Valley Finance, Inc. v. U.S.

• Decision Date: 09 September 1980
• Docket Number: 79-1151 and 79-1301,Nos. 78-1585,s. 78-1585
• Parties: , 80-2 USTC P 9554 VALLEY FINANCE, INC. et al., Appellants, v. UNITED STATES of America et al. PACIFIC DEVELOPMENT, INC., Appellant, v. UNITED STATES of America et al. PACIFIC DEVELOPMENT, INC., Appellant, v. UNITED STATES of America et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 162

629 F.2d 162

203 U.S.App.D.C. 128, 80-2 USTC P 9554

VALLEY FINANCE, INC. et al., Appellants, v. UNITED STATES of America et al.

PACIFIC DEVELOPMENT, INC., Appellant, v. UNITED STATES of America et al.

PACIFIC DEVELOPMENT, INC., Appellant, v. UNITED STATES of America et al.

Nos. 78-1585, 79-1151 and 79-1301.

United States Court of Appeals, District of Columbia Circuit.

Argued May 12, 1980.

Decided July 14, 1980.

Rehearing Denied Sept. 9, 1980.

Walter T. Charlton, Washington, D. C., and Richard T.Sampson, Baltimore, Md., with whom E. William Tupling, Washington, D. C., was on brief, for appellants.

Daniel F. Ross, Atty., Dept. of Justice, with whom M. Carr Ferguson, Asst. Atty. Gen., Carl S. Rauh, U. S. Atty. at the time brief was filed, and Crombie J. D. Garrett, Washington, D. C., were on brief, for appellees. Charles F. C. Ruff, U. S. Atty., and Before TAMM and MIKVA, Circuit Judges and GESELL, ^* United States District Court Judge for the District of Columbia.

Myron C. Baum, William A. Friedlander, S. Martin Teel, Jr., Attys., Dept. of Justice, Washington, D. C., also entered appearances for appellees.

Opinion for the Court filed by District Judge GESELL.

GESELL, District Judge:

These companion appeals were consolidated for argument with consent of counsel and will be dealt with in a single opinion. They arise from a jeopardy assessment for income taxes exceeding 4.5 million dollars made by the Internal Revenue Service ("IRS") against one Tongsun Park on January 18, 1977. The IRS seized assets of Pacific Development, Inc. ("Pacific"), a corporation wholly owned by Park, claiming that the company was a mere alter ego of the taxpayer. Pacific, incorporated in the District of Columbia in 1968, officially engages in the business of international brokerage and consulting. Park was its founder, president, and continuous sole shareholder. In an action brought under 26 U.S.C. § 7426(a) ¹ and 28 U.S.C. § 2410, ² Pacific sought return of its property and damages. The District Court upheld the seizure after finding that Pacific was not a separate entity for tax purposes but "a mere instrumentality of Park and a facade for his operations." ³

As appellant in Nos. 79-1151 and 79-1301, Pacific challenges the District Court's factual determination of its alter ego status, claiming that such a finding is clearly erroneous on the record. In addition, it contends that the United States violated its statutory rights by failing to provide notice of deficiency, and that the absence of a prompt post-seizure hearing amounts to a violation of its right to due process of law under the Fifth Amendment to the Constitution. ⁴ Appellants in No. 78-1585 are various creditors of Pacific ⁵ who sought to challenge the seizure on the same statutory and constitutional grounds. They proceeded by separate suit against Pacific and IRS under 26 U.S.C. § 7426(a), ⁶ and also by attempted intervention in the main Pacific action described above. They appeal from dismissal of their separate action on jurisdictional grounds.

The two actions progressed below along distinct tracks. Pacific filed suit on April 21, 1977, while the creditors did not bring an action until some nine months later. The District Judge granted the Government's

                motion to dismiss the creditors' action, at the same time denying the creditors' motion to intervene as party plaintiffs in Pacific's lawsuit.  7  Following extensive discovery, the main action was tried to the Court and judgment was entered for the United States.  8  We conclude that Pacific's creditors properly were barred from maintaining suit, and find no statutory or constitutional infirmities in the action taken by the IRS as to Pacific.  Accordingly, we affirm the District Court's judgment in all respects
                

STANDING

Following a lengthy investigation into the tax liability of Park, the IRS concluded that Park owed some 4.5 million dollars in personal Federal income taxes for the four-year period ending December 31, 1975. The IRS, believing that immediate action was necessary to safeguard collection of this substantial deficiency, entered a jeopardy assessment against Park on January 18, 1977. See 26 U.S.C. § 6861 (1976). Park was sent a statutory notice of deficiency within the applicable 60-day time period. 26 U.S.C. § 6861(b) (1976). He then petitioned the United States Tax Court, seeking a redetermination of the deficiency. See 26 U.S.C. § 6213(a) (1976). That action, which concerns the merits of the taxpayer's liability under the Internal Revenue Code, is still pending before the Tax Court.

Meanwhile, based on the apparent exigencies of the situation, the IRS moved quickly to ensure collection. Once demand for payment went unheeded, the IRS immediately filed notices of tax liens against the taxpayer himself and against Pacific as the "alter ego and nominee" of Park. See 26 U.S.C. § 6321 (1976). ⁹ It followed up this action by instituting levies or seizures of various properties belonging to Pacific, including bank account deposits, shares of stock, a life insurance policy and several automobiles. See 26 U.S.C. § 6331 (1976). ¹⁰ These liens and levies are still outstanding. Attachment by the Government will continue until the Tax Court resolves the nature and extent of Park's tax liability. The apparent effect has been to shut down Pacific's operations and deny payment to all complaining creditors.

No issue arises as to Pacific's right to challenge seizure of its property. However, an initial question addressed by the District Court and raised on appeal concerns whether or not Pacific's creditors have standing to test the action taken by the IRS.

Standing to sue in federalcourt is conferred on complainants alleging concrete injury to an interest that is "arguably within the zone of interests" to be protected by the statute in question. Association of Data Processing Serv. Orgs. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 830, 25 L.Ed.2d 184 (1970). In this instance, all complainants sue as persons other than taxpayers, claiming protection under 26 U.S.C. § 7426(a). The provision permits actions challenging a levy by the United States only if the plaintiff "claims an interest in or lien on" the property at issue. Pacific's creditors allege such an interest, arguing that any claim for payment on an outstanding debt amounts to an "interest" protected under the statute. At the outset, we must decide which of the interests asserted below arguably falls within the terms of the statute.

Section 7426 of the Internal Revenue Code was enacted as part of the Federal Tax Lien Act of 1966. ¹¹ Recognizing that the Government's rigorous tax enforcement activities at times encroached upon persons other than the delinquent taxpayer, Congress sought to provide a measure of protection for the property rights of these third parties. See S.Rep.No.1708, 89th Cong., 2d Sess. 29, reprinted in (1966) U.S.Code Cong. & Admin.News, pp. 3722, 3750. In so doing, Congress created a new exception to the broad statutory rule prohibiting suits in restraint of federal tax assessment efforts. 26 U.S.C. § 7421(a) (1976 & Supp. II 1978). This exception is precisely drawn and of limited scope. The statutory language, by effectively equating the terms "interest" and "lien" and relating both to "property," indicates that only persons claiming specific, possessory rights are entitled to seek judicial review. Subsequent discussion of relief affordable when property interests are found "superior to rights of the United States in such property" conveys a similar understanding that litigants must advance a particular, secured interest. 26 U.S.C. § 7426(b)(1) (1976). This traditional reading of the term "interest" is consistent with usage elsewhere in the Act. ¹² It is further supported by a legislative understanding that the Act as a whole "substantially improves the status of private secured creditors." ¹³

As already indicated, Pacific, the actual owner of the various properties levied or seized by the Government, unquestionably has standing under section 7426(a). It is equally apparent, however, that Pacific's three general creditors lack standing to sue. Their mere claim of a contractual right to be paid, unsecured by a lien or other specifically enforceable property interest, does not provide judicial access. To hold otherwise would invite litigation from numerous parties only remotely aggrieved by IRS levies, with consequent disruptive effects on federal tax enforcement. Congress intended a far narrower right to sue, and we see no reason to deviate from that clearly expressed design.

The situation as to Valley Finance, Inc. ("Valley") is somewhat different. Valley held a second deed of trust on the land and premises at 1604 K Street, N.W., Washington, D. C., making it a partly secured creditor of Pacific. ¹⁴ This deed of trust, entered into on February 15, 1977, and recorded one month later, is the type of property interest which does confer standing. Flores v. United States, 551 F.2d 1169, 1171 (9th Cir. 1977). The interest asserted in this instance, however, is clearly junior to that claimed by the Government. The Federal tax lien, which was filed on January 19, 1977, with the Recorder of Deeds in Washington,

                D. C., attached to all property owned by Pacific as of that date.  Pacific's subsequent transfer by deed of trust was therefore a conveyance without legal effect.  See generally United States v. Pioneer American Ins. Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963).  Valley's claim is not one on which relief can be granted, and it was properly dismissed.  15 Accordingly, we consider only the various challenges by Pacific to the legality of IRS conduct
                

NOTICE AND HEARING RIGHTS

In the first instance, Pacific claims to have been denied certain procedural rights due under the Internal Revenue Code. The failure to provide it with a notice of deficiency following the jeopardy assessment is said to invalidate the...