Pipola v. Chicco

• Decision Date: 21 January 1960
• Docket Number: No. 67,Docket 25649.,67
• Parties: Paul PIPOLA and Julia Pipola, Plaintiffs-Appellants, v. Mae CHICCO and Yorkville Savings and Loan Association, Defendants, and United States of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

274 F.2d 909 (1960)

Paul PIPOLA and Julia Pipola, Plaintiffs-Appellants, v. Mae CHICCO and Yorkville Savings and Loan Association, Defendants, and United States of America, Defendant-Appellee.

No. 67, Docket 25649.

United States Court of Appeals Second Circuit.

Argued December 9, 1959.

Decided January 21, 1960.

Herman S. Axelrod, New York City (Axelrod & Axelrod, New York City, on the brief), Maitland M. Axelrod, New York City, of counsel, for appellants.

Lola S. Lea, New York City (S. Hazard Gillespie, Jr., U. S. Atty. for the Southern District of New York, and Joseph M. Field, Asst. U. S. Atty., New York City, on the brief), for defendant-appellee.

Before LUMBARD, Chief Judge, and SWAN and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge.

This is an action by purchasers of real estate, pursuant to 28 U.S.C. § 2410(a), set forth below,¹ to cancel a tax lien filed by the government against purchasers' grantor. The principal question is whether plaintiffs can challenge the sufficiency of the evidence that led the Commissioner to make the assessment underlying the tax lien. Judge Weinfeld, in a thorough opinion, held they may not, and we agree. A subsidiary issue concerns the amount by which priority over the tax lien should be recognized because a mortgage senior to the lien was paid off when title to the plaintiffs closed. As to this we think the District Judge should have allowed the plaintiffs interest on the amount so paid.

Mae Chicco acquired title to a one-story house in the Bronx in 1951. In 1952 she executed a mortgage on the house to secure a $10,000 loan from North New York Savings and Loan Association; this was duly recorded. In August, 1953, New York City police raided the house, arrested Chicco and two men, and charged all three with operating a policy bank in violation of New York Penal Law, § 974. The men pleaded guilty but the charge against Chicco was dismissed. Early in 1954, after investigation, the Commissioner made an assessment against Chicco for $14,287.44 for the tax on wagers imposed by § 3285 of the 1939 Internal Revenue Code, 26 U.S.C. § 3285, and penalties thereon and for $62.50 for the occupational tax imposed by § 3290, 26 U.S.C. § 3290,² and penalties thereon. Chicco was twice notified of each of the two assessments. The taxes not having been paid, the District Director of Internal Revenue on June 28, 1954, caused a Federal tax lien to be duly filed against the property in the Register's Office, Bronx County, pursuant to § 3672, 26 U.S.C. § 3672.

On April 28, 1955, Chicco delivered a deed of the property to the plaintiffs for a consideration of $18,000. The examiners for the title company failed to find the notice of the United States tax lien. A balance of $8,573.49 was then due on the North New York mortgage. At the closing plaintiffs caused this to be paid, and the mortgage was satisfied. The funds for this payment came from a $12,000 loan by Yorkville Savings and Loan Association secured by a new mortgage executed by plaintiffs. The abstract company that searched title for Yorkville likewise missed the tax lien.

Also in April, 1955, the government filed an information in the Southern District of New York charging Chicco and the two men with wilful failure to register as required by § 3291, 26 U.S.C. § 3291, and to pay the taxes imposed by §§ 3285 and 3290. The two men pleaded guilty. A nolle prosequi was entered as to Chicco. The statement of the Assistant U. S. Attorney proposing the nolle prosequi stated that the evidence available to the government showed that title to the house in which the two men conducted part of their policy operation was in the name of Chicco, "a girl friend" of one of them, "and was occupied by her"; that the government had "no additional evidence to show that she was engaged in the business of accepting wagers as charged in the information"; and that "Even if the fact of her participation in the business could be inferred from her record ownership and occupation of the house, the evidence is insufficient to show her wilful failure to pay the required taxes and register as is charged in the information." Some months later Chicco disappeared; her present whereabouts are unknown.

In 1957 plaintiffs brought this action in the Supreme Court of New York, Bronx County, against Chicco, the United States, which had been joined under 28 U.S.C. § 2410, and Yorkville, to quiet title to the property by cancelling the tax lien. The ground asserted for this was that the evidence before the Commissioner as to Chicco's participation in the wagering operations was insufficient to warrant the assessment against her. The government removed to the District Court for the Southern District, 28 U.S. C. § 1444. There it answered and counterclaimed for foreclosure of the tax lien. Yorkville also answered and asserted that it was entitled to priority over the tax lien to the extent of the amount owing under the mortgage to North New York at the time of the sale. Chicco defaulted.

Judge Weinfeld held, 169 F.Supp. at page 232, that 28 U.S.C. § 2410(a) "simply provides a waiver of immunity by the United States in foreclosure actions or in suits to quiet title in instances where the Government has, or claims to have, a lien upon or other interest in property" and that in consequence the plaintiffs "cannot challenge the assessment imposed by the Commissioner against their grantor." He said also, 169 F.Supp. at page 234, that "assuming arguendo that plaintiffs could maintain a suit to attack the validity of the assessment, they have failed to sustain their claim that the assessment was made without any basis in fact." He thought this because "The investigation made by the Federal agents especially appointed to inquire into the activities of Chicco and her associates fully warranted the inference that they were engaged as joint venturers within the meaning of the wagering tax provisions." We do not reach the latter question since we affirm Judge Weinfeld's holding that plaintiffs may not go into the merits of the assessment against their grantor.³

The government's argument that the plaintiffs may not question the assessment on the merits proceeds from the premise that Chicco could not have done so if the government had sought to collect the tax assessed against her by any of the various methods provided by the Revenue Act including an action under § 3678, 26 U.S.C. § 3678, to enforce the tax lien. Starting from this premise the government argues that 28 U.S.C. § 2410 simply waived the government's immunity to suit to the extent there specified and did not give a plaintiff in such a suit, whether the taxpayer or another, greater substantive rights than the taxpayer would have had in a proceeding brought by the government to collect the tax. Plaintiffs question the government's premise, and they contend that in any event the conclusion would not follow since, as they argue, a construction of 28 U.S.C. § 2410 that would prevent inquiry into the merits of a tax assessment would deprive the section of its intended purpose as applied to tax liens. Alternatively, they contend that even if 28 U.S.C. § 2410 does not in all cases have the effect claimed, they are entitled to relief here under the same equitable principle that was recognized in Miller v. Standard Nut Margarine Co., 1932, 284 U.S. 498, 52 S.Ct. 260, 76 L.Ed. 422 to justify an exception to the statute prohibiting actions to enjoin the assessment or collection of tax, § 3653 of the 1939 Code.

The premise of the government's argument receives its most powerful support from Bull v. United States, 1935, 295 U.S. 247, 259-261, 55 S.Ct. 695, 699, 79 L.Ed. 1421. After a review of the practical considerations that justify the sovereign in resorting "to more drastic means of collection" of taxes than of other debts, Mr. Justice Roberts stated that in taxation "the assessment supersedes the pleading, proof, and judgment necessary in an action at law, and has the force of such a judgment," and that in taxation "the usual procedure for the recovery of debts is reversed" and "payment precedes defense." The government says that if the assessment against Chicco was thus a "judgment," for the collection of which § 3670, 26 U.S.C. § 3670, gives it a lien, Chicco, on ordinary principles, could not have challenged the merits of the assessment in an action under § 3678, 26 U.S.C. § 3678, to foreclose the lien.

The lack of precise authority either to prove or to disprove this contention is surprising. The statements quoted from Bull v. United States do not seem to have been necessary to the decision, namely, that an amount paid under an erroneous assessment could be used in recoupment against another tax claim for the same receipt even though the statute of limitations on a suit for refund of the tax erroneously assessed had run. Taxpayers point to the absence in § 3678 of a provision such as the direction in § 3679, 26 U.S.C. § 3679, relating to actions to clear title to realty, that in proceedings under the latter section "the assessment of the tax upon which the lien of the United States is based shall be conclusively presumed to be valid." They point out also that, in the course of the 1954 revision of the Internal Revenue Code, the House Bill added to § 3678 a provision identical to that just quoted from § 3679 but the Senate eliminated this. However, this history is inconclusive, since the House was careful to refer to its proposed change in § 3678 as the addition of an "express provision" and the Senate was equally careful to state that the elimination of the proposed addition "is not designed to change the effect under existing law given to the assessment in such an adjudication." 83d Cong. 2d Sess., H.R.Rep. No. 1337, page A-431; S.Rep. No. 1622, page 610.

In a suit by the government to enforce a tax lien under § 3678, the defendant clearly can raise such questions as whether the assessment complied with required...