I.R.S. v. Gaster, s. 94-7195 and 94-7196

• Citation: 42 F.3d 787
• Decision Date: 05 December 1994
• Docket Number: Nos. 94-7195 and 94-7196,94-7196,Nos. 94-7195,s. 94-7195 and 94-7196,s. 94-7195
• Parties: -7399, 94-2 USTC P 50,622, 25 UCC Rep.Serv.2d 27 INTERNAL REVENUE SERVICE v. Donald GASTER and Mary Ann Gaster v. NINTH WARD SAVINGS BANK, FSB * , Third-party Defendant, Mary Ann Gaster ** , Appellant in
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 787

42 F.3d 787

74 A.F.T.R.2d 94-7399, 94-2 USTC P 50,622,

25 UCC Rep.Serv.2d 27

INTERNAL REVENUE SERVICE v. Donald GASTER and Mary Ann Gaster v. NINTH WARD SAVINGS BANK, FSB ^*, Third-party

Defendant,

Mary Ann Gaster ^**, Appellant in Nos.

94-7195 and 94-7196.

Nos. 94-7195, 94-7196.

United States Court of Appeals Third Circuit.

Argued Sept. 19, 1994.

Decided Dec. 5, 1994.

Loretta C. Argett, Asst. Atty. Gen., Gregory M. Sleet, U.S. Atty., Gary R. Allen, William S. Estabrook, Alice L. Ronk (argued), Tax Div., Dept. of Justice, Washington, DC, for I.R.S Peter A. Mardinly (argued), Paul, Mardinly, Durham, James, Flandreau & Rodger, Media, PA, for appellants Donald & Mary Ann Gaster.

William J. Marsden, Jr. (argued), Potter, Anderson & Corroon, Wilmington, DE, for appellee Ninth Ward Sav. Bank, FSB.

Before: BECKER and COWEN, Circuit Judges and POLLAK, District Judge. ^***

OPINION OF THE COURT

BECKER, Circuit Judge.

This appeal from a judgment of the District Court for the District of Delaware primarily presents the question whether the Internal Revenue Service ("IRS") had the right to levy pursuant to 26 U.S.C.A. Sec. 6321 (1989) on a bank account at the Ninth Ward Savings Bank ("the Bank") in Wilmington, Delaware, owned jointly by appellants Donald Gaster and his wife Mary Ann Gaster, along with their son Bryan Gaster. The IRS levied against the account in order to enforce a judgment for a tax deficiency obtained against Donald Gaster in his individual capacity. Donald Gaster died during the pendency of this appeal, and his estate has challenged the propriety of the IRS levy. Alleging that the property which was levied upon was held by her and Donald Gaster (the "Gasters") as tenants by the entireties, Mary Ann Gaster claimed an interest in property seized for another's taxes under 26 U.S.C.A. Sec. 7426 (1989). (Bryan Gaster has waived all interest in the bank account and is not a party.)

It is unquestioned that the IRS can properly levy on the account if Donald Gaster, the delinquent taxpayer, had the unilateral right to withdraw money from the joint bank account under Delaware law. The district court determined, following a bench trial, that Donald Gaster had a unilateral right to withdraw funds from the account, and hence the IRS could properly levy on the account. We conclude, however, that the district court erred and that pursuant to the Gasters' contract with the Bank and applicable Delaware law, both the signature of Donald and Mary Ann Gaster were required in order to withdraw funds from the account. We therefore hold the IRS levy to be improper and reverse the judgment of the district court with the direction to dissolve the levy.

I.

On June 25, 1985, the Gasters opened an account at the Bank to deposit the proceeds from the sale of an apartment building in Secane, Pennsylvania, which they had held as tenants by the entireties. When they opened the account, the Gasters transferred a portion of it to their son, titling in the alternative the account's original signature card and six-month certificate of deposit ("CD")--"Donald Gaster or Mary Ann Gaster or Bryan Gaster." It is undisputed that the titling of a signature card in the alternative allows for unilateral withdrawal from the account by each owner. The district court found that the Gasters titled the signature card in the alternative--which permitted access to the account with one signature--because Donald Gaster would be unavailable due to the pendency of serious surgery.

On the following day, June 26, 1985, the Supreme Court decided United States v. National Bank of Commerce, 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985), holding that the determination whether a delinquent taxpayer has an interest in a joint bank account subject to a federal tax lien turns on whether the delinquent has a unilateral right under the applicable state law to withdraw funds from the account. Shortly after the publication of the National Bank of Commerce opinion, the Gasters became aware of its holding and resolved to protect their jointly-held property from an IRS levy that could arise from an IRS judgment obtained against Donald Gaster on May 12, 1977. To effectuate this intent, Donald Gaster went to the Bank in December 1985, and retitled the signature card to read "Donald Gaster and Mary Ann Gaster or Bryan Gaster," so that more than one signature would be required in order for Donald Gaster to withdraw funds from the jointly owned account. Over the next five years (until and including the time of the IRS levy on August 24, 1990) all correspondence from the Bank with regard to the account referred to the account in this conjunctive form.

From the time the account had been established, the Bank sent a savings transfer form to the Gasters every six-months to authorize the roll-over of the proceeds from an expiring CD for the purchase of a new CD. Even after the change in the signature card, Mary Gaster would return the form, with her signature alone, on behalf of both herself and her husband. With the return of each transfer form, the account's title remained conjunctive. No withdrawals of any kind have ever been made from the account.

On August 24, 1990, the IRS levied on the account pursuant to 26 U.S.C.A. Sec. 6321 (1989) to enforce the 1977 tax deficiency judgment against Donald Gaster. In response to this levy, the Bank filed a complaint in interpleader against the Gasters and the IRS in the Delaware Superior Court. The IRS removed the interpleader action to the District Court for the District of Delaware, 28 U.S.C.A. Sec. 1444 (1994), invoking jurisdiction pursuant to 28 U.S.C.A. Secs. 1340 and 1345 (1994) and also 26 U.S.C.A. Secs. 7402 and 7403 (1989). As we have noted, the district court held that the IRS could levy on the account, deciding that Donald Gaster had a unilateral right to withdraw the funds. The court concluded in a memorandum opinion that Donald Gaster's subsequent modification of the account signature card was ineffective, given that Donald Gaster alone formally executed the change. This appeal followed.

While we review the district court's findings of fact under a clearly erroneous standard, Sheet Metal Workers Int'l Ass'n Local 19 v. 2300 Group, Inc., 949 F.2d 1274, 1278 (3d Cir.1991), the court's conclusion that Donald Gaster had an unrestricted unilateral right to withdraw the funds under Delaware law is a legal question over which we exercise plenary review; Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 613 (3d Cir.1992); High v. Balun, 943 F.2d 323, 325 (3d Cir.1991).

II.

A.

Section 6321 of the Code, 26 U.S.C.A. Sec. 6321 (1989), provides: "[i]f 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."

In National Bank of Commerce, the Supreme Court addressed the question of when a delinquent taxpayer's interest in a joint bank account constitutes "property" or "rights to property" pursuant to Sec. 6321. The Court concluded that a delinquent taxpayer has such an interest in property on which the IRS may levy when "under state law, a taxpayer has the unrestricted right to withdraw funds from the account." National Bank of Commerce, 472 U.S. at 725-26, 105 S.Ct. at 2927. Whether the delinquent has such a right to the funds is governed by state law, since "state law controls in determining the nature of the legal interest which the taxpayer had in the property." Id. at 722, 105 S.Ct. at 2925 (internal quotation marks omitted). See also id. ("This follows from the fact that the federal statute creates no property rights but merely attaches consequences, federally defined, to rights created under state law." (internal quotation marks omitted)). Thus, in deciding whether the IRS may properly levy on the jointly-owned account at the Bank, we must determine whether the tax delinquent, Donald Gaster, had an unrestricted right to the funds in the account under Delaware law.

Pursuant to National Bank of Commerce, before considering Mary Ann Gaster's cross-claim for the return of her ownership interest in the proceeds of the bank account under 26 U.S.C.A. Sec. 7426 (1989), we are required to determine the propriety of the IRS levy. ¹ National Bank of Commerce, 472 U.S. at 728, 105 S.Ct. at 2928 ("[A] levy action settles no rights in the property subject to seizure." (internal quotation marks omitted)). If the IRS levy is determined to be proper, "one claiming an interest in property seized for another's taxes may bring a civil action [under Sec. 7426] against the United States to have the property or the proceeds of its sale returned." Id. Alternatively, 26 U.S.C.A. Sec. 6343(b) (1989) provides an administrative proceeding to allow a claimant a remedy for the return of seized property. Treas.Reg. Sec. 301.6343-1(b)(2), 26 C.F.R. Sec. 301.6343-1(b)(2) (1984). It is only under these post-seizure proceedings that the ownership form of the property becomes relevant.

In sum, as the Court made clear in National Bank of Commerce, the propriety of the IRS levy turns only on right to withdraw, not the ownership form of the bank account. The ownership form determines only the claimant's share of the seized property under her post-seizure claim. National Bank of Commerce, 472 U.S. at 728 n. 11, 105 S.Ct. at 2928 n. 11. Thus, whether or not Donald and Mary Ann Gaster owned their share of the account as tenants by the entireties is relevant only if we first determine that the IRS levy was proper.

Before proceeding to that determination, it is important to note that in National Bank of Commerce the Supreme Court acknowledged that if money is held by a husband and wife in a joint bank account as tenants by the entireties ² under applicable state law "the Government could not use the money in the account to satisfy the tax obligations of one...