Phillips v. Commissioner of Internal Revenue, 286.

• Decision Date: 09 June 1930
• Docket Number: No. 286.,286.
• Citation: 42 F.2d 177
• Parties: PHILLIPS et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

42 F.2d 177 (1930)

PHILLIPS et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 286.

Circuit Court of Appeals, Second Circuit.

June 9, 1930.

Herman Goldman, of New York City (Milton J. Levitt and Arthur Rothstein, both of New York City, of counsel), for appellants.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and John Vaughan Groner, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Allin H. Pierce, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondents.

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

SWAN, Circuit Judge (after stating the facts as above).

The appellants first challenge the constitutionality of section 280 of the Revenue Act of 1926 (26 USCA § 1069), and secondly assert that, even if it be constitutional, their liability is only for a pro rata share of the corporation's unpaid taxes.

Before passing to a consideration of these primary contentions, it is necessary to dispose of a jurisdictional question, although not urged by the appellee. That question is whether a "transferee" is given the same right of judicial review of the Board's decision as is a "taxpayer." The statute provides for review by the court upon petition filed by "either the Commissioner or the taxpayer" (26 USCA § 1224); and it may be argued that by the language of section 280 (26 US CA § 1069) Congress has differentiated between taxpayers and transferees by referring to the liability of the latter as "the liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax * * * imposed upon the taxpayer." But section 280 directs that the liability of the transferee shall be "assessed, collected and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter" — language which indicates, in our opinion, a clear intention to give to a transferee the same right as a taxpayer in respect to seeking a review of a proposed assessment by appeal to the Board of Tax Appeals and to the court. The precise point now under consideration was discussed in Routzahn v. Tyroler, 36 F.(2d) 208 (C. C. A. 6), and we agree with the view there expressed that the statutory definition of "taxpayer" (26 USCA § 1262) is not seriously inaccurate as applied to a transferee. This view finds added support in the language of the Supreme Court in United States v. Updike, 50 S. Ct. 367, 369, 74 L. Ed. 984, decided May 19, 1930, where Mr. Justice Sutherland said:

"Indeed, when used to connote payment of a tax, it puts no undue strain upon the word `taxpayer' to bring within its meaning that person whose property, being impressed with a trust to that end, is subjected to the burden. Certainly it would be hard to convince such a person that he had not paid a tax."

We conclude, therefore, that the appellants are rightfully here.

The constitutionality of section 280 is attacked upon the ground (1) that it confers judicial powers upon an administrative officer; and (2) deprives the transferee of his property without due process of law in violation of the Fifth Amendment. There is not lacking judicial authority in support of these contentions. Owensboro, etc., Co. v. Lucas, 18 F.(2d) 798 (D. C. W. D. Ky.); Mid-Continent Petroleum Corp. v. Alexander, 35 F. (2d) 43 (D. C. W. D. Okl.); cf. Felland v. Wilkinson, 33 F.(2d) 961, 962 (D. C. W. D. Wis.). But see Routzahn v. Tyroler, supra; see, also, "The Constitutionality of the Transferee Provisions of the Revenue Acts," 29 Columbia Law Rev. 1052. In our opinion the section is valid. Due process is afforded because a hearing is provided before this court in the event of dissatisfaction with the determination of the Board of Tax Appeals, to say nothing of the alternative remedy of an action to recover the tax after payment. Nor is judicial power improperly delegated. That the collection of taxes by summary process is a remedy which antedates the Constitution and does not violate its provisions as to the separation of powers is a doctrine too well established to require the citation of authorities. Nor is such summary procedure confined to the collection of taxes qua taxes. It extends to collection of a debt due the government from a defaulting collector of customs and his sureties. Den ex dem. Murray v. Hoboken Land, etc., Co., 18 How. 272, 15 L. Ed. 372. Within the principles ably discussed by Mr. Justice Curtis in that case, we think the procedure provided by section 280 (26 USCA § 1069) is sustainable. That section, as said by the Supreme Court in United States v. Updike, supra, "prescribes a mode of procedure against transferees of the property of a taxpayer." There is every reason for having the preliminary steps administrative and summary because that is the only efficient method of collecting promptly the tax due from the transferor, when he has made direct collection impossible by transferring his property. Enforcement of the transferee's liability by court process had been found ineffective to prevent loss of revenue and tax evasion. So Congress provided a new and summary procedure. See House Rep. No. 2, 70th Cong., pp. 31, 32. That the obligation of the transferee is not directly and primarily to pay his own tax, but is based upon his "liability at law or in equity" to pay the tax of another should make no difference, in our opinion, in the validity of the procedure Congress has provided for collection. The Commissioner's determination of the transferee's liability, and the extent of it, is not different in kind from the auditing of the amount due from the defaulting collector in Murray's Lessee. That which is paid results in the end in the collection of a tax, though from the transferee rather than from the person originally liable. It is a method of collecting revenue; and, though summary, it does not operate so harshly upon the transferee, in view of the recourse he may have to the courts to correct administrative errors, as to fall outside the pale of permissible legislation.

Having determined that the section is constitutional, it becomes unnecessary for us to consider the Commissioner's contention that, by availing of its provisions in seeking a redetermination by the Board of Tax Appeals, the appellants are estopped from questioning its constitutionality — a...