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
[56-2 USTC ¶9603]
United States of America
v. Washington Trust Company of
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.
Attorney, 613 New Postoffice and Courthouse,
, for plaintiff. Edward Goldberg, 1806 Law and
, for defendant.
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.
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.
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.
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
, its successors and assignees. Jones Coke & Briquette Company,
Louis M. Vinocur, Treasurer."
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
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.
delivered the check to Hyman on April 26, 1950.
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
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
, 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.
defendant, Washington Trust Company, has refused to pay the amount for
which levy was made.
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.
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.
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
District Court, West.
, Civ. 84-239, 4/4/88
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.
McKay, Assistant United States Attorney,
, 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
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
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.
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.
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.
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.
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
(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.
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 ."
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.
also argues, however, that the principles of
law as outlined by this court in Pittsburgh National Bank v. United
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
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."
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.
(quoting Aarons, 318
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
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.
and Loan Association, 318
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.
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.
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.' "
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
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.
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.
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.
order will follow.
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.
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
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.
Attorney for plaintiff. L. Roy Zapf, 601 Peoples Bank Building,
, for defendant.
of Fact and Conclusions of Law
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:
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
defendant, Peoples State Bank, is an
corporation with an office and place of business in
, 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
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.
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.
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.
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.
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.
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
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
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.
From the foregoing facts the Court concludes:
1. This Court
has jurisdiction over the parties and the subject matter in this cause
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.
v. Manufacturers Trust Company, 2 Cir., 198 Fed. (2d) 366 [52-2
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.
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.
be entered accordingly.
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.
THEREFORE HEREBY ORDERED, ADJUDGED AND DECREED that the Court's
Conclusion of Law Number 6 in this matter be amended to read as follows:
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.
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
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
Rul. 55-187, 1955-1 CB 197
SECTION 6331.--LEVY AND DISTRAINT
26 CFR 301.6331-1: Levy and distraint.
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
S. District Court, East.
, 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
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.
of Fact and Conclusions of Law
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
plaintiff Richard Bishop is, and at all times material hereto was, a
resident of the city of
, State of
. 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
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
, State of
quit-claim deed dated February 8, 1957, Charles E. Bishop conveyed to
his son, the plaintiff herein, a motion picture theater business located
, and operated under the name of the Roxy Theater. Thereafter, there was
operated from the theater building in
, a loan and collection business.
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
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
was written to Charles E. Bishop as the operator of the collection
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
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
, 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
, 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
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
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
, 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
and credited against the delinquent tax liability of Charles E. Bishop
and Ruth N. Bishop.
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
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.
foregoing Findings of Fact, the Court makes the following
I. By virtue
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.
II. At all
times material herein, and pursuant to 26
C. 6321, the
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.
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
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
52-1 USTC ¶9321]Antonio Raffaele and
Granger, Collector of Internal Revenue, Appellant
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
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.
Kauffman, 7 Court Place,
, for appellees. Frederic G. Rita, Special Assistant to Attorney
General, Department of Justice, Washington 25, D. C., for appellant.
KALODNER and HASTIE, Circuit Judges, HARTSHORNE, District Judge.
of the Court
This is an
appeal by a Collector of Internal Revenue from an order of a district
court quashing a warrant of distraint.
who fails upon demand to pay taxes owed the
, 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
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.
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
calls the ownership in these cases tenancy by the entireties. Madden
v. Grosztonyi Savings & Trust Co., 1938, 331
476, 200 Atl. 624, confirming a long line of adjudicated cases. But he
contends that what
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
law views this power of each spouse as a power to act for both, and no
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.
We think it
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
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
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].
of the Collector]
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.
, supra, note 2.
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
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
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.
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.
will be affirmed.
1 26 U. S. C.
§3690. Authority to distrain.
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."
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
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.
Attorney, for plaintiff. Samuel Rudner, Katzenbach, Gildea and Rudner,
for defendant, Trenton Banking Co.
of Facts, Conclusions of Law and Order for Judgment
Finding of Facts
I find as
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
corporation, having its principal place of business in
4. On November
10, 1953, the balance credited to the aforesaid joint savings account
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.
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.
defendants Clarence E. Richardson and Ann Richardson having failed to
appear or plead herein plaintiff, under applicable law of the State of
, is entitled to the entire interest of the defendant Clarence E.
Richardson in the balance of the joint savings account aforesaid.
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
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
S. District Court, No. Dist.
, 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.
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.
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.
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.
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.
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
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,
Meyler and Leo F. Covey, both of
, 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
ALLEN, and HAMILTON, Circuit Judges.
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
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
, 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
made a demand upon Hoefle for the payment of delinquent taxes in excess
of $50,000, in pursuance of certificates of assessment received from
. 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.
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
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
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
, 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
judgment, with other circumstances, led to a settlement between
, 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.
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.
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.
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.
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.
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.
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.
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.
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
. 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
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.
below is affirmed.
[65-2 USTC ¶9720]
United States of America
, Plaintiff v. National Bank of Commerce, Defendant
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.
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
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.
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.
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,
, 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.
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
C. A. §6332.)
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
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
law does not require exercise of setoff, but it occurs through
"compensation" by operation of law. The claim of the
in Bank of
, supra, was based on an agreement which gave the bank the option of
setoff under certain specified contingencies.
, the claim of setoff is treated in civilian terminology as
"compensation." Compensation is defined in Article 2207,
LSA-Revised Civil Code:
two persons are indebted to each other, there takes place between them a
compensation that extinguishes both the debts, in the manner and cases
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
provisions for legal compensation, and the credit in one account would
be extinguished by the overdraft debit in the other.
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
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
1 Mr. Belloni,
the manager, states in his affidavit:
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
, Defendant Third Party Plaintiff-Appellant v. Charles S. Smith, Third
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
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.,
, 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.
LUMBARD, FRIENDLY, and TIMBERS, Circuit Judges.
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
appeals from an order entered on June 5, 1973, in the Southern District
of New York which granted the
' 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).
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 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.
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.
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.
of whether the bank held property or a right to property of Smith is one
of state law, in this case
's. Aquilino v. United States [60-2 USTC ¶9538], 363
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,
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,
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
because of the contractor's unpaid taxes. Judge Mansfield held that,
agreed to pay the contractor all that was due it regardless of whether
was obliged to pay the contractor's workers,
need only turn over the difference between the two obligations to the
before us is clearly distinguishable from
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.
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
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  U. S. Code Cong. & Admin. News
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
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
[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.
Circuit Judge (dissenting):
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.
says, quite properly, that no bank in the Second Circuit can ever again
claim reasonable cause to act precisely as
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
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.
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.
PHILLIPS, Chief Judge, ENGEL, Circuit Judge, and DUNCAN, * District
This is an
appeal from a judgment in favor of the
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
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:
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
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.
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.
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.
v. First National Bank, 348 F. Supp. 388 (D. Ariz. 1970), affirmed
[72-2 USTC ¶9655] 458 F.2d 513 (9th Cir. 1972).
the judgment of the district court is affirmed.
Honorable Robert M. Duncan,
District Court for the Southern District of Ohio, sitting by
1 26 U. S. C.
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.
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
Savings Association, Defendant
S. District Court, No.
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.
Attorney, Charles B. Miller, Assistant United States Attorney,
, T. Kazan Ray, Department of Justice,
, 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
Opinion and Order
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
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
2. That on
November 16, 1978 Pete Bianco a/k/a Peter J. Bianco owed delinquent
income taxes to the
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
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
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.
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.
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
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
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.
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
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
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
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.
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.
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
of Law and Discussion
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
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.
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
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.
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],
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
[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.
[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."
, 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.
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
is determined by the contributions of the parties to that account
"unless there is clear and convincing evidence of a different
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.
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
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.
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.
Agreement v. Depositary Agreement]
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.
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.
, 132 N. E. 2d 608 (1956); Bulen v. Pendleton Banking Co.,
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
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.
of IRS Levy]
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
, 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.
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.
, 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.
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.
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.
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.
therefore ORDERED that:
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;
defendant had reasonable cause to refuse to surrender the funds at issue
and therefore will not be subject to the penalty provisions of 26
C. §6332(c)(2); and
(3) each party
shall bear its own costs.
84-2 USTC ¶9613]United States of
v. Third National Bank of
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.
United States Attorney, Nashville, Tenn. 37203, Robert E. Rice,
Department of Justice, Washington, D. C. 20530, for plaintiff. James L.
P. O. Box 2704
, for defendant.
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.
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
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
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
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.
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
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
1277, 4 L. Ed. 2d 1365 (1960). The
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
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
. Wills v.
, 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 (
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
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.
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
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.
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
C. §6323, intended to prohibit the Government from levying on that
which is plainly accessible to the delinquent taxpayer-depositor.
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.
The tax lien having attached, the subsequently exercised setoff could
not extinguish it. See Bank of Celina, supra, at 169.
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
order shall be entered.
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.
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
, 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.
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,
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).
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.
App. 1980); Walton v. Piqua State Bank, 204
741, 466 P. 2d 316 (1970). The Uniform Commercial Code does not apply to
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
369, 371, 32 S. W. 195 (1895); Robertson v. Wade, 17
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
625, 628, 4 Heisk. 491, 493 (1871).
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.
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
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.
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
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.
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
945 (1977), and
Nat'l Bank & Trust [74-1 USTC ¶9336], 494 F. 2d 919 (2d Cir.
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
The Pittsburgh Nat'l Bank case was a suit brought under 26
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
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.
also urges that the plain meaning of 26
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.
finally argues that permitting the government to recover under §6332
after a claim under 26
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
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.
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.
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).
order will follow.
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.
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).