U.S. v. Bell Credit Union, s. 86-2059

• Decision Date: 21 October 1988
• Docket Number: 86-2060,Nos. 86-2059,s. 86-2059
• Citation: 860 F.2d 365
• Parties: -5834, 88-2 USTC P 9564 UNITED STATES of America, Plaintiff-Appellee, v. BELL CREDIT UNION, Defendant-Appellant. UNITED STATES of America, Plaintiff-Appellee, v. GOLDEN PLAINS CREDIT UNION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 365

860 F.2d 365

62 A.F.T.R.2d 88-5834, 88-2 USTC P 9564

UNITED STATES of America, Plaintiff-Appellee, v. BELL CREDIT UNION, Defendant-Appellant.

UNITED STATES of America, Plaintiff-Appellee, v. GOLDEN PLAINS CREDIT UNION, Defendant-Appellant.

Nos. 86-2059, 86-2060.

United States Court of Appeals Tenth Circuit.

Oct. 21, 1988.

Rehearing Denied Nov. 22, 1988.

Eric D. Bruce, Bruce & Davis, Wichita, Kan., for defendants-appellants.

Robert L. Baker, Atty., Tax Div., Dept. of Justice, Washington, D.C. (Roger M. Olsen, Asst. Atty. Gen., Washington, D.C., Michael L. Paup, William S. Estabrook and Douglas G. Coulter, Attys., Tax Div., Dept. of Justice, Washington, D.C., on the brief, Benjamin L. Burgess, Jr., U.S. Atty., Wichita, Kan., of counsel), for plaintiff-appellee.

Durant S. Abernathy, III, General Counsel, U.S. Central Credit Union, Overland Park, Kan. and Gordon D. Payne, Madison, Wis., submitted a brief on behalf of amicus curiae U.S. Central Credit Union.

Robert E. Skar, Casper, Wyo., submitted a brief on behalf of amicus curiae, Wyoming Credit Union League.

Before ANDERSON, BALDOCK and BRORBY, Circuit Judges.

BALDOCK, Circuit Judge.

These cases involve the response of the defendant credit unions to administrative levies by the Internal Revenue Service (IRS) on share accounts owned by taxpayer members. The IRS was seeking to collect unpaid assessments and statutory additions to tax owed by certain taxpayers. The unpaid assessments and statutory additions to tax far exceeded the amounts in the taxpayers' share accounts. Initially, the credit unions did not comply with the levies. Rather, they applied the funds in the accounts to loan balances owed by the taxpayers. The government sued to enforce the levies under I.R.C. Sec. 6332(c) ¹ and, on cross motions for summary judgment, the district court held that the government was entitled to the funds in the share accounts. United States v. Bell Credit Union, 635 F.Supp. 501, 503-04 (D.Kan.1986). The district court also held that the credit unions were liable for a 50% penalty on the amounts recoverable, I.R.C. Sec. 6332(c)(2), because the refusal to honor the levies was without reasonable cause. Id. at 504-05.

On appeal, the credit unions suggest that the district court misunderstood the nature of the state-created property interest in credit union share accounts. They argue that credit unions do not have funds of the taxpayer-members which could be levied against under I.R.C. Sec. 6321 because the share accounts 1) represent capital, not fund deposits, 2) are not assignable to non-members of the credit union, 3) are subject to a statutory lien which is superior to a federal tax lien and 4) are subject to a contractual lien which is superior to a federal tax lien. Even if these arguments do not prevail ultimately, the credit unions argue they had reasonable cause for not honoring the levy and should not be liable for the 50% penalty. We review these legal issues de novo and affirm.

I.

The government may collect any unpaid tax by levy upon all property and rights to property belonging to a taxpayer who neglects or refuses to pay tax within 10 days after notice and demand. I.R.C. Sec. 6331; Treas.Reg. Sec. 301. 6331-1(a). A person in possession of property levied upon must surrender it to the government upon demand unless that property is subject to an attachment or execution under judicial process. I.R.C. Sec. 6332(a); Treas.Reg. Sec. 301.6332-1(a). If a person does not surrender leviable property, he will be personally liable for a sum equal to the value of the property together with interest and costs. I.R.C. Sec. 6332(c)(1); Treas.Reg. Sec. 301.6332-1(b)(1). If the failure to surrender the property is without reasonable cause, a 50% penalty shall be imposed. I.R.C. Sec. 6332(c)(2); Treas.Reg. Sec. 301.6332-1(b)(2).

Just as taxpayer deposit accounts in banks are subject to levy by the government under I.R.C. Sec. 6331(a) and Treas.Reg. Sec. 301.6331-1(a), so too are taxpayer share accounts in credit unions. Only two defenses to a levy will excuse noncompliance by a third party thought to hold property of the taxpayer. The third party must establish that it is not in possession of the property or that the property was subject to prior judicial attachment or execution. I.R.C. Sec. 6332(a); Treas.Reg. Sec. 301.6332-1(a); United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985). A panel of this court has determined that we have jurisdiction also to consider other defenses that might be raised by a third party in a civil action under I.R.C. Sec. 7426 for wrongful levy or an administrative proceeding under I.R.C. Sec. 6343 for release of levy or return of property. United States v. Central Bank, 843 F.2d 1300, 1305-06 (10th Cir.1988). We doubt, however, that these other defenses would excuse noncompliance with a valid administrative levy because the purpose of an administrative levy is to protect the government's potential interest in the property pending resolution of any conflicting claims. See United States v. National Bank of Commerce, 472 U.S. at 721, 105 S.Ct. at 2924. These other defenses are considered subsequent to the statutory defenses in I.R.C. Sec. 6332(a), and as a basis for the relief from the levy provided by I.R.C. Sec. 7426 or I.R.C. Sec. 6343. United States v. Central Bank, 843 F.2d at 1306 n. 5.

The credit unions have established neither statutory defense to the levies. It is undisputed that the accounts were not subject to a prior judicial attachment or execution. And the credit unions were obligated to apply the taxpayers' funds in the share accounts as the taxpayers directed. I.R.C. Sec. 6332(a); Treas.Reg. Sec. 301.6332-1(a). The legal significance of the taxpayers' unrestricted right to withdraw the funds has been ignored by the credit unions with pertinacity.

A federal tax lien arises upon "all property and rights to property, whether real or personal, tangible or intangible," of a taxpayer when the taxpayer is liable for tax and fails to pay after demand. Treas.Reg. Sec. 301.6321-1; accord I.R.C. Sec. 6321. The lien is effective from the time of assessment. I.R.C. Sec. 6322. The lien is broad and is intended "to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. at 720, 105 S.Ct. at 2924. The federal tax lien may be enforced "by levy upon all property and rights to property" belonging to the taxpayer. I.R.C. Sec. 6331(a); Treas.Reg. Sec. 301.6331-1(a). The share accounts surely are property which may be levied upon.

In concluding this, we look to state law to determine what interest the taxpayer had in the accounts. Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). Federal law, however, determines the tax consequences of the right created under state law. United States v. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925. State law provides that a credit union has the power to receive the savings of its members in payment for shares and regulate the withdrawal of those shares. Kan.Stat.Ann. Sec. 17-2204(1) & (11) (Supp.1987). Although a credit union has "a lien and right of setoff" on member shares to the extent of any amount owed the credit union, Kan.Stat.Ann. Sec. 17-2212(a) (Supp.1987), the credit unions did not exercise this protection until after the federal tax lien attached. Here, the parties' stipulations indicate that the taxpayers had an unrestricted right to withdraw the funds from their share accounts at the time of the levies. Rec. vol. I, doc. 7 (No. 86-2059); rec. vol. I, doc. 8 (No. 86-2060).

For purposes of a federal tax levy, the legal consequence of this unrestricted right to withdraw deposits from a share account is unmistakable. The funds in the share account are subject to the levy, even if priority or ownership questions are not yet resolved. United States v. National Bank of Commerce, 472 U.S. at 724-25, 105 S.Ct. at 2926-27; see also United States v. Central Bank, 843 F.2d at 1305; United States v. Citizens and Southern Nat'l Bank, 538 F.2d 1101, 1106-07 (5th Cir.1976), cert. denied, 430 U.S. 945, 97 S.Ct. 1579, 1580, 51 L.Ed.2d 792 (1977); United States v. Sterling Nat'l Bank & Trust Co., 494 F.2d 919, 921-23 (2d Cir.1974). We reject out of hand the credit unions' contention that taxpayer-member shares in a credit union may not be "forcibly transferred" to the government. The government steps into the shoes of the taxpayer and acquires "whatever" rights to the property that the taxpayer had. United States v. National Bank of Commerce, 472 U.S. at 713, 105 S.Ct. at 2919. The credit unions' restrictions concerning transferability of shares relate only to incidents of credit union membership. ² Thus, the credit unions had no valid basis for refusing to honor the federal tax levies.

II.

Having determined that the federal tax levy should have been honored, we next consider issues which concern priority. Relying on Kan.Stat.Ann. Sec. 17-2212 ³ (Supp.1987), the credit unions suggest that member shares are in the nature of equity capital, for which a setoff would not be permitted. They then argue that a lien attaches to the shares, either by statute or contract, whenever an amount is owed to the credit union and without any further action on the part of the credit union. This lien supposedly has priority over a federal tax lien.

We acknowledge that there are differences between banks and credit unions, but just as a bank has a right of setoff with respect to deposits under Kansas law, Karner v. Willis, 238 Kan. 246, 710 P.2d 21, 22 (1985), aff'g 10 Kan.App.2d 432, 700 P.2d 582, 583 (1985); see also Kan.Stat.Ann. Sec. 84-4-403 (1983); United States v. Central Bank, 843 F.2d at 1309 (applying Colorado U.C.C.), so too does a credit union with respect to shares, Kan.Stat.Ann. Sec. 17-2212 (Supp.1987). We look to the Kansas statutory...