C.I.R. v. Hendrickson

• Decision Date: 27 April 1989
• Docket Number: Nos. 88-1208,88-1421,88-1209,88-1422,s. 88-1208
• Citation: 873 F.2d 1018
• Parties: -1287, 89-1 USTC P 9300 COMMISSIONER OF INTERNAL REVENUE, Petitioner-Cross-Respondent, v. Leon E. HENDRICKSON, Respondent-Cross-Petitioner, and Peoples Loan & Trust Company, Cross-Petitioner.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1018

873 F.2d 1018

63 A.F.T.R.2d 89-1287, 89-1 USTC P 9300

COMMISSIONER OF INTERNAL REVENUE, Petitioner-Cross-Respondent, v. Leon E. HENDRICKSON, Respondent-Cross-Petitioner, and Peoples Loan & Trust Company, Cross-Petitioner.

Nos. 88-1208, 88-1209, 88-1421, 88-1422.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 5, 1989.

Decided April 27, 1989.

Marc A. Hetzner, Kreig Devault Alexander & Capehart, Indianapolis, Ind., for petitioner-cross-respondent.

Bruce R. Ellisen, Tax Div., Dept. of Justice, Washington, D.C., for respondent-cross-petitioner.

Before POSNER, COFFEY, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

When the Internal Revenue Service believes that a taxpayer intends to leave (or remove his property from) the country, conceal himself or his property, become insolvent, or do or suffer anything else that might thwart efforts to collect taxes due from him, it can make an immediate determination of his tax liability--that is, without waiting until the end of the taxpayer's tax year--and demand immediate payment of the taxes due. 26 U.S.C. Sec. 6851(a)(1). These are "termination assessments." Similarly, when the Service believes that collection of a tax deficiency would be jeopardized by delay, it can demand that the taxpayer pay the deficiency immediately. 26 U.S.C. Sec. 6861(a). These are "jeopardy assessments." The difference between the two types of assessment is merely that the first comes into play before the taxpayer's tax return is due, and the second after.

The Service's power to make termination and jeopardy assessments was strengthened by a Draconian measure that Congress enacted in 1982: if an "individual who is in physical possession of cash [or cash equivalents, as defined by regulation] in excess of $10,000 does not claim such cash," either as his own or "as belonging to another person whose identity the [Internal Revenue Service] can readily ascertain and who acknowledges the ownership of such cash," then for purposes of the termination and jeopardy assessment statutes "it shall be presumed that such cash represents gross income of a single individual [namely, the possessor] for the taxable year in which the possession occurs, and that the collection of tax will be jeopardized by delay." 26 U.S.C. Secs. 6867(a), (b)(3), (d)(2). The gross income imputed to the possessor is taxable at a 50 percent rate. 26 U.S.C. Sec. 6867(b)(2).

The thinking behind section 6867 is plain enough, with or without recourse to the legislative history. An individual (the statute does not apply to corporations) who holds a large amount of cash or its equivalent without claiming to be the owner, or being able to demonstrate who the owner is, probably is trying to conceal the receipt of illegal income (whether his own, or a principal's) from law enforcement authorities, including the Internal Revenue Service. The statute forces the owner to either 'fess up or kiss half his money goodbye. See H.R.Conf.Rep. No. 760, 97th Cong., 2d Sess. 580-83 (1982), U.S.Code Cong. & Admin.News 1982, pp. 781, 1352-55.

The remedies against a wrongful assessment under section 6867 vary depending on whether the person seeking the remedy is, on the one hand, the possessor of the cash or cash equivalent himself or, on the other hand, someone claiming to be the owner. The possessor can, like any other taxpayer against whom a deficiency is assessed, either contest the deficiency (i.e., the determination by the Internal Revenue Service that a 50 percent tax on the funds in the possessor's custody is due) in the Tax Court, as Peoples and Hendrickson did, or pay the deficiency and bring a suit for refund in federal district court. The person claiming to be the true owner can, utilizing procedures liberalized in 1976, see Hiley v. United States, 807 F.2d 623, 626-27 (7th Cir.1986), bring a suit in district court to challenge the assessment, see 26 U.S.C. Sec. 7429, posting a bond to stay collection pending the challenge (see Sec. 6863(a)) and recovering his attorney's fees and other costs of suit if he wins (see Sec. 7430). If the government has already succeeded in collecting the tax out of the possessor's cash (or cash equivalent), the true owner can bring a suit for wrongful levy under Sec. 7426. These remedies are not available to the possessor. Robrish v. United States, 579 F.Supp. 477 (D.Mass.1983); see also 26 U.S.C. Sec. 6867(b)(3). If in the course of any of these proceedings it turns out that the possessor was indeed not the owner, the government can substitute the true owner for the possessor in the termination or jeopardy assessment proceeding and issue a new deficiency notice to that owner, all with relation back to the date of the original assessment under section 6867 so that the government is not faced by a statute of limitations problem. See 26 U.S.C. Sec. 6867(c).

The present case arises out of the death in October 1983 of Larry Dale Martin, a Colorado "banker" to tax protesters. (On the tax-protester movement generally, see, e.g., Miller v. United States, 868 F.2d 236 (7th Cir.1989) (per curiam); Coleman v. Commissioner, 791 F.2d 68 (7th Cir.1986).) Under the name of the National Commodity Exchange and later the National Commodities Exchange Association, Martin offered to buy gold and silver coins and bullion for the accounts of persons distrustful of Federal Reserve notes and desiring maximum privacy in their financial dealings, and also to convert gold and silver in the depositors' accounts into paper money and at the depositor's direction pay his bills with the paper money. The agreements with the depositors stated that in buying gold and silver for their accounts and in paying their bills Martin was "acting only as an agent for the above specific purpose[s] and no other." The agreements also contained Martin's pledge not to divulge any information about the agency accounts.

Martin had extensive dealings with Leon Hendrickson, the sole proprietor of a company called Silver Towne. Located in Winchester, Indiana, Silver Towne trades gold and silver coins and bullion on a large scale and has large and heavily guarded vaults for the safe storage of precious metals. Martin not only bought gold and silver from Hendrickson and sold gold and silver to him when he needed Federal Reserve notes to pay depositors' bills, but also stored in Silver Towne's vaults some of the coins and bullion that he was holding for the accounts of his depositors. At the time of Martin's death Hendrickson was storing almost $3.7 million in coins, bullion, and cash for him.

Shortly before his death Martin had borrowed $150,000 from the Peoples Loan & Trust Company of Winchester, and to secure the loan had given the bank a security interest in 25 bags of silver coins. At the time of his death the bank was holding the 25 bags in its vaults plus the cash balance of Martin's account with the bank. The combined value of the silver and the cash exceeded $226,000. A month after Martin's death an Indiana state court, at the request of Peoples, appointed the bank to be the administrator of Martin's estate in Indiana. Lacking facilities for safe storage of all the cash and precious metals in the estate, Peoples made a storage contract with Hendrickson continuing his custody of the cash and precious metals that he had been storing for Martin.

More than five years have passed since the appointment of Peoples as the administrator of Martin's Indiana estate, and the estate has not yet been wound up. Roughly 400 persons have filed claims against it. These persons claim to be depositors in Martin's "bank," and they say that the cash and precious metals that Peoples and Hendrickson are holding really belong to them. The total claimed exceeds the amount held by Peoples and Hendrickson. Other lawsuits involving the estate are pending, but they are not directly relevant to the issues in the present case, although in one of them the Internal Revenue Service succeeded in enjoining the probate proceeding while the tax issues in the present case are straightened out.

In the spring of 1984 the Service made assessments against Peoples and Hendrickson under section 6867. Shortly afterward it sent them deficiency notices, having assessed on each of the two possessors a deficiency for 1983 equal to one-half of the value of the cash and precious metals held by them on Martin's account. (There is no dispute that the gold and silver coins and bullion are cash equivalents within the meaning of the statute and the applicable regulation. See 26 C.F.R. Sec. 301.6867-IT.) Peoples and Hendrickson contested the deficiencies in the Tax Court. Both had claimed that the cash belonged to Martin's estate, and Peoples, in its capacity as administrator of the estate, had expressly acknowledged to Hendrickson that Martin's estate was the owner. The Tax Court, in a 14-3 decision, accepted the argument and held that one of the prerequisites to applying section 6867--that the possessor not have claimed that the cash or cash equivalents "belong[ed] to another person whose identity the [Internal Revenue Service] can readily ascertain and who acknowledges ownership of such cash [or equivalent]"--had not been satisfied. The court then dismissed the suit as outside its jurisdiction. 89 T.C. 896 (1987).

The correctness of the Tax Court's interpretation of the statutory term "acknowledges ownership"--the only issue on this appeal--is a pure matter of law, on which we owe no special deference to the Tax Court's view. See Vukasovich, Inc. v. Commissioner, 790 F.2d 1409, 1411-13 (9th Cir.1986); Merit Life Ins. Co. v. Commissioner, 853 F.2d 1435, 1438 (7th Cir.1988). The Tax Court's findings of fact and its applications of law to facts we must review under the clearly-erroneous standard. See Yosha v. Commissioner, 861 F.2d 494, 499 (7th Cir.1988), and cases cited there.

The government has appealed only with regard to Hendrickson. No one had noticed during the Tax Co...