742.08 that plaintiffs claim was wrongfully taken by the Internal Revenue Service pursuant to a levy. The levy, directed to the Winthrop Savings Bank, related to substantial federal tax liability of plaintiffs. Plaintiffs contend that the nine savings accounts, the balance of which was paid to the IRS pursuant to the levy, were gifts established by Mrs. Martucci for the benefit of her grandchildren. Therefore, the plaintiffs argue, as perfected gifts to their grandchildren, the savings accounts were not "property and rights to property" subject to levy under §§6331(a) and 6332(a) of the Internal Revenue Code.

The government has moved for summary judgment on the grounds that the savings accounts were at all times held in trust by Mrs. Martucci, that she had the right to control those funds, and that therefore under federal law the funds were subject to levy as property of Mrs. Martucci.

Summary judgment should be granted if "the pleadings, depositions, answers to interrogatories, and admissions of file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The court must review the record in the light most favorable to the party opposing the motion and indulge all inferences favorable to that party. Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir. 1975), cert. denied, 425 U.S. 904 (1976).

The party opposing summary judgment must establish the existence of an issue of fact that is both "genuine" and "material." A "material" issue is one that affects the outcome of the litigation and "genuine" refers to a material issue established by "sufficient evidence supporting the claimed factual dispute . . . to require a jury or judge to resolve the parties' differing versions of the truth at trial." Id., quoting First National Bank of Arizona . v. Cities Service Co., Inc., 391 U.S. 253, 289 (1968).

With these standards in mind, I turn to the record presented by the parties.

The parties are in agreement that under the terms of plaintiff Mrs. Martucci's contract with the bank, she was entitled to make withdrawals from the accounts at any time. Under Massachusetts statutes, chapter 167D, Section 6 , a bank may make payments to the trustee of a savings account held in trust for another and the bank must upon the death of the trustee (and written notice of trust terms to the contrary) pay the amount remaining in the account to the person named as the beneficiary. However, there is no provision for the bank to permit withdrawals by anyone other than the trustee until the trustee's death.

The government contends that this unlimited state law right to withdraw funds from the accounts during Mrs. Martucci's lifetime establishes a property interest which under federal law is a proper subject of a tax levy. In support of this contention, the government cites a recent Supreme Court decision in which the Court stated that "the IRS acquires whatever rights the taxpayer himself possesses." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], ____ U.S. ____, 105 S. Ct. 2919, 2927 (1985). This argument is further bolstered by the language of National Bank of Commerce stating that "[c]ommon sense dictates that a right to withdraw qualifies as a right to property." Id. In sum, the government argues that Massachusetts law establishes that the bank accounts in question were revocable trusts, that under state law and the contract with the bank Mrs. Martucci had an absolute right to compel payment of the balances in the accounts, and that such a state-law right constituted "property [or] rights to property . . . belonging to" Mrs. Martucci within the meaning of the federal statute.

Plaintiffs argue that Mrs. Martucci intended to and did create trusts when she opened the savings accounts. Therefore, plaintiffs contend, as a matter of law those accounts were not the "property" of Mrs. Martucci and could not properly be subject to a levy by the IRS. Plaintiffs also oppose summary judgment on the grounds that as a matter of state law the determination of whether a savings account trust is irrevocable or constitutes a perfected gift is a fact question and therefore inappropriate for summary judgment.

Plaintiffs claim, correctly, that the determination of whether a valid present trust has been created is a question of fact under Massachusetts law. Buteau v. Lavalle, 187 N.E. 628 (1933). However, plaintiffs allege no facts to support the contention that Mrs. Martucci gave up (or in any way limited) her dominion and control over the savings accounts in order to perfect any gifts or establish any irrevocable trust. The mere allegation that Mrs. Martucci did not intend to make any withdrawals from those accounts coupled with the fact that prior to the levy she had not made any withdrawal does not establish that any trust that may have been created was irrevocable. Even if plaintiffs were able to prove at trial that (1) Mrs. Martucci did not intend to withdraw any funds from the accounts, (2) she did not in fact make any withdrawals prior to the levy, and (3) she informed the parents of the (minor) beneficiaries that she had established the accounts as gifts to the children, plaintiffs would still have failed to allege facts sufficient for any fact finder to find either that the trusts were irrevocable or that the savings accounts were present gifts.

Despite the absence of any written document or statute limiting Mrs. Martucci's state law right to control the savings accounts, plaintiffs deny that this control over the funds could be exercised to dispose of the funds in any way that would diminish the rights of the grandchildren for whom the funds were held in trust. The cases plaintiffs cite in support of this proposition all concern the easily distinguishable situation where the settlor of a savings account trust (so-called "Totten trust") has died, and the person named in the passbook is attempting to recover the funds remaining in the account. None of those cases suggests, nor is the court aware of any cases that suggest that the settlor of the "trusts" at issue was restricted in any way in his or her use of those funds during the settlor's lifetime. Absent any written trust agreement to the contrary, a savings account trust such as those created by Mrs. Martucci is revocable by the settlor, and is therefore reachable by the settlor as well as by the creditors of the settlor during the settlor's lifetime. Scott on Trusts, §330.12 at p. 2617 (1967).

Plaintiffs having failed to demonstrate any facts from which a fact finder could find the savings accounts to be either irrevocable trusts or perfected gifts and no such facts appearing on the record, I conclude that the savings accounts were revocable trusts subject to Mrs. Martucci's unlimited control. As revocable trusts, the nine savings accounts were "property" of Mrs. Martucci under 26 U.S.C. §§6331 and 6332 upon which the IRS properly levied. Accordingly, defendant's motion for summary judgment is granted. The clerk is directed to enter judgment for defendant.

 

[88-2 USTC ¶9564] United States of America , Plaintiff-Appellee v. Bell Credit Union, Defendant-Appellant United States of America , Plaintiff-Appellee v. Golden Plains Credit Union, Defendant-Appellant

(CA-10), U.S. Court of Appeals, 10th Circuit, 86-2059, 86-2060, 10/21/88, 860 F2d 365, Affirming the District Court, 635 F.Supp. 501, 86-1 USTC ¶9337

[Code Secs. 6323 and 6332 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Levy and distraint: Surrender of property: Reasonable cause: Priority: Set-off.--Several credit unions which failed to honor the IRS's administrative tax levies upon members' share accounts were liable for penalties equalling 50% of the tax amounts due because the credit unions' refusals to surrender the funds were without reasonable cause. After receiving notice of the levies and the attachment of the federal tax liens, the credit unions, nevertheless, applied the share account funds against loan balances which the delinquent taxpaying members owed the credit unions. The credit unions' contingent and inchoate rights of offset, however, were inferior to the federal tax liens, since the credit unions took no affirmative action exercising those rights prior to the federal attachments. The federal government's priority regarding the credit unions' members funds, which were not subject to any prior judicial attachment or execution, was clear and unmistakable.

 

Benjamin L. Burgess, Jr., United States Attorney, Wichita , Kan. 67202 , Robert L. Baker, Roger M. Olsen, Michael L. Paup, William S. Estabrook, Douglas G. Coulter, Department of Justice, Washington , D.C. 20530 , for plaintiff-appellee. Eric D. Bruce, Bruce & Davis, 2121 W. Maple St. , Wichita , Kan. 67213 , for defendants-appellants. Durant S. Abernathy III, General Counsel, U.S. Central Credit Union, Overland Park, Kan., Gordon D. Payne, 7700 Mineral Point Rd., Madison, Wis., amicus curiae, U.S. Central Credit Union. Robert E. Skar, Casper , Wyo. , amicus curiae, Wyoming Credit Union League.

Before ANDERSON, BALDOCK and BRORBY, Circuit Judges.

BALDOCK, Circuit Judge:

These cases involve the response of the defendant credit unions to administrative levies by the Internal Revenue Service (IRS) on share accounts owned by taxpayer members. The IRS was seeking to collect unpaid assessments and statutory additions to tax owed by certain taxpayers. The unpaid assessments and statutory additions to tax far exceeded the amounts in the taxpayers' share accounts. Initially, the credit unions did not comply with the levies. Rather, they applied the funds in the accounts to loan balances owed by the taxpayers. The government sued to enforce the levies under I.R.C. §6332(c) ¹ and, on cross motions for summary judgment, the district court held that the government was entitled to the funds in the share accounts. United States v. Bell Credit Union [86-1 USTC ¶9337 ], 635 F. Supp. 501, 503-04 (D. Kan. 1986). The district court also held that the credit unions were liable for a 50% penalty on the amounts recoverable, I.R.C. §6332(c)(1) , because the refusal to honor the levies was without reasonable cause. Id. at 504-05.

On appeal, the credit unions suggest that the district court misunderstood the nature of the state-created property interest in credit union share accounts. They argue that credit unions do not have funds of the taxpayer-members which could be levied against under I.R.C. §6321 because the share accounts (1) represent capital, not fund deposits, (2) are not assignable to non-members of the credit union, (3) are subject to a statutory lien which is superior to a federal tax lien and (4) are subject to a contractual lien which is superior to a federal tax lien. Even if these arguments do not prevail ultimately, the credit unions argue they had reasonable cause for not honoring the levy and should not be liable for the 50% penalty. We review these legal issues de novo and affirm.

I.

The government may collect any unpaid tax by levy upon all property and rights to property belonging to a taxpayer who neglects or refuses to pay tax within 10 days after notice and demand. I.R.C. §6331 ; Treas. Reg. §301.6331-1(a) . A person in possession of property levied upon must surrender it to the government upon demand unless that property is subject to an attachment or execution under judicial process. I.R.C. §6332(a) ; Treas. Reg. §301.6332-1(a) . If a person does not surrender leviable property, he will be personally liable for a sum equal to the value of the property together with interest and costs. I.R.C. §6332(c)(1) ; Treas. Reg. §301.6332-1(b)(1) . If the failure to surrender the property is without reasonable cause, a 50% penalty shall be imposed. I.R.C. §6332(c)(2) ; Treas. Reg. §301.6332-1(b)(2) .

Just as taxpayer deposit accounts in banks are subject to levy by the government under I.R.C. §6331(a) and Treas. Reg. §301.6331-1(a) , so too are taxpayer share accounts in credit unions. Only two defenses to a levy will excuse noncompliance by a third party thought to hold property of the taxpayer. The third party must establish that it is not in possession of the property or that the property was subject to prior judicial attachment or execution. I.R.C. §6332(a) ; Treas. Reg. §301.6332-1(a) ; United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722 (1985). A panel of this court has determined that we have jurisdiction also to consider other defenses that might be raised by a third party in a civil action under I.R.C. §7426 for wrongful levy or an administrative proceeding under I.R.C. §6343 for release of levy or return of property. United States v. Central Bank [88-1 USTC ¶9256 ], 843 F.2d 1300, 1305-06 (10th Cir. 1988). We doubt, however, that these other defenses would excuse noncompliance with a valid administrative levy because the purpose of an administrative levy is to protect the government's potential interest in the property pending resolution of any conflicting claims. See United States v. National Bank of Commerce, 472 U.S. at 721. These other defenses are considered subsequent to the statutory defenses in I.R.C. §6332(a) , and as a basis for the relief from the levy provided by I.R.C. §7426 or I.R.C. §6343 . United States v. Central Bank, 843 F.2d at 1306 n.5.

The credit unions have established neither statutory defense to the levies. It is undisputed that the accounts were not subject to a prior judicial attachment or execution. And the credit unions were obligated to apply the taxpayers' funds in the share accounts as the taxpayers directed. I.R.C. §6332(a) ; Treas. Reg. §301.6332-1(a) . The legal significance of the taxpayers' unrestricted right to withdraw the funds has been ignored by the credit unions with pertinacity.

A federal tax lien arises upon "all property and rights to property, whether real or personal, tangible or intangible," of a taxpayer when the taxpayer is liable for tax and fails to pay after demand. Treas. Reg. §301.6321-1 ; accord I.R.C. §6321 . The lien is effective from the time of assessment. I.R.C. §6322 . The lien is broad and is intended "to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. at 720. The federal tax lien may be enforced "by levy upon all property and rights to property" belonging to the taxpayer. I.R.C. §6331(a) ; Treas. Reg. §301.6331-1(a) . The share accounts surely are property which may be levied upon.

In concluding this, we look to state law to determine what interest the taxpayer had in the accounts. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960). Federal law, however, determines the tax consequences of the right created under state law. United States v. National Bank of Commerce, 472 U.S. at 722. State law provides that a credit union has the power to receive the savings of its members in payment for shares and regulate the withdrawal of those shares. Kan. Stat. Ann. §17-2204(1) & (11) (Supp. 1987). Although a credit union has "a lien and right of setoff" on member shares to the extent of any amount owed the credit union, Kan. Stat. Ann. §17-2212(a) (Supp. 1987), the credit unions did not exercise this protection until after the federal tax lien attached. Here, the parties' stipulations indicate that the taxpayers had an unrestricted right to withdraw the funds from their share accounts at the time of the levies. Rec. vol. I, doc. 7 (No. 86-2059); rec. vol. I, doc. 8 (No. 86-2060).

For purposes of a federal tax levy, the legal consequence of this unrestricted right to withdraw deposits from a share account is unmistakable. The funds in the share account are subject to the levy, even if priority or ownership questions are not yet resolved. United States v. National Bank of Commerce, 472 U.S. at 724-25; see also United States v. Central Bank, 843 F.2d at 1305; United States v. Citizens and Southern Nat'l Bank [76-2 USTC ¶9665 ], 538 F.2d 1101, 1106-07 (5th Cir. 1976), cert. denied, 430 U.S. 945 (1977); United States v. Sterling Nat'l Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 919, 921-23 (2d Cir. 1974). We reject out of hand the credit unions' contention that taxpayer-member shares in a credit union may not be "forcibly transferred" to the government. The government steps into the shoes of the taxpayer and acquires "whatever" rights to the property that the taxpayer had. United States v. National Bank of Commerce, 472 U.S. at 713. The credit unions' restrictions concerning transferability of shares relate only to incidents of credit union membership. ² Thus, the credit unions had no valid basis for refusing to honor the federal tax levies.

II.

Having determined that the federal tax levy should have been honored, we next consider issues which concern priority. Relying on Kan. Stat. Ann. §17-2212 ³ (Supp. 1987), the credit unions suggest that member shares are in the nature of equity capital, for which a setoff would not be permitted. They then argue that a lien attaches to the shares, either by statute or contract, whenever an amount is owed to the credit union and without any further action on the part of the credit union. This lien supposedly has priority over a federal tax lien.

We acknowledge that there are differences between banks and credit unions, but just as a bank has a right of setoff with respect to deposits under Kansas law, Karner v. Willis, 710 P.2d 21, 22 (Kan. 1985), aff'g 700 P.2d 582, 583 (Kan. App.; 1985); see also Kan. Stat. Ann. §84 -4-403 (1983); United States v. Central Bank, 843 F.2d at 1309 (applying Colorado U.C.C.), so too does a credit union with respect to shares, Kan. Stat. Ann. §17-2212 (Supp. 1987). We look to the Kansas statutory scheme regulating credit unions. See Kansas Credit Union League v. Redmond , 532 P.2d 1039, 1042 ( Kan. 1975). Section 17-2212(a) provides a credit union with "a lien and right of setoff" on member shares and dividends to the extent of amounts owed the credit union. ⁴ Thus, it is ludicrous to argue that the shares of the credit union, be they called capital or deposits, are not subject to a right of setoff. Moreover, in these circumstances, the lien is characterized accurately as "an equitable right of setoff" which allows the credit union to setoff the unmatured indebtedness of an insolvent member against the credit union's liability for the share deposit. Stann v. Mid American Credit Union, 39 B.R. 246, 248 (D. Kan. 1984). ⁵

Equally meritless is the credit union's argument that its interest, whether it be contractual or statutory, attaches automatically and defeats the federal tax lien. As noted, the federal tax lien attached at the time of assessment. I.R.C. §6322 ; United States v. Central Bank, 843 F.2d at 1306. The federal rule of priority is first in time first in right, meaning that the first lien to attach and become choate prevails. United States v. City of New Britain, Connecticut [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954). Until the credit unions "affirmatively acted" against the taxpayers' accounts, the credit union's rights were contingent or inchoate. United States v. Central Bank, 843 F.2d at 1310. The affirmative action necessary required: (1) a decision to exercise a setoff right, (2) an action which accomplishes the setoff and (3) a record corroborating that a setoff right has occurred. Id. ; Baker v. National City Bank, 511 F.2d 1016, 1018 (1975). The credit unions did not take these affirmative steps until after notice of the federal tax levies. The cases are legion holding that a federal tax lien prevails when a bank attempts to offset after service of a notice of levy. See, e.g., United States v. Central Bank, 843 F.2d at 1310; People's Nat'l Bank v. United States [85-2 USTC ¶9849 ], 777 F.2d 459, 462 (9th Cir. 1985); United States v. Euclid Nat'l Bank [75-1 USTC ¶9239 ], 510 F.2d 461, 463 (6th Cir. 1975); United States v. First Nat'l Bank [72-2 USTC ¶9654 ], 348 F. Supp. 388, 389 (D. Ariz. 1970), aff'd, [72-2 USTC ¶9655 ] 458 F.2d 513 (9th Cir. 1972).

The credit unions cannot claim priority based upon either the statutory lien created by Kan. Stat. Ann. §17-2212(a) (Supp. 1987) or upon contractual language in loan documents requiring the borrower to "pledge" shares or payments on shares as security. I.R.C. §6323(a) ⁶ provides that a claim of a purchaser, holder of a security interest, mechanics lienor or judgment lien creditor has priority if that claim arises before notice of the tax lien is filed. Id. ; Treas. Reg. §301.6323(a)(1) . There is no mention of a statutory lien or right of setoff like that created by Kan. Stat. Ann. §17-2212(a). In discussing §17-2212(a), the credit unions claim the protection of I.R.C. §6323(a) as it relates to a security interest. Reliance on I.R.C. §6323 here is misplaced for two reasons. First, art. 9 of the U.C.C. as adopted in Kansas does not extend "to any right of setoff" or "to a transfer of an interest in any deposit account." Kan. Stat. Ann. §84 -9-104(i) & (j) (1983); id. Official UCC Com. 7. Thus, the credit unions do not have a security interest based on the interest created by Kan. Stat. Ann. §17-2212(a) (Supp. 1987). Second, I.R.C. §6323(h)(1)