6321 Bank Deposits page2

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[Code Sec. 6502--Result unchanged by '69 Tax Reform Act]

Statute of limitations: Offers in compromise: Waiver: Collection after assessment.--The taxpayer's offer in compromise, and a later renewal of the compromise offer, which was neither accepted or rejected and which contained a waiver provision, operated to extend the running of the statute of limitations beyond the date of the filing of the Government's complaint. Furthermore, the movant bank, being a third party, could not challenge the validity of the taxpayer's waiver on the question of whether the offer in compromise was frivolous. Richard L. Thornburgh, United States Attorney, Pittsburgh , Pa. , for plaintiff. Coldren & Adams, 712 Gallatin Bank Bldg., Uniontown , Pa. , for defendants.

Opinion

GOURLEY, Senior District Judge:

The United States commenced this action pursuant to Sections 7401 and 7403 of the Internal Revenue Code of 1954, 26 U. S. C. §7401 and §7403, and seeks to enforce herein certain federal tax liens and to have determined the merits of all claims to and liens upon the property in question. The Court has jurisdiction pursuant to 28 U. S. C. §§ 1340 and 1345. Judgment by default has been entered in favor of the United States and against defendant Carlow (hereinafter "the taxpayer") in the sum of $13,769.96 plus interest. The present matters before the Court are a Motion for Summary Judgment filed by the United States and a cross-Motion for Summary Judgment filed by defendant Fayette National Bank and Trust Company (hereinafter "the Bank"). Counsel for the respective parties have entered into Stipulations of facts not in dispute. After hearing, the Court concludes that there is no genuine issue as to any material fact, the Motion of the United States should be granted and the Motion of the Bank denied.

In its Complaint, the United States averred that the expiration of the applicable statutory period for the enforcement of its assessment liens had been extended beyond the time of filing suit by virtue of several offers of compromise wherein the taxpayer entered into agreements supending the running of the applicable statute of limitations. The Bank averred in its Answer that it was without information sufficient to form a belief as to the truth of this averment and thereby effectively denied the averment. F. R. C. P. 8(b). Thereafter, counsel for the respective parties neither adverted to the statute of limitations issue in their respective Motions for Summary Judgment nor offered proof at the hearing, by affidavit or otherwise, with respect to this issue. Uncertain as to whether the issue had been abandoned, the Court made inquiry of respective counsel. Thereafter, counsel for the respective parties entered into a Stipulation as to the facts material to this issue and submitted briefs upon a disputed question of law. Accordingly, the Court will resolve this issue before proceeding to the question presented by the Motions for Summary Judgment.

[Facts]

The undisputed facts are as follows. During a period from February 8, 1962 to and including March 20, 1964, eleven federal tax assessments were made against the taxpayer for failure to pay on demand federal taxes totalling $9,827.67 in principal amount. On May 10, 1965, the taxpayer submitted to the United States an "Offer in Compromise," Form 656, which provides in pertinent part as follows:

"6. The undersigned proponent waives the benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitations on assessment and/or collection for the period during which this offer is pending, or the period during which any installment remains unpaid, and for 1 year thereafter."

The compromise offer was rejected on June 10, 1965. However, the waiver of the statute of limitations was accepted by the District Director of Internal Revenue on October 12, 1965.

Thereafter, on July 11, 1966, the taxpayer submitted a second compromise upon a form identical to the first and containing the same provision for the suspension of the statute of limitations. The waiver of the Statutes of Limitations was accepted by the District Director of Internal Revenue on September 20, 1966. Subsequently, the taxpayer amended the second compromise offer by a collateral agreement dated June 13, 1967 which reaffirmed the taxpayer's previous suspension of the statute of limitations. On May 18, 1970, the taxpayer substituted for the collateral agreement of June 13, 1967 another collateral agreement, again reaffirming his previous suspension of the statute of limitations. The United States has never rejected the second offer of compromise, dated July 11, 1966, and said offer, as modified by the collateral agreement of May 18, 1970, is presently under consideration. The United States filed the instant Complaint on May 13, 1969.

The governing statute of limitations is Section 6502 of the Internal Revenue Code of 1954, 26 U. S. C. A. §6502, which provides in pertinent 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, or

(2) prior to the expiration of any period for collection agreed upon in writing by the Secretary or his delegate and the taxpayer before the expiration of such 6-year period (or, if there is a release of levy under section 6343 after such 6-year period, then before such release).

The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. The period provided by this subsection during which a tax may be collected by levy shall not be extended or curtailed by reason of a judgment against the taxpayer."

Since more than six years elapsed between eight of the Government's assessments and the date of filing suit, the Government would be barred under Section 6502 from proceeding in Court upon these eight assessments unless the statutory period was suspended by agreement of the taxpayer and the Government.

[Compromise Offer as Waiver]

It has been held by the Hon. Herbert P. Sorg, an associate member of this Court, that an offer of compromise containing precisely the same language of waiver used in the taxpayer's two offers in the instant case effectively suspends the six-year limitation period in accordance with the terms of the offer. United States v. Moyer [70-1 USTC ¶9235], 308 F. Supp. 754, 756 (W. D. Pa. 1968 aff'd [70-1 USTC ¶9182] 420 F. 2d 375 (3d Cir. 1970), cert. denied 400 U. S. 819 (19--). Where the waiver of the statute of limitations by the taxpayer is accepted by the United States , it is unaffected by the ultimate rejection of the offer in compromise. United States v. Moyer, supra, at p. 756. Moreover, where waivers are issued with successive compromise offers, the waivers are cumulative in extending the time for collection. United States v. Havner [39-1 USTC ¶9286], 101 F. 2d 161, 163 (8th Cir. 1939); United States v. Maddas [53-1 USTC ¶9190], 109 F. Supp. 607, 612 (W. D. Pa. 1953).

In the instant case, the taxpayer's first offer of compromise was rejected thirty-one days after its submission under the terms of the waiver agreement, the six-year limitation period upon the earliest assessment, made on February 8, 1962, was suspended for a year and thirty-one days, thus extending the date of expiration of the statutory period into March of 1968. On July 11, 1966, before the extended date of expiration, the taxpayer proffered his second offer of compromise, accompanied with the identical waiver provision. Because the United States has yet to reject this second offer of compromise, the waiver provision contained therein has acted to extend the expiration date of the limitation period beyond the date upon which the Complaint was filed.

Defendant Bank contends, however, that both the first and second offers of compromise were so low as to have required immediate rejection by the United States and that, having failed to reject the second offer within a reasonable period of time, the United States may not claim the benefit of this delay against the Bank.

Section 7122 of the Internal Revenue Code of 1954, which governs compromises, imposes no obligation upon the Secretary of Internal Revenue to reject an offer of compromise within any given period of time. However, §301.7122-1 of the Regulations, adopted February 3, 1960, does provide in pertinent part as follows:

"(d) (4) Withdrawal or rejection. An offer in compromise may be withdrawn by the proponent at any time prior to its acceptance. In the event an offer is rejected, the proponent shall be promptly notified in writing. Frivolous offers or offers submitted for the purpose of delaying the collection of tax liabilities shall be immediately rejected. If an offer in compromise is withdrawn or rejected, the amount tendered with the offer, including all installments paid, shall be refunded without interest, unless the taxpayer has stated or agreed that the amount tendered may be applied to the liability with respect to which the offer was submitted."

In my judgment, the Bank is not entitled to the benefit of the aforequoted provision.

[Frivolous Offers]

It is apparent from the very terms of §301.7122-1(d)(4) that frivolous offers are to be rejected immediately so as to prevent undue delay in the collection of taxes. The provision is for the benefit of the United States , not the taxpayer. The taxpayer is protected from an indefinite suspension of the statute of limitations by his right, afforded by the very same Regulation, to withdraw his offer at any time before acceptance. The taxpayer in the instant case has not seen fit to make such a withdrawal of his second offer of compromise.

Moreover, even if the provision for prompt rejection of frivolous offers were partially for the benefit of the taxpayer, which I do not believe to be the case, the Bank, as a third party would not be entitled to such benefit. It is not disputed that, where a taxpayer enters into an agreement to suspend the running of the statute of limitations, this agreement binds not only the taxpayer but also any party to an action to foreclose the tax lien. United States v. Mojac Construction Corp. [61-1 USTC ¶9166], 190 F. Supp. 622, 626 (E. D. N. Y. 1960); United States v. Maddas, supra, at p. 612. Since a third party generally may not challenge the right of the taxpayer to suspend the statute of limitations by agreement with the United States, I conclude that the Regulation in question was not intended to afford a third party such a right in the particular case where the compromise offer accompanying the waiver is frivolous. The agreements between the taxpayer and the United States extending the expiration date of the limitation period upon all eleven assessments beyond the date of filing of the Complaint herein effectively precluded the Bank, a third party, from raising the statute of limitations defense herein.

[Property Subject to Lien]

I turn, then, to a consideration of the basic issue presented by the cross-Motions for Summary Judgment--whether, at the time of the assessments or thereafter, the Bank possessed property of the taxpayer to which assessment liens could attach.

As previously indicated, during a period from February 8, 1962 to and including March 20, 1964, eleven federal tax assessments were made against the taxpayer for failure to pay on demand federal taxes totalling $9,827.67 in principal amount. Notices of the assessments were filed during a period from February 8, 1962 through September 3, 1964. On November 5, 1964, the United States served an administrative Notice of Levy upon the Bank demanding that all property or rights to property of the taxpayer be turned over to the Government. Despite the receipt of service of this Notice of Levy, the Bank has failed to pay any funds over to the United States .

For some years prior to the period when the United States made the tax assessments in question, the taxpayer had been a customer of the Bank. In the course of his business as a seller of appliances and home improvements, the taxpayer regularly received promissory notes from the purchasers. On March 2, 1959, the taxpayer entered into a "Loan Agreement" with the Bank whereby the Bank agreed to discount such notes. The Loan Agreement further provided for the establishment of a reserve account in connection with the discounting of such notes. In fact, four such reserve accounts were established.

Subsequent to the date of the Loan Agreement establishing the reserve accounts, the taxpayer became personally indebted to the Bank. On June 28, 1962, the taxpayer became obligated to the Bank in the sum of $2,495.52 and, on July 27, 1963, he became indebted for the additional sum of $8,872.92. These obligations arose out of the taxpayer's acquisition of a truck and construction equipment, which were pledged to the Bank as security for the personal debts. The taxpayer subsequently defaulted upon both debts, and the Bank sold a portion of the pledged property. However, deficiencies remained. To satisfy the deficiencies, the Bank set off the existing balances in the reserve accounts on two occasions. Specifically, it set off the amount of $585.51 on September 4, 1964 and the amount of $4,797.80 on September 17, 1964. The Bank then sold the balance of the pledged property and returned $1,185.88 to one of the reserve accounts. There is presently $725.59 in the aforementioned reserve account, which the Bank concedes is due the taxpayer and subject to the tax liens of the United States . In dispute is the right of the United States to recover from the Bank $4,197.43, which is the net amount of the two setoffs which the Bank applied against the reserve accounts at a time subsequent to the Government's assessments upon the taxpayer.

Section 6321 of the Internal Revenue Code of 1954, 26 U. S. C. §6321, provides as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

Under Section 6322 of the Code, 26 U. S. C. §6322, the federal tax lien arises upon the date of assessment. Section 6323 of the Code, 26 U. S. C. §6323 establishes priorities and provides that a federal tax lien shall not be valid with respect to, or prior to, certain other claims to property unless a notice of lien is filed and, in some instances, regardless of whether a notice of lien has been filed. The Bank's defense, however, does not rest upon any of the specific priorities afforded by Section 6323.

The Bank contends that the four reserve accounts in question did not constitute "property or rights to property" at any relevant time. Therefore, it is reasoned, no federal tax lien could attach to the reserve accounts by virtue of the assessments against the taxpayer. Whether a taxpayer has an interest in particular property to which a lien can attach is determined by state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958). In the instant case, it must be ascertained whether, under Pennsylvania law, the Loan Agreement in question gave the taxpayer property rights in the reserve accounts created by the Agreement.

In detail the Loan Agreement provided that the Bank would purchase from the taxpayer at a discount rate of eight per cent per annum such notes as the taxpayer might receive in connection with home modernization and improvement contracts into which he might enter with customers in the course of his business. It was agreed that the Bank would have "full recourse" against the taxpayer on the notes. Furthermore, it was provided that a reserve account would be established "to be maintained on deposit" with the Bank. On each occasion when the Bank would purchase a note from the taxpayer, it would deduct a given amount from the payment to the taxpayer and "pay" said amount "into the reserve account." If a default in payment of an installment on a note so purchased were to occur, or if the Bank were to deem its security on any note insufficient, it would then have the right to charge the unpaid balance of the note to the reserve account. When all notes purchased by the Bank would be paid in full, the amount in the reserve account then would be paid over to the taxpayer.

["Special" Accounts]

The law of Pennsylvania recognizes a distinction between "general" accounts and "special" accounts deposited with a bank. R. M. Bourne & Co. v. Peoples Union Bank and Trust Co., 404 Pa. 519 (1961); Franklin Savings & Trust Co. v. Clark, 283 Pa. 212 (1925); Parker v. Hartley, 91 Pa. 465 (1879). "Whether a deposit is general or special depends on the facts and circumstances attending its making . . ." Franklin Savings & Trust Co. v. Clark , supra, at 218. It is evident from the terms of the Loan Agreement that funds to be paid into any reserve account established in connection with the Agreement were to serve the sole purpose of collateral security for the payment of the notes purchased by the Bank. See M'Intire v. Blakely, 12 Atl. 325, 10 Cent. 925, 9 Sadler 227 (1888).

The Bank contends that, although the reserve accounts were created for the singular purpose stated above, the accounts nevertheless were not "special" accounts. It is argued that no money was actually segregated in these accounts, the accounts being evidenced simply by credits on a bank ledger. This, we believe, is of no moment. Although the Supreme Court of Pennsylvania indicated in the Franklin Savings & Trust Co. case, supra, that a requisite element of a "special" account was the segregation of money or other property therein, the later decision of said Court in R. M. Bourne & Co., supra, appears to have abandoned such a requirement. Also, we deem it of no moment that the reserve accounts were to serve as collateral securing the Bank rather than a third party. Compare M'Intire v. Blakely, supra, with R. M. Bourne & Co., supra, and Parker v. Hartley, supra. We believe that the reserve accounts, established for the sole purpose of securing the Bank's recovery upon the notes purchased by it from the taxpayer, were "special" accounts under the law of Pennsylvania .

[ Pennsylvania Law]

It is recognized under Pennsylvania law that a "general" account creates simply the relationship of debtor and creditor between the depositor and the Bank. Franklin Savings & Trust Co. v. Clark, supra, at 218. This relationship alone creates in a depositor a sufficient property interest to which a federal tax lien may attach. MacKenzie v. United States [40-1 USTC ¶9229], 109 F. 2d 540 (9th Cir. 1940).

Here, the reserve accounts in question were "special" rather than general accounts. Under the terms of the Loan Agreement, the taxpayer cannot be said to have had less of a proprietary interest in these accounts than he would have had in a general account. In fact, he appears to have had more. By virtue of the provision in the Loan Agreement that the Bank would pay into a reserve account a portion of the purchase price of a discounted note to serve as security for ultimate collection of the note, we believe the taxpayer acquired a vested property right in such funds as were paid into the account at the times when they were so applied, subject to defeasance only upon the contingency and to the extent that the Bank ultimately would find certain notes to be uncollectible. Consequently, the funds deposited into the reserve accounts constituted "such property or rights to property" in the taxpayer as would be subject to the attachment of federal tax liens.

A federal tax lien attaches not only to property and property rights owned by the taxpayer on the date of assessment but also to such property and property rights which the taxpayer acquires thereafter during the continued existence of the lien. Thus, by virtue of the assessments against the taxpayer during the period from February 2, 1962 to March 20, 1964, the continuing federal tax liens attached not only to funds in the account on the dates of the assessments in question but also to such funds as were thereafter paid into the reserve accounts during the continuing existence of the liens. There is no dispute that the liens have continued to the date of filing suit.

The question remains, however, as to whether the Bank was entitled to the setoffs of September 4, 1964 and September 17, 1964 against the reserve accounts, free and clear of the federal tax liens arising from assessments made prior to the setoffs. No general right of setoff was afforded to the Bank under the terms of the Loan Agreement itself. Thus, if such a right existed, it had to be one afforded by law.

Under the law of Pennsylvania , funds deposited in a bank for a special purpose, known to the bank, or under a special agreement, cannot be set off by the bank against an unrelated debt due to it from a depositor. R. M. Bourne & Co. v. Peoples Union Bank & Trust Co., 404 Pa. 519 (1961). See also M'Intire v. Blakely, supra. The reserve accounts were "special" accounts. The Bank's attempted setoffs therefore were invalid.

It may be noted that we are not presented with a question of the respective priorities of the Bank's security interest in the reserve accounts and the federal tax liens. The Bank ultimately recovered in full upon all of the notes purchased by it and, accordingly, even if the Bank's security interest previously had been entitled to priority over the federal tax liens, the Bank's security interest now has terminated under the conditions of the Loan Agreement.

The assessments gave rise to perfected tax liens upon the amounts in the reserve accounts on the dates of assessment and paid into the account thereafter. The Bank's attempted setoffs against these special purpose accounts subsequent to the assessments were invalid under State law. Accordingly, the Bank is liable to the United States in the amount of $4,923.02, that amount being the sum of the net setoff of $4,197.43 and the amount of $725.59 currently on deposit in reserve account 800-313.

An appropriate order is entered.

Order

NOW, THEREFORE, this 16th day of March, 1971, IT IS HEREBY ORDERED that plaintiff's Motion for Summary Judgment be and the same is hereby granted and that defendant-Fayette National Bank & Trust Company's Motion for Summary Judgment be and the same is hereby denied.

IT IS FURTHER ORDERED that JUDGMENT be and the same is hereby entered in favor of the plaintiff and againt defendant-Fayette National Bank & Trust Company in the sum of FOUR THOUSAND NINE HUNDRED AND TWENTY THREE DOLLARS AND TWO CENTS ($4,923.02).

IT IS ALSO ORDERED that the satisfaction of the aforesaid judgment by Fayette National Bank & Trust Company shall act to the reduction of the Judgment against Frank Carlow in like amount.

 

 

 

United States of America , Plaintiff v. Charles Wergeles: Dorothy Wergeles: Charles Wergeles, Jr.; Theresa Mastrogiovanni Rush; and The State National Bank of Connecticut , Defendants

U. S. District Court, Dist. Conn., Civil Action No. 11219, 7/8/69

[Code Sec. 6323]

Unpaid taxes: Judgment: Surrender of bank deposit books.--The taxpayer wife was ordered to surrender to a bank two bank deposit books which she held in her name in trust for other persons. The bank was ordered to deliver a check payable to the United States in the full net amount of the bank accounts as payment for income taxes owed by the taxpayer husband and wife.

Jon O. Newman, United States Attorney, New Haven, Conn., John F. Mulcahy, Jr., Hartford, Conn., Charles A. Simmons, Department of Justice, Washington, D. C. 20530 for plaintiff. Abram W. Spiro, 54 Main St., Danbury, Conn., Robert J. Wolfe, 68 Main St., Danbury, Conn., Robert M. McAnerney, 43 Corbin Dr., Darien, Conn. for defendants.

Judgment

CLAIR, District Judge.

This cause having been submitted on plaintiff's motion for summary judgment and the Court having considered the pleadings, the affidavits, the exhibits and the briefs, and having been otherwise fully informed in the premises, it is

ORDERED, ADJUDGED and DECREED that plaintiff's motion for summary judgment be and is hereby granted in all respects; and it is further

ORDERED, ADJUDGED and DECREED that the plaintiff United States of America shall have judgment against the defendants Charles Wergeles and Dorothy Wergeles, jointly and severally, for unpaid federal income taxes for the tax year 1956 in the total amount of $27,155.39; and it is further.

ORDERED, ADJUDGED and DECREED that The State National Bank of Connecticut is awarded attorney's fees to be paid out of the amount on deposit with said bank in the amount of $400.00; (See discussion: Vol. 41 Conn. B. J. 528-530, Sept. 1967); and it is further

ORDERED, ADJUDGED and DECREED that the defendant Dorothy Wergeles forthwith surrender to The State National Bank of Connecticut deposit books for Account Numbers 748 and 749, being variously titled Dorothy Inez Wergeles in trust for Charles Wergeles, Jr., and Dorothy Inez Wergeles in trust for Theresa Mastrogiovanni, and that coincident thereto The State National Bank of Connecticut deliver to the United States a check payable to the United States of America in the full net amount of said accounts, including interest to the date of the closing of the accounts; and it is further

ORDERED, ADJUDGED and DECREED that this amount shall be applied in reduction of the judgment entered against the defendants Charles Wergeles and Dorothy Wergeles, jointly and severally.

 

 

 

Conrad Miklaski, Plaintiff v. United States of America and Paul McKay, Defendants

U.S. District Court, East. Dist. Mich. , So. Div., CIV. 97-CV-71212-DT, 6/6/97, 18 FSupp 2 d 707

[Code Secs. 6201 , 6511 and 7421 ]

Jurisdiction: Suit to restrain assessment: Authority for assessment: Lien for taxes: Notice of deficiency: Adequate remedy at law.--Jurisdiction was lacking over an individual's motion to schedule an evidentiary hearing in connection with an IRS levy on his wages and his personal savings account because the taxpayer established no exceptions to the Anti-Injunction Act. Although the taxpayer contended that the IRS's failure to provide him with a notice of deficiency prevented him from seeking review in the Tax Court, the IRS was not required to provide notice since the assessment was based on figures presented in the taxpayer's tax returns. Furthermore, the taxpayer was not without an adequate remedy at law because the two-year limitations period under Code Sec. 6511 for filing for a refund had not expired on his unpaid tax liability.

[Code Secs. 6321 and 6501 ]

Statute of limitations: Assessments: Levy: Authority: Refund claim: Two-year period for unpaid taxes: Adequate remedy at law.--Certificates of assessment showed that the IRS properly assessed an individual's taxes within three years after he filed his income tax returns. Also, the IRS had authority to issue levies against the taxpayer's wages and savings account.

OPINION AND ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AND DENYING PLAINTIFF'S EMERGENCY EX-PARTE MOTION TO ADVANCE THE CASE FOR THE PURPOSE OF SCHEDULING AN EVIDENTIARY HEARING

DUGGAN, District Judge:

This matter is before the Court on plaintiff's "Emergency Ex-Parte Motion to Advance the Case for the Purpose of Scheduling an Evidentiary Hearing" and defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) and (6). Because the Court believes that it lacks subject matter jurisdiction to hear this action, the Court grants defendants' motion and denies plaintiff's motion.

Background

From 1986 through 1990, plaintiff worked as an independent contractor for the NASIMBEM company. Defendant McKay is a revenue officer of the Internal Revenue Service ("IRS"). In 1991, plaintiff filed Forms 1040 with the IRS for the years 1986 through 1990. Plaintiff and the IRS agreed that plaintiff would pay $500 a month to satisfy his income tax liability. Defendants contend that the agreement allowed the IRS to modify the amount of plaintiff's payments if plaintiff's ability to pay changed significantly.

On April 1, 1995, plaintiff submitted a Form 433-A to the IRS, showing that plaintiff earned net income of $4,203 per month and had $1965 in expenses and debt payments per month. (Defs.' Ex. C.) Based on this information, the IRS increased plaintiff's payments to $500 per week. ¹ The IRS informed plaintiff of the change in 1995. Plaintiff claims that this increase was "unilateral" on the part of the IRS. Plaintiff failed to pay the increased amount. The IRS filed a First Notice of Intent to Levy on March 11, 1996. On January 30, 1997, defendant McKay sent plaintiff a Final Notice of Intent to Levy. On March 6, 1997, McKay issued a lien/levy on plaintiff's wages from his employer, Wisne Automation and Design Company, and on plaintiff's savings account at NBD Bank. Plaintiff received no notice of deficiency or notice of assessment before the IRS issued the lien/levy.

Discussion

Defendants argue that the Court should deny plaintiff's motion and dismiss plaintiff's complaint because the Court lacks jurisdiction over this dispute. 26 U.S.C. §7421 states,

Except as provided in sections 6212(a) and (c), 6213(a), 6672(b), 6694(c), and 7426(a) and (b)(1), and 7429(b), no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

Plaintiff argues that this case falls within an exception to §7421 because the IRS failed to follow the procedure for sending a notice of deficiency to plaintiff under 26 U.S.C. §6212)(a). ² Plaintiff contends that this failure on the part of the IRS foreclosed his ability to seek review in Tax Court under 6213(a). ³

The Court rejects plaintiff's argument. Defendants have submitted plaintiff's tax returns for the years 1986-1990. These forms show that plaintiff owed taxes of $27,188 for 1986, $9,582 for 1987, $13,980 for 1988, $19.190 for 1989, and $16,369 for 1990. (Defs.' Ex. A.) Defendants also submitted certificates of assessment that have the same figures as those presented in the tax returns. (Defs.' Ex. B.) Thus, it is apparent that the IRS based its assessment of plaintiff's liability for taxes and penalties on his tax returns. For this reason, no deficiency notice was required. See 26 U.S.C. §6201(a)(1) (authorizing the IRS to assess taxes and penalties, based on tax returns), see also Larsen v. U.S. , 1996 WL 848210 *1 (W.D. Wash. Dec. 3, 1996); IBEW Local Union No. 640 v. Forman, 1995 W.L. 735743 *2 (D. Ariz. Sept. 20, 1995). Plaintiff was not entitled to a notice of deficiency under §6212, and this action does not fall within an exception to §7421.

Plaintiff makes the alternative argument that §7421(a) is inapplicable in this case. In Enochs v. Williams Packing & Navigation Co. [62-2 USTC ¶9545], 370 U.S. 1, 7, 82 S. Ct. 1125, 1129, 8 L. Ed. 2d 292 (1962), the Supreme Court held that §7421(a) is inapplicable if 1) it is clear at the time the suit is filed that the government cannot prevail under any circumstances, and 2) equity jurisdiction otherwise exists.

Plaintiff believes that the government cannot prevail because the government did not provide him with a deficiency notice. As discussed above, plaintiff was not entitled to such a notice. Therefore, the Court must reject this argument.

Plaintiff next argues that the IRS did not assess his taxes within three years after he filed his tax returns, as required by 26 U.S.C. §6501. ⁴ Defendants have submitted certificates of assessment for the relevant years, which list "23c" dates in 1991. (Defs.' Ex. B). The IRS uses Form 23c to record assessments, and the 23c date indicates the date the IRS made the assessment. See Geiselman v. U.S. [92-1 USTC ¶50,200], 961 F.2d 1, 5-6 (1st Cir. 1992), cert. denied, 506 U.S. 891, 113 S. Ct. 261, 121 L. Ed. 2d 191 (1992). "Certificates of assessment and payments are generally regarded as sufficient proof, in the absence of evidence to the contrary, of the adequacy and propriety of notices and assessments that have been made." Gentry v. U.S. [92-1 USTC ¶50,225], 962 F.2d 555, 557 (6th Cir. 1992). Thus, plaintiff's tax liability was assessed in 1991, the same year that plaintiff filed his returns, and the Court must reject this argument as well.

Plaintiff also argues that the IRS has no authority to issue levies or liens against him. 26 U.S.C. §6321 states,

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

(emphasis added). This statute provides authority for the creation of tax liens. Therefore, the Court must also reject this argument.

Finally, plaintiff argues that he satisfies the second prong of the Enochs test because he has no adequate remedy at law. Defendants argue that equity jurisdiction is lacking because plaintiff could sue the government for a refund. "[T]he opportunity to sue for a refund is an adequate remedy at law which bars the granting of an injunction." Church of Scientology of California v. U.S. [91-1 USTC ¶50,004], 920 F.2d 1481, 1489 (9th Cir. 1990). A suit for refund cannot be maintained unless the claimant filed a claim for a refund with the Secretary of the Treasury or the Commissioner of Internal Revenue. See 26 U.S.C. §7422. Plaintiff counters that filing for a refund would be futile because it must be done within three years of filing the tax return, and more than three years have passed since plaintiff filed the returns in question. See 26 U.S.C. §6511(a) (providing for a limitations period of 3 years from the time the refund was filed, or 2 years from the time the tax was paid, whichever period is later). The Court notes that §6511 also provides an alternative limitations period of 2 years after the tax was paid. Plaintiff has not paid his entire tax liability for the relevant years. Therefore, the statute of limitations has not run on the amounts that he has not yet paid. Moreover, even if the statute of limitations bars plaintiff's claim for a refund, that fact does not deprive him of an adequate remedy at law. See Ohlendiek v. Schuler, 299 F. 182, 188 (6th Cir. 1924) ("It is a general rule that, when a party has a complete and adequate remedy at law and fails for any cause to rely upon it in that forum, he will not be permitted to assert it in equity merely because he has lost his right of action by bar of the statute of limitation, unless he was prevented by fraud or accident, or by such circumstances as he was unable to control."); see also Baker v. Cummings, 169 U.S. 189, 18 S. Ct. 367, 42 L. Ed. 2d 711 (1898) (" 'Courts of equity, in cases of concurrent jurisdiction, consider themselves bound by the statute of limitations which govern actions at law.' ") (quoting Metropolitan Bank v. St. Louis Dispatch Co., 149 U.S. 436, 448, 13 S. Ct. 944, 948, 37 L. Ed. 799 (1893)).

For the reasons set forth above,

IT IS ORDERED that plaintiff's emergency ex-parte motion to advance the case for the purpose of scheduling an evidentiary hearing is DENIED,

IT IS FURTHER ORDERED that defendants' motion to dismiss plaintiff's complaint is GRANTED pursuant to Rule 12(b)(1).

¹ Plaintiff's total unpaid balance is $89,799.22, including penalties and interest.

² Section 6212(a) states, "If the Secretary determines that there is a deficiency in respect to any tax imposed by subtitles A or B or chapter 41, 42, 43, 44, he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail."

³ Section 6213(a) states, "After 90 days . . . after the notice of deficiency authorized in section 6212 is mailed . . . the taxpayer may file a petition with the Tax Court for redetermination of deficiency."

⁴ Section 6501 states, "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed."

 

 

 

United States of America v. Silvio Amoroso and First National Bank of Boston , Massachusetts

U. S. District Court, Dist. Mass., Civ. Action No. 57-456-M, 12/23/57

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321; 1939 Code Sec. 1145--similar to 1954 Code Sec. 7485]

Lien for taxes: Bond to stay assessment and collection.--A lien for unpaid income taxes could be enforced against a bank account where a bond to stay assessment and collection was not filed with a petition for the review of a Tax Court determination by the Court of Appeals. The assessment could be made by the Commissioner during the pendency of the petition for review in the absence of the bond

Charles Barrett, Assistant United States Attorney, Boston , Mass. , for plaintiff. Joseph H. B. Edwards, 1 Federal Street , Boston , Mass. , Summer W. Elton, 390 Main Street , Worcester , Mass. , for defendant.

Opinion

MCCARTHY, District Judge:

This case was submitted to the Court upon an agreed statement of facts and briefs. The plaintiff seeks to establish and enforce a lien which it claims upon an account of the defendant Amoroso held by the defendant bank arising out of an assessment of taxes due for the tax year 1945 made on July 17, 1951.

The defendant Amoroso asserts by brief that the assessment was not timely made and that it must therefore fall. The determination of this question requires a reading and interpretation of several statutes. Before the statutes may be applied the facts should be stated.

On February 16, 1949, the Commissioner of Internal Revenue sent the taxpayer in notice of deficiency for his 1945 income tax of $1,655.27. On April 18, 1949, the taxpayer filed a petition with the Tax Court for a redetermination of this deficiency. [10 TCM 186, CCH Dec. 18,167(M).] On May 21, 1951, the Tax Court determined that a deficiency of $1,053.90 with interest existed. On May 31, 1951, the taxpayer filed a petition for review of this determination by the Tax Court with the Court of Appeals. The taxpayer did not avail himself of Section 1145 of the 1939 Internal Revenue Code and did not file a bond with this petition for review. On July 17, 1951, the Commissioner of Internal Revenue assessed the deficiency. Notice was sent to the taxpayer on July 25, 1951. Notice of a lien was served on the defendant bank on September 14, 1955, and notice of levy on account of the assessment was served on the bank on September 19, 1955. Final demand for payment of the levy by the bank was made on September 28, 1955. No payment was forthcoming by the bank. On May 8, 1957, the United States brought this action to foreclose the lien and for an order for payment by the bank to the United States of the amount standing in the account.

[Assessment Was Proper]

The defendant taxpayer asserts that the Statute of Limitations had run on the tax in question when the assessment was made. There is ordinarily a three-year statute of limitations applicable to the assessment. Sec. 275(a) of the Internal Revenue Code of 1939, now §6501(a) of the Internal Revenue Code of 1954 appearing in Title 26 of the United States Code. (All further references to sections are to sections of the 1939 Internal Revenue Code unless otherwise stated.) The statute of limitations on 1945 tax returns began to run on March 15, 1946, and the assessment had to be made within three years of that date unless there was some suspension of the running of the statute. Such a suspension is implicit in the terms of §272(a)(1) and is express in §277. The further question now arises of whether the suspension of the statute of limitations and the bar against assessment was in force on the date on which the assessment was made, July 17, 1951. At this time the Tax Court decision had been rendered and the taxpayer had petitioned the Court of Appeals for the First Circuit for review under §1142. The taxpayer did not file a bond with the petition for review in accordance with §1145. By its terms §1145 provides that assessment shall not be stayed if the bond is not filed.

Reading the applicable sections together I rule that the assessment could be made by the Commissioner during the pendency of the petition for review in the absence of the bond.

Judgment for the plaintiff accordingly.

 

 

 

United States of America , Petitioner-Appellee v. First National City Bank, Respondent-Appellant, and Milton F. Meissner, Proposed Intervenor-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket Nos. 75-6007, 75-6008, 568 F2d 853, 2/4/77, Affirming District Court decision reported at, 75-1 USTC ¶9168

[Code Secs. 6321, 6323, 6331 and 7402--result unchanged by '76 Tax Reform Act]

Levy and distraint: Jeopardy assessment: Funds in safe-deposit box: Motion for leave to intervene in pre-seizure enforcement proceedings.--The Second Circuit Court of Appeals affirmed a District Court decision in holding that a taxpayer's constitutional rights did not require that he be allowed to intervene in pre-seizure summary proceedings to enforce IRS levies on the contents of his safe-deposit box and that the taxpayer's bank was properly ordered to turn over the contents of the safe-deposit box to the IRS. The taxpayer's claim that the District Court lacked jurisdiction to enforce the levies was without merit. One Judge concurred and dissented.

Paul J. Curran, United States Attorney, William R. Bronner, Steven J. Glassman, Assistant United States Attorneys, New York, N. Y. 10007, for petitioner-appellee. Henry Harfield, Matthew C. Gruskin, Shearman & Sterling, 53 Wall St., New York, N. Y. 10005, for respondent-appellant. R. Kenly Webster, Kennedy & Webster, 888 17th St., N. W., Washington, D. C. 20006, Neal J. Hurwitz, 745 Fifth Ave., New York, N. Y. 10002, for proposed intervenor-appellant.

Before HAYS, TIMBERS and GURFEIN, Circuit Judges.

TIMBERS, Circuit Judge:

This appeal presents questions important to the administration of the internal revenue laws. They arise from the use of summary judicial proceedings to enforce IRS levies upon the contents of a taxpayer's safe deposit box following a determination by the IRS that the collection of back taxes from the taxpayer is in jeopardy. The central issue is whether the taxpayer's constitutional rights require that as a pre-seizure remedy he be granted leave to intervene in the summary enforcement proceedings or whether the taxpayer's post-seizure remedies are adequate to protect his rights. We affirm the district court's denial of the taxpayer's motion for leave to intervene and its direction that the bank allow the IRS to enter the box and obtain possession of the contents.

I. Prior Proceedings

Milton F. Meissner and First National City Bank (Citibank) appeal from orders entered in the Southern District of New York, Lloyd F. MacMahon, District Judge, (1) denying Meissner's motion for leave to intervene in pre-seizure summary proceedings to enforce levies on the contents of his safe deposit box; and (2) directing (a) that Citibank allow the IRS to enter the box for the purpose of obtaining possession of the non-exempt contents, and (b) that Citibank retain possession of the contents not removed by the IRS, subject to further order of the court. ¹

On April 9, 1974, the IRS made a jeopardy assessment against Meissner pursuant to §6851(a). ² It did so because it believed Meissner ³ owed substantial back taxes for the years 1970 and 1971, the collection of which was in jeopardy. ⁴ The IRS immediately served upon Meissner a notice of assessment and a demand for payment pursuant to §6861(a). It also served a notice of deficiency pursuant to §6861(b); this entitled Meissner to litigate his liability before the Tax Court, which he has done.

On April 10, the IRS issued jeopardy levies pursuant to §6331(a) upon the contents of two safe deposit boxes leased by Meissner, one from Citibank and the other from Chemical Bank New York Trust Co. (Chemical). ⁵ The two banks refused the IRS access to the boxes. On October 4, the United States Attorney commenced the instant proceedings against the banks for summary enforcement of the IRS levies pursuant to §7402(a). On October 15, Meissner, who was not a party to the summary enforcement proceedings, moved for leave to intervene in those proceedings.

The district court denied Meissner's motion for leave to intervene and directed the banks to allow the IRS access to Meissner's safe deposit boxes. See note 1, supra. The court also granted the motions of Meissner and Citibank for stays pending appeal conditioned on Meissner's posting a $260,000 bond, the approximate amount of his back taxes.

Instead of posting the bond ordered by the district court, Meissner moved in our Court for a stay pending appeal without bond. Citibank also moved in our Court for a stay pending appeal. We denied both motions on April 15, 1975. On April 17, Circuit Justice Marshall likewise denied appellants' applications for stays.

Chemical thereafter turned over to the IRS the contents of its safe deposit box which Meissner leased; and the government filed with the court an inventory, dated April 22, of the contents of the Chemical box. Citibank, on the other hand, while allowing the IRS access to the contents of its safe deposit box leased by Meissner, refused to permit the IRS to remove the contents. On April 22, after a hearing, the district court ordered that the Citibank box be placed under the joint control of the government and the bank. The court also ruled that the government, in order to remove the contents of the box, would be required to serve a formal subpoena. The government did serve upon Citibank an administrative subpoena demanding that the bank turn over to the IRS the contents of the box. No further action has been taken to enforce that subpoena pending the outcome of the instant proceedings.

The present appeals are from the district court's orders denying Meissner's motion for leave to intervene and directing Citibank to turn over to the IRS the contents of its safe deposit box leased by Meissner.

The essential questions presented are (1) whether summary proceedings to enforce IRS levies are authorized by §7402(a); (2) whether Meissner is barred by §7421(a) (the Anti-Injunction Act) from raising his claims in the pre-seizure summary proceedings; and (3) whether Meissner is entitled to intervene in the pre-seizure summary proceedings to protect his constitutional rights.

II. Summary Enforcement Proceedings Pursuant to Section 7402(a)

Appellants claim that the district court lacked jurisdiction to enforce the IRS levies by summary proceedings. They argue that §7402(a), ⁶ relied on by the district court, authorizes only "writs and orders" ancillary to plenary civil actions. We disagree.

The language of this statute is broad and clear. In addition to authorizing writs and orders ancillary to civil actions, it gives the district courts jurisdiction to issue "such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws." We decline to construe such a broad statutory mandate so restrictively as to add nothing to the power conferred by the All Writs Act, 28 U. S. C. §1651 (1970). ⁷ We hold, as the Third Circuit did in United States v. Mellon Bank [75-2 USTC ¶9690], N. A., 521 F. 2d 708, 710-11 (3 Cir. 1975) (related case), ⁸ that §7402(a) authorized the summary enforcement proceedings in the district court.

III. Anti-Injunction Act--Section 7421(a)

Before turning to Meissner's constitutional claims, we must determine whether he is barred by the Anti-Injunction Act ⁹ from raising those claims in the instant proceedings. We hold that he is not.

Section 7421(a) has no application to counterclaims or defenses interposed by a taxpayer in an action brought by the government. By its terms, this statute applies only to a "suit for the purpose of restraining the assessment or collection of any tax," meaning of course a suit by a taxpayer. It would seem fundamental that when Congress confers jurisdiction upon the district courts to entertain a government action to collect taxes, it may not bar a taxpayer from asserting in such action counterclaims or defenses which affect his rights with respect to the taxes sought to be collected.

In Commissioner v. Shapiro [76-1 USTC ¶9266], -- U. S. --, 44 U. S. L. W. 4313 (U. S. March 8, 1976), which was a post-seizure injunction action by the taxpayer, the Court held that the Anti-Injunction Act did not bar such an action and that the taxpayer would be entitled to injunctive relief if (1) he could show a likelihood of irreparable injury, and (2) the government could not establish a factual basis for its assessment. ¹⁰ -- U.S. at --, 44 U. S. L. W. at 4317-19. While the Court's holding was based on its interpretation of the statute, it strongly suggested that a narrower construction of the jurisdiction of the courts under the statute would involve "serious constitutional problems." -- U. S. at --, 44 U. S. L. W. at 4318.

In view of our holding below, under Section IV of this opinion, that Meissner is not entitled to a pre-seizure hearing, it is not necessary for us to decide what effect Shapiro (which was a post-seizure action) would have on the instant proceedings.

It is sufficient in the instant case to hold, as the Third Circuit did in United States v. Mellon Bank, N. A., supra, that the Anti-Injunction Act does not bar Meissner from raising his constitutional claims in the instant proceedings. See note 8, supra.

IV. Constitutional Claims

Turning directly to the constitutional claims which Meissner sought to raise by his motion for leave to intervene in the summary enforcement proceedings, and viewing the record in the light most favorable to Meissner, it appears that the following are the claims he sought to raise: (1) due process claim under the Fifth Amendment; (2) search and seizure claim under the Fourth Amendment; and (3) self-incrimination claim under the Fifth Amendment. ¹¹

(1) Due Process Claim. In order to focus on the precise due process claim raised, it is important to bear in mind what is not involved. The issue here is not whether the taxpayer has a right to a hearing after his property has been seized. Rather, the issue is whether he is entitled to litigate his claims before the government has obtained possession of the contents of his safe deposit box. Meissner has not commenced an action of his own. Instead, he has sought by intervening to oppose every step of the government's pre-seizure enforcement proceedings.

In Commissioner v. Shapiro--a post-seizure injunction action--the Court stated that due process required "some kind of predeprivation or prompt post-deprivation hearing." -- U. S. at --, 44 U. S. L. W. at 4318 (emphasis added). The Court again noted:

"We have often noted that, in resolving a claimed violation of procedural due process, a careful weighing of the respective interests is required, Goss v. Lopez, 419 U. S. 565, 579 (1975); and we have noted that the Government's interest in collecting the revenues is an important one, Fuentes v. Shevin, 407 U. S. 67, 92 (1972). This interest is clearly sufficient to justify seizure of a taxpayer's assets without a pre-seizure hearing, Fuentes v. Shevin, supra, and to remove any need to subject the Commissioner to the burden of an inquiry into the basis for his assessment absent factual allegations of irreparable injury by the taxpayer. Phillips v. Commissioner [2 USTC ¶743], 283 U. S. 589, 595, 596-97 (1931) . . ." -- U. S. at -- n. 12, 44 U. S. L. W. at 4318 n. 12 (emphasis added).

Under Shapiro the taxpayer is entitled to an initial hearing on his claims before a subsequent determination in the Tax Court or in a suit for a refund, "at least where irreparable injury may result from a deprivation of property pending final adjudication of the rights of the parties. . . ." -- U. S. at -- and n. 12, 44 U. S. L. W. at 4318 and n. 12. ¹² Meissner's remedy for alleged deprivation of his property rights is in a post-seizure hearing of the sort described in Shapiro.

We hold that the due process clause does not entitle Meissner under the circumstances of this case to intervene in the pre-seizure enforcement proceedings and thus to impede the government's efforts to obtain possession of the contents of the safe deposit box pursuant to its jeopardy assessment.

(2) Search and Seizure Claim. Meissner's principal claim appears to have been that the search of his safe deposit box violated his Fourth Amendment rights. Granted that the search did not come within the scope of the Fourth Amendment, we do not believe that Meissner's intervention in the summary proceedings was required to protect his Fourth Amendment rights. We hold that there was sufficient probable cause for the district court to order that the bank allow the government to search the safe deposit box. ¹³

No one would contend that a suspect has a right to intervene in opposition to an application by a police officer for a search warrant. The policies favoring expeditious tax enforcement procedures are as compelling as the need to effect a speedy search of a suspect's premises. To allow a taxpayer to tie up the initial enforcement proceedings after he has been given notice of the jeopardy assessment most assuredly would subvert the statutory purpose of the jeopardy assessment provisions. By delaying enforcement a taxpayer could secrete or dissipate what assets he had left. The government's interests moreover cannot be protected adequately merely by sealing the safe deposit box. The government must be able to search the contents of the box to determine the value of what is there and to learn what other assets the taxpayer may have elsewhere. We refuse to sanction the impeding of these investigatory functions and the concomitant frustration of the jeopardy assessment procedure which would result from intervention by the taxpayer in the pre-seizure enforcement proceedings.

The "warrant preference rule" requires no more than that a detached magistrate determine whether there is sufficient probable cause for the search. Mancusi v. De-Forte, 392 U. S. 364, 370-72 (1968); Camara v. Municipal Court, 387 U. S. 523 (1967); Johnson v. United States , 333 U. S. 10 (1948). That is precisely what was done here. The government's representations in support of its petition for enforcement, coupled with Meissner's own admissions in his motion papers, provided sufficient probable cause for the court to authorize the search of Meissner's safe deposit box. Although Meissner challenged the amount of the deficiencies assessed, he admitted that he had not properly computed his taxes. He did not deny that he owed substantial back taxes. Moreover his refusal to obey a grand jury subpoena, his absence from the United States in view of pending criminal and civil investigations involving him, and the IRS' inability to discover other assets owned by Meissner in the United States provided sufficient reason to believe that the collection of deficiencies against Meissner might be in jeopardy.

Beyond the protection afforded Meissner by the presentation of the government's petition to the district court in the summary enforcement proceedings, he is not foreclosed from objecting in subsequent civil or criminal proceedings to the use of evidence improperly obtained. This protection is no less than that required in the context of searches for other purposes.

Finally, Meissner relies on Reisman v. Caplin [64-1 USTC ¶9202], 375 U. S. 440 (1964), in support of his contention that he was entitled to intervene in the summary enforcement proceedings to assert his Fourth Amendment claim. In Donaldson v. United States [71-1 USTC ¶9173], 400 U. S. 517, 529 (1971), the Court pointed out that the language in Reisman with respect to a taxpayer's intervention "is permissive only and is not mandatory." The Court in Donaldson also indicated that intervention would be appropriate only in very limited circumstances, such as where a party's rights are inadequately protected otherwise and where they outweigh the government's interest in an expedited determination. Id. at 529-30 & n. 12. That is not the situation here.

(3) Self-Incrimination Claim. Meissner also suggests that his Fifth Amendment privilege against self-incrimination somehow was violated by the government's search of his safe deposit box.

We reject this claim as wholly without merit. It is well settled that "[c]ompulsion upon the person asserting it is an important element of the privilege [against self-incrimination]. . . ." Couch v. United States [73-1 USTC ¶9159], 409 U. S. 322, 328 (1973). Here there was no such compulsion on Meissner who did not have possession of the contents of the safe deposit box.

We affirm the district court's denial of Meissner's motion for leave to intervene and its direction that Citibank allow the IRS to enter the box for the purpose of obtaining possession of the contents. ¹⁴

Affirmed.

¹ The original order denying Meissner's original motion for leave to intervene is dated December 31, 1974; and a further order upon Meissner's motion for reargument, adhering to the original order, is dated May 20, 1975. The order directing Citibank to allow the IRS to enter the box is dated January 27, 1975. All orders implemented the court's opinion dated December 31, 1974.

² Unless otherwise stated, all citations to statutory provisions in this opinion are to sections of Title 26 of the United States Code, 1970 codification; here, for example, to 26 U. S. C. §6851(a) (1970).

³ Meissner is no stranger to this Court or to the District Court for the Southern District of New York. See I. I. T. v. Vesco, Dkt. Nos. 74-1969, 2366, 2341 (2 Cir. April 28, 1975); S. E. C. v. Stewart, 476 F. 2d 755 (2 Cir. 1973). He has been a close associate of Robert L. Vesco in the affairs of Investors Overseas, Ltd. (I. O. S.), of which he eventually became president. At the time of the instant proceedings in the district court and up to the present time, Meissner was and has been a fugitive, living in the Bahamas or in Costa Rica . On April 1, 1974--eight days before the jeopardy assessment against Meissner here involved--a warrant for his arrest was issued by Judge Tenney of the Southern District of New York because of Meissner's failure to comply with a grand jury subpoena which had been served on him and his failure to comply with Judge Pollack's order of March 5, 1974 specifically ordering him to appear before the grand jury.

⁴ For the distinction between the collection methods available to the IRS, including jeopardy assessments, and the usual procedures where there has been no jeopardy determination, see Laing v. United States [76-1 USTC ¶9164], 423 U. S. 161, 169-71 (1976), and Commissioner v. Shapiro [76-1 USTC ¶9266], -- U. S. --, --, 44 U. S. L. W. 4313, 4314-15 (U. S. March 8, 1976).

⁵ Chemical, having complied with the order of the district court by turning over to the IRS the contents of its safe deposit box leased by Meissner, is not a party to the instant appeal.

⁶ 26 U. S. C. §7402(a) provides:

"§7402. Jurisdiction of district courts.

(a) To issue orders, processes, and judgments.

The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws."

⁷ In New Hampshire Fire Insurance Co. v. Scanlon [60-1 USTC ¶9423], 362 U. S. 404 (1960), the Supreme Court, in holding that summary proceedings instituted by a private party to quash an IRS levy on property held by a stakeholder are not authorized by 28 U. S. C. §2463, carefully qualified its holding as follows:

"In the absence of express statutory authorization, courts have been extremely reluctant to allow proceedings more summary than the full court trial at common law." 362 U. S. at 407 (footnotes omitted) (emphasis added).

We hold that §7402(a) provides precisely that "express statutory authorization" here.

⁸ In Mellon the district court allowed Meissner to intervene in the pre-seizure summary proceedings against another bank, but then granted the government's petition for enforcement. The district court held that Meissner was precluded from litigating his counterclaims by the Anti-Injunction Act, 26 U. S. C. §7421(a) (1970).

The Third Circuit reversed the district court's holding with respect to the Anti-Injunction Act. While holding that the Act did not preclude litigation of Meissner's counterclaims in the pre-seizure proceedings, see our holding under Section III of this opinion, infra, the court did not reach the merits of Meissner's claims. 521 F. 2d at 711 n. 12. The court noted that there were "considerable problems with all of the claims Meissner proposed to raise on intervention . . ." Id. at 711 n. 11. The court held that Meissner was not an indispensable party entitled to intervention as of right under Fed. R. Civ. P. 24(a), but that the district court had not abused its discretion under Rule 24(b) in permitting him to intervene. Id. at 711 n. 11.

⁹ The Anti-Injunction Act, 26 U. S. C. §7421(a) provides:

"§7421. Prohibition of suits to restrain assessment or collection.

(a) Tax.

Except as provided in sections 6212(a) and (c), 6213(a) and 7426(a) and (b)(1), no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed."

¹⁰ The Supreme Court in Shapiro reaffirmed its earlier interpretation of §7421(a) in Enochs v. Williams Packing & Navigation Co. [62-2 USTC ¶9545], 370 U. S. 1, 7 (1962), where it held:

"The manifest purpose of §7421(a) is to permit the United States to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund. In this manner the United States is assured of prompt collection of its lawful revenue. Nevertheless, if it is clear that under no circumstances could the government ultimately prevail, the central purpose of the Act is inapplicable and . . . the attempted collection may be enjoined if equity jurisdiction otherwise exists."

The Court in Shapiro reaffirmed its holding in Enochs that the government is required to come forward with facts to establish that its assessment has a basis in fact. -- U. S. at --, 44 U. S. L. W. at 4317-19.

¹¹ The record before us is less than clear as to precisely what constitutional claims Meissner sought to raise. In a brief in support of his original motion for leave to intervene, his counsel asserted that enforcement of the government levy would violate Meissner's constitutional privileges under the Fourth and Fifth Amendments; that the IRS assessment was inaccurate and that the levy had not been carried out according to §6331(a); that the government's rights were fully protected without opening the safe deposit box; and that the taxpayer required discovery to determine whether the government had complied with all statutory and regulatory requirements in making the jeopardy assessment. Some seven months later, in a letter dated May 13, 1975 which Judge MacMahon treated as a motion for reargument, note 1, supra, Meissner's counsel interposed an even broader claim that Meissner was entitled to intervene "in order to resolve serious questions involving constitutional and property rights. . . ." Meissner's brief on appeal again asserts vaguely defined claims involving his property interests and the propriety under the Constitution and provisions of the Internal Revenue Code of the summary judicial proceedings to enforce the IRS levies.

Citibank's position is that it holds no property or rights to property of Meissner; that Meissner as the lessee of the safe deposit box is an indispensable party to the summary proceedings; and that summary proceedings, absent a plenary action, are not authorized.

¹² In Laing v. United States, [76-1 USTC ¶9164] 423 U. S. 161, 183 & n. 26 (1976), the Court noted that it did not have before it the question whether due process requires a post-seizure determination prior to a hearing in the Tax Court. The majority expressed no doubt about the propriety of denying the taxpayer a pre-seizure hearing. Justice Brennan, in his concurring opinion, expressed concern about the possibility of erroneous determinations by the Commissioner and emphasized the need for prompt review; but he acknowledged that "[n]o hearing is required, judicial or administrative, prior to the seizure." 423 U. S. at 186.

¹³ We do not find dispositive those cases cited by the government for the proposition that a taxpayer has no Fourth Amendment right to prevent the government from obtaining records kept by a bank or by an accountant. Unlike the situation here, in each of the cited cases the customer had little if any interest in, or expectation of privacy with respect to, the records kept by a bank or turned over to an accountant. California Bankers Association v. Shultz [74-1 USTC ¶9318], 416 U. S. 21, 52-53 (1974); Couch v. United States [73-1 USTC ¶9159], 409 U. S. 322, 335-36 (1973); Donaldson v. United States [71-1 USTC ¶9173], 400 U. S. 517, 530-31 (1971); id. at 537 (Douglas, J., concurring).

¹⁴ In view of our rulings above on what we consider to be the essential questions presented, we find it unnecessary to discuss other claims asserted by the government, e.g., that the orders from which the instant appeals have been taken are not final; that the appeals are moot; and that Meissner as a fugitive should not be permitted to press his appeal. Suffice it to state that we summarily reject these claims.

In short, we have carefully considered all claims raised by all parties to the instant appeals. With the exception of those specifically discussed and ruled upon in the body of this opinion, we find all other claims to be without sufficient merit to warrant discussion.

Concurring and Dissenting Opinion

GURFEIN, Circuit Judge, concurring and dissenting:

I would go further than my brother Timbers in favor of the Government in one respect. Instead of rejecting the Government's contention that if Meissner is a fugitive he should not be permitted to press his appeal, see majority opinion at note 14, I would accept it and dispose of the case on that basis. If Meissner is a fugitive now, a matter which was in some dispute when the appeal was argued, he should not have a right to appeal, and his appeal, and concomitantly the appeal of the bank, should be dismissed. See Molinaro v. New Jersey , 396 U. S. 365, 366 (1970). A remand should be ordered, therefore, to determine whether Meissner is a fugitive.

If, on remand, he is found not to be a fugitive, then I think it would be an abuse of discretion to deny him permissive intervention under F. R. Civ. P. 24(b). See United States v. Mellon Bank [75-2 USTC ¶9690], N. A., 521 F. 2d 708, 711 n. 11 (3d Cir. 1975), a related case where permission to intervene was sustained on appeal. ¹ Cf. Donaldson v. United States [71-1 USTC ¶9173], 400 U. S. 517, 528-30 (1971). Donaldson involved a summons for records of employment and the like and did not in any way involve private papers of the taxpayer. ² The Supreme Court, so far as appears, has not had occasion to consider in a civil action a taxpayer's Fourth Amendment claim relating to private papers in a safe-deposit box.

The majority opinion discussed Fourth and Fifth Amendment claims by the taxpayer. So far as stock certificates and other paraphernalia of ownership are concerned, I see no constitutional problem. So far as private papers, unrelated to the tax assessment are concerned, I think the scope of the order below was too broad in allowing the internal revenue agents to rummage through everything in the safe-deposit box without judicial supervision. In any event, the Government has actually been permitted to inspect whatever private papers may have been in the box, and, in that aspect, the case has become moot. I mention this to emphasize that my brother Timbers' views on the Fourth and Fifth Amendments are his own views expressed obiter. Lest I be thought to agree, I must indulge in some dicta of my own.

What the majority elides in its discussion of the Fourth Amendment (Part 2) and which concerns me, is the constitutional claim that arises under the Fourth Amendment with respect to private papers, other than the tangible assets involved in the tax matter, which may be situated in the safe-deposit box.

My brother Timbers concedes that "the search did come within the scope of the Fourth Amendment." He also concedes that cases where the Government seeks to obtain "records kept by a bank or an accountant" are not dispositive, because of a lack of "expectation of privacy." Note 13. But the majority sustains the broad order below on the curious ground that "probable cause" was shown. But they do not tell us "probable cause" to believe what. The analogy to warrants issued on probable cause in criminal cases, with due respect, has nothing whatever to do with a search of private papers in a civil tax proceeding which are not "particularly describe[d]," and which are presumptively neither contraband nor evidence.

The order below, perhaps because taxpayer's counsel was not permitted to join in its drafting, is simply too broad. It allows the IRS to have access to whatever private papers might be contained in the vault. In that sense the order is no less than a general writ proscribed by the Fourth Amendment which I believe Judge MacMahon did not intend. In modern times the strong box formerly kept at home is now the safe-deposit box kept in the vault of a bank. Out of fear of fire and burglary, private papers are kept safe away from home. The place of deposit makes them no less "private papers," and there is every expectation of privacy, see Katz v. United States , 389 U. S. 347 (1967), in a bank vault. By way of example, there is no reason for the internal revenue agents to read a man's letters to his wife when he was courting her in order to perfect a lien on his assets. The Fourth Amendment speaks of "the right of the people to be secure in their . . . papers . . . against unreasonable searches and seizures." And when warrants issue upon probable cause supported by oath or affirmation, they must particularly describe the ". . . things to be seized."

I respectfully suggest that my brothers do not face this probem of private papers--unrelated to tangible assets of the taxpayer or the discovery of such--which the order below permitted the Government to take and examine. It is commonplace that the Constitution must be read with the times. This kind of general incursion represents precisely what I think the Founding Fathers would have sought to prevent.

The Republic has survived with the search warrant requirement, codified to eliminate overburdering the Government and with due limitations for the protection of the citizen. We deal here, not with an exclusionary rule that protects the guilty whose guilt is made manifest by the very contraband seized. We deal rather with judicial intervention to serve a limited purpose, to insure that a valid lien of the Internal Revenue Service in a civil tax matter is enforced where the administrative summons encounters a resistance that will bend only to judicial authority.

I agree with the majority that the taxpayer has no Fifth Amendment privilege because he himself is not compelled to produce the papers. See Couch v. United States [73-1 USTC ¶9159], 409 U. S. 322 (1973); Fisher v. United States [76-1 USTC ¶9353], -- U. S. --, 44 U. S. L. W. 4514 (April 12, 1976). Couch was decided principally on Fifth Amendment grounds; the Fourth Amendment was held not to be applicable because there "exists no legitimate expectation of privacy." 409 U. S. at 336. Mr. Justice Brennan, concurring, did not discuss the Fourth Amendment but would have made the Fifth Amendment privilege available "to one who places records in a safety deposit box." 409 U. S. 322 at 337. And as the majority opinion notes, the Government itself tried to distinguish United States v. Guterma, 272 F. 2d 344 (2d Cir. 1959), albeit again on Fifth Amendment grounds, as involving "mere custodian safe-keeping of records," 409 U. S. at 334, n. 16, the very situation here.

In my view, the analogy to search warrants in criminal cases suggested by the majority is simply inapposite. In the case of a safe-deposit box in a bank, sealing the box is, generally, adequate protection against destruction or diversion of assets there situate. If the Government requires an inventory of assets, an equitable procedure should be evolved to accommodate both interests. I would hold that if Meissner is found by the District Court not to be a fugitive, the order of the District Court denying intervention should be reversed. While it is too late in this case, the Court should be directed in future cases to order that the safe-deposit box be brought to the Courthouse, where under the supervision of the Court, the box would be opened and those private papers, if any, which are unrelated to the taxpayer's assets be given to the taxpayer or his representative without scrutiny by the executive branch. I think this is a sensible procedure which would enable the Government to exercise its right to the taxpayer's assets, as if they were chattels upon which a lien has attached, while preserving the taxpayer's expectation of privacy in his own private papers, see Katz v. United States, supra, which have nothing to do with his tax inability. ³

I would remand for a determination of whether Meissner is a fugitive and of whether the case is now moot, so far as his private papers are concerned. In other respects, I concur in the majority opinion.

¹ It is doubtful whether the bank itself can claim the constitutional rights of the third party--jus tertii--in the absence of statutory authority. See, e.g., Sierra Club v. Morton, 405 U. S. 727, 732 & n. 3 (1972); Linda S. v. Richard D., 410 U. S. 614, 617 (1973); see Note, Standing to Assert Constitutional Jus Tertii, 88 Harv. L. Rev. 423 (1974). "Fourth Amendment rights are personal rights which, like some other constitutional rights, may not be vicariously asserted." Alderman v. United States , 394 U. S. 165, 174 (1969); Brown v. United States, 411 U. S. 223, 230 (1973); see Singleton v. Wulff, -- U. S. -- 96 S. Ct. 2868, 2876, n. 7 (1976).

² The Fourth Amendment claim was withdrawn. See 400 U. S. at 521. In any event, the obiter statement of Mr. Justice Blackmun concerning the Fourth Amendment on page 522 related only to records of accounts in banks, not safe-deposit boxes.

³ The American Law Institute in its proposed official draft of A Model Code of Pre-Arraignment Procedure has suggested that where documents other than the subject of a search warrant are found, the executing officer may not examine "intermingled documents," but must present the documents for a judicial hearing at which any person asserting any right or interest in the documents may appear and move for limitations on the further search as may be appropriate to prevent unnecessary or unreasonable invasion of privacy. Section SS 220.5, pp. 134-137 (April 15, 1975). If the ALI is right, a similar procedure would seem to be required a fortiori in a civil tax proceeding.

 

 

 

United States of America , Plaintiff-Appellant v. Central Bank of Denver , Defendant-Appellee

(CA-10), U.S. Court of Appeals, 10th Circuit, 84-1050, 3/31/88, 843 F2d 1300, Reversing an unreported District Court decision

[Code Secs. 6321 , 6323 , and 6332 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Property subject to: Bank deposits: Priority: Financing agreements: Colorado: Enforcement action.--A bank improperly refused to honor an IRS levy on the taxpayer's funds held by the bank in a general deposit account. The federal tax lien had priority over any inchoate interest as a creditor that the bank had in the taxpayer's account. The bank's security interest was not perfected so as to qualify for the preferred status of a choate state lien under Code Sec. 6323 . Also, the bank did not make a timely exercise of its setoff right under the provisions of the security agreement so as to defeat the IRS levy. The bank did not act affirmatively against the taxpayer's account until after it received notice of the levy and thus funds in the general deposit account belonged to the taxpayer and were subject to the levy. The taxpayer's interest in the bank account was property subject to the federal tax levy. Even after the taxpayer defaulted on a loan from the bank, the taxpayer retained a property interest in the nature of a chose in action under Colorado law with respect to the bank account at the time that the bank received notice of the levy.

Robert N. Miller, United States Attorney, Denver, Colo. 80294, Glenn L. Archer, Jr., Assistant Attorney General, Murray S. Horwitz, Michael L. Paup, Carleton D. Powell, Department of Justice, Washington, D.C. 20530, for plaintiff-appellant. Alice L. Parker, Cheryl A. Crandall, Denver , Colo. , for defendant-appellee.

Before HOLLOWAY, Chief Judge, LOGAN, Circuit Judge, and BRETT, District Judge. ^*

HOLLOWAY, Chief Judge:

The plaintiff-appellant, the United States of America, appeals from the district court's memorandum opinion and judgment holding that the appellee, the Central Bank of Denver, properly refused to honor an Internal Revenue Service levy served upon the bank because it had a perfected security interest in the delinquent taxpayer's bank account. The appellant (the "Government") filed a timely appeal. We reverse.

I

A. The factual background

On March 2, 1979, Mile-Hi Auto Interiors, Inc. ("taxpayer") executed a promissory note to the appellee, Central Bank of Denver ("Central"). The note was secured by a security agreement of the same date. Central filed a financing statement on March 6, 1979 with the Office of the Secretary of the State of Colorado . The statement identified Central as the secured party and the taxpayer as the debtor and covered "all accounts and contract rights now due or hereafter to become due."

Subsequently the Secretary of the Treasury made assessments for unpaid federal income withholding and Federal Insurance Contributions Act taxes, including penalties and interest, against the taxpayer. The amount assessed is $8,878.96 plus accrued but unassessed interest, penalties and statutory additions. The dates of assessment, notice and demand were stated in a stipulation as June 11, September 17, September 24 and November 19, 1979. R. 27. On August 24 and 27, 1979, the Government filed notices of federal tax liens against the taxpayer with the Secretary of State of Colorado and the Clerk and Recorder, City and County of Denver, Colorado for the tax assessment of June 11, 1979, showing a $7,841.26 total. R. 27.

The IRS served via mail a notice of an administrative levy (Treasury Form 668-A) upon Central on October, 10, 1979 pursuant to §6331(a) . ¹ The notice stated the taxpayer's outstanding tax liabilities and requested that Central remit to the IRS any funds belonging to the taxpayer. Central received the notice on October 15, 1979.

When the notice was received by Central, the balance in the taxpayer's account was $3,526.91. The stipulation stated that "the balance consisted of funds deposited to said account in payment for certain receivables owed to taxpayer by various customers, and as such represented proceeds of accounts receivable." R. 29. At this time the taxpayer was also in default on its note to Central. The note signed by the taxpayer placed no restrictions on its right to withdraw funds from the bank account. R. 31, 42. This access to the account was used by the taxpayer to make deposits and withdrawals even after it was in default to Central. R. 42, 43.

On October 17 Central made a setoff of $3,521.90 in the taxpayer's bank account, applied to the amount taxpayer owed the bank ($3,826.74), and debited the account for a $5 processing fee. Central then responded to the notice of levy by stating that "no funds were available" to remit to the IRS. The Government made a final demand on Central for the funds in the taxpayer's account on December 7, 1979, but the bank refused to honor the levy.

B. The procedural history

The Government filed this suit against Central in January 1983. It claimed that Central had in its possession the day after the notice of levy was served, property or rights to property belonging to the delinquent taxpayer amounting to at least $3,526.91; that Central had refused to surrender the funds and was liable under 26 U.S.C. §6332 ; ² and judgment for $3,526.91 and interest was sought. Cross-motions for summary judgment were filed.

The district court denied the Government's motion, but granted Central a summary judgment. In so holding, the court concluded that Central's perfected security interest in the taxpayer's account had priority over the federal tax lien and that Central's setoff of the account's funds against the taxpayer's outstanding debt to the bank was not wrongful. R. 75. Additionally, the court found that Central's claim and defense--that the levy was wrongful pursuant to 26 U.S.C. §7426 --was time barred by the terms of §7426 as it was raised more than nine months from the date of levy. The Government appealed.

The Government contends that the district court erred in not holding Central liable as the lien was properly asserted in accordance with 26 U.S.C. §6331 and that Central fails to demonstrate any of the defenses which excuse a failure to comply with the federal demand, i.e., that Central was not in possession of the property or rights to property belonging to the delinquent taxpayer or that the property was subject to a prior judicial attachment or execution. See 26 U.S.C. §6332 . The latter defense was not raised in the district court. Since state law determines the nature of the property which is subject to federal tax liens, Central contends that the taxpayer's account does not constitute property under Colorado law and, therefore, is not subject to a lien under §§6321 and 6331 . The Government challenges this contention.

The Government urges that, derived from the concomitant principle that federal law determines the consequences ensuing from a tax levy, Central's security interest does not have priority over the federal lien, nor does the security interest or setoff right excuse Central's failure to honor the tax levy. Even if the account is property or the right to property, Central argues that it is entitled to the account funds. This claim is based on Central's allegedly superior security interest and, alternatively, on Central's exercise of its right to setoff as provided by Colorado law. Central also contends that the Government executed a wrongful levy which Central can raise as a defense, not a claim in an action, which is not time barred under §7426 , despite the delay exceeding nine months from the date of the notice of the levy.

II

State law and the nature of property

We must initially determine whether the taxpayer's account constituted property or the right to property as state law determines the nature of property subject to federal tax liens. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983); United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958); United States v. Wingfield, 822 F.2d 1466, 1472, 1473 (10th Cir. 1987). Here this determination is of concern as Central argues as its first defense that the taxpayers' account did not constitute property under Colorado law in light of its perfected security interest and the taxpayer's indebtedness exceeding the account balance. The district court reached its holding without an explicit determination on this question. We feel we should decide this question first. We think that here Central's only defense would be that the account in these circumstances did not constitute "property or rights to property" within the meaning of §6331(a) . United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722 (1985). Then, once a court rules that property or the rights to it exist under state law, the consequences are governed by federal law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513, 514 (1960); Wingfield, 822 F.2d at 1473; United States v. Hunt [75-1 USTC ¶9327 ], 513 F.2d 129, 133 (10th Cir. 1975). When a taxpayer neglects or refuses to pay any tax after demand, the amount "shall be a lien in favor of the United States upon all property and rights to property" belonging to the person liable to pay the tax. 26 U.S.C. §6321 .

Central argues that under Colorado law the ownership of the money in the bank account was transferred to Central when the taxpayer deposited the funds. Consequently the IRS through its levy could not reach or succeed to the taxpayer's property or the right to property. Central relies upon the general principle, established in Colorado law, that "the simple deposit of money on account is a general deposit, ³ and transfers the ownership of the money to the bank." Boettcher v. Colorado National Bank, 24 P. 582, 584 ( Colo. 1890), overruled on other grounds, 336 P.2d 742, 749 (1959). The bank and its customer enter into a debtor and creditor relationship which is generally recognized at common law. Id. at 584; accord, Rivera v. Central Bank and Trust Co., 155 Colo. 383, 395 P.2d 11, 13 (1964); Cox v. Metropolitan State Bank Inc., 138 Colo. 576, 336 P.2d 742, 747 (1959); American National Bank of Denver v. First National Bank of Denver , 630 Colo. 557, 277 P.2d 951, 954 (1954), Sherberg v. First National Bank of Englewood , 122 Colo. 407, 222 P.2d 782, 785 (1950). As established by the Colorado Supreme Court in Boettcher, "Thereafter the depositor has only a debt owing him from the bank--a chose in action,--not any specific money, or a right to any specific money." Boettcher, 24 P. at 584 (emphasis added). Central argues the ownership element while ignoring the importance of the chose in action which is a necessary element of the relationship.

The chose in action or claim against the bank retained by the depositor is a form of property recognized under Colorado law. In determining the scope of the power enjoyed by one possessing a chose in action, the Colorado Supreme Court did not stray from that view, long established at common law. The opinion in In Re Hamilton's Estate, 113 Colo. 141, 154 P.2d 1008 (1945) explains:

[A] chose in action is a property right, often described as intangible property. Incidents of ownership with regards to a chose in action are rights or privileges to deal with it as one may deal with his property. . . . The value of the chose in action consists of the sum total of the incidents of ownership.

Id. at 1011; accord Anderson National Bank v. Luckett, 321 U.S. 233, 248 (1944) (bank account is chose in action of the depositor against the bank and property subject to state control); 10 Am. Jur. 2d Banks §§338 , 339 at 300, 301 (1963).

Here there is no showing of any alteration of the right of constructive possession to the chose in action, which constitutes the taxpayer's property and which is subject to a federal tax lien. See Wingfield, 822 F.2d at 1475 (absent a final judgment divesting taxpayer of the interest in the property on which the IRS has filed notice of a tax lien, the taxpayer's interest in the seized property is sufficient for a federal tax lien to attach). The taxpayer exercised the rights and privileges of ownership with respect to the account. Through its control of the account, the taxpayer deposited and withdrew money without prohibition from Central, even after the taxpayer's loan was in default. See National Bank of Commerce, 472 U.S. at 724-725 (where state law provides for taxpayer's right to withdraw from account it suffices as a right to property under §§6331 and 6332 ). The bank's interest in the account is not manifested by an assignment or pledge from the customer-taxpayer, which at common-law would transfer title or control of the account to the bank. See Peoples National Bank of Washington v. United States [85-1 USTC ¶9172 ], 777 F.2d 459, 461-462 (9th Cir. 1985). Absent an affirmative act of the customer to assign and transfer to Central its right in the chose in action, such as by an indispensable instrument like a passbook necessary to control an account, id., there is no basis for holding under Colorado law that a depositor loses all right to property in the bank account.

We hold that the taxpayer, Mile-Hi Auto Interiors, Inc., retained a property interest in the nature of a chose in action under Colorado law with respect to the account at the time that Central received notice of the administrative levy. We also hold that as property the taxpayer's interest in the account was subject to the federal tax levy.

III

Central's claims based on its perfected security interest and its right to a setoff

A. Controlling federal law. In a levy proceeding the IRS acquires whatever rights the taxpayer possessed. National Bank of Commerce, 472 U.S. at 725; United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 690, 691, n.16 (1983). There remain the claims of Central that its perfected security interest under Colorado law ⁴ and its right to a setoff precluded the IRS from obtaining rights in the account.

Central cannot claim the defenses allowed under §6332 for one refusing to comply with an administrative tax levy. The first defense--that Central did not possess property or rights to property of the delinquent taxpayer--has been rejected in Part II. The second defense, a judicial attachment or execution in favor of Central prior to the notice of the tax levy, has not been urged by Central.

The Government argues that because Central fails to raise defenses specifically arising from the terms of §6332(a) , it can raise no other issue including those of a priority based on a perfected security interest or the right to a setoff. According to the Government, these issues can only be raised where the property is the subject of an action brought under 26 U.S.C. §7426 .

We do not read the statutes or the decisions so narrowly. It is true that parties claiming an interest in property seized by a levy may recover in civil actions which they "may bring" against the United States . §7426(a)(1) . These are not the only proceedings, however, in which the issues can be raised. In fact, in the Court's decision in National Bank of Commerce, 472 U.S. at 729, 731, the Court referred specifically to postseizure administrative or judicial hearings. We feel that the instant proceeding to establish liability under 26 U.S.C. §6332(c)(1) is such a proceeding. We are not saying that the bank was entitled to refuse to honor the administrative levy, and we recognize the importance of the relief by this procedure which has been clearly provided for the Government. Id. at 733. Nevertheless, when a suit under §6332(c)(1) is brought by the Government, this does not mean that the third party may not raise the issue of a perfected security interest or a claim of a right to setoff as here. The district court and this court do have jurisdiction to consider those issues nevertheless.

Likewise, within the parameters of the postseizure administrative remedies, we feel that such issues could be raised by the bank under 26 U.S.C. §6343 . See National Bank of Commerce, 472 U.S. at 728 (referring to §6343(b) as "an effective and inexpensive administrative remedy" for the return of the property); 13 Mertens Law of Federal Income Taxation §54A.54 at 139, 140 (1942-1987). Section 6343 provides means for release of levy and return of property wrongfully levied upon, and we are satisfied that in the administrative proceedings, there would be jurisdiction to consider the assertion of issues such as a perfected security interest or the right to a setoff, which could then serve as the basis for a return of property. Accordingly we reject the narrow construction urged by the Government on the jurisdiction of the courts and the proceedings in which these issues may be raised. ⁵

Thus, we turn to the merits of Central's assertion of a perfected security interest and of its right of setoff. We must judge the merits of these claims by federal law. "The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question. Hence, although a state court's classification of a lien as specific and perfected is entitled to some weight, it is subject to reexamination by this Court." United States v. Security Trust & Savings Bank, Executor [50-2 USTC ¶9492 ], 340 U.S. 47, 49-50 (1950).

Under the Federal Tax Lien Act of 1966, 26 U.S.C. §§6321 -6326, the general rule is that a "lien first in time is first in right." United States v. City of New Britain, Connecticut [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954). In general, a federal tax lien attaches at the time the tax assessment is made. 26 U.S.C. §6322 . ⁶ Such a lien takes priority over liens attaching subsequent to the assessment of the delinquent tax. J.D. Court, Inc. v. United States, 712 F.2d 258, 260-261 (7th Cir. 1983) cert. denied, 466 U.S. 927 (1984); Marteney v. United States [57-1 USTC ¶9670 ], 245 F.2d 135, 137 (10th Cir. 1957). Under §6323(a) there is an exception to the general rule for security interests. When the holder of a security interest also claims an interest in the property subject to a federal tax lien, the federal lien is deemed to have attached when the IRS files a notice of the tax lien with the proper authority, rather then when the delinquent tax was first assessed. J.D. Court , 712 F.2d at 261.

A third party's claim of a security interest does not change the federal law with regard to attachment and choateness.

Notwithstanding the attachment of a tax lien upon assessment, [§6323(a) ] provides that . . . holders of security interests, . . . will prevail if their interest attaches before the Government files appropriate notice. Attachment occurs at the moment the interest becomes choate, which is a question of federal law . . . (emphasis in original).

J.D. Court, Inc. v. United States, 712 F.2d at 262 (quoting Sgro v. United States [79-2 USTC ¶9733 ], 609 F.2d 1259, 1261 (7th Cir. 1979)); see also United States v. Rotherham [88-1 USTC ¶9135 ], 836 F.2d 359, 362 (7th Cir. 1988). The priority of a lien created by state law depends upon the time it attached to the property in question and became choate. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963); New Britain , 347 U.S. at 85-86. While the theory of relation back to the date of attachment, when the financing statement was filed, is valid as concerns priority between private creditors under state law, it is not effective for federal tax purposes. United States v. Security, 340 U.S. at 50; Wingfield, 822 F.2d at 1475; United States v. Jenison [80-1 USTC ¶9195 ], 484 F.Supp. 747, 755 n.12 (D. R.I. 1980).

Only choate state-created liens take priority over later federal tax liens. Pioneer, 374 U.S. at 88 (citing United States v. New Britain , 347 U.S. at 86; Crest Finance Co. v. United States [62-1 USTC ¶9105 ], 368 U.S. 347 (1961)). Under federal law, liens are "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." Pioneer, 374 U.S. at 89.

B. Security interest. Under 26 U.S.C. §6323 , ⁷ the tax lien imposed by §6321 is not valid as against certain security interests until notice of the lien is filed in accordance with the statute's requirement. It is undisputed here that the IRS provided notice of lien filed with the State of Colorado in August 1979 and provided notice to the taxpayer in June and September 1979 for almost all of its demand. ⁸ Central appropriately filed a financing statement perfecting its interest in taxpayer's accounts and contract rights before the tax notice and filing. The question before us is whether Central's claim to entitlement is exempt under the federal provision for perfected security interests, §6323(h)(1) . To prevail against the tax lien, Central must demonstrate that its perfected security interest "has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation," id., and that the lien arising from security interest was choate at the time the IRS filed the tax lien.

Under the terms of the security agreement between Central and the taxpayer, the parties agreed to establish in favor of Central a security interest under the provisions of the Uniform Commercial Code (UCC). R. at 32. Exhibit B: Security Agreement: Accounts and Contract Rights, at ¶3(a). Under paragraph 7(f) of the agreement, the proceeds of the taxpayer's accounts and contract rights are to be deposited into a "Cash Collateral Account" in which the secured party, Central, has the security interest. Id. at 7(f). This "Cash Collateral Account" is a special account and not the same bank account which is at issue here.

Central does not have a security interest in the general deposits or accounts of the taxpayer under the terms of the agreement reached by Central and taxpayer and under Colorado UCC law. The agreement clearly states the security interest is in the proceeds of the accounts payable and the contract rights of the taxpayer which are to be placed in a "Cash Collateral Account" in which Central has the security interest. These terms are in accord with Colorado law which excludes certain properties or interests as a perfected security interest under the UCC.

The provisions of the UCC in Colorado law in effect at the time specifically excluded from perfection as security interests "a transfer in whole or in part of any of the following: . . . any deposit, savings, passbook, or like account maintained with a bank, savings and loan association, credit union, or like organization." Colo. Rev. Stat. §4 -9-104(k). The same section also excludes "any right of setoff." Id. at (i). The exclusion of general deposits from perfection under the UCC is not unusual as other states also similarly treat accounts. E.g., Peoples National Bank of Washington v. United States [85-1 USTC ¶9849], 777 F.2d 459, 461 (9th Cir. 1985) (State of Washington UCC does not provide for perfection of security interest in deposit accounts); see United States v. Third National Bank of Nashville, Tenn. [84-1 USTC ¶9613], 589 F.Supp. 155, 158 n.3 (M.D. Tenn. 1984) (Tennessee UCC does not provide for bank deposits to be subjected to perfected security interests) (dictum).

To the extent that Central was entitled to reach proceeds from accounts or contract rights which were in the general account of the taxpayer, it failed to affirmatively act as required under the state UCC, Colo. Rev. Stat. §4 -9-502. ⁹ Under this section which addresses the collection rights of a secured party, "If the security agreement secures an indebtedness, the secured party must account to the debtor for any surplus, and unless otherwise agreed, the debtor is liable for any deficiency . . ." Id. at (2) (emphasis added). Prior to the notice and filing of the tax lien, there is no showing that Central had ascertained or traced what portion of the deposit account funds were proceeds from the taxpayer's accounts and contract rights, in which Central's security interest existed, or that Central had accounted to the taxpayer as to its remaining surplus or deficiency on the security interest.

Here Central did not have a security interest in the general deposit account in question, but only in the specified accounts payable and contracts rights, as noted above. United States v. Bank of Celina, 721 F.2d at 169. Insofar as Central could have collected from the general account for liability arising from its security interest, the taxpayer's accounts and contract rights or proceeds therefrom, Central did not act before the notice and filing of the federal tax lien. More needed to be done before Central's lien could be established as to all three requirements of a choate state lien: the identity of the lienor, the property subject to the lien, and the amount of the lien as a sum certain. Pioneer, 374 U.S. at 89; J.D. Court , 712 F.2d at 261. The last two requirements were not shown to have been met at the time when the IRS filed notice of the tax lien with the state offices and when the IRS sent notices to Central of the levy. We hold that Central's security interest was not choate so as to qualify for the preferred status of a choate state-lien as provided by §6323 . C. Setoff

Central's alternative basis for defeating the administrative levy, the exercise of the right to a setoff against the taxpayer's account, must be examined for its compliance with the federal requirements for choateness and execution. This issue between the Government and Central turns on whether the latter made a timely exercise of its setoff right so as to defeat the attachment of the IRS lien and notice of the administrative levy. ¹⁰

Under the provisions of the security agreement, Central has the right to apply a setoff against the taxpayer's deposit account, which is the account at issue here, if items credited to the "Cash Collateral Account" are dishonored by the drawee or maker. R. 32, Ex. B at ¶11(c). Under Colorado law, the bank has a right of setoff; when it has possession of assets of the depositor-debtor, the bank "may apply these assets to payment of a matured debt." Sherberg, 222 P.2d at 785; Colo. Rev. Stat. §§4 -1-103, 4-4-303. Under the terms of Colorado law, §4 -4-303 provides for a setoff for a payor bank where its customer has a debt to the bank which is mature or in default. ¹¹ The statutory language and official comment for this provision focus upon the effect on the depositor's accounts when the bank has "exercised" the right of setoff. Id. , Official Comment at ¶¶1 and 2. The Official Comment states that "[i]n the case of setoff the effective time is when the setoff is actually made." Id. at ¶5; Baker v. National City Bank of Cleveland, 511 F.2d 1016, 1018 (6th Cir. 1975).

Under the facts of this case, the setoff was not effective before the IRS gave notice to the taxpayer and filed the tax lien and the setoff was not effective before Central received notice of the administrative levy against the taxpayer's property on October 15. R.28. Only after these actions by the IRS did Central act to exercise its right of setoff. Thus Central's acts did not meet the requirements for choateness stated in Pioneer, 374 U.S. at 89. Whether derived from an agreement with the taxpayer or the common law right to a setoff, until Central affirmatively acted against the taxpayer's account, the bank's right was inchoate or contingent. It is true that the setoff as a state-created right is categorically different from a lien. This, however, does not exempt the setoff from the federal requirement that a creditor's remedy must be in the form of a choate claim and is not effective where it is "contingent upon taking subsequent steps for enforcing it." Security, 340 U.S. at 51; accord, Pioneer, 374 U.S. at 90-91.

To meet the federal requirement for choateness, Central should have demonstrated an obvious decision to exercise the setoff right. Generally, three steps are necessary to exercise the setoff right:

(1) The decision to exercise the right;

(2) some action that accomplishes the setoff; and

(3) some record which evidences that the right of setoff has been exercised.

Baker v. National City Bank of Cleveland, 511 F.2d at 1018; accord, In Re Saugus General Hospital., Inc., 698 F.2d 42, 47-48 (1st Cir. 1983); Citizens & Peoples National Bank of Pensacola, Florida v. United States [78-1 USTC ¶9365 ], 570 F.2d 1279, 1283-84 (5th Cir. 1978); United States v. Citizens & Southern National Bank, 538 F.2d 1101, 1107 (5th Cir. 1976) cert. denied, 430 U.S. 945 (1977); see also 5A Michie on Banks and Banking, §122 at 385 (repl. ed. 1983) (states Baker elements as necessary to effect a nonjudicial setoff); Clark, B., The Law of Bank Deposits, Collections and Credit Cards, ¶11.9 at 11-28 (rev. ed. 1981) (bank's "[m]ere intention is not enough" to perfect a setoff; an affirmative act in accordance with Baker is required).

The requisites stated in the Baker, Peoples National, and Citizens and Southern decisions are congruous with the underlying state UCC requirements. See Baker, 511 F.2d at 1018; Peoples National, 570 F.2d at 1281-1284; Citizens and Southern, 538 F.2d at 1107; but cf. Pittsburgh National Bank v. United States [81-2 USTC ¶9626], 657 F.2d 36, 39 (3rd Cir. 1981) (rejects UCC §4 -303 as basis requiring affirmative action by bank with setoff right where state decisions hold that as soon as a debt owed to a bank by a depositor matures, the bank's right of setoff extinguishes the depositor's rights in the account), and United States v. Intermountain Region Concrete Co., Inc. [86-1 USTC ¶9304 ], 636 F. Supp. 280, 285 (D. Utah 1986).

Central failed to demonstrate "some overt act to carry out its intent to setoff" prior to the notice to Central of the administrative levy. Baker, 511 F.2d at 1017, 1018 (citing Studley v. Boylston Bank of Boston, 229 U.S. 523, 528 (1913) for requirement of an affirmative act, e.g., "making book entries"). Under the controlling federal law requirement for a choate legally cognizable right, as well as under Colorado law, Central's right of setoff was not exercised in a timely and certain manner so as to defeat the IRS administrative levy. Until the bank exercised the right of setoff, funds in the general deposit account belonged to the depositor and were subject to the federal tax levy. United States v. Sterling National Bank & Trust Co. of New York [74-1 USTC ¶9336 ], 494 F.2d 919, 922 (2d Cir. 1974). Absent some discrete act by Central to proscribe the taxpayer's control or constructive possession of the account, the Government could attach the account and "step into the shoes of the taxpayer" with regard to the property right to the account. National Bank of Commerce, 472 U.S. at 724-725.

We hold that Central's unexercised setoff does not have priority over the Government's administrative levy, and conclude that federal priority is necessary to carry out the federal policy and enforcement scheme. See National Bank of Commerce, 472 U.S. at 729, 733; People's National Bank of Washington, 777 F.2d at 462 (stating Ninth Circuit's fourth rejection of argument that an unexercised right of setoff defeats a federal tax lien); Citizens and Southern National Bank, 538 F.2d at 1106-1107; United States v. Sterling National Bank & Trust Company of New York [74-1 USTC ¶9336 ], 494 F.2d 919, 922 (2nd Cir. 1974); see also J.D. Court, 712 F.2d at 261-263 (Seventh Circuit discussion of choateness doctrine which is unchanged by the Tax Lien Act of 1966 preserving the federal priority because the collection of taxes is vital to the functioning and existence of government); United States v. First National Bank of Memphis [72-1 USTC ¶9357 ], 458 F.2d 560, 564 (6th Cir. 1972) (Appendix: History of the Federal Tax Lien discusses Congressionally "expressed solicitude for the protection of federal revenue" and related federal statutes). To hold that an inchoate state created right is superior to the federal administrative levy that was exercised would improperly subject the Government to consequences of state law. National Bank of Commerce, 472 U.S. at 726.

In these circumstances the IRS is not an ordinary creditor subject to the consequences of state law, but a superior creditor with federally defined rights and procedures. Id. at 727. The Government complied with the federal statutes. In this instance where Central had inchoate claims--the security interest lien and the setoff right--"it is inconceivable that Congress . . . intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer-depositor." Id. at 726 (quoting United States v. First National Bank of Arizona , 348 F.Supp 388, 389 ( Ariz. 1970), aff'd 458 F.2d 513 (9th Cir. 1972)).

IV

Conclusion

Accordingly the judgment of the district court is

REVERSED.

^* Honorable Thomas R. Brett, United States District Judge for the Northern District of Oklahoma, sitting by designation.

¹ Section 6331(a) reads in pertinent part:

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property and rights to property (except such property as is exempt under section 6334 ) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

The term "Secretary" means the Secretary of the Treasury or his delegate. 26 U.S.C. §7701(a)(11)(B) .

² Section 6332(a) reads:

Except as otherwise provided in subsection (b), any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, 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.

Central's liability is for a sum equal to the value of the property or rights not surrendered and not to exceed the amount of taxes for the collection of which such levy has been made. Section 6332(c)(1) . The Government has waived collection of additional liability arising when a person required to surrender property or rights to property fails or refuses to make such a surrender and is therefore liable for a penalty equal to 50 percent of the amount recoverable as taxes. Section 6332(c)(2) .

³ The parties do not dispute the fact that the account at issue was a general desposit, rather than a special deposit account. Boettcher v. Colorado National Bank, 24 P. 582, 584 ( Colo. 1890); Isenhart v. Monty, 161 Colo. 589, 423 P.2d 836, 838 (1967); Sherberg v. First National Bank of Englewood , 222 P.2d 782, 785 ( Colo. 1950). Under the Colorado law stated in Boettcher and Sherberg and generally accepted banking law, a special account or deposit arises from an express agreement or specific circumstances and the bank is precluded from exercising any right of setoff against this kind of account. Sherberg, 222 P.2d at 785 (quoting 9 C.J.S., Banks and Banking, §296 at 615); accord Rocky Mountain Machinery Co. v. First National Bank of Trinidad , 767 F.2d 722, 724-725 (10th Cir. 1985); Glenn Justice Mortgage Co., Inc. v. First National Bank of Ft. Collins , 592 F.2d 567, 569-70 (10th Cir. 1979).

⁴ 26 U.S.C. §6323 provides for specific property interests for which a federal tax levy is invalid, including certain security interests. Here we address whether the security interest claimed by Central falls within the provisions of §6323 which exempt property from IRS liens.

⁵ Thus in such a suit as this under §6332(c)(1) , the court would determine the defendant's liability for having refused to honor the administrative levy and any interest, penalty and costs due because the defendant could not assert either of the limited defenses to an administrative levy--that defendant possessed no property or rights to property of the delinquent taxpayer or that there was a judicial attachment or execution in favor of defendant prior to notice of the levy. Nevertheless, without the necessity of a multiplicity of separate actions, we feel the defendant in this suit is entitled to assert its claims that it has a perfected security interest or a right of setoff as a basis for relief that it could obtain in a separate suit on such grounds, or administratively as noted above.

The Government argues that Central's claims of a perfected security interest and of a right of setoff are time-barred by §7426 . Since we conclude below that Central had not exercised a choate right or a timely setoff against the taxpayer's account in any event, we need not address this issue.

⁶ 26 U.S.C. §6322 provides:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgement against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time."

The term "arise" is considered synonymous wih the term "attach." See J.D. Court, Inc. v. United States , 712 F.2d 258, 260-61 n.6 (7th Cir. 1983); Marteney v. United States [57-1 USTC ¶9670 ], 245 F.2d 135, 137 (10th Cir. 1957).

⁷ Section 6323 provides in pertinent part:

(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

Subsection (f) directs the Secretary or his delegate to (A) file the notice of the tax lien with the appropriate state office as required by state law; (B) file with the clerk of the federal district court where state law does not designate one office as required by part (f)(A); and (C) file with the Recorder of Deeds of the District of Columbia when the property subject to the lien is located in the District of Columbia. In this case, the IRS complied with subsection (f)(A).

⁸ The stipulation shows that the final penalty and interest amounts of $53.76 and $55.59 were assessed and noticed on November 19, 1979. R. 27. Since the notices antedating the setoff covered the basic tax liability, the later penalty notices related back to the dates of the earlier notices. United States v. Bank of Celina [83-1 USTC ¶9688], 721 F.2d 163, 166 (6th Cir. 1983).

⁹ As noted earlier, the stipulation made in this suit states that the account consisted of proceeds of accounts receivables of the taxpayer.

¹⁰ Central urges that we adopt the holdings of four cases in which the bank exercising the right of setoff, even after it received the notice of the tax levy, prevailed over the IRS lien. These cases are not persuasive. Three cases rely upon specific state laws in Pennsylvania , Louisiana , and New York which extinguish the property interest of the taxpayer-depositor so that there exists no property or right to property to which the federal tax lien could attach. Pittsburgh National Bank v. United States [81-2 USTC ¶9626 , 657 F.2d 36 (3rd Cir. 1981); United States v. National Bank of Commerce, 246 F.Supp. 597 ( E.D. La. 1965); United States v. Bank of the United States, 5 F.Supp. 942 (S.D. N.Y. 1934). The fourth case, United States v. Bank of Shelby [4 USTC ¶1226 ], 68 F.2d 538 (5th Cir. 1934) held that "at law or in equity" the bank "could have defeated" the taxpayer-depositor's demands because of his indebtedness and thus the IRS could not reach nor succeed to any rights in the account. Id. at 540. These cases do not comport with the Colorado law before us which establishes a property right in the account in the form of a chose in action which is not extinguished by the bank's unexercised right of setoff. Part II, supra.

¹¹ The Colorado law provides for the exercise of the setoff by the payor bank against the general account of its customer, the relationship between Central and the taxpayer in this case. Section 4 -4-303 provides: 4-4-303. When items subject to notice, stop-order, legal process, or setoff order in which items may be charged or certified. (1) Any knowledge, notice, or stop-order received by, legal process served upon, or setoff exercised by a payor bank, whether or not effective under other rules of law to terminate, suspend, or modify the bank's right or duty to pay an item or to charge its customer's account for the item, comes too late to so terminate, suspend, or modify such right or duty if the knowledge, notice, stop-order, or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the bank has done any of the following:

(a) Accepted or certified the item;

(b) Paid the item in cash;

(c) Settled for the item without reserving a right to revoke the settlement and without having such right under statute, clearing house rule, or agreement;

(d) Completed the process of posting the item to the indicated account of the drawer, maker or other person to be charged therewith or otherwise has evidenced by examination of such indicated account and by action its decision to pay the item; or

(e) Become accountable for the amount of the item under subsection (1)(d) of section 4 -4-213 and section 4 -4-302 dealing with the payor bank's responsibility for late return of items. (2) Subject to the provisions of subsection (1) of this section, items may be accepted, paid, certified, or charged to the indicated account of its customer in any order convenient to the bank.

 

 

 

Peoples National Bank of Washington, A National Banking Association, plaintiff-appellant v. United States of America , defendant-appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 85-3514, 777 F2d 459, 11/25/85, Affirming District Court, 84-2 USTC ¶9636

[Code Secs. 6321 and 7426]

Liens: Priority: Creditor: Demand loan: Security agreement: After acquired property.--A bank's unexercised right to use funds in a deposit account as a setoff against a demand loan made to depositors after the creation of the government's lien for unpaid taxes did not extinguish the depositors' property interest in such account. The bank's interest in such deposit account did not constitute a security interest for purposes of Code Sec. 6323(h)(1) because there was no assignment of the account (transfer of control) to the bank that would defeat a subsequent judgment lien under common law. Thus, the government's claim was superior and its levy on such account was valid.

James L. Austin, Jr., Bernard H. Friedman, Karr, Tuttle, Koch, Campbell, Mawer & Morrow, 111 Third Ave., Seattle, Wash. 98101, for plaintiff-appellant. Glenn L. Archer, Jr., Assistant Attorney General, Michael L. Paup, Steve Frahm, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before SNEED, SCHROEDER, and BRUNETTI, Circuit Judges.

Opinion

SCHROEDER, Circuit Judge:

Peoples National Bank of Washington brought this action against the United States , asking the district court to declare that the United States ' tax levy against a depositor's account was invalid. The district court dismissed the action on the ground that the bank had no interest in the account superior to that of the government. In this appeal, the bank argues that its rights in the account are superior by virtue of either its common law right of setoff or a "security agreement," which the depositor executed before the government provided notice of the tax lien. We hold that neither the right of setoff, which was unexercised, nor the "security agreement," which transferred no control over the account to the bank, created any interest superior to that of the government. We therefore affirm.

The facts are not in dispute. The Internal Revenue Service assessed income taxes against Jerry and Susan Redwine in 1981. The Redwines failed to pay the assessment after notice and demand. By operation of law, this created a lien on all of their property, including after acquired property. 26 U.S.C. §6321.

Two years later, the Redwines borrowed approximately $194,000 from Peoples National Bank and executed, in addition to a promissory note, a security agreement purporting to grant Peoples a security interest in the Redwines' property, including funds deposited with the bank.

Within three weeks after the loan was made, the IRS issued notice to the bank that it was levying on the Redwines' account in the amount of approximately $5,000. As of the time that Peoples received the notice, it had taken no action to set off the funds in the Redwines' account against any claims it had against the Redwines; nor had it otherwise restricted the Redwines' ability to withdraw funds from their account.

After receiving the notice, Peoples filed this action and delivered a check to the district court in an amount which would satisfy the levy. The district court dismissed the action, holding that the bank had no rights in the depositors' account which would defeat the government's levy.

In this appeal, the bank first argues that the account is not "property" within the meaning of 26 U.S.C. §6321, which establishes the government's right to impose a lien for taxes on "all property and rights to property" belonging to delinquent taxpayers. The existence of property rights is an issue controlled by state law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14 (1960).

The note the Redwines executed with Peoples was due on demand. Peoples therefore had a right to refuse withdrawal requests from the Redwines and to set off the debt against the Redwines' deposit account at any time. Peoples' theory is that because under Washington law it could at any time refuse to honor a request by the Redwines to withdraw funds from their account, the Redwines had no property interest in the account. It relies on Allied Sheet Metal Fabricators, Inc. v. Peoples National Bank of Washington, 10 Wash. App. 530, 518 P.2d 734, cert. denied, 419 U.S. 967 (1974), which held only that a bank may, without notice, set off a depositor's account to satisfy a debt owed by the depositor to the bank, when such debt is evidenced by a demand note. Allied does not hold that an unexercised right of setoff extinguishes a depositor's property interest in an account. Nor do any other Washington cases support this assertion.

Authority from other jurisdictions strongly supports the position that an unexercised right of setoff does not terminate the depositor's property rights in an account. See, e.g., United States v. Citizens & Southern National Bank [76-2 USTC ¶9665], 538 F.2d 1101, 1107 (5th Cir. 1976) (Georgia law), cert. denied, 430 U.S. 945 (1977); United States v. Sterling National Bank & Trust Co. of New York [74-1 USTC ¶9336], 494 F.2d 919, 922 (2d Cir. 1974) (New York law); United States v. Trans-World Bank [74-1 USTC ¶9632], 382 F. Supp. 1100, 1104 (C.D. Cal. 1974) (California law); see also United States v. First National Bank of Arizona , 348 F. Supp. 388, 389 (D. Ariz. 1970), aff'd, 458 F.2d 513 (9th Cir. 1972). We therefore find no basis for holding that, under Washington law, a depositor loses all property rights in his account simply because the bank has a right to set off funds in the account against an indebtedness owed to the bank.

Peoples next argues that its interest in the deposit account is a "security interest" as defined in 26 U.S.C. §6323(h)(1), and has priority over the IRS lien because it existed prior to the giving of notice of the tax lien. 26 U.S.C. §6323(a).

A "security interest" is defined in 26 U.S.C. §6323(h)(1). That statute requires that the interest must be "protected at local law against a subsequent judgment lien arising out of an unsecured obligation." Washington has adopted the Uniform Commercial Code, but its provisions for perfection of security interests do not apply to interests in deposit accounts. Wash. Rev. Code 62A.9-104(1). It is therefore necessary to look to the common law to determine whether the bank's interest in the Redwines' account can defeat a subsequent judgment lien. See 1G. Gilmore, Security Interests in Personal Property, §10.8, at 316 (1965).

Under the common law, a creditor may protect its interest in a deposit account by means of a pledge or an assignment. See Zubrow, Integration of Deposit Account Financing into Article 9 of the Uniform Commercial Code: A Proposal for Legislative Reform, 68 Minn. L. Rev. 899, 901, 936 (1984). A pledge of a deposit account is effective only upon the transfer from pledgor to pledgee of an indispensable instrument (i.e., one such as a passbook that is necessary to control of the account). See, e.g., Duncan Box & Lumber Co. v. Applied Energies, Inc., 270 S.E.2d 140, 144 (W.Va. App. 1980); Zubrow, supra, at 901 n.3. Because no such transfer took place in this case, a common-law pledge cannot be said to have occurred.

Similarly, the Redwines did not assign their account to the bank. A security agreement at common law constitutes a valid assignment only if it transfers title from the depositor to the bank. See Zubrow, supra, at 937. Here, the security agreement transferred to the bank no more control over, or interest in, the account to the bank than the bank would have had if there had been no "agreement."

Peoples relies upon Trust Company of Columbus v. United States [84-2 USTC ¶9614], 735 F.2d 447 (11th Cir. 1984), which held, under Georgia law, that a bank account had been successfully assigned to the bank, and that therefore the bank's interest defeated a tax lien. Under the agreement in Trust Company, however, the collateral was "delivered, pledged, assigned, conveyed and transferred" to the Trust Company. Id. at 448. The depositor thus renounced rights to the account and transferred them to the bank. There was no similar agreement in this case.

Peoples' final argument is that its common-law right of setoff against the Redwines' account should be sufficient, as a matter of law, to defeat the government's tax lien. This circuit, however, has three times rejected the argument that an unexercised right of setoff defeats a tax lien. Unites States v. First National Bank of Arizona, [72-2 USTC ¶9655], 458 F.2d 513 (9th Cir. 1972), aff'g [72-2 USTC ¶9654] 348 F. Supp. 388, 389 (D. Ariz. 1970); Bank of America National Trust & Savings Association v. United States [¶65-1 USTC ¶9429], 345 F.2d 624, 625 (9th Cir.), cert. denied, 382 U.S. 927 (1965); Bank of Nevada v. United States [58-1 USTC ¶9228], 251 F.2d 820, 825-27 (9th Cir. 1957), cert. denied, 356 U.S. 938 (1958).

Affirmed.

 

 

 

United States of America , Plaintiff-Appellant v. Citizens and Southern National Bank, Defendant-Appellee United States of America , Plaintiff-Appellant v. Citizens and Southern National Bank, Defendant-Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, Nos. 75-2549, 75-3571, 538 F2d 1101, 9/15/76, Reversing and remanding District Court decision, 75-2 USTC ¶9810

[Code Secs. 6321 and 6331]

Additions to tax: Tax liens: Bank's claimed right to set off: Depositor's assignment of funds to bank.--The Court of Appeals held that the existence of indebtedness to the bank, evidenced by language in the taxpayer's promissory notes to the bank, did not divest the depositor of all rights to his bank account property absent some act required by the bank before the service of notice of tax levy. Therefore, the depositors retained property interests in the accounts subject to tax levy.

R. Jackson B. Smith, Jr., United States Attorney, Edmund A. Booth, Jr., Assistant United States Attorney, Augusta, Ga., Ronald T. Knight, United States Attorney, John D. Carey, Assistant United States Attorney, Macon, Ga., Scott P. Crampton, Gilbert E. Andrews, Elmer J. Kelsey, Murray S. Horwitz, Department of Justice, Washington, D. C. 20530, for appellant. N. William Pettys, Jr., William M. Fulcher, P. O. Box 1484, Augusta, Ga., E. S. Sell, Jr., 1414 Georgia Power Bldg., P. O. Box 1014, Macon, Ga., for appellee.

Before WISDOM, GODBOLD and LIVELY ^*, Circuit Judges.

LIVELY, Circuit Judge:

In these two cases the government appeals from judgments in favor of banks which had refused to pay to the Internal Revenue Service the balances in bank accounts upon which levies were made for federal taxes previously assessed. In each instance the bank contended that the depositor-taxpayer in whose name the account stood had no property or rights to property in the account either at the time of the assessment of taxes or the time of the levy. In each case the government brought suit to enforce the levy, and the district courts, on somewhat different reasoning, entered judgments for the banks (separate offices of Citizens and Southern).

Section 6321 of the Internal Revenue Code of 1954 (26 U. S. C. §6321) creates a lien in favor of the United States "upon all property and rights to property, whether real or personal, belonging to . . ." a person liable for any tax who has not paid it after demand. Section 6331(a) of the Code (26 U. S. C. §6331(a)) gives to the Secretary of the Treasury or his delegate authority "to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax."

The facts in both cases were stipulated. In No. 2549 the Internal Revenue Service (IRS) made an assessment for unpaid wagering excise taxes against Robert W. Best, a customer of Citizens and Southern National Bank (the bank), on May 2, 1973. At noon on May 3, 1973, when the checking account ¹ of Best reflected a credit balance in excess of $57,000, officers of the bank determined that the bank was "insecure" with respect to indebtedness of Best to the bank in excess of $60,000 and determined to take all reasonable steps to protect the bank. At 3:05 p. m., May 3, 1973 an agent of IRS served a notice of levy directing the bank to surrender to the government the balance in the Best account. On May 4, 1973, the bank wrote Best that as of that date it had applied the balance in his account to his outstanding indebtedness to the bank. On May 8, 1973 the bank actually made the transfer entries, charging the Best account and crediting the Best notes.

Prior to the time of both the assessment and the levy Best had executed several promissory notes to the bank, each of which contained the following language:

To secure the payment of this Note and all other indebtedness or liabilities of the undersigned to Holder, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, or due or to become due (hereafter with this Note, collectively called "Liabilities"), undersigned transfers and conveys to Holder any and all balances, credits, deposits, accounts, items and monies of the undersigned now or hereafter with the Holder, and the undersigned agrees that the Holder shall have a lien upon, security title to and a security interest in all property of the undersigned of every kind and description now or hereafter in the possession or control of the Holder for any reason, including all dividends and distributions on or other rights in connection therewith.

In the event of nonpayment when due of any amount payable on any Liabilities, or if the Holder shall feel insecure for any reason whatsoever (1) any and all Liabilities may, at the option of Holder and without demand or notice of any kind be declared and thereupon immediately shall become due and payable, (2) the Holder may exercise from time to time any of the rights and remedies available to Holder under the Uniform Commercial Code as in effect at that time in Georgia, or otherwise available to Holder and (3) the Holder may, at any time, without demand or notice of any kind, appropriate and apply toward the payment of such Liabilities, and in such order of application as the Holder may from time to time elect, any balances, credits, deposits, accounts, items and monies of the undersigned with the Holder.

The "personal checking account signature form" which Best signed when the checking account was opened contained the following language:

Should Bank receive any process, summons, order, injunction, execution, distraint, levy, lien, or notice, "Process," which in Bank's opinion affects this deposit, Bank may, at its option and without liability, thereupon refuse to honor orders to pay or withdraw sums from this account and may either hold the balance herein until Process is disposed of to Bank's satisfaction, or pay the balance over to the source of the Process.

* * *

To secure any and all indebtedness and liability of (either or both) Depositors to Bank, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, due, or to become due, Depositors (jointly and severally) hereby transfer and convey to Bank all balances, credits, deposits, monies and items now or hereafter in this account and Bank is authorized at any time to charge such indebtedness or liability against this account, whether or not the same is then due, and Bank shall not be liable for dishonoring items where the making of such a charge results in there being insufficient funds in this account to honor such items.

The district court held that under Georgia law the relationship of a depositor to a bank is one of creditor and debtor and that funds which are deposited are transformed into a chose in action. The district Court further held that in Georgia a chose in action is property or rights to property within the meaning of 26 U. S. C. §6321. However, the court entered judgment for the bank upon finding that, under Georgia law, the language quoted herein from the promissory note constituted an assignment of Best's chose in action as collateral security for the debts evidenced by these promissory notes and operated as a valid assignment of all Best's rights as creditor of the Bank, existing by reason of his deposits, until the notes were paid. See Macon National Bank v. Smith, 170 Ga. 332, 338, 153 S. E. 4 (1930). Thus, C & S was not in possession of property or rights to property of the taxpayer at the time it received notice of the tax levy. For this reason, it cannot be held liable under section 6332(c) for its failure to turn over the funds deposited in Best's account.

In a footnote the district court quoted the assignment language from the signature form and stated that it granted "similar contract rights" to the bank.

The taxpayer in No. 3571 is B&G Wrecker (B&G) which borrowed from the bank and opened a checking account on March 20, 1968. The collateral installment note which B&G executed provided that

. . . the Holder may, at any time, without demand or notice of any kind, appropriate and apply toward the payment of such of the Liabilities, and in such order of application, as the Holder may from time to time elect, any balances, credits, deposits, accounts, items or monies of the undersigned with the Holder.

B&G also executed a "deposit agreement" which contained language substantially identical to that quoted from the personal checking account signature form in No. 2549. In addition B&G gave the bank other collateral for the loan.

On June 10, 1969 IRS made an assessment of taxes against B&G and on June 13th a tax lien was filed in the proper recorder's office. On June 23, 1969 a notice of levy with respect to the B&G account was served on the bank. Immediately thereafter the bank made a setoff, crediting the B&G note for the full amount of the balance then carried in its account.

The district court held that under Georgia law when a person makes a general deposit in a bank, title to the money immediately passes to the bank and "the depositor simply has a claim against the Bank, which claim is not considered 'property' or a 'right to property.'" The court further held that since B&G's indebtedness to the bank was greater than the sum on deposit at the time of the levy "B&G had no claim of any nature which it could have successfully asserted against the Bank . . .." Relying on United States v. Bank of Shelby [4 USTC ¶1226], 68 F. 2d 538 (5th Cir. 1934), the district court stated,

. . . since the Government's lien rights are derivative of those of the depositor, the Government takes subject to the defenses and equities affecting the depositor, so that even if the depositor has a claim, if it is not a claim which could have been maintained successfully by him, the Government is in no better position.

The court reasoned that the bank had both common law and statutory rights of setoff "and further, that this set-off could be made by the Bank either before it had knowledge of the Government's tax lien or after it became aware of it." The court concluded that the bank had "a contractual lien and security interest in the deposit which was created by the instruments taken by the Bank at the time the account was opened by the depositor." The district court found that the quoted language in the deposit agreement was a "specific transfer and conveyance of bank deposits as security for the loan by the Bank to B&G."

Our approach to the issues raised by these appeals has been chartered by the Supreme Court. In Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-14, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365 (1960), the Court wrote:

The threshold question in this case, as i., all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute." Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82, 60 S. Ct. 424, 426, 84 L. Ed. 585. Thus, as we held only two Terms ago, Section 3670 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . .." United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135. However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's "property" or "rights to property." (footnotes and citations omitted).

Thus we look first to the law of Georgia to determine whether Best and B&G had property or rights to property in their respective bank accounts at the time the government claims its tax liens attached.

It is settled law in Georgia that a person who places money in a bank on general deposit loses title to the money and becomes a creditor of the bank. McGregor v. Battle , 128 Ga. 577, 58 S. E. 28, 29 (1907). The funds which are deposited are transformed into a chose in action. Macon National Bank v. Smith, 170 Ga. 332, 153 S. E. 4, 6-7 (1930); Ricks v. Broyles, 78 Ga. 610, 3 S. E. 772, 773 (1887). This court stated in Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097, 1099 (1972), ". . . once it has been determined under state law that the taxpayer owns property or rights to property, federal law is controlling for the purpose of determining whether a lien will attach to such property or rights to property." (citation omitted). Thus, having determined that a depositor in a Georgia bank is vested with a chose in action, we look to federal law to determine whether a chose in action is property or rights to property under §§ 6321 and 6331. In United States v. Hubbell [63-1 USTC ¶9724], 323 F. 2d 197, 200 (5th Cir. 1963), after noting that "State law controls in determining the nature of the legal interest . . ." of one against whom a tax lien is asserted, ". . . but federal law controls the consequences attaching thereto . . .," the court held that a chose in action is subject to levy as "property" or "right to property." See also United States v. Metropolitan Life Insurance Co. [42-2 USTC ¶9609], 130 F. 2d 149 (2d Cir. 1942); United States v. Cohen [67-2 USTC ¶9602], 271 F. Supp. 709 (S. D. Fla. 1967).

The bank in No. 2549 argues that the levy in that case was ineffective because (1) Best had conveyed to the bank "a security interest in his legal and equitable rights to the funds on deposit," (2) that feeling itself insecure, the bank had determined to apply Best's balance against his indebtedness prior to the service of notice of levy and had effective control over the Best account until appropriate entries could be made and (3) that even if Best had property or rights to property, the security interest of the bank was superior to the government lien. Principal reliance is placed on Macon National Bank v. Smith, supra, and Georgia Bank & Trust Co. v. Hadarits, 221 Ga. 125, 143 S. E. 2d 627 (1965). In No. 3571 the chief argument of the bank is that where there are mutual debts between parties the claim of a delinquent debtor who owes more than he is owed is extinguished. Thus it is contended that B&G had no interest in the balance on deposit in its account, because the larger claim of the bank against him left him with no enforceable claim against the bank. Meriwether v. Bird, 9 Ga. 594 (1851), Skrine v. Simmons, 36 Ga. 402 (1861), and Taylor v. Jordan, 57 Ga. App. 285, 195 S. E. 215 (1938), are cited in support of this position.

Although the Supreme Court of Georgia held in Macon National Bank, supra, that a bank depositor retains a chose in action, it further found that the chose in action had been assigned to the bank as collateral for a debt which exceeded the balance on deposit. The bank as transferee was held entitled to a "preference" with respect to the balance in the depositor's account as against the claim of a creditor who served a garnishment subsequent to the assignment. In Georgia Bank & Trust Co. v. Hadarits, supra, a bank to which a depositor had assigned all balances in his account as security for a note was held to have been "invested with a lien" upon all deposits of the maker of the note. The court further held that the bank did not receive a new benefit when it set off the depositor's account against his note and that the right of setoff was not lost by the payment of other checks drawn on the account after the assignment to the bank took place.

The question of whether an assignment which is written to operate in the future divests the assignor of all rights in the property assigned has been answered differently by various courts, depending on the circumstances and applicable state law. Compare United States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264 (8th Cir. 1972), cert. denied, 410 U. S. 909, 93 S. Ct. 963, 35 L. Ed. 2d 270 (1973), with Monroe Banking & Trust Co. v. Allen [68-2 USTC ¶9526], 286 F. Supp. 201 (N. D. Miss. 1968). The statements in the opinions of the Supreme Court of Georgia that the assignee banks are entitled to a "preference" or have a "lien" on the borrower's account are inconsistent with the arguments of the banks in this case that after the assignments the borrower-depositors had no property interests in their accounts. It would be anomalous to hold one entitled to a preference with respect to, or a lien upon, property of which he was the sole and absolute owner. The alternative finding of the district court in No. 3571 that "the Bank in this case had a contracual lien and security interest in the deposit . . ." is likewise inconsistent with the court's finding that the assignment from the depositor to the bank divested B&G of all property and rights to property in the deposit. If the bank was the sole owner of the deposit, it could not have a lien or security interest in it. If indeed the assignments created only rights to a preference or liens, then some property or rights to property remained in the depositors and the issue between the parties is one of priority of liens. However, the claim of a prior lien may not be interposed as a defense to an action to enforce a tax levy. Commonwealth Bank v. United States [40-2 USTC ¶9769], 115 F. 2d 327 (6th Cir. 1940); United States v. Trans-World Bank [74-2 USTC ¶9632], 382 F. Supp., 1100, 1105 (C. D. Cal. 1974). The banks may litigate the priority of liens issue in an action under 26 U. S. C. §7426. Federal law is applied in determining property and such considerations as the chronology of the various steps taken by each of the parties and the "choateness" of the assignments are relevant. See United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 87, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963); Hammes v. Tucson Newspaper, Inc. [63-2 USTC ¶9808] 324 F. 2d 101, 103 (9th Cir. 1963).

Aside from the assignments the banks contend they were entitled to the benefit of a setoff of the balances in the Best and B&G accounts against the indebtedness of each depositor. An examination of the provisions of the notes relating to setoff reveals that they speak of some positive act by the banks to effect setoff. In both instances the notes provide "the Holder may . . . appropriate and apply" the balances, credits, deposits and accounts of the borrower to his indebtedness. In No. 2549 the bank did not attempt to apply the Best balance to his debts until May 4, 1973, the day following service of notice of levy. In No. 3571 the setoff was made "immediately after" the notice of levy was served. Since the contractual right of setoff required some discrete act by the banks and neither bank in the present cases performed such an act until after service of notice of the levy, the depositors retained property interests in the accounts subject to levy, unless these interests had been extinguished by operation of law.

We again look to state law to determine whether the existence of an indebtedness to the bank which exceeds the balance in a depositor's account divests that depositor of all property and rights to property in the account. Whatever may be the law in other states, ² the law of Georgia does not seem to provide for an automatic setoff between bank and depositor. In Taylor v. Jordan, 57 Ga. App. 285, 195 S. E. 215, 216 (1938), the court stated that "[m]utual demands extinguished each other by operation of law, without waiting for any act of the parties." Neither the Taylor case nor the two older Georgia cases cited in the briefs involved mutual debts of a bank and its depositor who was permitted to withdraw from his account after the mutual obligations came into existence. No Georgia case has been found which holds that a setoff by operation of law occurs where indebtedness of a bank depositor exceeds the balance of his deposits. On the other hand, Georgia cases involving the right of banks to set off debts against depositors' accounts uniformly indicate the requirement of some positive act. E.g., "The bank's action . . ." (Hadarits, supra, 143 S. E. 2d at 629); "When a bank which holds a note against one of its depositors charges it up . . ." (Davenport v. State Banking Co., 126 Ga. 136, 54 S. E. 977 (1906)); ". . . having exercised this right . . ." [to set off] (Caye v. Milledgeville Banking Co., 91 Ga. App. 664, 86 S. E. 2d 717 (1955)). (emphasis added in each quotation). Moreover, the Uniform Commercial Code provision for setoff by banks, effective in Georgia since 1962, used language connoting the necessity for some positive act on the part of the bank. Any . . . setoff exercised by a payor bank . . ." (emphasis added) Ga. Code §109A-4-303(1). Compare Baker v. National City Bank of Cleveland , 511 F. 2d 1016 (6th Cir. 1975).

In United States v. First National Bank of Arizona [72-2 USTC ¶9655], 348 F. Supp. 388, 389 (D. Ariz. 1970), aff'd per curiam, [72-2 USTC ¶9654] 458 F. 2d 513 (9th Cir. 1972), the District Judge wrote--

Until a bank has notified its depositor and then exercised its right of setoff, the depositor is free to withdraw from his account and it is inconceivable that Congress, by virtue of 26 U. S. C. §6323, intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer-depositor. (emphasis in original).

A similar view was expressed by the Second Circuit in United States v. Sterling National Bank & Trust Co. of N. Y. [74-1 USTC ¶9336], 494 F. 2d 919, 921-22 (1974).

We do not believe that United States v. Bank of Shelby [4 USTC ¶1226], 68 F. 2d 538 (5th Cir. 1934), relied on by the banks in the present case leads to a contrary conclusion. In Bank of Shelby the depositor was insolvent and the bank account upon which the government sought to levy constituted the balance of proceeds of the very loan which the bank offset. The court held that ". . . where the mutual obligations have grown out of the same transactions, insolvency on the one hand justifies the setoff of the debt due upon the other" (quoting from Scott v. Armstrong, 146 U. S. 499, 507, 13 S. Ct. 148, 36 L. Ed. 1059 (1892). Id. at 539.

We conclude that the government was entitled to judgments enforcing its levies in both cases before us because Best and B&G had property or rights to property in their respective bank accounts. As has been noted, both banks have argued that even if the depositors had property or rights to property in the accounts upon which levies were made, the banks had liens thereon which were superior to those of the government. The priority of liens is not before the court and we express no views on this issue.

In No. 2549 the government sought a 50 per cent penalty as provided in 26 U. S. C. §6332(c)(2) for failure of the bank to surrender property of the taxpayer "without reasonable cause." The district court did not reach this issue, but we conclude that there was a bona fide dispute as to whether the deposit represented property or rights to property of Best and that the penalty provision is not applicable in this case.

The judgment in each case is reversed and the cases are remanded to the district courts for entry of judgments for the government.

^* Of the Sixth Circuit, sitting by designation.

¹ Best actually had several accounts, but the terms of the agreement with the bank were substantially the same on all, and a single account will be referred to for convenience.

² See United States v. National Bank of Commerce [65-2 USTC ¶9720], 246 F. Supp. 597 (E. D. La. 1965), for discussion of the statutory provision for "compensation." But see United States v. First National Bank of Commerce (No. 72-247, E. D. La. 1973), aff'd per curiam, [74-2 USTC ¶9494] 493 F. 2d 1228 (5th Cir. 1974).

 

 

 

Bienvenida Riollano and Candia Garcia, Plaintiffs v. District Director of Internal Revenue, Defendant

U. S. District Court, So. Dist. N. Y., 61 Civ. 1487, 9/8/61

[1954 Code Sec. 6321]

Lien for taxes: Levy against joint bank account: Deposit by plaintiff not owing taxes: No rebuttal of joint tenancy.--The mere fact that the plaintiff who owed no taxes may have been the sole source of a deposit in a joint account with the other plaintiff who did owe taxes did not rebut the presumption of a joint tenancy. The court denied a motion for summary judgment made by plaintiffs, who were seeking to recover the deposit which had been turned over to the Government by the bank.

Herman S. Rosen, 905 E. 178th St. , New York , N. Y., for plaintiff. Robert M. Morgenthau, United States Attorney, New York , N. Y. (Lola S. Lea, Assistant United States Attorney, of counsel), for defendant.

METZNER, District Judge:

Plaintiffs bring this motion for summary judgment in an action which seeks to recover a sum of $577.47, turned over to the defendant by the Chase Manhattan Bank, pursuant to a notice of levy served upon the bank in November of 1960. This sum of money was deposited in a joint account bearing the names of Bienvenida Riollano and Candia Garcia. The levy was made by the defendant in order to effect collection of additional income taxes for the year 1952, assessed against plaintiff Candia Garcia and her husband, Henry Garcia.

Plaintiffs' principal contention is that Riollano was and is the sole owner of the monies deposited in the joint account; that it was her money that made up the funds in the account; that since no assessment existed against Riollano and no part of the bank account was the property of Garcia, the levy on the funds and the subsequent turning over of the funds was illegal. Defendant has denied these allegations in the complaint and contends that Riollano was not the sole source of the money in the account.

The law of New York which applies here provides that a joint bank account such as the one in issue raises the presumption of a joint tenancy. Banking Law, §134, subd. 3; Marrow v. Moskowitz, 255 N. Y. 219, 174 N. E. 460 (1931). This presumption may be rebutted by a showing through competent evidence that in the opening of the joint account something other than a joint tenancy was intended by the parties. Marrow v. Moskowitz, supra; Matter of Porianda's Estate, 256 N. Y. 423, 176 N. E. 826 (1931); In re Estate of Malone, 202 N. Y. S. 2d 804 (Sur. Ct. N. Y. Co. 1960).

The mere fact that Riollano may have been the sole source of the deposit does not rebut the presumption of a joint tenancy. On the contrary, such a deposit seems to be the usual practice. See cases cited above.

In any event, the defendant has not had the opportunity to take the depositions of the plaintiffs and exercise its right to cross-examination, which is so important in a case where all the facts are solely in the knowledge of the moving party. Arnstein v. Porter, 154 F. 2d 464 (2 Cir. 1946); Colby v. Klune, 178 F. 2d 872 (2 Cir. 1949). The moving party bears the burden of showing the absence of any genuine issue of fact requiring a trial, and when there is the slightest doubt as to the facts the motion for summary judgment should be denied. Doehler Metal Furniture Co. v. U. S. , 149 F. 2d 130, 135 (2 Cir. 1945); Bozant v. Bank of New York , 156 F. 2d 787 (2 Cir. 1946).

Motion denied. So ordered.

 

 

 

United States of America, Plaintiff-Appellee v. Harold Trilling; the Cosmopolitan National Bank of Chicago; Beatric Wyman; Jeannette Jaffe, Defendants, and Sara Trilling, Individually and as Executrix of the Estate of Gertrude Abramovitz, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 14306, 328 F2d 699, 3/3/64, Affirming an unreported District Court decision

[1954 Code Sec. 6321]

Tax lien: Property purchased in joint tenancy: Presumption of gift under state law.--There was substantial evidence to support the District Court's finding that a taxpayer owned an undivided one-half beneficial interest in real property where the only evidence to the contrary was the uncorroborated testimony of the taxpayer and his wife that, although the property was purchased in joint tenancy, the wife paid the full purchase price. The rule under the governing state law established a presumption of a gift when property is taken in the joint names of husband and wife even though the consideration is furnished by only one of the spouses.

[1954 Code Sec. 6323]

Tax lien: Enforcement: Notice requirement.--Notice of a tax lien is not required with respect to an individual whose interest in the property is not that of a martgagee, pledgee, purchaser, or judgment creditor.

[1954 Code Secs. 6502 and 6659(a)]

Statute of limitation: Collection of penalties and interest: Penalties as part of tax.--A suit involving penalties and interest is timely where filed within six years after assessment. Since penalties are considered as part of the tax under the Internal Revenue Code, the general provisions of 28 U. S. C. A. 2462 establishing a five-year limitation with respect to actions for the enforcement of civil pealties are not applicable.

[1954 Code Sec. 7403]

Jurisdiction: Tax liens: Sale of property held in joint tenancy.--Once the state law has been applied to ascertain the taxpayer's state-created property interests--to govern the determination of whether the taxpayer has "property" or an "interest in property" to which a tax lien attaches--the property may be subjected to the discharge of the tax liability even though it is held in joint tenancy with another person.

Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Department of Justice, Washington, D. C. 20530, Frank E. McDonald, John Peter Lulinski, Assistant United States Attorneys, Chicago, Ill., for plaintiff-appellee. Robert Jay Nye, 315 Plymouth Ct. , Ben Copple, 111 W. Washington St. , Chicago , Ill. , for defendant-appellant.

Before HASTINGS, Chief Judge, and DUFFY and CASTLE, Circuit Judges.

[Nature of Appeal]

CASTLE, Circuit Judge:

The defendant-appellant, Sara Trilling, individually and as Executrix of the Estate of Gertrude Abramovitz, prosecutes this appeal from a judgment order of the District Court foreclosing a federal tax lien asserted by the United States in connection with income tax owed by appellant's husband, Harold Trilling, and authorizing the sale of certain real estate in which the taxpayer is adjudicated to have an undivided one-half interest, and the payment of one-half the proceeds, after payment of fees and expenses, to the United States to the extent of the lien.

The record discloses that the real estate in question, an industrial property referred to as 3541-61 South Normal Avenue , Chicago , Illinois , was acquired by Harold and Sara Trilling in December, 1946. Title was taken in joint tenancy. An assessment of back taxes for the years 1942-47 in the amount of $107,375.11, including penalties of $16,777.44, was made against taxpayer Harold Trilling on May 21, 1954. On that date, pursuant to the provisions of 26 U. S. C. A. §§ 6321 and 6322, a lien attached against Harold Trilling's property and rights to property. In December, 1954, the Trillings conveyed their respective interests in the Normal Avenue property into an Illinois land trust, each retaining a 50% beneficial interest therein. In August, 1955, the taxpayer conveyed his interest in the land trust to appellant's mother, Gertrude Abramovitz, who died leaving a will bequeathing such interest to appellant.

The Government instituted suit in the District Court on May 20, 1960, seeking to reduce its assessment to judgment and asking for a decree allowing it to foreclose its lien against defendant Harold Trilling's interest in the Normal Avenue property. ¹ A judgment against defendant Harold Trilling on the asserted tax liability ($163,212.17), and declaring the Government's lien to be valid and subsisting, was entered on the Government's motion for partial summary judgment. The cause proceeded to trial on the issues of the existence and extent of the taxpayer's interest in the property sought to be subjected to the lien. The District Court, after making and entering findings of fact and conclusions of law, entered the judgment order from which appellant has appealed.

The main contested issues on appeal are:

(1) Is there substantial evidence to support the District Court's finding and conclusion that the taxpayer owned an undivided one-half beneficial interest in the Normal Avenue property or does the record require the conclusion that he held his share of the joint tenancy in a resulting trust for his wife, the appellant?

(2) Whether the enforcement of the lien is barred by a five-year statutory limitation period in so far as it includes penalties and interest on penalties.

(3) Whether enforcement of the lien against the appellant is precluded because of failure to file notice thereof.

(4) Whether the court erred in authorizing a sale of the property rather than the taxpayer's interest therein, and in subjecting appellant's interest to an equal share of the expenses of the sale.

[Property Held in Joint Tenancy]

Appellant contends that the record requires a conclusion that the taxpayer held his share of the joint tenancy in a resulting trust for her, that she is the owner of the entire beneficial interest in the property, and that the taxpayer was possessed of no beneficial interest to which the lien attached. In this connection the record does disclose testimony of the taxpayer that he did not use any of his money in the purchase of the property. ² And the appellant testified that she furnished the purchase price without contribution from her husband. But this testimony was not corroborated in any manner and was subject to appraisal and evaluation by the District Court in the light of the circumstances reflected by the record and reasonable inferences which may be drawn from what the record does reveal as to other pertinent factors including the relative status of each of the Trillings from the standpoint of earnings and income. Our examination of the record convinces us that when so viewed the weight to be accorded the uncorroborated testimony of the Trillings was solely for resolution of the District Court on the basis of credibility. And, the court's factual findings constitute an implicit rejection of their testimony as to who supplied the money used to make the purchase.

Moreover, the law of Illinois governs the determination of whether taxpayer owns a beneficial interest in the property (Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-514; United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55) and in Nickoloff v. Nickoloff, 384 Ill. 377, 51 N. E. 2d 565, the governing principle is stated as follows (p. 383):

"The rule is also settled that when property is taken in the joint names of husband and wife, even where the consideration is all furnished by one of them, there is a presumption of a gift from the one furnishing the consideration. Clear and convincing evidence is required to overcome this presumption and establish a resulting trust. [Citations.]"

Expression and application of this principle is found in Spina v. Spina, 372 Ill. 50, 56-57, 22 N. E. 2d 687, 690; Walker v. Walker, 369 Ill. 627, 631, 17 N. E. 2d 567, 569; and in Kartun v. Kartun, 347 Ill. 510, 518, 180 N. E. 423, 426, which admonishes that "[t]he presumption of gift is not to be frittered away by mere refinement."

Measured by the controlling principle established by the pertinent Illinois decisions the record in the instant case does not furnish the clear and convincing evidence requisite to overcome the presumption of a gift and establish a resulting trust. Appellant was unable to state with any certainty whether other real properties she stated were sold to provide the original purchase payment (and later to pay off the mortgage) on the Normal Avenue property were solely owned by her or were in joint tenancy with her husband; the reason advanced as to why the title was taken jointly was so that taxpayer could "manage" the property although it is admitted he managed other property without holding title jointly; and appellant testified on deposition that a right of survivorship was intended ³ in connection with the Normal Avenue property. We conclude that the record substantially supports the District Court's finding and conclusion that taxpayer owns an undivided one-half interest in the property.

[Action Not Barred]

The government filed its suit one day before the expiration of six years from the date of the assessment. The suit was filed within the period prescribed by 26 U. S. C. A. §6502(2)(1)--within six years after the assessment. And, as penalties are considered of the tax (26 U. S. C. A. §6659(a)) ⁴ the action, in so far as the collection and enforcement of penalties and interest on penalties are concerned, was not barred by limitation. Appellant's reliance on 28 U. S. C. A. §2462, a general provision establishing a five year limitation with respect to actions for the enforcement of civil penalties "[e]xcept as otherwise provided by Act of Congress", is misplaced. We find it unnecessary to consider the respective contentions of the Government and the appellant with respect to the standing of the appellant to assert a statute of limitations defense and as to whether her failure to affirmatively plead such defense in the District Court precludes her from urging it on appeal.

[Notice Not Required]

We perceive no merit in appellant's contention with respect to the application of the notice requirements of Section 3672 of the 1939 Internal Revenue Code and Section 6323 of the 1954 Code. ⁵ Appellant's interest is not that of a mortgagee, pledgee, purchaser or judgment creditor. We have considered, but reject as unpersuasive, the argument she presents based on the taxpayer's transfer of his interest in the land trust to appellant's mother. It is but a reassertion of the resulting trust theory.

[ Sale Permitted]

Appellant's final contention is that 26 U. S. C. A. §7403 does not empower the District Court to order a sale of the entire property, including appellant's admitted joint tenancy interest, or to charge appellant's interest with any of the fees, costs or expenses incident to the sale. The Government's complaint contained a prayer that the Normal Avenue real estate be sold and one-half of the proceeds be applied in satisfaction of the lien. From the record it appears appellant raised no question as to the scope of the relief sought either by any responsive pleading, during the course of the trial, or by post-judgment motion; and there is no evidence which suggests any impropriety in the sale of the entire property. Apart from the question as to whether appellant's belated protest should be entertained on appeal (Cf. Duignan v. United States, 274 U. S. 195, 199-200) we are of the opinion that appellant's position is without merit. We recognize that Folsom v. United States , 5 Cir., [62-2 USTC ¶9648] 306 F. 2d 361, relied upon by appellant, expresses a contrary view. But in our judgment Folsom overlooks the fact that in §7403 Congress has expressly authorized the district court to subject "any property" in which the delinquent taxpayer "has any right, title, or interest" to the payment of "such tax or liability"; has required that "all persons" claiming any interest "in the property involved" be made parties to the proceeding; and has empowered the court to order a sale "of such property" and direct distribution of the proceeds of such sale according to the "interest of the parties and of the United States". The express language of the statute negates any design or intent on the part of Congress to limit the reach of the statute to the "interest" of the taxpayer as distinguished from the "property" in which he has such "interest". This being so we are of the view that a proper recognition of the teachings of Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 and United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, requires the conclusion that once the state law has been applied to ascertain the taxpayer's state-created property interests--to govern the determination of whether the taxpayer has "property" or an "interest in property" to which the lien attaches--we enter the province of federal law in subjecting the property involved to the discharge of the tax liability. As Mr. Chief Justice Warren had occasion to observe in Aquilino (363 U. S. 509 at 514): "This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform administration of the federal revenue statutes."

And, where as here, "consequences, federally defined" have been applied "to rights created under state law" (Cf. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55) we perceive no inquity or error in the court's assessment of the costs and expenses of the sale according to the respective interests of the parties in the property.

The judgment order of the District Court is affirmed.

AFFIRMED.

¹ Defendant Harold Trilling neither admitted nor denied the allegations of the Government's complaint concerning his interest as a joint tenant with his wife in the property but claimed no independent knowledge as to his ownership of an interest in the real estate. The Cosmopolitan National Bank, Beatrice Wyman, and Jeannette Jaffe, also named as defendants, disclaimed interest in the subject matter of the suit.

² The purchase price for the Normal Avenue property was $50,000. $25,000 was paid at the time of purchase and the remainder secured by a mortgage. Testimony indicates the down payment money came mostly from the proceeds of a sale in 1946 of property at 43rd Street and Stewart Avenue in Chicago , and that the purchases money mortgage was discharged out of the proceeds of a 1947 sale of other property at 44th and LaSalle St. , Chicago .

³ Cf. Spina v. Spina, 372 Ill. 50, 58.

⁴ No showing is made that the penalties involved are of the class excluded by §6659(b) from the scope of §6659(a).

⁵ 26 U. S. C. A. §6323.