Annotations- Garnishment

---

6332 Annotations: Garnishment- Levy

 

 

Penalty for Failure to Surrender Property: Garnishment

 

[41-1 USTC ¶9140]United States of America, Plaintiff-Appellee, v. Long Island Drug Company, Inc., and Charles J. Steinberg, an officer, Defendants-Appellants

(CA-2), United States Circuit Court of Appeals for the Second Circuit, Calendar No. 20, Docket No. 17228, 115 F2d 983, December 16, 1940

Appeal from the United States District Court for the Eastern District of New York.

Distraint: Garnishment without effect on future earnings.--On April 15, 1936, notice of lien was served on the defendant drug company. At that time the delinquent taxpayer was indebted to the company. On the same date and until the last notice of lien was served on the company on March 7, 1939, the company loaned the taxpayer's wife a sum larger than his salary which he agreed should be applied towards repayment of the loans. The Court holds that the garnishment does not affect future earnings or salary, and that on the two dates of notice of lien, the company owed nothing to the delinquent taxpayer upon which distraint could be made. So far as the record shows, the garnishee's right to setoff was acquired for a valuable consideration before demand was made on the company. Reversing District Court decision, 39-2 USTC ¶9713

Otho S. Bowling, Attorney and Counsel for Defendants-Appellants. Harold M. Kennedy, United States Attorney, for plaintiff-appellee; Vine H. Smith and Mario Pittoni, Assistant United States Attorneys, Counsel.

Before L. HAND, SWAN and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge:

[The Facts]

The following facts appear from the pleadings and the papers filed on a motion by the United States for a summary judgment against the defendant Long Island Drug Company, Inc.:

On the May 1933 list the Commissioner of Internal Revenue assessed a distilled spirit tax against the defendant Charles Steinberg and others in the amount of $8,393.55. The list was signed July 1, 1933, and received in the office of the Collector of Internal Revenue on or about July 6, 1933. A notice and demand was made by the Collector on Charles Steinberg on July 14, 1933, and, owing to failure to make any payment on account of the tax, a warrant of distraint was issued on September 16, 1933.

On April 15, 1936, a notice of lien in the amount of $11,274.79 was filed in the office of the Clerk of the United States District Court for the Eastern District of New York, and in the office of the Register of Queens County. This sum included the assessment of $8,933.55, plus penalty and interest. On the same date notice of levy, copy of the notice of lien and of the warrant of distraint filed in the office of the Clerk of the District Court was served on the defendant Long Island Drug Company, Inc.

On June 17, 1936, another notice of lien was filed in the office of the Clerk of the District Court and with the Register of Queens County in the amount of $436.89 representing accrued interest in addition to that included in the previous notice of lien. On June 17, 1936, a notice of lien in the amount of $11,711.68, the amount specified in the notice of lien of April 15, 1936, plus the recent accruel of interest was served on Long Island Drug Company, Inc.

Finally, on March 7, 1939, the Long Island Drug Company, Inc., was served with a notice of levy in the sum of $12,777.65, a copy of the warrant of distraint, and a final demand for the surrender of $12,777.65 of the money, credits, property and property rights belonging to Steinberg, stated to be then in possession of the Long Island Drug Company, Inc.

At the time of the service of the first notice and demand on April 15, 1936, Steinberg was indebted to the Long Island Drug Company in the sum of $4,711.13 on account of overdrawn salary. Since that date there accrued to Steinberg on account of salary due from the Drug Company $37,161.61. After deducting the $4,711.13 there remained a balance of the accrued salary which amounted to $32,450.52. During the period between the date of service of the notice of lien on April 15, 1936, and the time when the last notice of levy was served on March 7, 1939, the Drug Company had loaned $40,677.16 to the wife of Steinberg. Steinberg was either a joint maker or endorser of the notes given by Mrs. Steinberg to the Drug Company for the sums she borrowed and he had agreed with it after April 15, 1936, that he would guarantee the repayment of the loans and that any salary that he might thereafter become entitled to might be applied toward such repayment.

This action was brought to enforce a statutory liability of the Long Island Drug Company, Inc., arising because of its refusal to surrender to the Collector of Internal Revenue $12,777.65 alleged to be subject to distraint as property and rights of a property to Steinberg.

The answer did not deny the allegations of the complaint and in the government's affidavits of service of notice and demand of taxes due under the assessments against Steinberg, nor did it deny that the Drug Company had failed to surrender his rights of property to the Collector. It did deny that the Drug Company was in possession of any rights of property of Steinberg at the time of the service of the notices upon it.

[Opinion]

Upon a summary motion against the Long Island Drug Company, Inc., the District Court directed judgment for the United States in the sum of $12,777.65 plus interest and costs, amounting in all to $12,581.66. The Drug Company appeals on the ground that any lien which might exist upon the salary of Steinberg was not prospective and, therefore, was not imposed upon earnings of Steinberg accruing after the notice and demand of March 7, 1939, which were previously applied in accordance with the agreement of the parties to the repayment of the loans made to Mrs. Steinberg. We find no proof that the Drug Company was in possession of any property belonging to Steinberg when the Collector demanded the surrender of $12,777.65 on March 7, 1939, in payment of taxes. We think that no case was made requiring payment of the sum by the Drug Company and that the judgment must accordingly be reversed.

Provisions relating to the collection of taxes are contained in U. S. Code, Title 26. ¹

[Third Party Indebtedness Is Subject to Distraint]

It seems reasonably clear that under the provisions of Sec. 3690 the indebtedness of a third party to a taxpayer is subject to distraint. That section, among other choses in action, specifies "bank accounts, and evidences of debt". Under Sec. 3710: "Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been make, shall, upon demand by the collector * * * surrender such property or rights to such collector, * * *". We think that the language quoted from Sec. 3690 and Sec. 3710 is broad enough to include the claim of Steinberg against the Long Island Drug Company, Inc., insofar as it had accrued when demands of payment were made by the Collector. This conclusion seems warranted by Matter of Rosenberg, 269 N. Y. 247; United States v. Canfield, 29 F. Supp. 734, (D. C. Cal.) [39-2 USTC ¶9641]; Karno-Smith Co. v. Maloney, 28 F. Supp. 907, (D. C. N. J.) [39-2 USTC ¶9668], reversed on other grounds; Filipowicz v. Rothensies, 31 F. Supp. 716, (E. D. Pa.) [40-1 USTC ¶9250]; Kyle v. McGuirk, 82 F. (2d) 212, (CCA. 3) [36-1 USTC ¶9121]; Cannon v. Nicholas, 80 F. (2d) 934, (CCA. 10) [35-2 USTC ¶9672].

The statement in United States v. Western Union Telegraph Co., 50 F. (2d) 102, (CCA. 2) [2 USTC ¶754] to the effect that the lien provided for in Sec. 3670 is limited to tangible property was a dictum based on a too narrow reading of the statute and cannot be taken as authoritative.

Though we shall assume that a salary or wages which have been earned may be made subject to a lien for unpaid taxes and also subject to distraint and levy, the situation in respect to future earnings is quite different. They are contingent upon performance of a contract of service and represent no existing rights of property. They are quite distinguishable from the right of a cestui que trust whose equitable life estate may be subjected to a lien on behalf of the government for unpaid taxes. Matter of Rosenberg , 269 N. Y. 247; United States v. Canfield, 29 F. Supp. 734 [39-2 USTC ¶9641]. In the same way they are distinguishable from a taxpayer's interest in an insurance policy upon his life, Kyle v. McGuirk, 82 F. (2d) 212, (CCA. 3) [36-1 USTC ¶9121]; Cannon v. Nicholas, 80 F. (2d) 934, (CCA. 10) [35-2 USTC ¶9672]. Neither right of the taxpayer is contingent but is a fixed right to realize property or income derived therefrom dependent upon no future performance. Rights which do not exist at the time of the demand upon the taxpayer are not subjected to any lien. United States v. Pacific R. R., 1 Fed. 97, (C. C. Mo.). Here there was no showing that the taxpayer had any claim against the Drug Company when the demand upon him for payment was made.

On April 15, 1936, when the Collector served its first notice of lien and demand on the Long Island Drug Company, Inc., nothing was due Steinberg from the Company but he then owed the latter $4,711.13. Between that date and March 7, 1939, when the second demand was been made by it with pany, a contract had been made by it with Steinberg whereby any indebtedness of Steinberg, as surety, might be applied to sums becoming due for his salary. There was an indebtedness of Steinberg at the time of such demand which had been set off pursuant to the agreement.

[Garnishment Not Applicable to Future Earnings]

In the absence of a statute to the contrary, it is the usual rule that a garnishment does not affect future earnings or salary. Savings Bank of Danbury v. Loewe, 242 U. S. 357. Moreover, there would seem to be no justice in depriving the garnishee of its right to setoff which, so far as the record shows, was acquired for a valuable consideration before the demand was made on the Drug Company by the Collector. Both on April 15, 1936, when payment was first demanded of the Drug Company, and on March 7, 1939, when the last demand was made, the latter owed no debt to Steinberg upon which distraint could be made. We find nothing in Sec. 3690 or Sec. 3710 which varies the general rule that a garnishee process is not to be extended to future earnings, but will only reach an indebtedness which has accrued.

It appears from the foregoing that there was no lien upon any earnings of Steinberg on April 15, 1936, or accruing thereafter, and that he had no accrued earnings upon the dates upon which a levy was attempted. Accordingly the Long Island Drug Company, Inc., had no property which it could be required to surrender by reason of the provision of U. S. Code Title 26, Sec. 3710.

Judgment reversed.

¹ Sec. 3670. Property subject to lien. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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.

Sec. 3671. Period of lien. Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time.

Sec. 3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors--(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

* * * * * * * *

Sec. 3690. Authority to distrain. If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the additional amounts as such interest and other additional amounts as are required by law, by distraint and sale, in the manner provided in this sub-chapter, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid.

Sec. 3692. Levy. In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy.

Sec. 3710. Surrender of property subject to distraint--(a) Requirement. Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process. (b) Penalty for violation. Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy. (c) Person defined. The term "person" as used in this section includes an officer or employee of a corporation or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

 

[44-2 USTC ¶9379] United States of America v. Guaranty Bank & Trust Company, a Corporation, and D. V. Clayton

District Court of the United States for the Eastern District of North Carolina, Washington Division, April Term, 1944, 56 FSupp 470, June 5, 1944

Charges in distraint and seizure: Bank accounts: When notice ineffective.--Where, on the date the Collector served notice of warrant for distraint upon a bank carrying two accounts of a taxpayer delinquent in payment of U. S. taxes, the bank books showed a credit but the evidence showed that checks drawn against such accounts by taxpayer were paid just prior to service of such notice, and other moneys of taxpayer come into the bank's possession immediately after the service of the notice, the District Court holds the Bank and its cashier not liable under Code Sec. 3710.

J. O. Carr, U. S. Attorney, Wilmington , N. C., for plaintiff. R. L. Coburn, Williamston, N. C., and Rodman & Rodman , Washington , N. C., for defendant.

Judgment

This cause came on to be heard and was heard by the undersigned Judge Presiding at the April Term in Washington , North Carolina . The parties waived a jury trial. Upon the evidence offered the Court finds the following facts:

[The Facts]

1. Guaranty Bank & Trust Company is a corporation organized under the laws of the State of North Carolina , with a branch office at Williamston in Martin County . Defendant, D. V. Clayton, is a resident of Martin County and was and is the cashier in charge of the Williamston, North Carolina , branch of defendant Guaranty Bank & Trust Company.

2. On November 7, 1941, an assessment to enforce unjust enrichment taxes for the year 1935 under the provisions of the Revenue Act of 1936 was duly made by the Commissioner of Internal Revenue of the United States against D. M. Roberson, in the sum of $8,114.58 with a penalty of $6,085.94 and interest to November 7, 1941, in the sum of $2,383.90. The total assessment for said taxes, penalty and interest to November 7, 1941, amounted to $16,584.42.

3. On November 12, 1941, notice and demand for income tax on Treasury Form 7658 was duly served on D. M. Roberson and on November 27, 1941, Charles H. Robertson, Collector of Internal Revenue for the State of North Carolina , issued a warrant for distraint for the said unpaid balance of $16,584.42.

4. As provided by the Internal Revenue Laws of the United States, a notice of tax lien, duly signed by Charles H. Robertson, Collector, dated November 27, 1941, was filed with the Register of Deeds of Martin County on November 28, 1941, and a similar notice was filed with the Clerk of the United States District Court at Raleigh, Wake County, North Carolina, on November 28, 1941. That notice of levy based upon said tax lien, issued by C. H. Robertson, Collector of Internal Revenue on December 23, 1941 (Government's Exhibit 6), was duly served upon the defendants on December 24, 1941, at which time the taxpayer, D. M. Roberson, had no balance in the defendant bank under any name. Credit balances shown on the books of the defendant bank and referred to hereinafter in paragraph 9 of these findings represented a part of deposits made by D. M. Roberson subsequent to December 24, 1941 and prior to February 24, 1942 in accounts belonging to said D. M. Roberson under the respective names of "Roberson Slaughter House" and "Roberson Stock Yard".

5. D. M. Roberson was and is a citizen and resident of Martin County, North Carolina.

6. On February 23, 1942, Charles H. Robertson, Collector of Internal Revenue, issued a warrant for distraint authorizing the levy on all of the property and property rights of D. M. Roberson and directing the collection of the aforesaid sum from the property and property rights of the said D. M. Roberson. This notice of levy was served on the defendant, D. V. Clayton, individually and as Cashier of the Guaranty Bank & Trust Company, by Phillip B. Woodley, Deputy Collector, on February 24, 1942, at 1:31 P. M. and demand was then and thereupon made that all moneys or property or rights to property in possession of said defendant bank belonging to the said D. M. Roberson in whatever name or account called be turned over to the said Charles H. Robertson, Collector of Internal Revenue for North Carolina, or his duly authorized deputy or deputies.

7. D. M. Roberson is now and for several years past has been engaged in Williamston in the business of buying, selling, slaughtering and processing and packing livestock and meat products. Mr. Roberson did business under the trade name of "Roberson Slaughter House". He maintained a bank account with the Guaranty Bank & Trust Company (Williamston branch) in the name of Roberson Slaughter House.

8. Roberson's business fell into two material divisions, (1) the purchase of cattle and hogs for slaughter and packing at his plant in Williamston, and (2) the purchase of cattle and other livestock for resale to packers on other markets. Prior to February 5, 1942, Roberson discussed with the defendant, Clayton, the question of maintaining two bank accounts, one to be known as the Roberson Stockyards account and the other to be known as the Roberson Slaughter House account, stating that separate bank accounts would facilitate his bookkeeping work. For this purpose there was opened an account by the defendant, D. M. Roberson, with the Guaranty Bank & Trust Company (Williamston branch) on February 5, 1942, an account designated as Roberson Stockyards. Roberson's sale of live animals was almost exclusively to Kingan & Company, Richmond , Virginia . There was credited to Roberson's Stockyards account with the defendant, Bank drafts drawn for the sale of livestock to other packers. There was charged to the Roberson Stockyards account checks given for the purchase of livestock for resale. Checks on the Slaughter House account were on a printed form the name "Roberson Slaughter House" printed thereon. Checks on the Roberson Stockyards account were on the regular customers desk form. Each of these accounts belonged to D. M. Roberson and the two names, Roberson's Stockyards and Roberson's Slaughter House were used merely as a matter of convenience in bookkeeping. On February 5, 1942, when the new account was opened by D. M. Roberson, with Guaranty Bank & Trust Company (Williamston branch) in the name of Roberson Stockyards, it was understood and agreed between Mr. Roberson and the Bank that the Bank would, as long as the two funds were sufficient for that purpose, cash checks drawn by Roberson or his duly authorized agent either in the name of Roberson's Slaughter House or Roberson's Stockyards, and that each of said accounts was responsible for the checks so drawn and that the Bank should have the right to charge said checks against either account.

9. On February 24, 1942, when the Deputy Collector served his warrant and levy on the defendant Bank and the defendant Clayton, the books of the defendant, Guaranty Bank & Trust Company (Williamston branch), showed a balance to the credit of Roberson's Stockyards of $10,116.74 and a credit to the account of Roberson's Slaughter House of $1.91.

10. On Saturday, February 21, 1942, defendant Guaranty Bank & Trust Company had paid checks drawn by D. M. Roberson against the account of Roberson's Slaughter House amounting to $6,915.93. These checks, although paid, had not been charged on the books of the Bank to either the Roberson Stockyard account or the Roberson Slaughter House account, but D. M. Roberson, the owner of both of said accounts, was indebted and liable to the Bank for the payment of the checks so drawn and which had not actually been charged on the books.

11. The Bank was not open for the transaction of business on Sunday, February 22nd, or on Monday, February 23rd, a holiday. On the morning of February 24, 1942, and before the Deputy Collector served his warrant of attachment and levy on the defendant Bank and the defendant Clayton, defendant Bank paid checks drawn by D. M. Roberson or his authorized agents on the account of Roberson's Slaughter House in excess of $3,202.72. These checks had not been charged to either of the checks were the time of said levy. All of said checks were either drawn by D. M. Roberson, personally, or by his duly authorized representative.

12. The Bank cashed and paid the checks referred to in the two preceding findings of fact pursuant to the agreement and understanding had with D. M. Roberson early in February, 1942, when his bank account was divided into two ledger accounts as Roberson's Slaughter House and Roberson's Stockyards; that each should be responsible for any checks drawn by D. M. Roberson or his duly authorized representative.

13. The checks which had been cashed and paid by the Bank on February 21st and February 24th (Sections 10 and 11 of these findings) were exhibited to the Deputy Collector at the time of his levy and the defendant Bank, at the time of said levy, asserted that because of the payment of said checks it was not indebted to D. M. Roberson in any sum and, hence, had no property or property rights of the said D. M. Roberson which could be applied or taken under the provisions of said levy. The Deputy Collector insisted that notwithstanding the payment of said checks by the Bank, the checks not having at that time been charged on the Bank's books to either of the bank accounts of D. M. Roberson, the Bank could not after said levy had been made charge said checks and that the Bank would have to pay over to the Deputy Collector pursuant to said levy the amount shown by the books of the Bank to be held to the credit of Roberson Stockyards and Roberson Slaughter House.

14. On February 25th, D. M. Roberson presented to defendant, Guaranty Bank & Trust Company, two drafts on Albert E. Jordan, First & Merchants National Bank, Richmond , Virginia , one of said drafts being in the sum of $2,940.02 and the other for the sum of $2,046.91. Said drafts, although dated February 24th, were not in fact in the possession of the defendant Bank on that date; the Bank did not know of the existence of said drafts on said date; they were not presented to the Bank until February 25th and when presented they were purchased by the Bank and the moneys for said purchase were turned over to D. M. Roberson.

The Government asserts a liability of the defendants under Section 3710 of the Internal Revenue Code. The Court being of the opinion on the facts found, as hereinabove set out, that the defendants were not at the time of the levy "in possession of any property or rights to property" of D. M. Roberson,

It is now ADJUDGED and DECREED that plaintiff, United States of America, take nothing by its action and that the defendants go without day.