Opinion
December 1, 1965 —
January 4, 1966.
APPEAL from an order of the circuit court for Milwaukee county: WiLLIAM I. O'NEILL, Circuit Judge. Affirmed.
For the appellant there were briefs by Martin J. Torphy and E. Campion Kersten, both of Milwaukee, and oral argument by Mr. Kersten.
For the respondent there was a brief by James B. Brennan, United States attorney, Robert J. Lerner, assistant United States attorney, and Stanton Sornsen, Internal Revenue Service, and oral argument by Mr. Lerner.
Milwaukee County Expressway Commission exercised the power of eminent domain to take certain real estate of P.C. Monday Tea Company, hereinafter called "the corporation." The corporation appealed to the circuit court from the condemnation award, thus beginning an action against the commission. The corporation was adjudicated a bankrupt, and the trustee in bankruptcy assigned the interest of the corporation to a mortgagee. The mortgagee ultimately assigned its interest, subject to its mortgage, however, to Robert W. Monday, the present plaintiff in the action.
Upon application by the United States, it had been made a party to the action. The United States filed a complaint alleging that the corporation was liable for certain withholding taxes, penalties, and interest; that the same had been assessed; that due notice had been given and demand made; that notices of lien had been appropriately filed. It prayed for payment on its claim out of any recovery secured by the corporation in the action.
In 1964, Mr. Monday appealed to this court from an order granting a new trial on the issue of valuation. On June 2, 1964, we ordered reversal of the order and reinstatement of the verdict of the jury. We refer to that opinion for a more detailed statement of the facts up to that point.
P. C. Monday Tea Co. v. Milwaukee County Expressway Comm. (1964), 24 Wis.2d 107, 128 N.W.2d 631.
On June 8, 1964, a document entitled Notice of Levy was served upon a deputy clerk of circuit court and filed in his office. The notice is on Form 668-A (Rev. 12-62), signed by a revenue officer on behalf of the district director of internal revenue. It referred to the instant action, and notified the clerk that the sum of $12,127.39 was due, owing, and unpaid to the United States from Mr. Monday. It indicated that the sum claimed had been assessed March 25, 1964, except for certain statutory additions. It was addressed to the clerk and stated, in part:
"You are further notified that demand has been made upon the taxpayer for the amount set forth herein, and that such amount is still due, owing, and unpaid from this taxpayer, and that the lien provided for by Section 6321, Internal Revenue Code of 1954, now exists upon all property or rights to property belonging to the aforesaid taxpayer. Accordingly, you are further notified that all property, rights to property, moneys, credits, and bank deposits now in your possession — and belonging to this taxpayer (or with respect to which you are obligated) and all sums of money or other obligations owing from you to this taxpayer are hereby levied upon and seized for satisfaction of the aforesaid tax, together with all additions provided by law, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth herein, or for such lesser sum as you may be indebted to him, to be applied as a payment on his tax liability. Checks or money orders should be made payable to `Internal Revenue Service.'"
On July 13, 1964, judgment was entered that Robert W. Monday recover of the commission $38,000 plus interest and costs; that the commission pay the amount of the judgment to the clerk of circuit court, and "that said Clerk retain all amounts so paid to him in his possession until further order of the Court, all notwithstanding notices of levy in the amount of $12,127.39 served upon said defendant and said Clerk by U.S. Internal Revenue Service."
On October 8, 1964, upon stipulation, orders were entered dismissing the other claimants who had been parties to the action. On the same day the United States attorney and the attorney for Mr. Monday filed a stipulation. They recited that the claim of the United States against the corporation had been reduced to an amount not exceeding $14,000. They also stipulated as follows:
"WHEREAS the District Director of Internal Revenue has served a Notice of Levy in the amount of $12,127.39 upon Ray Dundas, Deputy Clerk of Circuit Court, on June 8, 1964, under Section 6672 of the Internal Revenue Code of 1954 as amended, said assessment having been made against Robert W. Monday, the validity of said assessment and levy is to be determined by this Court or another court having jurisdiction in the matter; and, the undersigned, James B. Brennan, United States Attorney, represents that he is authorized to act to the extent of entering into this stipulation for partial distribution notwithstanding the Notice of Levy; now, therefore,
"IT IS STIPULATED by and between the undersigned that an order may forthwith be entered by the above Court directing immediate payment by the Clerk of said Court to Robert W. Monday, the sum of $30,243.10, said Clerk to retain in his possession until further order of the Court the remaining sum of $14,000.00 pending disposition of said claim and levy of the Intervenor, United States of America."
An order was entered accordingly.
Thereafter, Mr. Monday filed an answer to the complaint of the United States, accompanied by a counterclaim. The answer contained admissions, denials, and allegations with respect to the alleged claims of the United States against the corporation, set forth in the complaint of the United States.
The counterclaim was addressed to the claim of the United States against Mr. Monday, reflected in the Notice of Levy. Mr. Monday alleged that on March 25, 1964, the United States assessed a 100 percent penalty against
". . . Monday individually under section 6672 of the Internal Revenue Code of 1954 based on his alleged failure to collect, account for or pay over withholding taxes claimed due from P.C. Monday Tea Company for the third and fourth quarter of the taxable year 1960. The levy referred to in paragraph 3 above was based upon said assessment.
"5. Plaintiff Robert W. Monday alleges that said assessment and levy were and are illegal and invalid for the following reasons, among others:
"(a) Robert W. Monday is not and was not at all relevant times a `person required to collect, truthfully account for and pay over any tax' within the meaning of Section 6672 of the Internal Revenue Code;
"(b) Robert W. Monday did not `willfully fail to collect such tax, or truthfully account for or pay over such tax, or willfully attempt in any manner to avoid or defeat any such tax or the payment thereof' within the meaning of said Section 6672;
"(c) Said assessment was barred by the statutes of limitations;
"(d) Intervenor failed to collect the full amount of all taxes, penalties and interest from the estate in bankruptcy of the P.C. Monday Tea Company, although there were more than ample funds available therein as to which Intervenor stood in first priority;
"(e) Intervenor failed to exhaust all other remedies to collect any amounts claimed due from P.C. Monday Tea Company before assessing said penalties against Robert W. Monday individually;
"(f) Intervenor was guilty of laches in failing promptly to effect collection of taxes, penalties and interest claimed due from P.C. Monday Tea Company from the company assets, to the prejudice of plaintiff Robert W. Monday;
"(g) Intervenor assessed the 100% penalty and levied upon the funds of Robert W. Monday without any proper and valid determination that he was subject to such assessment and levy."
Mr. Monday prayed judgment dismissing the complaint, declaring the assessment against him, individually, null and void, and ordering payment to him of the balance held by the clerk.
The United States filed a pleading setting forth both a reply, which denied the allegations in paragraph 5 of the counterclaim, and a demurrer "due to the failure of the plaintiff's counterclaim to show this Court has jurisdiction over the subject matter because Sections 7421 and 7422 of the Internal Revenue Code of 1954 ( 26 U.S.C. § 7421-7422) prohibit suit for the purpose of restraining the assessment or collection of any tax or penalty in any Court."
On May 24, 1965, the circuit court entered an order sustaining the demurrer and dismissing the counterclaim because of lack of jurisdiction of the subject matter. Mr. Monday appealed.
On this appeal, we are concerned with only one of the claims of the United States to the fund under the control of the circuit court. The claim of lien here involved is grounded upon the alleged individual liability of Mr. Monday to the United States. The existence of such liability is attacked in Mr. Monday's counterclaim, and jurisdiction to determine such liability is challenged by the demurrer.
The complaint of the United States as an intervening party, and Mr. Monday's answer thereto, relate to the claim by the United States of a lien grounded upon the tax liability of the corporation, but any issues posed by the complaint and answer are not before us now.
The United States does not appear to challenge the jurisdiction of the circuit court to determine Mr. Monday's individual liability on the ground that the United States is immune from suit without its consent. Whether the request of the United States that it be made a party in order to assert its claim grounded on liability of the corporation is sufficient consent to the adjudication by the circuit court of its claim grounded on Monday's individual liability, or whether the service upon the clerk of the notice of levy, expressly referring to this action, standing alone, would be a consent to such adjudication, need not be decided. There appears to be no claim that the United States attorney exceeded his lawful authority in entering into the stipulation with reference to the disposition of the fund, and we deem that such stipulation, within his authority, is consent that the court determine the matter if and insofar as it has jurisdiction of the subject matter.
The two claims are related. The counterclaim discloses that the assessment against Mr. Monday was made on the premise that he was a person required to collect, account for, and pay over the tax of the corporation and wilfully failed to do so. 26 USCA, sec. 6672. Such penalty is to be assessed and collected in the same manner as a tax. 26 USCA, sec. 6671.
The question presented, as we see it, is whether a state court which has under its control a fund upon which the United States claims a lien for assessed and unpaid taxes, and against which the United States seeks to enforce its lien, has jurisdiction to go behind the assessment and determine the existence or amount of the taxpayer's liability. It should be noted that none of Mr. Monday's allegations in paragraph 5 of his counterclaim challenges the fact of the making of the assessment, nor alleges any defect in procedure thereafter, nor is there any issue of priority over any other claimant. All the allegations challenge the merits of the grounds for the assessment, i. e., whether Mr. Monday is really liable to the United States. In order to consider these objections, the circuit court must have jurisdiction to determine liability notwithstanding the determination made by the federal officer who entered the assessment.
We find no federal statute which confers such jurisdiction upon a state court, nor any court decisions which persuade us that such jurisdiction exists. To the contrary, we conclude, by reason of the considerations applicable to tax collection, and the general policy adopted by Congress, that such jurisdiction does not exist.
The United States acquires a lien where a person "liable to pay any tax neglects or refuses to pay the same after demand, . . ." The lien arises at the time the assessment is made. The assessment, though made ex parte, is an administrative act of an officer of the United States. It is made by recording the liability of the taxpayer in the office of the secretary of the treasury or his delegate. It is at least presumptively correct and is conclusive for the purpose of some types of proceedings. The question is whether it is conclusive in the action before us.
26 USCA, sec. 6203.
United States v. O'Connor (2d Cir. 1961), 291 F.2d 520, 527.
The broad, general policy with respect to the collection of disputed federal taxes has been succinctly summarized as "pay first and litigate later."
Flora v. United States (1960), 362 U.S. 145, 159, 164, 80 Sup. Ct. 630, 4 L.Ed.2d 623.
As stated, generally, in Bull v. United States:
(1935), 295 U.S. 247, 260, 55 Sup. Ct. 695, 79 L. Ed. 1421.
"Thus the usual procedure for the recovery of debts is reversed in the field of taxation. Payment precedes defense, and the burden of proof, normally on the claimant, is shifted to the taxpayer. The assessment supersedes the pleading, proof and judgment necessary in an action at law, and has the force of such a judgment. The ordinary defendant stands in judgment only after a hearing. The taxpayer often is afforded his hearing after judgment and after payment, and his only redress, for unjust administrative action is the right to claim restitution."
Congress has expressed and implemented such policy. A federal statute prohibits the maintenance in any court of a suit to restrain the assessment or collection of any tax, although the courts have allowed such suits in certain exceptional circumstances.
26 USCA, sec. 7421.
See Miller v. Standard Nut Margarine Co. (1932), 284 U.S. 498, 52 Sup. Ct. 260, 76 L. Ed. 422; Enochs v. Williams Packing Co. (1962), 370 U.S. 1, 82 Sup. Ct. 1125, 8 L.Ed.2d 292.
A tax may be collected by seizure and sale of all property and rights to property belonging to the taxpayer or subject to the lien provided by sec. 6321. For this purpose the assessment is conclusive.
26 USCA, sec. 6331.
Bull v. United States, supra, page 260, footnote 8; Bowers v. American Surety Co. (2d Cir. 1929), 30 F.2d 244.
After claim for refund, an action may be brought in a district court or the court of claims for the recovery of a tax alleged to have been erroneously or illegally assessed or collected.
In 1935, Congress showed its preference for "pay first and litigate later" by amending the Federal Declaratory Judgment Act so as to except disputes with respect to federal taxes.
Flora v. United States, supra, page 164, footnote 7.
28 USCA, sec. 2410, authorizes the naming of the United States as a party in any quiet-title or foreclosure action in a state or federal court where the United States claims a mortgage or other lien on the property involved. The federal court of appeals for the second circuit has decided, with reasoning which we find persuasive, that this statute does not confer jurisdiction to go behind an assessment of tax and adjudicate the liability of the taxpayer.
Falik v. United States (2d Cir. 1965), 343 F.2d 38. Although one basis for the same holding in an earlier case in the same court, Pipola v. Chicco (2d Cir. 1960), 274 F.2d 909, was disavowed by that court in United States v. O'Connor, supra, footnote 6, the court again reached the same conclusion in Falik as in Pipola.
A decision in the ninth circuit, relied on by Mr. Monday decided in an action under sec. 2410 that there were procedural defects in a federal tax lien, but noted that it did not decide whether it could consider the merits of the assessment.
United States v. Coson (9th Cir. 1961), 286 F.2d 453.
Ibid. at 463, 464. It was specifically pointed out in Cooper Agency, Inc., v. McLeod (D.C. S.C. 1964), 235 F. Supp. 276, 285, that Coson was decided "from a procedural standpoint only."
Thus in the normal course of events, except where resort to the tax court is permitted, payment must be made in full before the taxpayer can litigate the question of liability for the tax.
There are several exceptions to the broad rule requiring payment before litigation. One is the express authorization to resort to the tax court where certain types of taxes are involved.
Another exception occurs where the United States brings an action at law to recover judgment for the amount of the tax. In such an action the assessment is not conclusive, but presumptive only. Recognition of this exception began many years ago in Clinkenbeard v. United States and United States v. Rindskopf.
(1874), 88 U.S. (21 Wall.) 65, 22 L. Ed. 477.
(1881), 105 U.S. 418, 26 L. Ed. 1131.
A further exception has been found by the court of appeals for the second circuit. In United States v. O'Connor the United States brought an action in a federal district court, under the authority of 26 USCA, sec. 7403, seeking enforcement of its lien. The court concluded that the court could adjudicate the issue of liability in such action, saying, "We think the closer analogy is to the action at law on the assessment; when the Government seeks the aid of the courts in enforcing the assessment in any form, it opens the assessment to judicial scrutiny in all respects." Although the language quoted is not restricted to an action in a federal court, we emphasize that the particular action was one in federal court brought there pursuant to a statute.
Supra, footnote 6.
Ibid. page 527.
If Monday's counterclaim be treated as if it were the complaint in an action to quiet title to the fund, we would nevertheless find persuasive the reasoning in Falik that congressional policy requires that the assessment be taken as conclusive in such an action.
It seems somewhat more realistic, however, to view the government's service of its notice of levy upon the clerk, with its express reference to this action, as a demand that the circuit court recognize its lien upon Mr. Monday's cause of action against the county and require payment to the United States accordingly. If the notice be so viewed, the counterclaim becomes a defensive pleading in effect though not in form. So viewed we reach the question whether the enactments and doctrines which make up the federal scheme of tax collection impliedly exclude state courts from jurisdiction to set aside assessments of federal taxes made by federal officers. We conclude that even if the O'Connor decision is sound when applied to an action in a federal court pursuant to the authority of a federal statute, there is nevertheless an implied exclusion of state court jurisdiction to examine the merits of an assessment, at least in the type of situation now before us, where the United States is demanding payment out of a fund in the control of the state court.
See Note, Merits of a Tax Assessment, 71 Yale Law Journal (1962), 1329, 1335, criticizing O'Connor as contrary to the policy of summary tax collection.
We read such implication from the existence of the general rule — pay first, litigate later, and the anomaly of according to a state court the power to review the 'administrative decisions of a federal officer. We also see an anomaly in a state court's deciding the issue of an individual's liability to the United States under the tax laws of the latter. Although state courts are bound by the laws of the United States as part of the supreme law of the land, our duty to give full recognition to such laws does not compel the conclusion that Congress intended state courts to have jurisdiction to determine disputes over liability for federal taxes.
See Restatement, Conflicts, p. 728, sec. 610.
Congressional policy appears to favor adjudication of such disputes in federal courts after payment of the tax assessed. We conclude, therefore, that the state courts are not to adjudicate them, at least in the situation present here. We confess to some uneasiness in reaching this proposition because it is in accord with a contention appearing in the brief submitted on behalf of the United States, but expressly withdrawn by the United States attorney upon oral argument. Nevertheless it seems the sounder view.
We should, indeed, acknowledge that Mr. Monday has cited a case in which a state court decided a dispute over liability of the taxpayer to the United States. There the United States had intervened in a state court action. It sought a personal judgment for the penalty, as well as for foreclosure of its lien. The court did not discuss the propriety of its examination of the liability issue.
Paddock v. Siemoneit (1949), 147 Tex. 571, 218 S.W.2d 428.
Other state court cases cited by Mr. Monday do not adjudicate the merits of a dispute over tax liability, but determine the relative priority of the claims of the United States and others. By the Court. — Order affirmed.
New York v. Gilmore's Steak House (1958), 15 Misc.2d 730, 183 N.Y.Supp.2d 110; Ryan Ready Mixed Concrete Corp. v. Tallini Construction Corp. (1959), 23 Misc.2d 547, 194 N.Y.Supp.2d 330, and Oxford Distributing Co. v. Famous Robert's, Inc. (1958), 5 App. Div. 2d 507, 173 N.Y.Supp.2d 468. While In re Estate of Dwyer (1959), 168 Cal.App.2d 264, 335 P.2d 718, is not a priority case, it is not a redetermination an assessed tax liability.
I think United States v. O'Connor (2d Cir. 1961), 291 F.2d 520, applies to a suit or application to enforce a lien in a state court as it does to a federal court. I can find no implied exclusion of a state court's jurisdiction, as the majority does, nor do I see any anomaly in according this power to a state court to decide this issue. The United States sought this result when it applied to the state court for the enforcement of its lien against money not in the hands of a litigant but in the custody of the state court.