Annotations- Property in Custody of State
Court
6332 Annotations: Property
in Custody of State Court- Levy
Penalty
for Failure to Surrender Property: Property in Custody of State Court
[41-2 USTC ¶9794]
United States
, Plaintiff, v. F. G. Swink, Trustee, Consolvo and Overmyer, Inc.,
Defendant
In
the United States District Court for the Eastern District of Virginia,
C. A. 120, 41 FSupp 98, September 26, 1941
Collection of taxes: Surrender of property subject to distraint.--Suit
having been brought against the wrong party, Government's action is
defeated by denial of motion to substitute as the defendant person
individually for person as trustee (for the benefit of creditors of
delinquent taxpayer), but, relative to a major defense, the Court holds
that defendant is not liable for asserted federal taxes against
delinquent transferor either individually or as trustee, since at the
time when distraint was served upon him transferor's property was
already in custody of a state court, subject to an attachment or
execution under decree of such court, and was not subject to distraint
by an administrative officer. Moreover, person holding property under
such circumstances does not incur personal liability under Code Sec.
3710 for failure to surrender property to the Government.
Samuel O.
Clark, Jr., Assistant Attorney General, Andrew D. Sharpe and Stephen J.
Augland, Special Assistants to Attorney General, all of Washington, D.
C., and Sterling Hutcheson, U. S. Attorney and Russell T. Bradford,
Assistant U. S. Attorney, Norfolk, Va., for plaintiff. Swink, Swink
& White,
Norfolk
,
Va.
, for defendant.
WYCHE, D. J.:
This is an
action by the United States against F. G. Swink, Trustee of Consolvo and
Overmyer, Inc., for the recovery of federal unemployment compensation
taxes under Title IX of the Social Security Act (c. 531, 49 Stat. 620),
for the year 1937, in the amount of $250.00, federal insurance
contribution tax under Title VIII of the Social Security Act of a
portion of the year 1938, in the amount of $9.68, and a capital stock
tax for the year 1938, all of which was assessed against Consolvo and
Overmyer, Inc., of the City of Norfolk.
[The
Facts]
Consolvo and
Overmyer, Inc., a
Virginia
corporation, was operating a stone cutting and contracting business in
the City of
Norfolk
.
Virginia
, and on January 6, 1938, the plant and equipment, books, records, etc.
were totally destroyed by fire. The only assets remaining after the fire
were a small quantity of stone, damaged by fire and water, together with
a few receivables.
On January 25,
1938, the corporation, by deed of assignment for the benefit of
creditors, conveyed these remaining assets to F. G. Swink, Trustee, and
on February 8, 1938, the Trustee sold the property conveyed to him, and
after the payment of the costs and expenses, of executing the trust,
realized the sum of $356.92, which was deposited in a special account in
his name as Trustee. The deed of assignment provided, after the payment
of the costs and expenses, the Trustee should "pay all taxes,
levies, liens, debts, and charges given priority by law." The
Trustee not having any records or books showing what, if any, taxes were
owing, communicated with the United States Collector of Internal
Revenue, Workman's Compensation Commission of Virginia, the Department
of Taxation of the State of Virginia, and the Treasurer of the City of
Norfolk, inquiring as to what, if any, taxes were owing, and if so, to
send him a statement. He received promptly a statement from the
Treasurer of the City of
Norfolk
, showing taxes due the City of $14.84, plus interest and penalties. He
also received from the Department of Taxation of the State of
Virginia
, a statement of personal property of $22.80, and on February 19, 1938,
received statement of taxes from the United States Collector of Internal
Revenue, as follows: Balance 1936 Social Security Tax, $136.05, and
$30.00 capital stock tax. (The item of $136.05 was a penalty assessment
on the 1936 Social Security tax, by reason of delay in the payment. This
was later abated by the Collector of Internal Revenue.)
The
Corporation had no records from which it could make up its unemployment
tax return, either to the
United States
or the State of
Virginia
for the year 1937. These taxes were required to be paid on or before
March 15, 1938. All statements furnished the Trustee by the various
claimants were made out against the Corporation, and not against the
Trustee as Trustee. The claim of the United States for the $30.00
capital stock tax, were not disputed, as it was assessed against the
Corporation on December 28, 1937, and the Trustee admitted the validity
of the lien obtained by the United States under this assessment.
The amount in
the hands of the Trustee was not sufficient to pay all of the tax claims
in full, and the Trustee made repeated efforts to get the various
parties to prorate their respective claims, and finally, the City and
State agreed, without waiving their claims to priority, to prorate, if
the
United States
would do likewise. This was declined by the
United States
.
On May 23,
1940, the
Commonwealth
of
Virginia
, filed in the Clerk's Office of the Corporation Court of the City of
Norfolk, Virginia, a notice of lien and demand for payment, under
Section 382 of the Tax Code of Virginia. This notice of lien and demand
for payment was against the Corporation. On the same date, a summons
under this section, was issued and served on the Trustee, and a petition
was filed in the Corporation Court of the City of Norfolk, to subject
the funds in the hands of the Trustee to the payment of the taxes due
the State of Virginia, and to a lien on the funds in the hands of the
Trustee. An order was entered on this petition, making the Unemployment
Compensation Commission of Virginia, the City of
Norfolk
, and the
United States
, parties defendant. The City of
Norfolk
and the Unemployment Compensation Commission of Virginia, followed the
same procedure, and asserted their claims of priority against said fund.
The
United States
did not come in, although the United States Collector of Internal
Revenue, and the United States District Attorney's Office, were
furnished copies of the pleadings, and were kept fully advised of all
steps taken in this litigation.
The matter was
heard at the June 1940 term of the Corporation Court of the City of
Norfolk, Virginia, and the Court, after full argument, announced its
decision, and requested the attorneys for the various parties appearing,
to submit an order in accordance with its opinion. The entry of this
order was delayed, at the request of the Trustee, so that the
United States
could appear and assert its rights, if any it had.
The warrant of
distraint and notice of levy for taxes due the United States were served
July 12, 1940, and on the same day notice of lien for the taxes was
filed with the United States District Court for the Eastern District of
Virginia, and with the Corporation Court of the City of Norfolk, and
final notice of demand for payment of taxes was served on the defendant
July 13, 1940. In the fall of 1940, the District Attorney's office was
given a copy of the proposed order of the
Corporation Court
, and advised that the
Corporation Court
would hear argument on the proposed order on October 25, 1940, and if
this order was entered, the Trustee was required to comply with such
order, unless restrained.
The present
suit was brought against the Trustee on October 5, 1940, and on November
9, 1940, the Corporation Court of the City of Norfolk, entered an order
directing the Trustee to pay to the United States Collector of Internal
Revenue, the sum of $73.22, covering the $30.00 capital stock tax, $9.68
contribution for the portion of 1938 tax assessed, and 10% of the 1937
assessment, under Section 1601, Title 26 of the United States Code
Annotated, and the balance of the fund to be prorated and paid to the
other claimants.
[Motion
to Substitute Different Defendant Refused]
Counsel for
the United States during the course of his oral argument stated that he
was not seeking judgment against F. G. Swink as Trustee, but against F.
G. Swink individually, and moved first to strike the words
"Trustee, Consolvo and Overmyer" and later to add "F. G.
Swink, individually", and contends in his argument that this motion
should be granted under Rule 21, Rules of Civil Procedure, which is as
follows: "MISJOINDER AND NONJOINDER OF PARTIES. Misjoinder of
parties is not ground for dismissal of an action. Parties may be dropped
or added by order of the court on motion of any party of its own
initiative at any stage of the action and on such terms as are just. Any
claim against a party may be severed and proceeded with
separately." In my opinion Rule 21 was not adopted to give relief
to a plaintiff who sues the wrong party, but to a plaintiff who sues too
many parties, or not enough parties. The effect of plaintiff's motion,
however, is to substitute F. G. Swink individually for F. G. Swink as
Trustee, for counsel says in argument that he seeks no judgment against
F. G. Swinks, as Trustee. Rule 25 of the Rules of Civil Procedure
permits substitution under certain circumstances, but not under the
facts of this case. The motion to add or substitute F. G. Swink
individually should therefore be overruled.
[Opinion]
But be that as
it may, it is my opinion that the plaintiff cannot recover in this
action against F. G. Swink individually or as Trustee.
[Recovery
Asked Under Sec. 3710 of Code]
The plaintiff
seeks recovery against the defendant under the provisions of section
3710 of the Internal Revenue Code, 26 USCA 3710, which provides for the
personal liability of one having in his possession property of a
delinquent taxpayer upon whom notice of distraint is served in the event
such person does not turn over to the Government the property of the
delinquent taxpayer in his possession.
[Property
in Custody of Court and Not Subject to Distraint Under Sec. 3710]
The real
question in this case therefore is whether the defendant personally
became liable for failure to turn over the property of the delinquent
taxpayer in obedience to the warrant of distraint served upon him. It
must be remembered that at the time such distraint was served upon the
defendant a suit, under 382 1 of the Tax
Code of Virginia, had already been commenced in the State Court by
virtue of which the property of the delinquent taxpayer was brought into
that Court and attached with a specific lien, and made subject to
judgment and execution thereunder. The effect of this action in the
State Court was to bring the funds of the delinquent taxpayer in custodia
legis and to make of the defendant a mere custodian for the State
Court and not of the delinquent taxpayer. Accordingly, when the
distraint was served upon him by the Collector of Internal Revenue he
did not have any property of the taxpayer which under the terms of
section 3710 was "subject to distraint" because the fund which
he had in possession had already been taken into the custody and under
the control of the State Court. It seems obvious that property already
in the custody of a court is not subject to a summary distraint by an
administrative officer. Moreover, section 3710 provides that if the
property of the taxpayer is at the time of the distraint "subject
to attachment or execution under any judicial process" the person
holding such property does not incur personal liability if he fails to
turn the same over to the federal government. It seems to me that the
quoted language should be given a liberal construction to avoid any
unseemly and irreconcilable conflict between the federal government and
the state courts. For this reason, I believe that a liberal construction
of the statute should be had, and that it should be held that when a
fund is taken into the custody of a State Court subject to distribution
pursuant to the judgment and execution of that court the fund is
"subject to attachment or execution" under the judicial
process of the State Court. For this reason, I am of opinion that the
provisions of section 3710 do not apply to the instant case, and that
the defendant did not incur any personal liability to the United States
Government for failure to turn over to it money which was not subject to
distraint and which was subject to an attachment or execution under
decree of a competent court.
[Priorities
Need Not Be Discussed]
There has been
considerable discussion in the briefs of counsel as to conflicting
claims of priority of liens among the municipality, state and federal
governments. It is useless to discuss these questions, interesting
though they be, for the reason that the liability of the defendant in
this case is predicated solely upon section 3710 of the Revenue Code and
any discussion of conflicting priorities of liens is entirely beside the
point.
[Federal
Credit Must Be Allowed]
Having reached
this conclusion it is not necessary to decide other issues raised in the
argument of counsel, but I will add that it is my opinion that the
Corporation Court of the City of Norfolk, Virginia, properly held that
the assessment of the Social Security Tax for 1937, under Section 1600
of the Internal Revenue Code (26 USCA 390) is a duplication of the
Unemployment Compensation tax assessed by the State for the same year,
and under Section 1601 of the Internal Revenue Code (26 USCA 390) the
taxpayer is entitled to a credit of 90% of the amount of the tax
assessed. In other words, where 90% of the tax is paid to the State
Unemployment Compensation Commission, the taxpayer is only liable to 10%
of the assessment, to be paid to the
United States
.
The last
clause of paragraph three of Section 1601 of the Internal Revenue Code, supra,
is: "The preceding provisions of this subdivision shall not apply
to the credit against the tax of a taxpayer for any taxable year if such
taxpayer's assets, at any time during the period from such last day for
filing a return for such year to June 30 next following such last day,
both dates inclusive, are in the custody or control of a receiver,
trustee or other fiduciary appointed by, or under the control of, a
court of competent jursidiction," In Re Hy-Grade Meat and Grocery
Co., 26 F. Supp. 294; In Re Standard Composition Co., 23 F.
Supp. 391.
[Judgment
for Defendant]
The equities
of the case are clearly with the defendant. The record shows that the
Trustee attempted to convene the various claimants, kept the District
Attorney's Office and the Office of the United States Collector of
Internal Revenue advised as to what was being done in the State Court.
The
United States
had abundant opportunity to assert its rights to priority in the funds,
if any it had, in the State Court. When the judgment of the State Court
was entered, the defendant was obligated to make the payments ordered by
that Court, as he was under control of that Court, and was required by
the State law to have his account approved by the Commissioner of
Accounts of that Court. It appearing that he tendered to the United
States Collector of Internal Revenue the amount found to be owing by the
State Court, and also tendered same in open Court at the trial of this
case, and both tenders being refused, judgment should be entered for the
defendant, and the bill of complaint dismissed.
An appropriate
order is filed herewith.
1 Section 382
of the Tax Code of Virginia is: "When the officer cannot find
sufficient goods or chattels to distrain for taxes or levies, any person
indebted to or having in his hands estate of the party assessed with
such taxes or levies may be applied to for payment thereof out of such
debt or estate; and a payment by such person of the said taxes or
levies, either in whole or in part, shall entitle him to a charge or
credit for so much on account of such debt or estate against the party
so assessed."
It also
provides: "And if the sum due exceed twenty dollars, shall procure
from the clerk of the circuit court of the county or corporation court
of the city a summons directing such person to appear before such court
on the first day of the next term thereof; and from the time of the
service of any such summons, the said taxes and levies shall constitute
a lien on the debt so due from such person, or on the estate in his
hands."
[58-2 USTC ¶9827]Paul A. Kush,
Plaintiff v. Convair, Defendant
U.
S. District Court, No. Dist. Tex., Fort Worth Div., Civil No. 3456,
7/25/58
[1954 Code Secs. 6332 and 7402--similar to 1939 Code Secs. 3710 and
3800]
Lien for taxes: Property subject to levy: Judgment fund: Jurisdiction
of District Court: Intervention by United States.--A money judgment
recovered by taxpayer in this action was deposited with the Court by
defendant Convair. Thereupon the
United States
, which held a lien against taxpayer for unpaid income and unemployment
taxes, intervened in the suit seeking payment of its claim out of the
fund on deposit. The state of
Texas
and taxpayer's lawyer also intervened seeking collection of unpaid state
unemployment taxes and attorney's fees. After allowing the state
unemployment taxes to be credited against the federal unemployment
taxes, the interveners' claims were ordered to be satisfied out of the
proceeds of the judgment, the remaining balance going to the taxpayer.
Irvin W.
Shelman, for plaintiff and for himself. Sam Lane, Assistant Attorney
General, State of Texas, A. W. Christian, Assistant United States
Attorney, for defendant.
Final
Judgment
ESTES,
District Judge:
On the 8th day
of July, 1958, came on to be heard in the above entitled and numbered
cause the interventions of United States of America, State of Texas and
Irvin W. Shelman, whereupon appeared the intervener United States of
America, by and through the United States Attorney for the Northern
District of Texas, the intervener State of Texas, by and through the
Attorney General of the State of Texas, and intervener Irvin W. Shelman,
in person and in his own behalf, and plaintiff Paul A. Kush, acting by
and through his attorney, the said Irvin W. Shelman, and announced ready
for trial, and thereupon all matters in controversy herein, as well of
fact as of law, were submitted to the Court without the intervention of
a jury.
The Court,
after hearing and considering the stipulations and the evidence herein,
and the pleadings and the argument of counsel, is of the opinion and
finds as follows:
1. That on
June 5, 1957, judgment was entered herein in favor of plaintiff, Paul A.
Kush, and against the defendant General Dynamics Corporation, the
corporate name of Convair, in the amount of $2,386.77, which said amount
was deposited by the defendant Convair in the Registry of this Court,
and is now on deposit herein, and that all issues of fact and of law
have heretofore been disposed of except the respective claims of the
interveners herein and the plaintiff to said fund on deposit.
2. That the
intervener Irvin W. Shelman is entitled, for the services rendered by
him herein, to an attorney's fee in the amount of $300.00, to be paid
out of the said deposit.
3. That
Internal Revenue taxes, payable to intervener
United States of America
, have heretofore been assessed against plaintiff Paul A. Kush as
follows:
(a) Income
taxes for the year 1954, which were duly assessed on May 31, 1955, and
for which notice of tax lien was filed in the Office of the County Clerk
of Tarrant County, Texas, on May 28, 1956, and recorded in Volume 11,
Page 495, Federal Tax Lien Records of said county, and on which said
taxes there is unpaid the principal sum of $441.85, plus interest to
July 8, 1958, in the amount of $138.36, or a total of $580.21.
(b)
Unemployment taxes for the year 1953, which were duly assessed on May
23, 1955, and for which notice of tax lien was filed in the Office of
the County Clerk of Tarrant County, Texas, on July 27, 1955, and
recorded in Volume 11, Page 87, Federal Tax Lien Records of said County,
and on which said taxes there is unpaid, without any credit under the
provisions of Section 3302, Internal Revenue Code of 1954, the principal
sum of $354.56, plus interest to July 8, 1958, in the amount of $91.03,
or a total of $445.59.
(c) Additional
unemployment taxes for the year 1953, which were duly assessed on
January 23, 1956, and for which notice of tax lien was filed in the
Office of the County Clerk of Tarrant County, Texas, on March 28, 1956,
and recorded in Volume 11, Page 496, Federal Tax Lien Records of said
county, and on which said taxes there is unpaid, without any credit
under the provisions of Section 3302, Internal Revenue Code of 1954, the
principal sum of $946.66, plus interest to July 8, 1958, in the amount
of $127.68, or a total of $1,074.34.
4. Notices of
levy for said Internal Revenue taxes were served on Convair on March 5,
1956, and March 29, 1956, and final demand therefor was served on
Convair on May 10, 1957, and on June 28, 1957, the date of said deposit
in the Registry of this Court by Convair, a notice of levy for said
taxes was served on the Clerk of this Court.
5. That
plaintiff Paul A. Kush is indebted to
intervener
State
of
Texas
for unemployment taxes for the third and fourth quarters of the year
1953, on which there is past due and unpaid the sum of $969.62.
6. That the
said
Texas
unemployment taxes should be paid out of the fund on deposit herein and
credit given therefor on the said Federal unemployment and additional
unemployment taxes, pursuant to the provisions of Section 3302, Internal
Revenue Code of 1954.
7. That under
the provisions of Section 3302, Internal Revenue Code of 1954, upon the
payment of said Texas unemployment taxes, in the amount of $969.62, and
the issuance by the State of Texas of proof of credit therefor, the
amounts payable to United States of America for said Federal
unemployment taxes for the year 1953 will be reduced to $474.84, which
amount, plus the said sum of $580.21, due and payable for said income
taxes, or a total of $1,055.05, is payable to intervener United States
of America out of said fund on deposit herein.
8. That the
remainder of said fund on deposit, after deduction of said amounts
payable to Irvin W. Shelman, State of Texas and United States of
America, is payable to plaintiff Paul A. Kush.
It is,
therefore, ORDERED, ADJUDGED and DECREED that the said fund in the
amount of $2,386.77, on deposit herein, be paid out and disbursed by the
Clerk of this Court as follows:
(a) To Irvin
W. Shelman, as attorney's fees, the sum of $300.00.
(b) To State
of
Texas
$969.62.
(c) To
United States of America
, by check payable to the District Director of Internal Revenue,
$1,055.05.
(d) To Paul A.
Kush $62.10.
[67-1 USTC ¶9406]Richard Bishop,
Plaintiff v. Neal S. Warren, District Director, Internal Revenue
Service, Defendant
U.
S. District Court, East.
Dist.
Wash.
, No. Div., Civil Action No. 2586, 270 FSupp 156, 4/14/67
[1954 Code Sec. 6332]
Levy: Surrender of property subject to levy: Joint checking account:
Property held by court.--In a suit to recover monies paid under
notices of levy resulting from his parents' tax delinquencies, R was the
presumptive owner of a one-half interest in a checking account and was
allowed recovery. A sum in the hands of a court paid in satisfaction of
a judgment in favor of R's father was properly surrendered as was money
collected by another upon a collection account referred to it by R's
father.
Howard K.
Michaelsen, Michaelsen & Richard, 2315 N. Monroe, Spokane, Wash.,
for plaintiff. Smithmoore P. Myers, United States Attorney, Robert M.
Sweeney, Assistant United States Attorney, 334 Federal Bldg., Spokane,
Wash., for defendant.
Findings
of Fact and Conclusions of Law
LOWELL,
District Judge:
This matter
came on regularly for trial before this Court on December 20, 1966, the
plaintiff being represented by Howard K. Michaelsen, attorney at law,
and the defendant by Robert M. Sweeney, Assistant United States
Attorney, and the Court having considered the pretrial order herein, the
evidence adduced at trial, the argument of counsel, now makes the
following
Findings
of Fact
I. The
plaintiff Richard Bishop is, and at all times material hereto was, a
resident of the city of
Newport
,
Pend Oreille
County
, State of
Washington
. The defendant Neal S. Warren is, and at all times material hereto was,
the District Director for the Internal Revenue Service, Department of
the Treasury of the
United States
.
II. The
plaintiff is the son of Charles E. Bishop and Ruth N. Bishop, who at all
times material hereto were also residents of the city of
Newport
,
Pend Oreille
County
, State of
Washington
.
III. By
quit-claim deed dated February 8, 1957, Charles E. Bishop conveyed to
his son, the plaintiff herein, a motion picture theater business located
in
Newport
,
Washington
, and operated under the name of the Roxy Theater. Thereafter, there was
operated from the theater building in
Newport
,
Washington
, a loan and collection business.
IV. The
plaintiff Richard Bishop devoted the majority of his time to the
operation and management of the theater business. Charles E. Bishop
devoted most of his time to and controlled the operation of the
collection business. The said Charles E. Bishop prepared and filed
complaints for collection in the
Pend Oreille
County courts. The complaints were filed in the name of Charles E.
Bishop as the party in interest. Charles E. Bishop contacted other
collection agencies in the course of the collection business. The
collection agency bond required under the law of the State of
Washington
was written to Charles E. Bishop as the operator of the collection
business.
V. For the
taxable year 1958, and for the years thereafter, Charles E. Bishop and
Ruth N. Bishop did not file income tax returns. During these years, the
plaintiff Richard Bishop claimed Charles E. Bishop and Ruth N. Bishop as
dependents on his tax returns.
VI. At the
time this action was commenced, there was no federal tax liability
assessed by the Internal Revenue Service against the plaintiff Richard
Bishop.
VII. Prior to
the commencement of this action, assessments for delinquent federal
income and excise taxes had been duly and properly made against Charles
E. Bishop and Ruth N. Bishop. Notices of such delinquent taxes against
Charles E. Bishop and Ruth N. Bishop had been duly and properly filed in
Pend Oreille County
,
Washington
, as follows:
Type of Tax Assessment Amount of Date Notice of
and period Date Assessment Tax Lien Filed
Income 1947 ..... 4/12/63 $ 8,975.39 6/4/63
Income 1948 ..... 4/12/63 2,653.67 6/4/63
Income1949 ...... 4/12/63 1,315.38 6/4/63
Income 1950 ..... 4/12/63 4,478.79 6/4/63
Income 1951 ..... 4/12/63 16,607.94 6/4/63
Income 1952 ..... 4/12/63 8,871.70 6/4/63
Income 1953 ..... 4/12/63 3,273.63 6/4/63
Income 1953 ..... 4/12/63 3,970.28 6/4/63
Income 1954 ..... 4/12/63 3,436.99 6/4/63
Income 1955 ..... 4/12/63 12,005.49 6/4/63
Excise 6/30/54 .. 8/9/63 49,668.65 9/17/63
Said delinquent taxes remain due, owing and unpaid to the
United States
, except for credits in the total amount of $684.62.
VIII. On May
7, 1964, a Notice of Levy was served by the defendant upon the National
Bank of Commerce, Newport Branch, directing the bank to pay to the
defendant any property it had belonging to Charles E. Bishop and Ruth N.
Bishop. Pursuant to the Notice of Levy, the National Bank of Commerce on
June 5, 1964 paid to the defendant the sum of $409.10, which sum was
paid from a checking account at the bank under the name of "City
Finance Company," and upon which the plaintiff Richard Bishop and
his father, Charles E. Bishop, were authorized to draw checks. The sum
of $409.10 was paid into the Treasury of the
United States
and credited against the delinquent tax liability of Charles E. Bishop
and Ruth N. Bishop.
IX. On May 8,
1964 and June 18, 1964, Notices of Levy were served by the defendant
upon the Clerk of the Superior Court of Pend Oreille County, Washington,
directing the clerk to pay to the defendant any property he held
belonging to Charles E. Bishop and Ruth N. Bishop. Pursuant to the
Notices of Levy, the Clerk of the Pend Oreille County Superior Court on
July 6, 1964 paid to the Internal Revenue Service the sum of $268.85.
This sum had been paid into the registry of the Pend Oreille County
Clerk's office in satisfaction of a judgment obtained in favor of
Charles E. Bishop by the said Charles E. Bishop as a part of the
collection business. The sum of $268.85 was paid into the Treasury of
the
United States
and credited against the delinquent tax liability of Charles E. Bishop
and Ruth N. Bishop.
X. On May 12,
1964, a Notice of Levy was served by the defendant upon the Bonded
Adjustment Company of
Spokane
,
Washington
, directing the company to pay to the defendant any property it held
belonging to Charles E. Bishop and Ruth N. Bishop. Pursuant to the
Notice of Levy, the Bonded Adjustment Company on July 13, 1964 paid to
the defendant the sum of $6.67, which sum was held by the Bonded
Adjustment Company as an amount recovered by it upon a collection
account referred to it from Charles E. Bishop operating as Bishop's
Credit Service. The sum of $6.67 was paid into the Treasury of the
United States
and credited against the delinquent tax liability of Charles E. Bishop
and Ruth N. Bishop.
XI. In
addition to the Notices of Levy mentioned in Findings of Fact Nos. VIII,
IX and X, the Internal Revenue Service prior of the commencement of this
action had served Notices of Levy upon fourteen other parties in
connection with the delinquent tax liability of Charles E. Bishop and
Ruth N. Bishop. No money or other property was paid to the Internal
Revenue Service by virtue of these notices, all of which Notices named
Charles E. Bishop and Ruth N. Bishop as taxpayers from whom there were
federal taxes due, owing and unpaid and made demand for any money or
property belonging to said taxpayers. No assets of the theater business
were seized or levied upon the Internal Revenue Service.
XII. The sum
of $268.85 paid by the Clerk of the Pend Oreille County Superior Court
to the Internal Revenue Service pursuant to levy was money belonging to
Charles E. Bishop and Ruth N. Bishop and not to the plaintiff Richard
Bishop.
XIII. The sum
of $6.67 paid by Bonded Adjustment Company to the Internal Revenue
Service pursuant to levy was money belonging to Charles E. Bishop and
Ruth N. Bishop and not to the plaintiff Richard Bishop.
XIV. There is
no evidence by which it can be determined the division of interest, if
any, as between the plaintiff Richard Bishop and Charles E. Bishop in
the sum of $409.10 paid to the Internal Revenue Service by the National
Bank of Commerce pursuant to levy from the City Finance Checking account
and upon which the plaintiff Richard Bishop and Charles E. Bishop were
authorized to draw checks.
From the
foregoing Findings of Fact, the Court makes the following
Conclusions
of Law
I. By virtue
of 28
U. S.
C. 2201, this Court does not have jurisdiction to enter a declaratory
judgment herein. The Court had jurisdiction over the remaining subject
matter of this action and over the parties expense for the taxable year.
If, however,
II. At all
times material herein, and pursuant to 26
U. S.
C. 6321, the
United States
had valid and subsisting liens upon all the property and rights to
property belonging to the delinquent taxpayers Charles E. Bishop and
Ruth N. Bishop.
III. The sum
of $268.85 paid by the Clerk of the Pend Oreille County Superior Court
to the Internal Revenue Service pursuant to levy was properly paid to
the Internal Revenue Service and applied upon the tax delinquency of
Charles E. Bishop and Ruth N. Bishop.
IV. The sum of
$6.67 paid by Bonded Adjustment Company to the Internal Revenue Service
pursuant to levy was properly paid to the Internal Revenue Service and
applied upon the tax delinquency of Charles E. Bishop and Ruth N.
Bishop.
V. The sum of
$409.10 paid by the National Bank of Commerce to the Internal Revenue
Service pursuant to levy was presumptively owned by the plaintiff
Richard Bishop and Charles E. Bishop in undivided one-half interests as
joint tenants, and one-half thereof, or $204.55, was money belonging to
Charles E. Bishop and was properly paid to the Internal Revenue Service
and applied upon the tax delinquency of Charles E. Bishop and Ruth N.
Bishop. The remaining one-half thereof, or $204.55, was presumptively
owned by the plaintiff Richard Bishop.
VI. Except for
the sum of $204.55 mentioned in Conclusion V, the defendant has not
levied upon or attempted to levy upon property belonging to the
plaintiff.
VII. The
defendant is entitled to a judgment dismissing the complaint herein and
dismiss the injunction issued by Order of this Court on November 6,
1964, provided that the plaintiff is entitled to a judgment that the
defendant be directed to return to the plaintiff the sum of $204.55
besides interest.
[78-2 USTC ¶9526]
United States of America
, Plaintiff v. The Board of
County
Commissioners
for
Lucas
County
, et al., Defendants
U.
S. District Court, No. Dist.
Ohio
, West. Div., No. C 76-35, 5/19/78
[Code Sec. 6332--result unchanged under '76 Tax Reform Act]
Levy and Distraint: Failure to surrender seized property: Legal
custody.--The county sheriff was liable for failing to surrender
property for which the government had served a notice of levy. The
notice of levy was served after a court order of distribution had been
made in another case involving the delinquent taxpayer. Thus, the
property was not in legal custody and was not subject to an attachment
or execution under any judicial process. The sheriff was merely holding
the property as a debtor to the persons to whom the court order of
distribution had directed be paid.
Anthony G.
Pizza, Assistant Prosecuting Attorney, Lucas County Court House, Toledo,
Ohio 43624, Lewis H. Kirshner, 1048 Spitzer Bldg., Toledo, Ohio 43604,
William Bamman, Finn, Mahahan & Pietrykowski, 420 Madison, Toledo,
Ohio 43624, for defendants.
Memorandum
and Order
WALINSKI,
District Judge:
This cause
came to be heard on two motions: Motion of Plaintiff for Summary
Judgment against Defendant Sheriff of Lucas County, Ohio, filed pursuant
to Rule 56(a), F. R. Civ. P.; and Defendants' Motion for Summary
Judgment, filed pursuant to Rule 56(b), F. R. Civ. P. All issues have
been briefed by the parties and the matter is now ripe for disposition.
Preliminary
Statement
This action is
brought by the
United States
pursuant to §6332(c) of the Internal Revenue Code of 1954, 26
U. S.
C. §6332(c). 1 Jurisdiction
is predicated on 28
U. S.
C. §§ 1340 and 1345. Plaintiff herein seeks to recover damages in the
sum of $10,117.56 against the Sheriff of Lucas County, the Board of
County Commissioners of Lucas County, Ohio, and the American States
Insurance Company, for the refusal of the Sheriff of Lucas County to
surrender the property of taxpayer Mod-Com, Inc., to the United States
in accordance with a levy served on the Sheriff on July 18, 1974.
Cross
Motions for Summary Judgment
Rule 56(c), F.
R. Civ. P., provides that: * * * judgment sought shall be rendered
forthwith if the pleadings, depositions, answers to interrogatories, and
admissions on 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 a judgment as a matter of law.
Upon
review of the pleadings and the admissions on file in this action, the
Court finds that there is no genuine issue as to any material fact. The
events giving rise to this suit are as follows:
United
Savings and Loan Association v. Mod-Com, Inc., et al., Civil No.
73-2370, was a mortgage foreclosure action commenced in the Court of
Common Pleas of Lucas County, Ohio, and assigned to Common Pleas Judge
George Kiroff. Pursuant to an order of the Court of Common Pleas
(Kirkoff, J.), a judicial sale of property owned by Defendant Mod-Com,
Inc. (taxpayer herein) was held on July 12, 1974. The proceeds of the
sale amounted to $53,500.00, and on July 16, 1974, an Order
Confirming Sale, Ordering Deed and Distribution was entered which
provided for payment in sums certain to various parties, and further
provided that the balance, if any, was to be paid to Defendant Mod-Com,
Inc. The
United States
was not a party to the state court action due to a defect in service of
process, and accordingly the Order of Distribution made no provision for
any liens on the property held by the federal government. The Sheriff's
Return on the sale demonstrates that after satisfaction of the claims of
all other defendants, and payment of costs, the sum of $10,177.56
remained from the proceeds of the sale. On July 18, 1974, William M.
Callanan, Sheriff of Lucas County, was the custodian of said monies,
which were held in a bank account at the Toledo Trust Company.
On July 18,
1974, Sheriff Callanan was served, through an agent, with a "Notice
of Levy", notifying him that there was then owing and unpaid to the
United States
from Mod-Com, Inc. the sum of $30,481.09. Sheriff Callanan failed to
honor the Notice of Levy served on him, but instead paid out the sum of
$10,177.56 to Mod-Com, Inc. on August 15, 1974, by a check drawn on an
account at the Toledo Trust Company.
Prior to
making the payment to Mod-Com, Inc., an employee of the Lucas County
Sheriff's Office presented the "Notice of Levy" to Judge John
J. Connors, then presiding judge on the Court of Common Pleas, Lucas
County, Ohio. Judge Connors placed the following notation on the bottom
portion of the Notice of Levy: "Received subsequent to the Order of
Distribution (7/16/74) not allowed."
The statutory
obligation of surrender of property subject to levy is set forth in §6332(a)
of the Internal Revenue Code of 1954, 26
U. S.
C. §6332(a), which provides, inter alia:
* * * any
person in possession of * * * 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 * * * 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. (Emphasis added.)
The
sole issue before the Court in this action is whether or not the sum of
$10,177.56, which represented the balance of the proceeds of the
judicial sale after all claims had been satisfied, was property
"subject to an attachment or execution under any judicial
process", on July 18, 1974, the date the Secretary demanded
surrender. It is plaintiff's position that after the Order
Confirming Sale, Ordering Deed and Distribution was entered by Judge
Kiroff on July 12, 1974, the proceeds of the sale were no longer subject
to attachment, but rather were held by the Sheriff as agent for the
parties to whom the money was to be paid, including taxpayer
Mod-Com, Inc. Defendants, on the other hand, contend that the property
and its proceeds became subject to judicial process with the
commencement of the action by United Savings, and remained subject to
such process until the proceeds were paid out by the Defendant Sheriff,
thus excepting the proceeds from the reach of 26 U. S. C. §6332(a).
In resolving
this dispute, it should first be noted that the issue of the priority of
the federal tax lien in relation to the claims of other lien holders is
not before the Court. Accordingly, the Court finds the case of First
National Bank v. Charles Henneman Co., 10
Wis.
2d 260, 103 N. W. 2d 24, cert. denied, 364
U. S.
836 (1960), relied upon by the federal government, to be inapposite. The
case of United States v. Swink [41-2 USTC ¶9794], 41 F. Supp. 98
(E. D. Va. 1941), relied on by defendants, is somewhat more helpful.
In Swink,
an action was instituted by the State of
Virginia
in the Corporation Court of the City of Norfolk, Virginia, to subject
funds in the hands of the taxpayer's trustee to payment of certain taxes
due to the state. After the state court action was commenced, but before
an order was entered, the
United States
served a Notice of Levy for taxes due the
United States
with the Corporation Court of the City of
Norfolk
. Thereafter, the
United States
commenced an action in the United States District Court for the Eastern
District of Virginia, seeking to impose liability upon the taxpayer's
trustee for failing to turn over property of a delinquent taxpayer upon
notice of distraint. Said action was commenced under 26
U. S.
C. §3710, the predecessor to 26
U. S.
C. §6332(a). In denying the federal government's claim, District Court
Judge Wyche stated:
* * * It must
be remembered that at the time such distraint was served upon the
defendant a suit, under 382 of the Tax Code of Virginia, had already
been commenced in the State Court by virtue of which the property of the
delinquent taxpayer was brought into that Court and attached with a
specific lien, and made subject to judgment and execution thereunder.
The effect of this action in the State Court was to bring the funds of
the delinquent taxpayer in custodia legis and to make of the defendant a
mere custodian for the State Court and not of the delinquent taxpayer.
Accordingly, when the distraint was served upon him by the Collector of
Internal Revenue he did not have any property of the taxpayer which
under the terms of section 3710 was "subject to distraint"
because the fund which he had in possession hal already been taken into
the custody and under the control of the State Court. It seems obvious
that property already in the custody of a court is not subject to a
summary distraint by an administrative officer. Moreover, section 3710
provides that if the property of the taxpayer is at the time of the
distraint "subject to an attachment or execution under any judicial
process" the person holding such property does not incur personal
liability if he fails to turn the same over to the federal government.
It seems to me that the quoted language should be given a liberal
construction to avoid any unseemly and irreconcilable conflict between
the federal government and the state courts. For this reason, I believe
that a liberal construction of the statute should be had, and that it
should be held that when a fund is taken into the custody of a State
Court subject to distribution pursuant to the judgment and execution of
that court the fund is "subject to an attachment or execution"
under the judicial process of the State Court. For this reason, I am of
opinion that the provisions of section 3710 do not apply to the instant
case, and that the defendant did not incur any personal liability to the
United States Government for failure to turn over to it money which was
not subject to distraint and which was subject to an attachment or
execution under decree of a competent court.
41
F. Supp. at 101-02.
The Court is
in full accord with Judge Wyche's analysis and holding. However, the
facts of the case sub judice differ from those in Swink in
one critical respect. Whereas in Swink the federal government's
Notice of Levy was served prior to the state court's order of
distribution, in the instant case the Notice of Levy was served after
Judge Kiroff's Order Confirming Sale, Ordering Deed and Distribution
was journalized. While the proceeds of the foreclosure sale of taxpayer
Mod-Com, Inc.'s property were clearly subject to attachment or execution
under judicial process prior to the entry of the July 14, 1974 Order,
the Court finds that, under Ohio law, they were not so held after the
Order was entered.
In State,
ex rel. Boller v. Peffly, 78 Ohio App. 242 (Montgomery Co. 1946),
the issue presented was whether funds in the hands of the Clerk of
Courts were held in custodia legis, and therefore free from
attachment, or were merely held by the Clerk as a debtor of the person
to whom the funds were payable, and therefore subject to attachment. The
funds in question had been paid over to the Clerk as bond in a criminal
case. When the criminal action was concluded, an order was entered
releasing the bond and ordering the money refunded to one Mable Boller.
While the cash bond was still held by the Clerk of Courts, Ralph Skilken
commenced a civil action to recover a sum allegedly owed him by Boller,
and attached the money in the possession of the Clerk of Courts.
Thereafter, Boller sought a writ of mandamus against the Clerk to compel
return of the bond.
In resolving
the issue before it, the court noted the general rule that property held
in custodia legis is not subject to attachment prior to
fulfillment of the purpose for which it is held. However, the court
went on to state that:
* * * after
the purpose for which the fund has been held has been fulfilled and an
order made determining who is entitled to the fund and ordering payment
thereof, the fund ceases to be in custodia legis. Thereafter the
officer holding the fund holds it as debtor of the person to whom it is
payable. The purpose of the law having been fulfilled, the officer
thereafter is liable to the owner of the fund.
78
Ohio
App. at 246-47. See generally, Hubbard v. Elden,
43 Ohio St.
380, 384 (1885).
Under the rule
enunciated in Peffly, a fund held by a public official ceases to
be in custodia legis when the court has determined who is
entitled to the fund, and has ordered payment thereof. 78
Ohio
App. at 249-50. See also Weicht v. Automobile Banking Co., 354
Pa.
433, 47 A. 2d 705 (1946), followed in Wheatcraft v. Smith, 362 A.
2d 416, 418 (Pa. Sup. 1976). Applying this rule to the instant case, the
Court finds that the funds held by the Defendant Sheriff as a result of
the foreclosure sale of taxpayer Mod-Com, Inc.'s property ceased to be in
custodia legis when Judge Kiroff entered the Order of Distribution
on June 14, 1974. 2 Thereafter,
Sheriff Callanan held the funds as a debtor to the persons to whom Judge
Kiroff had ordered the proceeds paid, including taxpayer Mod-Com, Inc.
The funds were therefore not "subject to an attachment or execution
under any judicial process" at the time the plaintiff served the
Notice of Levy upon the Defendant Sheriff, and the Defendant Sheriff is
therefore liable to plaintiff for his failure to surrender to the
federal government the sum of $10,177.56 due taxpayer Mod-Com, Inc.
under Judge Kiroff's Order. 3
For the
reasons set forth above,
IT IS ORDERED
that the Motion of Plaintiff for Summary Judgment against Defendant
Sheriff of
Lucas
County
should be and hereby is granted for the reason that there are no genuine
issues of material fact, and plaintiff is entitled to judgment as a
matter of law.
IT IS FURTHER
ORDERED that Defendants' Motion for Summary Judgment should be and
hereby is denied.
This matter is
set for pretrial Friday, May 19, 1978, at 9:30 a. m.
1 26
U. S.
C. §6332(c), provides, inter alia:
(1) * * * Any
person who fails or refuses to surrender any property or rights to
property, subject to levy, upon demand by the Secretary or his delegate,
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 interests on such sum at the rate
of 6 percent per annum from the date of such levy. * * *
2 Whatever the
legal significance of the notation placed upon the Notice of Levy by
Judge Connors, it is clear to the Court that such a notation was not
effective under Ohio law to subject the funds held by the Sheriff as a
debtor to taxpayer Mod-Com, Inc. to an attachment or execution under
