Annotations- Property of Another

---

 

 

6332 Annotations: Property of Another- Levy

Penalty for Failure to Surrender Property: Property of Another

 

[54-1 USTC ¶9222]The Colorado Milling & Elevator Company, a Corporation, Plaintiff v. S. R. Glenn, as Collector of Internal Revenue; The United States of America; Koehler-Spalding Co.; Koehler Brokerage Co.; The Lincoln Bank & Trust Company; B. G. Wholesale Co.; Bottom Bernard Company; Oscar Brown & Sons; L. S. Cherry Co.; Danville Wholesale Grocery Co.; Durham Grocery Co.; Economy Wholesale Co.; Frankfort Grocery Co.; The Great A & P Tea Co.; D. G. Hayes Grocery Co.; Jellico Grocery Co.; Logan Murray Grocery Co.; Otter & Co., Inc.; Richardson Grocery Co.; Raymond Sales Co.; H. Runyan & Sons, Inc.; Vaughn Grocery Co.; W. T. Young Foods, Inc.; Bass Salvage Co.; Raymond-Johns Distributing Co., Defendants

In the District Court of the United States for the Western District of Kentucky at Louisville, Civil Action No. 2490, 118 FSupp 943, January 25, 1954

Distraint: Levy on proceeds of goods sold on consignment: Jurisdiction.--Taxpayer received goods on consignment under an arrangement pursuant to which it sold the goods to customers for an amount covering the base price payable to the consignor plus the additional amount charged by taxpayer for handling, storage and commission. Deficiencies were assessed against taxpayer, and the collector distrained consigned goods, taxpayer's bank account in which the proceeds of sales were deposited, and also the amounts owed to taxpayer by purchasers of the consigned goods. The consignor brought suit on the ground that taxpayer had acted as its agent and that the consigned goods and the proceeds of sale belonged to the consignor. The court held that it had jurisdiction, even though the amount in controversy exceeded $10,000, inasmuch as it involved claims of title to property seized by the United States . However, the goods and the accounts in question were the property of the taxpayer under the arrangement between it and the consignor, and, therefore, were subject to distraint.

William H. Abell, Ogden, Galphin & Abell, Marion E. Taylor Building, Louisville, Ky., for plaintiff. H. Brian Holland, Assistant Attorney General, Andrew D. Sharpe, Frederic G. Rita, Special Assistants to the Attorney General, Washington, D. C., Charles F. Wood, Assistant United States Attorney, Louisville, Ky., for defendants.

Findings of Fact and Conclusions of Law

SHELBOURNE, District Judge:

This action was filed October 21, 1952, by The Colorado Milling & Elevator Company against S. R. Glenn, Collector of Internal Revenue, The United States, Koehler-Spalding Company, Koehler Brokerage Company, Lincoln Bank & Trust Company and numerous other firms and persons and concerns, all of whom were indebted to Koehler-Spalding Company on invoices of beans or peas which they had purchased but had not paid for at the time a warrant of distraint issued by the Collector was served upon them.

Jurisdiction of the action was claimed under Section 1340, Title 28 U. S. Code, the United States being made a party under the provisions of Section 2463 of Title 28 U. S. Code, the complaint alleging that consent to such suit against the United States is granted by Section 2410 Title 28.

[Levy Upon Goods Held on Consignment]

In substance, the complaint alleged that the plaintiff hereinafter referred to as "Colorado" and defendant Koehler-Spalding Company, hereinafter referred to as "Koehler-Spalding" entered into an agreement about September 15, 1951, under which Colorado agreed to and did consign bulk and packaged beans and peas to Koehler-Spalding at Louisville and that the latter agreed to sell the beans and peas on behalf of Koehler-Spalding at prices fixed by Colorado; that Koehler-Spalding was to receive compensation sufficient to care for storage, handling, selling and invoicing, and out of the proceeds of sales of the merchandise was to pay Colorado the base price fixed by Colorado in advance of the sales by Koehler-Spalding, which represented a. f. o. b. Louisville price to be received by Colorado; that thereafter, in August 1952, the Collector of Internal Revenue served a jeopardy assessment against Koehler-Spalding for an amount in excess of $190,000, as delinquent income taxes against Koehler-Spalding, under which jeopardy assessment the Collector on August 26, 1952, seized and distrained the beans and peas in storage at Koehler-Spalding's plant in Louisville and various accounts and bank deposits belonging to Colorado and applied the money and merchandise so seized to the payment of the delinquent income taxes due by Koehler-Spalding.

Colorado claimed that the Collector had no right to levy upon the merchandise or money and accounts and sought by the complaint a judgment requiring the Collector to pay forthwith to Colorado all sums which he had collected from the debtors of Koehler-Spalding from the Lincoln Bank & Trust Company and sought an additional recovery in damages of $2,256.68.

[Defenses]

The answer of the Collector and of the United States denied the material allegations of the complaint and set up two affirmative defenses: 1. That the Court was without jurisdiction of the United States , because Colorado 's demand exceeded $10,000, and that under Section 1340 of Title 28 U. S. Code, Colorado 's forum, if any, was in the Court of Claims. 2. That the complaint failed to state a cause of action upon which relief could be granted.

The Collector's first affirmative defense was that all of the monies received by him under the jeopardy assessment or distraint warrant had been covered into the Treasury of the United States prior to the institution of this action, in accordance with Section 3971(a) of the Internal Revenue Code.

The case was tried to the Court without a jury September 3, 1953.

Counsel for plaintiff and defendants United States and the Collector have filed briefs and suggested findings of fact and conclusions of law. The Court makes the following findings of fact and conclusions of law, separately stated:

Findings of Fact

1. Plaintiff, The Colorado Milling & Elevator Company, is a corporation created under the laws of the State of Colorado . Defendant Koehler-Spalding Company is a corporation created under the laws of the State of Kentucky and doing business at Louisville , Kentucky .

2. About September 15, 1951, Colorado and Koehler-Spalding entered into an agreement, by which Colorado consigned dried beans and peas to Koehler-Spalding, which the latter agreed to sell from its Louisville plant where it maintained warehouses and elevators.

From the time the agreement became effective until sometime in January 1952, Koehler-Spalding reported to Colorado sales and invoices for such sales made in the name of Colorado and the customer remitted directly to Colorado.

In January 1952, the arrangement was changed so that Koehler-Spalding invoiced the sales to the purchasers in the name of Koehler-Spalding, the price of the sales being--first a base price furnished by Colorado to Koehler-Spalding and referred to in the evidence in this case as the base price f. o. b. Louisville which Colorado was to receive from each sale. Second, an additional amount representing the amount due Koehler-Spalding to compensate it for storing, handling and selling the merchandise. At the end of each day, Koehler-Spalding would report to Colorado the total sales made that day and Colorado in turn billed Koehler-Spalding for that day's aggregate sales. The proceeds of all sales, when received by Koehler-Spalding from the customers, were deposited by Koehler-Spalding in its general checking account in the Lincoln Bank & Trust Company at Louisville .

There is no evidence in this case as to any unconditional guaranty by Koehler-Spalding of the solvency of any customers to whom it sold merchandise consigned to it by Colorado and in making payment to Colorado, Koehler-Spalding remitted by check drawn on its general banking account in the Lincoln Bank & Trust Company at Louisville.

No special account was maintained by Koehler-Spalding for the deposit of the proceeds of sales of merchandise and no system of accounting has been filed in the evidence by which the Court could ascertain in the amount of any particular sale the portion thereof due Koehler-Spalding and the portion thereof due Colorado.

The accounts of Koehler-Spalding with its customers, to whom it sold the beans and peas consigned to it by Colorado , were kept in the same manner as other accounts of Koehler-Spalding with other wholesalers and manufacturers from whom it obtained merchandise which it sold.

3. On or about August 1, 1952, the Commissioner of Internal Revenue assessed against Koehler-Spalding deficiencies of income taxes for the years 1942 to 1946 inclusive, aggregating $192,418.56. The assessment lists covering these assessments were received by the defendant Glenn as Collector of Internal Revenue at Louisville , Kentucky , on August 4, 1952.

On or about August 26, thereafter, notice of the assessments and demand for payment were made upon Koehler-Spalding and when payment was not made, warrants of distraint issued and on August 26, 1952, notices of the levy under the warrants of distraint were served upon the Lincoln Bank & Trust Company, Louisville, and upon the following persons and business concerns to whom Koehler-Spalding had sold beans and peas consigned to it by Colorado and who were indebted to Koehler-Spalding, as appeared on its books, in the following amounts:

Name                                           Amount

B. G. Wholesale Co. ...............         $2,375.77

Bottom Bernard Co. ................            956.63

Oscar Brown & Sons ................            325.82

L. S. Cherry Co. ..................             10.44

Danville Wholesale Grocery Co. ....            165.85

Durham Grocery Co. ................            301.45

Economy Wholesale Co. .............            579.00

Frankfort Grocery Co. .............            426.68

The Great A. & P. Tea Co. .........            723.75

D. G. Hayes Grocery Co. ...........          1.806.61

Jellico Grocery Co. ...............             55.80

Dyche Jones Food Stores, Inc. .....             94.00

Kentucky

 Food Stores ..............          1,280.92

Louisville Grocery Co. ............            472.40

Logan Murray Grocery Co. ..........          1,174.50

Otter & Co., Inc. .................             42.00

Richardson Grocery Co. ............             68.75

Raymond Sales Co. .................             61.09

H. Runyan & Sons, Inc. ............          1,323.59

Vaughn Grocery Co. ................            102.29

W. T. Young Foods, Inc. ...........          1,114.00

Bass Salvage Co. ..................            125.80

Raymond-Johns Distributing

Co.
 ...............................             10.44

 

Upon the demand of the Collector, the above persons and firms paid the amounts of their respective indebtedness and the Lincoln Bank & Trust Company paid to the Collector the sum of $28,000.

4. Promptly, upon receipt of the payments of said various amounts and in accordance with the requirements of Section 3971(a) of the Internal Revenue Code, Glenn, as Collector, covered said payments into the Treasury of the United States.

5. Thereafter, and on September 15, 1952, Colorado demanded of the Collector $5,538.58 out of the $28,000 bank account, which the Lincoln Bank & Trust Company had paid to the Collector as the amount of the checking account of Koehler-Spalding and also demanded of the Collector $13,597.58 of the amounts received by the Collector from the debtors of Koehler-Spalding, claiming that the $5,538.58 of Koehler-Spalding's bank account and $13,597.58 of its accounts represented the proceeds of sales of merchandise which Koehler-Spalding had sold as the agent or factor of Colorado.

6. Colorado has not established in this action, by evidence satisfactory to the Court, that $5,538.58 of the $28,000 bank account of Koehler-Spalding in the Lincoln Bank & Trust Company, represented the base price f. o. b. Louisville , which Koehler-Spalding had agreed to pay Colorado for merchandise. Their claim in this respect is based upon the "first in, first out" theory and was thus stated by Colorado 's chief accountant A. K. McClelland:

"The opening balance of the Koehler-Spalding account on August 1st was $10,716.97. During the month of August, or before August 26th, there were deposits to the total amount of $71,656.74, which with the opening balance made a total of $82,373.71, total funds available in August. Against that, the Lincoln Bank & Trust Company honored checks in the total amount of $53,830.31 remaining in the bank.

"Taking the total amount of cash available, beginning with the opening balance and listing deposits in sequence on the dates they were made and taking the assumption that the last deposits made were those still remaining in the bank, using the first-in, first-out basis, it required the opening balance and all of the deposits through the 15th and a portion of the deposit made on the 18th to cover the $53,543.40 in checks that were honored by the bank--to cover the exact amount to be required, $4,359.36 of the $7,483.04, that would have left of this deposit of the 18th, $3,124.58 that was not required to cover checks honored by the bank during the month of August.

"To develop the first-in, first-out basis, as to the funds of the Colorado Milling and Elevator Company which were included in these deposits, I divided the $576.01, Colorado funds for August 18th in exactly the same proportion as the total deposit had to be divided in order to cover the total checks which were honored by the bank. On that basis, $335.52 of the $576.01 would have been used in honoring the checks which were paid by the bank and there would have been left $240.49 of that deposit, which on the first-in, first-out basis would still have remained in the bank on August 26th and to the firm's account and the deposits made from there after that time through August 26th on a first-in, first-out basis would still have remained in the bank on August 26th. The total funds in the bank were $28,830.31 and the amount of the Colorado Milling Company's funds developed on the basis I have outlined were $5,538.58."

7. The amount of the twenty-three accounts, aggregating $13,597.58, which Colorado seeks to recover represents not only the amount which Koehler-Spalding owed to Colorado, as the base price f. o. b. Louisville for the beans and peas, but includes the additional amount which Koehler-Spalding charged the purchasers for handling, storing and commission.

Conclusions of Law

I. The Court has jurisdiction of the parties and the subject matter under Section 1340, Title 28 U. S. Code.

It is claimed by the United States that the Court is without jurisdiction because plaintiff's claim is in excess of $10,000, and that this Court's jurisdiction under the Tucker Act, Title 28 U. S. Code, Section 1346(a)(2) is limited to claims not exceeding $10,000.

In Stuart v. Chinese Chamber of Commerce of Phoenix , 168 Fed. (2d) 709 [48-2 USTC ¶9315], the Court said:

"From early date the Supreme Court has held that district courts having jurisdiction of property taken or detained by revenue officers under authority of any revenue law of the United States, are given power to decide claims of title and to award to the rightful owner possession of the property seized. * * *

"We have been unable to discover, and have been apprised of no procedure prescribed either by the regulations or the code whereby a third party claimant, not a taxpayer, may reclaim property unlawfully seized or restrained, and since this is not an action to recover a tax alleged to have been erroneously assessed or collected, the Collector could not subject the appellants to the necessity of filing a full claim for refund under section 3772 of the Internal Revenue Code. In that event, a demand putting the Collector on notice of the appellees' position and apprising him of the amounts and the reason for their respective claims should be sufficient."

See also Glenn v. American Surety Company, (C. A. 6) 160 Fed. (2d) 977 [47-1 USTC ¶9220], and In Re Fassett, 142 U. S. 479.

II. The beans and peas levied on by the Collector, the bank account in the name of Koehler-Spalding and the accounts sought to be recovered by the plaintiff were the property of Koehler-Spalding.

There can be no doubt that the original arrangement between Colorado and Koehler-Spalding contemplated that the latter would act merely as the agent or factor of Colorado in the sale of the beans and peas, and had the conduct of the parties been in accordance with the plan, no confusion would have resulted, but as said by the Court in In Re Wells, 140 Fed. Rep. 752:

"There is no particular magic in the term 'consigned' or 'consigned account.' In a sense all goods shipped to another are consigned to him. The question is what was the inherent character of the transaction, which depends upon the purpose of it. Were the goods put in the hands of the one party by the other, to be sold for him and on his account, creating the relation of principal and factor; or were they turned over to such party, to be treated and disposed of as his own, being responsible to the other simply for the price? In the one case we have a trust or bailment, the goods throughout being those of the consignor or principal, as well as the moneys received for them. In the other there is a sale; the superadded condition, sometimes appearing, that the title shall not pass until the goods are paid for, amounting to nothing as a restriction upon it."

In the case of In Re Wells, supra, the Court quotes with approval from 24 American & English Encycl. Law (2d Ed.) 1026, the following:

"If, however, the consignee or factor is to sell upon terms fixed by himself, and is bound to pay to the consignor a fixed price, the contract is one of sale."

In Taylor v. Fram et al. (C. A. 2), 252 Fed. Rep. 465 (469) it is held that an agreement of which creditors do not have constructive notice, which reserves title to a consignor who nevertheless and contrary to the terms of the agreement permits the consignee to make sales and deposit the proceeds of sales in his general bank account and use them for his own purposes, does not entitle the consignor to claim proceeds of the sales as principal against his consignee as agent.

III. The arrangement as contemplated by the parties in September 1951 and January 1952, as reflected by the letters from Koehler-Spalding to Colorado , indicates an intention to establish the relationship of principal and agent. The expressions, however, in contracts are not conclusive of relationships that arise between parties as a result of the method of transacting business actually conducted between them.

Courts will ignore language of a contract which is at variance with the conduct of the parties pretending to act under the contract. City of Owensboro v. Dark Tobacco Growers Association, 222 Ky. 164.

It is concluded that the action of the Collector in subjecting the property assessed under the distraint warrant to the payment of the tax liability of Koehler-Spalding was proper, for the reason that the property assessed was property of the taxpayer and the claim of Colorado to be the owner of the property or entitled to the bank account, or any part thereof, or to the accounts assessed by the Collector should be dismissed.

A judgment is accordance with these findings and conclusions here made will be submitted by Counsel for the defendants, on notice to plaintiff's Counsel.

 

[55-2 USTC ¶9605]Brinker Supply Company, a corporation, Plaintiff v. Edward C. Dougherty, District Commissioner of Internal Revenue, and Raymond S. Kraft, Acting Director of Internal Revenue, Successors to Stanley Granger, Collector of Internal Revenue, Defendants

In the District Court of the United States for the Western District of Pennsylvania, No. 1738 Miscellaneous, 134 FSupp 384, June 30, 1955

[1939 Code Sec. 3690--similar to 1954 Code Sec. 6331(a)]

Levy and distraint: Another's property: Leased equipment.--The Collector of Internal Revenue had no right to levy on the construction equipment in the possession of the delinquent taxpayer but leased from plaintiff. The warrants of distraint issued by the Collector were quashed.

Ralph E. Smith, Economy Bank Bldg., Ambridge, Ra., for plaintiff. John W. McIlvaine, United States Attorney, 600 New Federal Bldg., Pittsburgh, Pa., for defendants.

Opinion and Order

Opinion

MARSH, District Judge:

This case is before the court on the application of Brinker Supply Company to quash certain warrants of distraint ¹ issued by the Collector of Internal Revenue.

At the outset it should be noted that this court has jurisdiction to entertain this proceeding, and in the attending circumstances, we think it can be disposed of summarily. Raffaele v. Granger, 196 Fed. (2d) 620 (3d Cir. 1952) [52-1 USTC ¶9321]; Rothensies v. Ullman, 110 Fed. (2d) 590 (3d Cir. 1940) [40-1 USTC ¶9308].

There is no dispute that on January 22, 1952, an agent of the Collector, acting under the authority of certain warrants of distraint issued by the Collector in September, 1951 and in January, 1952, levied on certain items of road building machinery in the possession of the delinquent taxpayer, Kline & Schmidt, Inc., a corporation of Monaca, Beaver County , Pennsylvania . Immediately following the levy, the proponent, Brinker Supply Company, notified the defendant Collector of its interest in the chattels and demanded possession. The Collector refused to relinquish possession.

After filing its motion to quash, the plaintiff submitted an affidavit made and verified by Fred C. Brinker, Secretary of Brinker Supply Company.

[Equipment Leased]

This affidavit alleged the following facts: On March 26, 1951, the Brinker Supply Company leased to Kline & Schmidt, Inc., four items of equipment which are the subject of the Collector's distraint. The lease created a bailment on a weekly basis. The rental was $150.00 per week which was to be paid by the bailment lessee Kline & Schmidt, Inc. This bailment lease contained no option to purchase the items. Upon default by the lessee, the lessor retained the right to immediately repossess the leased property. Following the seizure of the property by the Collector, the lessee refused and did fail to pay the weekly rental. At no time did the Brinker Supply Company bargain, sell or in any way transfer to Kline & Schmidt, Inc., any of the items seized by the defendant Collector.

The Collector's reply consisted of unsworn and unverified statements that the taxpayer-lessee had an equity in the property when it was seized. In addition he attached copies of three separate bailment lease contracts and a conditional sales contract, each contract purporting to cover one of the four items covered by the lease of March 26, 1951, relied upon by Brinker Supply Company.

The first of these contracts bears the date of October 2, 1947, and purports to be a bailment lease with an option to purchase. It was signed "Brinker Supply Company, Inc." and "Lawrence A. Schmidt". The second is dated April 27, 1948. This purports to be a bailment lease with an option to purchase like the first. This is signed "Brinker Supply Company, Inc., by Fred C. Brinker" and "L. A. Schmidt". The third, dated June 13, 1949, and also purporting to be a bailment lease with an option to purchase, was signed "Brinker Supply Company, Inc., By C. H. Brinker, Pres." and "Kline & Schmidt By Charles M. Kline". The fourth and final document is dated August 3, 1949. This purports to be a conditional sales agreement. This document is signed "Brinker Supply Company By F. C. Brinker, Treas." and "Kline & Schmidt By L. A. Schmidt". ²

It is apparent that none of these contracts were signed by the taxpayer Kline & Schmidt, Inc., as was the contract of March 26, 1951. The latter was clearly signed for the corporation by "L. A. Schmidt, Sec'y and Treas." This makes the four documents which the opponent of the application has produced res inter alios acta. There is no allegation even in the answer to the motion that the signator of any of the contracts purported to sign for the corporation. Neither is there any allegation that "Kline & Schmidt" was "Kline & Schmidt, Inc." Since the Collector has had more than sufficient time to reply, it appears to the court that said Collector is unable to raise either a material issue of fact or a valid defense. ³ Therefore, on this issue alone, an order quashing the warrants is proper.

[Property of Another]

But even if the Collector could succeed in convincing this court that the documents were not res inter alios acta, he would still be faced with establishing his claim to any of the property held by the taxpayer under the bailment lease. It is too well established for dispute that the Collector's distraint ⁴ is only valid against the property of the taxpayer. The property of no other can be so taken to satisfy the taxpayer's obligation. ⁵ Raffaele v. Granger, supra; 9 Mertens, Law of Federal Income Taxation §49.163 (1943). It follows irresistably that the bailor's or lessor's interest cannot be so seized, but rather only the possessory interest of the bailee or lessee. The bailor's or lessor's reversion is vested in him for the duration of the lease, and the present enjoyment of the reversion revests according to the terms of the contract. In the contract concerned, such revesting occurs when the bailment lessee defaults in his payments. It is undisputed that all of the equipment concerned was possessed under such a condition. Therefore, when the Collector seized the property, he had only the bailment lessee's interest--the present enjoyment--and when the bailment lessee defaulted this interest was lost to him and, therefore, to the Collector. This is the law of Pennsylvania ; Scott, Law of Bailments 44ff. (1931); and it is this law which determines the quantum of the taxpayer's property in the chattels distrained. Raffaele v. Granger, supra.

As has been noted, since the bailment lease of the four pieces of equipment involved covered the same pieces as were covered by the earlier bailment leases and conditional sale, and since the bailor or lessor in the former was the same as the bailor or lessor and conditional vendor in the latter, we may assume that no title passed under the latter contracts at any time prior to the execution of the former. For to say otherwise in the absence of facts would be to presume that the proponent did not own the property in the face of his sworn statement that he did.

These considerations all lead to the conclusion that the case does not present any issue of fact and that as a matter of law all the interest of the taxpayer terminated upon its default if it had any interest in the chattels at all. Therefore, there is no property in the chattels which can properly be subjected to distraint by the Collector for the tax liability of the taxpayer Kline & Schmidt, Inc. No purpose will be served by hearing testimony and a decision on the merits granting the relief sought is in order. See: Sauters v. Young, 118 Fed. Supp. 361 (W. D. Pa. 1954). Accordingly, the warrants will be quashed and all security given by the proponent in lieu of the chattels seized will be released.

An appropriate order will be entered.

Order of Court

AND NOW, to-wit, this 30th day of June, 1955, it is ordered that the warrants of distraint of September 27, 1951 and January 28, 1952, respectively, as they pertain to

1--3-5 ton Buffalo Springfield Roller.

1--10 ton 3 Wheel Roller No. 7107 Huber

1--8-10 ton Tandem Roller No. 5-T316 Huber

1--M-B-P610 Power Grader No. 448-5

be and the same hereby are quashed.

It is further ordered that Clerk of this Court return to Brinker Supply Company any and all security posted by it in lieu of the specific goods and chattels aforementioned.

¹ 26 U. S. C. §3690 (1952).

² It is interesting to note that under the terms of the alleged contracts, final performance under any of them would have been due in November, 1950.

³ Hearings were held on December 19, 1952 and September 29, 1954. Neither party at either hearing offered any testimony or any additional pertinent or relevant matter.

⁴ Distraint has been defined as "[t]he taking of a chattel from the possession of a wrongdoer or obligor to enforce the performance of an obligation." 27 C. J. S. Distraint.

⁵ There appears to be no dispute concerning the tax liability of the taxpayer or the facts relating to the issuance of the warrants. Moreover, it appears that the distraint when made was entirely proper because the taxpayer, admittedly, had rightful possession of the chattels at the time. The default occurred only after distraint.

 

[57-1 USTC ¶9423] United States of America , Plaintiff v. Enterprise Plumbing and Heating Company, Inc., Defendant

U. S. District Court, Dist. N. J., Civ. No. 1014-54, 2/7/57

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

Collection of taxes: Levy and distraint: Taxpayer's property in hands of another: Burden of proof.--The Collector of Internal Revenue issued warrants of distraint for withheld federal income taxes and Federal Insurance Contributions Act taxes allegedly due for 1949 and 1950. When the taxes remained unpaid, warrants of distraint and notice of levy were served on defendant directed to a sum of money due from the defendant to the taxpayer. Demand for payment was not honored and this suit was brought to recover judgment against the defendant in a sum equal to the value of the property or rights belonging to the taxpayer. The defendant denied that it had funds due and owing to the taxpayer. The Court decided in favor of the defendant and against the Collector on the ground that the latter had not sustained the burden of proving by a fair preponderance of evidence not only taxpayer's liability for the taxes but also defendant's indebtedness to taxpayer and that it was actually in possession of funds due and payable to the taxpayer.

Raymond Del Tufo, Jr., United States Attorney, Federal Building , Newark , N. J., for plaintiff. Antonio R. Cioffi, 113 North Fourth Street , Camden , N. J., for defendant.

Findings of Fact and Conclusions of Law

SMITH, District Judge:

This is a civil action in which the plaintiff seeks a judgment against the defendant "in a sum equal to the value of property or rights to property belonging to the Standard Sheet Metal Company." The claim here asserted is predicated primarily on the tax liability of the Standard Sheet Metal Company, which liability is not disputed. It is alleged that there is in the possession of the defendant certain sums owed by it to the Standard Sheet Metal Company and subject to distraints and levies heretofore made. This allegation is denied. Therefore, the only issue presented for determination is a narrow issue of fact.

Facts

I The Commissioner of Internal Revenue, between April of 1949 and August of 1950, filed assessments against the Standard Sheet Metal Company for the taxes due for the first and fourth quarters of the year 1949 and the first and second quarters of the year 1950, to wit, withholding taxes due under the pertinent provisions of the Internal Revenue Code of 1939, 28 U. S. C. A. 1621, et seq., and employment taxes due under the Federal Insurance Contributions Act of 1939, 28 U. S. C. A. 1400, et seq. The taxes assessed, together with interest and penalties thereon, were in the total amount of $5,162.65. The assessments were not honored by the taxpayer and the taxes were not paid.

II The Collector of Internal Revenue, pursuant to the authority vested in him by statute, issued warrants of distraint on June 13, 1949, March 22, 1950 and June 15, 1950. When the taxes remained unpaid the Collector of Internal Revenue, on July 25, 1950, served upon the defendant copies of the warrants for distraint and a notice of levy. The notice of levy was apparently directed to the sum of $4,877.33 allegedly due from the defendant to the taxpayer under a certain contract. The notice of levy was not honored for reasons hereinafter discussed.

III Thereafter, on February 6, 1952, the Collector of Internal Revenue served upon the defendant a final notice and demand for payment. The demand for payment was not honored. An additional notice of levy and demand for payment were served upon the defendant on June 12, 1953, at which time there was due and owing from the taxpayer taxes, together with interest and penalties thereon, in the amount of $6,122.30. The defendant again refused to honor the notice of levy and demand for payment. The present action followed.

Discussion

The defendant does not dispute either the liability of the taxpayer or the facts thus far recited. The defendant denies, however, that it is in possession of funds due and owing the taxpayer; it denies any indebtedness to the taxpayer. The burden is therefore upon the plaintiff to prove by a fair preponderance of the evidence not only the liability of the taxpayer to the plaintiff but also the defendant's indebtedness to the taxpayer. The burden is upon the plaintiff to prove that the defendant is actually in the possession of funds due and payable to the taxpayer. The plaintiff has failed to sustain this burden; in fact, the evidence offered by the plaintiff leaves much to be desired and fails to overcome the defendant's denial of its indebtedness to the taxpayer.

Conclusions

I This Court has jurisdiction of the subject matter and the parties.

II The plaintiff has failed to sustain the burden of proof cast upon it by law.

III The defendant is entitled to a judgment in its favor.

 

[60-1 USTC ¶9320] United States of America v. American Textile Machine Corporation and Paul Kent

U. S. District Court, Middle Dist. Tenn., Nashville Div., Civil No. 1399, 2/23/60

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

Property: Levy: Surrender: Penalty.--Since the defendant corporation was actually insolvent at the time of the levy against its tax-delinquent creditor, and since the individual defendant caused the corporation to pay to the Government, pursuant to the levy, cash far exceeding the amount of cash which the corporation had on the date of the levy, there is no personal liability against either defendant. Distraint for taxes applies only to the property of the delinquent taxpayer itself.

Fred Elledge, Jr., United States Attorney, and R. Hunter Cagle, Assistant United States Attorney, United States Court House, Nashville 3, Tenn. , for plaintiff. Judson Harwood, Nashville Trust Building , Nashville 3, Tenn. , for defendant.

Finding of Facts and Conclusions of Law

MILLER, District Judge:

Pursuant to the memorandum opinion filed in this cause on September 13, 1956, this cause came on for further hearing in order to give the plaintiff an opportunity to offer proof that the American Textile Machine Corporation was solvent at the time the levy was served on defendant, Paul Kent.

Finding of Facts

From the additional evidence offered, the Government has failed to establish that the American Textile Machine Corporation was solvent and able to pay its debts at the time of the levy in this cause. The evidence in fact establishes that the said American Textile Machine Corporation was not solvent and was not able to pay its debts at the time of the levy and the defendant Paul Kent did not willfully ignore said levy, but on the contrary made or caused to be made very substantial payments on the taxes of Hold Stitch Machine Company by American Textile Machine Corporation subsequent to said levy said payments far exceeding the cash on hand of American Textile Machine Corporation at the time of the levy.

Conclusions of Law

The only "property or right to property" contemplated by Section 3710--(I. R. C. 1939) are such as where the holder's payment or transfer thereof to the Collector will operate to discharge the holder's liability to the owner. (U. S. v. Penn Mutual Life Insurance Co., 130 F. 2d 495 [42-2 USTC ¶9623].)

Since American Textile Machine Corporation was obligated to Hold Stitch only for money, it could not transfer property other than money to the Government and thereby be relieved of its obligation to Hold Stitch.

Since the American Textile Machine Corporation was actually insolvent at the time of the levy and since defendant, Paul Kent caused American Textile Machine Corporation to pay to the Government pursuant to said levy, cash far exceeding the amount of cash which American Textile Machine Corporation had on the date of said levy there is no personal liability against Paul Kent or his estate.

An order dismissing this cause will be entered.

Order

In accordance with the finding of facts and conclusions of law filed in this cause this suit against Paul Kent's estate is hereby dismissed.

Amended Order (2/26/60)

The order entered February 23, 1960, dismissing this suit against Paul Kent's Estate, is hereby amended to include the dismissal of this suit against American Textile Machine Corporation in conformity with the Findings of Fact and Conclusions of Law entered on the same date.

It is, therefore, accordingly Ordered that this suit against American Textile Machine Corporation be, and the same is, hereby dismissed.

 

[59-2 USTC ¶9745]Herberts-Princess Stores, Incorporated v. Southern Realty Corporation, et al. United States of America v. Dress-Eteria Shops, Inc., et al.

U. S. District Court, East. Dist. Va., Richmond Div., Civil Action Nos. 2647, 2880, 8/31/59

[1954 Code Sec. 6332]

Collection of tax: Surrender of property subject to levy: Property in custody of court.--The court determined that of the $4,374.99 paid into the court by a sublessee, $2,457 was payable to one co-lessor (a corporation) and its attorneys, $1,836 was payable to the other co-lessor and her attorneys, and $81.99 was payable to the United States. The United States was granted a $100,323.67 judgment against the lessee which had assigned its interest in the lease, but had reserved an increased rental.

Arthur B. Daniel, 118 South 6th Street, Richmond, Va., for Dresseteria Shops, Inc. Marshall Lowenstein, 516 American Building, Richmond, Va., for Southern Realty, Harry Schrieberg, Mutual Building, Richmond, Va., for Herberts-Princess, etc., Oscar Lager, Henry Koplov, t/a Collins. Stanley Keeter, Assistant United States Attorney, Richmond , Va. , for United States .

Order

HUTCHESON, District Judge:

This day came the parties, by counsel, except the defendant, Elkay, Incorporated, said defendant being in default and not represented by counsel, upon the papers previously filed, the stipulations and admissions of the parties, by counsel, and the motions for summary judgment in each case on behalf of Southern Realty Corporation and Florence Maupin, after reasonable notice to all parties, and upon the motion of The United States of America, by Shanley Keeter, Assistant United States Attorney, for leave to file an amended complaint, and was argued by counsel,

On consideration whereof, the Court doth ADJUDGE AND DECREE THAT:

1. The above styled cases, relating to the same subject matter and involving the same parties, have been previously consolidated for hearing by agreement of counsel and by the Court, on February 12, 1959.

2. The preposed amended complaint, which The United States of America moves leave to file, does not state a new cause of action; said motion of The United States of America is denied.

3. There is no genuine issue as to any material fact and the motions for summary judgment in each case are, therefore, granted.

[Facts]

4. Southern Realty Corporation and Florence Maupin are the owners of certain premises leased to Dress-Eteria Shops, Incorporated (hereinafter called Dresseteria).

5. Dresseteria, assigned its rights in said premises to Oscar Lager and Henry Koplow, trading as Collins, Portsmouth, Virginia, conveying its whole term in said premises but reserving an increased rental; the leasehold was further assigned to Herberts-Princess Stores, Incorporated, all prior to April 1, 1957.

6. On April 1, 1957, Herberts-Princess Stores, Incorporated, was served with notice of levy of The United States of America on any funds due Dresseteria. Thereafter, on April 28, 1959, Herberts-Princess Stores, Incorporated, paid the monthly installment for April, 1957, to Southern Realty Corporation for distribution to Florence Maupin and Dresseteria, and subsequently paid into the registry of this Court the monthly rental installments due for the months of May, June and July, 1957. The monthly installment for March, 1957, had been paid on March 28, 1957.

7. Herberts-Princess Stores, Incorporated defaulted in the payment of rent (May, June and July), which was owed by it to the defendants, Southern Realty Corporation and Florence Maupin, the defendant, Dresseteria, being secondarily liable therefore. Under the terms of the leases, Herberts-Princess was in default and Southern Realty Corporation and Florence Maupin terminated their leases for non-payment of rent.

8. The defendant, Southern Realty Corporation, shall recover and have judgment against the plaintiff, Herberts-Princess Stores, Incorporated, in the sum of $2,100.00 (being the rent reserved for the months of May, June and July, 1957) plus legal interest thereon from July 1, 1957 to November 1, 1957, and the further sum of $315.00 on account of attorney's fees.

9. The defendant, Florence Maupin, shall recover and have judgment against the plaintiff, Herberts-Princess Stores, Incorporated, in the sum of $1,800.00 (being the rent reserved for the months of May, June and July, 1957) plus legal interest thereon from July 1, 1957 to November 1, 1957.

10. The balance of the funds paid into the registry of the Court is owing to the United States of America , by virtue of its tax lien against Dresseteria.

11. The United States of America shall have judgment against Dresseteria, in the amount of $100,323.67, with interest from September 6, 1951, less and except the sum of $81.99.

12. That the allegations of the United States asserting personal liability against the parties defendant in Civil Action No. 2880 are dismissed with prejudice.

[Conclusion]

Wherefore, the Court both order that the Clerk of this Court do check upon the fund of $4,374.99 paid into the registry of the Court herein in the amounts and to the parties, as follows:

(1) To Southern Realty Corporation and Dervishian, Lowenstein and Dervishian, its attorneys: $2,457.00.

(2) To Florence Maupin and Dervishian, Lowenstein and Dervishian, her attorneys: $1,836.00.

(3) To the Treasurer of The United States : $81.99.

 

[65-1 USTC ¶9218] United States of America , Appellant v. Bernard Stoumen, Appellee

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 14926, 340 F2d 321, 1/28/65, Affirming District Court decision, 64-1 USTC ¶9437

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

Levy and distraint: Third party not subject to levy.--Since a brother was not indebted to his deceased brother's estate, he was not subject to a levy by the Government to satisfy the estate's unpaid tax liability for the years 1943-1945.

Ralph A. Muoia, Department of Justice, Washington , D. C. 20530, for appellant. W. Bradley Ward, Schnader, Harrison, Segal & Lewis, 1719 Packard Bldg., Philadelphia, Pa., for appellee.

Before BIGGS, Chief Judge, and KALODNER ANDSMITH, Circuit Judges.

Opinion of the Court

PER CURIAM:

An examination of the record in this case discloses no error. The findings of fact and conclusions of law filed by the court below are correct. The judgment will be affirmed.

 

[55-2 USTC ¶9626] United States of America , Plaintiff v. Peoples Savings Bank and Trust Company of Wilmington , N. C., Defendant

In the United States District Court for the Eastern District of North Carolina, Wilmington Division, Civil No. 579, July 19, 1955

[1939 Code Sec. 3710(a)--substantially unchanged in 1954 Code Sec. 6332(a)]

Surrender of property subject to levy: Taxpayer's funds assigned to surety on performance bond.--Prior to the Government's notice of levy and distraint an assignment agreement was executed by taxpayer, a construction company, and the Employer's Mutual Casualty Company which was surety for taxpayer on a performance bond under a construction contract and had acquired an interest in the funds, now in the possession of the plaintiff bank, by virtue of an application assignment. The funds were not the property or property rights of taxpayer which were subject to distraint.

United States Attorney, Raleigh, N. C., for plaintiff. James & James, Wilmington , N. C., for defendant.

Judgment

GILLIAM, District Judge:

This cause coming on and being before the undersigned Judge of the United States District Court for the Eastern District of North Carolina, Wilmington Division, at the Special July Term 1955, and the Court having heard all the evidence finds therefrom the following facts:

1. That prior to and as of the date this action was begun certain sums of money were lawfully due the plaintiff, United States of America , by the Port Construction Company, Inc., on account of certain unpaid tax assessments as alleged in the complaint.

2. That on July 29, 1953, prior to date this action was begun, the plaintiff served notice of levy and distraint warrants on the defendant, Peoples Savings Bank and Trust Company, demanding of said defendant the sum of $16,665.93 or such lesser sum in its possession which plaintiff contended was property of the taxpayer, Port Construction Company, Inc., which demand was refused by the defendant on advice of counsel.

3. That as of the date said notice of levy and distraint warrants were served on the said defendant bank it held the sum of $8,291.57 which it had received under the terms of an assignment agreement executed on or about May 16, 1953, by the Port Construction Company, Inc., and the Employer's Mutual Casualty Company, which assignment provided that said funds were not to be paid out except with written approval of the said Casualty Company.

4. That the Employer's Mutual Casualty Company had a lawful interest in said funds by virtue of an application assignment to it as surety on the performance bond of said Port Construction Company under a contract to construct a certain armory at Raleigh, North Carolina, said funds being in payment for certain work thereon and said Port Construction Company having defaulted in the completion of its said construction contract.

5. That on July 28, 1953, one day prior to service of notice of levy and distraint warrants on the defendant bank, in a suit brought in the Superior Court of New Hanover County, North Carolina, wherein Employer's Mutual Casualty Company was plaintiff and Port Construction Company was defendant, the Court appointed Robert E. Calder as Receiver of all assets of said Port Construction Company and under such authority the said Receiver thereafter demanded that the defendant bank deliver to him the aforesaid funds in its possession, which demand was likewise refused on advice of counsel.

6. That thereafter, before the action herein was instituted, the defendant Peoples Savings Bank and Trust Company brought a suit in this District Court of the United States, naming as defendants therein all who had or claimed an interest in said funds, including the United States of America, and praying the Court to consider the conflicting claims and determine the rightful party to receive said funds, which suit is now pending.

7. That at the time demand was made on it the defendant was not in possession of property or property rights of the taxpayer which was subject to distraint, within the meaning and intent of Section 3710 of the Internal Revenue Code.

WHEREFORE, upon the foregoing facts, IT IS CONSIDERED, ADJUDGED, ORDERED AND DECREED that the plaintiff is not entitled to the relief demanded in the complaint, and that this action be and is hereby dismissed.

 

[75-2 USTC ¶9555] United States of America , Plaintiff v. Vincent J. Cuti, Jr., Defendant

U. S. District Court, East., Dist. N. Y., 74 C 887, 395 FSupp 1064, 6/6/75

[Code Sec. 6332]

Surrender of property subject to levy: Property in possession of third party: Escrow fund: Reasonable cause.--The holder of funds in escrow was ordered to pay over the sum which was subject to a lien for taxes. The escrow fund was not subject to prior judicial attachment or execution and the court concluded that the holder was in possession of the property or had rights to the property so as to be able to turn over the fund. However, the court concluded that the holder was not subject to the penalty provided by law for dishonoring the government's lien because he had been presented with an unsettled question of law--who bore the burden of paying for a lien record search.

Lloyd H. Baker, Assistant United States Attorney, Brooklyn , N. Y., for plaintiff. Vincent J. Cuti, 464 New York Ave. , Huntington , N. Y., for defendant.

Memorandum and Order

BRAMWELL, District Judge:

This is a motion by the government for summary judgment. The defendant has interposed a cross-motion for summary judgment. Fed. R. Civ. P. 56. The material facts in the case are not in controversy.

This case involves a dispute regarding the obligations of the defendant, Vincent J. Cuti, an attorney of the State of New York , as escrow agent, resulting from a tax levy affecting his principal, the Bivona Vista Restaurant, Inc.

The government brought this action against Vincent J. Cuti, Jr. after he failed to honor a tax levy imposed by the Internal Revenue Service (I. R. S.) upon moneys held by him which originally came into his possession as escrow agent for Bivona Vista Restaurant, Inc.

[Levy on Escrowed Funds]

Since the chronology of events is crucial to the disposition of the motions before this Court, it is set forth below.

On August 27, 1971, the taxpayer, Bivona Vista Restaurant, Inc., sold the assets of its business, and placed the proceeds of sale, amounting to $4,555.20, in escrow with its attorney, Vincent J. Cuti, Jr. ¹

The government's complaint and supporting affidavit indicate that on October 28, 1971, January 28, 1972, December 18, 1972, and February 2, 1973, a delegate of the Secretary of the Treasury of the United States issued and served upon Mr. Cuti, notices of levy on all property and rights to property in his possession belonging to the taxpayer, on which liens had attached in favor of the United States of America. Such liens included any sums of money held in escrow by the defendant to or for the account of the taxpayer to the extent that such property and rights to property were necessary to satisfy the amounts due from the taxpayer. Final demands were issued and served upon Mr. Cuti on January 28, 1972, July 18, 1972, and October 11, 1973.

[Fund Holder's Challenge]

In his affidavit in support of his notice of cross-motion the defendant expressly conceded: that he has no standing to and does not challenge either the validity or the amounts of the assessments made against the taxpayer; and that he does not contest or dispute either the validity or the amounts of the levies served upon him, or that the same were valid and accurate.

Section 6332(a) of Title 26 of the United States Code (Internal Revenue Code) provides in pertinent part:

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

[Two Defenses]

Section 6332(a) gives the possessor of property upon which a levy has been made only two defenses: first, that such person was not in possession of property which was subject to levy; and second, that the property was subject to prior judicial attachment or execution. The statute provides no other defenses. See United States v. Manufacturer's Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366 (2d Cir. 1952); United States v. Third National Bank & Trust Co., Scranton, Pa., 111 F. Supp. 152 (D. C. M. D. Pa. 1953).

Section 6332(c)(1) provides that when one dishonors a tax levy, he is personally liable to the United States for the value of the property not surrendered, together with costs and interest. At the outset of this action, the amount sued for by the government was $4,555.20, plus interest and costs. The defendant does not dispute the value of the property not surrendered, that is $4,555.20. The government is also seeking to exact a penalty from the defendant pursuant to Section 6332(c)(2) for his failure to turn over the corpus of the escrow account.

The defendant has cross-moved for summary judgment. His supporting papers do not establish that the property which the government seeks to recover was subject to prior judicial attachment or execution. Therefore, that defense is not available to the defendant. The basis upon which the defendant has predicated his refusal to pay over the escrow fund to the government is that the same does not constitute "property or rights to property" of the taxpayer made subject to levy by the provisions of Section 6332 of the United States Code. Defendant contends that where an escrow account may be subject to the claims of other creditors whose claims have not been the object of prior judicial attachment or execution, the property in the escrow account is not the property of the taxpayer. However, the defendant has failed to provide any authority for this proposition. After exhaustive research, the Court has been unable to find any authority for the defendant's argument. One must ask rhetorically then, if Mr. Cuti was not in possession of property or rights to property of the taxpayer, then who was in possession of such property? Who had rights to such property? Clearly, it was not the property of creditors who had not reduced their claims to judgment or who had not levied upon their judgments. Therefore, such moneys in the defendant's possession are payable to the government.

[Subject to Penalty?]

The remaining issue to be confronted by this Court is whether the defendant having dishonored the government's tax levy is liable for a penalty under Section 6332(c)(2). Subsection (c)(2) provides that in addition to the personal liability imposed by subsection (c)(1):

[I]f any person required to surrender property or rights to property fails or refuses to surrender such property or right to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount recoverable under [subsection (c)(1)]. No part of such penalty shall be credited against the tax liability for the collection of which such levy was made.

26 U. S. C. §6332(c)(2) [emphasis added].

In United States v. Sterling National Bank & Trust Company of New York [74-1 USTC ¶9336], 494 F. 2d 919 (2d Cir. 1974), the Second Circuit addressed itself to an interpretation of the term "reasonable cause" as it is used in the subject statute. There the Court emphasized that "[n]o penalty can be imposed if the [defendant] acted with 'reasonable cause' in resisting the levy." 494 F. 2d at 923. Further, the Court expressly indicated that it rejected the view that for the purposes of this statute "reasonable cause" could not as a matter of law be an adherence to "a non-frivolous, but erroneous, argument of law . . ." Moreover, the Court set forth the principle that a holder of property which is levied upon has "reasonable cause" to resist the levy if he is presented with an unsettled question of law concerning the rights and obligations with respect to such property held:

"The question here is whether we should penalize the [defendant] for forcing the government to litigate an unsettled question of law. There is no reason to believe that Congress would wish to penalize the holder of the property levied upon for litigating a test case. Nor do we believe that failing to impose the 50% penalty in situations like this will detract from the congressional purpose of requiring compliance with tax liens." Id. at 923.

Applying the Sterling standard to the facts of this case, we find that the defendant, Mr. Cuti, was a mere stakeholder who was ready, willing and able to disburse the funds in his possession in accordance with the Order of a Court of competent jurisdiction. He engaged in a continuous dialogue and course of correspondence with the I. R. S. in an attempt to comply with the statutory requirements of the Internal Revenue Code. He continuously indicated to the I. R. S. that he was only trying to insulate himself from potential liability to adverse claimants to the funds he held in escrow. Defendant correctly asserted that under the circumstances of this case he is afforded no statutory protection from liability to beneficiaries of the escrow fund.

[Holder Cooperative]

Mr. Cuti made every effort to cooperate with the government to the extent that he agreed to assume the role of a Court of competent jurisdiction and make the determination as to priority of liens, if the government would agree to authorize deduction of the cost of a search for the liens of record from the escrow fund. This offer the government declined.

Thus, the issue before this Court has ultimately narrowed to this: who bears the burden of making and paying for a search for the liens of record in the circumstances presented? Neither of the parties has set forth authority for their contentions that the burden of search and payment for such search rests upon the other. The Court is aware of American Honda Motor Co., Inc. v. United States [73-2 USTC ¶9670], 363 F. Supp. 988 (S. D. N. Y. 1973), where in dictum the burden was placed upon the possessor of taxpayer's property. However, Honda, supra, is factually dissimilar from the instant case. Moreover, in that case, no authority is cited for that view.

[Unsettled Legal Question]

The test for reasonable cause set forth in Sterling , supra, is whether or not a unsettled question of law exists. This Court finds that the question of whether the government or the attorney-escrow agent bears the burden of making and paying for a search for the liens of record in the circumstances presented is such an unsettled question. The dictum in Honda, supra, does not lead this Court to a contrary conclusion. Therefore, the demand for the 50% statutory penalty is denied.

Accordingly, partial summary judgment is granted to the government to the extent that Mr. Cuti is directed to pay over the corpus of the escrow account, $4,555.20 to the government, plus interest; and partial summary judgment is granted to Mr. Cuti to the extent that he is held not liable to the United States for the 50% statutory penalty.

SO ORDERED.

¹ The portion of the contract dealing with the escrow account reads as follows:

"EIGHT: The parties agree to comply with the provisions of the Uniform Commercial Code relative to Sale in Bulk and Bivona Vista Restaurant, Inc., agrees to provide at least FIFTEEN (15) DAYS prior to the closing, a list of its existing business creditors and that all existing taxes pertaining thereto and all creditors shall be paid on or before closing of title. The seller shall provide the buyer with a release as to taxes. A tax credit and escrow shall be held by seller's attorney in the minimum of 5000 to a maximum of 7500 to be determined at closing for a period of 90 days and applied to the payment of the aforesaid."

 

[78-1 USTC ¶9339] United States of America , Plaintiff v. Dorothy P. Augspurger, Executrix of the Will of Charles H. Augspurger, and Loeb, Rhoades & Co., Defendants

U. S. District Court, West. Dist. N. Y., Civ. 76-595, 452 FSupp 659, 3/17/78

[Code Sec. 7405]

Erroneous refund: Determination: Burden of proof.--The evidence established that there was an erroneous refund of the amount claimed.

[Code Sec. 7421--result unchanged by '76 Tax Reform Act]

Suit to restrain collection of taxes: Jurisdiction: Exceptional circumstances.--Taxpayers were not entitled to injunctive relief from collection of taxes. No exceptional circumstances existed to give the district court jurisdiction to so order.

[Code Sec. 6331 and 28 U. S. C. §§ 2283 and 2463--result unchanged by '76 Tax Reform Act]

Funds in estate: Constructive trust: Levy.--A constructive trust could be imposed on the proceeds of the erroneous refund. The funds were levied by the U. S. prior to the possession of them by a state probate court.
[Code Sec. 6332-result unchanged by '76 Tax Reform Act]

Surrender of property subject to levy: Third-party possession: Penalty: Reasonable cause.--There was no reasonable cause for the holder of an escrow fund to resist a tax levy on that fund. Hence the imposition of a penalty on the holder was proper.

Richard J. Arcara, United States Attorney, Kenneth A. Cohen, Assistant United States Attorney, Buffalo, N. Y. 14202, for plaintiff. Leland A. Cook, Jaeckle, Fleischmann & Nugel, 700 Liberty Bank Bldg., Buffalo, N. Y. 14202, for Dorothy Augspurger, Harry P. Trueheart, III, Nixon, Hargrave, Devans & Doyle, Lincoln First Tower, Rochester, N. Y. 14603, for Loeb, Rhoades & Co.

Memorandum and Order

CURTIN, District Judge:

The United States of America ("the Government") instituted this suit pursuant to 26 U. S. C. §7405 to collect an erroneous refund of federal taxes. ¹ Jurisdiction exists under 26 U. S. C. §7402 and 28 U. S. C. §§ 1340 and 1345. There are several motions before me for decision: plaintiff's motion for summary judgment against defendant Augspurger; plaintiff's motion for summary judgment on its "counterclaim in reply" against defendant Loeb, Rhoades & Co. ("Loeb"); defendant Augspurger's motions for partial dismissal and for partial summary judgment; defendant Loeb's motions for summary judgment on its counterclaim and cross-claim for interpleader, for discharge and for dismissal of the complaint and cross-claim; and defendant Augspurger's motion for a trial by jury.

Plaintiff's Motion for Summary Judgment Against Defendant Augspurger and Defendant Augspurger's Motions for Partial Summary Judgment and Partial Dismissal

The Government argues that it is entitled to a judgment declaring the monies received by Charles H. Augspurger from the Internal Revenue Service to be an erroneous refund and that it is entitled to have a constructive trust imposed upon the proceeds of the refund which were invested with Loeb. Defendant Augspurger (the personal representative of Charles H. Augspurger, now deceased) claims that there are material questions of fact which preclude the court from rendering a decision declaring the refund to be erroneous. She argues, in the alternative, that Fed. R. Civ. P. rule 56(f) is applicable, and that a continuance or denial of the motion is warranted in this situation. She has also moved to dismiss the portion of the complaint requesting the imposition of a constructive trust. In addition, she has moved for judgment on the pleadings pursuant to Fed. R. Civ. P. rule 12(c) with respect to her counterclaim, which asks the court to declare the assessment made on Charles H. Augspurger on February 22, 1971 to be invalid, to declare the liens and levies imposed as a result of the assessment to be invalid and to enjoin the Government from any further attempts to collect monies pursuant to such assessment, liens and levies. ²

Before proceeding to the merits, there are some preliminary matters that must be disposed of. The Government applied for leave to file supplemental affidavits and records. The records comprise certificates of assessment and purport to show all the outstanding tax liabilities of Charles H. Augspurger. All the certificates of assessment were completed May 23, 1977. The Government is granted leave to file the affidavits and accompanying documents, but they will be considered only for the limited purpose of showing payments credited to decedent's account with relation to the February 22, 1971 penalty assessment. Defendant Augspurger has offered the affidavit of Leland C. Cook, her attorney, in support of her motions. His affidavit does not meet the requirements set forth in Fed. R. Civ. P. rule 56(e) and has been treated as if it were a brief. Defendant Augspurger's motion concerning the constructive trust was made pursuant to Fed. R. Civ. P. rule 12(c); it will be treated as a motion for summary judgment.

Defendant Augspurger's Rule 56(f) Motion

Rule 56(f) of the Federal Rules of Civil Procedure permits a district court judge to either deny a motion for summary judgment or order a continuance of the motion, when it appears from the affidavits of the party opposing the motion "that [she] cannot for reasons stated present by affidavit facts essential to justify [her] opposition." Although Mrs. Augspurger's affidavit does not state that it is offered in support of her Fed. R. Civ. P. rule 56(f) motion, her memorandum of law shows that this issue is one of her primary arguments against the Government's summary judgment motion. In the affidavit (sworn to December 31, 1976) she states that she has "no knowledge * * * which would indicate whether or not" the Government's allegation that the check received by her husband was an erroneous refund "is true." The application of rule 56(f) is warranted where the knowledge of the facts in issue is in the exclusive control of the moving party. However, it is not enough merely to assert that the moving party has exclusive knowledge or control of the facts. "The opposing party must show to the best of [her] ability what facts are within the movant's exclusive knowledge or control; what steps have been taken to obtain the desired information pursuant to the discovery procedures under the Rules; and that [she] is desirous of taking advantage of these discovery procedures." 6 Moore 's Fed. Pract., ¶56-24. See, also, United States v. Donlon [73-1 USTC ¶16,090], 355 F. Supp. 220 (D. Del. 1973), aff'd 487 F. 2d 1395 (3d Cir. 1973). Defendant Augspurger has failed to elaborate on what information is within the exclusive control of the Government, which has furnished the court with extensive records concerning the penalty assessment against Charles H. Augspurger. His representative does not state what additional information is missing or what information within the Government's control would support her opposition to the motions. She has not made any attempt to obtain discovery from the Government.

In one of her memoranda it is stated that her opposition to summary judgment is based on her ignorance of the facts surrounding the February 22, 1971 penalty assessment and the financial affairs of the corporation with which her deceased husband was associated. The Government has provided numerous documents with respect to the penalty assessment showing the facts that led it to the conclusion that the refund was erroneously made and defendant Augspurger has access to the financial affairs of the H. R. Weissberg Corp. (the said corporation) which is equal to, if not greater than, the Government's. She does not contest the fact that a penalty assessment was made, but merely argues that she has no knowledge whether or not the refund was erroneous. It is the corporation ³ that has control over the facts concerning its payment of the withholding taxes and the facts concerning any payment that might have been made on behalf of Mr. Augspurger. ⁴ In addition, defendant Augspurger has control over the records of her date husband and has not attempted to supply the court with any information such as a cancelled check, which would show a complete or partial payment made by Charles H. Augspurger. ⁵

Defendant Augspurger's motion for a continuance is denied. Denial of plaintiff's motion for summary judgment on the basis of Fed. R. Civ. P. rule 56(f) is not warranted in this case.

Plaintiff's Motion for Summary Judgment on the Issue of the Erroneous Refund

Summary judgment is a drastic device that should only be granted when there is no genuine issue as to any material fact. Gladstone v. Fireman's Fund Insurance Co., 536 F. 2d 1403, 1406 (2d Cir. 1976). The court is to determine whether or not there are issues to be tried and is not to resolve any disputed issues of fact. American Manufacturers Mutual Insurance Co. v. American Broadcasting Paramount Theatres, Inc., 388 F. 2d 272 (2d Cir. 1967). In deciding a motion for summary judgment, a court "must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought * * * with the burden on the moving party to demonstrate the absence of any material factual issue genuinely in dispute." Heyman v. Commerce and Industry Insurance Co., 524 F. 2d 1317, 1320 (2d Cir. 1975); Judge v. City of Buffalo , 524 F. 2d 1321 (2d Cir. 1975).

Most of the facts are undisputed. Defendand Augspurger, in her answer, denied the Government's allegations that the check was a tax refund check and that the refund was erroneous. The face of the check shows that it is a tax refund check; therefore, that issue cannot be said to be genuinely in dispute. The issue whether or not the refund was erroneous is a conclusion of law, not fact. Defendant Augspurger also disputes the Government's assertion that the penalty assessment has not been abated. This question is genuinely in dispute but is not material to a decision in this case.

1. Findings of Fact

My findings are based on the affidavits submitted by the parties and the documents submitted by the Government. (Defendant Augspurger submitted several of the Government's documents in support of her motion.)

On February 22, 1971 the Internal Revenue Service ("the IRS") made a one hundred (100) percent penalty assessment against Charles H. Augspurger as the responsible person for H. R. Weissberg Corp., pursuant to 27 U. S. C. §6672. The amount assessed against Mr. Augspurger was $210,092.62. On December 17, 1971 two additional penalty assessments were made against Mr. Augspurger as the responsible person for the Paramount Hotel ($13,390.17) and for the Lord Baltimore Hotel ($28,383.82). A lien covering the December 17, 1971 assessments was filed in the Erie County Clerk's Office on January 21, 1974. ⁶ Mr. Augspurger filed a Request for Abatement (Claim form 843) dated May 29, 1974 with respect to the February 22, 1971 penalty assessment. The claim sets forth Mr. Augspurger's reasons for believing that a penalty assessment should not have been made against him. The request for abatement was forwarded to the Manhattan District Revenue Office, where a revenue officer filled out a Request for Adjustment, Form 3870, dated January 7, 1976 in which he recommended an abatement of the 100% penalty. ⁷ The latter form was received by the Brookhaven Service Center January 27, 1976. It came to the attention of a tax examiner February 4, 1976 who began to process it February 19, 1976. The penalty assessment account card (the "Unit Ledger Card") has a credit entry for July 12, 1974. The date is followed by a TR symbol which indicates either a transfer of the account from one service center to another or a credit to the account resulting from an overpayment of other tax liabilities. In this case, the entry referred to a transfer of the account to the Brookhaven Service Center from the Andover Service Center . The examiner incorrectly interpreted the credit entry as a direct payment by the taxpayer and proceeded to fill out a Notice of Adjustment Certificate and indicated thereon that a refund was due to Mr. Augspurger. This form was certified by the certifying officer of the Accounting Branch March 5, 1976. On that date, a voucher and schedule of payments, Standard Form 1166-A, was prepared and Forwarded to the Birmingham, Alabama office of the Division of Disburssements of the United States Treasury. This form indicated that a check in the amount of $235,826.94 (penalty amount plus interest) should be issued to Charles H. Augspurger. The Alabama office sent back a "confirmed" copy of Form 1166-A that indicated the check had issued. The check was received by Mr. Augspurger and was subsequently endorsed to Loeb, who then purchased $235,000.00 worth of shares in Temporary Investment Fund, Inc. for Mr. Augspurger. ⁸

Charles H. Augspurger's penalty assessment account came to the attention of Patricia Korth, a Supervisory Tax Examiner, March 23, 1976. After reviewing the account Korth determined that an erroneous refund had been issued. She discussed the problem with her supervisor and they decided that the best course of action would be to contact Mr. Augspurger by telephone. At 4:45 p. m. on March 23, 1976 Korth telephoned Mr. Augspurger and told him that the IRS had erroneously issued a refund check to him. ⁹ A letter was sent to Mr. Augspurger on April 9, 1976. Korth requested the initiation of erroneous refund procedures. Before Korth had determined that an erroneous refund had been issued, the Notice of Adjustment, Form 1331B, had been forwarded to the Accounting Branch and the adjustment had been scheduled as of March 5, 1976. ¹⁰

No direct payments--i. e., a payment by the taxpayer--had been made on the penalty assessment account at the time of Mr. Augspurger's death (September 21, 1976). However, the Certificate of Assessments and Payments reflects three credits. The first credit dated April 15, 1976 is in the amount of $217.30 and was credited as a result of an overpayment on other tax liabilities. The second and third credits resulted from notices of levy served on Loeb. The second credit for $856.58 was entered in the account June 9, 1976 and the third credit for $845.54 was entered November 15, 1976. The outstanding balance in the account as of May 23, 1977 was $208,983.20.

After the Government became aware that it had issued what it believed to be an erroneous refund to Mr. Augspurger, it served notices of levy on Loeb, based on the penalty assessments it had made in 1971. Notices of levy were served May 3, 1976, June 30, 1976 (two notices were served on this date), July 30, 1976, August 30, 1976, September 29, 1976, November 1, 1976 and December 3, 1976. The May 3rd levy and one of the June 30th levies were solely based on the February 22, 1971 penalty assessment. The others were based on both the February 22nd and the December 17th levies. The Government collected $6,730.86 from Loeb. This amount represents dividends owing to Charles H. Augspurger from his investment with Loeb pursuant to the levies. Only $1,702.12 has been applied to the February 22, 1971 penalty assessment.

2. Erroneous Refund

Section 7405(b) of Title 26 of the United States Code authorizes actions to be brought in the name of the Government for recoupment of erroneous refunds. In order to prove its case the Government must establish that the refund was erroneous and the amount of the refund. Soltermann v. United States [59-2 USTC ¶9770], 272 F. 2d (9th Cir. 1959); United States v. Claycraft Company, 364 F. Supp. 1358 (S. D. Ohio 1972). The Government has met its burden in this case.

There is no record of direct payment having been made on the penalty assessment account. Defendant Augspurger argues that the IRS admitted it owed the money to Mr. Augspurger by its forwarding to Mrs. Augspurger of Form 1099, indicating that Mr. Augspurger received interest income of $24,924.32 (the interest on the penalty assessment). This argument is without merit. Mr. Augspurger did receive interest income, whether or not he was entitled to it, and such income is subject to taxation.

The Government's motion for summary judgment on the question of the erroneous refund hereby is granted.

Defendant Augspurger's Motion for Partial Summary Judgment

Defendant Augspurger alleges in her counterclaim that the assessments made by the Government February 22, 1971 and December 17, 1971 are invalid and that the levies based upon these assessments are invalid. She has moved for a declaratory judgment to that effect and has also asked the court to enjoin the Government from collecting any monies pursuant to these assessments, levies and liens. Defendant Augspurger also asks for judgment in the amount of $6,730.86.

The Government asserts that 28 U. S. C. §2201 (the Declaratory Judgment Act), by its own terms, prohibits this defendant from maintaining a declaratory judgment action. It also argues that 26 U. S. C. §7421(a) prohibits her from obtaining an injunction. Defendant Augspurger states that the courts have fashioned an exception to 26 U. S. C. §7421 whereby a taxpayer may obtain an injunction if he shows that the tax is illegal and that special and extraordinary circumstances exist. According to her, if a taxpayer is entitled to an injunction he may also obtain a declaratory judgment. She points to Botta v. Scanlon [61-1 USTC ¶9293], 288 F. 2d 504 (2d Cir. 1961), as supporting her position. Most of the cases cited in Botta were cases in which taxpayer B's property was levied upon for a tax owed by taxpayer A. Here, the assessment was against Mr. Augspurger personally. In addition, Enochs v. Williams Packing Co. [62-2 USTC ¶9545], 370 U. S. 1 (1962), was decided after the first decision was rendered in Botta, wherein the Second Circuit Court of Appeals remanded the case to allow the plaintiffs an opportunity to amend their complaint. The district court dismissed the amended complaint and the Court of Appeals subsequently upheld such dismissal, Botta v. Scanlon [63-1 USTC ¶9352], 314 F. 2d 392 (2d Cir. 1963), relying on Enochs v. Williams Packing Co., supra. Enochs created a two-pronged test for foregoing the application of 26 U. S. C. §7421(a). First, the court must decide that even under the most liberal view of the facts, the Government could not establish its claim. If this issue is decided in the taxpayer's favor, the court may issue an injunction if it determines that equity jurisdiction otherwise exists. See, Enochs, supra at 7. Equity jurisdiction exists if the taxpayer would suffer irreparable injury and does not have an adequate remedy at law. Defendant Augspurger has not met this burden. ¹¹

A question of fact exists as to whether or not the penalty assessment was valid when made and, if it was, whether or not it had been abated at the time of the levy. It is not clear from the record before me that the Government could not prevail under any circumstances. See, Enochs, supra at 7. The assessment's validity depends upon the payment of the withholding taxes owed by H. R. Weissberg Corp. There is not enough evidence in the record to make a determination on this issue.

I do not have jurisdiction over defendant Augspurger's counterclaim. ¹² See, 26 U. S. C. §7421(a).

Plaintiff's Motion for Summary Judgment on Its Request for a Constructive Trust and Defendant Augspurger's Motion for Partial Dismissal

It is undisputed that Charles H. Augspurger invested the monies he received from the Government with defendant Loeb and that Loeb purchased $235,000.00 worth of shares in Temporary Investment Fund, Inc. out of said monies. Nor is it disputed that Mr. Augspurger redeemed $35,000 of those shares. When this suit began, Loeb still held shares in Temporary Investment Fund, Inc. for Mr. Augspurger's account and the Government sought to have a constructive trust imposed upon them. The parties entered into an agreement whereby the shares in Temporary Investment Fund, Inc. were liquidated and the resultant proceeds paid into court. The proceeds were used to buy seven six-month certificates of deposit. When the six months expire, the court's Clerk is to re-purchase sixty-day certificates of deposit until a final decision shall have been rendered in the case. Defendant Augspurger moves to dismiss this part of the complaint for lack of subject matter jurisdiction. She argues that the assets are in the hands of the Erie County (New York) Surrogate and that the Surrogate's jurisdiction cannot be interfered with by a federal district court. She also argues that the anti-injunction statute, 28 U. S. C. §2283, applies in this case.

The general rule is that, where property is in the possession of a court of competent jurisdiction, such possession cannot be disturbed by the process of another court. Markham v. Allen, 326 U. S. 490 (1946); U. S. v. Bank of New York Co., 296 U. S. 463 (1936); Waterman v. Canal-Louisiana Bank Co., 215 U. S. 33 (1909); Byers v. McAuley, 149 U. S. 608 (1893). A federal court does not have jurisdiction to probate a will, nor can it entertain any suit that would interfere with the possession of the res in a probate court. United States v. Estate of Slate [69-2 USTC ¶9690], 304 F. Supp. 380 (S. D. Tex. 1969), aff'd [70-1 USTC ¶9312] 425 F. 2d 1208 (5th Cir. 1970). Charles H. Augspurger died September 21, 1976 and his will was admitted to probate November 15, 1976. This suit was not commenced until December 15, 1976.

The Government contends that 28 U. S. C. §2283 does not apply when the United States is the plaintiff. Although this assertion is correct, the general rules of comity do apply even when the United States is the plaintiff. The United States may not obtain an injunction that would interfere with a state court's jurisdiction over a particular res. See, United States v. Certified Industries, Inc. [66-1 USTC ¶9469], 361 F. 2d 857 (2d Cir. 1966). See, also, N. L. R. B. v. Nash-Finch Company, 434 F. 2d 971 (8th Cir. 1970); United States v. Farmers State Bank, 249 F. Supp. 579 (D. S. D. 1966). Plaintiff relies heavily upon Leiter Minerals, Inc. v. United States, 352 U. S. 220 (1957), wherein a district court's award of an injunction against a state court proceeding brought against lessees of the United States was upheld. The court found U. S. v. Bank of New York Co., supra, distinguishable because the United States had never been in possession of the res in that suit, whereas in Leiter the United States was the owner of the land involved in both the state and federal court actions, and the United States was in a defensive position. Contrary to plaintiff's assertion, the Leiter case is not authority for the proposition that the United States can obtain an injunction against a state court proceeding, when the state court has previously obtained jurisdiction over the res that is the subject of the federal court action.

Both parties have overlooked the fact that the United States was in possession of the res that is the subject of this lawsuit prior to the death of Charles H. Augspurger. A notice of levy constitutes a constructive seizure of the funds held for a taxpayer. United States v. Cameron Construction Co., 246 F. Supp. 869 (S. D. N. Y. 1965). Section 2463 of Title 28 of the United States Code states that "[a]ll property taken or detained under any revenue law of the United States shall not be repleviable but shall be deemed to be in the custody of the law and subject only to the orders and decrees of the courts of the United States having jurisdiction thereof." Funds affected by levies made pursuant to 26 U. S. C. §6331 have been "detained" for the purposes of 28 U. S. C. §2463. Seattle Association of Credit Men v. United States [57-1 USTC ¶9402], 240 F. 2d 906 (9th Cir. 1957). See also, N. H. Fire Ins. Co. v. Scanlon, 362 U. S. 404 (1960). The funds in issue in the instant case are subject to the jurisdiction of this court. Defendant's motion to dismiss is denied.

"Constructive trusts arise out of operation of law and are raised to prevent injustice; they depend upon equitable principles, and are imposed in those cases where it would be inequitable to do otherwise." Knight Newspapers v. Commissioner of Internal Revenue [44-2 USTC ¶9417], 143 F. 2d 1007, 1011 (6th Cir. 1944). A constructive trust may arise if there has been a mistake of fact or if there has been a mistake of law. Blake Construction Co. v. American Vocational Association, Inc., 419 F. 2d 308 (D. C. Cir. 1969). A constructive trust may arise whenever a party obtains property which does not belong to him, "and which he cannot in good conscience withhold from another who is beneficially entitled to it." Blake Construction Co., supra, at 311. The transferee of the property is treated as a constructive trustee for the person to whom the property rightfully belongs. Ibid. The party requesting the imposition of the constructive trust has the burden of identifying the trust fund. In re Anjopa Paper & Board Manufacturing Co., 296 F. Supp. 241, 261 (S. D. N. Y. 1967). The Government has sustained its burden.

Its motion to have a constructive trust impressed upon the proceeds of the shares held by Loeb in Temporary Investment Fund, Inc., for Charles H. Augspurger is granted.

Defendant Augspurger's motion for jury trial is hereby denied as moot.

Defendant Loeb's Motion for Summary Judgment

Loeb moves for summary judgment on its motion for interpleader and discharge. The Government opposes the motion on the grounds that this is not a proper case for interpleader and that the court lacks jurisdiction over the discharge claim.

Interpleader is authorized where a party may be subject to multiple liability. The Government and defendant Augspurger are the only two claimants to the fund, and their rights to the fund will be finally adjudicated in this action; there is no necessity for an interpleader.

Even if interpleader were warranted in this situation, discharge would not be. The Government's claim that it is entitled to recover monies from Leob, pursuant to 26 U. S. C. §6332(c)(2), is a separate claim and its resolution does not depend upon the Government's success in its action against defendant Augspurger. Loeb is not in the position of a stakeholder with respect to this claim. The liability imposed by 26 U. S. C. §6332(c)(2) is personal liability.

Defendant Loeb's motion for summary judgment is hereby denied and its counterclaim and cross-claim for interpleader and discharge are hereby dismissed. Defendant Loeb's motion for attorneys' fees is hereby dismissed as moot.

The Government's Motion for Summary Judgment on Its "Counterclaim in Reply"

The Government seeks the imposition of the fifty percent penalty authorized by 26 U. S. C. §6332(c)(2) on defendant Loeb. Loeb argues that the Government is not entitled to the penalty because Loeb was not in possession of property or the right to property at the time of the levy. Loeb also argues that it did not fail or refuse to comply with the levy without reasonable cause; therefore, a penalty should not be assessed against it.

A levy may be made on intangible as well as tangible property. United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3d Cir. 1963); United States v. Barker, 309 F. Supp. 1369 (W. D. Va. 1970). A contractual right to receive property is the equivalent of a right to property. United States v. Barker, supra. In the instant case, Charles H. Augspurger had the right to have his shares in Temporary Investment Fund redeemed at any time. His right was not conditioned on the occurrence of a stated event or on the passage of time. Under these circumstances Loeb was in possession of a right to property.

Reasonable cause to resist a levy exists when there is "a bona fide dispute over the amount owing to the taxpayer (by the property holder) or over the legal effectiveness of the levy itself * * *." United States v. Sterling National Bank & T. Co. of N. Y., 494 F. 2d 919 (2d Cir. 1974). An unsettled question of law concerning the rights and obligations with respect to the property held constitutes reasonable cause. Id.; United States v. Cuti [75-2 USTC ¶9555], 395 F. Supp. 1065 (E. D. N. Y. 1975). Loeb has failed to establish that it acted with reasonable cause.

Loeb has relied heavily upon the Cuti case in its memorandum of law. According to Loeb, Cuti held that a person is not liable for the penalty imposed by 26 U. S. C. §6332(c)(2) if he (it) is willing and able to disburse the funds pursuant to an order of a court of competent jurisdiction and if he makes the IRS aware of his willingness to comply with the levy. There is one essential difference between the Cuti case and the case at bar; the defendant in Cuti was not shielded from liability to the beneficiaries of the escrow fund in his possession by 26 U. S. C. §6632(d), whereas Loeb is protected by said section.

In its first memoranda of law, Loeb argued that it was unable to redeem the shares it held for Mr. Augspurger. It claimed that this fact was admitted by the Government; however, the Government maintains that such shares were redeemable by Loeb. Loeb's statement that it could not redeem the shares is not supported by facts or by legal authority.

Loeb also argues that the first levy was invalid because the assessment of February 22, 1971 had been abated. Only the May 3, 1976 levy was based solely on the February 22, 1971 penalty assessment. Even if there had been a bona fide dispute as to the validity of that levy, there is no bona fide dispute with respect to the subsequent levies. Although there are disputed questions of fact, none of them is material to the outcome of the litigation; therefore I am not precluded from issuing summary judgment on the plaintiff's "counterclaim in reply." See, Kiess v. Eason, 442 F. 2d 712 (7th Cir. 1971).

Plaintiff's motion for summary judgment is granted against the defendant Loeb, Rhoades & Co. for the penalty authorized by 26 U. S. C. §6332(c)(2) in an amount to be separately determined and fixed by me on proper papers. Plaintiff's claim under 6332(c)(1) is now moot and is hereby dismissed.

¹ Although the refund to Charles H. Augspurger was based on a penalty assessment, 26 U. S. C. §6659(a)(2) states that any reference to "tax" shall be deemed to encompass a penalty.

² Defendant Augspurger originally asked for judgment in the amount of $6,730.86. This amount represents the dividends that accrued on Charles H. Augspurger's investment with Loeb and that were paid over to the Internal Revenue Service pursuant to the levies served on Loeb. Defendant Augspurger later requested $856.58, the amount turned over to the Internal Revenue Service as a result of the first levy.

³ The H. R. Weissberg Corporation was put into the hands of a receiver, a Mr. Patton, December 19, 1967. He was discharged April 15, 1968.

⁴ At one point defendant Augspurger claimed that the penalty assessment had been paid, citing the Request for Adjustment form filled out by the Manhattan District Revenue officer. The only reference to payment of taxes is to the withholding taxes owed by the H. R. Weissberg Corp. This statement is based on hearsay set forth by Mr. Augspurger in his May 29, 1974 claim requesting an abatement of the penalty.

⁵ The statement attached to the claim filled out by Mr. Augspurger negates any inference that he paid the penalty assessment. In paragraph seven of his statement to the Internal Revenue Service, Mr. Augspurger states that he did not know of the penalty assessment until the summer of 1971. He outlines several reasons why the penalty assessment should be abated, but does not indicate that he ever made a complete or partial payment of the assessment.

⁶ The records of the IRS and the statement made by Mr. Augspurger indicate that a lien was filed in the Spring of 1971 (the date in the IRS records is June 8, 1971; the date in Mr. Augspurger's statement is May 1971) based on the February 22, 1971 penalty assessment. The IRS did not furnish a copy of the request for a lien filed with the Erie County Clerk's Office; therefore, I make no finding concerning this issue.

⁷ The revenue officer's statement lists several reasons for his recommendation: the assessment was hurriedly made without time for investigation; the witholding taxes were reported to have been paid; and the assessment was made "without the usual letters to the responsible parties."

⁸ In her answer, efendant Augspurger denied that Charles H. Augspurger endorsed the revenue check to Loeb, but in her memo she states that it is undisputed that Charles H. Augspurger made his investment with Loeb, with the funds he received from the Treasury Department.

⁹ A xerographic copy of the check shows that it was a tax refund check.

According to Korth, the telephone call was followed by a letter, Form 4728, which requested the return of the $235,826.94. She stated that the letter was typed and mailed March 24, 1976. Defendant Augspurger denies that such a letter was sent. The IRS did not furnish a copy of the letter to the court; therefore, I do not make a finding on this issue.

¹⁰ There is no indication in the papers as to what effect "scheduling" an adjustment has. Defendant Augspurger maintains that the assessment was abated, while the IRS contends that it was not. The Government has not supplied any information to the court that would allow me to determine the point at which a penalty assessment can be said to be abated.

¹¹ She argues that special and extraordinary circumstances exist because they cannot afford to pay the amount claimed by the Government and sue thereafter for a refund. The decision in Botta held that financial hardship does not constitute special and extraordinary circumstances. No court has explicitly ruled that financial hardship is not to be considered when determining whether or not a taxpayer has an adequate remedy at law.

¹² There is no need to rule on her claim that the right to declaratory relief is coterminous with the right to injunctive relief.

 

[79-2 USTC ¶9622]The United States of America, Plaintiff v. Dorothy P. Augspurger, Executrix of the Will of Charles H. Augspurger and Loeb, Rhoades & Co., Defendants

U. S. District Court, West. Dist. N. Y., CIV 76-595, 477 FSupp 94, 9/14/79

[Code Secs. 6331 and 6332]

Levy and distraint: Estate funds: Constructive trust: Surrender of third-party's property: Penalty.--Motions for reconsideration of an earlier decision made by a corporation and an executrix were denied. The court determined that it was not required to make an affirmative finding that a levy is valid before imposing a constructive trust, as the executrix had argued. Also rejected was the corporation's argument that it would have been liable for conversion if it had complied with the levy. The court held that Code Sec. 6332 would have protected the corporation from liability.

Richard J. Arcara, United States Attorney, Buffalo, N. Y. 14202, for plaintiff. Leland G. Cook, Jaekle, Fleischmann & Mugel, 700 Liberty Bank Bldg., Buffalo, N. Y. 14202, Harry P. Trueheart, III, Nixon, Hargrove, Devons & Doyle, Lincoln First Tower, P. O. Box 1051, Rochester, N. Y. 14603 for defendant.

Memorandum and Order

ELFVIN, District Judge

Defendants have moved individually for reconsideration and modification of this court's Memorandum and Order entered March 20, 1978 [78-1 USTC ¶9339] (reported at 452 F. Supp. 659).

Defendant Augspurger based her motion on Fed. R. Civ. P. rules 59 and 60. These rules do not apply in the instant case because no final judgment or order has been issued; the exact amount of the penalty to be paid by defendant Loeb, Rhoades & Co. remains to be determined. See, Fed. R. Civ. P. rule 54(b). The motion will be considered as if brought pursuant to rule 54(b).

Defendant Augspurger relies upon State of New Jersey v. Moriarity, 268 F. Supp. 546 (D. N. J. 1967), to support her argument that a court must affirmatively find the levy to be valid before imposing the constructive trust. The factual situation in Moriarity bears little relation to that in the instant case. Therein, New Jersey had seized a sum of money as contraband and subsequently brought forfeiture proceedings. Between the time of the seizure and commencement of the forfeiture proceeding, the United States of America had levied on the property. The District Director of the Internal Revenue Service removed the state forfeiture proceedings to the federal court and, in opposing the state's motion for a remand, argued that as a result of the federal levy the state forfeiture proceeding was in reality not an in rem suit against the confiscated property but an in personam suit against the District Director seeking return of the money which had been levied upon. 28 U. S. C. §1442(a)(1) would permit him to remove the latter type of action. The state contended that there was no property to which the levy could attach because once the seizure had occurred the citizen no longer owned the property, but had only a right to recover it should he be acquitted of the crime charged. The court determined that the state's position was correct and that there was not "removal jurisdiction". The Moriarity case simply does not stand for the proposition that the United States of America must affirmatively establish the validity of a levy to defend suits for injunctions brought by taxpayers. The Moriarity court never reached the question of the validity vel non of the lien, but only whether there was property to which it might attach. When considering defendant Augspurger's motion for partial summary judgment on her counterclaim, I concluded that Enochs v. Williams Packing Co. [62-2 USTC ¶9545], 370 U. S. 1 (1962), prevented me from issuing an injunction barring collection of monies pursuant to the levies in the instant case. Having determined that under Enochs this court was not the proper forum for resolving the dispute between the taxpayer and the United States over the possible abatement or invalidity of the assessment, I later reached the conclusion that the levies based on the penalty assessments constituted a constructive seizure of the property and therefore brought such property within the jurisdiction of the court. Nothing submitted by defendant Augspurger has persuaded me to alter those conclusions.

Although defendant Augspurger did not request an evidentiary hearing, I have reviewed the materials in the file to determine if such a hearing should be held to determine whether the February 22, 1971 penalty assessment was abated. I have concluded that such hearing is not warranted. See, Trent v. United States [71-1 USTC ¶15,995], 442 F. 2d 405 (6th Cir. 1971). Cf., Bauer v. Foley [69-1 USTC ¶9136], 404 F. 2d 1215 (2d Cir. 1968), supplemental opinion after rehearing [69-1 USTC ¶9136], 408 F. 2d 1331 (1969); Gordon v. United States Treasury Dept. Int. Rev. Serv. [77-2 USTC ¶9747], 322 F. Supp. 537 (E. D. N. Y. 1970). See generally, Bob Jones University v. Simon [74-1 USTC ¶9438], 416 U. S. 725 (1974).

Defendant also argues that I cluld not impose a constructive trust upon the funds seized pursuant to the levy, because the levy was based on the 1971 penalty assessment, whereas the constructive trust resulted from the later erroneous refund. Because of the intricate connections between the assessment, the erroneous refund, and the levy, I adhere to my original decision that the facts of the instant case warrant the imposition of a constructive trust.

In reviewing my Memorandum and Order I note that ambiguities exist with reference to the penalty assessments. Although defendant Augspurger contested the validity of both the February 22, 1971 and December 17, 1971 penalty assessments, her contentions as to abatement were directed only at the former. My Memorandum and Order dated March 17, 1978 and filed March 20, 1978 is hereby ORDERED amended in the following regards:

In the last paragraph preceding the section of the opinion labeled "1. Findings of Fact" the phrase "February 22, 1971" should be inserted immediately before "penalty assessment".

Additionally, the last three sentences in the last paragraph preceding the section of the opinion labeled "2. Erroneous Refund" should read,

"The others were based on both the February 22nd and the December 17th penalty assessments. The Government collected $6,730.86 from Loeb pursuant to the levies. This amount represents dividends owing to Charles H. Augspurger from his investment with Loeb. Only $1,702.12 has been applied to the February 22, 1971 penalty assessment."

The first two sentences of the first full paragraph on page 14 (452 F. Supp. at 667) are amended to read:

"Questions of fact exist as to whether the penalty assessments were valid when made and whether the February 22, 1971 penalty assessment had been abated prior to the levies. Even if the February 22, 1971 penalty assessment had been abated, questions of fact remain as to the validity of the December 17, 1971 penalty assessment, and it is not clear from the record before me that the Government could not prevail under any circumstances. See Enochs, supra, at 7."

Defendant Augspurger's motion for reconsideration hereby is ORDERED denied.

Defendant Loeb, Rhoades & Co. (hereinafter "Loeb") also moves for reconsideration on grounds distinct from those urged by its co-defendant. In brief, Loeb's argument is that, because of unusual restrictions on the shares of the mutual fund held for Augspurger by it, it could not have complied with plaintiff's levy without exposing itself to liability for conversion of the property of such customer and that 26 U. S. C. §6332(d) (which normally protects persons complying with a tax levy from liability to the delinquent taxpayer) would not have protected it in the instant case.

I assume, for purposes of discussion, the validity of Loeb's first point: that redeeming Augspurger's shares and transferring the cash to the United States would have made it liable for conversion under New York law. However, for Loeb to prove "reasonable cause" for its failure to comply with the levy by turning over the redemption proceeds, it must also show that it had at least a rational fear that 26 U. S. C. §6332(d) would not have protected it. See United States v. Cuti [75-2 USTC ¶9555], 395 F. Supp. 1065 (E. D. N. Y. 1975). Loeb's arguments to the contrary notwithstanding, the section unquestionably and clearly protects from liability not only those who comply with a levy by turning over the property in question, but also those who fail to so comply and thus are personally liable for the value of the property levied upon, if they discharge their liability. The statute obviously would have protected Loeb fully had it followed the suggestion of the United States, redeemed Augspurger's shares and transferred the cash to the United States. Loeb's legitimate concern with the legality of the levy ended there. It was not Augspurger's attorney. As a matter of law, Loeb's failure to comply with levy under these circumstances was without "reasonable cause". It is thus unnecessary to consider the other links in Loeb's logical chain.

Defendant Loeb's motion for reconsideration hereby is ORDERED denied.

Plaintiff and defendant Loeb are hereby ORDERED to submit affidavits in order that I may determine the amount of the penalty to be imposed under 26 U. S. C. §6332(c)(2).

 

[37-1 USTC ¶9154]Joseph L. Jacobson, Appellee, v. John Hahn, as Clerk of the United States District Court for the Northern District of New York; Joseph Higgins, as Collector of Internal Revenue for the Third District of New York; and Arthur Flegenheimer, Appellants.

(CA-2), United States Circuit Court of Appeals for the Second Circuit, No. 246, 88 F2d 433, March 1, 1937

Appeal from the District Court for the Northern District of New York.Plaintiff put up Liberty bonds as bail for a taxpayer who was acquitted of the criminal charge of violation of the income tax laws. Taxpayer was later found to owe income taxes, interest, and penalty in an amount exceeding the value of the Liberty bonds. It is held that where the Government cannot prove that the bonds were purchased with the taxpayer's funds, the bonds are returnable to the plaintiff, and may not be attached to satisfy a lien for taxes due. Reversing, on this issue, District Court decision, 14 Fed. Supp. 339, reported at 364 CCH ¶9106.

Robert H. Jackson, Asst. Attorney General, Sewall Key, Frederic G. Rita, Donald J. Marran, Special Assistants to the Attorney General, Ralph L. Emmons, U. S. Attorney. James M. Noonan, attorney for appellee.

Before MANTON, A. N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge:

Both plaintiff and defendants appeal from a decree awarding to the plaintiff 25 and to the defendants 50, $1,000 Liberty Loan bonds, of a total of 75, deposited as bail for Arthur Flegenheimer, who was charged with a criminal offense in the Northern District of New York. Defendant Higgins, as collector of Internal Revenue of the Third District of New York, filed a lien for income taxes due the government from Flegenheimer and contends that all these bonds belonged to Flegenheimer or were purchased with money which he borrowed.

[Facts]

On December 20, 1934, the bonds were deposited by plaintiff as bail in a removal proceeding to the Southern District of New York. After indictment of Flegenheimer on February 20, 1935 for the same offense as charged in the Southern District of New York, the bail in the removal proceedings was withdrawn by consent of counsel and deposited for appearance in answer to the indictment in the Northern District of New York. February 20, 1935, the collector filed with the clerk of the court, notices of lien and levy to cover the Liberty Bonds. October 10, 1935, the district court entered an order as of February 20, 1935, granting permission to the collector to file said notice. August 1, 1935 Flegenheimer was acquitted of the crime charged. Plaintiff was then entitled to the return of the bonds deposited as bail if the lien was invalid. 6 U. S. C. A. §15.

[Issue]

After demand for their return and refusal, plaintiff brought this suit to cancel the notices of lien and levy filed by the Collector and to direct the clerk to turn over the bonds to him. Plaintiff made out a prima facie case at the trial by establishing that he deposited the 75-$1,000 bonds as bail and that Flegenheimer was thereafter discharged from custody and that a demand was made upon the clerk of the court for the return of the bonds which was refused. The defendants then proved an assessment against Flegenheimer for taxes, interest and penalty totaling $79,236.72. The question presented was whether the Liberty Bonds so deposited were the property of Flegenheimer and so subject to distraint by the collector for unpaid income taxes.

[Review of Evidence]

To establish this defense, the defendants called three witnesses and offered the deposition of one Davis, all for the purpose of showing the sources of the moneys used in the purchase of the bonds. Isaac N. Jacobson, one of Flegenheimer's attorneys, testified that he assisted in securing the bail; that $25,000 was procured from the plaintiff in cash, which was drawn out of several savings bonks by him; this witness gave him a promissory note therefor. Davis stated in his deposition that he spoke to Flegenheimer while he was in the Albany County Penitentiary before bail and the prisoner said he could not secure bail and asked Davis to see certain people to secure their help, amongst whom were Weinberg and Schneck. Weinberg gave him $40,000 and Schneck $24,000. Davis gave the latter a receipt which read that the moneys were received for the purpose of securing bail for Flegenheimer and upon discharge of the bail it was to be returned to Schneck. He was not definite as to whether he gave Weinberg a similar receipt but said that if he did not he made an oral agreement to the same effect. He said he understood the money advanced by Weinberg and Schneck was their money. Schneck testified that he gave $24,000 to be used for the specific purpose of bail upon promise he would have his money back after the removal proceedings were over, and that it was his own money withdrawn from a safe deposit box in the Manufacturers Trust Co. which was in his name. It was the proceeds of his winnings at horse races. He paid an income tax on these profits. Weinberg said he advanced $40,000 for the specific purpose of bail but that within two days after he gave the money to Davis, the latter asked if he would loan him (Davis) $11,000 of it, which he did, and Davis repaid it the last of March or the first of April, 1935. The $40,000 was the witness' money; no part belonged to Flegenheimer. Weinberg was a gambler and made his money at the race tracks and other forms of gambling; he kept his money in a steel box kept in his apartment. He disclaimed any association in business or gambling with Flegenheimer. He paid income tax on his earnings which included the $40,000.

The bonds were purchased by Isaac Jacobson from a banking house and were delivered to the plaintiff who gave his note for the full amount of the purchase price of the bonds. The court entered a decree for plaintiff holding $25,000 of the bonds was his property and that the remaining $50,000 of bonds was the property of Flegenheimer. Jacobson v. Hahn, 14 Fed. Supp. 339.

The burden of proof is on the defendants to establish that the bonds were the property of Flegenheimer. The witnesses called by the defendants, as well as by the plaintiff, established ownership of the bonds in the plaintiff, Weinberg and Schneck. The court below was asked to rest its decision on suspicion and conjecture and to reject the positive testimony of all the witnesses that Flegenheimer was not the owner and that the money was not loaned to Flegenheimer but was placed in Davis' and then Jacobson's possession for the specific purpose of bail.

[Plaintiff May Recover]

Plaintiff rightfully can recover because of absence of proof of ownership in Flegenheimer. It was conceded he deposited the moneys with the clerk for Flegenheimer's bail pursuant to §15, Title 6, U. S. C. A. Having called these witnesses to whose testimony we have referred, the defendants may not now successfully question their statements and ask us to reject them as untruthful or unworthy of belief upon mere suspicion that the money was loaned to Flegenheimer. Carlisle v. Norris, 215 N. Y. 400; Pollock v. Pollock, 71 N. Y. 137. It is immaterial that Davis' testimony (introduced by the defendants) was taken from his deposition before the United States Attorney or that Schneck was later recalled as a witness in behalf of the plaintiff. Hanrahan v. N. Y. Edison Co., 238 N. Y. 194. The testimony is not inherently improbable nor is it contradicted by evidence and the collector having presented it, is bound by it. Pastene v. Irving Natl. Bank, 249 N. Y. 272; Arnall Mills v. Smallwood, 68 Fed. 2, 57 (CCA 5).

We are therefore obliged to hold the finding below that part of the money was Flegenheimer's is without evidence to support it. Since the fact is sufficiently established that Flegenheimer obtained the $75,000 used to purchase the bonds for bail purposes only, the court below was not at liberty to draw contrary inferences and place total ownership in Flegenheimer upon mere conjecture or an unwillingness to believe the witnesses called by the defendants. Winn v. Consol. Coach Corp., 65 Fed. 2, 256, cert. den. 291 U. S. 668. Mere suspicion, conjecture or surmise is insufficient. See, Penn. R. R. v. Chamberlain, 288 U. S. 333, 344. These moneys were advanced for bail purposes and title did not pass to Flegenheimer. Cf. Van Wagoner v. Buckley, 148 A. D. 808. The plaintiff should recover the 75 bonds so deposited in lieu of cash bail pursuant to §15, Title 6, U. S. C. A.

Decree modified.

 

[58-2 USTC ¶9743]Renato Lavino et al., Plaintiffs v. Glen T. Jamison, etc., et al., Defendants

U. S. District Court, No. Dist. Calif., So. Div., No. 31,558, 165 FSupp 293, 7/8/58

[1939 Code Secs. 3690-3697--similar to 1954 Code Secs. 6331-6340]

Seizure and sale of property for taxes: Property of another taxpayer.--The plaintiffs alleged that they sold a bar and restaurant to a corporation but not the liquor inventory which was seized and sold by the Commissioner for unpaid taxes of the corporation. The liquor, supposedly kept aside in a locked storeroom, was actually used at will by the corporation with the result that, at the time of seizure, it was impossible to trace or identify the plaintiffs' liquor. The conclusion was that none of the plaintiffs' liquor was seized.

Col. Arthur N. Ziegler, 329 West Portal Avenue, San Francisco, Calif., for plaintiffs. Lloyd H. Burke, United States Attorney, Post Office Building, San Francisco, Calif., for defendants.

Memorandum for Judgment

CARTER, District Judge:

This is the second trial of this case, the judgment after the first trial having been reversed and a new trial ordered by the Court of Appeals for the Ninth Circuit. (230 Fed. (2d) 909 [56-1 USTC ¶9337]). The factual background is set forth in that opinion. At the second trial evidence was presented by both parties, including the deposition of Albert Ellison, and was heard by the Court. The matter has been briefed, argued and submitted.

The question is whether defendant has wrongfully taken property of the plaintiffs. Defendant admits that he had no right to take any property of plaintiffs when he levied on and seized the property of the S. J. R. Corporation, a California corporation, to satisfy the unpaid taxes of Sidney E. and Joan T. Wolfe. The factual question is whether any of the liquor inventory seized by defendant was the property of plaintiffs. Plaintiffs rely on a judgment in claim and delivery from the Superior Court of the State of California based on an inventory of liquor taken some time in March, 1951. The inventory seized by defendant was taken in July, 1951. When plaintiffs sold the business to the S. J. R. Corporation, they retained the inventory of liquor in a locked storeroom on the premises but the same storeroom was used by employees of S. J. R. Corporation. The evidence clearly establishes that S. J. R. liquor was stored in the storeroom and that S. J. R. used plaintiffs' liquor from time to time. A comparison of the two inventories shows that many items on plaintiffs' inventory were not on the premises when defendant seized the liquor on the premises and took an inventory. In addition, where the items are the same, the quantities are different. This establishes that S. J. R. used plaintiffs' inventory at will and treated it as S. J. R.'s property. At the time defendant took possession of the liquor, S. J. R. had so used plaintiffs' liquor that it was impossible to trace or identify plaintiffs' liquor. The conduct of S. J. R. leads to the inference that none of plaintiffs' liquor inventory was left on the premises at the time defendant made his seizure. This was made possible by plaintiffs, not defendant. The Court therefore concludes as a matter of fact that the defendant did not seize any of plaintiffs' liquor.

Plaintiffs argue that their judgment is conclusive and that the return of the Sheriff is prima facie evidence of the fact that defendant was holding plaintiffs' property. This argument is not compelling because the judgment declares plaintiffs' ownership of specific, identifiable property as against S. J. R. Since the property seized by defendant is not the property owned by plaintiffs as declared by the judgment, the judgment is no bar to defendant's seizure. The inference created by the Sheriff's return has been overcome by the comparison of the inventories and other evidence.

Plaintiffs also complain that the seizure proceedings were defective and therefore defendant did not get title to the liquor seized. If true, this is of no help to plaintiffs because plaintiffs are in no position to challenge defendant's title unless they can show that by his seizure defendant took some of plaintiffs' property.

The Court therefore finds the facts as set forth in the stipulation between the parties (plaintiffs' Exhibit 1) and, in addition, as set forth in defendant's request for Findings of Fact on pages 2, 3 and 4 of defendant's brief filed on April 18, 1958.

Judgment is awarded to defendant with costs. Counsel for defendant is directed to prepare and present Findings, Conclusions and a Judgment in accordance herewith.

 

[56-1 USTC ¶9337]Renato Lavino, Lawrence Andreini, Olga Andreini, Frank Andrini, Teresa Andrini, Joseph Andrini, Louis Andreini, Violet Andrini and Grace Andreini, Appellants, v. Glen T. Jamison, Collector of Internal Revenue, Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,385, 230 F2d 909, March 1, 1956

Appeal from the United States District Court for the Northern District of California, Southern Division.

[1939 Code Secs. 3690-3697--similar to 1954 Code Secs. 6331-6340]

Seizure and sale of property for taxes: Property of another taxpayer.--The taxpayers sold a bar and restaurant, but not the liquor inventory, to a corporation. The liquor inventory was seized and sold by the collector for unpaid taxes of the corporation. The taxpayers sued the Collector to recover the monetary equivalent of the liquor inventory, but the District Court dismissed their action on the ground that they had failed to prove the Collector had seized their property. On appeal, the Ninth Circuit reversed the judgment and remanded the case to the District Court for a new trial holding (1) that the statement in the Sheriff's return of a writ of execution against the corporation, obtained by the taxpayers in a prior civil action for recovery of the liquor inventory, to the effect that the inventory was "seized by the U. S. Treasury," placed the burden of going forward with the evidence to show the statement was inaccurate on the Collector, (2) that evidence of a bartender employed by the corporation was material and, if believed, would tend to explain the discrepancies between the list of inventory items the Collector sold and the taxpayers' list of inventory items thereby possibly overcoming the inference that the Collector did not seize the taxpayers' property, and (3) that the taxpayers' neglect in failing to present the bartender at the first trial was excusable and their failure to interview him (he was a witness for the Collector) was not in error.

Arthur N. Ziegler, Allan L. Sapiro, San Francisco, Calif., for appellants. Lloyd H. Burke, United States Attorney, Charles E. Collett, Edward H. Boyle, Assistants, San Francisco, Calif., for appellee.

Before DENMAN, Chief Judge, STEPHENS, Circuit Judge, and MATHES, District Judge.

DENMAN, Chief Judge:

This is an appeal from a judgment which denied appellants recovery for the alleged seizure of their property by the Collector of Internal Revenue to satisfy the taxes of another person ¹ and from the denial of appellants' motion for a new trial. The district court granted a motion to dismiss at the conclusion of appellants' case on the ground that they had failed to prove that the Collector had seized their property. F. R. C. P. 41(b). Appellants contend that they made a prima facie showing of this fact, that this showing was not overcome by the Collector, and that the findings of the district court were "clearly erroneous," F. R. C. P. 52(a), and further that new evidence offered on the denied motion for a new trial reinforced their contention of the sufficiency of the evidence.

[Facts]

Appellants sold a bar and restaurant to the S. J. R. Corporation on January 3, 1951. Although the liquor inventory was not included in the sale it remained on the premises locked in a storeroom. Unknown to appellants, the Collector of Internal Revenue seized certain personal property in the possession of the S. J. R. Corporation on July 24, 1951, including a liquor inventory. The seizure was a levy to collect unpaid taxes owed to the Government by the S. J. R. Corporation. ² On August 1, 1951, appellants commenced a suit in a California court to recover the liquor inventory from the S. J. R. Corporation. They recovered judgment entitling them to possession of the inventory or $4,444.57.

A writ of execution was issued against the S. J. R. Corporation and served by the Sheriff of the City and County of San Francisco on August 16, 1951. The return of execution stated that the sheriff was unable to obtain possession of the property, the liquor inventory, "said property having been seized by the U. S. Treasury. Demand was made upon John J. Boland, Chief Field Deputy, 1st District of Calif., of the Bureau of Internal Revenue. Said demand refused." On August 17, 1951, the liquor inventory was sold at public auction for $4,350.00.

Section 26662 of the California Government Code provides that the "return of the sheriff upon process or notices is prima facie evidence of the facts stated in the return." The statement in the sheriff's return that appellants' liquor inventory had "been seized by the U. S. Treasury" was the sole evidence relied on by appellants to show that their personal property was taken by the Collector when he took the property which was in the possession of the S. J. R. Corporation.

[Statements In Sheriff's Return]

This presents the contention that Section 26662 of the California Government Code is not applicable, since this is an action in a federal court brought under a federal statute, and there is no federal statute or rule as to the effect to be given statements in a sheriff's return. However, Section 1652 of Title 28 of the United States Code provides:

"The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply."

We think the federal rule of evidence as to the weight to be given statements in a sheriff's return is the same as that prevailing in California. ³ Sheriff's returns are documents executed by public officials who normally carry out their duties properly. It is more convenient to place the burden of going forward with the evidence to show that statements in a return are inaccurate on the party so asserting than to require a sheriff to be called away from his duties in every case.

The collector argues that the district court was correct in finding that appellants had failed to prove that he had seized their liquor inventory. He first argues that the statement in the sheriff's return that "said property" was "seized by the U. S. Treasury" was a mere conclusion of law and as such was not prima facie evidence of this fact. We do not agree. A return is not prima facie evidence of conclusions of law. ⁴

The statement is no more than that the Collector has appellants' liquor inventory. It does not attempt to state that that possession is lawful or the legal consequences of that possession.

[Discrepancies In Lists of Property]

The Collector argues that the judgment should be upheld since the appellants themselves introduced evidence which overcame the effect of the sheriff's return. The evidence referred to is the fact that the list of property which the sheriff attempted to recover and the list of property which the Collector sold are different. Some of the items are as follows:

ITEM                               Collector's List         Appellants' List

King Williams Scotch .....       23 cases                None

Mr. Boston Gin ...........       33 bottles              None

Old Hickory Bourbon ......       29 bottles              60 bottles

Kinsey Whiskey ...........       38 bottles              None

Old Grand Dad Whiskey ....       2 cases                 11 3/4 bottles

Old Taylor Whiskey .......       3 cases                 17 1/3 bottles

Yellowstone Whiskey ......       1 case                  17 bottles

White Horse Scotch .......       1 case                  17 bottles

Since the appellants' liquor inventory was left on the premises in the possession of the S. J. R. Corporation the Collector argues that the district court could have inferred that the S. J. R. Corporation had used appellants' liquor and exhausted the supply. There is merit in this contention. This is sufficient evidence from which the district court could find that appellants' property had not been shown to have been seized by the Collector. The findings were not "clearly erroneous."

[Evidence on Motion For New Trial]

Appellants moved for a new trial upon the basis of affidavits of Albert Ellison, a bartender formerly employed by the S. J. R. Corporation, in which he stated that at least part of the property on the Collector's list belonged to the appellants. The district court denied the motion for new trial. This is a matter within its discretion and its decision stands unless there has been an abuse of that discretion. Norwich Union Fire Insurance Society v. Glasser, 224 Fed. (2d) 385 (Cir. 9, 1955).

The testimony of Ellison, if believed, would tend to explain the discrepancies between the list of what the Collector seized and the list of appellants' property. However, the question remains whether appellants made a sufficient showing that their neglect to present Ellison at the first trial was excusable. The affidavit of their attorney in support of the motion for new trial stated that they had relied on admissions of the appellee that the stock sold by the Collector was the same as specified in their list, that they had not known of Ellison's whereabouts before trial and that they had believed that Ellison would appear at the trial as a witness for the Collector since he had filed an affidavit for the Collector earlier in the proceedings.

The newly discovered evidence is material and not merely cumulative. We think the new trial should have been granted and the district court, trying the case without a jury, should have set aside its judgment and considered the evidence. Appellants were not in error in refraining from interviewing their opponent's witness to determine whether he had knowledge of facts favorable to them.

The judgment is reversed and the case remanded to the district court for a new trial.

¹ 28 U. S. C. §2463 provides: "All property taken or detained under any revenue law of the United States shall not be repleviable, but shall be deemed to be in the custody of the law and subject only to the orders and decrees of the courts of the United States having jurisdiction thereof."

Under this statute district courts having jurisdiction over the seized property may quash distraint warrants, Raffaele v. Granger, 196 Fed. (2d) 620 (Cir. 3, 1952) [52-1 USTC ¶9321], enjoin the distraint, Long v. Rasmussen, 281 Fed. 236 (D. C. Mont., 1922), or order the property or its monetary equivalent returned, Stuart v. Chinese Chamber of Commerce of Phoenix, 168 Fed. (2d) 709 (Cir. 9, 1948) [48-2 USTC ¶9315], in order to give a remedy to a third party whose property has been taken to satisfy the taxes of another.

² The seizure was made pursuant to 26 U. S. C. §§ 3690-3697 [now 26 U. S. C. §§ 6331-6340].

³ Cf. Cleaves v. Funk, 76 Fed. (2d) 828 (Cir. 10, 1935).

⁴ Kee v. Becker, 54 Cal. App. 2d 466, 129 P. 2d 159, 1942; Gilbank v. Benton, 9 Cal. App. 2d 517, 50 P. 2d 815.

 

[91-1 USTC ¶50,158] United States of America, Plaintiff-Appellee v. General Motors Corporation, Defendant-Appellant

(CA-6), U.S. Court of Appeals, 6th Circuit, 89-1423, 4/1/91, Reversing and remanding an unreported District Court decision

[Code Secs. 6323 and 6332 ]

Lien for taxes: Assignment of property.--An automobile manufacturer that owed funds to an engineering company and made payment to the company's assignee was not liable for failing to honor an IRS lien on the same funds for unpaid taxes of the engineering company. According to state (Michigan) law, when the engineering company assigned accounts receivables that were due from the automobile manufacturer and others to a bank, all of the company's rights in the receivables were transferred to the assignee-bank. Thus, at the time the automobile manufacturer received notice of the subsequent IRS levy, it was not in possession of funds that the engineering company had any property interest in and that could be levied upon. Furthermore, a valid tax lien could not attach to receivables that were the subject of a prior assignment.

Before RYAN and NORRIS, Circuit Judges; and ALLEN, Senior District Judge. ^*

RYAN, Circuit Judge:

The government filed this action against General Motors Corporation ("GM"), pursuant to 26 U.S.C. §6332(c) , alleging that GM failed to honor an Internal Revenue Service ("IRS") levy upon property in its possession that belonged to another taxpayer and was encumbered by federal tax liens. The district court entered summary judgment for the government. We are asked to decide whether, as the district court held, GM is liable under I.R.C. §6332(d)(1) for failing to honor the levy. We conclude that it is not.

Specifically, we hold that the district court erred in granting the government's motion for summary judgment because GM was not, at the time it received notice of the levy, in possession of property subject to the levy. We shall, therefore, set aside the summary judgment and direct that judgment be entered for GM.

I.

In 1975, Oakwood Engineering and Experimental, Inc. ("Oakwood") and GM entered into a design agreement under which Oakwood was to perform certain engineering and related services for GM. GM agreed to pay for the services upon the terms and conditions set forth in the design agreement. The contractual relationship continued for a number of years. In February 1980, Oakwood negotiated a bank loan from NBD Troy Bank, N.A. for $75,000 and gave as security an assignment to the Bank of its "present and future" account receivables. On July 28, 1981, GM sent purchase order No. GEN 33534 to Oakwood calling for certain design services. Oakwood performed the requested services and between January 25 and February 2, 1982, submitted six invoices to GM in the total amount of $53,876.76.

On February 19, 1982, GM was notified by NBD Troy Bank, N.A. that Oakwood had assigned all its account receivables to the Bank and that, as a result, any money GM owed to Oakwood should be paid to the Bank.

However, on February 24, and again on March 2, 1982, the IRS served notices of levy upon GM directing GM to pay the IRS all property or rights to property in GM's possession which belonged to Oakwood, up to $87,175.02, Oakwood's outstanding federal tax liability.

On February 26, 1982, GM, in response to the Bank's February 19th notice, paid $53,876.76 to NBD Troy Bank, N.A., the amount owed to Oakwood for work performed under purchase order No. GEN 33534.

Because GM made no payments to the government pursuant to either of the levy notices, the IRS filed this action in the United States District Court for the Eastern District of Michigan to recover $53,876.76. The suit was brought pursuant to I.R.C. §6332(c) , on the theory that GM was obligated to honor the levy upon property in its possession which was encumbered by federal tax liens. The government claims, as it did below, that GM was in possession of funds it owed to Oakwood and refused to surrender the property to the IRS after notice of levy and final demand for payment.

GM claims that under Michigan law, by assigning its account receivables to the Bank in 1980, Oakwood transferred its entire interest in the accounts to the Bank and contends that under M.C.L. §440.9318(3), when GM received notice of the assignment from the Bank, Oakwood had no property interests whatever in the funds, and GM could no longer pay the account receivables over to Oakwood. Thus, GM argues, when it received the notice of levy, it was not in possession of any property or rights to property subject to levy. GM contends that the Bank had a superior interest to that of the government in the account receivables, and that the government did not have a lien on the account receivables at all.

The government and GM filed cross motions for summary judgment in the district court. The court found for the government, stating:

it is clear that under the Design Agreement and purchase order GEN 33534, Oakwood had a contractual property interest in the Funds for work performed. The fact that the Funds may have been subject to the Bank's lien, does not change the fact that Oakwood had a property interest in the funds.

The district court also found that GM's argument that the Bank had a superior security interest in the funds was without merit. The court held that "[l]ien priority is not a defense to an action to enforce a levy." The district court found that the "appropriate remedy for a person claiming a superior interest in the property is to bring an action for wrongful levy."

II.

A. Levy Theory

The dispositive issue in this case is whether, at the time the IRS levy was received, GM was the custodian of the property or a property interest to which the tax lien could attach.

Under 26 U.S.C. §6321 , a lien arises when a taxpayer fails or refuses to pay his taxes after assessment, notice and demand. See I.R.C. §§6321 and 6322 (1982). "This lien arises upon assessment and attaches to 'all property and rights to property, whether real or personal, belonging to [the taxpayer]' including property which the taxpayer subsequently acquires." United States v. Safeco Ins. Co. of Am., Inc., 870 F.2d 338, 340 (6th Cir. 1989) (quoting 26 U.S.C. §6321 ). Section 6321 is construed broadly because the language of the statute "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720 (1985).

If the tax remains unpaid, within ten days after notice and demand, the IRS may collect the tax by levy. 26 U.S.C. §6331 . When a taxpayer's property is held by another, the IRS customarily serves a notice of levy upon that party, pursuant to 26 U.S.C. §6332(a) . This notice of levy "gives the IRS the right to all property levied upon, and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 720 (citations omitted).

In National Bank of Commerce, the Supreme Court compared the administrative levy under 26 U.S.C. §6332 to a lien foreclosure suit under 26 U.S.C. §7403 . The Court noted that the administrative levy protects the government "against diversion or loss while such claims are being resolved." 472 U.S. at 721. The Court specifically held that the IRS had a right to levy on the taxpayer's joint bank accounts pursuant to 26 U.S.C. §§6331 and 6332 for delinquent federal income taxes even though the accounts were in joint names because the taxpayer had an absolute right under state law and under his contract with the bank to compel the payment of the outstanding balances in the accounts. Id. at 725-26.

Under 26 U.S.C. §6332(d) , if the custodian of the taxpayer's property honors the levy, the custodian is "discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment." However, if the custodian refuses to surrender the property in response to the levy, he is personally liable to the government in an amount equal to the value of the property not surrendered. 26 U.S.C. §6332(c)(1) . The custodian has two defenses for failure to comply with a tax levy: 1) the custodian is not in possession of the taxpayer's property; or, 2) the property is subject to a prior judicial attachment or execution. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 721-22; State Bank of Fraser v. United States [88-2 USTC ¶9592 ], 861 F.2d 954, 958 (6th Cir. 1988).

Because GM does not claim that the account receivables were subject to a prior judicial attachment or execution, the question is whether, at the time the notice of levy was received, GM held property in which Oakwood had any interest subject to levy. If it did, then it is personally liable under section 6332(c)(1) for the amount the government would have collected by the levy.

In determining whether the account receivables were subject to levy, state law determines "the nature of the legal interest which the taxpayer had in the property." National Bank of Commerce, 472 U.S. at 722. The government claims that at the time the notice of levy was served, GM clearly had property or rights to property that were subject to levy for Oakwood's tax liability. The government argues that account receivables are property or rights to property of a taxpayer that may be levied upon, citing United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 167 (6th Cir. 1983); United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612 (6th Cir. 1979), cert. denied, 447 U.S. 905 (1980).

We think the Celina and Weintraub cases cited by the government can be distinguished from the case at bar. Celina was a bank deposit setoff case which held that the tax assessment giving rise to the tax lien attached before the account receivables were transferred to the bank. Weintraub was a statute of limitations case which held that because a sovereign is exempt from operation of the statute of limitations, the fact that the IRS did not sue the defendant to collect on its attachment for 13 years did not preclude imposition of the liability. Id. at 621.

GM argues that it was not in possession of property or an interest in property belonging to Oakwood at the time of the levy. It claims that once the Bank notified GM that under the terms of the assignment contained in Oakwood's security agreement with the Bank, GM should pay the Bank the account receivables, Oakwood no longer had a property interest in those account receivables.

Under Michigan law, an assignment is defined as a

transfer or setting over of property, or of some right or interest therein, from one person to another, and unless in some way qualified, it is properly the transfer of one's whole interest in the estate, or chattel or other thing. It is the act by which one person transfers to another or causes to vest in another, his right to property or interest therein.

Allardyce v. Dart, 291 Mich. 642, 644, 289 N.W. 281 (1939) (emphasis added).

The Michigan Court of Appeals, citing Allardyce, defined an assignment as a "transfer or setting over of property from one person or entity to another and, unless in some way qualified, transfers one's whole interest." Moore v. Baugh, 106 Mich. App. 815, 819, 308 N.W.2d 698 (1981). Moore concerned the assignment of a judgment and the court found that "once a judgment is assigned, the assignor is completely disassociated from the rest except to the extent that his obligor may have rights against him which would then be assertable [sic] against the assignee." Id.

Moreover, M.C.L. §440.9318(3) provides that: "the account debtor [GM] is authorized to pay the assignor [Oakwood] until the account debtor receives notification that the amount due or to become due has been assigned and that payment is to be made to the assignee [Bank]." Thus, the rights of the assignor and the assignee are fixed at the time of notification of the assignment.

It is not disputed that Oakwood assigned its account receivables and contract rights to the Bank. The effect of the assignment under Michigan law was that all of Oakwood's contract rights in its account receivables were transferred to the Bank when Oakwood's account debtors were notified of the assignment. This post-default notice of assignment on February 19, 1982, divested Oakwood of legal and equitable title to the funds and deprived Oakwood of the right to sue for their recovery. Therefore, when GM received notice of the assignment, it was obligated to pay the Bank and could not pay the debt to Oakwood.

Because the IRS "steps into the taxpayer's shoes" and acquires whatever rights the taxpayer has with respect to the property, the IRS can succeed to rights no greater than those the taxpayer possesses. Thus, when money or property held by a third party is not the taxpayer's because it was assigned to another before the levy, it is no longer subject to the levy. At the time of the levy on February 24, 1982, the Bank, not Oakwood, owned the funds the IRS sought.

Therefore, we conclude that because of the assignment on February 19, 1982, Oakwood no longer possessed any property right in the disputed funds. Michigan law does not support the trial court's conclusion that some right to the funds remained in Oakwood on February 24, 1982, which would permit Oakwood to control payment of the funds. The Supreme Court has stated: "It would indeed be anomalous to say that the taxpayer's 'property and rights to the property' include property in which under the relevant state law, he had no property interest at all." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 n.3 (1960).

Thus, because section 6332(a) cannot resurrect a taxpayer's property rights that were previously completely extinguished, we hold that the lower court erred in concluding that Oakwood had sufficient property rights upon which the government could levy.

B. Lien Theory

Even if we were to decide that on the day it received notice of the levy, GM held property in which Oakwood had some interest, we would then have to decide whether the government had a valid lien in Oakwood's property. The government claims that the Bank possessed only a security interest in the account receivables and that the government's lien is superior to that of the Bank's. The government argues that GM mistakenly acted on the belief that the Bank had a superior lien in the account receivables when it paid the Bank instead of the IRS. GM argues, on the other hand, that the government's lien theory is without merit because the tax lien did not attach to the account receivables.

Federal tax liens arise when unpaid taxes are assessed and continue until the resulting liability is either satisfied or becomes unenforceable through the lapse of time. 26 U.S.C. §6322 . The government's argument assumes that the account receivables in this case were impressed with a federal tax lien. However, a tax lien cannot attach to property which has been previously assigned or transferred by the taxpayer at the time the assessment is made. Assignments made prior to a tax assessment preclude lien attachment.

In this case, Oakwood assigned its right to its account receivables to the Bank on February 6, 1980. The assessment made against Oakwood for unpaid withholding and Federal Insurance Contribution Act taxes occurred March 9, 1981, well after Oakwood assigned its account receivables to the Bank. The assignment extinguished any property rights in those receivables to which the subsequent federal tax lien might have attached.

As noted previously, state law determines the nature of the property right. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722. Under Michigan law, an assignment of after-acquired account receivables defeats the property interest of other creditors. In re United Fuel & Supply Co., 250 Mich. 325, 230 N.W. 164 (1930). Even though the assignment grants the assignor, as agent of the assignee, a revocable license to collect the accounts in the usual course of business, it does not impair the absolute nature of the assignment. Id. at 330-32. This court has recognized that under Michigan law, an assignment of future account receivables is effective when made, not when the specific account comes into existence. Union Trust Co. v. Bulkeley, 150 F. 510 (6th Cir. 1907). Thus, it is clear that the assignment by Oakwood of future account receivables was absolute as of February 6, 1980, and left Oakwood with no property rights to which the lien could attach.

III.

For the reasons stated, we REVERSE the judgment of the district court, REMAND the matter, and direct that summary judgment be entered for the defendant.

^* The Honorable Charles M. Allen, Senior District Judge of the United States District Court for the Western District of Kentucky, sitting by designation.

 

[91-2 USTC ¶50,538] United States of America, Plaintiff v. Michael J. Peloquin, Defendant

U.S. District Court, Dist. Ariz., Civ 90-0974 PHX PGR, 10/18/91

[Code Secs. 6331 , 6632 and 6502 ]

Levy and distraint: Validity of lien: Statute of limitations.--An IRS action to enforce surrender of property subject to a lien was allowed. The property was held by an individual who had been held liable for a cash judgment to delinquent taxpayers. Arguments by the judgment debtor that the IRS presented insufficient evidence to enforce the lien, that the judgment had been assigned to another party, and that the statute of limitations had run were all rejected. The judgment debtor offered no evidence indicating that the assessments were incorrect, that the liens were not properly recorded or that he did not receive the levy notices. There was no evidence supporting the judgment debtor's claim that the judgment had actually been assigned. Finally, the statute of limitations is not a defense to a surrender of property action under Code Sec. 6332 .

MEMORANDUM AND ORDER

ROSENBLATT, District Judge:

The United States of America ("Plaintiff") brings this action pursuant to 26 U.S.C. §§6331 and 6332 , which authorize the Internal Revenue Service ("IRS") to levy upon and enforce surrender of property or rights to property for the payment of taxes.

I. BACKGROUND

This case is based upon the IRS's pursuit of taxes owed by James R. Hinchcliff and Dorothy J. Hinchcliff. Federal tax assessments were made against James R. Hinchcliff in 1981, 1983, 1987 and 1988. ¹ Federal tax assessments were made against Dorothy J. Hinchcliff in 1988. Appropriate notices of federal tax liens were filed by the IRS. As of October 18, 1989, the Hinchcliffs continued to owe the assessment amounts plus statutory additions.

The Hinchcliffs are not parties to this action. On or about June 25, 1985, they were awarded a $25,000 judgment against the defendant herein, Michael J. Peloquin. Approximately October 18, 1989, the IRS served Mr. Peloquin, via certified mail, with Notices of Levy advising him of its levy upon "all money or other obligations" owed to James and Dorothy Hinchcliff, i.e., the amount of the judgment. Mr. Peloquin, however, has not made any payments on the judgment, either to the Hinchcliffs or to the IRS.

The IRS asserts that it is entitled to summary judgment against defendant for his failure to honor the IRS levies served upon him. Defendant challenges this motion on the grounds that (1) the evidence presented by plaintiff is insufficient for summary judgment; (2) prior to the levy in 1989, the Hinchcliffs' interest in the judgment was assigned by them to another party, Gary Yahnke, and the Notice of Levy therefore did not reach any property or rights to property; and (3) the applicable statute of limitations for collection has expired.

I. INTRODUCTION

Under 26 U.S.C. §6331(a) , if any person liable to pay any tax neglects to do so, the IRS has the power to levy "upon all property and rights to property" belonging to a taxpayer or on which there is a federal tax lien. Under 26 U.S.C. §6332(a) , "any person in possession of property or rights to property subject to levy upon which a levy has been made shall, upon demand, surrender such property or rights." A federal tax lien attaches to a taxpayer's property when unpaid taxes are assessed, and continues to attach until either the tax is paid or the lien becomes unenforceable because of lapse of time. 26 U.S.C. §§6321 , 6322 . The lien continues to attach to a taxpayer's property regardless of any subsequent transfer of the property. U.S. v. Donahue Industries, Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1330-31 (9th Cir. 1990).

Any person who fails to surrender any property or rights to property subject to a levy under §6331 , shall be personally liable to the United States in the sum equal to the value of the property or rights not so surrendered, together with costs and interest on such sum. 26 U.S.C. §6332(d) .

II. DISCUSSION

A. Sufficiency of Evidence for Summary Judgment

In bringing a motion for summary judgment, the moving party bears the initial burden to show the absence of a material and triable issue of fact; the burden "then moves to the opposing party, who must present significant probative evidence tending to support its claim or defense." Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir. 1987); Fed.R.Civ.P. 56(c). Unsubstantiated and conclusory allegations are insufficient to oppose a moving party's evidentiary showing under Fed.R.Civ.P. 56(e). Mitchel v. General Electric Company, 689 F.2d 877, 879 (9th Cir. 1982).

Defendant claims that the figures provided by the United States as to the assessments are not correct, and the exhibits demonstrating recordation of the tax liens and mailing of the Notices of Levy to defendant are not proper.

Plaintiff presented regularly kept records identified and attested to as such. Defendant does not offer any evidence indicating that the assessments are incorrect, the liens were not properly recorded, or that he did not receive the levy notices. Plaintiff has met its burden; defendant has failed to provide significant probative evidence tending to support his challenges.

B. Validity of Levy

As plaintiff points out, Arizona law creates a creditor/debtor relationship upon award of a judgment: a judgment debtor owes the amount of the judgment to the party holding the judgment. Under §6332 , the IRS may levy upon persons indebted to taxpayers for the amount of the indebtedness. See U.S. v. DeCicco [59-1 USTC ¶9247 ], 170 F.Supp. 394 (D.C.N.Y. 1959). Defendant concedes that "a judgment debt may be a right to property in a theoretical sense." Defendant does not cite any authority preventing the IRS' levy under this "theory."

Several cases have held that there are only two defenses to a government suit under §6332 : "that the person levied upon does not possess the delinquent taxpayer's property, and/or that the property is subject to a prior judicial attachment or execution. See Bank of Nevada v. United States [58-1 USTC ¶9228 ], 251 F.2d 820 (9th Cir.1957), cert. denied, 356 U.S. 938 (1958) . . . United States v. Trans World Bank [74-2 USTC ¶9632 ], 382 F.Supp. 1100 (C.D.Cal.1974)." United States v. Stephens [83-2 USTC ¶9704 ], 568 F.Supp. 1198, 1199 (N.D.Cal. 1983). See also United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 620 (6th Cir. 1979); U.S. v. Marine Midland Bank, N.A. [88-1 USTC ¶9159 ], 675 F.Supp. 775, 778-79 (W.D.N.Y. 1987).

Defendant does not contest the allegation that the Hinchcliffs obtained a judgment against him, nor does he offer any proof that he does not possess the judgment amount. Defendant's first available defense fails.

Nor has defendant shown that the property is subject to a prior judicial attachment or execution. Defendant argues that the Hinchcliffs assigned their interest to Gary Yahnke. Defendant did submit copies of deposition testimony concerning the claimed assignment to Yahnke. As plaintiff points out, however, that testimony does not significantly contradict plaintiff's evidence showing that an assignment never actually took place. Even if such an assignment had occurred, there is no evidence that Yahnke ever obtained judicial authorization for attachment or execution. Defendant's second available defense also fails.

C. Statute of Limitations

Defendant contends that the IRS attempt to collect is barred by the statute of limitations set forth in 26 U.S.C. §6502(a) . ²

Defendant has failed to show that the two acceptable defenses are available to him. As to other defenses, this Circuit and other courts have held that the appropriate remedy for one upon whom a notice of levy has been served which he believes to be wrongful, is to surrender the property and bring an action against the government pursuant to 26 U.S.C. §7426 . ³ U.S. v. Badger [91-1 USTC ¶50,198 ], 930 F.2d 754, 756-57 (9th Cir. 1991) United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 621, 622-23 (6th Cir. 1979). It has specifically been held that the statute of limitations is not a defense to a §6332 suit. United States v. Stephens [83-2 USTC ¶9704 ], 568 F.Supp. 1198, 1199 (N.D.Cal. 1983); Weintraub [80-1 USTC ¶9172 ], 613 F.2d at 620-21; U.S. v. Marine Midland Bank, N.A. [88-1 USTC ¶9159 ], 675 F.Supp. 775, 778-79 (W.D.N.Y. 1987).

Even if the statute of limitations under 26 U.S.C. §6502 were a defense to a §6332 suit, it would not be a defense in this matter.

The IRS issued notices of levy as to all of its assessments against the Hinchcliffs, including the 1981, 1983, 1987 and 1988 assessments. It properly filed the liens as to the 1987 and 1988 assessments, and timely refiled its 1981 lien. Both the 1981 and 1983 liens were in effect when the Hinchcliffs were awarded judgment in June, 1985.

The judgment amount is below the amount of the 1981, 1983, 1987 and 1988 assessments; at the very least, the tax liens for 1981, 1987 and 1988 were in effect at the time of the levies against defendant; the defendant was indebted to the Hinchcliffs at the time of filing and refiling of the liens; and the "property" is still in the possession of defendant. The levies were timely. See U.S. v. Donahue Industries, Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1329-30 (9th Cir. 1990); In re Carla Prosser Brafford, 189 Bankr. LEXIS 1306 (N.C. 1989).

III. CONCLUSION

Defendant has failed to meet his burden of proof in raising any genuine issues of material fact. Further, Defendant has failed to raise any valid defenses to the government's suit to enforce its levy. For these reasons, plaintiff is entitled to summary judgment.

Based on the foregoing, IT IS ORDERED THAT:

Plaintiff's Motion for Summary Judgment is granted in favor of the United States and against the defendant, Michael J. Peloquin, in the amount of $25,000, plus accrued interest as provided for by the Hinchcliff judgment, and interest on such sum for defendant's failure to honor levy at the under payment rate established under 26 U.S.C. §6621 from October 21, 1989.

¹ Plaintiff's moving papers indicate assessments in 1981, 1983 and 1988. There is a tax lien indicating an assessment on February 23, 1987, but plaintiff does not refer to this assessment.

² Section 6502 provides in relevant part:

(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun . . .

(1) within 6 years after the assessment of the tax 26 U.S.C. §6502(a)(1) . A 1990 amendment of this section extended the period in which a tax may be collected by levy or court proceeding from 6 years to 10 years, but that amendment does not apply to taxes assessed prior to November 5, 1990.

³ Section 7426 provides in pertinent part:

(a) Actions permitted.--(1) Wrongful levy.--If a levy has been made on property or property has been sold pursuant to a levy, any person . . . who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States . . .

 

[93-1 USTC ¶50,224] United States of America, Plaintiff v. James Michael Morey, Defendant

U.S. District Court, West. Dist. Okla., CIV-91-1949-T, 3/10/93

[Code Sec. 6332 ]

Levy: Surrender of property: Third party.--An individual's nonsurrender of funds to the IRS pursuant to a levy was not improper. The individual was litigating the amount of fees he owed his attorney when the IRS placed a levy on the fees for back taxes owed by the attorney. On the date of the levy, the attorney held a chose in action which under state law (Oklahoma) was an intangible, contingent interest in personal property that could be levied only if vested. The attorney's rights were not vested on the date of the levy because the individual's obligation toward the attorney existed only when the liability was fixed and determinable.

Charles P. Hurley, Department of Justice, Washington, D.C. 20530, for plaintiff. Michael Lee Bardrick, Mark Fitch, 1001 NW 63rd St., Oklahoma City, Okla. 73116, for defendant.

ORDER

THOMPSON, District Judge:

Before the court are cross-motions for summary judgment in the captioned cause. By this motion, the United States ("IRS") seeks judgment against the defendant, James Michael Morey, pursuant to 26 U.S.C. §6332 , ¹ based upon his failure to honor a levy in the original amount of $55,502.61 served upon him by the Internal Revenue Service. Section 6332(d)(1) imposes personal liability for failure to honor a levy with damages to be measured by the value of the taxpayer's property or property rights, not surrendered, but not exceeding the amount of the levy. The defendant, James Michael Morey, denies any liability pursuant to the levy arguing that he did not possess property of the taxpayer at the time the levy was served; and on this basis, defendant seeks judgment in his favor. The facts giving rise to this suit are as follows:

The defendant, James Michael Morey ("Morey"), and the now-deceased taxpayer, Raymond Burger, entered an Agreement for Establishment of Attorney's Fees dated July 11, 1986. The contract recites that Raymond Burger, an attorney, had represented Morey "in various and sundry matters dealing with among other things his anticipatory inheritance under a Will allegedly drawn by his aunt, Onez Norman Rooney, wherein Morey expects and has expected to inherit a substantial amount of money." Plaintiff's Motion for Summary Judgment, Exhibit "B." The substantive provisions of the contract provided:

IT IS THEREFORE MUTUALLY AGREED, STIPULATED AND UNDERSTOOD between Morey and Burger that in forgiveness of all of the prior debts owed by Morey to Burger for whatever cause and under whatever conditions to be forgiven by Burger that Morey stipulates with Burger that there is due at the time of settlement of the estate of Morey's aunt, Onez Norman Rooney, the sum of Two Hundred Thousand Dollars ($200,000.00) which takes into consideration all of the interest, charges, principal, judgments of any kind, character or nature, owed by Morey to Burger for whatever purposes owed, and does hereby liquidate the debt owing to a fixed amount of Two Hundred Thousand Dollars ($200,000.00).

In consideration of Morey executing this agreement setting out the amount owed to Burger, Burger hereby gives up all rights that he may have to sue Morey for any individual debt created for any purpose until the ripening of Morey's rights under any Will whereby Morey is in a position to inherit from Onez Norman Rooney, his aunt.

The further consideration of Morey's executing this instrument is that Burger has agreed to continue to represent Morey on credit in the establishment of whatever rights Morey has in the estate of Onez Norman Rooney during her lifetime or at her death or thereafter without charge to Morey as the work is done but with the understanding that any additional work done will be added to the liquidated amount of Two Hundred Thousand Dollars ($200,000.00) now due and owing.

Plaintiff's Motion for Summary Judgment, Exhibit "B." Shortly after the agreement was executed, Morey's aunt died. A dispute arose between Burger and defendant concerning the handling of the Rooney estate, and on May 29, 1987, defendant Morey fired Burger as his counsel. On June 5, 1987, Burger filed suit against defendant Morey seeking to collect the attorney fees provided for in the agreement.

Raymond Burger had previously, on April 1, 1985, been issued an assessment by the IRS for unpaid taxes, penalties and interest, relating to his 1983 federal income taxes. When the IRS learned of the suit between Burger and defendant Morey, it served on June 24, 1987, a levy upon defendant Morey seeking to obtain all money or other obligations owed by defendant Morey to Burger. The levy reflected the unpaid balance owing by Burger for his 1983 federal income taxes, as of March 30, 1987, in the amount of $55,502.61.

The underlying action between Burger and Morey was zealously contested by defendant Morey, who asserted various affirmative defenses to the contract, including lack of consideration, failure of performance, mutual mistake of fact, and unconscionability. Additionally, Morey filed a counterclaim against Burger by which he sought to rescind the agreement. In his counterclaim, Morey alleged that he had, in fact, entered into an attorney/client relationship with Burger and had sought legal advice and services from Burger. In the action upon the agreement, defendant Morey survived two motions for summary judgment filed by Burger such that liability was never established in the action by virtue of a judgment against defendant Morey.

On March 26, 1989, Burger died. On August 7, 1989, Morey entered into a Release and Indemnity Agreement with Burger's estate in settlement of the litigation. The settlement agreement called for Morey to pay to the estate the sum of $100,000 in exchange for a complete release and a dismissal of the litigation with prejudice. The settlement agreement also provided that the estate would indemnify Morey for any money or damages sought against Morey from a taxing authority. The estate was paid the sum of $100,000 on or about July 31, 1989. Despite the IRS's continuing assertion of the validity of the levy, the payment was made by defendant Morey to the estate; that is, the levy was not honored.

On or about October 16, 1989, the IRS, aware of the settlement, made demand upon Morey's lawyer for the amount of $55,502.61, giving Morey five (5) days to respond or face proceedings under 26 U.S.C. §6332 . The IRS was informed on October 23, 1989, of Morey's captionposition--that the levy did not reach monies paid to the estate. This litigation ensued.

The dispositive issue with respect to both motions is whether, at the time the levy was served upon Morey, Morey was obligated with respect to property or rights to property subject to the levy.

Under Section 6331(a) of the Internal Revenue Code, the IRS is authorized to levy upon all property and rights to property (except property exempt by statute) belonging to a delinquent taxpayer. . . .

An IRS levy, . . . reaches only property which exists on the date of the levy. Thus, the Treasury Regulations provide that, except with respect to levies on salary or wages (as to which the Internal Revenue Code specifically authorizes a continuing levy), "[a] levy extends only to property possessed or obligations which exist at the time of the levy." Reg. §301.6331(a)(1) , emphasis added.

Under the Regulations, an IRS levy also will reach a vested, accrued right to receive money in the future. The Regulations then provide that an IRS levy will reach property "when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date." Id. . . . This would cover, for example, a note providing for specific payments on fixed future dates.

In contrast, an IRS levy will not reach a taxpayer's claim to receive payments in the future where the taxpayer does not, at the time of the levy, have a fixed and determinable right to those payments. For example, the IRS has ruled that a levy will not reach unvested, contingent rights to future payments. See Rev. Rul. 75-554 , 1975 C.B. 478. . . .

Similarly, the example in the Regulations stating that an IRS levy will reach future payments due under completed sales of personal property implies that an IRS levy will not reach amounts to be received in the future for sales of personal property that have not yet occurred.

In re Hawn, -- B.R. --, Nos. 90-01973-C-11, 92-2034-C, 1993 WL 7273 at *7 (Bankr. S.D. Tex., January 14, 1993). See also 26 C.F.R. §301.6331-1 (1992).

Morey asserts that at the time he was served with the levy at issue he was not "in possession of or obligated with respect to property or rights to property," 26 U.S.C. §6332 (West 1989 & Supp. 1992), belonging to Burger, because his liability on the contract was disputed. See U.S. v. Bell Credit Union [88-2 USTC ¶9564 ], 860 F.2d 365, 367 (10th Cir. 1988) ("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."). The IRS, in its brief, admits that "[r]esearch has uncovered no cases directly on point to Morey's argument." Plaintiff's Motion for Summary Judgment, p. 9. It then falls to this court to determine the nature of attorney Burger's interest, and whether that interest gave rise to an obligation chargeable to the defendant.

"Because the IRS 'steps into the taxpayer's shoes' and acquires whatever rights the taxpayer has with respect to the property, the IRS can succeed to rights no greater than those the taxpayer possesses." U.S. v. General Motors Corp. [91-1 USTC ¶50,158 ], 929 F.2d 249, 252 (6th Cir. 1991). "[S]tate law determines 'the nature of the legal interest which the taxpayer had in the property.' National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722, 105 S. Ct. at 2925." Id. at 251. See also U.S. v. Bell Credit Union [88-2 USTC ¶9564 ], 860 F.2d at 367 ("[W]e look to state law to determine what interest the taxpayer had in the accounts. (citation omitted) Federal law, however, determines the tax consequences of the right created under state law." (citation omitted)).

The IRS characterizes the contract as a "receivable." Motion for Summary Judgment, p. 8. Defendant Morey likens this situation to attachment and garnishment process under Oklahoma law; however, this argument presumes the interest without defining it. The court believes Burger's interest in the contract to be best characterized as a chose in action, ² or as termed in Oklahoma, a "thing in action." A "thing in action" is defined in Okla. Stat. Ann. tit. 60, §312 (West 1971) as "a right to recover money or other personal property, by judicial proceedings." Under Oklahoma law, a chose in action "is considered intangible personal property." Shebester v. Triple Crown Insurers, 826 P.2d 603, 608 (Okla. 1992). See also Perkins v. Oklahoma Tax Commission, 428 P.2d 328, 330 (Okla. 1967) ("[A] chose in action [is] a right to receive money shown to be due on liquidation and accounting--and hence constitutes intangible property.") It is a "mere contingent interest." Norman v. Trison Development Corp., 832 P.2d 6, 11 (Okla. 1992). By virtue of the chose in action, attorney Burger had an intangible, contingent interest in personal property to which the IRS succeeded on the date of levy. It has been held that "a federal tax lien can attach to contingent interests." (citations omitted) Bigheart Pipeline Corp. v. United States [84-2 USTC ¶9961 ], 600 F.Supp. 50, 53 (N.D. Okla. 1984), aff'd, [88-1 USTC ¶9110 ], 835 F.2d 766 (10th Cir. 1987). Nevertheless, while federal tax liens may attach to contingent interests, a contingent interest must be vested. In re Hawn, supra. "A bundle of rights to contractual consideration need not have present existentiality in order to be 'property'; such rights may operate in the future as long as they have value in the present." Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770 ], 542 F.2d 270, 277 n.13 (5th Cir. 1976).

The defendant Morey vehemently argues, consistent with the Treasury Regulations, that he had no obligation to the taxpayer arising from this interest on the date of levy, since an "obligation" exists only "when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date." 26 C.F.R. §301.6331-1 . See Nicholas v. Richlow Mfg. Co., 126 F.2d 16 (10th Cir. 1941) (Treasury Regulations "neither unreasonable nor inconsistent with the statute [are] entitled to respectful consideration and should not be overruled except for weighty reasons."). Defendant's argument rests in the good faith dispute over the contract--that the obligation or liability was not fixed at the time the levy was served.

The IRS argues that all acts giving rise to the claim and cogent to its determination had been performed on that date and that if liability existed, it was fixed and determinable on the date of levy. Nevertheless, 26 U.S.C.A. §6332(d) (West 1989 & Supp. 1992) (emphasis supplied) states for purposes of enforcement that the nonsurrendering person shall be liable "in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes." It thus appears that for purposes of enforcing a levy, one must be able to fix and determine the value of the taxpayer's property interest on the date of levy in order for there to be property subject to levy in the hands of the obligor. This is consistent with the fact that under subsection (d), interest accrues on the amount owed from the date of levy.

Here, the taxpayer's rights were not vested on the date of levy. See Perkins v. Oklahoma Tax Commission, 428 P.2d 328, 330 (Okla. 1967) ("Intangible personal property is such property as has no intrinsic value but which is representative or evidence of value.").

The court holds that the taxpayer held a chose in action to which, upon levy, the IRS succeeded. Any obligation arising thereunder was not vested, or fixed and determinable on the date of levy. Therefore, defendant Morey was not "in possession of (or obligated with respect to) property or rights to property," 26 U.S.C.A. §6332(a) (West 1989 & Supp. 1992), on the date of levy. His subsequent nonsurrender did not violate the statute. This holding MOOTS the assertion that IRS is entitled to a fifty (50) percent penalty pursuant to 26 U.S.C.A. §6332(d)(2) (West 1989 & Supp. 1992).

Accordingly, the Motion for Summary Judgment of defendant Morey is GRANTED. The Motion for Summary Judgment of plaintiff, United States, is DENIED.

IT IS SO ORDERED.

¹ 26 U.S.C.A. §6332 (West 1989 & Supp. 1992) provides in pertinent part:

§6332 . Surrender of property subject to levy

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

. . .

(d) Enforcement of levy.--

(1) Extent of personal liability.--Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which a levy has been made, together with costs and interest on such sum at the underpayment rate established under section 6621 from the date of such levy (or, in the case of a levy described in section 6331(d)(3) , from the date such person would otherwise have been obligated to pay over such amounts to the taxpayer). Any amount (other than costs) recovered under this paragraph shall be credited against the tax liability for the collection of which such levy was made.

(2) Penalty for violation.--In addition to the personal liability imposed by paragraph (1), if any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount recoverable under paragraph (1). No part of such penalty shall be credited against the tax liability for the collection of which such levy was made.

² The concept of chose in action encompasses accounts receivable.

The term "chose in action" is one of comprehensive import. It includes the infinite variety of contracts, covenants, and promises which confer on one party the right to recover a personal chattel or a sum of money from another by action. Thus, the general class of choses in action includes money due on a bond, note, or other contract, damages due for breach of contract, for the detention of chattels, or for torts, and the rights of action for recovery thereof. As illustrating the comprehensiveness of the term in this respect, it has been held to include open or unliquidated accounts, bills and accounts receivable, the right to receive contract payments under a contract for the sale of real property, and a policy of insurance. Shares of corporate stock are regarded as personal property in the nature of choses in action, as are certificates of corporate stock.

63A Am. Jur. 2d Property §26 (1984).