Annotations- Savings Account Attachment

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6332 Annotations: Savings Account Attachment- Levy

 

Penalty for Failure to Surrender Property: Savings Account Attachment

 

[52-2 USTC ¶9417] United States of America , Plaintiff-Appellant v. Manufacturers Trust Company, Defendant-Appellee

(CA-2), In the United States Court of Appeals for the Second Circuit, No. 262--October Term, 1951, Docket No. 22375, 198 F2d 366, Decided July 28, 1952

Appeal from a judgment of the District Court for the Southern District of New York.

Distraint proceedings: Bank deposit.--Where the Government attempted to collect taxes due from the delinquent taxpayer out of her funds in a savings account in the bank, the bank could not insist upon presentation of the depositor's bank book before it would relinquish the funds to the Government. The third person, upon whom such a demand is made, has only two defenses: that he is not in possession of the property which is subject to distraint or that the property is subject to prior judicial attachment or execution. The bank not having presented either of these defenses consequently could not, by agreement with its depositor, immunize the account from distraint.

Myles J. Lane, United States Attorney, Southern District of New York, attorney for appellant, Joseph N. Friedman, Assistant U. S. Attorney, of Counsel. Simpson Thacher & Bartlett, attorneys for defendant-appellee, Douglas A. Caulkins, George B. Balamut and David G. Sacks, of Counsel.

Before: SWAN, Chief Judge, CHASE and FRANK, Circuit Judges.

CHASE, Circuit Judge:

The interesting question raised by this appellant concerns the steps which must be taken by the government to collect the taxes due from a delinquent taxpayer out of her funds on deposit in a savings ¹ account in the appellee bank.

It is undisputed that one Ruth Post owed the United States eighty-three dollars plus interest as the unpaid remainder of the amount she was properly assessed for income taxes for 1949. Also, that there is, and at all pertinent times was, on deposit in her name in a savings account in the Manufacturers Trust Company, a New York commercial banking corporation having its principal office and place of business in the City of New York, funds in excess of the amount here sought to be recovered payable to her upon demand and the presentation of her pass book.

[Demand for Payment]

Before this suit was brought payment was duly demanded of the taxpayer and, upon her failure to pay in full within ten days, a notice of levy and warrant of distraint was served upon the bank pursuant to the provisions of Sections 3690 and 3692 of Title 26 U. S. C. ² A demand, pursuant to the provisions of Section 3710(a) of Title 26 U. S. C., ³ was duly made upon the bank to surrender so much of the deposit to the collector as was required to pay the remainder, with interest, of the tax Miss Post owed but the bank refused to comply with the demand because the depositor's pass book was not presented to it. At the time of this demand the bank account was not subject to an attachment or execution under any judicial process. This suit was, thereupon, brought pursuant to Section 3710(b) ⁴ to recover from the bank a sum equal to the taxes due plus interest together with costs and interest from the date of the levy and distraint. Both sides moved for summary judgment and the government has appealed from an order granting the motion of the bank.

[Requirement Before Payment]

The contract of the bank with its depositor required it to make payment to her only "upon presentation of the pass book" or, upon receiving satisfactory indemnity, "in the event that a pass book has been lost, stolen, or destroyed, or in any exceptional case where the pass book cannot be produced, without serious loss or inconvenience to the depositor, and the depositor shall immediately notify the Company in writing stating the facts relating to said loss, theft, destruction or exceptional case to the Company, * * *"

[Position of Bank]

The position of the bank may be outlined as follows: The relationship between the bank and its depositor is that of debtor and creditor, Fidelity and Casualty Co. of N. Y. v. Farmers, National Bank of Hudson, 275 N. Y. 194, and, therefore, it is not obliged to make payments out of the account except in conformity with the contract which created that relationship. Bank of United States v. Public Bank of New York City, 88 Misc. 568, aff'd 168 App. Div. 915; Krupp v. Franklin Savings Bank, 255 App. Div. 15. The distraint, at most, gave the government the rights of a judgment creditor who has levied upon the depositor's property, United States v. Warren R. Co., 2 Cir., 127 Fed. (2d) 134 [42-1 USTC ¶9391], and, as such, the government obtained no greater rights than the depositor. Karno-Smith Co. v. Maloney, 3 Cir., 112 Fed. (2d) 690 [40-2 USTC ¶9533]. It seeks to bolster its position by insisting that the presentation of the pass book is necessary to show that the bank owed the depositor anything subject to distraint and relies upon cases like United States v. Metropolitan Life Ins. Co., 2 Cir., 130 Fed. (2d) 149 [42-2 USTC ¶9609] and United States v. Massachusetts Mut. Life Ins. Co., 1 Cir., 127 Fed. (2d) 880 [42-1 USTC ¶9342].

[Requirements Under Regulation Q]

As a second defense, appellee points out that it is a member of the Federal Reserve System subject to the rules and regulations of the Board of Governors which have been promulgated under Section 371(b) of Title 12 U. S. C. to effectuate the purposes of Section 19 of the Federal Reserve Act, as amended, 12 U. S. C. Sections 371(b) and 461, relating to "savings deposits." Section 1(e)(2) of Federal Reserve Regulation Q provides as to savings deposits that,

"Withdrawals are permitted in only two ways, either (i) upon presentation of the pass book, through payment to the person presenting the pass book, or (ii) without presentation of the pass book, through payment to the depositor himself but not to any person whether or not acting for the depositor, * * *"

The last point is not well taken since, if the statute is construed to permit distraint in the manner here attempted, the regulations of the Board of Governors of the Federal Reserve Board cannot abrogate the power of the Treasury to enforce the collection of taxes. Cf. 12 U. S. C. Section 246. And, there is nothing to make reasonable any conclusion that they were so intended.

[Debtor-Creditor Relationship]

Nor is the argument tenable that the presentation of the pass book is analogous to the condition precedent present in United States v. Metropolitan Life Ins. Co., supra, the performance of which was held necessary to the creation of any rights in property which were subject to distraint. That case involved the right of the government to reach the cash surrender value of a life insurance policy and the basis for decision was that the insurance company did not owe this amount to the insured unless, and until, the insured elected to receive it by relinquishing his other rights under the policy. It was held that the government could not make this election for the insured. But there is no like situation here. The relationship of debtor-creditor exists between the bank and its depositor regardless of the presentation of the pass book. See Myers v. Albany Savings Bank, 270 App. Div. 466, aff'd 296 N. Y. 562.

[Effect of Distraint]

This brings us to the main contention of the appellee which is that the distraint has no more effect than to put the government in the position of the depositor vis v. vis the bank, i. e., to give it only the rights of an assignee pro tanto of the depositor's account. If this were so, the above outlined argument of the appellee would be conclusive since the bank would be bound to surrender only in accordance with the terms upon which it had agreed to pay its depositor. However, the remedy of the government to enforce collection of taxes by the summary administrative method of distraint is not so limited in its effect and is a special privilege it has which is analogous to, but in addition to, garnishment and other remedies of an ordinary creditor. Zimmern v. United States , 5 Cir., 87 Fed. (2d) 179 [37-1 USTC ¶9024], cert. denied 300 U. S. 671. Cf. United States v. Long Island Drug Co., 2 Cir., 115 Fed. (2d) 983 [41-1 USTC ¶9140]. It is a constitutionally valid expedient for the collection of taxes necessary to the very existence of government, Phillips v. Commissioner, 283 U. S. 589 [2 USTC ¶743]; Springer v. United States, 102 U. S. 586; Murray's Lessee v. Hoboken Land and Improvement Co., 18 How. (U. S.) 274, and has been available by law since 1791. See Bull v. United States, 295 U. S. 247 [35-1 USTC ¶9346]. In 1926 this remedy of the government was extended in the statutes above mentioned to permit the seizure of the property of a taxpayer in the hands of a third party and, at that time, the definition of property, or rights to property, subject to such seizure was made to include bank accounts. 26 U. S. C. Section 3690.

The terms of the statute permit the third person upon whom is made a demand for property in his possession only two defenses; that he is not in possession of property of the taxpayer which is subject to distraint, or that the property is subject to a prior judicial attachment or execution. The statute admits of no other defenses. The appellee raises neither of these defenses and that determines the matter. Its contractual right to have the pass book presented before making payment is but a banking convenience to facilitate the identification of persons who are properly entitled to withdraw from the account but it is not enforceable to the letter in every case even where the original depositor, the contracting party, makes the demand. Myers v. Albany Savings Bank, supra. To be sure, the bank is entitled to the substance of the protection which it obtained for itself by the imposition of this requirement, that is, protection from claims by one presenting the pass book, in which no, entry of the amount surrendered appeared, with a demand for the payment in whole or in part of what had been surrendered. What we have held in no way deprives the appellee of such protection. The pass book, being a non-negotiable chose in action, payment, or its equivalent in this instance, surrender, out of the account without prior notice of any rights of third parties, and no such notice is claimed, would release the bank from further liability for what had been surrendered. Wade v. Security Savings & Commercial Bank, D. C. Cir., 99 Fed. (2d) 995; First State Bank of Jacksonville, Tex. v. Pure Van Pipe Line Co., 5 Cir., 77 Fed. (2d) 820. Absent possible liability for double payment, the bank could not by agreement with its depositor immunize the account from distraint. As was said by BOOTH, C. J., speaking for the Court of Claims in First Trust Co. of Omaha v. United States, 1 Fed. Supp. 900, 904 [1932 CCH ¶9559],

"Agreements entered into between individuals may not prevail as against the provisions of the Internal Revenue laws if in conflict therewith."

Judgment reversed.

¹ The account involved is denominated a "Special Interest Account" but it is, for all purposes here relevant, the same as a savings account.

² 26 U. S. C. Section 3690.

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

26 U. S. C. Section 3692.

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

³ 26 U. S. C. Section 3710(a).

"Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process."

⁴ 26 U. S. C. Section 3710(b).

"Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy had been made, * * *"

 

[61-2 USTC ¶9728] United States of America , Plaintiff-Appellee v. Bowery Savings Bank, Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 26569, 297 F2d 380, 11/6/61, Affirming District Court, 60-2 USTC ¶9537, 185 F. Supp. 30

[1954 Code Secs. 6332(a) and 7403(a)]

Surrender of property subject to distraint: Banks: Non-surrender of passbook.--The Government was entitled to a levy against a tax delinquent's bank account, even though the account passbook had not been surrendered.

Morton L. Ginsberg, Assistant United States Attorney, New York, N. Y. (Robert M. Morgenthau, United States Attorney, Lola S. Lea, Morton L. Ginsberg, Assistant United States Attorney, New York, N. Y., of Counsel), for appellee. Richard W. Hagan, Cadwalader, Wickersham & Taft, 14 Wall St., New York 5, N. Y. (Jacquelin A. Swords, Richard W. Hagan, 14 Wall St., New York 5, N. Y., of Counsel), for appellant.

Before LUMBARD, Chief Judge, FRIENDLY and SMITH, Circuit Judges.

FRIENDLY, Circuit Judge:

Bowery Savings Bank appeals from an order of the District Court for the Southern District of New York granting summary judgment to the United States in an action under §6332 of the Internal Revenue Code of 1954 for failure to respond to a levy, under §6331, in the amount of $451.55, upon the account of a taxpayer, Clare Peter Johnson, Jr. The Bowery admitted that an account had been opened in the name of C. Peter Johnson, Jr., in respect of which it issued a passbook; that the balance in the account exceeded the amount of the levy; that it had received no notice that the account was claimed by anyone other than Johnson; and that it had refused to make payment as required by the levy. Its defense was that, because of §238(3) of the New York Banking Law and the by-law adopted by the bank pursuant thereto, which, so far as relevant, we quote in the margin, ¹ it was not required to pay over any part of the balance in Johnson's account unless the passbook was presented or the bank was furnished with indemnity for any loss it might suffer for having made payment without the book. The District Court granted summary judgment to the United States [60-2 USTC ¶9537], 185 F. Supp. 30 (S. D. N. Y. 1960). We affirm.

Section 6331(a) of the Code authorizes the Secretary of the Treasury or his delegate to collect the tax from any person who is in default "by levy upon all property and rights to property * * * belonging to such person." It is plain that, generally speaking, this authorization permits the Government to proceed "against intangible property such as a debt," United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, 121 (4 Cir. 1955), and that therefore, by virtue of the supremacy clause, payment of a debt "to the government pursuant to such levy is a complete defense against any action which the taxpayer might bring" against the obligor, Hoye v. United States [60-1 USTC ¶9365], 277 F. 2d 116, 120 (9 Cir. 1960). ² Consistently with these principles, in United States v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366 (2 Cir. 1952), we overruled a defense similar to that here presented except that it was asserted in respect of a deposit in a savings account in a New York commercial bank whose contract with its depositor required the bank to make payment only "upon presentation of the pass book" or upon receipt of indemnity, save in exceptional cases. The premise for that decision was that the relation of the bank to its depositor was no more than that of debtor and creditor and that the issuance of the passbook was a mere matter of convenience, so that payment to the depositor or his administrator without notice of the delivery of the passbook to another would discharge the debt, id. at 369; see Wade v. Security Savings & Commercial Bank, 99 F. 2d 995, 997 (D. C. Cir. 1938). The factors asserted by the Bowery to be distinguishing here are the so-called savings bank passbook rule as to assignments and §238(3) of the New York Banking Law, which applies to savings banks but not to the savings departments of commercial banks.

Decision whether the asserted distinctions are meaningful turns on whether the savings bank passbook rule and §238(3) alter the relationship created by the opening of a savings bank account so that the rights of the depositor are in effect embodied in the passbook. If they do, then at least arguably the bank was not holding "property and rights to property" belonging to Johnson, but rather was obligated to pay moneys in the account to anyone who presented the passbook, just as the obligor of a negotiable instrument "engages that he will pay it according to its tenor," N. Y. Negotiable Instruments Law §110, to a holder who presents it at or after the date of its maturity, id. §148. The instrument is "a species of property," Britton on Bills and Notes (1943), §50 at p. 197; see 8 Holdsworth, History of English Law, p. 145, and the underlying debt is at least conditionally merged into it, see Ogden, Negotiable Instruments (5th ed. 1947), §41. Regardless of the terms used to describe what happens to the debt when a negotiable note is given in payment of it, the net effect is that the maker need not pay his original creditor without surrender of the note, since he remains liable on his engagement to pay any holder who duly presents it later on. Per contra, if the assignee of a savings bank passbook does not acquire any indefeasible property right against the bank until he gives notice of the assignment, §238(3) of the New York Banking Law is merely a regulation governing the conduct of savings banks but not fundamentally altering the normal debtor-creditor relationship, and must yield to federal law, Hoye v. United States, supra, at 119.

In New York, as in many states, delivery of a savings bank passbook is sufficient to transfer ownership of the account irrevocably as between the parties even in the absence of consideration, Matter of Wilkins, 131 Misc. 188, 194, 226 N. Y. Supp. 415, 425 (Surr. Ct. 1928); Restatement, Contracts §158(1)(b), Illustration 1; cf. Matter of Cassola's Estate, 183 Misc. 66, 70-71, 47 N. Y. S. 2d 90, 93 (Surr. Ct. 1944), the usual rule that gratuitous assignments are revocable, Restatement, Contracts §158(1), being held inapplicable. Although the rights of the assignee of such a passbook against the assignor are thus fixed, this does not of itself affect the general principle that an assignee may not recover against an obligor who thereafter pays the assignor without notice of the assignment, Restatement, Contracts §170(2)(a). Thus, any assertion that the savings bank passbook in New York has acquired a status analogous to a negotiable instrument must rest on §238(3) of the Banking Law.

Neither the language nor the setting of that section suggests a purpose to confer attributes of negotiability. Section 238 is entitled "Regulations and restrictions as to repayments of deposits," and seems designed to procure orderly administration rather than to alter fundamental rights. The New York Law Revision Commission has said that "the regulations and restrictions of §238 provide a framework within which by-laws of savings banks may operate, and a standard by which the practices of savings banks are judged." Quoted in R. H. Macy & Co. v. Tyler , 21 Misc. 2d 998, 999, 193 N. Y. S. 2d 243, 244-245 (Westchester Co. Ct. 1959). No effect on property rights seems to have been contemplated. Moreover, the New York courts in recent years have said that the passbook of a savings bank "fundamentally is nothing more or less than a non-negotiable chose in action" so that "the bank runs little or no risk in paying a depositor when it is shown that a passbook has been lost and notice of an assignment has not been given within a reasonable time." Myers v. Albany Savings Bank, 270 App. Div. 466, 469-470, 60 N. Y. S. 2d 477, 480 (3d Dept.), motion to dismiss appeal denied, 295 N. Y. 893, 67 N. E. 2d 524, aff'd, 296 N. Y. 562, 68 N. E. 2d 866, motion for reargument denied, 296 N. Y. 636, 69 N. E. 2d 484 (1946); see Matter of Newsome's Estate, 179 Misc. 862, 38 N. Y. S. 2d 702 (Surr. Ct. 1942); Matter of Tosetti's Estate, 17 Misc. 2d 520, 185 N. Y. S. 2d 841 (Surr. Ct. 1959); R. H. Macy & Co. v. Tyler, supra; Brown v. Empire City Savings Bank, 23 Misc. 2d 1094, 203 N. Y. S. 2d 339 (Sup. Ct. 1960). In the Macy case, supra, the court, relying on Myers, supra, stated specifically that an assignee of a savings bank passbook must give notice to the bank in order to perfect his rights against it. 21 Misc. 2d at 1000, 193 N. Y. S. 2d at 246.

The statements in the above-cited cases would be dispositive of the issue before us were it not for language in other relatively recent cases suggesting that New York's concern for the rights of passbook assignees goes beyond the usual rule that the assignee of a contract right is unprotected against the obligor until he gives notice of the assignment. In Krupp v. Franklin Savings Bank, 255 App. Div. 15, 5 N. Y. S. 2d 365 (1st Dept. 1938), the court sustained against the representative of a depositor a by-law adopted pursuant to §238(3) requiring him to post an indemnity bond to get the deposit, and reasoned that "it might well be necessary to protect the bank from liability for double payment in the event an account had been assigned." See also Reese v. Chappelle, 206 Misc. 887, 889, 135 N. Y. S. 2d 200, 202 (Sup. Ct. 1954); Elvira Apartments, Inc. v. Kidd, 259 App. Div. 874, 20 N. Y. S. 2d 661 (1st Dept. 1940 ); Yonkers-Cameo, Inc. v. Liossatos, 262 App. Div. 996, 30 N. Y. S. 2d 818 (1st Dept. 1941 ). Although we have discovered no cases involving the right to a second recovery by an assignee of a savings bank passbook who has not given notice to a bank which has made payment without requiring the book's production, it would seem that the New York courts would permit recovery by the assignee if he could show absence of due care on the bank's part to determine his existence. Just as New York courts have long held savings banks liable for making payments to the wrongful possessor of a passbook without using reasonable care and diligence to ascertain his rights, Kummel v. Germania Savings Bank, 127 N. Y. 488, 28 N. E. 398 (1891); Noah v. Bowery Savings Bank, 225 N. Y. 284, 122 N. E. 235 (1919); Laurent v. Williamsburgh Savings Bank, 137 N. Y. S. 2d 750 (Sup. Ct. 1954), §238(3) can be seen as setting up a similar standard to judge payments made to depositors and others who do not present a passbook. See R. H. Macy & Co. v. Tyler , supra, 21 Misc. 2d at 1000, 193 N. Y. S. 2d at 245. The effect of the statute is to put the bank on "constructive notice" that there has been an assignment whenever its depositor asks for money without presenting his passbook.

It is clear, however, that a bank will not be held to a standard of behavior requiring more than what is reasonably calculated to protect the interests of a possible prior assignee. In Myers, supra, the court, in granting recovery to the depositor without requiring him to post bond, relied on the fact that there had been no notice of assignment within a reasonable period following the depositor's claim that he had lost his passbook as negating such "constructive notice," see also Matter of Newsome's Estate, supra (passbook lost since decedent's death eleven years earlier); Matter of Tosetti's Estate, supra (no notice of assignment received during the eighteen months since decedent died). Similarly a judgment creditor who has exhausted every possible means of obtaining the passbook may reach the depositor's funds without the posting of indemnity. Moran v. Toth, 195 Misc. 570, 920 N. Y. S. 2d 162 (Sup. Ct. 1949). In Moran, the court said the reason the account may then be reached without an indemnity bond is that it "can be done without danger of double liability to the bank because it does not appear that notice of any assignment, actual or constructive, has been given the bank * * *" 195 Misc. at 571, 92 N. Y. S. 2d at 164.

With the rights of a prior assignee who holds the passbook but has not given notice thus limited to recovery against the bank for its negligence, it is clear that the passbook does not itself so embody the right to the funds as to make the account cease to be the "property" of the taxpayer depositor. Section 238(3) of the Banking Law is merely a regulation governing the conduct of savings banks but not fundamentally altering the normal debtor-creditor relationship between bank and depositor, and hence cannot destroy the right of the United States to the funds under Federal law. Hoye v. United States, supra, at 119.

We conclude that an account in a New York savings bank, like a savings account in a New York commercial bank, United States v. Manufacturers Trust Co., supra, remains property or a right to property of the depositor until the bank receives notice of assignment; that §6331 of the Internal Revenue Code of 1954 thus applies to a levy on an account of a taxpayer in a New York savings bank at such a time; and that payment to the United States pursuant to such a levy protects the bank against any claim by the depositor or any holder of the passbook who had not given notice prior to the levy. There was thus no justification for the bank's refusal to pay.

Judgment affirmed.

¹ New York Banking Law §238(3):

"Except as provided in subdivisions four and five of this section, a savings bank shall not pay, nor shall a depositor, his assignee nor anyone claiming through a depositor, be entitled to receive any dividend or deposit, or portion of a deposit, unless the passbook of the depositor be produced and the proper entry be made therein at the time of the payment. The board of trustees, however, may provide in the bylaws for making payment in cases of loss of passbook or other exceptional cases where the passbooks cannot be produced without serious inconvenience to depositors. The right to make such exceptional payments shall cease when the superintendent shall so direct, upon his being satisfied that such right is being improperly exercised. Payments, however, may be made upon the judgment or order of a court."

By-Law:

"The Bank shall be liable to repay deposits or dividends only on presentation of the passbook. If it is claimed that the passbook is lost, or that other exceptional circumstances exist so that it cannot be produced without loss or serious inconvenience to the depositor, the Bank may, in its discretion, pay the deposit to whomsoever it may decide is entitled thereto, without any right in the depositor, his assignee, or anyone claiming through him to question such payment. And if such a claim is made, the Bank may, before issuing a duplicate passbook or making any payment on the account, in its discretion, require any one or more of the following: (a) proof by affidavit or otherwise of the loss of the original book, or other exceptional circumstances, and of its ownership, satisfactory to the Bank; (b) a waiting period of up to six months; (c) an agreement by the person to whom the duplicate passbook is to be issued, or the payment is to be made, holding the Bank harmless for having issued such book or for having made such payment; and (d) a bond of indemnity of a surety company satisfactory to the Bank in an amount to be determined by it, not to exceed, however, double the balance of the account."

² The Eiland case was decided under the Internal Revenue Code of 1939, §3690 of which authorized distraint "of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidence of debt, of the person delinquent as aforesaid." However, we do not think any shrinkage of scope was intended by the more general language of §6331(a) of the 1954 Code. This view is implicit in the Hoye decision. 

[53-1 USTC ¶9255] United States of America , Plaintiff v. Third National Bank and Trust Company, Scranton , Pennsylvania , Defendant

In the United States District Court for the Middle District of Pennsylvania, Civil Action No. 3974, 111 FSupp 152, March 13, 1953

Collection of taxes: Surrender of property subject to distraint.--The defendant bank refused to surrender part of the deposits in the savings accounts of the taxpayer-depositor, against whom a warrant for distraint had been issued. Taxpayer had three savings accounts at the defendant bank. The first account was in taxpayer's name alone. The second was in the name of taxpayer and/or her husband with the right of survivorship, and the signature card bore only taxpayer's signature with her husband's name merely typed thereon. Taxpayer had deposited in that account two checks made out to her order and their amounts constituted substantially all of its balance. The third was also in the name of taxpayer and/or her husband. The balance in the first account was the proper subject matter for distraint, since the account was in taxpayer's name alone, and likewise the balance in the second, because, regardless of whether taxpayer was the sole owner or a joint tenant, she was the "owner of property or rights to property," which were subject to distraint. Since the balances in the first and second accounts were more than sufficient to cover the tax, interest and costs, it was not necessary to consider the third account. Being in possession of property or rights to property, which had not been subject to prior attachment or execution, the defendant must surrender such part of the deposits as will cover the Government's claim. The defendant's defense that it would be subject to double liability because taxpayer and her husband were not parties to this action was held invalid.

Arthur A. Maguire, United States Attorney, Federal Building , Scranton , Pennsylvania for plaintiff. Welles & Mackie, First National Bank Building , Scranton , Pennsylvania , for defendant.

Opinion

WATSON, District Judge:

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 of the United States .

The parties stipulated the facts, and on the basis of such the Court makes the following findings of fact:

1. The defendant is a corporation, organized and existing under the National Bank Act, with its principal office and place of business in Scranton , Pennsylvania .

2. The Commissioner of Internal Revenue duly assessed against Mary E. Noone, hereinafter called taxpayer, an income tax deficiency in the amount of $255.40 for the year 1945.

3. Notice and demand for payment of said assessment was made on taxpayer on December 21, 1948, and on January 31, 1949, but the assessment was not paid.

4. A warrant for distraint was issued on February 16, 1949, by the Collector of Internal Revenue for the Twelfth District of Pennsylvania, listing $306.99, including interest and lien fee, owing by taxpayer.

5. A notice of tax lien was filed on May 12, 1949, with the Prothonotary of Lackawanna County, Scranton , Pennsylvania .

6. On May 13, 1949, a notice of levy was issued on the defendant, Third National Bank and Trust Company by the Collector, demanding that defendant turn over the amount of $306.99, which was the amount of tax, interest and lien fee then due and owing by the taxpayer. Copies of the warrant for distraint and notice of the tax lien were also served on the defendant.

7. On May 13, 1949, the date of levy, the defendant was in possession of the following bank accounts of said taxpayer:

(a) Savings Account No. 78274, in the name of Mary E. Noone, balance $151.35. ($154.00 at date of trial.)

(b) Savings Account No. 88160, in the name of Thomas E. Noone and/or Mary E. Noone, with the right of survivorship, balance $2,293.49. ($2,333.87 at date of trial.) Signature card dated October 19, 1945, bears the signature of Mary E. Noone alone, although the name of Thomas E. Noone is typed thereon. The account shows the following deposits:

Deposit Date                 Amount          Type

October 19, 1945          $ 280.42

January 7, 1946              66.00

                                          Check in amount of $854.46, 

                                          $50.00 taken and balance of 

                                          $804.46 deposited. Recordak 

                                          reveals: "Paid to the order 

                                          of Mary E. Noone in amount of 

                                          $854.46 drawn on First 

                                          National Bank of 

Chicago

, 

                                          issued by Household Savings

January 21, 1946            804.46         

                                          Retirement Trust. Signed by 

                                          two trustees." Check, 

                                          Recordak reveals: "Paid to 

                                          the order of Mary E. Noone in 

                                          amount of $2140.07; drawn on 

                                          First National Bank of 

                                          

Chicago

;

June 26, 1946              2140.07         

                                         issued by Household Finance 

                                         Corporation."

 

(c) Savings Account No. 84919, in the name of Thomas E. Noone and/or Mary E. Noone, with the right of survivorship, balance $10.58. ($10.66 at date of trial.) Signature card dated May 16, 1944, bears signature of both Tomas E. Noone and Mary E. Noone.

8. A Certificate of Assessment and Payments signed by the Collector of Internal Revenue for the Twelfth District of Pennsylvania on July 15, 1949, shows a payment on said assessment of $12.53 made on June 28, 1949, and lists an outstanding balance due from taxpayer of $284.78, including interest to December 10, 1948.

9. The defendant has failed and refused to surrender to the United States of America any part of the above deposits.

Discussion

Before this action was brought, payment of the assessment was duly demanded of the taxpayer and, upon her failure to pay, a notice of levy, warrant of distraint and notice of tax lien were served upon the bank pursuant to the provisions of Section 3690 of the Internal Revenue Code. ¹ A demand pursuant to the provisions of Section 3710(a) ² was duly made upon the bank to surrender so much of the deposits to the Collector as was required to pay the tax owed by the taxpayer, but the bank refused to comply with the demand. At the time of this demand the bank accounts were not subject to an attachment or execution under any judicial process. The suit was then brought pursuant to Section 3710(b) of the Internal Revenue Code ³ to recover from the bank a sum equal to the taxes due, plus interest and costs.

In order to enforce the right conferred upon the Collector by Section 3710(a), it is necessary to establish the following: (1) the existence of property or rights to property in a delinquent taxpayer, (2) the possession of such property or rights to property by the person to whom demand therefor is made by the Collector, and (3) that such property or rights to property are subject to distraint. United States v. Penn Mut. Life Ins. Co., 3 Cir., 1942, 130 Fed. (2d) 495 [42-2 USTC ¶9623].

As to Savings Account No. 78274, which appears in the name of Mary E. Noone, it is clear that the taxpayer is the owner of said account and thus is the owner of "property or rights to property." As to Savings Account No. 88160, which is in the name of Thomas E. Noone and/or Mary E. Noone, with the right of survivorship, the evidence establishes that Thomas E. Noone is not the sole owner of said account. The bank records indicate that Mary E. Noone deposited $2944.53 of the total deposits of $3290.95 made in the account; the records do not indicate who deposited the balance. Furthermore, though the name of Thomas E. Noone is typed on the signature card, it bears only the signature of Mary E. Noone. Having found that Thomas E. Noone is not the sole owner of said account, it is not necessary to determine whether Mary E. Noone is the sole owner of said account or merely a joint tenant with right of survivorship, ⁴ because in either case the taxpayer was the "owner of property or rights to property." It is not necessary to consider the third bank account as the balance in the first two was more than sufficient to cover the tax, interest and costs.

As to the second requirement under Section 3710(a) that the third person be in possession of "property or rights to property" of the taxpayer, since the money was on deposit in defendant bank, this requirement was also satisfied.

[Bank Accounts Subject to Distraint]

The third requirement under Section 3710(a) that such "property or rights to property" be legally subject to distraint is likewise present. Under Section 3690, bank accounts are included within the scope of the Collector's authority to distrain. United States v. Penn Mutual Life Insurance Co., 3 Cir., 1942, 130 Fed. (2d) 495, supra; United States v. Marine Midland Trust Co. of New York , D. C. S. D. N. Y., 1942, 46 Fed. Supp. 38 [42-2 USTC ¶9590]. It cannot be questioned that the first account, which is in the name of Mary E. Noone alone, was the proper subject matter of a distraint. As to the second account, which was in the name of Thomas E. Noone and/or Mary E. Noone, having determined that Thomas E. Noone was not the sole owner of said account, the interest of Mary E. Noone in said account was the proper subject matter of a distraint. This holds whether she was the sole owner of the account, or merely a joint tenant with the right of survivorship, because the interest of one of two joint tenants of a bank account may be seized under an attachment or execution. The attachment of the interest of a joint tenant operates as a severance of the joint ownership, makes them tenants in common and terminates the right of survivorship. Dover Trust Co. v. Brooks et al., Court of Chancery of N. J., 160 A. 890; In re Erie Trust Co., 19 Erie ( Pa. ) 469.

[Defendant's Sole Defense]

The sole defense asserted by the bank appears to be that since Mary E. Noone and Thomas E. Noone are not parties to the action, the bank may be subject to double liability.

Section 3710(b) is entirely a penal statute directed against persons who refuse to surrender property to the Collector as required by Section 3710(a), and accordingly no other parties are necessary to the suit. United States v. Metropolitan Life Ins. Co., D. C. E. D. Pa., 1941, 36 Fed. Supp. 399 [41-1 USTC ¶9173]. The fact that the bank may be subject to double liability is no defense, because Section 3710(a) permits only two defenses, to wit, that the third person is not in possession of property of the taxpayer which is subject to distraint or that the property is subject to a prior judicial attachment or execution. United States Manufacturers Trust Co., 2 Cir., 1952, 198 Fed. (2d) 366; Commonwealth Bank v. United States , 6 Cir., 1940, 115 Fed. (2d) 327 [42 USTC ¶9769]; United States v. Marine Midland Trust Co. of New York, D. C. S. D. N. Y., 1942, 46 Fed. Supp. 38, supra. The defendant has failed to raise or establish either of these defenses.

Conclusions of Law

1. Savings Account No. 78274 and No. 88160 constituted property rights of the taxpayer, and were in possession of the defendant.

2. Said property rights were subject to distraint under Section 3710(a) of the Internal Revenue Code, 26 U. S. C. A.

3. At the time of demand such property rights were not subject to an attachment or execution under any judicial process.

4. Plaintiff is entitled to judgment in the amount of $284.78, with interest thereon from December 21, 1948, together with costs.

¹ 26 U. S. C. 3690.

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

² 26 U. S. C. 3710(a).

"Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand subject to an attachment or execution under any judicial process."