UNITED STATES of America, Plaintiff-Appellee,
v.
Raymond A. O'CONNOR, Bertha K. O'Connor, Raymond A.
O'Connor, Executor under the Last Will and Testament of
Elizabeth F. Fitzpatrick, sometimes known as Mary Elizabeth
Fitzpatrick, deceased, Raymond A. O'Connor, Julian J.
O'Connor and John K. O'Connor, individually and as
co-partners, trading and doing business under the name of R.
A. O'Connor & Co., Burt Packing & Warehouse, Inc., Burt Cold
Storage Co., Inc., Chisholm Ryder Co., Inc., Howard L.
Kaynor, County Treasurer, Niagara County, New York, Cecilia
Finnigan, Carmelite Sisters, St. Catharines, Ontario,
Catholic Extension Society, Toronto, Ontario, Rev. Thomas A.
O'Connor, St. Paul, Minnesota, rev. Mr. Thomas A. O'Connor,
Fordham University, New York, New York, Rev. Father
Campbell, whose Christian name is unknown, Catherine E.
Kelly, 2322-41st Street, N.W., Washington, D.C., Vivian A.
O'Connor, Maid of the Mist Steamboat Co., Inc., Niagara
Falls, New York, Cocker Saw Co., Inc., Burt, New York,
Defendants-Appellants.
No. 115, Docket 26057.
United States Court of Appeals Second Circuit.
Argued May 16, 1961.
Decided June 5, 1961.
Richard M. Roberts, Sec. Chief, Claims, Tax Division, Dept. of Justice, Washington, D.C. (Neil R. Farmelo, U.S. Atty., Buffalo, N.Y., Charles K. Rice, Asst. Atty. Gen., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, James P. Turner and Robert W. Kernan, Attys., Dept. of Justice, Washington, D.C., on the brief), for plaintiff-appellee.
Charles J. McDonough, Buffalo, N.Y. (Mc, donough, Boasberg & McDonough, Buffalo, N.Y., on the brief), for defendants-appellants.
Before FRIENDLY and SMITH, Circuit Judges, and WATKINS, District judge.*
FRIENDLY, Circuit Judge.
This appeal concerns the civil side of the long-standing tax controversy between the United States and Raymond A. O'Connor of Niagara Falls. O'Connor was convicted in 1954 and again in 1957 of wilfully attempting to evade payment of his income taxes for 1946-1949; both convictions were reversed by this Court on grounds not going to the merits of the Government's claim, 1956,
On September 12, 1951, the Commissioner made jeopardy assessments against Raymond O'Connor and his wife Bertha for deficiencies in income taxes, fraud penalties and interest totalling $409,370.28 for the years 1943-1949; Int.Rev. Code of 1939, 273(a), 26 U.S.C.A. 273(a). Thereafter Raymond and Bertha filed a petition in the Tax Court requesting a redetermination of the deficiencies and penalties; however, no bond to stay collection of the tax was filed, as permitted by 273(f) of the 1939 Code. The Commissioner answered and taxpayers replied; no further proceedings have been taken. On August 4, 1952, the Commissioner made transferee assessments, under 311, in the sum of $261,209.00 against Elizabeth F. Fitzpatrick as alleged transferee of certain real prperty deeded to her by Bertha O'Connor on July 31, 1951.
On August 23, 1957, just before the six year statute of limitations, Int.Rev. Code of 1954, 6502, 26 U.S.C.A. 6502, would have run on the O'Connor assessments, the Government brought this action under 7403. The complaint alleged, in addition to certain of the facts set forth above, that the assessment lists covering the assessments against the O'Connors had been received by the Collector in Buffalo on September 14, 1951, notice and demand upon the taxpayers made that day, and notices of the tax liens filed on September 21; that, in the case of the Fitzpatrick assessment, the assessment lists were received August 7, 1952, notice and demand made that day, and notice of lien filed on August 8; that seven parcels of real estate and a mortgage standing in the name of Bertha O'Connor but allegedly owned by Raymond had been fraudulently conveyed to Mrs. Fitzpatrick; that O'Connor had an interest in an accounting partnership, held a claim against Chisholm Ryder Co., Inc., and wholly owned and controlled two other companies, Burt Packing and Warehouse, Inc. and Burt Cold Storage Co., Inc. which owed him large sums; and that other named defendants claimed interests or liens upon or against O'Connor's properties. The complaint sought a personal judgment against the O'Connors for the amount assessed; the setting aside of the transfers to Mrs. Fitzpatrick; judgment against Raymond O'Connor, as executor of her estate, for the amount of the transferee assessment; determination of the validity and priority of all liens and claims with respect to the O'Connors' properties; sale and distribution to satisfy the liens; and, finally, the appointment of a receiver to enforce the Government's lines against the properties of the O'Connor's and the two Burt corporations with the powers of a receiver in equity. Annexed to the complaint was a certificate of the Commissioner, 7403(d), that apppointment of a receiver for the O'Connors and the two companies was in the public interest.
The late Judge Morgan issued an order requiring defendants to show cause on July 28, 1958, why the prayer for the appointment of a receiver should not be granted. On the return day the Government presented a 'Memorandum of Points Relied Upon' and affidavits. Some of these, by E. C. Coyle, Jr., then District Director of Internal Revenue, related to the facts of assessment, notice and demand, filing, etc.; they recited also that in September 1951, large tax deficiencies, not alleged in the complaint, had been assessed against the two Burt companies, and notice and demand made. The Memorandum of Points stated that, for proof of other facts to support the appointment of a receiver, the Government relied on other affidavits attached to the Memorandum, on copies of deeds and of probate papers relating to Mrs. Fitzpatrick, and on the entire transcripts of the two criminal trials. The Government also served a subpoena on Raymond O'Connor.
At the hearing on July 28, counsel for the defendants asked the Court to quash the subpoena as violating O'Connor's Fifty Amendment privilege against selfincrimination and for time to brief and prepare to argue 'various questions of law with respect to the validity of the Government's lien after certain sales of real estate which were deeded out of Bertha O'Connor, the defendant, prior to the filing of assessment rolls in this case'; he indicated he might also wish to object to use of the transcripts of the criminal trials. The judge set times for the filing of answering affidavits and briefs and adjourned the matter until September 2; the defense filed a brief dated August 18 but no answering affidavits. Apparently no proceedings were had on September 2. On September 4, Judge Burke announced that, due to serious illness, Judge Morgan was unable to be present as expected, but that he had made a decision, which Judge Burke distributed.
The decision recited the facts; determined that, although the Court in its discretion would not consider any portion of the transcript of the first criminal trial before Judge Knight, it would consider the entire transcript of the second trial, over which Judge Morgan had presided; granted the prayer for the appointment of a receiver, who was also to determine the issues of fact and law raised by the complaint; and denied the motion to quash the subpoenas, which appears to have been rendered moot. The judge said his decision was based on the oral argument, presumably on July 28, and the briefs, and that 'in the considered opinion of this Court, further argument and/or testimony is unnecessary for the exercise of the discretion of the District Court in the appointment of a receiver.' There followed, on September 10, 1958, the order, here under appeal, appointing Clarence R. Runals as receiver and also as special master.
Appealability
An order appointing a receiver is appealable under 28 U.S.C. 1292(a)(2). An order appointing a special master, standing alone, would not be, although it could normally be attacked by a petition for mandamus to the court and prohibition to the master, La Buy v. Howes Leather Co., 1957,
Appointment of the Receiver
( 1) Appellants claim they were deprived of a fair hearing. They were not. The proceedings on July 28 made plain that any further factual material was to be presented in affidavits rather than in open court; appellants chose not to file any. The adjourned session was to be only for further argument a privilege the judge was not required to grant, see F.C.C. v. WJR, The Goodwill Station, 1949,
(2) Appellants' second attack is that the Government failed to prove demand, which 3670 of the 1939 Code, 26 U.S.C.A. 3670, requires before the lien of a tax may attach. They make much of the point that Coyle's affidavit alleges there were sent to the O'Connors in 1951 forms of Statements of Income Tax Due, labelled Form 17-A, which, in fact, did not then exist, the then applicable form of notice of assessment and demand for payment being Form 7658. However, there were also annexed to Coyle's affidavits copies of the Assessment Certificate and accompanying Assessment List in regard to the O'Connors and also in regard to Mrs. Fitzpatrick, and the 'Remakrs' column of these lists carries a reference '(7658-- Sept 14 1951)' for the O'Connors and '(7658-- Aug 7-1952)' for Mrs. Fitzpatrick. This sufficiently proved the mailing of Form 7658 in the absence of countervailing evidence.
( 3) Appellants' claim that the pendency of the Tax Court proceedings prevented the appointment of a receiver flies in the face of the reasons underlying the statutory provisions for jeopardy assessments. These were necessary concomitants to establishment of the procedure whereby normally taxpayers may obtain a review of the Commissioner's determination in advance of payment; without provision for jeopardy assessments there would be too many cases in which the time spent in such a review might defeat collection of the tax. As explained in Sen.Rep. No. 52 (69th Cong. 1st Sess.), pp. 26-27, incident to the Revenue Act of 1926 (1939-- 1 Cum.Bull. 332, 352), the system of jeopardy assessment 'does not interfere in any manner with the regular course of deficiency letters, petitions to the Board, and appeals therefrom to the circuit court of appeals'; but neither do the latter stay collection of the tax when a jeopardy assessment has been made, unless the taxpayer files a bond as permitted by 273(f) of the 1939 Code. If, after collection, the courts determine the Commissioner has over-assessed, a refund will be made. There are no valid objections to this procedure on constitutional grounds, see Phillips v. Commissioner, 1931,
(4) Finally, appellants argue that the Government did not establish it had valid claims against any f the defendants, and especially against the property of Mrs. O'Connor, who had filed no income tax returns, or of Mrs. Fitzpatrick. Even though, as we later hold, the assessment is not conclusive in an action under 7403, the remedy of the appointment of a receiver does not depend on the Government's having already proved its claim and its lien; that is one of 'the matters' which the court is to 'adjudicate * * * and finally determine.' It is sufficient if the Government makes a prima facie showing, United States v. Peelle Co., 2 Cir., 1955,
Appointment of the Special Master
Renewing their complaint as to denial of a fair hearing, aggravated, on this branch of the case, by the fact that the Government had not sought a reference, appellants attack the appointment of the Special Master on four additional grounds:
(1) That, under our decision in Pipola v. Chicco, 2 Cir., 1960,
(2) That the pending Tax Court proceedings barred any litigation of the merits of the tax claims in the District Court;
(3) That the appointment of a Special Master violated the dictate of F.R.Civ.Proc. 53(b), 28 U.S.C.A., that 'a reference shall be made only upon a showing that some exceptional condition requires it'; and
(4) That, in any event, the receiver should not have been appointed special master.
The last objection is clearly sound. Although in theory the receiver may have no interest in whether any claims are established, in fact he certainly does; such an interest, as well as his duties to the claimants and the taxpayer, disqualify him from performing the judicial duties here imposed, see Tumey v. State of Ohio, 1927,
Pipola v. Chicco, supra, was an action by purchasers of real estate under 28 U.S.C. 2410(a) to cancel a Government tax lien against their grantor as erroneously assessed. The Government challenged plaintiffs' right to go behind the assessment; it urged, on the authority of a dictum in Bull v. United States, 1935,
Our intuition that there must be authority on this issue has proved sounder than our belief that, on a question of tax collection procedure, the Government could be expected to have known of it. The Government has not elaborately researched the point and has concluded that it erred in arguing to us in Pipola that, in a suit under what is now 7403, a taxpayer may not challenge the merits of the assessment underlying an asserted lien, although it contends the decision was none the less correct because of asserted differences between the rights of the taxpayer and of a third person3 -- an issue not now before us. Another Court of Appeals has found our statement disturbing, United States v. Coson, 9 Cir., 1961,
The Government's present position starts from the language of subsection (c), 'The court shall * * * proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property.' That alone settles nothing; for, if, as said in Bull, the assessment in fact had all the force of a judgment save in a proceeding before the Tax Court under 6213, 26 U.S.C.A. 6213, or in a refund suit under 7422 of the Code, 28 U.S.C.A. 7422, and 28 U.S.C. 1346(a)(1), 'the merits' would be simply the procedural regularity of the assessment and the determination of the property to which the lien attached. However, we are convinced the assessment does not have so broad an effect.
Two early Supreme Court decisions, not mentioned in Bull or cited to us in Pipola, held that when the Government sues on a bond to secure payment of an assessment, the legality of the assessment is open for judicial determination, Clinkenbeard v. United States, 1874,
The question thus becomes whether in a suit under 7403 the assessment is conclusive, as it would be in a summary method of enforcement, or presumptive but inconclusive, as it would be in an action at law on the assessment or on a bond to secure its payment. A number of cases have stated the latter. United States v. Feazel, D.C.W.D.La.1943,
This conclusion also is supported by history. The present 7403 began as 106 of the Act of July 20, 1868, c. 186, 15 Stat. 125, 167; this became Rev. Stat. 3207. Section 1030 of the Revenue Act of 1924, c. 234, 43 Stat. 253, 350, renumbered it as (a) and added, as (b), what is now 7224 of the 1954 Code, 26 U.S.C.A. 7424, dealing with civil actions by third persons to clear title to property. The presence in what was then Rev.Stat. 3207(b) of a provision that, in proceedings thereunder, 'the assessment of the tax upon which the lien of the United States is based shall be conclusively presumed to be valid,' and the absence of such a provision in 3207(a), had a significance when the two sections were juxtaposed more apparent than now when they have been separated. Again, when in 1936, 3207(a) was amended to include personal property, c. 690, 49 Stat. 1648, the House report stated this would 'give the Government an opportunity to secure a determination of the tax liability of a taxpayer in a court of equity * * *' H.R.Rep. No. 2818, 74th Cong. 2d Sess., p. 7. Finally, the history of the 1954 Code itself, which we found 'inconclusive' in our previous opinion,
Appellants' two other attacks on the appointment of a special master are best considered together. The first is that a taxpayer who has seasonably elected to have his tax liability determined by the Tax Court may not be forced to trial before another forum. The Government responds that the procedure before the Tax Court was simply intended 'to furnish a forum where full payment of the assessment would not be a condition precedent to suit,' Flora v. United States, 1960,
Order affirmed insofar as it appoints a receiver, vacated insofar as it appoints a special master.
Notes
United States District Judge for the Northern and Southern Districts of West Virginia, sitting by designation
We note a possible counter-argument namely, that Judge Morgan's death would prevent the issuance of mandamus under the principle of United States v. Boutwell, 1873,
This is so despite appellants' argument that Raymond O'Connor was the only civil defendant who had been a party to the cirminal trial. Since no final determination was being made upon the merits, the Government's entire showing could have been by affidavits. To the extent that the trial testimony had been subject to cross-examination by anyone, it was tested that much more than affidavits would have been
Taken literally, this contention would mean that a transferee such as Mrs. Fitzpartrick could not contest an assessment although the taxpayer could
This opinion has been submitted to Chief Judge Lumbard and Judge Swan, who joined in the Pipola opinion; although the present panel necessarily takes full responsibility for the instant decision, Judges Lumbard and Swan have authorized me to say they perceive no objection to the withdrawal of the statements in Pipola here under consideration
A lower court had earlier reached the same result, in another case involving Rindskopf, in a suit on the assessment itself, C.C.E.D.Wis.1879, 27 Fed.Cas.No. 16,166, p. 816, under Rev.Stat. 3207, the ancestor of 7403
Cf. Florida v. United States, supra,