Annotations- Bank Accounts Page4

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 [48-1 USTC ¶9180] United States of America , Plaintiff, v. The Mutual National Bank of Chicago, Defendant

In the District Court of the United States for the Northern District of Illinois, Eastern Division, No. 4513, 77 FSupp 609, February 5, 1948

Collection of taxes: Distraint: Bank account.--The United States was allowed to recover by distraint levy the amount of cash in the custody of the defendant bank derived from the sale of securities deposited therein by a delinquent taxpayer under a pseudonym and liquidated at his request.

Otto Kerner, Jr. , U. S. Attorney, for the plaintiff. Francis E. Hinckley, 100 W. Monroe St., Chicago, Ill.; Chester W. Kulp, Rathje, Sabel & Sullivan, 100 W. Monroe St., Chicago, Ill., for the defendant.

Findings of Fact and Conclusions of Law

Findings of Fact

SULLIVAN, District Judge:

1. That the plaintiff is a corporation sovereign and body politic.

2. That the defendant is a national banking corporation duly organized, created and existing under and by virtue of the laws of the United States of America as a banking institution with its office and principal place of business in Chicago , Illinois .

3. That one J. Roy Brangenberg and his wife, Nelda Brangenberg, are jointly and severally liable for income taxes to the plaintiff for the years 1924, 1926, 1927 and 1928, together with penalties and interest on said income tax liability, in the total amount of $25,411.64.

4. That said income tax liability and penalties and interest thereon have never been paid by the said J. Roy Brangenberg or said Nelda Brangenberg to the plaintiff.

5. That the defendant had in its possession certain securities which have been deposited with defendant by one Leo Lundquist, and that said securities consisted of bonds or certificates of deposit for bonds on five different parcels of real estate all situated in Cook County, Illinois, and that all such securities have been liquidated by the defendant at the request and direction of the said Leo Lundquist, and have been converted into cash, so that the defendant now holds in its possession for the said Leo Lundquist the sum of $3,918.00.

6. That the said J. Roy Brangenberg and the said Leo Lundquist are one and the same person.

7. That on June 12, 1941 the Collector of Internal Revenue served upon the defendant on account of the aforesaid income tax liability of J. Roy Brangenberg liens and levies against all properties held by the defendant for the said J. Roy Brangenberg, alias Leo Lundquist.

8. That the aforesaid tax liability of said J. Roy Brangenberg was assessed on the June 1935 Special #6 List of the Commissioner of Internal Revenue, and that prior to the expiration of six years from that date the plaintiff herein commenced an action in the United States District Court for the Northern District of Illinois against the said J. Roy Brangenberg as case number 3115 for the collection of said tax liabilities.

Conclusions of Law

1. The aforesaid tax liability was legally, duly and timely assessed against the said J. Roy Brangenberg.

2. That the said J. Roy Brangenberg is indebted to the plaintiff for income taxes, plus penalties and interest for the years 1924, 1926, 1927 and 1928 in the total amount of $24,411.64.

3. That the said sum of $3,918.00 held by the defendant in the name of Leo Lundquist is the property of the aforesaid J. Roy Brangenberg.

4. That by virtue of the provisions of law in such cases made and provided the United States by virtue of the said assessment of income tax liabilities has a lien upon all property or rights to property, whether real or personal, belonging to said J. Roy Brangenberg, and that lien is still in full force and effect.

5. That this action was commenced at the request of the Commissioner of Internal Revenue and at the direction of the Attorney General of the United States to enforce said lien against said moneys held by the defendant for the aforesaid J. Roy Brangenberg.

6. That the plaintiff is entitled to judgment against the defendant, The Mutual National Bank of Chicago, in the sum of $3,918.00, said sum being all the moneys, properties or rights to property held by the defendant for the said J. Roy Brangenberg, and the payment of said judgment by the defendant shall relieve it of any obligations to the said J. Roy Brangenberg for said funds.

 

[42-2 USTC ¶9590] United States of America , Plaintiff, v. The Marine Midland Trust Company of New York , Defendant

United States District Court, Southern District of New York, Civil 14-105, 46 FSupp 38, Filed July 2, 1942

Distraint: Proceeding against bank account.--Action was brought to collect taxes assessed for the year 1936, together with a delinquency penalty, by levy against the deposit of taxpayer in the defendant bank. The bank declined to deliver the funds because taxpayer's account was designated as a "Special Account." The Court holds that the term "Special Account" is not indicative of a trust relationship in the absence of supporting evidence and that the taxpayer had both legal title and beneficial interest in the account which was subject to distraint for his unpaid taxes.

Mathias F. Correa, U. S. Attorney for the Southern District of New York, for plaintiff. John B. Creegan, of Counsel. Sullivan & Cromwell, for defendant. Frank J. Berberich, of Counsel.

GALSTON, D. J.:

This is an action of a civil nature arising under the Internal Revenue Laws and instituted pursuant to the authority and sanction of the Commissioner of Internal Revenue under the direction of the Attorney General.

I find the following facts:

[The Facts]

On September 14, 1939, the Commissioner of Internal Revenue duly assessed against Fred B. Lloyd and Genevieve Lloyd an income tax in the amount of $125 for the year 1936. On January 22, 1940 the Commissioner duly assessed against the same taxpayers a delinquency penalty of $31.25 for the year 1936. These taxes were not paid though notices and demand were issued by the Collector of Internal Revenue for the Second District of New York on September 11, 1939, and again on January 31, 1940.

On October 26, 1939 a notice of levy was served on the defendant. The Marine Midland Trust Company of New York , by the Collector; and on March 25, 1940 an amended notice of levy was served on the defendant demanding that it turn over the amount of $179.53, which was the amount of tax and interest then due and owing by the taxpayer. On March 25, 1940 the defendant bank had on deposit in the name of Fred B. Lloyd the sum of $223.50 in an account designated "Special Account". The defendant declined to turn over any part of the said deposit of Fred B. Lloyd.

The foregoing facts are not in dispute. In addition it appears that Fred B. Lloyd disappeared on October 26, 1936 and has not since been heard from. The defense apparently rests on the contention, as set up in the answer, that it is not clear to defendant that persons other than said Fred B. Lloyd had no interest in this "Special Account" and that the defendant requested the Collector to withhold further proceedings until the situation was clarified either by the re-appearance of Lloyd or by the appointment of a temporary administrator.

[Statutes Involved]

The statutes involved are Sec. 3690, Title 26, U. S. C., and Sec. 3710, Title 26, U. S. C. The former statute authorizes the Collector to collect taxes with interest and other additional amounts by distraint, "in the manner provided in this sub-chapter, of the goods, chattels, or equities, including * * * bank accounts, and evidences of debt of the person delinquent as aforesaid." And the latter statute provides that any person in possession of property subject to distraint shall, on demand by the Collector, surrender such property to said Collector, "unless such property or right is, at the time of such demand, subject to any attachment or execution under any judicial process."

Clearly then, if the account opened by the taxpayer Lloyd, designated "F. B. Lloyd, Special Account", is the property of the taxpayer, the United States has a right of action against the bank for failure to turn over the funds sought. United States v. American Exchange Irving Trust Company, 43 Fed. (2d) 829 [2 USTC ¶577]; United States v. National City Bank of New York, 32 F. Supp., 890 [40-1 USTC ¶9253]. The sole asserted defense of the bank seems to be that because the account is designated "Special Account" it served as a notice to it that some persons other than F. B. Lloyd "may have an interest in the monies in the account". But the defendant admits in its brief that it has found no authority to sustain its position.

[Term "Special Account" Not Indicative of Trust Relationship]

Thus so far as the record in this case reveals, the funds standing to the credit of the "Special Account" of F. B. Lloyd, were deposited by Lloyd. Clearly then he had legal title to these funds and there is no evidence of any beneficial or otherwise equitable or adverse interest therein. To conclude that the term "Special Account" is indicative of a trust relationship would go beyond any authoritative interpretation of the nature of a trust fund. The usual indicia of a trust are lacking. There was no agreement either written or oral proved. There is no evidence of a named trustee or named beneficiary, nor indeed is there any evidence of any of the usual or ordinary terms provided for in a trust instrument. So far as the proof in the case demonstrates, Lloyd held both the legal title and the beneficial interest in the "Special Account". It must be concluded than that a trust was not created by him. See generally Restatement of the Law, Trusts, Secs. 2, 4 and 17. It must be concluded that the term "special" in the present instance was merely by way of distinguishing the account, perhaps, from other accounts. No other reason has been disclosed.

Finally it may be observed that the defense of the bank that it may be subject to double liability is not sustainable. Sec. 3710, Title 26, U. S. C. would relieve the bank only in the event that the funds had been shown to be subject to an attachment or execution under judicial process. See Coler v. Corn Exchange Bank, 250 New York 136; affirmed 280 U. S. 218.

Judgment is accordingly directed in favor of the plaintiff against the defendant in the amount of $179.53, with interest thereon from March 25, 1940, together with costs and disbursements.

 

[58-2 USTC ¶9723]Richard D. Leuschner, Appellant v. First Western Bank and Trust Company, a California Banking Corporation, and United States of America , Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 15,618, 261 F2d 705, 7/1/58, Affirming District Court, 57-2 USTC ¶9734

[1954 Code Sec. 6332 and R. S. Sec. 3466]

Collection: Lien for taxes: Priority in administration: Beneficiary of spendthrift trust and lien by Government.--First, the Government can reach the interest of a beneficiary of a spendthrift trust to enforce its claim for unpaid taxes. It is for the very reason that the taxpayer-beneficiary acquires a property right to receive the trust income that the Government has the power to levy thereon. Second, a claim of the United States for unpaid taxes, filed but not adjudicated in a voluntary bankruptcy proceeding of the beneficiary, did not bar the right of the United States of enforce a lien filed subsequent to the adjudication of bankruptcy. The filing of notice of levy and seizure after adjudication by the bankruptcy court seemed to preclude any jurisdiction over the lien by that court.

C. Ray Robinson, Merced, Calif., Lewis, Field, DeGoff & Stein, Sidney F. DeGoff, M. S. Huberman, A. B. Canelo, San Francisco, Calif., for appellant. Charles K. Rice, Assistant Attorney General, Arthur I. Gould, A. F. Prescott, Lee A. Jackson, Department of Justice, Washington, D. C., Lloyd H. Burke, United States Attorney, Lynn J. Gillard, Assistant United States Attorney, San Francisco, Calif., for United States. Orrick, Dahlquist, Herrington & Sutcliffs, Christopher M. Jenks, San Francisco, Calif., for First Western Bank and Trust Co.

Before HEALY, POPE and FEE, Circuit Judges.

FEE, Circuit Judge:

In this case there are only two questions for decision. First, the trial court held [57-2 USTC ¶9734] that the right of the United States to collect unpaid income taxes prevails over spendthrift provisions of a trust notwithstanding the statute of the State of California, which exempts a portion of the right of a beneficiary thereunder for his education and support. Second, it was also held that the claim of the United States for preference on the unpaid taxes, filed in a voluntary bankruptcy proceeding of the beneficiary, did not bar a subsequent adjudication in the District Court of the right of the United States to enforce a lien upon property of the bankrupt filed subsequent to the adjudication.

The technical framework whereby these questions were raised need not delay us. Leuschner brought suit against his co-trustees, including the First Western Bank and Trust Company, in the state court for moneys held by the Bank as depository and claimed to be due him as a beneficiary of a trust. The bank filed interpleader, joining the United States. The United States removed the cause to the federal court and sued the Bank independently, pursuant to 26 U. S. C. A. §6322(b), for penalty because of failure to turn over to the United States funds belonging to Leuschner. The adjudication of bankruptcy of Leuschner was dated July 7, 1955. The government filed lien on July 22, 1955, and on that same date delivered a notice of levy to a trust officer of the First Western Bank and Trust Company. On April 5, 1956, a final demand was delivered. The court found that the Bank had made no payments to Leuschner from the trust after that date, that the Bank was not subject to penalty, that the United States did not state a claim in the pleadings for the foreclosure of its lien, and that the Bank and trustee who interpleaded were entitled to attorney fees. None of these findings has been appealed. After determining the questions first above set out, the District Court dismissed the complaint filed by Leuschner, and he appeals.

The mother of Leuschner, executed a trust agreement where he, Erida Leuschner Reichert, Armin O. Leuschner and First Western Bank and Trust Company were trustees, and he, along with others, was a beneficiary. The pertinent provisions of the trust agreement reads:

"Each and every beneficiary under this trust is hereby restrained from and shall be without right, power or authority to sell, transfer, pledge, mortgage, hypothecate, alienate, anticipate or in any other manner affect or impair his, her or their beneficial and legal rights, titles, interests, and estates in and to the income and/or principal of this trust during the entire term hereof; nor shall the rights, titles, interests and estates of any beneficiary hereunder be subject to the rights or claims of creditors of any beneficiary, and all the income and/or principal of this trust shall be transferable, payable and deliverable solely to the beneficiaries as herein provided, and the Trustees may require the personal receipt of any beneficiary as a condition precedent to the payment of any money or other property to such beneficiary."

The provision is legal under §867 of the California Civil Code. ¹ But, by another section of the same Act, ordinary creditors are permitted to reach all income of a beneficiary of such a provision except so much as is necessary for his education and support. ²

It is the claim of the United States that, under the Income Tax Amendment to the Federal Constitution, a lien for unpaid income tax may be levied and collected from all property or income received by a person, irrespective of private agreements or laws of the states to the contrary. The position of the government is that the California legislation above considered attempts to provide an exemption for the beneficiary which is valid as to creditors. ³ In view of the paramount amendment, such income cannot be isolated from the lien of the United States.

This rule is stated in the Restatement of the Law as follows:

"Although a trust is a spendthrift trust or a trust for support, the interest of the beneficiary can be reached in satisfaction of an enforceable claim against the beneficiary, * * * (d) by the United States * * * to satisfy a claim against the beneficiary." Restatement, Trusts, §157 (1948 Supp.). ⁴

There is no doubt that the paramount right to collect taxes of the federal government overrides a state statute providing for exemptions. ⁵

But the bastion of the claim built up by Leuschner is that he had a property right to receive this income for education and support. Thus it is sought to construe the California statute to avoid the inference that an exemption is granted thereby. It is for the very reason that Leuschner acquires a property right that the government has the power to levy thereon. ⁶ No opinion is expressed as to what result would follow if the trust provided that, upon seizure of the proceeds, the gift would lapse and thereafter the income would be payable to the other cestui que trust. So long, however, as Leuschner has a property interest in these payments, the government has the power to seize them. ⁷

The last point made by Leuschner is not maintainable. Leuschner filed a voluntary petition in bankruptcy and was so adjudicated. The government filed a claim that the tax liability of Leuschner be paid in preference to other creditors. Leuschner suffered no detriment from the filing of such a claim, and it was not discharged by the adjudication. The trustee did seek to have the trust income applied to the claims of creditors. The referee held that this fund could not be reached. The claim of the government was never passed upon or adjudicated in any way. Sometime after the petition was filed, the lien notice was served on the Bank. No estoppel is involved. If the referee had held that the government had no claim or that there was no lien upon the fund by the service of the notice, some question might be raised. ⁸ But the filing of the notice of levy and seizure after the adjudication seems to preclude any jurisdiction over the lien by the bankruptcy court. None of the cases cited by Leuschner bears upon the point.

Affirmed.

¹ "The beneficiary of a trust for the receipt of the rents and profits of real property, or for the payment of an annuity out of such rents and profits, may be restrained from disposing of his interest in such trust, during his life or for a term of years, by the instrument creating the trust." Cal. Civ. Code, §867.

² "Where a trust is created to receive the rents and profits of real or personal property, and no valid direction for accumulation is given, the surplus of such rents and profits, beyond the sum that may be necessary for the education and support of the person for whose benefit the trust is created, is liable to the claims of the creditors of such persons, in the same manner as personal property which cannot be reached by execution." Cal. Civ. Code, §859.

³ Section 859 of the California Civil Code is an exemption statute. By enactment of it, "the legislature has provided that the amount of income necessary for [the] * * * 'education and support' [of beneficiaries of the proceeds of a spendthrift trust] shall be free from claims of creditors." Canfield v. Security First National Bank, 13 California 2d 1, 12. The New York Court of Appeals, in dealing with a similar enactment, said that "the provisions of law which afford protection to the beneficiaries of trusts are practically simply statutes of exemption." Brearley School, Ltd. v. Ward, 201 New York 358, 364.

⁴ The leading case in support of this proposition is similar to the instant one. It is In re Rosenberg's Will, 269 New York 247 [35-2 USTC ¶9650], cert. den. sub nom. Rosenberg v. United States, 298 U. S. 669. See also United States v. Dallas National Bank, 5 Cir., 152 Fed. (2d) 582 [46-1 USTC ¶9117]; United States v. Canfield, 29 Fed. Supp. 734 [39-2 USTC ¶9641], appeal dismissed sub nom. Security-First National Bank v. United States, 9 Cir., 113 Fed. (2d) 491.

"It has been held in a number of cases that the government can reach the interest of a beneficiary of a spendthrift trust to enforce its claim for unpaid taxes. * * * It seems clear that the creator of a trust ought not to be permitted to exempt the interest of the beneficiary from liability for taxes payable by the beneficiary, even where he can exempt it from the claims of ordinary creditors." Scott, Trusts, §157.4 (1956 ed.).

"Although a spendthrift trust is held valid against creditors and assignees of the beneficiary, it does not necessarily follow that the same conclusion must be reached when a state or the United States seeks to reach the beneficiary's interest." Griswold, Spendithrift Trusts, §342, p. 403 (2d ed., 1947).

⁵ "Against [federal tax] * * * liens, exemptions prescribed by State laws are ineffective." United States v. Heffron, 9 Cir., 158 Fed. (2d) 657, 659 [47-1 USTC ¶9194], cert. den., 331 U. S. 831 (state homestead exemption); Fried v. New York Life Insurance Company, 2 Cir., 241 Fed. (2d) 504 [57-1 USTC ¶9412], cert. den. 354 U. S. 922 (proceeds of disability insurance exempt from claims of creditors by state statute not exempt from federal tax liens). See also Knox v. Great Western Life Assurance Co., 6 Cir., 212 Fed. (2d) 785.

⁶ See United States v. Dallas National Bank, 5 Cir., 152 Fed. (2d) 582, 584-585 [46-1 USTC ¶9117].

⁷ "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property whether real or personal, belonging to such person." Internal Revenue Code of 1954, §6321. See Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449].

⁸ The referee in his findings did recite that the government had levied upon the property claimed to be exempt on July 22, 1955, many days after the adjudication. But this amounts to a disclaimer of jurisdiction over this lien, which, by virtue of §67(6) of the Bankruptcy Act, was valid against the Trustee. It is also recited in the conclusion of the referee that the creditors have no claim on the exempt property. This finding does not intimate that the referee is attempting to pass upon the right of the government to levy a lien for unpaid taxes upon the property which the referee has held exempt from claims of ordinary creditors.

 

[58-1 USTC ¶9499]United States of America, Plaintiff v. R. E. Williams, Special Administrator for the Estate of George D. Stout, and United States Savings Bank of Newark, New Jersey, Defendants

U. S. District Court, Dist. N. J., Civil Action, File No. 24-56, 160 FSupp 761, 4/3/58

[1954 Code Sec. 6332]

Property subject to levy and distraint: Bank account: "Totten Trust": Beneficiary predeceased depositor: New Jersey law.--The Government was not entitled to a savings account standing in the name of "George D. Stout, in trust for Merritt Lane, friend," where its claim arose through a levy and distraint for income tax deficiencies assessed against Merritt Lane, who had predeceased Stout. The earlier death of the beneficiary terminated the tentative trust..

Chester A. Weidenburner, United States Attorney, Barbara Ann Morris, Assistant United States Attorney, for plaintiff. Alden Reid, Harrigel, Bolan & Herrigel, Joseph Ginsburg, for defendant.

Opinion

WORTENDYKE, District Judge:

In this action the Government sues to recover from defendant Bank the amount of the balance due upon a savings account, No. 142,631 therein, standing in the name of "George D. Stout, in trust for Merritt Lane, friend." The Government's claim arises through a levy and distraint upon the account for income tax deficiencies assessed against Merritt Lane, deceased. 26 U. S. C. §§ 3670, 3678, 3690 and 3692. Demand for payment or the aggregate amount of those deficiencies was made upon decedent's executrix, who made certain payments on account thereof but left a balance unpaid for which said levy and distraint was made.

George Stout, the creator of the savings account levied upon, died intestate, a resident of San Bernardino County, California, on April 9, 1947, and defendant R. E. Williams, as Public Administrator of that County, was duly appointed administrator of the estate of said intestate. The beneficiary, Merritt Lane, a resident of Madison, New Jersey, died on or before June 23, 1939. The Government seeks judgment in this action declaring that said administrator has no interest in said savings account. Defendant Bank admits the account which it says was opened September 25, 1933 in the amount of $1,950.29. The following withdrawals from the account were made by the depositor, viz.: $400 on December 12, 1933; $400 on August 25, 1936; and $200 on June 5, 1937. Items of accrued interest were added from time to time through June 30, 1957, when the credit balance was $1,529.38.

[Interpleader]

On October 9, 1954 the executrix of Merritt Lane duly assigned all her right, title and interest in the bank account to the Government. The Bank concedes its liability to pay the amount due under said Account, but alleges doubt as to whether the Government or Williams is entitled to the balance therein. Accordingly, the Bank has sought interpleader between plaintiff and Williams, and an adjudication of their respective rights in the fund. Service by mail having been effected upon the Administrator (Williams) in accordance with order of this Court, he has answered and claims that the balance in the bank account belongs to the estate of George D. Stout, of which he is Administrator. In lieu of trial, the parties have submitted the case upon a written stipulation of facts, and upon briefs for Government and Bank respectively. No brief has been filed for Williams.

The contract between the Bank and the depositor having been made and to be performed in the State of New Jersey, both the Government and the Bank concede that right to the fund must be governed by New Jersey law. Cutts v. Neidrowski, E. & A. 1938, 123 N. J. Eq. 481; Fidelity Trust Co. v. Field, 1940, 311 U. S. 169. The single question here presented, therefore, will be answered by a determination of the ownership of the bank account as of June 23, 1939, the latest possible date of the taxpayer's death.

[Law]

In 1933, when the bank account here in dispute was opened, N. J. R. S. 17:9-4 read as follows:

"When a deposit has been or shall be made in a bank, savings bank or trust company by a person in trust for another, and no other or further notice of the existence and terms of a legal and valid trust has been given in writing to the bank, savings bank or trust company, in the event of the death of the trustee, the same or any part thereof, together with the dividends or interest thereon, shall be paid to the person in trust for whom the deposit was made, or to his legal representative and the legal representative of the deceased trustee shall not be entitled to the funds so deposited nor to the dividends or interest thereon notwithstanding that the funds so deposited may have been the property of the trustee. * * *"

The foregoing statutory provisions were considered and construed in Bendix v. Hudson County National Bank, E. & A. 1948, 142 N. J. Eq. 487, where the Court said at p. 491:

"* * * R. S. 17:9-4 does not give rise to a conclusive presumption of the existence of an intention to make an absolute gift inter vivos or to create an irrevocable trust. * * * The statute has application only where 'no other or further notice of the existence and terms of a legal and valid trust has been given in writing to the bank;' * * *. The form of the account is but prima facie evidence of a gift or a trust inter vivos; it constitutes presumptive evidence of an intention to make the purported gift or to create the trust which stands until overthrown by proof contra. The statute simply raises a rebuttable presumption of a valid and enforceable gift or trust. * * *"

The evidence in this case does not disclose some unequivocal act during the depositor's lifetime which would give rise to an irrevocable trust, and we are, therefore, relegated to the presumption which arises under the statute. In the absence of any evidence which would rebut the presumption of an intention to create a trust, or a revocation thereof pro tanto by the withdrawal of sums by the depositor, the intended beneficiary, had he survived the depositor, would have been entitled to what remained in the account free from any claim on the part of the depositor's representatives. Abruzzese v. Oestrich, Ch. 1946, 138 N. J. Eq. 33; Hickey v. Kahl, Ch. 1941, 129 N. J. Eq. 233. Where, however, as here, the beneficiary predeceased the depositor, the question presented is whether such survival by depositor of the beneficiary did not terminate the tentative trust. Although the stipulated facts, of necessity, raised this question as an issue, it was not briefed, and my research did not result in the disclosure of any controlling authority explicitly so holding.

["Totten Trusts"]

Before the passage of R. S. 17:9-4, a deposit of money in a savings account in the name of the depositor in trust for another who was dead at that time did not give rise to a trust. Nicklas v. Parker, Ch. 1905, 69 N. J. Eq. 743; aff'd, E. & A. 1907, 71 N. J. Eq. 777. In New York, where a tentative trust of savings bank deposited money was first sustained, the rule was laid down that the trust, in absence of some unequivocal act on the part of the depositor manifesting an intent to create an irrevocable trust, did not arise unless the depositor died before the beneficiary before revocation. In re Totten, 1904, 179 N. Y. 112; Conry v. Maloney, 1950, 5 N. J. 590. Therefore, where the beneficiary predeceases the depositor, the trust is automatically terminated. Rs. Trusts, §58, Comment b; 1 Scott, Trusts (2nd ed.) §58.4. However, the phrase "* * * or to his legal representative" is suggestive of a trend toward a contrary rule.

In Jefferson Trust Co. v. Hoboken Trust Co., Ch. 1930, 107 N. J. Eq. 310, the court held, at p. 313, that statute which included the phrase "or to his or her legal representatives" was intended "merely to protect a trust company from liability in the event of its making payment * * *." We know, today, that more was intended. Bendix v. Hudson County National Bank, supra. However, in Thatcher v. Trenton Trust Co., Ch. 1936, 119 N. J. Eq. 408, 411, the court said, in answer to the argument that the 1932 act also merely intended to protect depositaries:

"From a comparison of the language of the acts of 1903 and 1932, and consideration of the fact that the act of 1932 was enacted shortly after the decision in Jefferson Trust Co. v. Hoboken Trust Co., supra, it may well be assumed that the purpose back of the 1932 act was to accomplish such a change in the law as to prevent in future such result as had been adjudicated in the last named case. The meaning and effect of a statute, however, must be determined on the basis of the language which has actually been used."

Therefore, there has been a gradual advancement toward the acceptance of the "Totten Trust" in New Jersey, but a recognition that the statute was meant to do more than protect depositories does not answer the question of what is the effect of the death of the beneficiary before the depositor. I doubt that the phrase in question was meant to do more than to protect the depository in its payment while also providing for the creation of a tentative trust in a proper case. Bendix v. Hudson County National Bank, supra. Beyond this the legislature did not appear to intend to permit such a trust to arise despite the prior death of the beneficiary. In subsequent legislation, although not conclusive as to this issue, the legislature specifically provided that the prior death of the beneficiary terminates the trust. N. J. S. 17:9-216A(2).

The precise question here presented was before the court in Abruzzese v. Oestrich, supra, where the beneficiary had predeceased the depositor. Because the beneficiary died testate leaving her property to the depositor, thereby accomplishing the same ultimate disposition, whether the depositor received the money because the trust was terminated by the beneficiary's prior death or under the will of the beneficiary, the court declined to rule on the problem, saying at pp. 43-44:

"Now for the devolution of Mrs. Smith's half of the fund. In New York , it is considered that upon the death of the named beneficiary in the lifetime of the depositor, the interest of the beneficiary terminates and the depositor holds free of any trust, tentative or otherwise. The direction in our statute that payment be made to the beneficiary 'or to his or her legal representatives,' may indicate a different rule. However, Mrs. Smith died testate, making her mother, Mrs. Bear, her sole legatee and naming her executrix. * * * So, either because of the nature of these bank account trusts, or by force of Mrs. Smith's will, the representatives of Mrs. Bear are entitled to one-half of the fund."

Subsequently, in Bendix v. Hudson County National Bank, supra, the court in construing this statute described the beneficiary as being merely a putative cestui who must survive the depositor, saying at pp. 490, 492:

"* * * [I]f the decedent's design was not a presently operative gift, but rather a transfer to himself as trustee with a reservation of full ownership and absolute dominion over the fund or chose in action until his death, the putative cestui to take the balance of the credit in the event of his survival, without any immediate interest in the deposit, there was not a gift in praesenti or a valid trust inter vivos; and the gift in case of survival, i. e., to take effect upon the death of the transferor, would be testamentary in character and void for non-conformance with the Statute of Wills. (Citing cases.)"

"Apart from the protection afforded the depository, the evident purpose was to raise, as between the depositor and the putative cestui inter se, a rebuttable presumption of an inter vivos gift or trust from the form of the account, nothing more."

If the trust remained revocable in the lifetime of the depositor, it continued to be revocable after the beneficiary's death. If there still remained any trust after the beneficiary's death, it was, at best, tentative. But who was the cestui after the death of the beneficiary? No provision was expressed by the depositor for the contingency, which has occurred, in which the beneficiary has predeceased the depositor. But the interest of the beneficiary here was, at the time of his death, purely contingent. There was no expression of intent by the depositor that the "trust" created by the deposit was to pass to the beneficiary's administrator, executor, or legatee upon the beneficiary's death before the death of the depositor. There was no vesting of equitable title to the trust res in the named sole beneficiary. No title to the res passed to the beneficiary's executor. There was no interest of the beneficiary which could be reached by his creditors. Restatement Trusts, §162. See, Muller v. Cox , Ch. 1925, 98 N. J. Eq. 188.

[Conclusion]

Therefore, I hold that the prior death of the putative cestui terminated the tentative trust and that the representative of the deceased depositor, Stout, is entitled to the fund. Since the trust is held terminated, it is unnecessary to discuss the effect of the deposit in trust as aided by the rebuttable presumption raised by the statute.

This opinion shall constitute my findings of fact and conclusions of law, as required by Rule 52(a), and an order for judgment accordingly may be presented.

 

 

[82-1 USTC ¶9182]United Stated of America v. Equitable Trust Company

U. S. District Court, Dist. Md. , No. M-81-704, 524 FSupp 1133, 1/21/82

[Code Sec. 6332]

Levy and distraint: Property subject to levy: Trust account.--Where the uncontroverted evidence established that depositors opened and maintained a joint checking account, which was labeled a trust account solely due to the practices of a trust company, the United States was entitled to summary judgment against the trust company for failure to comply with a federal tax levy made against one of the depositors. No trust was created under state law so as to deprive the taxpayer of property rights in the account.

Russell T. Baker, Jr., United States Attorney, David Dart Queen, Assistant United States Attorney, Baltimore, Maryland 21202, Mitchell R. Berger. Department of Justice, Washington, D. C. 20530, for plaintiff, John S. Hebb, III, Timothy L. Mullin, Jr., Miles & Stockbridge, 10 Light Street, Baltimore, Maryland 21202, for defendant.

Memorandum and Order

MILLER, JR., District Judge:

The United States brought this action to obtain a judgment against the Equitable Trust Company (Equitable) for Equitable's failure to comply with a federal tax levy served on July 24, 1980. ¹ I. R. C. §6331. The levy purported to attach any property and property rights in Equitable's possession but belonging to Douglas R. Cranston. I. R. C. §6332.

At the time of the levy, Equitable had on deposit funds in checking account #515-6565-5, titled in the names of Cranston and Melody L. McManus. ² The signature cards used by Equitable to establish the account list two authorized signatures, "Douglas R. Cranston" and "Melody L. McManus," and bear the legend "in trust for self and joint owners, subject to the order of either, balance at the death of either to belong to the survivor." ³ $qEquitable has refused to honor the levy on the ground that it possesses no property belonging to Cranston. According to Equitable, account #515-6565-5 is a trust account under Maryland law, in which Cranston does not have "property" rights subject to levy. ⁴ The Government contends, among other things, that the account was not a trust account and that, in any event, Maryland law relating to the seizing of funds held in trust does not affect the enforcement of a federal tax levy.

This case is before the court on cross-motions for summary judgment. ⁵ Having reviewed the entire record, the court concludes that no hearing is necessary. Local Rule 6(E).

I. Overview. As noted above, the signature card establishing the account indicates that it was to be a "trust" account. ⁶ Nevertheless, McManus' deposition testimony indicates that neither she nor Cranston ever requested or intended that the account be opened "in trust" for herself or Cranston. ⁷

McManus was the one who actually went to Equitable's office to open the account. She told the bank employee who opened the account, Kathy Roach, that she and Cranston wanted a "joint checking account." ⁸ According to McManus, both she and Cranston intended to establish with Equitable only a "regular joint checking account." ⁹ During her visit at the Equitable branch, McManus made this intent known to Roach, and there was no discussion between them regarding other available forms of accounts. ¹⁰

McManus testified at her deposition that the purpose of the account was to enable her, as Cranston's fiancee, to pay bills, primarily on Cranston's behalf, during his regular absences from their home occasioned by his work as a moved and truck driver. ¹¹ Both McManus and Cranston had authority to spend from the account without limit, and they regarded the funds as being available to either of them. ¹²

It is Equitable's practice to style all joint checking accounts as "in trust" accounts unless the parties to the account request otherwise. ¹³ Apparently because of this practice, Equitable personnel provided McManus with a signature card bearing the "in trust" legend. ¹⁴ According to McManus, she does not now recall the content of the signature card and does not recall ever discussing it with Cranston. ¹⁵ McManus simply signed the card presented to her by Equitable, and then secured Cranston's signature on the card by bringing it to him at his work place that same day. ¹⁶ When she returned the completed card to Equitable, McManus received no explanation as to the significance of the "in trust" legend. ¹⁷

The initial deposit used to open the account came entirely from Cranston's paycheck. ¹⁸ The majority of all subsequent deposits were derived from Cranston's earnings, and the frequency of those deposits depended upon the regularity of Cranston's salary payments. ¹⁹ According to McManus, both she and Cranston understood that each of them had unlimited access to the funds in the account. ²⁰

II. Discussion. In determining whether the federal tax levy attached to the checking account, it must first be determined whether Cranston had, at the time of the levy, property rights in the account under Maryland law. E.g., Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960); United States v. Baldwin [78-1 USTC ¶9441], 575 F. 2d 1097, 1098 (4th Cir. 1978). Should Cranston be held to have property rights in the account, federal law determines whether that interest can be seized for federal tax purposes. E.g., United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56-57 (1958); United States v. Baldwin, 575 F. 2d at 1098.

The parties disagree both as to the nature of the checking account and whether a federal tax levy can attach the funds in that account. Equitable's argument is two-fold. First, due to the manner in which the account is titled, Equitable contends that the funds associated therewith are held "in trust." Second, Equitable asserts that Maryland law precludes any attachment of funds held in trust because neither party has a "property" interest in the funds.

The Government first contends that the evidence of record establishes conclusively that the checking account is, under Maryland law, a joint account with Cranston having the absolute right to the entire fund. The Government next contends that regardless of the form of the account, Maryland law cannot prevent an otherwise valid federal tax levy from attching to the account.

Given the language on the account signature card, there is a presumption under Maryland law that the account was held "in trust" for Cranston and McManus. See, e.g., Bierau v. Bohemian Building S. & L. Ass'n, 205 Md. 456, 461 (1954); Milholland v. Whalen, 89 Md. 212, 216 (1899). Nevertheless, as the Court of Appeals stated in Shaffer v. Lohr, 264 Md. 397 (1972),

"Even though the account be entered in trust form, the presumption that it was intended to import survivorship may be rebutted by a showing that the trust was intended for a limited purpose, such as paying bills, Ragan v. Kelly, 180 Md. 324, 24 A. 2d 289 (1942), or that no right of survivorship was intended, Shirk v. Suburban Trust, 248 Md. 114, 235 A. 2d 549 (1967); Shook v. Shook, 213 Md. 603, 607, 132 A. 2d 460 (1957); Bierau v. Bohemian Bldg. Etc. Assn., supra, 205 Md. at 461, or that the account was set up in trust form without a request made by the depositor, Pearre v. Grossnickle, 139 Md. 274, 115 A. 49 (1921)."

264 Md. at 408 (emphasis supplied).

The undisputed evidence produced by the Government establishes the following: (1) McManus and Cranston decided to open a joint checking account for the sake of convenience; (2) McManus went to Equitable with the intent to open, for herself and Cranston, a joint checking account, and believes that she conveyed that intent to Equitable; (3) McManus did not intend, either for herself or on behalf of Cranston, to open a trust account; (4) McManus did not understand the legal import of the "in trust" legend on the signature card; (5) Cranston signed the signature card while he was at work without discussing with McManus the meaning of the signature card legend; (6) no employee of Equitable ever explained to either McManus or Cranston the legal meaning of the "in trust" legend; and (7) McManus and Cranston treated the account as a simple joint checking account, opened for the sake of convenience. This evidence, if left uncontroverted, establishes that the account was labeled a trust account solely due to the practices of Equitable, and not because of any intent on the part of Cranston or McManus to establish a trust. See Pearre v. Grossnickle, 139 Md. at 278-79. Consequently, the Government has met its initial burden under Rule 56(c), Fed. R. Civ. P., to show the absence of a genuine issue concerning any material fact. Adickes v. S. H. Kress & Co., 398 U. S. 144, 159-60 (1970).

It is not inconceivable that Cranston could testify at a trial that, as the owner of the original fund, he intended that the checking account be a trust account, and thereby create an issue for the finder of fact. Nevertheless, that possibility, given the Government's showing, does not preclude the granting of summary judgment. Since the Government has fulfilled its initial burden under Rule 56(c), Equitable must, to avoid summary judgment, go forward under Rule 56(e) and show through competent evidence specific facts indicating that there is a genuine issue for trial, including any issue of credibility. See, e.g., Atkinson v. Bass, 579 F. 2d 865, 866 (4th Cir. 1978); Kipps v. Ewell, 538 F. 2d 564, 566 (4th Cir. 1976); Carroll v. United Steelworks of America, 498 F. Supp. 976, 978 (D. Md.), aff'd mem., 639 F. 2d 778 (4th Cir. 1980).

Equitable has made no such showing, and has not attempted to proceed pursuant to Rule 56(f) and request a continuance until Cranston becomes available for deposition or affidavit. See, e.g., Atkinson v. Bass, 579 F. 2d at 866; 6 Moore's Federal Practice ¶56.24 (2d ed. 1979).

Since the Government has demonstrated that the checking account is not a trust account, it is simply a joint checking account, there being no evidence of a gift. ²¹ See Tyler v. Suburban Trust Co., 247 Md. 461, 469-70 (1967). Thus, prior to the federal tax levy, both Cranston and McManus owned the account as joint tenants, each having the absolute right to use or withdraw the entire fund. See, e.g., Haneke v. United States [77-1 USTC ¶13,176], 548 F.2d 1138, 1140 (4th Cir. 1977); Kornmann v. Safe Deposit & Trust Co., 180 Md. 270, 273-74 (1942). Consequently, Cranston had property rights in the checking account, for the purpose of I. R. C. §6332, at the time of Notice of Levy, and Equitable was required by federal law to surrender to the Government the proceeds of the account.

The Government has indicated that it is not seeking in this proceeding to impose on Equitable any penalty for failing to comply with the levy. See I. R. C. §6332(c)(2). In addition, the Government has requested the opportunity to provide the court with an updated account of Cranston's tax liability to ensure that Equitable's liability in the instant case does not exceed that amount. ²² Consequently, the entry of judgment in this case will be withheld pending the Government's submission of an updated statement of Cranston's tax liability.

In light of the above ruling, there is no need for the court to address the other issues raised by the parties.

Accordingly, it is this 21st day of January, 1982, by the United States District Court for the District of Maryland, ORDERED:

1. The motion of the United States for summary judgment is GRANTED.

2. The motion of Equitable for summary judgment is DENIED.

3. The Clerk shall withhold entry of judgment until directed to do so by the court.

4. The United States shall submit an updated statement regarding Cranston's federal tax liability and a proposed judgment order within twenty (20) days of the date of this Memorandum and Order.

5. The Clerk shall forward a copy of this Memorandum and Order to counsel for the parties.

¹ Stipulation of Facts, Paper No. 22, at ¶1.

² Stipulation of Facts, supra note 1, at ¶5.

³ Stipulation of Facts, supra note 1, at ¶6; Paper No. 19, Ex. A.

⁴ Equitable's Interrogatory Answer Numbers 3 & 4, Paper No. 7.

⁵ Paper Nos. 23 & 24.

⁶ See note 3 and accompanying text supra.

⁷ Deposition of Melody L. McManus, Paper No. 15, at 8-9, 12, & 22-23.

⁸ McManus Deposition, supra note 7, at 10.

⁹ Id. at 10. See id. at 8-10- & 22.

¹⁰ Id. at 22-23

¹¹ Id. at 6, 11-12, 18-19 & 28-31.

¹² Id. at 17 & 27.

¹³ Stipulation of Facts, supra note 1, at ¶12.

¹⁴ McManus Deposition, supra note 7, at 9.

¹⁵ Id. at 23-24.

¹⁶ Id. at 8 & 23-24.

¹⁷ Id. at 24.

¹⁸ Id. at 39.

¹⁹ Id. at 13, 16 & 33.

²⁰ Id. at 17 & 24-28.

²¹ Although clearly cognizant of this case, McManus has not attempted to assert, by way of intervention or otherwise, that Cranston made a gift to her of the account. In any event, her deposition testimony would not support such a claim.

²² Paper No. 24, at 5-6 n. 4.

 

[51-1 USTC ¶9169]Clinton H. Givan, Receiver of the Steel or Bronze Piston Ring Corporation, Plaintiff-Appellant v. Ralph W. Cripe, Individually and as Collector of Internal Revenue for the District of Indiana, and Fidelity Trust Company, Defendants-Appellees

(CA-7), In the United States Court of Appeals for the Seventh Circuit, No. 10275. October Term, 1950, January Session, 1951, 187 F2d 225, February 9, 1951

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division.

Threatened distraint of assets: Notice of levy on bank assets: Injunction suit by receiver.--The receiver of the taxpayer brought suit to enjoin the Collector from issuing a warrant of distraint against the corporation-taxpayer's bank assets to satisfy certain taxes due which have become final. The dismissal of the suit was upheld on appeal on the grounds that the receiver acquired no greater rights than the taxpayer from whom his rights came, and the notice of levy which acted to freeze the taxpayer's bank assets was permissible in view of the fact that the taxes in question had become fixed by the final decision of the Tax Court. The ten-day period after notice and demand was not required by statute with reference to notice of levy, and no warrant of distraint, which would have required the ten-day period, was issued.

Merlin M. Dunbar and Lucien L. Dunbar, Indianapolis, Indiana, for plaintiff. Theron Lamar Caudle, and Ellis N. Slack, Washington, D. C., for defendants.

Before KERNER, FINNEGAN, and LINDLEY, Circuit Judges.

KERNER, Circuit Judge:

Plaintiff, the receiver of the taxpayer corporation, appeals from the dismissal of his petition "to enjoin and restrain unlawful acts of defendants" who are the Collector of Internal Revenue for the District of Indiana and a bank in which the taxpayer maintained a checking account and a safe deposit box. We shall refer to these defendants as the Collector and the Bank.

The unlawful acts sought to be restrained relate to steps taken by the Collector for the purpose of collecting income and excess profits taxes in the total sum of $156,302. According to the petition, written notice of assessment of the taxes and demand for immediate payment thereof was delivered personally to the taxpayer on February 17, 1950, and, on the same day, notice of levy was served on the Bank, which notice and attempted levy it alleges were in violation of §§ 3690 and 3692 of the Internal Revenue Code.

On February 18, plaintiff was appointed by the Superior Court of Marion County, Indiana, receiver of the taxpayer to take charge of taxpayer's property and assets including all checking accounts and safe deposit boxes, and to operate the taxpayer for the purpose of filling all orders on hand. And he obtained leave of that court to file the petition or complaint here involved.

[Receiver's Allegations]

In this petition he alleged that the Collector threatened to issue a warrant of distraint against the corporation's checking account and safe deposit box and to sell the contents if the same were surrendered to him; that if the Collector were permitted to pursue his illegal acts this plaintiff would not be able to carry out the orders of the state court which had jurisdiction of the assets and property of the corporation; that the plaintiff could not operate said corporation without the monies on deposit and the property in the box; that his failure to finish work in process and on order would result in such materials and labor theretofore expended thereon becoming worthless; and that the loss would be irreparable. He therefore prayed that the Collector be required to release the money on deposit and the safe deposit box and that the Bank be required to turn them over to him; that the notice of levy be quashed; and that the Collector be "perpetually enjoined and restrained from in any manner attempting to enforce the collection of the demands * * * and from in any manner so attempting to levy upon the money on deposit and to sell the contents of the safe deposit box * * * and for such other and proper relief to which the plaintiff may be entitled."

The Bank filed answer stating that it had refused to deliver the property to plaintiff in obedience to the notice of levy. The Collector filed motion to dismiss on the ground that the complaint failed to state any grounds upon which any relief could be granted as against him. The court sustained the motion and dismissed the action as to him. The appeal is from that order of dismissal.

The notice of levy is not attached to the petition, and the petition does not state the year or years for which the taxes were assessed. However, plaintiff states in his brief that they were for the years 1942 and 1943, and the Collector calls our attention to the fact that review had been had by the Tax Court which rendered its decision on October 24, 1949. 13 T. C. 636 [CCH Dec. 17,254]. The principal question there presented was whether the income for the years involved was due in any material part to the development of patents, formulae and manufacturing processes in prior years rather than to an increased wartime demand for the taxpayer's products, and the court determined the issues adversely to the taxpayer. Since there was no petition for review filed in this court, that decision became final ninety days thereafter.

Section 3690 of the Internal Revenue Code grants authority to distrain:

"If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector * * * to collect the said taxes * * * by distraint and sale, in the manner provided in this subchapter, of the goods * * * including stocks, securities, bank accounts * * *."

And §3692 provides that in case of neglect or refusal under §3690, the collector may levy upon the property of the delinquent taxpayer.

[Relief Sought]

It is somewhat difficult to understand upon what theory plaintiff relies for the relief sought. It appears to be two-fold, first that his appointment as receiver of the taxpayer a day after service of the notice and demand--without notice to the Collector, according to that official--removed the assets of the taxpayer to the protective custody of the state court beyond reach of the Collector for the collection of the taxes finally determined by the Tax Court to be due, and second, that the simultaneous service of the notice and demand upon the taxpayer and the notice of levy upon the Bank rendered the procedure for collection wholly void. He asserts that his proceeding is one to quash an illegal levy and seizure and not a suit to restrain the assessment or collection of the tax which is, of course, prohibited by §3653.

Insofar as plaintiff relies upon his status as receiver, we think that he is in no better position that the taxpayer itself would be--of course he took the assets of the taxpayer subject to all obligations and liens in its own hands and could acquire no greater rights than the taxpayer from which he derived whatever rights he did have.

["Ten-Day" Requirement]

As to the alleged illegality of the proceeding for failure of the Collector to allow ten days after notice and demand, that official asserts that the taxpayer had already had its notice and demand, construing the ninety-day letter which preceded the Tax Court review and redetermination as such notice and demand. Without deciding whether or not that letter satisfied the requirements of §3690, we are convinced that the Collector's action in serving notice on the Bank, if it was premature, was irregular rather than illegal. Cf. Commonwealth Bank v. United States, 115 Fed. (2d) 327 [40-2 USTC ¶9769].

As we read the allegartions of the petition, it asserts a threat to distrain rather than an actual distraint. The Collector was entitled under the statute to make a seizure any time after ten days after notice, and we see no reason why he should not serve notice of intent to do so at any time, including the date of notice and demand for collection. The facts here, insofar as the procedure is concerned, appear to be quite similar to those in United States v. O'Dell, 160 Fed. (2d) 304, 307 [47-1 USTC ¶9190]. There it was held that a Collector's notice to a trustee in bankruptcy that there were unpaid taxes due from the bankrupt, and that all money and other property in his hands belonging to the bankrupt was seized and levied upon for payment of the taxes did not constitute a seizure of such property but was only a statement or notice of claim. "Nothing alleged to have been done amounts to a levy, which requires that the property be brought into legal custody through seizure, actual or constructive, levy being 'an absolute appropriation in law of the property levied upon.' * * * Levy is not effected by mere notice. * * * No warrants of distraint were issued here." We think the same is true in our case. So far as the petition shows, there was no seizure, but only a threat of seizure--the petition alleges that the Collector threatens to issue a warrant of distraint. As we interpret the facts, the notice of levy operated to freeze the assets of the taxpayer in the hands of the Bank, and no more. We find nothing in the statute to prohibit such freezing, particularly in view of the fact that the law liability had become fixed by the final decision of the Tax Court.

[Conclusion]

We conclude that the plaintiff is not entitled to have the notice of levy quashed. And there is no basis whatever for his prayer that the Collector be enjoined from in any manner attempting to enforce the collection of the demands and attempting to levy upon the assets of the taxpayer in the Bank. The most plaintiff could have had was a ten-day delay in proceedings to distrain, and since that period had elapsed long before the action of the District Court dismissing the petition (on July 21, 1950), there was no error in that action. In reaching this conclusion we have not overlooked the cases cited by plaintiff claimed to be in support of his contention that the court erred in dismissing the petition or complaint. These we have considered, but find they have no bearing on the questions presented in view of the facts here appearing.

Affirmed.

 

[53-2 USTC ¶9540]Mrs. Carolyn M. Abney, et vir, James K. Abney, Appellants v. Ellis Campbell, Jr., Collector of Internal Revenue for the Second Collection District of Texas, Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14251, 206 F2d 836, August 18, 1953

Appeal from the United States District Court for the Northern District of Texas.

Collection of income tax at source: Constitutionality of withholding requirement.--The 1950 law, which requires an employer to withhold and pay social security taxes on wages of a domestic employee, is held to be constitutional. Code Sec. 1622(a) at 534 CCH ¶1755C.21. Affirming the decision of the District Court reported at 52-2 USTC ¶9445.

R. Dean Moorhead, Austin , Tex. , for appellants. Carlton Fox, Ellis N. Slack, Special Assistants to the Attorney General, Charles S. Lyon, Acting Assistant Attorney General, Department of Justice, Washington, D. C., William Cantrell, Jr., Assistant United States Attorney, Fort Worth, Tex., for appellee.

Before HUTCHESON, Chief Judge, and RUSSELL, and STRUM, Circuit Judges.

HUTCHESON, Chief Judge:

Brought against the collector by appellants, the suit was for the recovery of sums alleged to have been erroneously and illegally seized from them under the purported authority of the 1950 Amendment to the Federal Insurance Contributions Act. ¹

The matter comes up in this way. Appellee having seized from taxpayers the sums claimed to be due from them under the the act for the first, ² second and third/3/ quarters of the calendar year 1951, they brought this suit alleging that the said sums had been exacted of, and seized from, them in violation of Section 9 of Art. 1 and of the Fifth and Tenth Amendments to the Constitution of the United States . Their claim was that the amendment ⁴ is unconstitutional as to appellants for that, as employers of domestic servants, they cannot be subjected to an excise tax, nor can they be compelled to withhold and pay to the United States income taxes due by their domestic employees.

Appellee, answering, took issue with appellants' claim that the sums sued for were collected from them in violation of the constitution, and therefore, without authority of law, and the parties agreeing in open court that there was no issue of fact between them but only one of law, the cause was submitted and argued upon the agreed facts. ⁵ Thereafter, the district judge, agreeing with the appellee that the sums had been rightfully collected by him, entered judgment in his favor, and taxpayers have appealed.

Here, in their attack upon the exactions from them, appellants put forward four specifications of error, ⁶ each in theory presenting a separate and different ground of attack. The gist, however, the sum and substance of their attack is, as stated above, that the 1950 amendment is unconstitutional and invalid as to them because domestic, as contrasted with business, employment may not be subjected to an excise tax, nor may domestic employers be burdened, as uncompensated tax collectors, as it is conceded business employers may be, by being required to withhold and account to the government for portions of wages, withheld for payment of their employees' income taxes.

[Domestic Employees Excepted Prior to 1950 Amendment]

In reply the United States points out that the original act in terms covered all employers, with an express exemption, however, of domestic service in private homes, and that this court, in Charles C. Steward Machine Co. v. Davis, 89 Fed. (2d) 207, and the Supreme Court, in Steward Machine Co. v. Davis, 301 U. S. 548, and Helvering v. Davis, 301 U. S. 619, in thorough and thoughtful opinions, sustained its validity against massive attacks upon it. Carefully canvassing and completely rejecting the contentions vigorously made and pressed there, that the employment relation could not be subjected to an excise tax, Mr. Justice Cardozo assembled and called attention to numerous examples and instances of the imposition of such taxes upon business and domestic employment alike. So pointing, appellee urges upon us: that appellants are but seeking to rethresh old straw; that, however appealing but for those decisions their arguments and contentions might have been, appellants, in putting them forward now, are running a completely covered track; that either expressly or by implication every question raised and every argument put forward by them has been already decided against them; and that we should treat the questions argued against them as already foreclosed against them.

Appellants on their part agree that the validity of the act as applied to business employment has been definitely and finally adjudicated, and that, because of the decisions appellee cites, the case presented here is in narrow compass. They yet urge upon us that the questions they present for decision are different from those already adjudicated and must be considered as open and not foreclosed.

They particularly insist that since the Davis cases dealt with a statute which, while covering employers generally, expressly exempted domestic service, they did not decide, they could not have decided, the question arising here. This question is whether the 1950 Amendment, which was drawn to cover and did cover domestic employers and employees who were expressly exempted from the coverage of the earlier act, is valid and enforceable as against such employers.

They emphasize the fact that, in the Steward case, the employment involved was a business one and, while the argument there, that the right of one man to employ and of another to be employed in a business relation is a natural, inherent, inalienable right and not a privilege, and therefore excises which are taxes imposed upon the enjoyment of privileges could not be imposed upon the relation, was general in its nature, the only impoyment involved was a business one. They, therefore, scout as mere dicta what the court, after setting out instances of excises imposed upon domestic employments, there said, "In 1777, before our Constitutional Convention, Parliament laid upon employers an annual 'duty' of 21 shillings for 'every male Servant' employed in stated forms of work."

Insisting that this statement cannot possibly be regarded as deciding that such excises may be constitutionally imposed, they urge upon us that the questions they present here, involving as they do domestic employment which was expressly exempted from the statute there under construction, are new ones and should be considered and determined as such.

We agree with appellants that the precise questions they present have not been presented and decided in haec verba, and with appellee that they have, though, been in substance decided against appellants. We shall, therefore, with respect to each of appellants' contentions point out briefly our reasons for thinking that this is so.

[Meaning of the Term "Excise"]

Turning first to their basic contention, indeed the one on which all the others rest, that the relation of domestic employment does not come within Art. I, Sec. 8, ⁷ and is therefore immune from the imposition of federal taxes and burdens, we find ourselves in no doubt that appellants are neither historically nor etymologically correct in their claim in substance that excises are limited to taxes laid on the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations and upon corporate privileges only. It is true that taxes of the kind referred to are excise taxes but it is also true, as was held in Steward v. Davis, that the excises which congress has power to impose are not limited to vocations or activities which may be prohibited altogether or to those which are the outcome of franchise, but extend to vocations or activities pursued as of common right. The term "excise" is and was before and at the time of the adoption of the Constitution a term of very wide meaning.

In the Brittanica article on Excises, it is stated that "excise" is a word derived through the Dutch "excijs" or "accijs" from late Latin "accensare--to tax", meaning in British law any branch of the revenue placed by statute under the aegis of the commissioners of excise. In Steward Machine Co. v. Davis, supra, the court saying, "The subject matter of taxation open to the power of the Congress is as comprehensive as that open to the power of the states", ⁸ took occasion to point to the wideness of the meaning of the significant words in Art. I, Section 8, "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises". It then went on to say:

"Together, these classes include every form of tax appropriate to sovereignty. Cf. Burnett v. Brooks, 288 U. S. 378, 403, 405; Brushaber v. Union Pacific R. Co., 240 U. S. 1, 12 [1 USTC ¶4]. Whether the tax is to be classified as an 'excise' is in truth not of critical importance. If not that, it is an 'impost'. (Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 622, 625; Pacific Insurance Co. v. Soule, 7 Wall. 433, 445), or a 'duty' (Veazie Bank v. Fenno, 8 Wall. 533, 546, 547; Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429; 570; Knowlton v. Moore, 178 U. S. 41, 46). A capitation or other 'direct' tax it certainly is not. 'Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words 'duties, imposts and excises', such a tax for more than one hundred years of national existence has as yet remained undiscovered, notwithstanding the stress of particular circumstances has invited thorough investigation into sources of power.' Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 557."

[Classification Not Arbitrary]

When it is considered that what we are here dealing with is not congressional policy but congressional power, when it is not only admitted that business employment is a relation subject to excise taxation, but it is also established that excise taxes on domestic employments have been commonly laid and collected, it is quite plain that appellants' position needs something more to support it than an argument based on considerations of policy. Indeed, when it is considered that in law and in fact there is no substantial difference between the relation of business employers to their employees and that of domestic employers to theirs, it is clear that it would take some compelling, some overruling, authority to justify this or any other court in holding that Congress had the power to subject appellants as business employers to the act but did not have the power to subject them to it as domestic employers.

With their first, their main, contention decided against them, appellants can find nothing solid to stand on with respect to their other positions. Their position, that the act violates the Fifth Amendment because it is arbitrary and discriminatory in the respect pointed out, that it does not apply to all domestic servants but only to those who receive more than $50 and work more than 24 days in the quarter, while different in detail from the contentions made in the Davis cases, was answered completely in them. There, basing its decision on settled law that in the exercise of the taxing power, Congress has the widest powers of selection and classification, and that only in cases where the classification is so arbitrary as to have no reasonable basis whatever, can either the Fifth Amendment or the Fourteenth Amendment be invoked against a taxing law, ⁹ the court in Steward Machine Co. v. Davis, at page 584, said:

"The classifications and exemptions directed by the statute now in controversy have support in considerations of policy and practical convenience that cannot be condemned as arbitrary. The classifications and exemptions would therefore be upheld if they had been adopted by a state and the provisions of the Fourteenth Amendment were invoked to annul them. * * * Carmichael v. Southern, Coal & Coke Co., and Carmichael v. Gulf States Paper Corp., ante, p. 495."

Appellants' contention, that the taxes are not levied for the general welfare, falls both because of our holding that the tax imposed is a proper excise tax and because of the decisions in the Davis cases, supra, where all the matters argued and discussed under appellants' third point were fully canvassed and flatly decided against their contention.

For the same reasons and upon the same considerations it is equally clear that the claim of the specification, that the tax is a direct tax, also falls.

[No Imposition of Involuntary Servitude]

The specification, that the act violates the Thirteenth Amendment by imposing involuntary servitude upon an employer of domestic servants, seems to us farfetched, indeed frivolous. There is no suggestion, in the law, of the imposition of a servitude, there is merely a requirement that as to the tax due by domestic employees on account of the wages paid them by their employer, the employer must withhold the amount fixed by law and account it to the United States . The enforcement of the act is not the imposition of a servitude. It is the collection of a tax and the enforcement of an obligation, which under settled federal law appellants may be and are lawfully subjected to. From our holding that the taxes and burdens imposed are valid, it must follow that the enforcement of the law imposing them is not, it cannot be, a violation of the Thirteenth Amendment.

Appellants recognize that the law in the United States has been declared as above stated in respect of business employees. They go on though to say, "However, as is stated elsewhere in this brief, the operation of a household has not yet become an activity which the government can tax. Neither have matters yet progressed so far that a license from the government is required for the operation of a household. Unlike the situation with respect to a gasoline retailer or a bank, a householder does not occupy his or her status as a result of a government license or boon, or at the pleasure of the government."

Thus, all of appellants' positions return to, they base upon, their primary one, and thus all of them fall with it. In numerous cases, including the Davis cases, the Supreme Court has upheld withholding requirements, indeed withholding provisions have now become a familiar part of our system of taxation and can no longer be successfully challenged. Brushaber v. Union Pacific, 240 U. S. 1 [1 USTC ¶4]; Allen v. Regents, 304 U. S. 439 [38-2 USTC ¶9321]; Wilmette Park Dist. v. Campbell, 338 U. S. 411 [50-1 USTC ¶9105].

After all is said and done, what appellants really present here is a claim based upon the assumption that a tax on a domestic employer is not, it cannot be, an excise tax and is therefore invalid, and that the relation between such employer and his employee is not properly the subject of congressional action and therefore congress may not impose upon such an employer the duty of withholding and paying over.

If we could agree with appellants that the tax imposed upon them with respect to wages for domestic service was not validly imposed upon them, and that the relation of domestic employer and domestic employee was not regulable to the extent of imposing upon appellants the duty of withholding and paying income taxes imposed upon and due by their domestic employee on account of wages paid her by appellants, we should, of course, agree that the moneys sued for by appellants were wrongfully exacted from, and should be returned to, them. Of quite the contrary opinion, that, in short, both the taxes and the withholding obligations were properly imposed, we are bound to hold, as we have done: that the sums sued for were rightfully exacted of and collected from plaintiffs; that the judgment was right; and that it must be affirmed.

AFFIRMED.

¹ 26 U. S. C. A. Secs. 1400-1432.

² For this quarter the employee paid directly the tax imposed upon her. The amount collected was therefore $2.51, the excise tax imposed upon the taxpayers as employers on account of cash wages paid in the amount of $156 to Emma Lee Adams, their employee, for domestic services in their private home.

³ For these quarters the employee did not pay the tax directly imposed upon her. The amount collected for these quarters was, therefore, $10.06. This sum included both the excise tax imposed on the taxpayers as employers and the income tax imposed upon the employee and required to be withheld by the employers.

⁴ 26 U. S. C. A. Sec. 1426(a)(7).

⁵ As stated in appellants' brief, these are:

During the first calendar quarter of the year 1951. Appellants paid cash remuneration to an employee for domestic service in their private home in an amount sufficient to render them liable for the sum of $4.68 under the provisions of the Federal Insurance Contributions Act, as amended, if said Act is constitutional as applied to Appellants. One-half of this amount was due as the excise tax levied upon Appellants, and the other one-half was the "additional income tax on employees" which the Act required Appellants to withhold from the wages of their employee.

Appellants paid their employee the full amount of the wages due her for this calendar quarter, without withholding the amount of the "additional income tax on employees". However, the employee herself paid the additional income tax on her wages for this period. Hence, Appellants were liable only for the amount of the excise tax imposed upon them. The amount of this tax, plus interest or a penalty, was $2.51.

Appellants reported to the Commissioner of Internal Revenue the amount of cash remuneration which they paid for domestic service in their private home during the first calendar quarter of 1951, but, because of their belief that the Federal Insurance Contributions Act, as amended, is unconstitutional as applied to them, Appellants did not pay to the Appellee Ellis Campbell, Jr., as Collector of Internal Revenue, the aforementioned amount of $2.51.

During the second and third calendar quarters of 1951, Appellants paid cash remuneration to an employee for domestic service in their private home in an amount sufficient to render them liable for the sum of $10.06, if the Act is constitutional as applied to them. One-half of this amount was due as the excise tax, and the other one-half was the "additional income tax on employees" which the Act required Appellants to withhold from the wages of their employee.

Appellants also reported to the Commissioner of Internal Revenue the amount of cash remuneration which they paid for domestic service in their private home for these two quarter years, but they did not pay to Appellee the aforementioned sum of $10.06.

During these two quarter years, Appellants' domestic employee did not herself pay the additional income tax on her wages, as she had done during the first quarter. Hence, if the Federal Insurance Contributions Act, as amended, can validly be applied to Appellants, Appellants were liable for the full sum of $10.06 for the second and third calendar quarters of 1951.

On August 6, 1951, Appellee caused to be seized from Appellants' bank account the sum of $2.51, and on February 13, 1952, he caused to be seized from such bank account the sum of $10.06. No question is raised in this case concerning the regularity of the methods employed in these distraints.

Within the period provided by law, Appellants filed with Appellee claims for refund of the amounts so seized, alleging as a basis for such claims that the Federal Insurance Contributions Act, as amended, is unconstitutional as applied to them; and that this suit for refund of the amounts seized from Appellants was instituted within the time required by law for the institution of such a suit after the disallowance of a claim for refund.

⁶ (1) That the law, as amended in 1950, is arbitrary and discriminatory with respect to wages which are taxed and wages which are not taxed, and thus violates the Fifth Amendment to the Constitution;

(2) that the tax imposed by the law upon employers is not a lawful excise tax, but a direct tax in contravention of Section 9 of Article I of the Constitution;

(3) that the taxes imposed by the law are not levied for the general welfare, but constitute a taking of property in contravention of the Fifth and Tenth Amendments to the Constitution; and

(4) that the withholding provisions of the law impose involuntary servitude upon employers in violation of the Thirteenth Amendment to the Constitution, and deprive them of their property and liberty in violation of the Fifth Amendment to the Constitution.

⁷ "Section 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform, throughout the United States;"

⁸ Cf. Gold Dredging Co. v. Balderston, 78 Pac. (2d) 105, where it was held that excise includes every form of taxation which is not a burden laid directly upon persons or property; in other words that excise includes every form of charge imposed by public authority for the purpose of raising revenue, upon the performance of an act, the employment of a privilege, or the engaging in an occupation.

⁹ Cf. Sonzinsky v. U. S. , 300 U. S. 506 [37-1 USTC ¶9195], Illinois Central RR. Co. v. Minnesota, 309 U. S. 157, Oliver Iron Co. v. Lord, 262 U. S. 172, Brushaber v. Union Pacific, 240 U. S. 1 [1 USTC ¶4], and Magnano Co. v. Hamilton, 292 U. S. at p. 44.

 

[92-1 USTC ¶50,280] Bank of Mill Creek, Plaintiff v. United States Department of Treasury-Internal Revenue Service and Stephen I. Lester and Joyce A. Lester, husband and wife, Defendants

U.S. District Court, No. Dist., W.Va., Civ. 90-0148-E(S), 3/16/92

[Code Sec. 6332 ]

Tax levy: Surrender of property.--A bank that received a notice of levy regarding a depositor's account in the bank's possession remained liable to turn over the levied funds to the IRS, despite its assertion that it did not surrender the levied funds because it was uncertain whether the levy was proper. Instead of submitting the funds to the IRS, the bank sought a court order to have the money paid to a county court and to release it from liability. However, the bank did not establish either of the two possible defenses to a failure to comply with a levy demand: namely, that it was not in possession of the property or that the property was subject to a prior judicial attachment or execution.

MEMORANDUM OPINION AND ORDER DISMISSING PLAINTIFF'S COMPLAINT AS TO DEFENDANTS STEPHEN I. LESTER AND JOYCE A. LESTER, AND GRANTING THE UNITED STATES' MOTION FOR SUMMARY JUDGMENT

STAMP, Jr., District Judge:

This action was originally instituted in the Circuit Court of Randolph County, West Virginia on September 24, 1990. On October 24, 1990, this action was removed by the United States Department of Treasury-Internal Revenue Service (" United States ") to this Court pursuant to 28 U.S.C. §§1340 and 1441. Defendant United States filed its responsive pleading on November 2, 1990. According to the information available to the Court, defendants Stephen I. Lester and Joyce A. Lester have not, to date, been served with the complaint and have not therefore filed a responsive pleading.

On August 12, 1991, this Court ordered plaintiff to show cause why service was not made upon the defendants Stephen I. Lester and Joyce A. Lester within the one hundred twenty (120) days following the filing of the complaint as proscribed by Rule 4(j) of the Federal Rules of Civil Procedure. After this Court granted plaintiff an extension of time to answer the show cause order, as well as permitting plaintiff to substitute counsel, plaintiff filed its response on October 1, 1991. Plaintiff indicated that there had been some confusion by plaintiff's former counsel as to the service of process on defendants Stephen I. Lester and Joyce A. Lester. Plaintiff indicated that it required a reasonable amount of time to effect service on the remaining defendants.

A reasonable amount of time, in fact a considerable amount of time, has now elapsed. Inasmuch as five (5) months has now passed and plaintiff has failed to comply with this Court's order, plaintiff's complaint is DISMISSED without prejudice as to defendants Stephen I. Lester and Joyce A. Lester.

The United States , which was properly served by plaintiff and filed its responsive pleading, filed a Motion for Summary Judgment and a memorandum in support thereof on August 2, 1991. Plaintiff has failed to file a response to the United States ' motion and pursuant to Local Court Rule 2.07(f) plaintiff is deemed not to oppose the motion. As grounds for its motion, the United States asserts that no genuine issue of material fact exists and therefore the United States is entitled to judgment as a matter of law.

The United States ' motion seeks summary judgment pursuant to Fed.R.Civ.P. 56(c). Under Fed.R.Civ.P. 56(c), summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to material fact and the moving party is entitled to judgment as a matter of law." The defendant seeking summary judgment bears the initial burden of showing the absence of any issues of material fact. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-323 (1986). However, as the United States Supreme Court noted in Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986), "Rule 56(c) itself provides that a party opposing a properly supported motion for summary judgment may not rest upon mere allegation or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial." Id. at 256. "The inquiry performed is the threshold inquiry of determining whether there is the need for a trial--whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. at 250. See also Trivathan v. Newport News Shipbuilding and Dry Dock Company, 944 F.2d 902 (4th Cir. 1991) [table] ("Summary judgment should be granted only in those cases where it is perfectly clear that no issue of fact is involved and inquiry into the facts is not desireable to clarify the application of the law." citing Charbonnages De France v. Smith, 597 F.2d 406, 414 (4th Cir. 1979); Stevens v. Howard D. Johnson Co., 181 F.2d 390, 394 (4th Cir. 1950)).

In Celotex, the Court stated that "the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. Summary judgment is not appropriate until after the non-moving party has had sufficient opportunity for discovery. Oksanen v. Page Memorial Hospital , 912 F.2d 73, 78 (4th Cir. 1990). In reviewing the supported underlying facts all inferences must be viewed in the light most favorable to the party opposing the motion. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

In this case, plaintiff held property belonging to Stephen I. Lester and Joyce A. Lester in the amount of $21,806.39. Plaintiff received a Notice of Levy from the United States against the account of Stephen I. Lester and Joyce A. Lester, delinquent taxpayers, in the amount of $81,545.27. Plaintiff alleged in its complaint that it was not sure whether the Lester account had been properly levied upon and accordingly sought a court order to have the money paid to the Clerk of the Circuit Court of Randolph County and the plaintiff released from any liability.

26 U.S.C. §6332 provides for the surrender of property subject to levy. 26 U.S.C. §6332(a) , specifically, provides for the requirements of surrender as follows:

(a) Requirement. Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

In this case, plaintiff readily admits that it was in possession of property upon which a Notice of Levy was received. Plaintiff has failed to demonstrate that the property in question was subject to a judicial attachment or execution. In fact, plaintiff simply asserts that it is uncertain whether or not the property has been properly levied upon.

Plaintiff attempted to relieve itself from liability by placing the property, or funds, in question with the Clerk of the Circuit Court of Randolph County . Plaintiff would have discharged itself from liability to the Lesters, or others, if it had honored the levy. 26 U.S.C. §6332(e) provides:

(e) Effect of honoring levy. Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

In this case plaintiff failed to honor the levy placed on the Lesters' account. Plaintiff has not offered any evidence to prove that the levy was improper. Similarly, plaintiff has failed to offer any evidence that the property in question was subject to a judicial attachment or execution. Since it failed to follow the provisions of 26 U.S.C. §6332 plaintiff has not removed itself from liability.

The United States correctly asserts that the Supreme Court has established that when a bank receives a notice of levy and the bank is in possession of property of the delinquent taxpayer, the bank must comply with the levy unless the property is subject to a prior judicial attachment or execution. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985). The Supreme Court further stated that "a bank served with a notice of a levy has two, and only two, possible defenses for failure to comply with the demand: that it is not in possession of the property of the taxpayer, or that the property is subject to a prior judicial attachment or execution." Id. at 727.

Plaintiff admits to having been in possession of the property when it received the notice of levy. Additionally, plaintiff has failed to demonstrate that the property was subject to a prior judicial attachment or execution. Pursuant to the standard established by the Supreme Court in National Bank of Commerce, plaintiff has failed to meet either of the two defenses specifically available to banks for failure to comply with the demands of a tax levy.

Additionally, the Ninth Circuit, in a factually similar case, held that the district court properly dismissed an interpleader action because the bank was clearly obligated to pay over to the government the amount of money in the account which had been levied upon. Bank of America National Trust & Savings Ass'n. v. Mamakos [75-1 USTC ¶9211 ], 509 F.2d 1217 (9th Cir. 1975). In that case, a bank responded to a notice of a tax levy on a customer's account by filing an interpleader action, which the United States subsequently removed to federal court. The district judge granted the United States ' motion for summary judgment. See Bank of America National Trust & Savings Ass'n. v. Mamakos, 73-1 USTC (CCH) ¶9290, 31 A.F.T.R. 2d (P-H) ¶73-548 (N.D. Cal. 1972).

"Summary judgment is appropriate if the evidence offered demonstrates that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Kientzler v. Sun Line Greece Special Shipping, 779 F. Supp. 342, 343 (S.D.N.Y. 1991) citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).

[A] party opposing a properly supported motion for summary judgment 'may not rest upon the mere allegations or denials' of its pleadings, but must go beyond the pleadings and by affidavits, or by 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'

United States v. CPS Chemical Co., Inc., 779 F. Supp. 437 (E.D. Ark. 1991) citing Fed.R.Civ.P. 56(e). Plaintiff has failed to file a response to the United States ' motion for summary judgment. Even if this Court relies solely upon plaintiff's complaint and any inferences which can be drawn therefrom, this Court cannot and does not find that any dispute exists as to any issue of material fact.

Accordingly, Defendant United States' motion for summary judgment is hereby GRANTED. The Clerk of the Circuit Court of Randolph County is hereby DIRECTED to pay over to the Internal Revenue Service the amount of $21,806.39 paid by the plaintiff, plus all interest which has accrued on this account.

Inasmuch as the Court has DISMISSED plaintiff's complaint without prejudice as to Defendants Stephen I. Lester and Joyce A. Lester and GRANTED summary judgment to Defendant United States, the Court directs the Clerk that this action be STRICKEN from the active docket of this Court.

The Clerk is directed to transmit certified copies of this order to counsel of record herein and to the appropriate agencies.

 

 

[92-2 USTC ¶50,343] United States of America , Plaintiff v. First Interstate Bank of Idaho , N.A., Defendant

U.S. District Court, Dist. Ida., CIV. 89-3053, 3/30/92, 793 FSupp 934

[Code Secs. 6332 and 7402 ]

Notice of levy: Escrow accounts, assigned.--A bank's motion for summary judgment was granted because it was not liable for failing to honor an IRS tax lien on an escrow account. After an IRS lien on the escrow account, the delinquent taxpayer who owned the account assigned his interest to another party. Although the lien had priority over the assignment, the bank justifiably decided not to turn over the funds. The language in the lien demanded property belonging to the delinquent taxpayer at the time the bank received notice of the levy, which was after the assignment. Further, as a third-party escrow holder, the bank was not asserting an ownership interest in the funds. Thus, the bank was not responsible for failing to honor the levy. Additionally, a motion for leave to file a counterclaim made by the delinquent taxpayer was denied since his claim was not the subject of the litigation.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT AND DISMISSING COMPLAINT

I. FACTS AND PROCEDURE

RYAN, District Judge:

This suit arises out of a Complaint filed by the United States against Defendant First Interstate Bank, N.A. (Bank), for its failure to honor a Notice of Levy served upon it on June 27, 1983. On May 25, 1981, the Internal Revenue Service (IRS) made an assessment against taxpayer Daniel Bauer for unpaid federal income taxes for the tax year of 1977 in the amount of $8,939.31. On January 14, 1982, the IRS filed a notice of federal tax lien in Kootenai County , Idaho , the county of taxpayer's residence and the county in which the escrow account was located. (See Moore Decl., filed Nov. 5, 1990, Ex. 1.) On June 27, 1983, the IRS served upon the Bank a Notice of Levy in the amount of $11,857.76. (See Complaint, filed Aug. 20, 1989, Ex. A.) In this Notice of Levy, the IRS sought all property, rights to property, credits, and bank deposits in the possession of the bank which belonged to the taxpayer. The IRS assumed that the Notice of Levy should encompass an escrow account in the name of the taxpayer. ¹

The Bank responded to the Notice of Levy by stating: "We do not find any checking or savings account at this branch. Also the escrow listed has been assigned and is not in the name of Daniel Bauer." (See Seaman Aff. Supp. Def.'s Summ. J., filed Oct. 15, 1990, Ex. A.) The bank took the position then, and continues to assert that same position now, that because the funds in the escrow account had been assigned on August 31, 1982, to Mr. and Mrs. James D. Bauer, the bank no longer had in their possession any funds of Mr. Daniel Bauer to turn over to the IRS.

Subsequently, the IRS returned the Notice of Levy, advising the bank that the levy had priority over any assignment that occurred subsequent to January 18, 1982. On October 27, 1983, the IRS made a Final Demand for payment pursuant to the Notice of Levy. (See Complaint, filed Aug. 30, 1989, Ex. B.) However, the bank maintained its position and did not honor the levy.

The government filed this suit against the Bank on August 30, 1989, claiming that the Bank is liable under 26 U.S.C. §6332 in an amount equal to the value of property or funds that they had in their possession on June 27, 1983, the date the Notice of Levy was served. ² On June 26, 1990, the bank filed its Answer and alleged that at the time of the service of the Notice of Levy the bank possessed no property, rights to money, or credits of taxpayer Bauer, as the funds in the escrow account had been assigned to a Mr. and Mrs. James Bauer.

On October 15, 1990, the defendant moved for summary judgment. The government responded to this motion on November 5, 1990, by filing its own Motion for Summary Judgment. The parties have filed their respective responses and replies to these motions. On May 9, 1991, a hearing on these motions was held in Boise , Idaho . During the hearing, the court took the motions under advisement and encouraged the parties to work out a solution to this case. Shortly thereafter, on May 31, 1991, the Bank filed a Motion for Leave to File Counterclaim. The government filed its brief in opposition to this motion on May 30, 1991. On June 6, 1991, the Bank filed its reply brief. On July 22, 1991, Daniel Bauer and Helen Bauer both moved to intervene in this action pursuant to Rule 24 of the Federal Rules of Civil Procedure. In addition, these parties also conditionally filed an answer to the Complaint should the court decide to allow them to intervene. The government filed its response to the motions to intervene on August 2, 1991, and a reply to this response was filed on September 3, 1991. Accordingly, the motions are now fully briefed and ripe for review.

II. ANALYSIS

A. CROSS-MOTIONS FOR SUMMARY JUDGMENT

1. Summary of arguments.

In the Bank's brief in support of its Motion for Summary Judgment, the Bank argues that when it received the Notice of Levy on June 27, 1983, it did not possess any property or rights to property of the taxpayer, Daniel Bauer. The Bank notes that the funds in the escrow account had been assigned to James D. Bauer and Helen E. Bauer ³ on August 31, 1982, and therefore, the funds belonged to these third parties and not Daniel Bauer. (Seaman Aff. Supp. Def.'s Summ. J., filed Oct. 15, 1990, at 4.) In addition, the Bank argues that both the Notice of Levy, ⁴ and the Final Demand ⁵ requested that funds which belonged to Daniel Bauer, at that time, should be turned over. However, because of the assignment, the Bank argues that it did not, at that time, have in its possession any property, rights to property, money, credits, or bank deposits belonging to the taxpayer. The Bank concludes that it is entitled to judgment as a matter of law because its failure to turn over the funds in the escrow account was legally justifiable.

The government, in its brief in support of its own Motion for Summary Judgment and in response to the Bank's Motion for Summary Judgment, argues that when it filed, on January 14, 1982, the notice of a federal tax lien in Kootenai County, Idaho, that lien took priority over any subsequent assignment by the taxpayer pursuant to 26 U.S.C. §6322 . Section 6322 provides in part that the tax lien "shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C.S. §6322 (Law. Co-op. 1991).

The government notes that when the taxpayer attempted to convey his rights in the escrow account via the assignment, the lien had not yet been satisfied, and therefore, the lien, as long as it was properly filed, had priority over the assignment. The government notes that it properly filed its notice of federal tax lien in the county where the real property, the bank account, and the residence of the taxpayer were all located. See 26 U.S.C.S. §6323(a) , -(f) (Law. Co-op. 1991) and Idaho Code §45 -202 (1979).

The government also argues that even if it would not have filed its notice of federal tax lien, the assignment was not valid because the taxpayer's brother cannot be a protected "purchaser" under Section 6323 because the taxpayer's family members are not purchasers unless adequate consideration is paid to the taxpayer in exchange for the taxpayer's property. Here, the executed assignment stated that James and Helen Bauer were to pay $1.00 for the right to receive the remaining funds in the escrow account.

The government then argues that once that lien attached to the escrow account, it remained in effect until satisfied, and that any of the taxpayer's property acquired by others is subject to the tax lien. United States v. Donahue Indus., Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1330-31 (9th Cir. 1990); United States v. Oil Resources, Inc. [87-2 USTC ¶9461 ], 817 F.2d 1429, 1433 n.3 (9th Cir. 1987); United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). The government concludes by asserting that because its lien had priority over the assignment, the Bank, pursuant to Section 6331 of Title 26, should have relinquished possession of the funds in the escrow account. 26 U.S.C.S. §6331 (Law. Co-op. 1991); Chevron, USA, Inc. v. United States [83-1 USTC ¶13,523 ], 705 F.2d 1487, 1490 (9th Cir. 1983). Accordingly, the government seeks to recover against the Bank the value of the funds in the escrow account at the time of the Notice of Levy was served, ⁶ plus statutory interest and costs. 26 U.S.C. §6332(d)(1) .

In response, the Bank argues that there is some confusion on the date of assessment and whether or not a notice of federal tax lien was actually filed for taxes assessed on September 20, 1980. The Notice of Levy reflects an assessment date of September 20, 1980, which is in contrast to the May 25, 1981, assessment date that appears on the notice of federal tax lien. However, having reviewed the Certificate of Assessments and Payments, the court finds that there was only one assessment that occurred on May 25, 1981, and that the September 20, 1980, date, which is listed as the date of assessment in the Notice of Levy, was actually the date that the IRS noted that the no-liability return was filed for the 1977 tax year. (Moore Decl., filed Jan. 8, 1991, Ex. 11.) Therefore, it does appear that the September 20, 1980, assessment date noted in the Notice of Levy is simply a typographical error. The court finds that there is no genuine issue of material fact as to this argument raised by the Bank, as the records are clear and speak for themselves.

2. Summary Judgment Standard.

Motions for summary judgment are governed by Rule 56 of the Federal Rules of Civil Procedure. Rule 56 provides, in pertinent part, that judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." U.S.C.S. Court Rules, Federal Rules of Civil Procedure, Rule 56(c), (Law. Co-op. 1987).

The Supreme Court has made it clear that under Rule 56, summary judgment is mandated if the non-moving party fails to make a showing sufficient to establish the existence of an element which is essential to his case and upon which he will bear the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). If the non-moving party fails to make such a showing on any essential element of his case, "there can be no 'genuine issue as to any issue of material fact' since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Id. at 323. ⁷

Moreover, under Rule 56, it is clear that in order to preclude entry of summary judgment an issue must be both "material" and "genuine." An issue is "material" if it affects the outcome of the litigation. An issue, before it may be considered "genuine," must be established by "sufficient evidence supporting the claimed factual dispute . . . to require a jury or judge to resolve the parties' differing versions of the truth at trial." Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir. 1975) (quoting First Nat'l Bank v. Cities Serv. Co., Inc., 391 U.S. 253, 289 (1968)). The Ninth Circuit cases are in accord. See e.g., British Motor Car Distrib., Ltd. v. San Francisco Automotive Indus. Welfare Fund, 882 F.2d 371 (9th Cir. 1989).

According to the Ninth Circuit, in order to withstand a motion for summary judgment, a party

(1) must make a showing sufficient to establish a genuine issue of fact with respect to any element for which it bears the burden of proof; (2) must show that there is an issue that may reasonably be resolved in favor of either party; and (3) must come forward with more persuasive evidence than would otherwise be necessary when the factual context makes the non-moving party's claim implausible.

Id. at 374 (citation omitted).

3. Application of summary judgment standard.

Having thoroughly reviewed the record in this matter, the court finds that summary judgment is clearly appropriate in this case as there are no genuine issues of material fact. The controlling facts in this case are clearly not disputed.

Having reviewed the facts involved in the case, the court questions if the government has sued the right party. It would seem to this court that when the Bank notified the IRS that the escrow account had been assigned, the IRS, at that point in time, had other options to collect the funds in the account. If the IRS was aware of the assignment, and knew that its lien had priority over that assignment, the court questions why the IRS did not bring an action against the third-party assignees on the grounds that the assignees took the funds in the escrow account subject to the government's lien and that the assignment was voidable because of the lack of consideration in a family transaction. To the court, this would seem to have been a better approach than waiting nearly six years to file a lawsuit against the Bank for failure to honor the levy.

The court also recognizes that the Bank also had other options. Once the Bank became aware of the fact that the IRS was not going to back down on its position regarding the funds in the escrow account, it too could have avoided the current nature of this lawsuit by filing an interpleader action. From reviewing the correspondence between the Bank and the IRS, it would appear that the Bank initially had every intention of filing an interpleader action as early as March of 1985, yet the Bank failed to initiate this procedure until recently when it filed its motion for leave to file a counterclaim. (Motion for Leave to File Counterclaim, filed May 10, 1991.)

Regardless of this court's view of how this case was poorly managed by both parties, the court still must decide the issue before it today. The issue that this court must decide is not whether the IRS has named the right parties in this litigation, or whether the Bank should have filed an interpleader; but instead, the only question that is before this court is whether the Bank should be held liable for its failure to honor the Notice of Levy that was served upon it by the IRS. The court finds, after reviewing the entire record in this matter and the authority cited by the respective parties, that the Bank should not be liable under Section 6332 for failing to honor the Notice of Levy.

The court does not question the fact that the tax lien which was filed on January 14, 1982, has priority over the subsequent assignment of the funds in the escrow account. The lien clearly existed prior to transfer. However, the court is not convinced that it necessarily follows that because the lien had priority, the Bank, when it received the Notice of Levy, was required to pay over the funds in an escrow account, which at the time was in someone's name other than the taxpayer listed in the Notice of Levy.

The Bank in this case is not a transferee or assignee. The Bank in this case did not and has not claimed any interest in the funds in the escrow account. It is simply a third-party escrow holder which has contractual obligations to the parties of the escrow. Had the Bank paid over the funds to the IRS, the Bank would have run the risk of the assignees suing the Bank for turning over funds to the IRS that rightfully belonged to them. As counsel for the Bank stated in his November 20, 1984, letter to the IRS:

[W]e are caught between the proverbial rock and the hard place. On one hand, we are in possession of property which appears to be subject to IRS Levy. On the other hand, we are potentially subject to suit from the assignees of the escrow contract for failure to remit payments to them pursuant to the assignment. . . .

(Moore Decl., filed Dec. 6, 1990, Ex. 6)

The court simply is not willing to penalize the Bank for what the court finds is a justifiable decision not to turn over the funds. Upon service of the Notice of Levy, the Bank looked at their records and found that the escrow account no longer belonged to Daniel Bauer; that is, it was no longer in Daniel Bauer's name. At that point, they advised the IRS that the funds in the escrow account would be held by the Bank until the IRS, the taxpayer, and the third parties, resolved the conflicting claims to the funds. Given the facts in this case, the position taken by the Bank was justified. The Notice of Levy served upon the Bank stated that all property and monies "now" in the Bank's possession which "belonged" to the taxpayer were levied upon for payment of taxes. The escrow account, at the time the Notice of Levy was served upon the Bank, did not belong to the taxpayer. The demands made upon the Bank did not request the Bank to turn over property or monies owned by the taxpayer on the date of the original assessment in 1980. Accordingly, the bank had a defense for its failure to comply with the demand. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985).

The government asserts that "possession of the property does not provide the answer to the question of entitlement to the property; rather, the nature of the underlying claims to the property must be analyzed to determine who is entitled to the property." (Reply Mem. Supp. U.S. 's Summ. J., filed Dec. 6, 1990, at 6 (emphasis added)). The government would have the responsibility of evaluating the nature and validity of these underlying claims [that] fall upon the innocent stakeholder, the third-party escrow holder. That is, the government wants the bank to be responsible for determining whom the funds originally belonged to and whether or not the funds rightfully belong to someone else. The court, however, strongly disagrees with this rational. It should not be the Bank's obligation to research and investigate the validity of the assignment and whether or not the assignment was subject to the 1980 assessment. The court simply is not persuaded that all the risk, burden, and costs associated with that obligation should somehow be placed upon the innocent third-party escrow holder. It is not the Bank's duty to do the work of the IRS, who after all is the party seeking to have access to the funds.

The court has also reviewed in detail the main authority cited by the government in support of its position and finds that each case is clearly distinguishable from the facts in this case. In each of the cases cited by the government, the party that was found to be responsible for not honoring the levy was not a third-party escrow holder, an innocent stakeholder, a non-buyer, or non lien holder. Rather, in each of the cases cited by the government, the party whose actions were in question had some kind of interest in the funds. In all these cases, the Bank was in the position similar to the assignees in this case. The parties in these cases were attempting to take the funds of the taxpayer to satisfy the taxpayer's debts and obligations with the bank. For example, in the Ninth Circuit case of United States v. Donahue Indus., Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325 (9th Cir. 1990), the government brought an action to enforce the levy against Rainier National Bank. The bank had loans outstanding with the taxpayer, and as one of the conditions to the loans, the bank could set off the deposits, checking and savings accounts of the taxpayer against the loan amounts. Upon learning that federal agents had seized the taxpayer's premises, the bank officer had the taxpayer's due and payable loans set off against the taxpayer's bank accounts. Two and one-half hours later, the government served the Notice of Levy upon the bank. The Ninth Circuit found that even though the taxpayer's property interest in those accounts was extinguished prior to the notice of levy, the bank took the funds subject to the government's lien and should be held liable for failure to honor the levy. Id. at 1331. Thus, the Donahue case is clearly distinguishable as the bank in that case was a transferee, who would be in a similar position as the assignees in the case before this court. See also United States v. Cache Valley Bank [89-1 USTC ¶9157 ], 866 F.2d 1242 (10th Cir. 1989) (Bank had right of offset against unsecured loans on any bank account of the taxpayer. When bank received notice of levy, there were negligible funds in the taxpayer's accounts; thus, bank responded that there were no funds available. Later on that same day, Bank received a significant deposit to the taxpayer's account and immediately off-set the entire amount in the accounts against the unsecured loan balances. Court held bank took deposits subject to tax lien.); United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163 (6th Cir. 1983) (Bank obtained payment on its loans to the taxpayer by setting off outstanding loan balances against the bank accounts of the taxpayer. After receiving notice that the IRS had padlocked the taxpayer's premises, a bank official directed, on that same day, that the due and payable loans be set-off against taxpayer's bank accounts. Two and a half hours after the bank processed these set-offs, the IRS served a notice of levy upon the bank. Court held tax lien had attached to taxpayer's accounts prior to the set-off by the bank; thus set-off was an invalid transfer.)

As can be seen from a review of these cases, these cases only support the proposition that subsequent transferees and assignees will take subject to the government's preexisting lien; they do not address the issue of the third-party escrow account holder or innocent stakeholder who has no interest in the subject funds. Accordingly, the court finds the government's authority is not persuasive. The cases would only be persuasive if the government would have sued the third-party assignees who claimed their interest in the escrow account ahead of the tax lien, or if the Bank in the case was attempting to claim some ownership interest in the funds in the account.

4. Conclusion.

Based upon the foregoing analysis and the applicable standards under Rule 56, the court finds that the Bank is entitled to summary judgment on the government's claims raised in the Complaint. In light of the undisputed facts in this case, the government has simply failed to state a claim upon which relief can be granted.

B. MOTION FOR LEAVE TO FILE COUNTERCLAIM AND MOTIONS TO INTERVENE

As noted above, on May 10, 1991, the Bank moved for leave to file a counterclaim in this action which would allow the Bank, pursuant to Rule 22 of the Federal Rules of Civil Procedure, to interplead the funds in question. The government opposes this motion based upon the grounds that this action does not involve who actually is entitled to the funds in the escrow account, but instead is focused on whether the Bank should be personally liable for its failure to honor the levy served upon it. The government emphasizes that its action against the Bank and the Bank's proposed counterclaim interpleader are two separate and distinct actions. The government argues that any person who claims an interest in funds may bring a separate Section 7426 wrongful levy action, and that the time to interplead the funds was in 1983, not some seven years later.

The Bank, in response, argues that its motion for leave to file a counterclaim was made only in the alternative, if the court were to deny its Motion for Summary Judgment. If the court grants the Bank's Motion for Summary Judgment, then the motion to file the counterclaim for interpleader purposes would be moot. The IRS may, if it so chooses, then attempt to set aside the assignment and enforce its lien by the institution of another civil action under 26 U.S.C §7403 . This new potential suit, then, would address the question of who actually is entitled to the funds and whether the assignment was valid.

The court, having granted the Bank's Motion for Summary Judgment, finds that the Motion for Leave to File Counterclaim is moot in that the court has determined that the Bank is not personally liable for its failure to honor the Notice of Levy. It is clear that this action, currently before the court, is an action regarding only whether the Bank should be liable for its failure to honor the levy. The Complaint in this action clearly does not deal with the merits of who actually is entitled to the funds in the escrow account. This issue will have to be the subject of a separate action brought either by the Bank in an interpleader action or brought by the IRS under 26 U.S.C. §7403 to enforce its lien upon the escrow account. Under either scenario, all the parties with an interest in the funds would be joined and the court in that action could adjudicate the respective claims and interests of the involved parties in respect.

Accordingly, the Motion for Leave to File Counterclaim should be denied. For these same reasons, the motions to intervene by the Daniel and Helen Bauer should also be denied. The claims asserted by the Bauers are not the subject of the litigation currently before the court. Their claims relate to the question of a wrongful levy and/or a valid assignment, and are separate and distinct claims from a failure to honor levy action which this court is dismissing. The court, pursuant to Rule 24 of the Federal Rules of Civil Procedure, finds that denying the motions to intervene will not impair, impede, or prejudice the ability of these parties to protect their claims and interests in the funds in the escrow account, as these claims and interests can be asserted in a separate action.

III. ORDER

Based upon the foregoing, and the court being fully advised in the premises,

IT IS HEREBY ORDERED that the United States ' Motion for Summary Judgment, filed November 5, 1991, should be, and is hereby, DENIED.

IT IS FURTHER ORDERED that the defendant's Motion for Summary Judgment, filed October 15, 1990, should be, and is hereby, GRANTED.

IT IS FURTHER ORDERED that the plaintiff's Complaint in this action, should be, and is hereby, DISMISSED.

IT IS FURTHER ORDERED that the defendant's Motion for Leave to File Counterclaim, filed May 10, 1991, should be, and is hereby, DENIED.

IT IS FURTHER ORDERED that the motions to intervene, filed by Helen Bauer and Daniel Bauer on July 22, 1991, should be, and are hereby, DENIED.

¹ This escrow account was established in 1973 as a result of the sale of some of Mr. Bauer's property. (See Mem. Opp. Def.'s Summ. J. and Supp. U.S. 's Summ. J., filed Nov. 5, 1990, at 2.)

² By the government's calculations, the balance of the escrow account on July 27, 1983, was $7,849.79. (Mem. in Opp. to Def.'s Summ. J. and Supp. U.S. 's Summ. J., filed Nov. 5, 1990, at 6 n.1.) This amount does not appear to be disputed by the Bank.

³ James Bauer was identified by the government in its responsive brief as Daniel Bauer's brother. The Bank argues that one of the material facts that prevent the government from prevailing on summary judgment is that there is no evidence before the court which establishes the relationship between James and Daniel Bauer. (Statement of Material Fact, filed Nov. 14, 1990, at 2.) However, the court finds that this issue is not material or relevant to the granting or denial of summary judgment.

Moreover, the court notes that this issue has subsequently been clarified. In the reply brief filed by the potential intervenors, Helen Bauer and Daniel Bauer, the intervenors state that James Bauer was the father of Daniel Bauer and not his brother. James Bauer has subsequently passed away since the institution of this litigation. (Reply Supp. of Intervenors, filed Sept. 3, 1991, at 1).

⁴ The Notice of Levy provided in part that: "All property, rights to property, money, credits, and bank deposits now in your possession and belonging to this taxpayer . . . and all money or other obligations owing from you to this taxpayer, are levied upon for payment of the tax plus all additions provided by law." (Complaint, filed Aug. 30, 1989, Ex. A.)

⁵ The Final Demand provided in part that: "On June 27th, 1983, a notice of levy was served on Beverly Garland. . . . The notice of levy attached property, rights to property, money, credits, and bank deposits then in your possession, to the credit of, belonging to, or owned by Daniel R. Bauer of Rt. 3 Box 422, Coeur d'Alene, Idaho 83814." (Complaint, filed Aug. 30, 1989, Ex. B.)

⁶ As stated above, the government argues that the balance of this account at the time the Notice of Levy was served on June 27, 1983, was $7,840.79.

⁷ See also Rule 56(e), which provides in part:

When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

U.S.C.S. Court Rules, Rules of Civil Procedure, Rule 56(e) (Law. Co-op. 1987 & Supp. 1990).

 

[93-1 USTC ¶50,129] Dean Meminger, Sr., Plaintiff v. United States Internal Revenue Service and Republic National Bank, Defendants

U.S. District Court, So. Dist. N.Y., 91 Civ. 6971 (MBM), 1/20/93

[Code Secs. 6332 , 6532 and 7426 ]

Levy and distraint: Personal property: Bank accounts: Suits by nontaxpayers: Statute of limitations.--Despite an individual's claim that the IRS wrongfully levied upon his bank account for the delinquent taxes owed by his son, his wrongful levy action, which was filed 16 months after the bank received notice of the IRS levy, was dismissed for failure to comply with the nine-month statute of limitations for wrongful levy actions. Although the individual claimed that the IRS should have notified both him and his bank, the IRS was not required to notify the individual, and the parties did not dispute that the bank was given adequate notice. Further, the individual did not demonstrate that the nine-month period should have been extended since he failed to file an administrative claim for return of the levied account. Finally, the bank honored the IRS levy; therefore, the individual's federal claims against the bank were dismissed.

Joseph A. Bailey, 630 W. 158th St. , New York , N.Y. 10032 , for plaintiff. Edward Scarvalone, Assistant United States Attorney, New York, N.Y. 10007, for U.S., Malcolm B. Choset, Wrenn & Schmid, 103 W. Main St., East Islip, N.Y. 11730, for Republic Natl. Bk.

OPINION AND ORDER

MUKASEY, District Judge:

Plaintiff claims that on June 21, 1990 the United States Internal Revenue Service wrongfully levied upon his bank account at Republic National Bank in the amount of $25,269.11. He sues defendant United States for wrongful levy, pursuant to 26 U.S.C. §7426(a)(1) (1988), and defendant Republic National Bank under state law for negligence in releasing his account to the IRS. Defendant United States moves to dismiss plaintiff's claim for failure to comply with the nine-month statute of limitations for wrongful levy actions. 26 U.S.C. §6532(c)(1) (1992). For the reasons stated below, the motion is granted and plaintiff's claims against the United States are dismissed. Because plaintiff and defendant Republic are each citizens of New York , plaintiff's claims against Republic are dismissed for lack of jurisdiction. 28 U.S.C. §1332 (1992). This court retains jurisdiction over Republic's cross-claim against the IRS, as described in the final section of this opinion.

I.

By Notice of Levy dated June 21, 1990, the IRS directed that Republic National Bank transfer $25,269.11 from the bank account of "Dean Meminger" to the IRS. (Scarvalone Decl. Exs. A & B) At that time, both plaintiff Dean Meminger, Sr. and plaintiff's son Dean Meminger, Jr. held accounts at Republic, and Republic possessed both of their Social Security numbers. (Bailey Aff. ¶2-6) The IRS Notice of Levy listed only the Social Security number of plaintiff's son, Dean Meminger, Jr. (Scarvalone Decl. Ex. A) Following the Notice of Levy, the IRS sent Republic two Final Demands for the money. Each listed "Dean Meminger" as accountholder, but neither indicated Jr. or Sr. (Id. Ex. B) Republic paid to the IRS $25,269.11 in satisfaction of the levy by check dated August 28, 1990. ( Id. Ex. C).

Plaintiff claims, and defendants do not dispute, that "Dean Meminger, Sr. was not indebted to the Internal Revenue Service." (Compl. ¶7) Rather, the IRS levy had targeted plaintiff's son, who, according to plaintiff, "was in the process of negotiating with I.R.S. agents . . . and in fact had reached an agreement with them on a payment plan to settle his account with the Internal Revenue Service." (Bailey Aff. ¶4) Because "[t]he levy was intended for [Dean Meminger, Jr.] and not the plaintiff," (Bailey Aff. ¶6) plaintiff claims (1) that defendant United States wrongfully levied on plaintiff's account, and (2) that Republic negligently released plaintiff's money to the IRS. (Bailey Aff. ¶2; Compl. ¶7) Plaintiff argues that "[t]he question now remains as to which of the defendants bears the responsibility for the wrong done to plaintiff." (Bailey Aff. ¶5)

Plaintiff sued first in New York State Supreme Court for New York County by complaint verified April 13, 1991. (Scarvalone Decl. Ex. D) Plaintiff commenced this action on October 17, 1991--approximately 16 months after the IRS Notice of Levy. As noted above, defendant United States has moved to dismiss plaintiff's complaint as barred by the nine-month statute of limitations for wrongful levy actions. 26 U.S.C. §6532(c)(1) (1992).

II.

Section 6331(a) of the Internal Revenue Code provides that the IRS may collect the taxes of a delinquent taxpayer "by levy upon all property and rights to property . . . belonging to such person." 26 U.S.C. §6331(a) (1992). Section 6332(a) provides further 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 [ United States ], surrender such property or rights." 26 U.S.C. §6332(a) (1992).

It is well established that a bank account is property "subject to levy" within the meaning of §§6331 and 6332 . United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985). Courts have permitted levies on bank accounts since the Revenue Act of 1924; Treasury Regulations explicitly authorize such levies. See 26 C.F.R. §301.6331-1(a)(1) (1984).

To levy upon a bank account, the IRS must notify the bank in writing of its intention to levy. 26 U.S.C. §6331(d) (1992). However, the IRS need not notify the accountholder. See, e.g., Williams v. United States [91-2 USTC ¶50,529 ], 947 F.2d 37 (2d Cir. 1991), cert. denied, 60 U.S.L.W. 3798 (1992); Winebrenner v. United States [91-1 USTC ¶50,057 ], 924 F.2d 851, 855 (9th Cir. 1991); Douglas v. United States [83-1 USTC ¶9182 ], 562 F.Supp. 593, 596 (S.D. Ga. 1983); American Honda Motor Co. v. United States [73-2 USTC ¶9670 ], 363 F.Supp. 988, 991 (S.D.N.Y. 1973). A bank is required to comply with an IRS levy unless (1) it is neither "in possession of" nor "obligated with respect to" property belonging to the delinquent taxpayer, or (2) the taxpayer's property is "subject to prior judicial attachment or execution." 26 U.S.C. §6332(a) ; see Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 721-22 (citing United States v. Sterling Nat'l Bank & Trust Co. of New York [74-1 USTC ¶9336 ], 494 F.2d 919, 921 (2d Cir. 1974)). Failure to comply subjects a bank to liability. See 26 U.S.C. §6332(d) (1992); United States v. Donahue Indus., Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325 (9th Cir. 1990); Texas Commerce Bank-Fort Worth, N.A. v. United States [90-1 USTC ¶50,155 ], 896 F.2d 152 (5th Cir. 1990); United States v. Philadelphia Yearly Meeting of the Religious Society of Friends [91-1 USTC ¶50,042 ], 753 F.Supp. 1300 (E.D. Pa. 1990).

III.

First, plaintiff challenges the levy procedure described above as "lawless," and claims that the IRS was required to notify both Republic and plaintiff. (Bailey Aff. at 1) However, the constitutionality of the levy procedure "has long been settled" as a function of the power of Congress to lay and collect taxes. United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 721 (quoting Phillips v. Comm'r [2 USTC ¶743 ], 283 U.S. 589, 595 (1931)). The Second Circuit has ruled that notifying all potential competing claimants would be impractical and overly burdensome on the government and, therefore, is not required. Williams v. United States [91-2 USTC ¶50,529 ], 947 F.2d at 39 (citing cases). Moreover, the IRS was not required to notify plaintiff, and the parties do not dispute that Republic was given adequate notice.

Second, plaintiff claims that the IRS wrongfully levied upon his account. One claiming an interest in property seized for another's taxes may bring a civil action against the United States to have the property returned, pursuant to 26 U.S.C. §7426(a)(1) (1988). See, e.g., Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 728; American Honda [73-2 USTC ¶9670 ], 363 F.Supp. at 991; Carlos v. United States [82-1 USTC ¶9142 ], 531 F.Supp. 359, 361 (N.D.N.Y. 1981). Section 7426(a)(1) provides that "[i]f a levy has been made on property . . ., any person (other than the person whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States." 26 U.S.C. §7426(a)(1) (1988).

The statute of limitations for wrongful levy actions states that "no suit or proceeding under section 7426 shall be begun after the expiration of 9 months from the date of the levy or agreement giving rise to such action." 26 U.S.C. §6532(c)(1) (1988). Courts have interpreted the "date of levy" as the date on which the person possessing the property received notice of the levy. See, e.g., Winebrenner v. United States [91-1 USTC ¶50,057 ], 924 F.2d 851, 855 (9th Cir. 1991); State Bank of Fraser v. United States [88-2 USTC ¶9592 ], 861 F.2d 954, 967 (6th Cir. 1988) (notice to holder of accounts receivable); Dieckmann v. United States [77-1 USTC ¶9224 ], 550 F.2d 622, 624 (10th Cir. 1977) (entrusted funds); Douglas v. United States [83-1 USTC ¶9182 ], 562 F.Supp. 593, 596 (S.D. Ga. 1983) (savings and loan account); Carlos v. New York State Dep't of Taxation [82-1 USTC ¶9142 ], 531 F.Supp. 359, 361-62 (N.D.N.Y. 1981) (cash in possession of police department); American Honda Motor Co. v. United States [73-2 USTC ¶9670 ], 363 F.Supp. 988, 991-92 (E.D. Mo. 1973); Treas. Reg. 301.6532-3(c) ex. 1 (tangible personal property). Republic received notice of the levy on June 21, 1990. Plaintiff filed this suit on October 17, 1991, 16 months after Republic received notice of the IRS levy.

Finally, plaintiff has not demonstrated that the nine-month period should be extended. The period is extended if a plaintiff makes an administrative request for return of the property. 26 U.S.C. §6532(c)(2) . Such a request must be "in writing, addressed to the district director of the IRS, and contain certain information about the parties and property involved." Winebrenner [91-1 USTC ¶50,057 ], 924 F.2d at 856 (citing Treas. Reg. 301.6343-1(2) ,-1(3)). Plaintiff did not file an administrative claim for return of the levied account. (Scarvalone Decl. ¶¶7-8 and Exs. E & F) Moreover, even if plaintiff's state court action should be regarded as a "suit or proceeding under section 7426 " for the purposes of the statute of limitations, that state court action was not commenced until April 13, 1991, also more than nine months after the IRS levy. Accordingly, I need not decide whether the state court action should be so regarded.

As a sovereign, the United States is subject to civil liability only when it consents to be sued. See, e.g., Block v. North Dakota , 461 U.S. 273, 287 (1983); Williams v. United States [91-2 USTC ¶50,529 ], 947 F.2d at 39. When a plaintiff who sues the United States fails to comply with the relevant statute of limitations, the court is deprived of subject matter jurisdiction. Williams [91-2 USTC ¶50,529 ], 947 F.2d at 39. Therefore, because plaintiff has not satisfied the nine-month statute of limitations, his claims against the United States are dismissed for lack of subject matter jurisdiction. Because plaintiff and defendant Republic are both citizens of New York , plaintiff's claims against Republic are dismissed also for lack of jurisdiction. 28 U.S.C. §1332 (1992).

IV.

As a fourth affirmative defense and as a cross-claim against the IRS, Republic claims that it acted properly in responding to the IRS Notice of Levy and Final Demands, (Def. Republic Answer ¶10) and that, consequently, the IRS is liable in indemnity to Republic for any judgment against Republic. (Def. Republic Answer ¶11)

Section 6332(e) provides that any person honoring a federal tax levy by surrendering property subject to levy "shall be discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment," 26 U.S.C. §6332(e) (1992). Republic honored the IRS levy and plaintiff's federal claims against Republic are dismissed.

However, plaintiff may still sue Republic for negligence in state court. Therefore, defendants are to submit by February 13, 1993 memoranda of law not to exceed ten pages addressing two questions: (1) is Republic's cross-claim against the IRS viable? and (2) if the claim is viable, should the claim be heard in this or another court? Until that date, this court retains jurisdiction over Republic's cross-claim against the IRS.

* * *

For the reasons stated above, defendant's motion is granted, and plaintiff's claims are dismissed.

SO ORDERED:

 

[93-2 USTC ¶50,494] Martin B. Quillen, et al., Plaintiffs v. United States of America , et al., Defendants

U.S. District Court, West. Dist. Va., Big Stone Gap Div., Civ. 92-0097-B, 8/9/93

[Code Secs. 6103 , 6331 , 6332 , 7430 , 7431 , 7432 and 7433 ]

Bankruptcy: Levy and distraint: Seizure of property.--The court had no jurisdiction over a bankrupt individual's claim that the IRS violated the automatic stay provision of the Bankruptcy Code. The IRS levied on the taxpayer's bank account and real property subsequent to his bankruptcy. However, the taxpayer could not recover damages against the IRS for a violation of the automatic stay provision because the U.S. had not waived sovereign immunity with respect to that provision. Furthermore, the automatic stay was dissolved when the Chapter 11 discharge was confirmed, which occurred prior to the levies. As a result, the IRS did not violate Code Secs. 6331 --6343 (provisions related to the seizure of property). Nor were the disclosures of tax returns by the IRS improper. The taxpayer did not allege any facts to the contrary. Finally, the taxpayer's bank was not liable to him for surrendering his account funds to the IRS because Code Sec. 6332 released the bank from liability for complying with the levy.

Joseph E. Wolfe, Wolfe & Farmer, P.O. Box. 625, Norton , Va. 24273-0625 , for plaintiff. Richard A. Lloret, Poff Bldg., 4th Flr., Roanoke, Va. 24008-1709, Angelo A. Frattarelli, Department of Justice, Washington, D.C. 20530, for defendant (I.R.S.) Mark L. Esposito, Penn, Stuart, Eskridge & Jones, Abington, Va. 24210, for defendant (Hamilton Bk. of Upper E. Tenn.)

MEMORANDUM OPINION

WILSON, District Judge:

Plaintiffs Martin B. Quillen, Sr. and Marlene C. Quillen bring this action against the United States and Hamilton Bank of Upper East Tennessee ("Hamilton Bank"). Liberally construed, the Quillens' complaint alleges that the Internal Revenue Service ("IRS") violated 26 U.S.C. §§6331 --6343 and 11 U.S.C. §362 by levying on a bank account at Hamilton Bank that was subject to an automatic stay, violated 26 U.S.C. §§6331 --6343 by filing a tax lien on certain real property owned by the Quillens, and violated 26 U.S.C. §6103 by making unauthorized disclosures of income tax returns and return information. The complaint further alleges that Hamilton Bank violated 11 U.S.C. §362 as well by complying with the levy, violated 26 U.S:C. §6332 by failing to remit all funds in the account to the IRS, and violated 26 U.S.C. §6334 by failing to exempt certain amounts from the funds remitted to the IRS. The court has jurisdiction over the title 26 claims against the United States pursuant to 26 U.S.C. §§7431 and 7433 and jurisdiction over the claims against Hamilton Bank pursuant to 28 U.S.C. §§1331 and 1334(b) and 11 U.S.C. §362(h). Both defendants have moved for dismissal under Rule 12(b) of the Federal Rules of Civil Procedure. Because, with respect to the claims against the United States , matters outside the pleadings are before the court, the court will treat the United States ' motion as one for summary judgment. ¹ Finding no jurisdictional basis for the title 11 claim against the United States and finding that the Quillens' other claims fail as a matter of law, the court will grant the defendants' motions.

I.

On April 3, 1986, the Quillens filed for reorganization under chapter 11 of the Bankruptcy Code. They subsequently opened a bank account at Hamilton Bank for use as an operating account while in reorganization. On March 1, 1988, the bankruptcy court confirmed their chapter 11 plan and granted discharge.

On October 10, 1989, the IRS provided the Quillens notice of its intention to levy on their property under 26 U.S.C. §6331(d) due to outstanding federal tax liabilities. On March 15, 1990, the IRS served a Notice of Levy on Hamilton Bank with respect to the Quillens' account. Hamilton Bank complied with the levy by withdrawing $1,372.35 from the account on April 24. On April 27 the IRS again served a Notice of Levy on Hamilton Bank, which complied by withdrawing $2,171.14 on May 29. On April 27 the IRS filed a tax lien on certain real property belonging to the Quillens. The IRS then served a third Notice of Levy on June 19, but Hamilton Bank did not comply with that levy. The Quillens subsequently sought administrative review of the tax lien and the levies, which was rejected by the IRS.

II.

Initially, the court finds no jurisdictional basis for the Quillens' claim under title 11 that the United States violated the automatic stay from the Quillens' prior bankruptcy. To assert a claim against the United States , the Quillens must show a waiver of sovereign immunity. In their amended complaint the Quillens assert jurisdiction for all of their claims under 26 U.S.C. §§7430 --7433. However, §7430 contains no waiver of immunity for any kind of claim; §7431 waives immunity only for unauthorized disclosure claims; §7432 waives immunity only for claims alleging failure to release a lien; and §7433 waives immunity only for claims alleging a violation of title 26. Clearly, none of those sections waives immunity for the claim that the IRS violated 11 U.S.C. §362 . ² Furthermore, while 11 U.S.C. §106 waives sovereign immunity for certain claims under the bankruptcy code, it has been held not to waive immunity for monetary claims. See United States v. Nordic Village Inc. [92-1 USTC ¶50,109 ], -- U.S. --, 112 S.Ct. 1011, 60 U.S.L.W. 4159, 4161 (1992). Indeed, the Court stated in Nordic Village that the United States has nowhere waived immunity for monetary claims under title 11. Id. Accordingly, the court finds that it does not have jurisdiction over the Quillens' claim under 11 U.S.C. §362(h).

III.

The Quillens also allege violations of 26 U.S.C. §§6103 and 6331--6343 by the United States , which they maintain are actionable under 26 U.S.C. §7433(a) . The court finds that those claims fail as a matter of law. ³ The Quillens' claims for alleged violation of §§6331 --6343, a subchapter of the Internal Revenue Code concerning the procedures by which the IRS may collect taxes and seize property, are premised on the theory that the IRS's collection actions violated the automatic stay from the Quillens' prior bankruptcy proceedings. That underlying theory is in error, however, because the automatic stay ceased to exist as of March 1, 1988, when the Quillens received confirmation of their Chapter 11 plan and discharge. At that time all property of the estate vested in the Quillens as debtors, see 11 U.S.C. §1142(b), and the automatic stay dissolved, see 11 U.S.C. §362(c)(1) . See United States, Dep't of the Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1474 (4th Cir. 1990). The stay was, therefore, not in effect in 1990 when the IRS levied on the Quillens' bank account and placed a tax lien on their property.

The Quillens' claim that the IRS violated §6103 by willfully making unauthorized disclosures of tax returns and return information fails as a matter of law as well. Section 6103 provides that returns and return information are confidential and shall not be disclosed. 26 U.S.C. §6103(a) (West Supp. 1993); see also Mallas v. United States [93-1 USTC ¶50,302 ], 993 F.2d 1111, 1117 (4th Cir. 1993). The section, however, authorizes disclosure by the IRS

to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax, liability for tax, or the amount to be collected or with respect to the enforcement of any other provision of this title. Such disclosures shall be made only in such situations and under such conditions as the Secretary may prescribe by regulation.

26 U.S.C. §6103(k)(6) . Treasury Regulations promulgated under the section allow disclosure "to apply the provisions of the [Internal Revenue] Code relating to the establishment of liens against [a taxpayer's] assets, or levy on, or seizure, or sale of, the assets to satisfy any . . . liability" under the Code. Treas. Reg. §301.6103(k)(6)-1(b) (1980). There is no evidence, and indeed the Quillens do not even allege, that confidential information was disclosed in any context other than that described in the statute and regulation. The court therefore finds that any disclosures made by the IRS in connection with its levies were authorized under 26 U.S.C. §6103(k)(5) . See Maisano v. United States [90-2 USTC ¶50,399 ], 908 F.2d 408, 410 (9th Cir. 1990). ⁴

IV.

All of the Quillens' claims against Hamilton Bank are based upon Hamilton Bank's compliance with the IRS's levies on funds held by the Quillens at Hamilton Bank. 26 U.S.C. §6332(e) states:

Any person in possession of . . . property . . . subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property . . . to the Secretary . . . shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property . . . arising from such surrender or payment.

26 U.S.C. §6332(e) (West Supp. 1993). That section clearly discharges Hamilton Bank from any liability to the Quillens based on its compliance with the levies. See Burroughs v. Wallingford [86-1 USTC ¶9173 ], 780 F.2d 502, 503 (5th Cir. 1986); Schiff v. Simon & Schuster, Inc. [86-1 USTC ¶9204 ], 780 F.2d 210, 212 (2nd Cir. 1985); DiEdwardo v. First Nat'l Bank of Bath [78-1 USTC ¶9380 ], 442 F.Supp. 499, 500 (E.D. Pa. 1977). Accordingly, the court finds that the Quillens' claims in that respect are deficient as a matter of law.

V.

For reasons stated, the court will grant summary judgment to the United States and will grant Hamilton Bank's motion to dismiss.

An appropriate order will issue.

¹ See Gay v. Wall, 761 F.2d 175, 177 (4th Cir. 1985).

² 26 U.S.C. §7433(a) provides:

If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally disregards any provision of this title . . ., such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

26 U.S.C.A. §7433(a) (West 1989). As framed, the Quillens' complaint alleges violations of title 26, and the court therefore has jurisdiction over those claims under §7433(a) . However, their claims under 26 U.S.C. §§6331 --6343 are ultimately premised on alleged violations of the automatic stay provision, 11 U.S.C. §362 . The court expresses no opinion as to whether there might be circumstances under which a levy in violation of the automatic stay provision would somehow contravene the procedures set forth in §§6331 --6343 and, by that fact, become actionable under §7433(a) . It is unnecessary to reach that question because, as stated in Part III of this opinion, the court finds no violation of the automatic stay.

³ The court finds that issues of material fact preclude entry of summary judgment based upon the limitations periods provided in 26 U.S.C. §§7431(d) and 7433(d)(3) .

⁴ The Quillens' amended complaint does not specify any facts pertaining to the alleged unlawful disclosure, but merely consists of the bare allegation that the IRS made an unlawful disclosure. The court has liberally construed the complaint as alleging the unlawful disclosure in connection with the levies. To the extent that the Quillens allege unlawful disclosure apart from the levies, the court finds that the claim is unsupported by facts sufficient to survive a motion for summary judgment.

[94-1 USTC ¶50,119] Shyrl Brown, Plaintiff v. United States , et al., Defendants

U.S. District Court, Dist. Utah , Cent. Div., Civ. 92-C-788 G, 11/5/93

[Code Secs. 7402 and 7433 ]

Jurisdiction: District courts: Immunity: Civil damages: IRS conduct.--An individual's suit for tortious conversion arising from an IRS levy of his bank accounts was dismissed for lack of subject matter jurisdiction. The government did not waive its immunity to the suit under the Federal Tort Claims Act (28 U.S.C. Sec. 2671), because the allegation of tortious conversion related to the collection of taxes.
[Code Secs. 6331 and 6332 ]

Levy and distraint: Constitutional rights: Surrender and demand: Notice: Bank accounts.--An individual's claim for damages arising from an allegedly wrongful levy was dismissed because the individual failed to state a claim that an officer or agent of the IRS acted recklessly or with intentional disregard of the Code and the regulations in the collection of taxes. Although the levy did constitute a seizure, no Fourth Amendment violation occurred because the IRS merely levied his bank account and did not enter his premises. His Fifth Amendment rights were not violated since there was adequate opportunity for post-collection review of the actions. No constitutional rights were impaired by the IRS's failure to notify him of their intention to levy. Further, the individual's arguments that the levy and surrender were improper in the absence of attachment or execution under judicial process and in the absence of any formal adjudication or determination of the parties' claims to the property were meritless. Finally, the IRS did not act improperly by accepting the property from the bank less than 21 days after the notice of levy.
[Code Sec. 7402 ]

Jurisdiction: District court: Sufficiency of complaint.--An individual's claim against a bank for an allegedly improper surrender of property under an IRS levy was dismissed for lack of general or specific personal jurisdiction. The out-of-state bank did not conduct any substantial and continuous activity in the state ( Utah ). Further, jurisdiction under the state long-arm statute could not be based solely upon the financial injury to the state resident.
[Code Sec. 6331 ]

Levy and distraint: Immunity of IRS agents.--An individual's motion for reconsideration of an order dismissing his complaint against an IRS agent who executed a levy on his bank account was denied. The assessment and levy of property in connection with the collection of taxes did not violate any clearly established constitutional or statutory right. Therefore, a constitutional tort action did not lie against the agent. Further, the agent did not act under the color of state law.

Scott M. Matheson, Jr., 350 S. Main, Salt Lake City , Utah 84101 , for plaintiff. Kirk C. Lusty, Department of Justice, Washington , D.C. 20530 , for defendants.

MEMORANDUM DECISION and ORDER

GREENE, District Judge:

This matter comes before the court on the following motions:

(1) Plaintiff's second motion for summary judgment;

(2) Plaintiff's motion for reconsideration of the order dismissing Defendant Karen Shields;

(3) Plaintiff's motion to compel discovery;

(4) Defendant Blaine State Bank's motion to dismiss for lack of personal jurisdiction and for failure to state a claim;

(5) Defendant United States ' second motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim;

(6) Plaintiff's motion to disqualify; ¹ and

(7) Defendant United States ' objections to Plaintiff's proposed pretrial order. ²

Memoranda in opposition to Plaintiff's motions have been filed by Defendant United States. Memoranda in opposition of Defendants' motions to dismiss have been filed by Plaintiff. The court has reviewed the file, the motions and memoranda filed by the parties and has determined that oral argument would be of no material assistance in determining these pending motions. Accordingly, the case will be decided on the existing record.

FACTS

Plaintiff Shyrl Brown did not pay taxes for the years 1984-86. In an effort to collect the unpaid taxes for those years, the Internal Revenue Service (IRS) levied Plaintiff's bank account at Blaine State Bank (the Bank). In response, the Bank surrendered the property subject to levy, remitting the money on deposit in Plaintiff's bank account to the IRS. Plaintiff then brought this action against the United States , Karen Shields (IRS revenue officer), Blaine State Bank and unnamed defendants.

Plaintiff made the following claims against the Defendants:

(1) the IRS and the Bank unlawfully converted the funds in his bank account;

(2) the IRS and the Bank conspired to deprive him of his constitutional rights in violation of 42 U.S.C. §1985 by unlawfully converting funds in his bank account;

(3) the IRS and the Bank deprived him of his constitutional rights in violation of 42 U.S.C. §1983 by taking money on deposit in his bank account without due process of law and by unlawfully searching his personal records and seizing the money in his bank account; and

(4) the IRS violated 26 U.S.C. §7433 by recklessly or intentionally disregarding procedures in the Internal Revenue Code (IRC) and regulations thereto in collecting the taxes allegedly due.

Plaintiff maintains that he is not required to pay taxes, that Karen Shields did not have the authority to levy his account, that he was not properly notified of the levy, that the Bank unlawfully surrendered the money in his account without attachment or execution under judicial process, and that the Bank did not wait the 21 days required by 26 U.S.C. §6332(c) before acting on the Notice of Levy. Plaintiff seeks return of the money that was allegedly illegally converted, the costs incurred in the recovery and $100,000 in punitive damages from each defendant.

The government moved to dismiss for lack of subject matter jurisdiction and failure to state a claim. The government argued that the doctrine of sovereign immunity bars Plaintiff's cause of action, that Plaintiff failed to exhaust his administrative remedies, that Plaintiff was subject to levy, that the IRS did not violate any provision of the IRC, and that the levy procedures did not violate any of Plaintiff's constitutional rights. The Bank moved to dismiss for lack of personal jurisdiction and failure to state a claim. Plaintiff opposed the motions to dismiss on several grounds, including waiver of sovereign immunity by Congress.

On February 2, 1993, this court heard arguments on various motions pending in the case. ³ By order dated February 26, 1993, this court dismissed Karen Shields as a defendant in the matter, denied Plaintiff's initial motion for summary judgment and denied Plaintiff's motion for costs.

Now being fully advised, the court enters its memorandum decision and order. The court's analysis is broken down into three sections in which the motions remaining in this matter are addressed. The first section has to do with Defendant United States' motion to dismiss. The second section addresses Defendant Blaine State Bank's motion to dismiss. The last section addresses Plaintiff's motion for reconsideration as to this court's order dismissing Defendant Karen Shields.

ANALYSIS

I. DEFENDANT UNITED STATES' MOTION TO DISMISS

Plaintiff has two basic claims pending against Defendant United States: ⁴ (1) tortious conversion of property and (2) improper income tax collection practices in violation of 26 U.S.C. §7433 . ⁵ In response, Defendant United States asserts two grounds for dismissal. First, the government argues that the court lacks subject matter jurisdiction because Defendant United States has not waived sovereign immunity. Second, the government argues that Plaintiff's claim under 26 U.S.C. §7433 fails to state a claim for which relief can be granted. These arguments will be addressed seriatim.

A. Plaintiff's Claim of Tortious Conversion

It has long been established that the United States , as sovereign, is immune from suit save its consent to be sued. United States v. Testan, 424 U.S. 392, 399 (1976) (citing United States v. Sherwood, 312 U.S. 584, 586 (1941)). However, sovereign immunity cannot be implied. Rather, it must be unequivocally expressed. Testan, 424 U.S. at 399 (citing Soriano v. United States, 352 U.S. 270, 276 (1957)). The doctrine of sovereign immunity limits subject matter jurisdiction over the United States to the terms of the specific statute conferring jurisdiction. Affiliated Ute Citizens of Utah v. United States , 406 U.S. 128, 141 (1972).

Conversion is a common law tort. Presumably, Plaintiff intended to proceed against the United States under the waiver of immunity granted by the Federal Tort Claims Act, 28 U.S.C. §2671 et seq. However, 28 U.S.C. 2680(c) states that the immunity of the United States is not waived in actions "arising in respect of the assessment or collection of any tax." See National Commodity and Barter Ass'n et al. v. Gibbs [90-1 USTC ¶50,147 ], 886 F.2d 1240, 1246 (10th Cir. 1989); Childress v. Northrop Corporation, 618 F.Supp. 44, 48-49 (D.D.C. 1985). Because Plaintiff's allegation of tortious conversion of property relates to the collection of taxes, the United States is immune from Plaintiff's claim. The government may properly specify that it will not be sued for matters related to the collection of taxes as Plaintiff has claimed in the instant case. United States v. Mitchell, 445 U.S. 535, 538 (1980). Accordingly, this court lacks subject matter jurisdiction over Plaintiff's claim against the United States for tortious conversion of property. Therefore, Plaintiff's tortious conversion claim against the United States is dismissed pursuant Fed. R. Civ. P. 12(h)(3).

B. Plaintiff's Claim Under 26 U.S.C. §7433

Plaintiff brought a claim for damages against the United States under 26 U.S.C. §7433 alleging that IRS agent Karen Shields recklessly and intentionally disregarded the provisions of the IRC and regulations thereto in the collection of Federal income tax owed by him. Congress waives the sovereign immunity of the United States when an officer or employee of the IRS acts recklessly or with intentional disregard of the IRC and regulations thereto in the collection of taxes. See 26 U.S.C. §7433(a) (stating that "if, in the collection of Federal tax with respect to a taxpayer, an officer or employee recklessly or intentionally disregards any provision of this title . . . such taxpayer may bring a civil action against United States in a district court of the United States"). Therefore, this court has subject matter jurisdiction over Plaintiff's claim against the United States under 26 U.S.C. §7433 because the government expressly has waived sovereign immunity.

Specifically, Plaintiff alleges that the IRS illegally converted the money on deposit in his bank account at the Bank through an improper administrative levy. In support of his claim Plaintiff maintains: (1) that he is not subject to levy; (2) that the seizure of his funds violated his constitutional rights; ⁶ and (3) that the Bank surrendered the money on deposit in the bank account without waiting twenty-one days as required by statute. Each of these assertions will be addressed in the following sections.

1. Plaintiff is subject to levy. Plaintiff maintains that he is not subject to levy because he is not a government employee and the only lawful use of the Notice of Levy is to serve notice upon the employer of government employees. Plaintiff erroneously interprets 26 U.S.C. §6331(a) to restrict its application to government employees. The first sentence of 26 U.S.C. §6331(a) demonstrates the breadth of the Service's ability to levy property for the payment of taxes stating, in relevant part, "[i]f any person liable to pay tax neglects or refuses to pay same . . . it shall be lawful for the Secretary to collect such tax . . . by levy upon all property . . . belonging to such person. . ." (emphasis added). ⁷ Section 6331(a) continues stating that "[l]evy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States . . . by serving a notice of levy on the employer . . . of such officer, employee, or elected official." 26 U.S.C. §6331(a) (emphasis added). The part of Section 6331(a) that Plaintiff cites in support of his proposition merely provides the government with a procedure to collect taxes from government employees. It is not the exclusive scope of Section 6331(a) . Indeed, the Tenth Circuit Court of Appeals in Lonsdale v. United States [90-2 USTC ¶50,581 ], 919 F.2d 1440 (10th Cir. 1990), rejected Plaintiff's argument that the authority of the United States to levy property in the collection of taxes is limited and characterized the argument as "completely lacking in legal merit and patently frivolous." Id. at 1448. Accordingly, Plaintiff's argument that agent Karen Shields recklessly or intentionally disregarded provisions of the IRC by levying a non-governmental employee's bank account fails to state a claim upon which relief can be granted.

2. The levy did not violate Plaintiff's constitutional rights. Plaintiff claims that the government's levy violated his constitutional rights against deprivation of property without due process of law and unlawful searches and seizures. ⁸ At times, Plaintiff appears to contend that the levy per se violated his Fourth and Fifth Amendment rights. At other times it appears that perhaps alleged violations 26 U.S.C. §§6331(d) and 6332(c) underlie Plaintiff's constitutional claims.

The levy is not a per se violation of Plaintiff's Fourth Amendment rights. The levy in question did constitute a seizure. 26 U.S.C. §6331(b) . However, there is no doubt as to the lawfulness of the seizure. Baddour, Inc. v. United States [86-2 USTC ¶9748 ], 802 F.2d 801, 807 (5th Cir. 1986). The Supreme Court resolved that question in G.M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338 (1977), holding that where the government seizes property to collect delinquent taxes, the seizure does not violate the Fourth Amendment if it involves no invasion of one's premises. Id. at 351-352. In the instant case, because the IRS levied Plaintiff's bank account and did not enter his premises, there was no violation of Plaintiff's Fourth Amendment rights.

Likewise, the levy is not a per se violation of Plaintiff's Fifth Amendment rights. The Supreme Court has specifically upheld the constitutionality of the Internal Revenue Service levy procedures in a variety of contexts. See, e.g., Commissioner of Internal Revenue v. Shapiro [76-1 USTC ¶9266 ], 424 U.S. 614, 630-32 n.12 (1976); Fuentes v. Shevin, 407 U.S. 67, 91-92 (1972); G.M. Leasing Corp. [77-1 USTC ¶9140 ], 429 U.S. at 352; United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985). A seizure under 26 U.S.C. §6331 is provisional and does not determine the rights of third parties until after a post-seizure administrative or judicial hearing. Baddour [86-2 USTC ¶9748 ], 802 F.2d at 807. Summary assessment and collection activities by the Service do not run afoul of the due process clause of the Fifth Amendment so long as there is adequate opportunity for post-collection review of the actions. Baddour [86-2 USTC ¶9748 ], 802 F.2d at 807; Morales v. Haynes [90-2 USTC ¶50,494 ], 890 F.2d 708, 710 (5th Cir. 1989). Therefore, Plaintiff's attack on the levy procedures as a per se violation of the Fifth Amendment is similarly without merit.

Plaintiff also contends that it was improper for the IRS to levy his account or for the Bank to surrender the money on deposit pursuant to 26 U.S.C. §6332(c) in the "absence of an attachment or execution under judicial process." Plaintiff again misconstrues the language of the Internal Revenue Code. Section 6332(a) states, in relevant part,

[e]xcept as otherwise provided in this section, any person in possession of . . . property . . . upon which a levy has been made shall, upon demand of the Secretary, surrender such property . . . to the Secretary, except such part of the property . . . as is, at the time of such demand, subject to an attachment or execution under any judicial process.

26 U.S.C. §6332(a) . Section 6332(c) qualifies the general surrender requirements of §6332(a) and provides a special rule for banks which extends the period of time to surrender levied property in the bank's possession. See 26 CFR 301.6332-3 (stating that the provisions of Section 6332(a) , which relate generally to the surrender of property subject to levy, apply to the extent not inconsistent with the special rules set forth with respect to a levy on property held by banks). Section 6332(c) states that "[a]ny bank . . . shall surrender (subject to attachment or execution under judicial process) any deposits . . . in such bank only after 21 days after service of levy." Plaintiff has read §6332(c) out of context and incorrectly interpreted it to require banks to wait for attachment and execution under judicial process prior to surrendering property in bank accounts. The regulations to Section 6332(c) also illustrate that the parenthetical limitation on surrender of property subject to attachment properly relates to competing liens rather than a broad sweeping requirement which would obviate the effectiveness of an administrative levy. See 26 CFR 301.6332-3 (stating that the bank shall surrender deposits not otherwise subject to an attachment or execution under judicial process) (emphasis added). Moreover, courts have made clear that an administrative levy pursuant to 28 U.S.C. §6331 and the corresponding surrender provisions of 28 U.S.C. §6332 are valid statutory means by which the government may collect unpaid taxes. Resolution Trust Corp. v. Gill [92-1 USTC ¶50,199 ], 960 F.2d 336, 340 (3rd Cir. 1992) (citing National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 720). Furthermore, unlike other methods of enforcing the collection of taxes, for example the lien-foreclosure suit, an administrative levy and surrender occurs prior to any formal adjudication and prior to the determination of the parties' claims to the property. Gill [92-1 USTC ¶50,199 ], 960 F.2d at 340. Therefore, Plaintiff misinterpreted Section 6332(c) to require attachment and execution under judicial process prior to the surrender of property in bank accounts. Accordingly, Plaintiff fails to state a claim of reckless or intentional disregard of the IRC or regulations thereto as a result of the levy and surrender procedure. ⁹

Finally, Plaintiff claims that he was not provided with notice of levy as required by 26 U.S.C. §6331(d) . Section 6331(d)(1) states, in relevant part that "[l]evy may be made under subsection (a) upon the . . . property of any person with respect to any unpaid tax only after the Secretary has notified such person in writing of his intention to make such levy." The Service is required to give notice at least 30 days prior to the day of the levy. 26 U.S.C. §6331(d)(2) . A levy includes the notice of levy upon any person in possession of property. 26 CFR §301.6331-1(a) . Section 6331(d)(3) permits the IRS to waive notice of its intention to levy "if the Secretary has made a finding . . . that the collection of taxes is in jeopardy." 26 U.S.C. §6331(d)(3) . The government does not dispute Plaintiff's contention. However, Defendant Karen Shields stated in her declaration that Plaintiff's account was marked "Potentially Dangerous Taxpayer" because he had previously received several written demands for payment of taxes. Shields Declaration at ¶5. Apparently, the Service made a determination that collection of Plaintiff's taxes was in jeopardy and therefore no notice was required pursuant to 26 U.S.C. §6331(d)(3) . Furthermore, the Service's designation of Plaintiff as a "Potentially Dangerous Taxpayer" undermines Plaintiff's claim that agent Shields acted recklessly or with intentional disregard of the IRC and regulations thereto. Finally, because a levy of property is provisional and the rights of third parties are not determined until after a post-seizure administrative or judicial hearing, Plaintiff's constitutional rights were not impaired because of the Service's failure to notify him of their intention to levy his bank account. Baddour [86-2 USTC ¶9748 ], 802 F.2d at 807; Morales [90-2 USTC ¶50,494 ], 890 F.2d at 710 (holding that even if a levy is wrongfully imposed, plaintiff's constitutional rights have not been violated because he can pursue post-collection, administrative remedies). Therefore, Plaintiff has failed to establish either a constitutional violation or a claim under 26 U.S.C. §7433 as a result of the government's failure to notify Plaintiff of their intention to levy.

3. By accepting payment from Blaine State Bank the government did not violate the Internal Revenue Code. Plaintiff claims that the government violated provisions of the IRC by accepting payment from the Bank without waiting twenty-one days to pass after the Notice of Levy was served on the Bank. Section 6332(c) , governing the surrender of property by banks pursuant to levy, states that "[a]ny bank . . . shall surrender . . . any deposits . . . in such bank only after 21 days after service of levy." 26 U.S.C. §6332(c) . Plaintiff again misinterprets the provisions of the IRC. Section 6332 governs the surrender of property subject to levy. The section describes the obligations of the custodian of property subject to levy. Nowhere does Section 6332 impose a reciprocal obligation on the government to monitor the responsibilities of the custodian. As the government observes in their motion to dismiss, Plaintiff's claim is, at best, misdirected. A claim, if any, properly lies against the Bank for early surrender. Accordingly, the IRS did not violate the provisions of the IRC and regulations thereto as a result of the Bank's alleged early surrender of Plaintiff's property.

In conclusion, Plaintiff is subject to levy. The seizure of Plaintiff's funds from the Bank did not violate his constitutional rights. The government did not violate the IRC by accepting payment from the Bank without waiting for twenty-one days to pass after the Notice of Levy. As all of the allegations underlying Plaintiff's 26 U.S.C. §7433 claim are without merit, Plaintiff fails to state a claim for which relief can be granted.