Bank Deposits page2
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,
, for plaintiff. Coldren & Adams, 712
, for defendants.
GOURLEY, Senior District
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
C. §§ 1340 and 1345. Judgment by default has been entered in favor of
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
should be granted and the Motion of the Bank denied.
In its Complaint, the
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
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
an "Offer in Compromise," Form 656, which provides in
pertinent part as follows:
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
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
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
filed the instant Complaint on May 13, 1969.
The governing statute of
limitations is Section 6502 of the Internal Revenue Code of 1954, 26
C. A. §6502, which provides in pertinent part:
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--
within 6 years after the assessment of the tax, or
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).
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."
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.
819 (19--). Where the waiver of the statute of limitations by the
taxpayer is accepted by the
, 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.
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
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
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
(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."
my judgment, the Bank is not entitled to the benefit of the aforequoted
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
, 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
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.
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
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
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
For some years prior to the
period when the
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
. In dispute is the right of the
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
C. §6321, provides as follows:
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."
Section 6322 of the Code, 26
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],
509 (1960); United States v. Bess [58-2 USTC ¶9595], 357
51 (1958). In the instant case, it must be ascertained whether, under
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.
The law of
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
519 (1961); Franklin Savings & Trust Co. v. Clark, 283
212 (1925); Parker v. Hartley, 91
465 (1879). "Whether a deposit is general or special depends on the
facts and circumstances attending its making . . ." Franklin
Savings & Trust Co. v.
, 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
It is recognized under
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
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
, 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
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
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
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
An appropriate order is
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
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
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
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.
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
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
District Court, East.
, So. Div., CIV. 97-CV-71212-DT, 6/6/97, 18 FSupp 2 d 707
Secs. 6201 , 6511
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.
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
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.
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
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.
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
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.
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.
, 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
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
Plaintiff also argues that
the IRS has no authority to issue levies or liens against him. 26 U.S.C.
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
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.,
436, 448, 13 S. Ct. 944, 948, 37 L. Ed. 799 (1893)).
For the reasons set forth
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).
Plaintiff's total unpaid balance is $89,799.22, including penalties and
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."
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
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
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,
, for plaintiff. Joseph H. B. Edwards,
1 Federal Street
, Summer W. Elton,
390 Main Street
, for defendant.
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
brought this action to foreclose the lien and for an order for payment
by the bank to the
of the amount standing in the account.
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
United States of America
, Petitioner-Appellee v. First National City Bank,
Respondent-Appellant, and Milton F. Meissner, Proposed
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
[Code Secs. 6321, 6323, 6331 and 7402--result unchanged by '76 Tax
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
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.
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
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.
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.
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.
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.
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.
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.
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.
Summary Enforcement Proceedings Pursuant to Section 7402(a)
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.
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
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
Anti-Injunction Act--Section 7421(a)
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
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.
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
at --, 44
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." --
at --, 44
L. W. at 4318.
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.
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.
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
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.
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:
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],
589, 595, 596-97 (1931) . . ." --
at -- n. 12, 44
L. W. at 4318 n. 12 (emphasis added).
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. . . ." --
at -- and n. 12, 44
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.
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
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
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
"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
364, 370-72 (1968); Camara v. Municipal Court, 387
523 (1967); Johnson v.
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
in view of pending criminal and civil investigations involving him, and
the IRS' inability to discover other assets owned by Meissner in the
provided sufficient reason to believe that the collection of
deficiencies against Meissner might be in jeopardy.
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
Meissner relies on Reisman v. Caplin [64-1 USTC ¶9202], 375
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],
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
at 529-30 & n. 12. That is not the situation here.
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.
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
322, 328 (1973). Here there was no such compulsion on Meissner who did
not have possession of the contents of the safe deposit box.
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
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.
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).
Meissner is no stranger to this Court or to the District Court for the
Southern District of New York.
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
. 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.
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).
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.
C. §7402(a) provides:
Jurisdiction of district courts.
To issue orders, processes, and judgments.
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
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:
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
at 407 (footnotes omitted) (emphasis added).
hold that §7402(a) provides precisely that "express statutory
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
C. §7421(a) (1970).
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 . . ."
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.
at 711 n. 11.
The Anti-Injunction Act, 26
C. §7421(a) provides:
Prohibition of suits to restrain assessment or collection.
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."
The Supreme Court in Shapiro reaffirmed its earlier
interpretation of §7421(a) in Enochs v. Williams Packing &
Navigation Co. [62-2 USTC ¶9545], 370
1, 7 (1962), where it held:
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
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
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. --
at --, 44
L. W. at 4317-19.
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.
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.
In Laing v. United States, [76-1 USTC ¶9164] 423
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
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
21, 52-53 (1974); Couch v. United States [73-1 USTC ¶9159], 409
322, 335-36 (1973); Donaldson v. United States [71-1 USTC ¶9173],
517, 530-31 (1971); id. at 537 (Douglas, J., concurring).
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.
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.
and Dissenting Opinion
Circuit Judge, concurring and dissenting:
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.
365, 366 (1970). A remand should be ordered, therefore, to determine
whether Meissner is a fugitive.
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
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.
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.
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
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.
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.
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
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.
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
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
322 (1973); Fisher v. United States [76-1 USTC ¶9353], --
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
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
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.
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
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.
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
727, 732 & n. 3 (1972); Linda S. v. Richard D., 410
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.
165, 174 (1969); Brown v. United States, 411
223, 230 (1973); see Singleton v. Wulff, --
2868, 2876, n. 7 (1976).
2 The Fourth Amendment claim was withdrawn. See 400
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.
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
U.S. Court of Appeals, 10th Circuit, 84-1050, 3/31/88, 843 F2d 1300,
Reversing an unreported District Court decision
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
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,
, for defendant-appellee.
Before HOLLOWAY, Chief
Judge, LOGAN, Circuit Judge, and BRETT, District Judge. *
HOLLOWAY, Chief Judge:
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.
A. The factual background
On March 2, 1979, Mile-Hi
Auto Interiors, Inc. ("taxpayer") executed a promissory note
to the appellee, Central Bank of
("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
. 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)
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,
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 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
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
. 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
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.
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
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
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 (
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
557, 277 P.2d 951, 954 (1954), Sherberg v. First National Bank of
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
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
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.
at 1011; accord
Anderson National Bank v. Luckett, 321
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
, 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
at 724-725 (where state law provides for taxpayer's right to withdraw
from account it suffices as a right to property under §§6331
). 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
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
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.
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
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
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
. 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
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.
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
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
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
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
, 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.
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
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);
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
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
at 88 (citing
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
B. Security interest.
Under 26 U.S.C. §6323
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
. 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
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
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
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
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
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.
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,
, 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
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.
-1-103, 4-4-303. Under the terms of
-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.
, 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."
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,
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
at 51; accord, Pioneer, 374
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:
decision to exercise the right;
action that accomplishes the setoff; and
record which evidences that the right of setoff has been exercised.
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,
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
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,
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
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
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."
at 726 (quoting
v. First National Bank of
, 348 F.Supp 388, 389 (
1970), aff'd 458 F.2d 513 (9th Cir. 1972)).
Accordingly the judgment of
the district court is
Honorable Thomas R. Brett, United States District Judge for the Northern
District of Oklahoma, sitting by designation.
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.
term "Secretary" means the Secretary of the Treasury or his
delegate. 26 U.S.C. §7701(a)(11)(B)
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
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
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 (
1890); Isenhart v. Monty, 161
589, 423 P.2d 836, 838 (1967); Sherberg v. First National Bank of
, 222 P.2d 782, 785 (
1950). Under the
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
, 767 F.2d 722, 724-725 (10th Cir. 1985); Glenn Justice Mortgage
Co., Inc. v. First National Bank of
, 592 F.2d 567, 569-70 (10th Cir. 1979).
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.
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.
26 U.S.C. §6322
"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."
term "arise" is considered synonymous wih the term
"attach." See J.D. Court, Inc. v.
, 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).
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.
(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).
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).
As noted earlier, the stipulation made in this suit states that the
account consisted of proceeds of accounts receivables of the taxpayer.
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
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 (
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
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.
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.
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
(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
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.
SCHROEDER, Circuit Judge:
Peoples National Bank of
brought this action against the
, asking the district court to declare that the
' 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
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
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
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
, 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
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
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."
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
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
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.
at 448. The depositor thus renounced rights to the account and
transferred them to the bank. There was no similar agreement in this
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
United States of America
, Plaintiff-Appellant v. Citizens and Southern National Bank,
United States of America
, Plaintiff-Appellant v. Citizens and Southern National Bank,
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
[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.,
Before WISDOM, GODBOLD and
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
C. §6321) creates a lien in favor of the
"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:
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.
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:
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.
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
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
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
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
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.
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
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
509, 512-14, 80
1277, 1280, 4 L. Ed. 2d 1365 (1960), the Court wrote:
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
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
51, 55, 78
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).
we look first to the law of
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
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.
577, 58 S. E. 28, 29 (1907). The funds which are deposited are
transformed into a chose in action. Macon National Bank v. Smith,
332, 153 S. E. 4, 6-7 (1930); Ricks v. Broyles, 78
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.
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.
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
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
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
84, 87, 83
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
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
case nor the two older
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
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,
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
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
, 511 F. 2d 1016 (6th Cir. 1975).
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--
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
C. §6323, intended to prohibit the Government from levying on that
which is plainly accessible to the delinquent taxpayer-depositor.
(emphasis in original).
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
[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).
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
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.
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.
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
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.
Bienvenida Riollano and
Garcia, Plaintiffs v. District Director of Internal Revenue, Defendant
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
Herman S. Rosen,
905 E. 178th St.
, N. Y., for plaintiff. Robert M. Morgenthau, United States Attorney,
, N. Y. (Lola S. Lea, Assistant United States Attorney, of counsel), for
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,
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
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.
, 149 F. 2d 130, 135 (2 Cir. 1945); Bozant v. Bank of
, 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
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
[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
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.
, for defendant-appellant.
Before HASTINGS, Chief
Judge, and DUFFY and CASTLE, Circuit Judges.
CASTLE, Circuit Judge:
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
, 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
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
property into an
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
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:
there substantial evidence to support the District Court's finding and
conclusion that the taxpayer owned an undivided one-half beneficial
interest in the
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
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
Whether enforcement of the lien against the appellant is precluded
because of failure to file notice thereof.
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.
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):
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.]"
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
Measured by the controlling
principle established by the pertinent
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
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
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
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.
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
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
195, 199-200) we are of the opinion that appellant's position is without
merit. We recognize that Folsom v.
, 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
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.
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.
The purchase price for the
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
, and that the purchases money mortgage was discharged out of the
proceeds of a 1947 sale of other property at 44th and
Cf. Spina v. Spina, 372
No showing is made that the penalties involved are of the class excluded
by §6659(b) from the scope of §6659(a).
26 U. S. C. A. §6323.