United States v. Trans-World Bank

• Decision Date: 17 July 1974
• Docket Number: Civ. No. 73-1829-HP.
• Citation: 382 F. Supp. 1100
• Parties: UNITED STATES of America, Plaintiff, v. TRANS-WORLD BANK, Defendant.
• Court: U.S. District Court — Central District of California

382 F. Supp. 1100

UNITED STATES of America, Plaintiff, v.TRANS-WORLD BANK, Defendant.

Civ. No. 73-1829-HP.

United States District Court, C. D. California.

July 17, 1974.

William D. Keller, U. S. Atty., Charles H. Magnuson, Asst. U. S. Atty., Chief, Tax Div., Authur M. Greenwald, Asst. U. S. Atty., Los Angeles, Cal., for plaintiff.

Morris L. Davidson, Los Angeles, Cal., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PREGERSON, District Judge.

Plaintiff, United States of America, filed suit seeking to have this Court declare Defendant, Trans-World Bank (hereafter "Defendant-Bank") personally liable for its refusal to honor an Internal Revenue Service levy served upon it on November 1, 1971.¹In addition, Plaintiff requested that a penalty equal to fifty percent (50%) of the amount recoverable under the levy be imposed against Defendant-Bank, since it acted without "reasonable cause" in failing to honor the levy.²

On May 3, 1974, Plaintiff filed its motion for summary judgment supported by a memorandum of points and authorities and attached exhibits.Thereafter, on May 20, 1974, Defendant-Bank filed its points and authorities in opposition to Plaintiff's motion.The matter was heard by this Court on June 10, 1974.Assistant United States Attorney Authur M. Greenwald appeared for Plaintiff and Attorney Morris L. Davidson appeared for Defendant-Bank.

Defendant-Bank, through its attorney, Morris L. Davidson, represented to the Court at the June 10, 1974 hearing that there were no genuine issues of material fact to be resolved.Prior to the hearing, Defendant-Bank did not file a "statement of genuine issues" setting forth all material facts as to which it contended there existed a genuine issue to be litigated.³Moreover, Defendant-Bank did not file any affidavit controverting the facts claimed by Plaintiff in its motion; therefore, the facts claimed by Plaintiff are deemed admitted.⁴

In its motion, Plaintiff contended that the sum of $1,260.35 on deposit in a checking account maintained at Defendant-Bank by taxpayer, Arnold A. Winter(hereafter referred to as "Taxpayer Winter") was "property or rights to property subject to levy," as that term is used in Section 6332(a) of Title 26, United States Code.⁵Moreover, since Defendant-Bank refused to turn over this sum to Plaintiff, as required by the levy, Defendant-Bank, under the provisions of Section 6332(c)(1), became personally liable to Plaintiff for the sum of $1,260.35.Furthermore, because its refusal was without reasonable cause, Defendant-Bank became liable for the fifty percent (50%) penalty imposed by Section 6332(c)(2).

In opposing Plaintiff's motion, Defendant-Bank contended that on the date the levy was served, it did not hold any property belonging to Taxpayer Winter which was subject to levy because on that date, it was entitled to set off against the sum of $1,260.35 in Taxpayer Winter's checking account debts in excess of that amount then owed it by Taxpayer Winter.At the June 10, 1974 hearing, Defendant-Bank acknowledged that it had not exercised any right of setoff before the levy was served.

Defendant-Bank also contended that it should not be subjected to the penalty imposed by Section 6332(c)(2) because it had reasonable cause to refuse to honor the levy, since this action was to be a test case in this Circuit.

In response to Defendant-Bank's arguments, Plaintiff contended that it is the exercise of the right of setoff that determines whether the property in question is subject to levy, not the existence of that right.

Further, Plaintiff contended that in the light of long standing judicial recognition of the importance of the government's ability to collect revenue expeditiously, it is essential that reasonable cause not encompass a clearly erroneous view of the law.In this regard, Plaintiff referred to the dissent of Circuit Judge Friendly in the case of United States v. Sterling National Bank & Trust Co. of New York, 494 F.2d 919, 923(2d Cir.1974).

This Court, having considered the pleadings, exhibits, memoranda, and arguments of counsel, and being fully advised, now makes the following findings of fact and conclusions of law:

I

FINDINGS OF FACT

1.This action was commenced by Plaintiff pursuant to Section 7401 of Title 26, United States Code, at the direction of the Attorney General and at the request of and with the authorization of the Chief Counsel, Internal Revenue Service, a delegate of the Secretary of the Treasury.

2.On September 30, 1970, Taxpayer Winter and his wife, Betty L. Winter, borrowed $2,710.62 from Defendant-Bank.This loan was secured by certain personal property, as more particularly described in a financial statement filed with the California Secretary of State on October 21, 1970.⁶

3.On May 14, 1971, for the taxable year 1968, Plaintiff assessed Taxpayer Winter the sum of $10,296.82.This assessment consisted of unpaid income taxes in the amount of $7,265.59, together with the penalty provided by Section 6651(a)(1) of Title 26, United States Code in the amount of $1,791.40, plus the penalty provided by Section 6653(a) of Title 26, United States Code in the amount of $358.28, together with interest thereon as provided by law in the amount of $881.55.Moreover, on May 14, 1971, notice of the assessment and demand for payment of the sum of $10,296.82 were made upon Taxpayer Winter by Plaintiff.

4.In connection with this 1968 assessment of $10,296.82, Taxpayer Winter has made payments to Plaintiff totaling $912.90.To date, there is due and owing to Plaintiff from Taxpayer Winter for unpaid 1968 income taxes the sum of $9,383.92 plus interest thereon as provided by law.

5.On August 11, 1971, Taxpayer Winter borrowed the additional sum of $1,845.96 from Defendant-Bank.This second loan also was secured by certain personal property, as more particularly described in a security agreement dated August 11, 1971, signed by Taxpayer Winter.⁷

6.On September 29, 1971, Plaintiff filed a notice of tax lien with the Los Angeles County Recorder's Office regarding its May 14, 1971 assessment.

7.On November 1, 1971, Plaintiff served a notice of levy upon Defendant-Bank.The notice declared that, as of November 1, 1971, Taxpayer Winter was indebted to Plaintiff in the amount of $10,579.48, that demand had been made upon him for this amount, and that he had neglected and refused to pay that sum.In addition, the notice told Defendant-Bank that all property, rights to property, monies, credits and bank deposits in its possession on November 1, 1971 which belonged to Taxpayer Winter were levied upon and seized to satisfy his tax liability, and furthermore, that demand was being made on Defendant-Bank to surrender these properties to Plaintiff to be applied against Taxpayer Winter's tax liability.

8.On November 1, 1971, the loans of September 30, 1970 and August 11, 1971 were in default in the amounts of $1,064.73 and $1,697.13, respectively.

9.On November 1, 1971, the date the levy was served, Taxpayer Winter maintained at Defendant-Bank a checking account (Account Number XX-XXX-XXX) in the name of Arnold A. Winter, d/b/a Winter's Building Maintenance.On that date, the checking account had a balance of $1,260.35.The checking account had not been pledged as security for either the September 30, 1970 or August 11, 1971 loans.

10.Because Defendant-Bank failed to surrender to Plaintiff the funds maintained by Taxpayer Winter in this checking account, Plaintiff, on November 30, 1971, served upon Defendant-Bank a final demand, which directed Defendant-Bank to honor the levy as required by Section 6332(a) of Title 26, United States Code.To date, Defendant-Bank has failed to honor the levy.

11.Before Defendant-Bank was served with notice of levy, it had not exercised any right of setoff on Taxpayer Winter's checking account in connection with any loans owed it by Taxpayer Winter.

12.On November 29, 1971, Morris L. Davidson, attorney for Defendant-Bank, wrote a letter to Revenue Officer R. D. Leslie of the Internal Revenue Service stating that Defendant-Bank would surrender the sum of $1,260.35, if the Internal Revenue Service would execute a "hold harmless" agreement indemnifying Defendant-Bank from any claim asserted by Taxpayer Winter in connection with this sum.

13.On November 30, 1971, Revenue Officer R. D. Leslie replied to Mr. Davidson's letter and advised him of the protection afforded by Section 6332(d) of Title 26, United States Code.⁸

14.On December 6, 1971, Mr. Davidson wrote another letter to Revenue Officer R. D. Leslie stating that Defendant-Bank would not honor the levy because it had a security interest relating to certain obligations owed by Taxpayer Winter to Defendant-Bank which had priority over Plaintiff's tax claims against Taxpayer Winter.The nature of the security interest and the legal basis upon which the alleged priority was asserted were not set forth in Mr. Davidson's letter.

15.The following Conclusions of Law, insofar as they may be considered Findings of Fact, are so found by this Court to be true in all respects.

From the foregoing facts, the Court concludes:

II

CONCLUSIONS OF LAW

1.This Court has jurisdiction by virtue of Section 7402(a) of Title 26, United States CodeandSections 1340and1345 of Title 28, United States Code.

2.On November 1, 1971, the sum of $1,260.35 in Taxpayer Winter's checking account, Number XX-XXX-XXX, at Defendant-Bank was "property or rights to property subject to levy," within the purview of Section 6332(a) of Title 26, United States Code, because Defendant-Bank had not exercised any right of setoff on this checking account before it was served with the notice of levy on November 1, 1971.SeeUnited States v. First National Bank of Arizona, 348 F.Supp. 388(D.Ariz., 1970), affirmed per curiam, 458 F.2d 513(9th Cir.1972), andUnited States v. Sterling National Bank & Trust Co. of New York, 360 F.Supp. 917(S.D.N.Y...