In re Quakertown Shopping Center, Inc.

• Decision Date: 13 September 1966
• Docket Number: No. 15682.,15682.
• Citation: 366 F.2d 95
• Parties: In the Matter of QUAKERTOWN SHOPPING CENTER, INC., Bankrupt. United States of America, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

366 F.2d 95 (1966)

In the Matter of QUAKERTOWN SHOPPING CENTER, INC., Bankrupt.

United States of America, Appellant.

No. 15682.

United States Court of Appeals Third Circuit.

Argued March 8, 1966.

Decided September 13, 1966.

Howard M. Koff, Dept. of Justice, Tax Division, Washington, D. C. (Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Attys., Dept. of Justice, Washington, D. C., Drew J. T. O'Keefe, U. S. Atty., Sidney Salkin, Asst. U. S. Atty., on the brief), for appellant.

M. E. Maurer, Philadelphia, Pa. (Wexler, Mulder & Weisman, Philadelphia, Pa., Furst, Furst & Feldman, Newark, N. J., on the brief), for trustee in bankruptcy of Electricon Suburban, Inc., appellee.

Before SMITH and FREEDMAN, Circuit Judges and MILLER, District Judge.

OPINION OF THE COURT

FREEDMAN, Circuit Judge.

The question presented is whether the District Director of Internal Revenue may validly serve notice of levy under the Internal Revenue Code of 1954, §§ 6331-6332, on a Chapter XI receiver to attach the claim of a taxpayer against its debtor in receivership without the prior permission of the Bankruptcy Court.

On May 27, 1960 the United States assessed tax liabilities of $15,334.03 for withholding and F.I.C.A. taxes against Electricon Suburban, Inc. On July 6, 1960 Electricon filed a proof of claim in the amount of $130,000¹ with the receiver of Quakertown Shopping Center, Inc., who had been appointed on May 26, 1960 by the District Court for the Eastern District of Pennsylvania after the filing of a Chapter XI petition for arrangement. A short time later, on July 27, 1960, the District Director of Internal Revenue, without seeking the permission of the Bankruptcy Court, served a notice of levy in the amount of $15,334.03 "together with all additions provided by law" on the Quakertown receiver to attach Electricon's claim as a creditor of Quakertown. The notice stated that all property, rights to property, moneys and credits in the possession of the receiver and belonging to the taxpayer (or with respect to which the receiver was obligated) and all sums of money or other obligations owing by the receiver to the taxpayer "are hereby levied upon and seized for satisfaction of the aforesaid tax, * * * and demand is hereby made upon you for the amount necessary to satisfy the liability. * * *" Sometime later Electricon's claim against Quakertown was allowed in the amount of $130,000. The dividend thereon amounts to $34,913.15, which is more than sufficient to pay the government's claim against Electricon with interest.

Before the referee and in the district court the government claimed that the levy was authorized by § 301.6331-1(a) (3) of the Treasury Regulations adopted under the 1954 Code. This provision recognizes that during bankruptcy or receivership the assets of a taxpayer generally are under the control of the court and that taxes cannot be collected by levy upon assets in the custody of the court. It declares that an exception exists where the proceeding has progressed to such a point that the levy would not interfere with the work of the court or where the court grants permission to levy.² The referee adopted the government's contention and found that the Quakertown proceeding had progressed to a point where the service of notice of the levy would not interfere with the administration and liquidation of the estate or the work of the court or the receiver and trustee. The referee therefore awarded the full amount of the tax claim with interest to the District Director, and the remainder of the dividend was ordered to be paid to the estate of Electricon, which had itself filed a Chapter XI petition (later converted into a bankruptcy) on August 9, 1960.

On review the learned district judge rejected the government's view and held that the levy was unauthorized without the prior permission of the Bankruptcy Court because the funds were in custodia legis.³ In re Quakertown Shopping Center, Inc., 248 F.Supp. 749 (E.D.Pa.1965).

On appeal the government has wisely abandoned reliance on the Regulation and its position now is far different from that urged on the district judge.

In our view the Regulation applies only to a levy made upon a taxpayer in bankruptcy or receivership and not to one made by way of an attachment against an estate which is indebted to the taxpayer.

With the Regulation out of the case the question is whether the levy is forbidden by the Bankruptcy Act or by the general doctrine that property in custodia legis is not attachable.

Section 6321 of the Internal Revenue Code of 1954 confers a lien in favor of the United States upon all property and rights to property belonging to any person liable for any tax who neglects to pay it after demand. Section 6331 of the Code authorizes the government to collect the tax by levy upon all property and rights to property belonging to the taxpayer. The right to levy includes the power to distrain and seize "by any means", and the government is authorized to seize and sell the property or rights to property of the taxpayer. Section 6332(a) of the Code requires that any person in possession of property or rights to property subject to levy upon which a levy has been made shall on demand of the government surrender such property and if obligated with respect thereto shall discharge such obligation to the government.⁴ Section 6332(b) of the Code provides that any person who fails or refuses to comply with the levy shall be liable personally to the United States for the value of property, but not exceeding the amount of the government's claim with costs and interest.

"The right of the United States to collect its internal revenue by summary administrative proceedings", said Mr. Justice Brandeis, "has long been settled." Phillips v. Commissioner of Internal Revenue, 283 U.S. 589, 595, 51 S.Ct. 608, 75 L.Ed. 1289 (1931). More recently Chief Judge Biggs in United States v. Sullivan, 333 F.2d 100, 116 (3 Cir. 1964) described this summary administrative remedy of self-help which is derived from the sovereign power of taxation. "Levy is a summary, non-judicial process, a method of self-help authorized by statute which provides the Commissioner with a prompt and convenient method for satisfying delinquent tax claims. citing authorities Statutory levy is substantially broader in scope than anything known to the common law, and it is applicable to intangible as well as to tangible property. citing authority When validly invoked, it effects a seizure of the delinquent's property tantamount to a transferal of ownership. citing authority The very nature and breadth of this somewhat drastic administrative process gives continued emphasis to its raison d'être and serves to underscore the fundamental truth that `taxes are the lifeblood of government, and their prompt and certain availability an imperious need.' Bull v. United States, * * * 295 U.S. 247, at 259, 55 S.Ct. 695, 79 L.Ed. 1421. * * *"

The United States here was simply exercising its right of self-help expressly granted to it by the same authority which created the Bankruptcy Court and authorized Chapter XI proceedings. The...