Annotations- Bank Accounts Page2

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Moreover, defendant's contention that the lapse of time between the Notice of Levy and the commencement of the instant action prejudiced defendant is without merit. Defendant fails to cite to any authority for the proposition that lapse of time plays a factor in cases dealing with tax levies.

 

[56-2 USTC ¶9603] United States of America v. Washington Trust Company of Pittsburgh , Pa.

U. S. District Court, West. Dist., Pa., Civil Action No. 9483, 4/13/56

[1939 Code Secs. 3690 and 3692--similar to 1954 Code Sec. 6331; 1939 Code Sec. 3710--similar to 1954 Code Sec. 6332]

Distraint and levy for taxes: Assignment of account receivable before levy: Comingling of funds in bank account.--Although a valid assignment of an account receivable took place before the time of the government's distraint and levy for unpaid taxes, the action of the assignee, permitting the assignor (party owing taxes) to make collection and deposit the funds in its own bank account, caused the assignment to be ineffective against the government's levy. When the co-mingling of the funds in the assignor's bank account took place, the property interest of the assignee in the funds was lost and the assignor was no longer the agent of the assignee, but its debtor. Accordingly, the funds in the assignor's bank account were its own property and the defendant bank was required to pay over such funds, for which the levy was made, to the government.

United States Attorney, 613 New Postoffice and Courthouse, Pittsburgh 30, Pa. , for plaintiff. Edward Goldberg, 1806 Law and Finance Building , Pittsburgh , Pa. , for defendant.

Findings of Fact

SORG, District Judge:

1. In March, 1950, Jones Coke & Briquette Company was a corporation engaged in the business of recovering usable fuels from old coke piles which product was then sold to National Carbide Corporation.

2. The officers of Jones Coke and Briquette Company were Marshall Jones, president, David Stern, secretary, and Louis Vinocur, treasurer.

3. Due to the financial condition of Jones Coke & Briquette, arrangements were made for the advance of moneys to it from Samuel Hyman, through the Jones Pittsburgh Coal Company, a partnership in which the above named David Stern, Marshall Jones and the said Samuel Hyman were partners.

4. These arrangements were negotiated by David Stern, brother-in-law of Samuel Hyman, and they were made as an accommodation to Stern by Hyman.

5. Under the partnership agreement, funds of the Jones Pittsburgh Coal Company could be disbursed only upon the signature of Samuel Hyman who advanced the moneys necessary to finance Jones Coke & Briquette Company.

6. On March 18, 1950, the Jones Pittsburgh Coal Company advanced $2600.00 to the Jones Coke & Briquette Company; on March 24, 1950, the sum of $2000.00 and on April 6, 1950, the sum of $2500.00.

7. In accordance with a previously established practice between Jones Coke and Jones Pittsburgh, these advances were made upon presentation to Hyman of certain weigh slips for shipments to National Carbide Company. The following notation was made on the books of Jones Coke & Briquette Company: "On March 31, 1950, this account receivable assigned, transferred and pledged to the Jones Pittsburgh Coal Company of Pittsburgh , its successors and assignees. Jones Coke & Briquette Company, Louis M. Vinocur, Treasurer."

8. Shipments to National Carbide were made in the name of Jones Coke & Briquette Company and payments were received by Jones Coke & Briquette Company for credit reasons, with the consent of Jones Pittsburgh Coal Company and Hyman.

9. On April 14, 1950, the Jones Coke & Briquette Company received a check from National Carbide Company in the amount of $6391.00.

10. This check was deposited in the Washington Trust Company on April 17, 1950, in the account of Jones Coke & Briquette Company.

11. On April 14, 1950, Jones Coke & Briquette Company made its check payable to Jones Pittsburgh Coal Company in the amount of $6391.00.

12. On April 17, 1950, the check was signed by Vinocur, treasurer of Jones Coke & Briquette Company and placed in his hands for delivery to Hyman.

13. Vinocur delivered the check to Hyman on April 26, 1950.

14. Warrants for distraint covering assessments against Jones Coke & Briquette Company for withholding taxes and F. I. C. taxes in the amount of $3542.07, with interest, were issued against Jones Coke & Briquette Company on April 26, 1950, and a notice of levy dated April 26, 1950, together with copies of the warrants for distraint, was addressed by United States of America, plaintiff, to and served upon the defendant, Washington Trust Company of Pittsburgh, Pa., on April 26, 1950, at 10:45 A. M.

15. A final notice and demand dated May 5, 1950, was addressed by the plaintiff, United States of America , to and served upon the defendant, Washington Trust Company of Pittsburgh , Pa. , on that date.

16. At the time the notice of levy and final notice were served upon the defendant, Washington Trust Company, it had in its possession and on deposit in a general checking account of Jones Coke & Briquette Company, an amount in excess of $6000.00.

17. The defendant, Washington Trust Company, has refused to pay the amount for which levy was made.

Conclusions of Law

1. This Court has jurisdiction over the subject matter and the parties.

2. There was an assignment from Jones Coke to Jones Pittsburgh Coal Company of the funds in question for a good and valuable consideration which became effective between Jones Coke and Jones Pittsburgh prior to the time of the levy by the plaintiff.

3. By permitting collection of the account by Jones Coke, the relationship of principal and agent between Jones Pittsburgh, as principal, and Jones Coke as agent for collection purposes was established.

4. By the consent of Jones Pittsburgh to the depositing of the funds by Jones Coke in its general checking account, a co-mingling of funds was authorized.

5. At the moment the co-mingling of funds took place, the special property of Jones Pittsburgh in such funds was lost and the relationship between agent and principal became that of debtor and creditor.

6. The assignment to Jones Pittsburgh was not effective as against plaintiff's levy on April 26, 1950, and judgment will be entered accordingly.

 

[88-1 USTC ¶9340] United States of America , Plaintiff v. First National Bank and Trust Company, Defendant

U.S. District Court, West. Dist. Pa. , Civ. 84-239, 4/4/88

[Code Sec. 6332 --Result unchanged by the Tax Reform Act of 1986]

Surrender of property subject to levy: Certificate of deposit.--A taxpayer lacked a property interest in a $25,000 bank deposit he made to secure extensions of credit by a bank to a corporation of which he was president and principal shareholder. At the time of the IRS notice of levy, the demand obligation was mature, and because it exceeded the amount of the deposit, the bank had the right to automatically set off the deposit against the demand obligation for which the deposit was collateral. As a consequence of this right of setoff, the taxpayer had no property right in the certificate of deposit at the time of levy, and there was nothing to which the government's levy could attach.

Craig R. McKay, Assistant United States Attorney, Pittsburgh , Pa. 15219 , for plaintiff. Berkman, Ruslander, Pohl, Lieber & Engel, One Oxford Center, Pittsburgh, Pa. 15219-6498, Bela A. Karlowitz, William M. Hoffman, Karlowitz, Hoffman & Kane, 600 Grant St., Pittsburgh, Pa. 15219, Gary J. Gaertner, 2917 Koppers Bldg., Pittsburgh, Pa., for defendants.

MEMORANDUM OPINION

DIAMOND, District Judge:

This is an action by the plaintiff to recover the value of certain property plus interest, costs and a penalty of fifty percent (50%) of that value pursuant to 26 U.S.C. §6332(c)(1) and (2), as a result of defendant's failure to surrender on plaintiff's demand certain property of a delinquent taxpayer. The property in question is a $25,000 certificate of deposit made by Bert Gigli, Jr. ("taxpayer") to secure extensions of credit ¹ by the defendant bank to a corporation of which the taxpayer was president and principal shareholder. Presently before the court are cross-motions for summary judgment.

On October 16, 1985, this court issued an opinion and order granting summary judgment for the plaintiff on the grounds that there are only two defenses to an action to recover property pursuant to §6332 , see United States v. Citizens Southern National Bank [76-2 USTC ¶9665 ], 538 F.2d 1101 (5th Cir. 1976), cert. denied, 430 U.S. 945 (1967), neither of which were available to this defendant. ² Subsequently, the defendant brought to the court's attention United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 86 L.Ed.2d 565 (1985). In that case, the Supreme Court recognized a third defense to a §6332 action, namely, that at the time of levy, the levied property did not constitute property or rights to property of the taxpayer. Id. at 722. Since the court had not considered this specific issue, defendant's motion to reconsider was granted. Accordingly, the sole issue before the court is whether the taxpayer in the present case had any interest in the certificate of deposit at the time of levy.

The defendant asserts that the taxpayer did not have a property interest in the certificate of deposit at the time of levy for essentially two reasons. First, the defendant argues that under the National Bank of Commerce case [85-2 USTC ¶9482 ], 472 U.S. 713, the taxpayer in the present case lacked a property interest in the certificate of deposit because the taxpayer lacked the absolute right to withdraw the funds in the bank at the time of levy. Second, the defendant argues that under the principles of Pennsylvania law set forth by this court in Pittsburgh National Bank v. United States [81-1 USTC ¶9239 ], 498 F.Supp. 101 (W.D.Pa. 1980), aff'd [81-2 USTC ¶9626 ] 657 F.2d 36 (3d Cir. 1980), the taxpayer lacked a property interest in the deposit since at the time of levy, the defendant had the right to automatically setoff the deposit against the demand obligation for which the deposit was collateral. ³ For the reasons set forth below, the court agrees with defendant's second assertion and will grant defendant's motion for summary judgment.

Regarding defendant's first assertion under National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, the court notes that in that case, the Supreme Court recognized that a bank served with an IRS notice of levy could assert a successful defense by showing that the account in question "did not constitute 'property or rights to property' " of the taxpayer. Id. at 722. The Court stated that the question of whether the taxpayer had a legal interest in the property is to be determined by application of state law. Id. (citing Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960)).

In the National Bank case, the property in question was a joint bank account. The Court noted that under the taxpayer's contract with the bank, the relevant state law, and by stipulation of the parties, the taxpayer had the "absolute right" to withdraw the full amounts on deposit, notwithstanding the joint nature of the account. Id. at 724. The Court concluded that "[c]ommon sense dictates that a right to withdraw qualifies as a right to property for purposes of §§6331 and 6332 ." Id. at 725.

Although an absolute right to withdraw funds from a bank sufficiently shows a right to property within the meaning of §6332 , this court concludes that it does not follow that an inability to make withdrawals is equally compelling to show a lack of any interest in the property sufficient to constitute the defense recognized in National Bank. Thus, the assertion by the defendant that the taxpayer in the present case lacked the ability to withdraw funds from the certificate of deposit because it was collateral for the letter of credit and other loans are not sufficient under National Bank to show that the taxpayer lacked any interest in the deposit.

The defendant also argues, however, that the principles of Pennsylvania law as outlined by this court in Pittsburgh National Bank v. United States [85-2 USTC ¶9482 ], 498 F.Supp. 101, support the conclusion that the taxpayer in the present case lacked any interest in the deposit in question. In that case, the bank had sued the IRS challenging a levy made against one of its depositor's accounts which had been pledged to the bank as security for an outstanding loan. The court noted that under Pennsylvania law, "where a demand note exceeds the debtor's deposits in which the bank has been given a security interest, the bank may setoff, at any time against the note, the debtor's deposits on hand." Id. at 104 (citing Duffy v. Building and Loan Association, 325 Pa. 127 (1937), Aarons v. Public Service Building and Loan Association, 318 Pa. 113 (1935)). This court went on to note that the Pennsylvania Supreme Court has held that this right of setoff actually extinguishes the depositor's rights to draw upon the deposit leaving nothing belonging to the depositor. Id. (quoting Aarons, 318 Pa. at 116). The court then held that since at no time after the debt had matured could the taxpayer have compelled the bank under state law to deliver any of the money on deposit, "the taxpayer had no property right in the account, and there was nothing to which the government's levy could attach." Pittsburgh National Bank, 498 F.Supp. at 104 (citation omitted).

The right of automatic setoff under Pennsylvania law referred to in the Pittsburgh National Bank case only applies, however, when the debt owed to the bank by the depositor is mature. 498 F.Supp. at 104; see Pittsburgh National Bank v. United States [81-2 USTC ¶9626 ], 657 F.2d 36, 38 (3d Cir. 1981) (citing Aarons v. Public Service Building and Loan Association, 318 Pa. 113, 116 (1935); General Electric Credit v. Tarr, 457 F.Supp. 935 (W.D.Pa. 1978)). The defendant claims that in the present case, the $40,716.00 demand obligation was such a mature debt giving the bank the right to automatically setoff the $25,000 certificate of deposit against the demand note at the time of levy.

The plaintiff, however, contests the maturity of the demand note. Specifically, the plaintiff claims that the mere fact that the debt was a demand obligation does not, in and of itself, make the debt mature. Rather, plaintiff argues that the obligation must also be in default; and, insofar as the obligation was not in default in the present case, the debt was not mature and no right of automatic setoff applied.

Under Pennsylvania law, a "demand note is due and payable immediately at the option of the holder." Cheltenham National Bank v. Snelling, 326 A.2d 557, 558 n.1 (Pa.Super. 1974) (citing Master Homecraft Co. v. Zimmerman, 222 A.2d 440 (Pa. Super. 1966)). Regarding maturity, the Pennsylvania Supreme Court has stated that "a demand note has, in a sense, no maturity since payment is due immediately on execution and delivery, without any demand." Heimpel v. First National Bank & Trust Co., 12 A.2d 28, 30 (1940) (citations omitted). The court conceded that since the demand note was at all times due and payable, it had 'matured.' " Id. (citation omitted).

The district court decision cited by the plaintiff, General Electric Credit Corp. v. Tarr, 457 F.Supp. 935 (W.D.Pa. 1978), is not to the contrary. In that case, the court had to determine, as in the present case, whether or not the demand obligation was a mature debt and, thus, subject to a valid setoff by the bank. In concluding that the debt was mature, the court relied on the fact that the debtor had defaulted by filing a bankruptcy petition. Id. at 937-38. From that reliance upon default, the plaintiff would have this court impose a similar requirement in the present case. However, the terms of the demand note in the General Electric case specifically provided that the note would become " 'immediately due and payable' " upon the happening of certain events, one of which was the commencement of bankruptcy proceedings. Id. at 938. Thus, in that case, it could not be said that the demand note was at all times due and payable. There is no similar limitation in the present case. Although in the March 21, 1980, agreement, the bank agreed to accept payment of the demand obligation in monthly installments, the agreement specifically provided that "[n]otwithstanding that Bank has agreed to accept payment of the Loan in monthly installments, the Loan shall remain payable to the Bank on demand." Exhibit C to Supplemental Affidavit of Muriel A. Colbert in Support of Defendant's Motion for Summary Judgment at 3.

Thus, although the court agrees with plaintiff that the parties to a demand note may change the nature of a demand obligation by contract as in General Electric, the court concludes that the parties in the present case did not make such a change, notwithstanding the agreement to accept monthly payments. Therefore, the demand obligation was mature at the time of levy; and since it exceeded the amount on deposit, the defendant had the right automatically to setoff the certificate of deposit against the demand obligation. Because of this right of setoff, the taxpayer had no property right in the certificate of deposit at the time of levy and there was nothing to which the government's levy could attach. Accordingly, defendant's motion for summary judgment will be granted, and plaintiff's motion for summary judgment will be denied.

An appropriate order will follow.

ORDER OF COURT

AND NOW, this 4th day of April, 1988, for the reasons set forth in the memorandum opinion filed this day in the above case, IT IS ORDERED that defendant's motion for summary judgment be, and the same hereby is, granted; and,

IT IS FURTHER ORDERED that plaintiff's motion for summary judgment be, and the same hereby is, denied.

¹ At the time of the government levy, July 8, 1981, these extensions of credit were a $25,000.00 irrevocable letter of credit obligation, a $111,478.41 mortgage obligation, and a $40,716.00 demand obligation.

² This opinion assumes familiarity with this court's earlier memorandum opinion.

³ The defendant concedes that this argument does not apply to the letter of credit or mortgage obligations since those debts were not yet mature at the time of levy.

 

[55-2 USTC ¶9655] United States of America v. Peoples State Bank

In the United States District Court for the Southern District of Indiana, Indianapolis Division, Civil No. 3166, August 17, 1955

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

Surrender of property subject to levy: Duty of bank: Taxpayer's funds on deposit.--The checking account of a delinquent income taxpayer in a local bank was subject to distraint under 1939 Code Sec. 3710(a). By its failure to pay to the Collector the amount levied against it within five days of the date of the final notice and demand, the bank became personally liable for this amount, plus interest thereon, notwithstanding the continuing liability of the taxpayer for an equivalent amount, pursuant to Sec. 3710(b). Had the bank surrendered out of the taxpayer's account the sum in question in compliance with the final notice and demand, and had it had no notice of any rights of third parties in the account, which, incidentally, it does not claim, the bank would have been released from further liability for what had been surrendered. The Commissioner, therefore, was entitled to judgment against the bank for the amount due plus interest.

United States Attorney for plaintiff. L. Roy Zapf, 601 Peoples Bank Building, Indianapolis , Ind. , for defendant.

Findings of Fact and Conclusions of Law

STECKLER, District Judge:

The above entitled cause came on regularly for trial and the Court having duly considered the evidence and the post trial briefs filed by the parties and being fully advised in the premises now finds the following:

Finding of Fact

1. This controversy arose out of the failure and refusal of the defendant to surrender to the Collector of Internal Revenue the amount on deposit in a checking account in defendant's bank in the name of a delinquent income taxpayer as required by the provisions of §3710(a), Title 26 United States Code. Defendant contends that it acted on advice of counsel and that had it complied with the demand of the Collector of Internal Revenue it would have acted in violation of the statutes of Indiana; that a compliance with the Collector's demand would have subjected the bank to possible double liability, particularly in respect to holders in due course of checks drawn by the depositor; that the bank stood in a debtor-creditor position with its depositor, the delinquent taxpayer, and that not until it was served with process or with an order from a court of competent jurisdiction would it surrender the contents of the bank account. This action was therefore brought under and pursuant to §3710(b), Title 26 United States Code.

2. The Court has jurisdiction over the parties and the subject matter in this cause of action.

3. The defendant, Peoples State Bank, is an Indiana corporation with an office and place of business in Indianapolis , Indiana , within the jurisdiction of this Court, and was so at the time of the filing of this suit on August 11, 1952.

4. This action was authorized by the Commissioner of Internal Revenue of the United States Treasury Department and was brought under the direction of the Attorney General of the United States .

5. On December 14, 1951, the Commissioner of Internal Revenue of the United States Treasury Department made an assessment of taxes on the income of one John J. Briggs for the years 1943 to 1946 amounting to a total tax liability of $18,414.70.

6. The aforesaid assessment list containing the particular assessments was received by the Collector for the District of Indiana on December 17, 1951; notice and demand for payment of said assessments were made upon the delinquent taxpayer on the same day.

7. At the time of the filing of this suit on August 11, 1952, the taxpayer had not paid the amount herein outstanding.

8. Warrants for distraint for each of the years 1943 to 1946, inclusive, were duly issued on January 14, 1952, and served upon the taxpayer, Dr. John J. Briggs, by Frank L. Clouds, Collection Officer of the Internal Revenue Service for the District of Indiana.

9. A notice of lien of the aforesaid tax liability of Dr. John J. Briggs was filed with the Recorder of Marion County, Indiana, on June 5, 1952. This lien for taxes was in the sum of $19,010.60, plus a lien fee of $1.00.

[Notice of Levy Served]

10. On June 5, 1952, a notice of levy, together with copies of warrants for distraint and a notice of a lien were served by the said Collector of Internal Revenue on the Peoples State Bank. The said notice of levy informed the defendant that the taxpayer, Dr. John J. Briggs, was liable for an outstanding tax liability of $19,010.60; that all property, rights to property, moneys, credits, and/or bank deposits then in its possession and belonging to said taxpayer and all sums of money owing from it to said taxpayer were thereby seized and levied upon for the payment of the aforesaid tax; and demand was made for the same or for such sum less than the tax liability that the defendant owed to the taxpayer.

11. On June 5, 1952, the defendant, Peoples State Bank, was in possession of and had under its control a checking account in the name of the taxpayer, Dr. John J. Briggs, in the amount of $9,599.71.

12. On June 5, 1952, a final notice and demand were made by the Collector of Internal Revenue upon the defendant, Peoples State Bank.

13. Immediately upon the service of the warrant of distraint, levy, final notice and demand upon the defendant bank, the bank took steps to inactivate or freeze the taxpayer's checking account.

14. Subsequent to June 5, 1952 and after the expiration of five days from said date, the delinquent taxpayer paid the difference between the amount on deposit in the Peoples State Bank and the total amount of his tax indebtedness. Thereupon the Collector of Internal Revenue gave authority to the bank to reactivate the taxpayer's checking account with respect to any amounts over and above the sum subject to distraint, namely, $9,599.71. Thereafter the delinquent taxpayer personally went to the Office of the Collector of Internal Revenue on at least two occasions and offered to make payment of his remaining tax indebtedness, including interest and penalty, once with a cashier's check in the amount of $9,599.71 drawn on the defendant bank, and once with $10,000.00 in currency furnished him by the defendant bank pursuant to an agreement with the bank. On the occasion that he took the cash to the Office of the Collector of Internal Revenue a messenger of the bank carried the funds to the door of the Office of the Collector of Internal Revenue but at that point the messenger turned over the cash to the taxpayer and the messenger waited in the corridor for the taxpayer. On each of the occasions when the taxpayer offered to pay the Collector of Internal Revenue the remaining balance of his tax indebtedness he was informed by the Assistant Director of Internal Revenue that he, the taxpayer, owed the Government nothing and that the Collector was looking to the bank for payment pursuant to the warrant of distraint, levy and final demand which had been made upon the bank with respect to the taxpayer's checking account. On the occasion that the cash was taken to the Office of the Collector of Internal Revenue the Court finds that Mr. Wilbur O. Plummer, the Assistant Director of Internal Revenue with whom the taxpayer conferred, was not aware of the fact that the taxpayer had on his person the $10,000.00 in currency. After leaving the Collector's Office on that occasion the money was returned to the bank by the messenger. The Collector was not aware that the messenger from the bank had accompanied the taxpayer to the Federal Building .

15. At no time did the defendant, Peoples State Bank, or any authorized representative thereof, pay or attempt to pay over all or a portion thereof of the indebtedness owing by it in this cause to the office of the Collector of Internal Revenue or its authorized representative.

16. On July 13, 1954, the defendant, Peoples State Bank, with the consent of Dr. John J. Briggs, the delinquent taxpayer, caused to be paid into the hands of the Clerk of this Court the sum of $9,599.71 to be used as the Court directs in this cause. The payment of said sum into the hands of the Clerk of the Court included only the principal amount of the demand involved in this cause and did not include any interest thereon.

17. During all conversations which the taxpayer, Dr. John J. Briggs, had with Mr. Wilbur O. Plummer, Assistant Director of Internal Revenue for the District of Indiana, in regard to the tax liability of Dr. Briggs, the taxpayer's checking account in the Peoples State Bank was frozen pursuant to the distraint as levied by the Collector of Internal Revenue.

18. At no time was defendant Peoples State Bank given authority by the Office of the Collector of Internal Revenue or its authorized representative to release the frozen checking account of Dr. John J. Briggs below the sum of $9,599.71 except to the Office of the Collector.

19. At the time of the final notice and demand by the Office of the Collector of Internal Revenue, the checking account of the taxpayer, Dr. John J. Briggs, held in the Peoples State Bank in the amount of $9,599.71 was not subject to an attachment or execution under any judicial process.

Conclusions of Law

From the foregoing facts the Court concludes:

1. This Court has jurisdiction over the parties and the subject matter in this cause of action.

2. The checking account of Dr. John J. Briggs in the sum of $9,599.71 at the Peoples State Bank, the defendant herein, on June 5, 1952 was subject to distraint under Section 3710(a) of the Internal Revenue Code, Title 26 United States Code.

3. By its failure to pay to the Collector of Internal Revenue for the Collection District of Indiana the amount levied against it within five days of the date of the final notice and demand, the defendant, Peoples State Bank, became personally liable for this amount, plus interest thereon, notwithstanding the continuing liability of the taxpayer for an equivalent amount, pursuant to Section 3710(b) of the Internal Revenue Code, Title 26 United States Code.

4. The terms of the statute under which this action has been brought permit the third person upon whom is made a demand for property in his possession, in this instance the bank, only two defenses, to-wit: That he is not in possession of the property of the taxpayer which is subject to distraint, or that the property is subject to a prior judicial attachment or execution. The statute admits of no other defenses. And had the defendant surrendered out of the account of Dr. John J. Briggs the sum of $9,599.71 in compliance with the final notice and demand, and had it had no notice of any rights of third parties in the account, which, incidentally, it does not claim, the bank would have been released from further liability for what had been surrendered. United States v. Manufacturers Trust Company, 2 Cir., 198 Fed. (2d) 366 [52-2 USTC ¶9417].

5. From the evidence presented at the trial, there was no valid legal tender made by the defendant, Peoples State Bank, to the Collector of Internal Revenue prior to the commencement of the trial.

6. Plaintiff is entitled to judgment against the defendant in the amount of $9,599.71 together with interest thereon from June 5, 1953, to and including the date of entry of judgment in this cause.

7. The costs of this action shall be taxed against the defendant.

8. Upon the payment of said judgment together with the costs of this action, the Clerk of the Court is directed to issue a refund check payable to J. J. Briggs and Peoples State Bank in the sum of $9,599.71 representing the amount paid into the hands of the Clerk of this Court by check dated July 12, 1954 and for the purpose of this proceeding, identified as Plaintiff's Exhibit B.

Let judgment be entered accordingly.

Entry

It having come to the attention of the Court that the Court's entry of August 15, 1955 setting forth the Court's Findings of Fact and Conclusions of Law contained a typographical error in Conclusion of Law Number 6 wherein it is provided that the plaintiff is entitled to judgment against the defendant in the amount of $9,599.71 together with interest thereon from June 5, 1953, whereas such date should have been June 5, 1952.

IT IS THEREFORE HEREBY ORDERED, ADJUDGED AND DECREED that the Court's Conclusion of Law Number 6 in this matter be amended to read as follows:

6. Plaintiff is entitled to judgment against the defendant in the amount of $9,599.71 together with interest thereon from June 5, 1952, to and including the date of entry of judgment in this cause.

The Clerk will enter judgment accordingly.

Judgment Entry

The above entitled cause of action came on to be heard by the Court without the intervention of a jury, and the Court having made and filed its Findings of Fact and Conclusions of Law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, and having ordered that judgment be entered in accordance therewith, it is hereby

ORDERED AND ADJUDGED that the plaintiff, United States of America, recover judgment against the defendant, Peoples State Bank, in the amount of $9,599.71 together with interest thereon from June 5, 1952, to and including the date of entry of judgment in this cause.

IT IS ORDERED AND ADJUDGED that upon the payment of said judgment together with costs of this action, the Clerk of Court is directed to issue a refund check payable to J. J. Briggs and Peoples State Bank in the sum of $9,599.71 representing the amount paid into the hands of the Clerk of this Court by check dated July 12, 1954, and identified in this cause as Plaintiff's Exhibit B.

IT IS FURTHER ORDERED AND ADJUDGED that the costs of this action be taxed against the defendant.

 

Rev. Rul. 55-187, 1955-1 CB 197


SECTION 6331.--LEVY AND DISTRAINT

26 CFR 301.6331-1: Levy and distraint.

A joint checking account is subject to levy only to the extent of a taxpayer's interest therein, which will be determined from the facts in each case. Where one of the persons in whose name a joint account has been established can prove that the funds deposited therein are his sole property, no levy can be made on such funds to satisfy an outstanding tax liability of the other. Factors bearing on the question of the extent of a taxpayer's interest in such an account include the nature of the tenancy created under State law; the source of the funds deposited; and intent of the person opening the joint account; and whether in actual practice the account was under the control of one party even though the other had authority to withdraw funds from the account.

67-1 USTC ¶9406]Richard Bishop, Plaintiff v. Neal S. Warren, District Director, Internal Revenue Service, Defendant

U. S. District Court, East. Dist. Wash. , No. Div., Civil Action No. 2586, 270 FSupp 156, 4/14/67

[1954 Code Sec. 6332]

Levy: Surrender of property subject to levy: Joint checking account: Property held by court.--In a suit to recover monies paid under notices of levy resulting from his parents' tax delinquencies, R was the presumptive owner of a one-half interest in a checking account and was allowed recovery. A sum in the hands of a court paid in satisfaction of a judgment in favor of R's father was properly surrendered as was money collected by another upon a collection account referred to it by R's father.

Howard K. Michaelsen, Michaelsen & Richard, 2315 N. Monroe, Spokane, Wash., for plaintiff. Smithmoore P. Myers, United States Attorney, Robert M. Sweeney, Assistant United States Attorney, 334 Federal Bldg., Spokane, Wash., for defendant.

Findings of Fact and Conclusions of Law

LOWELL, District Judge:

This matter came on regularly for trial before this Court on December 20, 1966, the plaintiff being represented by Howard K. Michaelsen, attorney at law, and the defendant by Robert M. Sweeney, Assistant United States Attorney, and the Court having considered the pretrial order herein, the evidence adduced at trial, the argument of counsel, now makes the following

Findings of Fact

I. The plaintiff Richard Bishop is, and at all times material hereto was, a resident of the city of Newport , Pend Oreille County , State of Washington . The defendant Neal S. Warren is, and at all times material hereto was, the District Director for the Internal Revenue Service, Department of the Treasury of the United States .

II. The plaintiff is the son of Charles E. Bishop and Ruth N. Bishop, who at all times material hereto were also residents of the city of Newport , Pend Oreille County , State of Washington .

III. By quit-claim deed dated February 8, 1957, Charles E. Bishop conveyed to his son, the plaintiff herein, a motion picture theater business located in Newport , Washington , and operated under the name of the Roxy Theater. Thereafter, there was operated from the theater building in Newport , Washington , a loan and collection business.

IV. The plaintiff Richard Bishop devoted the majority of his time to the operation and management of the theater business. Charles E. Bishop devoted most of his time to and controlled the operation of the collection business. The said Charles E. Bishop prepared and filed complaints for collection in the Pend Oreille County courts. The complaints were filed in the name of Charles E. Bishop as the party in interest. Charles E. Bishop contacted other collection agencies in the course of the collection business. The collection agency bond required under the law of the State of Washington was written to Charles E. Bishop as the operator of the collection business.

V. For the taxable year 1958, and for the years thereafter, Charles E. Bishop and Ruth N. Bishop did not file income tax returns. During these years, the plaintiff Richard Bishop claimed Charles E. Bishop and Ruth N. Bishop as dependents on his tax returns.

VI. At the time this action was commenced, there was no federal tax liability assessed by the Internal Revenue Service against the plaintiff Richard Bishop.

VII. Prior to the commencement of this action, assessments for delinquent federal income and excise taxes had been duly and properly made against Charles E. Bishop and Ruth N. Bishop. Notices of such delinquent taxes against Charles E. Bishop and Ruth N. Bishop had been duly and properly filed in Pend Oreille County , Washington , as follows:

Type of Tax               Assessment          Amount of         Date Notice of

and period                      Date         Assessment         Tax Lien Filed

Income 1947 .....            4/12/63         $ 8,975.39                 6/4/63

Income 1948 .....            4/12/63           2,653.67                 6/4/63

Income1949 ......            4/12/63           1,315.38                 6/4/63

Income 1950 .....            4/12/63           4,478.79                 6/4/63

Income 1951 .....            4/12/63          16,607.94                 6/4/63

Income 1952 .....            4/12/63           8,871.70                 6/4/63

Income 1953 .....            4/12/63           3,273.63                 6/4/63

Income 1953 .....            4/12/63           3,970.28                 6/4/63

Income 1954 .....            4/12/63           3,436.99                 6/4/63

Income 1955 .....            4/12/63          12,005.49                 6/4/63

Excise 6/30/54 ..             8/9/63          49,668.65                9/17/63

Said delinquent taxes remain due, owing and unpaid to the United States , except for credits in the total amount of $684.62.

VIII. On May 7, 1964, a Notice of Levy was served by the defendant upon the National Bank of Commerce, Newport Branch, directing the bank to pay to the defendant any property it had belonging to Charles E. Bishop and Ruth N. Bishop. Pursuant to the Notice of Levy, the National Bank of Commerce on June 5, 1964 paid to the defendant the sum of $409.10, which sum was paid from a checking account at the bank under the name of "City Finance Company," and upon which the plaintiff Richard Bishop and his father, Charles E. Bishop, were authorized to draw checks. The sum of $409.10 was paid into the Treasury of the United States and credited against the delinquent tax liability of Charles E. Bishop and Ruth N. Bishop.

IX. On May 8, 1964 and June 18, 1964, Notices of Levy were served by the defendant upon the Clerk of the Superior Court of Pend Oreille County, Washington, directing the clerk to pay to the defendant any property he held belonging to Charles E. Bishop and Ruth N. Bishop. Pursuant to the Notices of Levy, the Clerk of the Pend Oreille County Superior Court on July 6, 1964 paid to the Internal Revenue Service the sum of $268.85. This sum had been paid into the registry of the Pend Oreille County Clerk's office in satisfaction of a judgment obtained in favor of Charles E. Bishop by the said Charles E. Bishop as a part of the collection business. The sum of $268.85 was paid into the Treasury of the United States and credited against the delinquent tax liability of Charles E. Bishop and Ruth N. Bishop.

X. On May 12, 1964, a Notice of Levy was served by the defendant upon the Bonded Adjustment Company of Spokane , Washington , directing the company to pay to the defendant any property it held belonging to Charles E. Bishop and Ruth N. Bishop. Pursuant to the Notice of Levy, the Bonded Adjustment Company on July 13, 1964 paid to the defendant the sum of $6.67, which sum was held by the Bonded Adjustment Company as an amount recovered by it upon a collection account referred to it from Charles E. Bishop operating as Bishop's Credit Service. The sum of $6.67 was paid into the Treasury of the United States and credited against the delinquent tax liability of Charles E. Bishop and Ruth N. Bishop.

XI. In addition to the Notices of Levy mentioned in Findings of Fact Nos. VIII, IX and X, the Internal Revenue Service prior of the commencement of this action had served Notices of Levy upon fourteen other parties in connection with the delinquent tax liability of Charles E. Bishop and Ruth N. Bishop. No money or other property was paid to the Internal Revenue Service by virtue of these notices, all of which Notices named Charles E. Bishop and Ruth N. Bishop as taxpayers from whom there were federal taxes due, owing and unpaid and made demand for any money or property belonging to said taxpayers. No assets of the theater business were seized or levied upon the Internal Revenue Service.

XII. The sum of $268.85 paid by the Clerk of the Pend Oreille County Superior Court to the Internal Revenue Service pursuant to levy was money belonging to Charles E. Bishop and Ruth N. Bishop and not to the plaintiff Richard Bishop.

XIII. The sum of $6.67 paid by Bonded Adjustment Company to the Internal Revenue Service pursuant to levy was money belonging to Charles E. Bishop and Ruth N. Bishop and not to the plaintiff Richard Bishop.

XIV. There is no evidence by which it can be determined the division of interest, if any, as between the plaintiff Richard Bishop and Charles E. Bishop in the sum of $409.10 paid to the Internal Revenue Service by the National Bank of Commerce pursuant to levy from the City Finance Checking account and upon which the plaintiff Richard Bishop and Charles E. Bishop were authorized to draw checks.

From the foregoing Findings of Fact, the Court makes the following

Conclusions of Law

I. By virtue of 28 U. S. C. 2201, this Court does not have jurisdiction to enter a declaratory judgment herein. The Court had jurisdiction over the remaining subject matter of this action and over the parties expense for the taxable year. If, however,

II. At all times material herein, and pursuant to 26 U. S. C. 6321, the United States had valid and subsisting liens upon all the property and rights to property belonging to the delinquent taxpayers Charles E. Bishop and Ruth N. Bishop.

III. The sum of $268.85 paid by the Clerk of the Pend Oreille County Superior Court to the Internal Revenue Service pursuant to levy was properly paid to the Internal Revenue Service and applied upon the tax delinquency of Charles E. Bishop and Ruth N. Bishop.

IV. The sum of $6.67 paid by Bonded Adjustment Company to the Internal Revenue Service pursuant to levy was properly paid to the Internal Revenue Service and applied upon the tax delinquency of Charles E. Bishop and Ruth N. Bishop.

V. The sum of $409.10 paid by the National Bank of Commerce to the Internal Revenue Service pursuant to levy was presumptively owned by the plaintiff Richard Bishop and Charles E. Bishop in undivided one-half interests as joint tenants, and one-half thereof, or $204.55, was money belonging to Charles E. Bishop and was properly paid to the Internal Revenue Service and applied upon the tax delinquency of Charles E. Bishop and Ruth N. Bishop. The remaining one-half thereof, or $204.55, was presumptively owned by the plaintiff Richard Bishop.

VI. Except for the sum of $204.55 mentioned in Conclusion V, the defendant has not levied upon or attempted to levy upon property belonging to the plaintiff.

VII. The defendant is entitled to a judgment dismissing the complaint herein and dismiss the injunction issued by Order of this Court on November 6, 1964, provided that the plaintiff is entitled to a judgment that the defendant be directed to return to the plaintiff the sum of $204.55 besides interest.

 

52-1 USTC ¶9321]Antonio Raffaele and Marietta Raffaele v. Stanley Granger, Collector of Internal Revenue, Appellant

(CA-3), In the United States Court of Appeals for the Third Circuit, No. 10,586, 196 F2d 620, Filed May 14, 1952

Appeal from the United States District Court for the Western District of Pennsylvania.

Collection of delinquent taxes: Levy on joint account of taxpayer and his wife.--The distraint of the Collector on the joint bank account of taxpayer and his wife so as to collect taxes owed by taxpayer, is improper where, under state law, such account is treated as a tenancy by the entirety so as to be free from the demands of third parties claiming solely against either spouse.

Henry Kauffman, 7 Court Place, Pittsburgh , Pa. , for appellees. Frederic G. Rita, Special Assistant to Attorney General, Department of Justice, Washington 25, D. C., for appellant.

Before KALODNER and HASTIE, Circuit Judges, HARTSHORNE, District Judge.

Opinion of the Court

By HASTIE, Circuit Judge:

This is an appeal by a Collector of Internal Revenue from an order of a district court quashing a warrant of distraint.

Against one who fails upon demand to pay taxes owed the United States , a Collector of Internal Revenue has a statutory remedy of "distraint upon the goods, chattels or . . . bank accounts of the person delinquent". ¹ Purporting to exercise this power with reference to property of Antonio Raffaele, a tax delinquent, the Collector who is appellant here issued a warrant of distraint and levied thereunder upon certain deposits standing in banks in the Western District of Pennsylvania to the credit of Antonio Raffaele and his wife, Marietta Raffaele. Thereupon the spouses filed a "petition to quash warrant of district" in the United States District Court of the Western District of Pennsylvania. The court required the Collector to show cause why the warrant of distraint should not be quashed. In response, the Collector filed a motion to dismiss the petition challenging the court's jurisdiction and the petitioners' procedure. The motion to dismiss was denied and the petition to quash was granted.

The Collector urges that the proceeding in the district court was improper both because the purpose and effect of the litigation was to restrain the collection of a tax in disregard of the prohibition of Section 3653(a) of Title 26 of the United States Code and because the court permitted summary procedure not in conformity with the rules governing the institution and conduct of civil actions in district courts.

Both questions must be considered in the light of what the petitioners have claimed and the record reveals concerning ownership of the distrained property. It is alleged that each of the bank accounts upon which the Collector levied was created in the joint names of the husband and wife "as tenants by the entireties". The Collector admits the joint accounts of husband and wife and that the law of Pennsylvania calls the ownership in these cases tenancy by the entireties. Madden v. Grosztonyi Savings & Trust Co., 1938, 331 Pa. 476, 200 Atl. 624, confirming a long line of adjudicated cases. But he contends that what Pennsylvania says is not really true because the deposits are so established that either spouse may draw upon them. This power of each spouse to withdraw funds, he argues, is inconsistent with the unity of control and singleness of estate fundamental to the conception of tenancy by the entireties and shows that the individual spouse has independent authority over the account and a severable interest in it. The simple answer we think is that Pennsylvania law views this power of each spouse as a power to act for both, and no more. And Pennsylvania carries through with this conception so that the ownership of both attaches to funds withdrawn by either. See Madden v. Grosztonyi Savings & Trust Co., supra.

[Court's Conclusion]

We think it clear that Pennsylvania has in legal effect created with reference to such bank accounts as these a unity of ownership by the spouses as if they were a single personality. ² The interest of neither is severable except by consent of both. Any attempt to deal separately with or dispose of the interest of one is in derogation of the other spouse's ownership of the entire property and, therefore, legally ineffective. It is the inevitability of destruction of property rights which the Pennsylvania law has vested in both spouses which necessarily places title beyond the reach of those claiming solely against either. And it does not matter that a claim against one spouse is being asserted under a federal statute for taxes owed the United States . The United States has no power to take property from one person, the innocent spouse, to satisfy the obligation of another, the delinquent spouse. Cf. Jones v. Kemp, 10 Cir. 1944, 144 Fed. (2d) 478 [44-2 USTC ¶9410]; United States v. Hutcherson, 8 Cir. 1951, 188 Fed. (2d) 326 [51-1 USTC ¶9249].

[Contentions of the Collector]

This analysis makes clear the answer to the Collector's contentions, stated at the beginning of this opinion. This court and others have consistently held that Section 3653(a) of Title 26 does not prevent judicial interposition to prevent a Collector from taking the property of one person to satisfy the tax obligation of another. Rothensies v. Ullman, 3 Cir. 1940, 110 Fed. (2d) 590 [40-1 USTC ¶9308]; Glenn v. American Surety Co., 6 Cir. 1947, 160 Fed. (2d) 977 [47-1 USTC ¶9220]; Long v. Rasmussen, D. Mont. 1922, 281 Fed. 236. And that is what the Collector has attempted to do here, whether his attack be viewed as an invasion of property of the wife or of title vested in "a distinct legal entity, consisting of the unified personalities of the husband and wife". See C. I. T. Corp. v. Flint , supra, note 2.

The other contention of the Collector, that petitioners cannot have summary process without plenary civil action to release their property from illegal distraint, also fails. Distraint is a summary, extra-judicial remedy having its origin in the common law. There, a form of self-help, it consisted of seizure and holding of personal property by individual action without intervention of legal process for the purpose of compelling payment of debt. Relief of one aggrieved by the levy of distraint, at common law, was by an action of replevin against the distrainor. Pollock and Maitland, History of the English Law, Vol. II, page 577. In our time, distraint, together with a power of sale, has been made available to the Collector of Internal Revenue as a sanction for securing payment of taxes which persons liable have refused or neglected to pay. But property taken or detained under any revenue law, unlike property seized at common law, is not repleviable. By Section 2463 of Title 28 of the United States Code, however, it is "deemed to be in the custody of the law" and is subject to the "orders and decrees of the courts of the United States having jurisdiction thereof". ³

In this case, we think it is clear that "the court having jurisdiction thereof" is the district court for the Western District of Pennsylvania wherein the property is situated and the distraint has occurred. Cf. In re Fassett, 1891, 142 U. S. 479; U. S. v. Dallas National Bank, 5 Cir. 1946, 152 Fed. (2d) 582 [46-1 USTC ¶9117]; In re Behrens, 2 Cir. 1930, 39 Fed. (2d) 561; Gillam v. Parker, D. S. C. 1927, 19 Fed. (2d) 358. Moreover, a plenary civil suit is not necessary to enable a court to exercise jurisdiction over property thus in custodia legis. It suffices that the statute says property distrained by the tax collector is deemed to be before the court and "subject only to . . . [its] orders and decrees . . ." Once due process has been satisfied by notice to the interested parties and opportunity to be heard, the court may proceed summarily to adjudicate the rightfulness of seizure. Cf. In re Behrens, supra; Gillam v. Parker, supra. It follows, of course, that in proper case the levy may be dissolved. Schweinler v. Manning, D. N. J. 1949, 88 Fed. Supp. 964 [50-1 USTC ¶9103]. A most obviously proper case is that in which it appears that the Collector, authorized only to levy distraint upon "bank accounts of the person delinquent" has levied upon accounts of another.

Finally, we have considered a contention of the Collector that the district court improperly released property from distraint without giving him an opportunity to offer proof of relevant facts. What happened in this connection was informal and is not clear on the record. However, at most it seems that the Collector sought an opportunity to show that into preexisting bank accounts owned by the spouses as tenants by the entireties the husband deposited certain personal funds after a tax levy against his property became imminent. In substance it is the Collector's position that he was deprived of an opportunity to justify a levy upon property of B for the taxes of A by proving something like a transfer from A to B in fraud of creditors, which equity should set aside. It may well be that such an approach would be permissible in some other proceeding but the distrainor may not be heard to argue that he has exercised the prerogatives of the chancellor. Historically and in sound reason he who would employ distraint as a special extra-judicial remedy and form of self help must justify his seizure of property on the basis of title as it is not as he thinks in equity it ought to be.

The judgment will be affirmed.

¹ 26 U. S. C. §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 said taxes, with such interest and other additional amounts as are required by law, by distraint and sale, in the manner provided in this subchapter, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid."

² In C. I. T. Corp. v. Flint, 1939, 333 Pa. 350, 354-55, 5 A. 2d 126, 128, the Supreme Court of Pennsylvania said: "The title, legal and equitable, was in what may be regarded as a distinct legal entity, consisting of the unified personalities of the husband and wife, somewhat as if-- although the analogy is, of course, a crude one--the spouses together constituted a corporate body. . . . In such a tenancy each spouse is seized per tout et not per my. There is but one legal estate, which, by a long course of judicial decisions, has been buttressed against inroads attempted either by the parties themselves or by their individual creditors."

³ "All property taken or detained under any revenue law of the United States shall not be repleviable, but shall be deemed to be in the custody of the law and subject only to the orders and decrees of the courts of the United States having jurisdiction thereof." 28 U. S. C. §2463.

 

[54-1 USTC ¶9204] United States of America , Plaintiff v. Clarence E. Richardson, Ann Richardson and Trenton Banking Company, Defendants

In the United States District Court for the District of New Jersey, Civil Action No. 53-52, November 30, 1953

Collection of taxes: Distraint: Bank accounts.--It was ordered that the bank pay over to the Government one-half of the balance in a joint savings account of taxpayer and his wife. The deficiency was assessed and taxpayer failed to appear or plead in this action.

United States Attorney, for plaintiff. Samuel Rudner, Katzenbach, Gildea and Rudner, for defendant, Trenton Banking Co.

Finding of Facts, Conclusions of Law and Order for Judgment

Finding of Facts

FORMAN, District Judge:

I find as facts that:

1. Defendant Clarence E. Richardson, is indebted to plaintiff United States of America for an income tax deficiency arising from the 1944 tax year.

2. The amount of the deficiency with interest to November 10, 1953 is $1,035.06, which deficiency was properly assessed and demanded.

3. On April 5, 1948, a joint savings account, No. 34027 was opened by defendants Clarence E. Richardson and Ann Richardson, his wife, with defendant Trenton Banking Company, a New Jersey corporation, having its principal place of business in Trenton , New Jersey .

4. On November 10, 1953, the balance credited to the aforesaid joint savings account was $1,166.82.

5. On April 19, 1951, the Collector of Internal Revenue levied against the aforesaid joint savings account by causing to be served on defendant Trenton Banking Company, a Notice of Levy and a Final Notice of Demand.

6. On January 3, 1952, this action was instituted by the plaintiff. Defendants Clarence E. Richardson and Ann Richardson failed to answer or otherwise appear, having moved to a place without this jurisdiction. Accordingly, on November 19, 1952 pursuant to the provisions of 28 USC 1655, an Order of this Court, in lieu of summons, directed defendants Clarence E. Richardson and Ann Richardson to appear or plead in this cause not later than December 20, 1952. On December 10, 1952, a copy of said Order, together with a copy of the complaint herein was personally served upon defendants Clarence E. Richardson and Ann Richardson. Said defendants thereafter failed, refused and neglected to appear or plead herein pursuant to the Order of this Court.

Conclusions of Law

I concede as a matter of law that:

1. This is a suit of a civil nature properly instituted and maintained under and by virtue of the provisions of the Internal Revenue Code.

2. The defendants Clarence E. Richardson and Ann Richardson having failed to appear or plead herein plaintiff, under applicable law of the State of New Jersey , is entitled to the entire interest of the defendant Clarence E. Richardson in the balance of the joint savings account aforesaid.

This matter having come on for trial before the Court without a jury on November 10, 1953 and the Court's Finding of Facts and Conclusions of Law being set forth hereinbefore,

IT IS, on this 30th day of November 1953 ORDERED that a judgment in the amount of $1,035.06 be entered for the plaintiff and against defendant Clarence E. Richardson without costs;

IT IS FURTHER ORDERED that defendant Trenton Banking Company pay over to plaintiff the sum of $583.41, which sum represents the interest of defendant Clarence E. Richardson in a joint savings account maintained by defendant Trenton Banking Company for and on behalf of defendants Clarence E. Richardson and Ann Richardson.

 

[66-2 USTC ¶9571] United States of America , Plaintiff v. Exchange-Security Bank, Defendant

U. S. District Court, No. Dist. Ala. , So. Div., Civil Action No. 65-720, 7/12/66

[1954 Code Sec. 6332]

Tax liens: Levy on bank account: Bank's failure to surrender property subject to levy: Penalty assessed.--A bank, which responded to a notice of levy on a depositor's account by issuing a cashier's check for the amount in the account made jointly payable to the IRS and the depositor and then refused to honor the check when presented by the IRS for payment due to insufficient indorsement, was liable for the full amount deposited plus the penalty for failing to surrender property subject to levy.

Macon L. Weaver, United States Attorney, E. Ray Action, Assistant United States Attorney, Federal Bldg., Birmingham, Ala., for plaintiff. Henry E. Simpson, Lange, Simpson, Robinson, & Somerville, Exchange-Security Bank Bldg., Birmingham, Ala, for defendant.

 

Judgment

GROOMS, District Judge:

This case came on for pretrial at this time and it is shown unto the Court that the following facts are undisputed in the case; that on July 14, 1965, Patton Contracting, Inc. of 1055 Washington Avenue, S. W., Birmingham, Alabama, maintained an account with the defendant, Exchange-Security Bank, a banking corporation; that on, to-wit, June 25, 1965, the District Director of Internal Revenue, a delegate of the Secretary of the Treasury, made an assessment against said Patton Contracting, Inc. in the amount of $1,479.27; and that on July 14, 1965, a notice of levy was served on the Exchange-Security Bank. The Exchange-Security Bank admits that it had on deposit to the account of Patton Contracting, Inc. at the time of the notice of said levy the sum of $1,034.13. Said Bank responded to the notice of levy by issuing a cashier's check in said amount made jointly to the Internal Revenue Service and the said Patton Contracting, Inc. When said check was endorsed by A. J. O'Donnell, Jr., District Director of Internal Revenue, and presented to the Bank for payment, the Bank would not honor same because of insufficient endorsement, that is, the absence of an endorsement of Patton Contracting, Inc. or someone endorsing on its behalf.

Section 6332 of the Internal Revenue Code of 1954 required the Bank upon demand to surrender said funds and subjects the Bank to liability for failure to do so. The Bank has at all times admitted, and does admit in open court, that it has said sum of $1,034.13 in its possession.

Based upon the undisputed facts in the case, it is the opinion of the Court that the plaintiff is entitled to have and recover this sum from the Bank, together with interest at six per cent and costs of this action, and the Bank is entitled to be absolved from further liability upon payment of said sum to the plaintiff.

It is, therefore, ORDERED, ADJUDGED and DECREED that the plaintiff, United States of America, have and recover of the defendant, Exchange-Security Bank, the sum of $1,034.13 with interest in the amount of $62.00, or a total of $1,096.13, together with costs, for which execution may issue in the time and manner provided by law.

Upon the payment of said judgment, the defendant stands discharged from all further liability to the Government or to Patton Contracting, Inc.

 

[40-2 USTC ¶9769]Commonwealth Bank, T. Allen Smith, Fred H. Talbots, Appellants, v. United States of America , Appellee

(CA-6), United States Circuit Court of Appeals, Sixth Circuit, No. 8312, 115 F2d 327, Decided November 13, 1940

Appeal from the District Court of the United States for the Eastern District of Michigan, Southern Division.

Lien for taxes: Property subject to lien.--When the delinquent taxpayer, a depositor in appellant bank, was charged with forgery of checks collected by the bank, the latter's attorney made an agreement with the depositor that the bank might hold any of his funds as indemnity against any loss or expense resulting to it by reason of the alleged forgery. Since the evidence shows that the bank either did not authorize or ratify this agreement, or, having done so, repudiated it, the bank did have funds of the taxpayer which were not subject to the alleged agreement, and the bank is liable for failure to surrender the funds under Sec. 1114(e), 1926 Act. Affirming District Court decision, 39-1 USTC ¶9385, 27 Fed. Supp. 787,

Charles F. Meyler and Leo F. Covey, both of Detroit , Mich. , for appellants. Leon F. Cooper, Washington, D. C. (Samuel O. Clark, Jr., and Sewall Key, both of Washington, D. C., and John C. Lehr and J. Thomas Smith, both of Detroit, Mich., were with him on brief), for appellee.

Before SIMONS, ALLEN, and HAMILTON, Circuit Judges.

SIMONS, Circuit Judge.

The suit was brought by the United States to enforce liability against the appellant bank and two of its officers, for failure to surrender property or property rights alleged to be in the possession of the bank, belonging to a delinquent taxpayer, and subject to distraint under §1114e of the Revenue Act of 1926. The bank defended upon the ground that it possessed no property of the taxpayer and if so had rights therein superior to the claims of the government, and with its codefendants appeals from a judgment in favor of the United States .

[The Facts]

The delinquent taxpayer is John J. Hoefle (see Hoefle v. Commissioner, 114 Fed. [2d] 713 [C. C. A. 6], [¶9673 herein], decided September 16, 1940), who for several years carried a substantial commercial checking account with the bank. On October 31, 1933, affidavits were served upon the bank, sworn to by Wm. C. Rands, of Detroit, setting forth that his name, and the name of a corporation of which he was president, had been forged upon dividend checks issued by various corporations in which Rands, or Rands, Inc., was the payee, aggregating upwards of $30,000, and demanding payment from the bank, and all other responsible parties, for the amount of the checks. Photostatic copies of the allegedly forged checks filed with the affidavits, disclosed that they were endorsed in the name of the payee, followed by the name "John J. Hoefle." An investigation made by the bank, showed that the checks had been deposited by Hoefle, credited to his account, and the proceeds paid out upon his signature. The deposited checks had been collected from drawee banks, through various other banks and clearing houses. At the time of the investigation, Hoefle had a balance in his checking account of $552.64, but on the 26th of October, he had deposited an additional sum of $10,310.73, against which cashier's checks in like amount, payable to the Collector of Internal Revenue at Detroit , had been delivered to him. Inquiry at the Collector's office brought the information that the cashier's checks had not been delivered to the Collector, and there was no record there of any sum owing by Hoefle for taxes. On November 2, Hoefle returned the cashier's checks to the bank with the request that they be canceled and new checks, in the same aggregate amount, issued, one of them payable to Hoefle himself, and others to the Collector, whereupon the bank informed Hoefle of Rands' claim of forgery and advised him that all his funds would be held by the bank as an off-set against his liability to it.

On the 10th of November, Hoefle presented at the bank a general assignment of all his right to money on deposit, and all other property in the possession of the bank, to one Shaeffer. He was advised that the assignment would not be honored until the bank's liabilities, arising out of Hoefle's deposits, had been determined and satisfied. On December 11th, the Collector at Detroit made a demand upon Hoefle for the payment of delinquent taxes in excess of $50,000, in pursuance of certificates of assessment received from Washington . Contemporaneously the Collector filed with the Register of Deeds for Wayne County, Michigan, and with the Clerk of the United States District Court for the Eastern District of Michigan, notice of a tax lien claimed by the government, against all property and property rights belonging to Hoefle. Warrants of distraint followed on December 21, 1933, and a notice of levy, together with copies of the distraint warrants and lien notice, was served upon the bank, together with a demand that it surrender all money, property, and property rights belonging to Hoefle. The bank refused, advising the Collector of the possibility that it might be held liable for alleged forgeries of checks deposited by Hoefle, and that no funds belonging to him would be surrendered until its liability had been determined.

The government began its action on February 6, 1936. In the meantime, numerous claims had been filed against the bank by banks which had endorsed the allegedly forged checks in process of collection, and Rands had brought suits against the drawers of the checks, including one against a Canadian Corporation, in the Supreme Court of Ontario. All of the defendants called upon the bank to defend. Conceiving that liability would be asserted against it in the event that Rands should prevail, the bank undertook defense and expended substantial sums in investigation, retainer of attorneys, and preparation for trial. The first case to reach trial was that in Ontario , where the bank successfully defended on a by-law of the dividend-paying corporation, which constituted the issuance and mailing of a dividend check payment of its dividend obligation. The Ontario judgment, with other circumstances, led to a settlement between Rands , Hoefle, and the appellant bank, whereby the liability of each of the parties, growing out of the alleged forgeries, was discharged. The settlement was consummated in May, 1937, and by it the bank's loss first became fixed and determinable.

Shaeffer was permitted to intervene in the proceedings below, to plead his assignment of Hoefle's claim against the bank, and to pray for judgment against it. The bank responded with a denial of the intervener's rights under the assignment. Upon trial, appellants and appellee offered to waive a jury, but the intervener declined. At the close of all the proofs, the Court, of its own motion and over the objections of all parties, dismissed the intervener from the proceeding, and, acting upon the earlier waiver of the remaining parties, dismissed the jury, took the cause under advisement, and later, upon announcing findings of fact and conclusions of law, entered judgment for the government for an amount equal to Hoefle's deposit balance including the impounded cashier's checks.

Section 1114e of the Revenue Act of 1926, provides that 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 his deputy, surrender such property or rights unless they were subject to an attachment or execution under judicial process, and that any person who fails to do so shall be liable to the United States in a sum equal to the value of the property or rights not surrendered, up to the amount of the taxes for the collection of which the levy was made.

[Opinion]

The first contention of the appellant is that there was no valid levy against Hoefle, because ten days had not elapsed between the date of notice and demand and the levy, and that the levy was, therefore, premature and void. We need give little consideration to this contention since the appellant is not the taxpayer and the latter is not here to complain. United States v. First Capital Natl. Bank, 89 Fed. (2d) 116 (C. C. A. 8) [37-1 USTC ¶9201]; United States v. American Exchange Irving Trust Co., 43 Fed. (2d) 829 (D. C. N. Y.) [2 USTC ¶577]. Were the controversy one that involved, primarily, priority of liens, inquiry might be made as to their validity, though this we do not decide. There is no issue here, however, of priority. If the bank has a lien upon funds owing by it to Hoefle, its lien is clearly prior to that of the government.

That the appellant has been in doubt as to the legal principle to be invoked against the imposition of the liability asserted by the government, is obvious. At the outset it claimed a lien upon funds ostensibly belonging to Hoefle. Concluding, however, that there were no specific funds in its possession belonging to Hoefle, since the relationship of a bank to its depositor is merely that of a creditor, Keyes v. P. & I. R. R. Co., 61 Fed. (2d) 611 (C. C. A. 6), and Hoefle's deposit was not ear-marked, or set apart from other funds of the bank, it sensed anomaly in claiming a lien upon its own funds. It now takes the position that it was not in possession of property or rights of property belonging to the debtor, because its indebtedness to Hoefle had become subject to the terms of an agreement it had made with Hoefle, prior to the levy, whereby the bank acquired the right to indemnify itself for any expense incurred by it as a result of such claims, the consideration for the agreement being the bank's undertaking to defend against them and to pay over to Hoefle any balance remaining, with interest thereon at savings bank rates. This necessitates some amplification of the facts of record.

[Alleged Agreement]

Appellant's counsel, Meyler, gave evidence that, following Hoefle's first call upon the bank, and before the date of the tax levy, Hoefle had had an interview with him during which an agreement had been reached that the bank might hold any funds to which Hoefle was entitled, as indemnity against any loss or expense which it might incur by reason of the alleged forgeries, and that if Hoefle would assist and cooperate in the defense of claims against the bank, any part of the fund eventually determined to be his would carry savings bank interest, that the bank carried out this agreement, was successful in resisting judgments that ultimately might have imposed a liability upon Hoefle or the bank, and incurred thereby an expense in excess of $7,000. It is this sum which it seeks to set off against any moneys owing to Hoefle.

It is undisputed that the bank incurred no liability by reason of its endorsement and collection of the allegedly forged dividend checks. Its claim of right to be compensated for the expense incurred in defending suits, including those to which it was not itself a party, rests entirely upon the oral agreement claimed to have been made with Hoefle. The court below found the terms of the alleged agreement to be vague and uncertain. Meyler's testimony is uncorroborated, and Hoefle was not called by either side as a witness. The court assumed that if he had been, he would have testified adversely to the bank's contention and that there was no such oral agreement. The presumption is unwarranted. Meyler is a practitioner in good standing in this circuit; has been for many years attorney for the bank; and Hoefle's interests were adverse. No inference may be invoked that Meyler's testimony was either deliberately, or, through faulty memory, inaccurate. We have said, upon another occasion, Voltz v. Treadway and Marlatt, 59 Fed. (2d) 643, "While the testimony of interested parties to an alleged parol assignment should undoubtedly be received with some caution, In re Maculay, 158 Fed. 322 (D. C. Mich.), yet where such parol assignment is established by testimony which is uncontradicted and credible, by witnesses who are not impeached, and there are no circumstances which cast doubt upon their truthfulness, it will be upheld."

But to accept the truth of Mr. Meyler's testimony is not to determine the validity of the alleged parol agreement, or the definiteness of its terms. The court found them vague and uncertain, and so they appear to be. Undoubtedly, what the parties to the agreement had principally in mind, was a possible loss to the bank upon its endorsements. No loss was sustained. There are, moreover, circumstances which indicate that neither Hoefle nor the bank recognized any oral assignment to result from Mr. Meyler's interview with Hoefle. The interview took place on or about November 6 or 8, 1933. Yet within a few days thereafter, Hoefle appeared at the bank with an assignment to Shaeffer, dated November 2, 1933. The bank, in refusing to recognize the assignment, asserted no right to retain the funds under any agreement made between Hoefle and Meyler. It made no entry upon its books indicating that the items were held as an indemnity, or pledge, to secure Hoefle's possible liability to it. Throughout the controversy its ledger sheet, reflecting Hoefle's account, showed a balance of $500, without notation that this sum was retained in pledge of any contingent liability. Likewise, is there no notation upon the cashier's checks impounded, to indicate that they too were held as a pledge for security against loss or expense for defending suits. There is no charge against Hoefle's account for sums expended in litigation or preparation for trial, and it must be presumed that such items were charged to general operating expenses. Nor was there credit to Hoefle for savings bank interest, in accordance with the terms of the agreement. While the bank's defense against litigation and Hoefle's cooperation with it, is consistent with the terms of the agreement, the circumstances are equally consistent with the purpose of both to protect individual interests. The conclusion is inescapable that the bank either did not authorize or ratify Meyler's agreement with Hoefle, or, having done so, repudiated it, and so also did Hoefle.

[Dismissal of Intervener]

The bank's contention that there was error in dismissing Shaeffer as an intervener, is of no avail to it. Shaeffer did not appeal and the bank's answer to his intervening petition was a denial of Shaeffer's rights under his assignment. There is ample basis in the record for a conclusion that the assignment was but a subterfuge designed to defeat the claim of the United States . The loan for which it stood as security was, in fact, a withdrawal of Hoefle's own funds from an account carried in the name of Shaeffer, his brother-in-law. Whether the dismissal of the intervening petition is an adjudication of its invalidity, we do not undertake to decide. The court made an order preserving the evidence bearing upon the Shaeffer assignment, in the event that at another time, and in other litigation, its validity might come into question. This was for the protection of the bank.

Finally, it must be said that the terms of the statute, under which the tax levy was made, recognize no defense except where there is no property or property right of the taxpayer in the defendant's possession, where the property or right is not subject to distraint, or is subject to an attachment or execution under some judicial process. The proceeding authorized is not an action in rem, nor is it a suit for the collection of a tax. It is a suit to enforce personal liability for failure to surrender property belonging to a delinquent taxpayer.

The judgment below is affirmed.

 

[65-2 USTC ¶9720] United States of America , Plaintiff v. National Bank of Commerce, Defendant

U. S. District Court, East. Dist. La., New Orleans Div., No. 15250, Civil Action Division, 246 FSupp 597, 10/15/65

[1954 Code Sec. 6323]

Lien for taxes: Bank deposits: Property.--Where a taxpayer maintained two accounts with a bank, one of which was overdrawn in excess of the amount in the second account, the bank held no property of the taxpayer upon which the Government could levy for taxes.

Sherin V. Reynolds, Tax Division, Department of Justice, Washington, D. C. 20530, Louis C. LaCour, United States Attorney, Ernest N. Morial, Assistant United States Attorney, New Orleans, La., for plaintiff. Louis C. Guidry, 920 National Bank of Commerce Bldg., New Orleans, La., for defendant.

AINSWORTH, District Judge:

This case involves a claim by the United States against the National Bank of Commerce (hereafter called NBC) for judgment against the defendant in the sum of $814.79 for the latter's refusal to honor an Internal Revenue tax levy served upon it, against funds of one of its customers claimed to be on deposit in the bank.

Both parties have moved for summary judgment under Rule 56, Fed. R. Civ. P., and there is no genuine issue as to any material fact. These motions are before us for determination.

On September 20, 1963 plaintiff made assessments against the Quality Construction Company, Inc. (hereafter called taxpayer) for corporation income taxes due for taxable periods in 1959 and 1960 for $7,062.26 and $337.74, respectively. On the same date plaintiff demanded payment from taxpayer who failed to pay.

On February 4, 1964 a notice of tax lien relative to the assessment was filed with the Clerk of Court in Jefferson Parish, Louisiana , taxpayer's domicile. On February 7, 1964 a notice of levy together with a copy of the tax lien were served by plaintiff on NBC, in which bank taxpayer maintained a general account and a payroll account. At that time taxpayer's payroll account showed a credit of $814.79, but the general account was overdrawn $1,516.94. The defendant bank contends that the credit in the payroll account was subject to the overdraft of $1,516.94 in the general account and therefore the bank was not in possession of any property belonging to the taxpayer.

Plaintiff contends that on the date of the service of its tax levy on the bank, the bank possessed funds belonging to the taxpayer in the amount of $814.79, which is subject to its lien. (See 26 U. S. C. A. §6332.)

The bank's position in essence is that the general and payroll accounts of the taxpayer, Quality Construction Company, are in fact one account; that for the convenience of its corporate customers such as Quality, it maintains two accounts. This banking practice is verified by the affidavit of the manager of NBC's branch office where taxpayer maintained its account. ¹ Therefore, if the two accounts are maintained merely for the customer's convenience, and are treated as one account for banking purposes, the operation of debiting or crediting either account against the other is merely a bookkeeping transaction. The overdraft in one account merely represents a debit to be made in the second account. The entire transaction is handled as if both accounts represented the debit and credit columns of a single account. Accordingly, when the levy was served upon the defendant the taxpayer's net account showed a credit of $814.79 and a debit of $1,516.94, which means that there was a deficit in the account and the taxpayer was actually indebted to the bank for $702.15, the net overdraft. Thus, the bank is correct that it did not possess any property or rights to property subject to the government's levy. ²

While the foregoing reasons are sufficient to decide this case, we find that the bank's plea of compensation (setoff) is likewise well taken. The United States, relying on Bank of Nevada v. United States, 9 Cir., 1958, [58-1 USTC ¶9228], 251 F. 2d 820, cert. den., 356 U. S. 938, 78 S. Ct. 780 (1958), contends that NBC did not exercise its right of setoff until after the government's levy was served on it. Bank of Nevada is inapplicable to the facts here because Louisiana law does not require exercise of setoff, but it occurs through "compensation" by operation of law. The claim of the United States in Bank of Nevada , supra, was based on an agreement which gave the bank the option of setoff under certain specified contingencies.

In Louisiana , the claim of setoff is treated in civilian terminology as "compensation." Compensation is defined in Article 2207, LSA-Revised Civil Code:

"When two persons are indebted to each other, there takes place between them a compensation that extinguishes both the debts, in the manner and cases hereafter expressed."

Compensation occurs in Louisiana by the mere operation of law even unknown to the debtors. See Article 2208, LSA-Revised Civil Code. Therefore, even if we treated the payroll and general accounts as two entirely separate accounts the defendant would still prevail under the Louisiana provisions for legal compensation, and the credit in one account would be extinguished by the overdraft debit in the other.

Bank of Nevada, supra, was based on the court's rejection of the bank's contention that as a "general rule" a bank has a "general lien" upon deposits. There is no inchoate agreement here, nor is the defendant, NBC, claiming a general lien under some elusive general rule. The bank asserts a legal right afforded to it by virture of law and it was not necessary for it to do some positive act in order to perfect this right, for as we have seen in Louisiana Civil Code Article 2208, legal compensation takes place "even unknown to the parties."

We hold that whether the accounts herein are treated separately or as a single account, defendant must prevail. There is no genuine issue of material fact and defendant is entitled to judgment in its favor as a matter of law.

Decree accordingly.

¹ Mr. Belloni, the manager, states in his affidavit:

"That in order to facilitate the handling of payrolls by some of the customers of the Bank, it is usual to have the customer open two separate accounts, one known as the General Account, and the other as the Payroll Account. That it is possible for one of the accounts to become overdrawn through various reasons and such overdrafts approved for payment upon consideration of the balance in the other account and the merit of the principals involved. Especially is this true where the persons authorized to sign on each account are the same persons, as was the case in this instance."

² The debit against the payroll account was not made until February 21, 1964, after the tax levy was made against the bank. However, this delay is explained by Mr. Belloni in his affidavit. On the date the levy was served a deposit was made by taxpayer consisting of two checks for $10,212.48 and $45.44, respectively. This was on Friday, and there was no clearing date until the following Monday, February 10, 1964, at which time the check for $10,212.48 was returned because it had not been properly signed by the drawer. The bank waited before making its debit entry to the payroll account, believing that taxpayer would procure the proper signatures and redeposit the check. However, by February 21, 1964 the affiant was convinced that the taxpayer did not intend to cover the overdraft in the general account by redepositing the $10,212.48 check. Affiant then authorized the debit to the payroll account and credit to the general account for $814.79.

 

[74-1 USTC ¶9336] United States of America , Plaintiff-Appellee v. Sterling National Bank & Trust Company of New York , Defendant Third Party Plaintiff-Appellant v. Charles S. Smith, Third Party Defendant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket Nos. 73-2300, 73-2301, 494 F2d 919, 3/27/74, Aff'g and rev'g District Court, 73-2 USTC ¶9494, 360 F. Supp. 917

[Code Sec. 6332(c)]

Levy: Property subject to: Failure to surrender: Penalty: Reasonable cause.--A bank was under a duty to comply with an IRS levy on funds in a depositor's account. Under state law, the entire amount of those funds was property of the bank. However, the penalty for failure to comply with the levy should not have been assessed. Prior decisions gave the bank reasonable cause to believe some of the money belonged to the customer.

One dissent.

Paul J. Curran, United States Attorney, David P. Land, Assistant United States Attorney, New York, N. Y., for plaintiff-appellee. Harry Gurahian, Sterling Nat'l Bank & Tr. Co., New York , N. Y., for defendant and third party plaintiff-appellant. David M. Huggin, H. Rodgin Cohen, Sullivan & Cromwell, 48 Wall St., New York, N. Y., for third party defendant.

Before LUMBARD, FRIENDLY, and TIMBERS, Circuit Judges.

LUMBARD, Circuit Judge:

This appeal concerns the duty of a bank to comply with a levy upon the checking account of one of its customers imposed by the Internal Revenue Service (IRS) under the authority given it by the Internal Revenue Code of 1954, as amended by the Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1125. The Sterling National Bank and Trust Company of New York appeals from an order entered on June 5, 1973, in the Southern District of New York which granted the United States ' motion for summary judgment and imposed a penalty of $1,889.82 on the bank for not complying with a tax levy of the Internal Revenue Service. [73-2 USTC ¶9494] 360 F. Supp. 917 (S. D. N. Y. 1973).

[Background]

1. On February 13, 1970, the IRS made an income tax assessment and demand for payment against Charles S. Smith and his wife, jointly and severally, in the amount of $8,211.38 for the year 1968. Thereafter, Smith borrowed $6,097.32 from the Sterling Bank of June 23, 1970, giving in turn a promissory note. Under the terms of the note, the bank had a "continuing lien and/or right to set-off" for the amount due on the note, whether matured or unmatured, against any balance that Smith had in his accounts at the bank, which the bank could exercise at its option without giving Smith any notice. Subsequently on August 14, 1970, the IRS made a second assessment and demand for $6,475.20 in back taxes due from the Smiths for the year 1969. Pursuant to Int. Rev. Code of 1954, §§ 6321-23, the IRS filed notices of its liens concerning the two assessments with the Register of New York County on November 5, 1970 and March 3, 1971, respectively.

On June 9, 1971, the IRS served the bank with a notice of levy which informed it that Smith was indebted to the United States in the amount of $15,531.25 in back taxes and statutory additions and which directed the bank to remit to IRS all of Smith's property which it held. At that time Smith's checking account had a balance of $5,132.36. Prior to the service of the levy, the bank had not restricted Smith's right to draw upon his account, and Smith had not fallen behind in his installment payments on the loan.

The bank did not remit the funds as requested and on June 18, 1971, the IRS served on the bank a final demand to turn over the funds in Smith's account. On July 2, the bank, exercising its alleged right of setoff under the terms of the June 23, 1970, loan, deducted from the funds in Smith's checking account the $3,779.64 which was still outstanding on the loan and turned over to the IRS the balance of $1,352.72. On August 5, the IRS wrote the bank a letter which stated that the IRS had a right to the entire amount in the account and demanded the remaining $3,779.64. When the bank did not comply with this demand, the United States instituted this action against the bank to recover the $3,779.64, a statutory penalty of 50% of that amount under Int. Rev. Code of 1954, §6332(c)(1), and interest and costs. The claim for the $3,779.64 was rendered moot when Smith died and his estate subsequently paid his tax indebtedness with interest in full. The government, however, continued its suit to recover the statutory penalty of $1,889.64 on the ground that the bank did not have reasonable cause when it refused to comply with the tax levy. Judge Palmieri granted judgment for the government, and the bank appeals.

[The Law]

II. Section 6332(a) of the Internal Revenue Code of 1954 provides (with an exception not relevant here) that "any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which levy has been made" shall upon demand by the Internal Revenue Service surrender such properties and rights to the Service unless such property or rights is subject to attachment or execution under any judicial process at the time of the demand. Section 6332(c)(2) provides that any person who fails to surrender property to the IRS without reasonable cause is subject to a penalty of 50% of the amount demanded.

Three defenses are asserted here on the bank's behalf: (1) the bank held no property of Smith at the time of the levy other than the $1,352.72 it turned over; (2) the bank's right of setoff gave it a lien priority over the government's tax lien; (3) and, in any event, no penalty should be imposed because the bank was acting with reasonable cause. We have previously held that a person served with a tax levy has only two defenses for a failure to comply with the demand, which are either that the person is not in possession of the taxpayer's property or the property is subject to a prior judicial attachment or execution. United States v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366, 369 (2d Cir. 1952). See also Bank of Nevada v. United States [58-1 USTC ¶9228], 251 F. 2d 820, 824 (9th Cir. 1957), cert. denied, 356 U. S. 938 (1958); United States v. Bank of America National Trust & Savings Association [64-2 USTC ¶9533], 229 F. Supp. 906, 909 (S. D. Cal. 1964), aff'd per curiam [65-1 USTC ¶9429] 345 F. 2d 624 (9th Cir.), cert. denied, 382 U. S. 927 (1965). Therefore, the defense of lien priority is not before us. ¹ Concerning the other two defenses, we hold that the bank did hold property of Smith's which it was obligated to turn over to the IRS, but that since the legal question was movel it should not have been penalized for its failure to comply.

The question of whether the bank held property or a right to property of Smith is one of state law, in this case New York 's. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). It is maintained that the bank had no property of Smith other than the $1,352.72 turn over since the bank had a right to set off against the checking account any unpaid balance on the loan. Therefore, it is argued, at any one moment only the balance of the checking account funds over any unpaid obligations is property of the taxpayer held by the bank. In support of this proposition §151 of the New York Debtor and Creditor Law is cited. That provision provides in part that upon "the issuance of a warrant attachment against any property" of a creditor, the debtor may set off and apply the property against the creditor's indebtedness to him. Cases are also cited that have allowed banks to offset other obligations from account. See, e.g., Kress v. Central Trust Co. of Rochester, 246 App. Div. 76, 283 N. Y. S. 467 (1935), aff'd mem., 272 N. Y. 629, 5 N. E. 2d 365 (1936).

We are not convinced by this argument. The cases cited deal only with the right of setoff, and not with whether the full amount in the account is "property" of the bank's customer. The literal language of §151 quoted above would indicate that the full amount in the account is the customer's property. Under any realistic definition of "property" the full amount in Smith's account was his property or his right to property. Until the bank acted to restrict his right to draw on the funds, Smith was entitled to write checks up to the full amount in the account. Clearly then all the funds in Smith's checking account were his property at the time that the IRS served the bank with notice of levy. In similar circumstances, the Ninth Circuit has reached the same conclusion. Bank of Nevada v. United States, supra; United States v. Bank of America National Trust & Savings Association, supra.

To support the bank's position, two cases from the Southern District are cited. In United States v. Hampton Garment Co., 71-1 USTC ¶9357 (S. D. N. Y. 1971), Hampton Garment owed money to a contractor. Under the terms of a collective bargaining agreement, Hampton was obligated to pay the wages of the contractor's employees if the contractor defaulted in payment. The contractor did so default, but prior to notice of the default the IRS served notice of a tax levy on Hampton because of the contractor's unpaid taxes. Judge Mansfield held that, unless Hampton agreed to pay the contractor all that was due it regardless of whether Hampton was obliged to pay the contractor's workers, Hampton need only turn over the difference between the two obligations to the IRS.

The case before us is clearly distinguishable from Hampton Germent. The thrust of that case is that the government can stand in no better position that the taxpayer whose property or right to property is being levied upon. See also United States v. Winnett [48-1 USTC ¶9115], 165 F. 2d 149 (9th Cir. 1947); Karno-Smith Co. v. Maloney [40-2 USTC ¶9533], 112 F. 2d 690 (3d Cir. 1940). Here Smith had full freedom to use the funds in his checking account until the bank acted to restrict his use. At any time up to when the IRS served its notice of levy, Smith could have written a check payable to the IRS for the balance of his account. Here the IRS was asserting no right to the funds in the checking account that Smith did not already have.

The second case cited for the bank's position is United States v. Bank of the United States [1934 CCH ¶9099], 5 F. Supp. 942 (S. D. N. Y. 1934). There the bank's customer gave a demand note in return for a loan. The customer had a checking account at the bank which he regularly used for deposits and withdrawals. The government served notice of levy upon the customer's account and the bank refused to honor it. The district court held that the government was entitled to nothing because the amount outstanding on the loan was greater than the amount in the checking account. The court reasoned that since the bank could have demanded payment on the note at any time, the right of the customer to withdraw funds from his account was really a "revocable license" which the bank could withdraw even after notice of a tax levy was served. 5 F. Supp. at 945. We think this decision completely ignores the reality of the situation. Until the bank acts to restrict the right of its customer to withdraw funds from his account, the bank is holding the customer's property or his right to property. Therefore, we hold that Sterling Bank had a duty to honor the tax levy upon Smith's checking account. ² To the extent the Bank of United States is contrary to this holding, it is overruled.

[Penalty]

III. We now turn to the question of whether the 50% penalty of §6332(c)(2) should be imposed on the bank for its failure to comply with the tax levy. No penalty can be imposed if the bank acted with "reasonable cause" in resisting the levy. A Senate report accompanying the Tax Lien Act of 1966 stated that "it is intended that a bona fide dispute over the amount owing to the taxpayer (by the property holder) or over the legal effectiveness of the levy itself is to constitute reasonable cause under this provision." S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), in 3 [1966] U. S. Code Cong. & Admin. News 3722, 3740.

Since the facts were undisputed and there were cases within this circuit that supported the bank's position, the issue here is whether a bona fide legal dispute over the amount that the bank owed the taxpayer is sufficient excuse for the bank's failure to honor the levy. We have recently stated that a regional director of the National Labor Relations Board did not have the reasonable cause necessary to get a preliminary injunction under the National Labor Relations Act when it was clear that a court would not enforce an order of the Board finding that the conduct sought to be enjoined violated the Act. Danielson v. Joint Board of Coat, Suit & Allied Garment Workers' Union, ILGWU, slip op. pp. 1979-2009 (2d Cir. Feb. 27, 1974). The clear holding of that case is that a non-frivolous, but erroneous, argument of law is not sufficient reasonable cause for obtaining a preliminary injunction under the National Labor Relations Act.

We see no reason to extend the interpretation given "reasonable cause" in the National Labor Relations Act to the same phrase in the Tax Lien Act. The same words can have different meanings in different statutes. The harm caused by a court granting a preliminary injunction against certain labor activity when it believes that activity does not violate the Labor Act is obvious. The question here is whether we should penalize the Sterling Bank for forcing the government to litigate an unsettled question of law. There is no reason to believe that Congress would wish to penalize the holder of the property levied upon for litigating a test case. Nor do we believe that failing to impose the 50% penalty in situations like this will detract from the congressional purpose of requiring compliance with tax liens. Only for purposes of this initial case did the Sterling Bank refuse to honor the tax levy with reasonable cause. It and other banks confronted with levies in similar circumstances after this decision cannot reasonably refuse to comply.

Accordingly, we affirm the district court's order insofar as it held that Sterling Bank had a duty to comply with the IRS levy and we reverse the order insofar as it imposed the 50% penalty upon the bank. No costs.

¹ As the district court noted, 360 F. Supp. at 922-23, there are other procedures to determine who has lien priority.

² We do not think that United States v. Bank of Shelby [4 USTC ¶1226], 68 F. 2d 538 (5th Cir. 1934), is relevant here. It appears that the bank there might not have permitted the customer to withdraw funds from his account. All the funds in the account had been derived from a loan on a note and by the time the notice of levy was served on the bank, the security for the note had been sold and the customer was insolvent.

[Dissenting Opinion]

FRIENDLY, Circuit Judge (dissenting):

I respectfully dissent.

In light of Judge Lumbard's convincing demonstration that the Sterling National Bank was bound to honor the tax levy upon the entire amount of Smith's checking account, I cannot agree that a national bank, fully warned (in the IRS' August 5 letter) of the Service's position, of the strong authorities therefor, and of its intention to enforce its position, can be said to have had "reasonable cause" to believe that the levy need be honored only for the excess of the account over the amount owed to the bank. In light of longstanding judicial recognition of the importance of the Government's being able to collect the revenues swiftly and surely, see Murray's Lessee v. Hoboken Land & Improvement Co., 59 U. S. (18 How.) 272 (1856), it seems to me even more essential in this area than in the context presented by Danielson v. Joint Board of Coat, Suit & Allied Garment Workers' Union, ILGWU, -- F. 2d --, -- (2 Cir. 1974), slip op. 1979, 1996-2009, that "reasonable cause" should not be read to include a clearly erroneous view of the law, stubbornly adhered to after investigation should have disclosed the error. The majority's ruling permits a bank to pay the Government whatever its lawyers say it should, with no risk beyond having to pay the balance if it turns out to be wrong. Surely the distinctions between this case and Hampton Garment, the antiquarian unreality of Judge Woolsey's opinion in United States v. Bank of United States [1934 CCH ¶9099], 5 F. Supp. 942 (S. D. N. Y. 1934), and the force of the Ninth Circuit decisions, all so ably elucidated in the majority opinion, should not have escaped the notice of Sterling's experienced counsel.

The majority says, quite properly, that no bank in the Second Circuit can ever again claim reasonable cause to act precisely as Sterling did, and the Government will scarcely founder through its failure to collect the $1,889.82 penalty here at issue. But lawyers will dream up other "reasons" why parties holding property belonging to a taxpayer should not pay this to the Government as §6332(c) requires. I would not permit collection of the revenues to be delayed on first appearance of each such question in each jurisdiction where, as here, the question is not really close, the party had access to competent legal advice, temporary sacrifice of the funds and pursuit of other remedies against the Government would not represent any hardship, and the IRS proceeded deliberately and gave ample notice of its intention and the sound view of the law on which this was based.

I would affirm the judgment of the District Court.

 

[75-1 USTC ¶9239] United States of America , Plaintiff-Appellee v. Euclid National Bank, Defendant-Appellant

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 74-1014, 510 F2d 461, 2/12/75

[Code Sec. 6332]

Surrender of property subject to levy: Penalty for failure to surrender: Bank account.--Penalty assessed against the bank for failure to surrender funds in account of a delinquent taxpayer was upheld. The bank had received funds and credited the taxpayer's account prior to the notice of levy and did not set off the taxpayer's account until three days after the notice was received.

Frederick M. Coleman, Robert Bauer, United States Attorneys, Cleveland, Ohio, Scott P. Crampton, Assistant Attorney, Meyer Rothwacks, Stephen Gelber, Bennet Hollander, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. Karl D. Kammer, David Ralph Hertz, 1020 Leader Bldg., Cleveland, Ohio, for defendant-appellant.

Before PHILLIPS, Chief Judge, ENGEL, Circuit Judge, and DUNCAN, ^* District Judge.

PER CURIAM.

This is an appeal from a judgment in favor of the United States against defendant Euclid National Bank in the amount of $17,590.01.

The action was brought by the United States pursuant to 26 U. S. C. §6332(c), ¹ alleging the Bank's failure to honor a tax levy assessed against the commercial payroll checking account of a delinquent taxpayer, Julien Construction Company. After a non-jury trial on the merits, the court found that the Bank held certain funds of the taxpayer on May 20, 1970, when the Internal Revenue Service served Notice of Levy upon it. It further found that the Bank's effort to set off monies owed it by the taxpayer was ineffective against the government's tax lien, because it was exercised subsequent to the serving of the Notice of Levy. From these findings the Bank appeals.

Appellant's first contention is that the court's finding that the delinquent taxpayer had an actual credit balance of $17,590.01 in its account on May 20, 1970 was clearly erroneous. Appellant claims instead that the evidence shows that it had no property of the taxpayer when the Notice of Levy was served at 4:15 p. m. on May 20, 1970. In support of its contention, appellant cites paragraph I of the "Rules and Regulations Governing Commercial Accounts' which reads as follows:

"1. Bank, in receiving items for deposit, acts only as collecting agent of depositor and assumes no responsibility beyond the exercise of ordinary care. Items, including those drawn on any office of Bank, will be cashed, accepted or credited provisionally and if not found good may be charged back to depositor's account or the amount thereof recovered from depositor at any time. Unpaid items may be returned by mail at depositor's risk."

The Bank argues that under the quoted rule, the delinquent taxpayer's account received no actual credit on May 19, 1970, when the taxpayer deposited its check for $17,785.05 with the Bank. Further, it argues that there is no evidence in the record to show that the check was ever more than provisionally accepted before the Notice of Levy was received at 4:15 p. m. on May 20, 1970.

We reject appellant's contention that it had no property of the taxpayer when it received the Notice of Levy. The Bank's own records (Exhibits 4 and 8) indicate that the deposit made on the 19th of May by the taxpayer was credited to his account on that date. In addition, testimony of the Internal Revenue Service accountant corroborates these records and supports the district judge's conclusion that the amounts listed in the records represented actual credit balances on the dates in question. We conclude, therefore, the district judge's finding on this factual issue was not clearly erroneous.

Next, the Bank challenges as clearly erroneous the finding of the district court that the Notice of Levy was served on the Bank prior to the Bank's attempted setoff of the funds in the taxpayer's account. In support of this contention, appellant relies primarily upon Exhibit D, a document which shows the taxpayer's account being debited in the amount of $17,225.86 and which is dated on the front May 20, 1970. Appellant contends that this document shows that the setoff occurred on May 20, 1970, presumably before the Notice of Levy was received at 4:15 p. m. on that day, and thus the Bank's setoff has priority over the government lien.

The district court held as a factual determination that on May 23, 1970 "the Bank debited the account of Julien Construction Company in the sum of $17,225.86, setting off the account against the loan indebtedness owed by the Company to the Bank. The evidence fails to establish that the Bank placed any hold on the account relating to a setoff prior to May 23, 1973". This finding has ample support in the Bank's records and summaries received in evidence and is not clearly erroneous. We find no indication that Exhibit D, now relied upon by the Bank, was received in evidence. Rather, the exhibit appears to have been in the nature of a response made by the Bank to the government's request for admissions. Assuming somehow it was properly before the court, the exhibit itself indicates that it was not stamped by a teller until May 22, 1970. Finally and conclusively, a stipulation of facts entered into between the parties "for all purposes connected with suit" expressly states that "On May 23, 1970, the defendant Bank debited the account of Julien Construction for the sum of $17,225.86, setting off this sum against the loan indebtedness owed by Julien". Under such circumstances, the district judge correctly concluded that the tax lien was superior to the Bank's right of setoff. United States v. First National Bank, 348 F. Supp. 388 (D. Ariz. 1970), affirmed [72-2 USTC ¶9655] 458 F.2d 513 (9th Cir. 1972).

Accordingly, the judgment of the district court is affirmed.

^* The Honorable Robert M. Duncan, Judge , United States District Court for the Southern District of Ohio, sitting by designation.

¹ 26 U. S. C. §6332(c):

"Enforcement of levy.--

"(1) Extent of personal liability.--Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary or his delegate, shall be liable in his own person and estate to the United States in sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made, together with costs and interest on such sum at the rate of 6 percent per annum from the date of such levy. Any amount (other than costs) recovered under this paragraph shall be credited against the tax liability for the collection of which such levy was made.

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

 

[83-2 USTC ¶9585] United States of America , Plaintiff v. Capital Savings Association, Successor to First State Savings Association, Defendant

U. S. District Court, No. Dist. Ind. , Hammond Div., Civil No. H 80-692, 576 FSupp 790, 7/27/83

[Code Sec. 6332]

Levy and distraint: Bank accounts: Failure to surrender property: Reasonable belief.--A saving association's reasonable belief that all of the funds within a joint savings account belonged to an innocent spouse, and not to her and her husband, did not excuse it from liability to the government for one-half of the funds when it released all of the funds to her and did not place a hold on the account until the IRS could determine exactly which portion or how much of the account should have been paid over in satisfaction of a levy. The saving association, however, was not liable for an additional 50-percent penalty pursuant to Code Sec. 6332(c)(2) because there had been a bona fide dispute as to the ownership of the funds in question.

United States Attorney, Charles B. Miller, Assistant United States Attorney, Hammond , Indiana 46320 , T. Kazan Ray, Department of Justice, Washington , D. C. 20530, for plaintiff. James A. Holcomb, Lucas, Clifford & Holcomb, 1000 E. 80th Place, Merrillville, Indiana 46410, David Capp, 8585 Broadway, Merrillville, Indiana 46410, for Mary T. Bianco, for defendant.

Memorandum, Opinion and Order

MOODY, District Judge:

This cause came on for trial without intervention of a jury upon Plaintiff's Complaint and the Defendant's Answer and affirmative defenses only on the 23rd day of May, 1983, and the Court, having heard and considered the evidence, finds the facts and states the conclusions of law as follows:

Findings of Fact

1. The Defendant, Capital Savings Association, formerly known as First State Savings Association, is a savings and loan association having its principal offices at 100 West Ridge Road , Gary , Indiana .

2. That on November 16, 1978 Pete Bianco a/k/a Peter J. Bianco owed delinquent income taxes to the United States government for the years 1968 through 1971. That this tax liability was his alone and that his wife, Mary T. Bianco, had been granted "innocent spouse" status.

3. On November 16, 1978 David M. Moss, a Revenue Agent with the Internal Revenue Service, served a "Notice of Levy" upon the defendant at its offices at 100 West Ridge Road, Gary, Indiana, requiring the defendant to pay over to the Internal Revenue Service any property or rights to property belonging to the taxpayer, Peter J. Bianco. The Revenue Officer indicated that only those funds belonging to Peter J. Bianco were to be turned over pursuant to the Notice of Levy.

4. That on said date and at the time of the serving of the Notice of Levy there existed a savings account at First State Savings Association, now known as Capital Savings Association, Account No. B-495 in the joint names of Pete Bianco and Mary T. Bianco which account was opened on July 16, 1975 and which was rolled over from a previous account that the parties held in joint names, and which prior to that time belonged to Mary Bianco alone.

5. That on the same date, namely, November 16, 1978, one of the attorneys for the Defendant discussed with the Revenue Agent in charge of the collection the subject of Indiana law with respect to ownership of joint savings accounts, the procedures for determining same and inquired as to his or the authority of the IRS for levying upon a joint account when the liability is only that of one taxpayer rather than the joint tenants. The Revenue agent indicated that he would look into the question and get back to her in that regard.

6. That at no time from November 16, 1978 through April 25, 1979 did the Internal Revenue Service or any of its agents or employees ever furnish to the defendant or its attorneys, as requested, any authority for its levying on a joint savings account to satisfy the tax deficiency of one of the signators only to that joint account.

7. Further, on November 16, 1978, and after discussing the matter with defendant's counsel, the Revenue officer informed John Sikora, President of Capital Savings Association, that he did not expect payment that day but rather he should put a hold on the account until the Internal Revenue Service could determine exactly which portion or how much of the account should be paid over to the Internal Revenue Service in satisfaction of the levy.

8. On January 26, 1979, Mary Bianco, wishing to purchase a new home, entered Capital Savings Association for the purpose of obtaining a mortgage until such time as she could sell her home. John Sikora informed her that it was impossible to obtain a mortgage in the three to five day period which she indicated. Sikora then suggested to Mrs. Bianco that she withdraw the money from her savings account, No. B-495, and replace that money once her present home had been sold. It was at this time that Mr. Sikora informed Mrs. Bianco of the levy against the account and once again placed a call to the attorneys for Capital Savings Association indicating that Mrs. Bianco wanted to withdraw the funds from the savings account upon which the levy had been placed.

9. Upon being informed of the levy, Mrs. Bianco indicated to Mr. Sikora that the money in Account No. B-495 was her money, a claim which she maintains in this litigation and of which she had previously informed the Internal Revenue Service through her attorney.

10. That upon receiving the inquiry from the defendant concerning the request of Mary Bianco to withdraw the funds from the account in question, the attorneys for the defendant attempted to reach the Revenue agent and others at the Internal Revenue Service concerning this action, but were unsuccessful in their attempts. Unable to reach the Revenue Agent in charge and not having heard from him on January 29, 1979, and not having any word from the Internal Revenue Service or any of its agents or employees concerning the ownership question of the account or what specific funds, it any, were to be turned over to the Internal Revenue Service, Mary Bianco was allowed to withdraw the sum of $18,518.21 from Account No. B-495 on January 29, 1979.

11. Those funds were then used as payment for the home in which Mary Bianco and Peter Bianco presently reside and which was purchased shortly after the withdrawal of funds from the account in question on January 29, 1979.

12. On April 24, 1979, the Revenue agent contacted the attorneys for the defendant inquiring as to whether or not the funds in the account had been released and the following day, April 25, 1979, served a Final Demand upon the defendant.

13. From November 16, 1978 until April 25, 1979 the only action taken by the Internal Revenue Service to determine ownership interest in the account in question was to serve a summons upon First State Savings Association through which summons they obtained the signature card for the account and the card showing the transactions with respect to the account, namely, deposits, withdrawals and adding of dividends or interest.

14. That the signature card for the account in question contains the following language:

"It is agreed by the signatory parties with each other and by the parties with you that any funds placed in or added to the account by any one of the parties are and shall be conclusively intended to be a gift and delivery at that time of such funds to the other signatory party or parties to the extent of his or their pro rata interest in the account. (Emphasis in original.)

15. While the taxpayer, Peter Bianco, was in the service during the early '40s in World War II, Mary Bianco worked at U. S. Steel in Gary , Indiana and lived with her mother, saving all of her money. This money was deposited in the predecessor account to the one in question. After Peter Bianco returned from the service, Peter and Mary Bianco entered into the restaurant business at which they both worked seven days a week, a minimum of 12 hours a day.

16. After returning home from the service, Peter Bianco began losing money by way of betting or gambling and an agreement was reached between he and Mary Bianco that he would turn over all of his money to her. She cashed his paychecks, gave him an allowance, paid all the household bills, purchased the food and clothing and ran the entire household while he was employed.

17. From that time to the present, Mary Bianco handled all of the family finances; did all the banking; made all deposits in Account No. B-495; made all withdrawals in that account; did all the saving; and was the only one to deal with the savings account at First State Savings Association.

18. That Mary Bianco had complete control over the monies and the checks once turned over to her and further at all relevant times had control and possession of the pass book to savings Account No. B-495 and its predecessor accounts.

19. At the time that Peter Bianco turned over his checks and monies to Mary Bianco it was not his intention to make a gift of those sums to her at that time and prior to her depositing any of those sums in savings account No. B-495 or its predecessors. Rather, the agreement was a matter of convenience.

20. That at no time did Peter Bianco make any deposits or withdrawals to Account No. B-495 or any other account within the knowledge of First State Savings Association and Mr. Sikora never saw Peter Bianco transacting business in First State Savings Association.

[Reasonable Belief]

21. That based upon Mary Bianco's handling of and dealing with the accounts and monies placed into and withdrawn from the accounts and further based upon statements made by Mary Bianco both immediately prior to withdrawal on January 26th and for the time she was a depositor, the defendant reasonably believed that the funds in Account No. B-495, belonged to Mary Bianco and not Peter Bianco.

[Reasonable Cause]

22. That based upon the evidence, or reasonable inferences that can be drawn therefrom and under the circumstances with which it was confronted, the Defendant, First State Savings Association, had reasonable cause to release the funds in Account No. B-495 to Mary Bianco and to refuse to surrender such funds to the Government.

23. That Mary Bianco and Peter Bianco each owned one-half of the funds in the bank account at issue at the time of the levy.

24. That at the time of the levy, the bank account at issue contained a balance of $18,665.57.

Conclusions of Law and Discussion

The Government brought this case against Capital Savings Association, successor to First State Savings Association (Capital) to recover money withdrawn from a joint savings account held by Capital in the names of Peter and Mary Bianco. The Government served a notice of levy on Capital on November 16, 1978 in relation to any "property or rights to property" belonging to one Peter J. Bianco a/k/a Peter J. Pianco, Jr. On January 29, 1979, Capital permitted one Mary T. Bianco, wife of Peter Bianco to withdraw money from the joint account. The Government argues that this action violated the levy and that Capital is personally liable for the money withdrawn under 26 U. S. C. §6332(c).

Section 6332(c)(1) provides in relevant part that:

Any person who fails or refuses to surrender any property, subject to levy, upon demand by the Secretary, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made.

Section 6332(c)(2) further provides for a penalty equal to fifty percent of the amount recoverable under paragraph (1) where the refusal is "without reasonable cause." In the present case the Government seeks to recover both the amount withdrawn from the Bianco account and a penalty.

A defendant in an action brought under section 6332(c) has only two alternative defenses: (a) the property at issue is subject to prior judicial execution or attachment, and (b) the defendant is not in possession of property owned by the taxpayer. See United States v. Weintraub [80-1 USTC ¶9172], 613 F. 2d 612 (6th Cir. 1979); United States v. Sterling National Bank, [74-1 USTC ¶9336], 494 F. 2d 919 (2d Cir. 1974). There is no indication of any kind that the bank account at issue here was subject to a prior judicial execution or attachment. Rather, Capital bases its case on the claim that the funds in the subject account belonged solely to Mary Bianco at the time of the levy and not to the delinquent taxpayer.

A determination of the relevant property interests in a tax levy case is a matter of state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). Some cases have held that the burden of proving a taxpayer's interest in property subject to levy rests on the Government. See, e.g., United States v. Stock Yards Bank of Louisville [56-1 USTC ¶9418], 231 F. 2d 628 (6th Cir. 1956). More recent cases, however, have held that the burden rests on the party opposing the levy to show that the taxpayer does not have an interest in the property at issue. See, e.g., Flores v. United States [77-1 USTC ¶9380], 551 F. 2d 1169 (9th Cir. 1977); United States v. National Bank of Commerce [83-2 USTC ¶9568], 554 F. Supp. 110 (E. D. Ark. 1982). The reasoning for the latter holdings is the belief that it is more appropriate to place the burden of showing nonownership by the taxpayer on the party challenging the levy "because the purpose of the statute is a coercive one which seeks to foster a swift tender of property which has been levied upon." Flores , 551 F. 2d at 1174. In summary, although there are good arguments for placing the burden of proof on either party here, the Court concurs with the more recent case holdings above and concludes that the burden of proof is on the defendant in this case to show nonownership by the taxpayer in the joint account at issue.

Capital bases its defense in this case on the argument that the money in the account at issue belonged to Mary Bianco rather Peter Bianco. The ownership of a joint bank account in Indiana is determined by the contributions of the parties to that account "unless there is clear and convincing evidence of a different intent." West's Ind. Code Ann. §32-4-1.5-3(a). The evidence at trial reveals that most, if not all, of the money in the account at the time of the levy consisted of Peter Bianco's earnings. Although Mary Bianco testified that the account originally belonged to her and that some of the money deposited in the account prior to 1955 was contributed by her, she conceded that after 1955 all of the money deposited in the account at issue originated from Peter Bianco. Thus, if ownership of the account is based solely on contributions, the Court would find that most if not all of the funds in the account belonged to Peter Bianco. The decision on the ownership of the account does not end with analysis of the contributions, however, since Capital contends that it has "evidence of a different intent." This "evidence of a different intent" consists of two somewhat related arguments.

Capital's first argument is based on the third party donee-beneficiary theory first recognized by the Indiana Supreme Court in Estate of Fanning, -- Ind. --, 333 N. E. 2d 80 (1975). In that case, the donor purchased a certificate of deposit from a bank. The certificate was issued to the donor and the donee "either or to the survivor." The Court found that the certificate constituted a contract between the donor and the bank to which the donee was a third party donee-beneficiary. As such, the donee received a present gift of a contingent contractual right to the funds in the account. The contractual right was contingent because it could have been extinguished during the lifetime of the donor.

The Fanning case and the cases generally dealing with the third party donee-beneficiary theory involve disputes over decedent's estates and whether the decedent actually intended the entire proceeds of the account to vest in the donee-beneficiary upon his death. Estate of Fanning, supra; Moore v. Bowyer, Ind. App. 388 N. E. 2d 611, (1979); Robison v. Fickle, Ind. App. 340 N. E. 2d 824 (1976). Consequently, it is somewhat difficult to apply the third party donee-beneficiary theory to a case like the present where both the donor and donee are living and the Court is required to carve out their respective interests in a joint account. Even though these cases may not directly apply in the present situation they are analogous and they teach that a determination by this Court as to the effect of any contract herein on the interest of Peter and Mary Bianco in the joint account at issue must be based, as in the cases above, on the clear language of the contract itself. See, e.g., Robinson, supra.

Capital would apply the theory discussed in the Fanning case to the present situation by arguing that Mary Bianco was a third party donee-beneficiary of the contract between Capital and Peter Bianco. The contract here is the signature card signed by both Mary and Peter Bianco and which provides that all deposits in the account by either of the parties "are and shall be conclusively intended to be a gift and delivery at that time of such funds to the other signatory party . . . to the extent of his . . . pro rata interest in the account." As applied in the present case, then, the theory urged by Capital would only provide Mary Bianco with a one-half interest in the joint account. The reason for this is that the plain language of the contract states that the noncontributing party in a joint account receiving a gift of funds deposited to that account only "to the extent of his . . . pro rata interest in the account." As there are two parties to the account at issue, Mary Bianco's pro rata interest in the account is one-half and, as per the terms of the contract between Peter Bianco and Capital, she is the owner of no more than one-half of the account.

[Intra-spousal Agreement v. Depositary Agreement]

Capital disagrees that Mary Bianco only owned one-helf of the account. Rather, Capital contends that an agreement existed between Mary and Peter Bianco in which Peter completed a gift inter vivos to Mary of all his money, prior to it being deposited in the joint account. This is, in effect, an attempt by Capital to vary the terms of a third party donee-beneficiary contract by the use of parol evidence. This is generally impermissible where, as here, the meaning of the contract is plain and unambiguous. Robison v. Fickle, 340 N. E. 2d at 828-9. Even so, assuming arguendo that such evidence could be admitted to vary the terms of the contract, the Court does not find that they would do so.

Capital bases its argument that Mary Bianco was a gift recipient of all Peter's money on the following facts: Mary Bianco opened the account at issue prior to her marriage to Peter Bianco; shortly after their marriage Mary added Peter's name to the account because, in her words, "in case something should happen to her"; Peter Bianco served in the military during World War II and returned home with a gambling problem; Peter and Mary reached an agreement that from thence forth Mary would have complete control over the family finances; that from the time of their agreement to the present Peter Bianco turned over his paychecks to Mary, who would cash them, give Peter an allowance, pay the bills and bank the remainder; and finally, that Mary handled all of the deposits and the withdrawals in the account at issue. Capital argues that these facts show that Peter made an inter vivos gift to Mary of all his earnings. The Court does not agree.

A valid gift inter vivos must be the result of a donative intent borne by the free will of the donor. Kraus v. Kraus , Ind. , 132 N. E. 2d 608 (1956); Bulen v. Pendleton Banking Co., Ind. App., 78 N. E. 2d 449 (1948). Mary Bianco testified on direct that she insisted that Peter Bianco allow her to manage his money or else she would leave him. Certainly this belies a free will or a donative intent on the part of Peter Bianco to give up all his rights to the money. Furthermore, the Court finds that the agreement between Peter and Mary Bianco was more in the nature of a convenience than a gift. As with an incompetent person who permits another to sign checks on his account for the purpose of paying his expenses and so forth, Peter Bianco permitted his wife to handle the family financial affairs because he was unable to do so in a manner that would keep his family intact. Such an arrangement does not constitute a gift. Cf. Gary National Bank v. Sabo, 279 N. E. 2d 248, 252 (1972). Based on the Court's interpretation of the agreement between Peter and Mary Bianco, then, the Court does not find that the agreement varied the clear and unambiguous contractual terms of the signature card in any way. Based on those terms, the Court concludes that Mary and Peter Bianco each owned one-half of the funds in the joint account.

As the Court has concluded that Mary and Peter Bianco each owned one-half interest in the joint account at Capital, it follow that the Government's levy was effective against one-half of the account. A joint account may be subject to claims to the extent of the debtor-party's interest therein. Cf. West's Ind. Code Ann. §32-4-1.5-7 (a surviving party to a joint account is liable to the decedent's personal representative for the amount of the account which the decedent owned beneficially in order to discharge unpaid claims against the decedent's estate); §32-4-1.5-13 (where a party to a joint account is indebted to a financial institution, the financial institution has a right to a set-off on that portion of the account to which the debtor was beneficially entitled). At the time of the levy on November 16, 1978, the account contained a balance of $18,665.57, one-half of which belonged to Peter Bianco and was subject to the levy. Section 6332(c)(1) provides that the bank is liable for "a sum equal to the value of the property [subject to levy] not so surrendered." Accordingly, the bank is liable for one-half of $18,665.57, which equals $9,332.79.

[Enforceability of IRS Levy]

Capital presents three remaining arguments in its favor which the Court now rejects. Capital argues that the levy here is unenforceable because the Government failed to show that it met three prerequisites to levy: assessment; notice to taxpayer of deficiency and demand for payment; and failure of the taxpayer to pay the deficiency within ten days. See Martinez v. United States , 669 F. 2d 568 (9th Cir. 1981). Capital maintains that the Government failed to present evidence at trial of its compliance with these prerequisites. This is incorrect. The Government submitted its Exhibit A into evidence which shows the assessments made, the notices sent to Peter Bianco and the subsequent partial payments. By implication, then, this exhibit also shows the failure of Peter Bianco to pay his tax arrearages within ten days. The exhibit was admitted into evidence without objection by Capital. Capital's counsel points out that he stipulated to the admission of the exhibit stating that he assumed the exhibit was apparently being admitted merely to show the assessments and payments. Capital now argues that it did not agree for the document to be admitted to show the Government's compliance with the levy prerequisites. Where a party seeks to limit the purpose for which evidence is admitted at trial, it is incumbent upon the party to make an explicit request for such a limitation. Fed. R. Evid., Rule 105; 1 Louisell and Mueller, Federal Evidence §45 (1977). This request was not made and cannot be implied based on counsel's comment at the time of admission of what the opposing party's evidence was apparently being admitted for. Furthermore, this Court will not nullify a legitimate Internal Revenue Service levy for unpaid taxes where it clearly appears on the face of the record that the statutory prerequisites for that levy were satisfied.

[Potential Double Liability]

Capital next argues that it should not be held personally liable because the levy placed Capital in a position of potential double liability. Presumably Capital feels that if it had given the money in the joint account to the Government pursuant to the levy, it would have been subject to a claim by Mary Bianco that the money had belonged to her. Capital further points out that section 6332(d) protects it only from liability to the delinquent taxpayer. The short answer to Capital's argument is that it has failed to point out any authority showing that the possibility of multiple liability serves as a defense in an action for personal liability under section 6332(c). Callous as this response may seem, it is not the Court that enacted the Internal Revenue Code. The Court recognizes that Mary Bianco was a longtime valued customer of Capital Savings and certainly Capital wanted to please her when she wished to withdraw the money. Even so, there was a levy on the account. Had Capital released the money in the account to the Government in accordance with the levy, the proper procedure would have been for Mary Bianco to bring a refund action under 26 U. S. C. §7426. Cf. United States v. Rodgers [83-1 USTC ¶9139], No. 81-1476 (Slip op. May 31, 1983). In such an action, the burden would have been on the Government to prove that the property belonged to the taxpayer. Flores , supra. Of course, this may not bar Mary Bianco from also bringing an action against Capital for releasing the money to the Government. Without deciding what Capital's interest in the money was, it might be possible in such case for Capital to bring the Government in as a third-party defendant under section 7426.

[Estoppel]

Capital's final argument is that the Government should be estopped from asserting the personal liability of Capital here because of its inaction in informing Capital as to how the ownership of the account should be determined. The simple answer to this contention is that the facts of this case do not present a situation where estoppel would apply. Generally, "one who by his deed or conduct has induced another to act in a particular manner will not be permitted to adopt an inconsistent position . . . and thereby cause loss or injury to another." 31 C. J. S. Estoppel §1 (1964). Mere silence will operate as an estoppel only where there is a duty to speak and where the silence has led the adverse party to do something which he would not have done but for such silence. Id. at §87. Capital cannot argue that it permitted Mary Bianco to withdraw the money because the Government failed to inform Capital of its position on the ownership of the account. Granted, the Government did promise to make such a determination, but its failure to do so cannot be construed as prior approval of Capital's action. Capital's estoppel argument is without merit.

[Additional Penalty]

One more issue is as yet to be determined here regarding whether Capital is subject to the fifty percent penalty provision of section 6332(c)(2). Section 6332(c)(2) provides for a penalty where a defendant's refusal to surrender property subject to levy is without reasonable cause. A "reasonable cause" to resist the levy exists where there is a bona fide dispute over the amount of property owned by the taxpayer. United States v. Sterling National Bank and Trust [74-1 USTC ¶9336], 494 F. 2d 919, 923 (2nd Cir. 1974). The Court finds that there was a bona fide dispute as to the ownership of the property in question in this case and that no penalty should be imposed.

Judgment

It is therefore ORDERED that:

(1) the plaintiff has prevailed in this action and the defendant therefore is liable to the plaintiff in the amount of $9,332.79, plus any interest which may be applicable by law;

(2) the defendant had reasonable cause to refuse to surrender the funds at issue and therefore will not be subject to the penalty provisions of 26 U. S. C. §6332(c)(2); and

(3) each party shall bear its own costs.

 

84-2 USTC ¶9613]United States of America v. Third National Bank of Nashville , Tennessee

U. S. District Court, Mid. Dist. of Tenn., Nashville Div., No. 3-83-0763, 589 FSupp 155, 4/30/84

[Code Secs. 6331 and 6332]

Collection: Levy and distraint: Surrender of property: Ownership: Bank accounts: Reasonable cause: Savings account attachment: Penalty--Failure to surrender.--A bank's failure to honor the U. S. Government's levy against a taxpayer's savings account was wrongful and unreasonable; therefore, a fifty percent penalty, as well as the principal sum in controversy, plus costs and interest, was awarded against the bank. After having been served with a notice of levy against the taxpayer's bank account, the bank set off the balance in the savings account against the taxpayer's promissory note. The bank argued that it rightfully dishonored the levy because it was not in possession of property of the taxpayer which was subject to levy. The bank claimed that the taxpayer had no property right in his account because the bank could have exercised its contractual right of setoff prior to the maturity of the taxpayer's debt. By applying state law, the court determined that the taxpayer owned a property right in the savings account to which the levy would attach. The court found that the bank failed to exercise either its common law or contractual right to setoff before the federal tax lien attached to such property right and the subsequent setoff did not extinguish such lien. Further, the bank's initial decision to set off the funds in the account without seeking legal counsel, and its steadfast refusal to change such course of action despite overwhelming legal precedent was held to be unreasonable.

Joe Brown, United States Attorney, Nashville, Tenn. 37203, Robert E. Rice, Department of Justice, Washington, D. C. 20530, for plaintiff. James L. Roberts, P. O. Box 2704 , Nashville , Tenn. 37219 , for defendant.

Memorandum

MORTON, Chief Judge:

The United States brings this action against Third National Bank (hereinafter Bank) for the latter's failure to honor a tax levy upon a delinquent taxpayer's savings account. 26 U. S. C. §6332. The Government seeks to recover $1,683.52 plus costs and interest and a penalty of $841.76. Id. Neither party challenges this court's jurisdiction over this matter. 26 U. S. C. §7402; 28 U. S. C. §§ 1340, 1345.

The facts of this case are not in dispute. On September 6, 1979, M. A. "Mike" Warnke opened savings account number 004-21144-08 with the Bank. The contract governing that account provided in part that "[t]he Bank may pay depositors at its discretion on demand without notice, but the right is reserved to require sixty days' written and acknowledged notice of intention to withdraw funds on deposit." The Bank does not deny that Warnke in fact made deposits to and withdrawals from this account. On October 25, 1982, there was a balance of $1,683.52 on deposit in Warnke's account.

It was on October 25, 1982, that the Bank was served with a notice of levy upon all property and rights to property belonging to Michael A. and Rose Warnke in its possession. See 26 U. S. C. §6331. This levy was made in an effort to recover unpaid federal income taxes assessed against the Warnkes on April 19, 1982, and August 2, 1982, for the tax years 1980 and 1981, respectively. The levy sought to collect up to $99,155.28 in taxes.

The Bank refused to honor the levy. It notified the Internal Revenue Service that it was setting off the balance in the savings account against an indebtedness owed by Mike Warnke to it. This indebtedness was evidenced by a 91-day promissory note dated August 2, 1982, in the amount of $9,000. The terms of that note provided that "[a]ny indebtedness due from the legal holder hereof to the undersigned may be appropriated and applied hereon at any time, as well before as after the maturity hereof." For the purpose of this opinion, the court accepts the Bank's assertions that the August 2, 1982, note was the last in a series of renewal notes evidencing an obligation originally incurred on October 4, 1979, see First National Bank v. Yowell, 294 S. W. 1101 (Tenn. 1927); First National Bank of Sparta v. Hunter, 22 Tenn. App. 626, 125 S. W. 2d 183 (1938), and that each note in the series contained the setoff provision quoted above. There is no dispute that the setoff occurred after, and indeed was triggered by, the notice of levy. The Bank does not allege that the note was in default, see Doughty-Stevens Co. v. Greene County Union Bank, 172 Tenn. 323, 112 S. W. 2d 13, 15 (1938), the debt mature, see Id., nor Warnke insolvent. See Conquest v. Broadway National Bank, 134 Tenn. 17, 183 S. W. 160, 161 (1916). ¹ The Internal Revenue Service issued its notice of final demand January 10, 1983. When the Bank persisted in its refusal to surrender the $1,683.52 that had been in Warnke's savings account, the Government commenced this action.

There is no question that a lien in favor of the United States arose on April 19, 1982, when the Warnkes failed to pay the taxes assessed against them. ² 26 U. S. C. §6321. That lien immediately attached to all property and rights to property owned by the Warnkes on that date. Id. The Bank can raise only two defenses against the Government's efforts to enforce its lien: either it was not in possession of property of the taxpayer which was subject to levy or the taxpayer's property it was in possession of was subject to a prior judicial attachment or execution. 26 U. S. C. §6332(a); accord, United States v. Weintraub [80-1 USTC ¶9172], 613 F. 2d 612, 616, 622-23 (6th Cir. 1979), cert. denied 447 U. S. 905, 100 S. Ct. 2987, 64 L. Ed. 2d 854 (1980); United States v. Citizens and Southern National Bank [76-2 USTC ¶9665], 538 F. 2d 1101 (5th Cir. 1976), cert. denied, 430 U. S. 945, 97 S. Ct. 1579, 51 L. Ed. 2d 792 (1977); Bank of Nevada v. United States [58-1 USTC ¶9228], 251 F. 2d 820, 824 (9th Cir. 1957), cert. denied, 356 U. S. 938, 78 S. Ct. 780, 2 L. Ed. 2d 813 (1958); United States v. Manufacturer's Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366, 369 (2d Cir. 1952). A claim of lien priority is not a defense to a federal tax levy. Id. The Bank does not allege that Warnke's savings account was subject to a prior judicial lien.

The court must look to state law to determine whether the Bank held any of Warnke's property or rights to property on October 25, 1982. E.g., Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). The Tennessee cases unanimously hold that the relationship between a bank and a general depositor is that of a debtor to its creditor. Doughty-Stevens Co., supra, at 15; Conquest, supra, at 161; Wagner v. Citizens' Bank & Trust Co., 122 Tenn. 164, 122 S. W. 245, 247 (1909). Thus, the bank owns all those funds deposited with it, and the depositor retains a chose in action to recover those funds. A chose in action is property in Tennessee . Wills v. Franklin , 131 F. Supp. 668, 672 (E. D. Tenn. 1953), aff'd, 217 F. 2d 899 (6th Cir. 1954); See United States v. Bank of Celina [83-2 USTC ¶9688], 721 F. 2d 163, 167 (6th Cir. 1983); Citizens and Southern National Bank, supra, at 1105 ( Georgia law).

Having determined that Warnke retained a property right to recover his money from the Bank when he opened his savings account with it, the only remaining issue the court must decide is whether Warnke alienated that property right before the Government levied on his savings account. The Bank argues that since it could have exercised its contractual right of setoff prior to the maturity of Warnke's debt, he really had no property right in his account on October 25, 1982. In essence, the Bank's position is that a person does not own that against which there is an outstanding lien. It cites as authority for this remarkable proposition In Re Pine, 717 F. 2d 281 (6th Cir. 1983). The Bank has terribly misread In Re Pine, supra. The bankruptcy statute which the court construed in that case provided that a debtor could only exempt his equity interest in property from the claims of his creditors. See Tenn. Code Ann. §26-2-102 (1980). The court did not hold that one does not legally own property subject to a lien. Indeed, as Judge Lively and other astute scholars have observed, it is logically impossible to hold a lien against that which one owns. Citizens and Southern National Bank, supra, at 1106; 1 Schlichting, Rice & Cooper, Banking Law §11.02 (1983). Conversely, if property is subject to a lien, it must be owned by someone other than the lien holder.

Turning more particularly to the problem before the court here, it is perfectly clear that Warnke held a property right to the funds he had deposited with the Bank until the Bank exercised either its common law or contractual right of setoff. Common law setoff in Tennessee requires discrete action by the debtor before the creditor's property right is extinguished. The same is true of the Bank's contractual right of setoff: the note provides that the Bank "may," not that it "shall," appropriate and apply funds on deposit with it.

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

United States v. First National Bank of Arizona, 348 F. Supp. 388, 389 (D. Ariz. 1970), aff'd, [72-2 USTC ¶9655] 458 F. 2d 513 (9th Cir. 1972) (per curiam) (emphasis in the original); accord, Citizens and Southern National Bank supra, at 1106; United States v. Sterling National Bank and Trust Company of New York [74-1 USTC ¶9336], 494 F. 2d 919, 922 (2d Cir. 1974); United States v. Trans-World Bank [74-2 USTC ¶9632], 382 F. Supp. 1100, 1104 (C. D. Cal. 1974).

The tax lien having attached, the subsequently exercised setoff could not extinguish it. See Bank of Celina, supra, at 169.

Since Warnke had access to his account on October 25, 1982, the Bank's failure to honor the Government's levy was wrongful. Moreover, a review of the facts and law convinces the court that its refusal was completely unreasonable. The Bank made its initial decision to set off the funds in Warnke's account without consulting legal counsel, and then remained obdurately steadfast in its course of action despite overwhelming legal precedent against it. Consequently a fifty percent penalty as well as the principal sum in controversy plus costs and interests shall be awarded against the Bank. ³

An appropriate order shall be entered.

Order

In accordance with the memorandum filed herewith, judgment shall be entered for the Government in the amount of $2,525.28 plus costs and interests as provided by law.

¹ Arguably, neither Doughty-Stevens Co., supra, nor Conquest, supra, is authority for a bank's common law right of setoff, because both cases apply a state statutory right of setoff created by the bankruptcy code. However, the principles articulated in those cases regarding the statutory right of setoff are in accord with the common law. Compare Doughty-Stevens Co. , supra, and Conquest, supra, with 1 Schlichting, Rice & Cooper, Banking Law §§ 11.02-11.04 (1983).

² The April 19, 1982 assessment was for $23,525.34 exclusive of interest and penalties. Since this amount was far in excess of the value of any of the Warnkes' property held by the Bank, the court need not concern itself with the August 2, 1982, assessment.

³ Although the court is aware such a pronouncement is obiter dicta, were the question before it, it would find that the Government's lien had priority over any interest the Bank had in Warnke's account.

While the question of whether a taxpayer has property is a question of state law, the issue of priority of tax liens is governed by federal law. Aquilino, supra. It is this court's opinion that 26 U. S. C. §6323(b)(10) clearly provides that the only way a security interest in a bank account can take priority over a federal tax lien is for the secured party to cut off the depositor's access to the funds completely. The account need not be represented by a tangible instrument to block the depositor's access to it. As the regulations provide,

the term "passbook" includes . . . [a]ny procedure or system, such as an automatic data processing system, the use of which by the bank or other savings institution will prevent a withdrawal from the account to the extent of the loan balance.

Treas. Reg. §301.6323(b)-1(j)(2)(ii) (1976).

The same conclusion is reached if one analyzes the Bank's right as a security interest. See 26 U. S. C. §6323(a). Assuming that the Bank's contractual right of setoff is an interest in property acquired by contract to secure the payment of an obligation, it had not, as of October 25, 1982, become protected under local law against a subsequent judgment lien arising out of an unsecured obligation. See 26 U. S. C. §6323(h)(i). One may perfect a security interest in a chose in action either by assignment or pledge. See Duncan Box & Lumber Co. v. Applied Energies, 270 S. E. 2d 140 (W. Va. App. 1980); Walton v. Piqua State Bank, 204 Kan. 741, 466 P. 2d 316 (1970). The Uniform Commercial Code does not apply to bank deposits. Tenn. Code Ann. §47-9-104(k) (1979). Both assignment and pledge require the owner of the property affected to surrender all control over it to the secured party. See Woodward v. Crump, 95 Tenn. 369, 371, 32 S. W. 195 (1895); Robertson v. Wade, 17 Tenn. App. 457, 68 S. W. 2d 487, 493 (1933). Joint possession by the obligor and obligee, which is the most the Bank can argue in this case, is insufficient to create a security interest superior to subsequently attaching creditors. See Smith v. Atkinson, 51 Tenn. 625, 628, 4 Heisk. 491, 493 (1871).

Although dicta, hopefully this discussion of lien priority will forestall any further litigation between the parties to this action

 

[85-2 USTC ¶9798] United States of America , Plaintiff v. First National Bank and Trust Company, Defendant.

U. S. District Court, West. Dist. Pa., Civil Action No. 84-239, 10/16/85

[Code Secs. 6332, 7403 and 7426]

Assessment and collection: Surrender of property subject to levy: Defenses: Certificate of deposit: Bank.--A bank that failed to obey a tax levy and to surrender a certificate of deposit belonging to a delinquent taxpayer was liable for the value of the certificate plus interest, costs and a penalty of 50% of the certificate's value pursuant to Code Sec. 6332. The bank's assertion that it had a security interest in the certificate was not one of the two recognized defenses to a suit brought for failure to surrender property. Although the bank's assertion may have been valid in a suit brought by a nontaxpayer to determine property rights under Code Sec. 7426, the bank failed to timely file such a suit. The government's initiation of the surrender suit after an action to determine the bank's rights was barred did not constitute fundamental unfairness. In addition, the bank could not assert its property rights under Code Sec. 7403 since it dealt with lien enforcement and was inapplicable to the situation where a party fails to surrender property.

Craig R. McKay, Assistant United States Attorney, Stuart M. Fischbein, Department of Justice, Washington, D. C. 20530, for plaintiff. B. A. Karlowitz, W. M. Hoffman, G. J. Gaertner, Berkman, Ruslander, Pohl, Lieber, Engel, One Oxford Center, Pittsburgh, Pa. 15219, for defendant.

Memorandum Opinion

DIAMOND, District Judge:

By this action, plaintiff seeks to recover the value of certain property plus interest, costs and a penalty of 50% of that value pursuant to 26 U. S. C. §6332(c)(1) and (2) (1967), as a result of defendant's failure to surrender on plaintiff's demand certain property of a delinquent taxpayer. Presently before the court are plaintiff's and defendant's crossmotions for summary judgment. For the reasons given herein, the plaintiff's motions will be granted, and the defendant's motion will be denied.

The undisputed facts necessary to the disposition of the motions are as follows. The plaintiff (hereafter "government") made an assessment against, and gave noice of the demand for payment of delinquent taxes to, one Robert Gigli (hereafter "Gigli"). After Gigli failed to comply with the demand for payment, the government duly filed a notice of a Federal Tax Lien (hereafter "Lien"). Thereafter, plaintiff served a notice of levy on defendant on certain assets of Gigli in the possession of the defendant. These assets consisted of a certificate of deposit in the amount of $25,000 and a checking account. The defendant tendered the balance of Gigli's checking account in accordance with the levy, but refused to render the certificate of deposit of Gigli, which previously was pledged by him as security for a loan extended by the defendant to a third party. As a result of the defendant's refusal to comply with the government's final demand for the certificate of deposit, this suit was initiated.

Title 26 U. S. C. §6332(a) (1967) provides in its pertinent part that ". . . any person in possession of . . . property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property . . . except such part of the property . . . as is, at the time of such demand, subject to an attachment or execution under any judicial process." (emphasis added). Subsection (c)(1) of §6332 imposes upon a party who fails to surrender the levied property, liability equal to the value of the property at the time of the levy along with interest and costs, and subsection (c)(2) adds a penalty equal to 50% of the aforementioned liability if the party fails or refuses to surrender the property without reasonable cause.

While the Third Circuit has not addressed the issue, other courts uniformly have recognized only two defenses to a suit filed pursuant to §6332(c)(1) and (2). These defenses are that at the time of the §6332(a) demand (1) the defendant was not in possession of the levied property of the taxpayer or (2) the property was subject to a prior judicial attachment or execution. United States v. Citizens Southern National Bank [76-2 USTC ¶9665], 538 F. 2d 1101 (5th Cir. 1976), cert. denied, 430 U. S. 945 (1977), and United States v. Sterling Nat'l Bank & Trust [74-1 USTC ¶9336], 494 F. 2d 919 (2d Cir. 1974). ¹

The defendant, however, maintains that a party also may assert as a defense to a claim under §6332 that the party has a superior interest in the property. The defendant argues that in Pittsburgh Nat'l Bank v. United States [81-1 USTC ¶9239], 498 F. Supp. 101 (W. D. Pa. 1980), aff'd [81-2 USTC ¶9626], 657 F. 2d 36 (3d Cir. 1981), this court rejected the authority of Citizens Southern and Sterling National, supra.

We disagree. The Pittsburgh Nat'l Bank case was a suit brought under 26 U. S. C. §7426 (1967) for wrongful levy by a person in possession of property of a taxpayer which had been levied upon by the government. The Citizens Southern and Sterling National cases were cited by the government as a defense to plaintiff's claim that the government had wrongfully levied on property of a taxpayer as to which plaintiff had a superior claim. They were offered as authority for the proposition that a levy could attach to deposited funds which were held as security for demand loans with the banks. At n. 3 on p. 104 we rejected that defense for the reason that the underlying state law applicable in the states involved in those cases was different than Pennsylvania law, which controlled in the Pittsburgh Nat'l Bank case. The rejection by the court of those cases as authority for the defense asserted by the government in a §7426 case is no basis for our rejection of them as authority for the entirely different proposition for which they do indeed stand; to-wit, that the only defenses which may be asserted against a claim made pursuant to §6332 are those set forth supra. As we note subsequently, has the defendant here filed a timely suit under §7426, as the plaintiff did in Pittsburgh Nat'l Bank, the result here could well be different. This is a §6332 suit and that section, not §7426, establishes the procedural posture of this case and prescribes the defenses available to the defendant.

The defendant also urges that the plain meaning of 26 U. S. C. §7403 (1967) permits the defendant freely to assert its property rights in this action. ² This argument also is without merit. Section 7403 pertains to suits "to enforce liens" and it empowers a court, after having considered all the claims of all interested parties, to order the sale of property subject to a levy. The purpose of that section is to assure the adjudication of all claims and interests prior to sale of the asset. It has nothing to do with the situation where a party fails to surrender property subject to a levy.

The defendant finally argues that permitting the government to recover under §6332 after a claim under 26 U. S. C. §7426 (1967) is time barred by the applicable statute of limitation, as is the case here, is fundamentally unfair. The adjudication of conflicting interests in levied property is governed by 26 U. S. C. §7426 (1967). ³ Of course, the short answer to this argument is that the defendant has only itself to blame for failing timely to file suit pursuant to §7426. In Pittsburgh Nat'l Bank, supra, where the institution in possession timely filed a §7426 action, it prevailed.

In accordance with the foregoing, we find that the defendant is liable pursuant to §6332(c)(1) since the certificate of deposit was within defendant's possession and was not subject to a prior judicial attachment or execution. In addition, we find that the defendant is liable under §6332(c)(2), since we find that in view of the clear language of §6332; the well-established precedent limiting the defenses to a claim filed under §6332; the clear absence of either of those defenses; and the failure of the defendant timely to assert a claim available to defendant under §7426, that the defendant did not act with reasonable cause when it refused to surrender the certificate of deposit to the plaintiff.

In accordance with the foregoing, we find that the defendant, First National Bank and Trust Company, is liable to the plaintiff, the United States of America, in the amount of $25,000, the value of the certificate of deposit, (along with the value of any interest or dividend which had accrued at the time of the levy) plus the statutory interest as provided in 26 U. S. C. §6621 compounded from July 8, 1981 to February 3, 1984, and the penalty provision pursuant to 26 U. S. C. §6332(c)(2).

An appropriate order will follow.

Order of Court

AND NOW, this 16th day of October, 1985, for the reasons given in the court's memorandum opinion filed this date, IT IS ORDERED that plaintiff's motion for summary judgment be, and the same hereby is, granted; and,

IT IS FURTHER ORDERED that defendant's motion for summary judgment be, and the same hereby is, denied; and,

IT IS FURTHER ORDERED that the parties submit a proposed form of judgment consistent with the court's memorandum opinion within ten (10) days.

¹ See also, e.g., United States v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366 (2d Cir. 1952); United States v. Commonwealth of Pa., Pa. Dept. of Highways [73-2 USTC ¶9619], 349 F. Supp. 1370 (E. D. Pa. 1972); United States v. New England Merch. Nat'l Bank [79-1 USTC ¶9250], 465 F. Supp. 83 (D. Mass. 1979) and Marshall v. Presidio Valley Farms, Inc., 512 F. Supp. 1195 (D. Del. 1981).

² Section 7403 provides that the Attorney General may file a civil action in a district court of the United States, §7403(a) and that the court, after adjudicating and determining the merits of all claims and liens upon the property, may decree the sale of such property §7403(c).

³ Section 7426 provides that any person (other than the assessed taxpayer) who claims an interest or lien on property subject to a Federal Tax Lien may file an action in a district court of the United States, §7426(a), and seek either an injunction prohibiting the enforcement of the levy or recovery of the enforcement of the levy or recovery of the property, §7426(b).