U.S. v. Donahue Industries, Inc.

• Decision Date: 18 June 1990
• Docket Number: No. 88-4354,88-4354
• Citation: 905 F.2d 1325
• Parties: -5202, 59 USLW 2028, 90-2 USTC P 50,343 UNITED STATES of America, Plaintiff-Appellee, v. DONAHUE INDUSTRIES, INC., dba Donahue Printing Company, Defendant, and Rainier National Bank, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1325

905 F.2d 1325

66 A.F.T.R.2d 90-5202, 59 USLW 2028, 90-2

USTC P 50,343

UNITED STATES of America, Plaintiff-Appellee, v. DONAHUE INDUSTRIES, INC., dba Donahue Printing Company, Defendant, and Rainier National Bank, Defendant-Appellant.

No. 88-4354.

United States Court of Appeals, Ninth Circuit.

Argued, Submission Deferred Dec. 5, 1989.

Resubmitted Dec. 13, 1989.

Decided June 18, 1990.

Craig Miller, Davis, Wright & Jones, Seattle, Wash., for defendant-appellant.

Joan I. Oppenheimer, Atty., Tax Div., Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Washington.

Before WALLACE, PREGERSON and NELSON, Circuit Judges.

PREGERSON, Circuit Judge:

The United States government brought this action in district court to enforce an administrative tax levy against Rainier National Bank for the unpaid taxes of Donahue Industries, Inc. The district court found for the government and ordered the bank to pay a total of $83,215.23, including penalty and interest. On appeal, the bank contends (1) that the government's levy enforcement action was time-barred, (2) that even if the action was not time-barred, the bank was not required to honor the levy, and (3) that even if the bank was required to honor the levy, it was not liable for a penalty because it had reasonable cause for refusing to honor the levy. We have jurisdiction under 28 U.S.C. Sec. 1291. We affirm.

BACKGROUND

In January 1980, Rainier National Bank ("the bank") loaned money to Donahue Industries, Inc., also known as Donahue Printing Company, Inc. ("the taxpayer"). As collateral for the loan, the bank took a security interest in the taxpayer's accounts receivable. Meanwhile, the Internal Revenue Service ("IRS") assessed deficiencies against the taxpayer for unpaid employment taxes incurred in 1978 and 1979, and filed notices of federal tax liens. On July 14, 1980, the IRS filed a notice of federal tax lien relating to assessments made in February, March and May 1980 in the amount of $20,569.91. The IRS filed a second lien notice on September 17, 1980, relating to an assessment made in August 1980 in the amount of $13,792.21. A third notice of federal tax lien was filed on November 19, 1980, relating to an assessment made in October 1980 in the amount of $9,935.87. ¹

The taxpayer defaulted on the bank loan in January 1981. The taxpayer's accounts receivable debtors thereafter made checks payable jointly to the taxpayer and the bank. The bank then deposited the checks in a special account not accessible to the taxpayer. As soon as payments were received, the bank applied the payments against the balance of the defaulted loan. The last payment was received in May 1981.

In March 1982, the IRS served a summons on the bank for an accounting of the taxpayer's accounts receivable collected by the bank. The summons identified the taxpayer as "Donahue Industries, Inc. (a/k/a Donahue Printing Company, Inc.)." In The IRS demanded by letter in November 1982 that the bank remit "monies collected from accounts receivable[ ] of Donahue Industries, Inc. on which the Internal Revenue Service claims a lien priority." The bank replied that it needed time to assemble documents and consult legal counsel. In September 1983, the IRS served a Notice of Levy (Form 668-A) on the bank in the amount of $78,568 for the deficiencies assessed against the taxpayer in 1980. The notice of levy referred to the taxpayer as "Donahue Printing Company, Inc." The bank responded in a letter that it was "unable to find an open or closed account relationship under the name of Donahue Printing." In October 1983, the IRS served a Final Demand Notice (Form 668-C) on the bank for the amount levied upon. Again, the demand notice identified the taxpayer as "Donahue Printing Company, Inc." The bank did not respond.

April 1982, the bank provided the accounting. Its cover letter referred to the taxpayer as "Donahue Industries, Inc. (a/k/a Donahue Printing Company, Inc.)."

The government brought an action in district court in March 1987 to enforce the levy pursuant to section 6332(c) of the Internal Revenue Code of 1954, as amended, 26 U.S.C. Sec. 6332(c). ² A year later, the bank moved for summary judgment on the ground that it was not required to honor the IRS levy because it had no property belonging to the taxpayer when the levy was made. The district court denied the motion. The parties then agreed to a stipulated statement of facts and filed trial briefs. ³ The bank argued (1) that the levy enforcement action was barred by the statute of limitations set forth in 26 U.S.C. Sec. 6502(a)(1); ⁴ (2) that it was not required to surrender property pursuant to 26 U.S.C. Sec. 6332(c)(1) because it possessed no property belonging to the taxpayer when the levy was made; and (3) that it had reasonable cause for refusing to surrender the property levied upon, and thus was not liable for the penalty under 26 U.S.C. Sec. 6332(c)(2).

The district court rejected each of the bank's arguments. The court held that (1) the government's action was not timebarred because the time limit in section 6502(a)(1) does not apply to actions brought under section 6332(c); (2) the bank was required under section 6332(c)(1) to surrender the property levied upon because it possessed the property subject to federal tax liens; and (3) the bank was liable for the 50% penalty under section 6332(c)(2) because it had no reasonable cause for failing to surrender the property.

STANDARD OF REVIEW

Because the issues on appeal are purely legal, we review the district court order de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

DISCUSSION

I. Statute of Limitations

The bank contends that the government was barred from bringing this action by the six year statute of limitations set forth in 26 U.S.C. Sec. 6502(a)(1). The government responds that neither the six year statute of limitations in section 6502(a)(1) nor any other limitations period applies to levy enforcement actions brought under 26 U.S.C. Sec. 6332. We need not decide whether a statute of limitations longer than the six year statute of limitations set forth in section 6502(a)(1) applies to actions brought under section 6332, because the levy in this case was made less than six years after the assessment of the tax.

The IRS assessed deficiencies against the taxpayer between February and October 1980. Approximately three years later, in September 1983, the IRS served a notice of levy on the bank. The applicable Treasury Regulation provides that a "[l]evy may be made by serving a notice of levy." 26 C.F.R. Sec. 301.6331-1(a)(1) (1989). Therefore, the levy in this case was made in September 1983--well within the six year time limit of section 6502(a)(1).

The bank argues, however, that to "levy" for purposes of the statute of limitations, the government had to seize the bank's property, rather than properly serve a notice of levy, as it did in this case. The bank rests this argument on 26 U.S.C. Sec. 6502(b), which provides that "[t]he date on which a levy on property or rights to property is made shall be the date on which the notice of seizure provided in section 6335(a) is given." Section 6335(a), in turn, states in relevant part:

(a) Notice of seizure.--As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property (or, in the case of personal property, the possessor thereof).... Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.

26 U.S.C. Sec. 6335(a). Since the government never physically seized the property, the bank argues, the government did not satisfy the statute of limitations.

The bank misinterprets the statute and regulations by failing to distinguish between levies on tangible property and levies on intangible property. There is no question that the government has authority to levy upon both tangible and intangible property. The statute defines levy as "the power of distraint and seizure by any means," 26 U.S.C. Sec. 6331(b) (emphasis added), and explicitly provides that levy may be made upon "property or rights to property (whether real or personal, tangible or intangible )." Id. (emphasis added); see also 26 C.F.R. Sec. 301.6331-1(a)(1) ("The district director may levy upon any property, or rights to property, whether real or personal, tangible or intangible....").

The government cannot physically seize intangible property. The regulations, therefore, clearly provide for levy by proper service of notice.

Levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions, or other compensation.

26 C.F.R. Sec. 301.6331-1(a)(1) (emphasis added). ⁵ Each type of property listed in this The Supreme Court has recognized the distinction between intangible and tangible property for purposes of determining when a levy is made in a particular case, and specifically cited section 301.6331-1(a)(1) as authority for determining when a levy is made upon intangible property. The Court stated:

regulation is intangible. If, as the bank argues, the government cannot effect levy by notice of levy, then the government cannot satisfy the statute of limitations in administrative levy actions involving intangible property without actually filing an action in district court. The bank's position conflicts with section 6502(a)(1), which provides that unpaid taxes may be collected by levy or by a proceeding in court within six years after assessment of the tax. 26 U.S.C. Sec. 6502(a)(1).

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