Opposition Brief — United States v. Merchants National Bank of Mobile

Supreme Court, U.S. |

FILED

i} APR 1 1006

es F. SPANIOL, JR.

No. 85-1480 JOSEPH CLERK

eee

In The

Supreme Court of the United States

October Term, 1985

UNITED STATES OF AMERICA,

Petitioner,

Vv.

MERCHANTS NATIONAL BANK OF MOBILE,

Respondent.

ne

Vv

On Petition for Writ of Certiorari to the

United States Court of Appeals for the

Eleventh Circuit

fy.

Vv

RESPONSE TO PETITION FOR

WRIT OF CERTIORARI -

ra’

Vv

Brook B. Gorpon

Auan C, CHRISTIAN

P.O. Box 1988

Mobile, Alabama 36633

(208) 432-7682

Or CounsEL:

Jounstone, ApAMs, Howarpb, Bamey anp Gorpon

Attorneys for Respondent,

Merchants National Bank

‘ of Mobile

COCKLE LAW BRIEF PRINTING CO., (800) 835-7427 Ext. 333

QUESTION PRESENTED

Section 6303(a) provides that the government, upon

choosing to assess taxes unpaid by an employer, must

give notice to each person liable for the unpaid tax. The

question presented is whether, as a prerequisite to the

government’s maintenance of a civil suit to collect a lend-

er’s § 3505 derivative liability for said assessed taxes and

extension of the statute of limitations for collection there-

of, the government must comply with the general notice

requirements of § 6303(a) and give notice of the assess-

ment to the lender.

ii

TABLE OF CONTENTS

Response to Statement

Reasons for Denying the Petition

Conclusion

ill

TABLE OF AUTHORITIES

Page

CaSEs :

Cohen v. Gross, 316 F.2d 521 (3rd Cir. 1963) ............ 6

Rambo v. United States, 492 F.2d 1060 (6th

Cir. 1974), cert. denied 423 U.S. 1091, 96

S.Ct. 886, 47 L.Ed.2d 103 (1976) 6

Sedima, S.P.R.L. v. Imrex Co., Inc., 473 US.

—, 105 S.Ct. —, 87 L.Ed.2d 346 (1985) oo. 7

United States v. American Bank & Trust

Co., No. 85-1615 (3d Cir.) ........... 4

United States v. Associates Commercial Corp.,

721 F.2d 1094 (7th Cir. 1983) ........... 3, 4

United States v. Dixieline Financial, Inc., 594

F.2d 1311 (9th Cir. 1979) ................ 3, 4, 6

United States v. Harvis Construction Co.,

No. 86-1540 (9th Cir.) 4

United States v. iiunter Engineers & Con-

structors, Inc., No. 84-2652 (9th Cir. argued

RIE ETS eR ncn ER SC 4

United States v. Jersey Shore State Bank,

781 F.2d 974 (3d Cir., 1986) ................. 4,5,7

Umted States v. Messina Builders & Contrac-

tors Co., No. 85-2505 (8th Cir.) 2. 4

United States v. United California Bank, No.

BR ARR ne 4

United States v. Walker, 217 F. Supp. 888,

I, 6

STATUTES:

Internal Revenue Code of 1954 (26 U.S.C.) :

Ta Gees 2, 3, 4, 5, 7, 8, 9

iv

TABLE OF AUTHORITIES—Continued

Page

§ 3505(b) ..... ‘J Reig Dee RRS 2,6,8

SEI citer tbieipsiness - 10

§ 6204 E 10

oe Seeadcihantee Minin enios Neo nema Nene passim

aac etceeremynecesenicyennlhancomceeniianineninaaneneenen 8

I ssbcintdsiscpainenicaeowtiinsintns 4 2, 8,11

§ 6672. ........... , 8

SEI REnn uC ONTNSS ONT weve 8

‘Ts ee 2

MISCELLANEOUS:

U.S. Const., Fifth Amendment il

No. 85-1480

In The

Supreme Court of the United States

October Term, 1985

ray

Vv

UNITED STATES OF AMERICA,

Petitioner,

w.

MERCHANTS NATIONAL BANK OF MOBILE,

Respondent.

4).

Vv

On Petition for Writ of Certiorari to the

United States Court of Appeals for the

Eleventh Circuit

4

wv

RESPONSE TO PETITION FOR

WRIT OF CERTIORARI

ray

Vv

RESPONSE TO STATEMENT

1. On November 9, 1977, the Commissioner made an

assessment of employment taxes unpaid by Dri-Mix Prod-

ucts, Inc. (hereinafter ‘‘Dri-Mix’’) for the third quarter

of 1977 and a similar assessment for employment taxes

unpaid by Dri-Mix on May 15, 1978 for the fourth quarter

of 1977. The government never gave the Merchants Nat-

ional Bank of Mobile (hereinafter ‘‘MNB’’)' notice under

§ 6303(a) of the Internai Revenue Code? of said assess-

ments.

Section 6303({a) provides the general statutory notice

rule for collection actions under Subtitle F, including

§ 7401, which authorizes the Secretary of the Treasury

to initiate civil proceedings for § 3505 tax collection, such

as the case herein. The statute provides that ‘‘{w]here

it is not otherwise provided by this title, the Secretary or

his delegate shall . . . within sixty (60) days, after the

making of, an assessment o a tax pursuant to section

6203, give notice to each person liable for the unpaid tax

...’’. (Emphasis added). The government did not give

§ 6303(a) notice to MNB, and § 3505 does not ‘‘otherwise

provide’’ that notice was not required. Dri-Mix failed to

pay the taxes assessed.

2. On March 18, 1983, some five and one-half (51%)

years after assessment of the taxes unpaid by Dri-Mix

without notice to MNB, the government brought this action

in the United States District Court for the Southern Dis-

trict of Alabama against MNB, for so-called lenders’ liabil-

ity under ¢§ 3505(a) and (b), asserting the right to do so

under the post-assessment extended statute of limitations

of § 6502.

1Subsequent to the filing of the complaint in this matter,

MNB was merged into, and is now known as, First Alabama Bank.

2Unless otherwise noted, all statutory references are to the

Internal Revenue Code of 1954 (26 U.S.C.), as amended.

3

.

MNB answered said complaint and, after discovery,

moved for summary judgment on the basis that the gov-

ernment’s failure to give §6303(a) notice to MNB pre-

cluded the government’s civil action to impose 4 3505 li-

ability for the unpaid taxes. The District Court, relying

on United States v. Associates Commercial Corp., 721 F.2d

1094 (7th Cir. 1983), granted MNB’s motion for summary

judgment.

3. Petitioner appealed to the Eleventh Cireuit Court

of Appeals, and that Court, relying on Associates, af-

firmed the grant of summary judgment in favor of MNB.

The Eleventh Cireuit concluded that the government’s

‘*failure to provide MNB with the Section 6303(a) notice

bars the present suit against MNB.’’ 772 F.2d at 1524.

LY.

ww

REASONS FOR DENYING THE PETITION

At the time of its opinion on October 7, 1985, the

Eleventh Cireuit decided an important question of federal

tax law in a manner which squarely agreed with the only

other appellate decision on the issue, the Seventh Cirenit’s

opinion in Associates. Before Associates, the Ninth Cireuit

had addressed the interplay between §6303(a) and § 3505

in United States v. Dixieline Financial, Inc., 594 F.2d 1311

(9th Cir. 1979), stating:

26 U.S.C. § 6303 requires that notice of the assessment

be given within 60 days ‘‘to each person liable for

the unpaid tax.’’ If Dixieline was not given notice

of the assessment against the employer of the tax for

which it is being held liable, then the case may present

a question as to the consequences that flow from that

fact.

4

*94 F.2d at 1313. The Seventh Cireuit in Associates looked

directly to, and answered the question left open in Diie-

line, holding that one of ‘‘the consequences’’ is a bar to a

subsequent suit to impose § 3505 liability for those taxes.

The decision of the Eleventh Cireuit adopted the Asso-

cates rule.

The government then obtained a ninety (90) day ex-

tension within which to file its petition for a writ of cer-

tiorari on the ground that it was awaiting a hopeful con-

flict in the circuits. After the time originally allotted for

seeking a writ of certiorari, but within the extended pe-

riod, the hoped for conflict appeared in United States v.

Jersey Shore State Bank, 781 F.2d 974 (3d Cir. 1986).

MNB contends that because there was no conflict in

the circuits at the time of or created by the opinion below,

it is entitled to the finality of the judgment in its favor

and for which no basis for certiorari was timely asserted.

If the government intends to pursue this matter which

it now contends for the first time is of ‘‘considerable ad-

ministrative importance,’’ (Petition, p.5), it should be

required to do so in response to a petition in Jersey Shore,

or as appropriate in other pending cases.*

Furthermore, MNB contends that the issue sought

to be reviewed herein by the government is so clearly in-

3Appeals on this issue are also currently pending in the

Third, Eighth and Ninth Circuits in United States v. American

Bank & Trust Co., No. 65-1615 (3d Cir.); United States v. Messina

Builders & Contractors Co., No. 85-2505 (8th Cir.); United States

v. Harvis Construction Co., No. 86-1540 (9th Cir.); United States

v. United California Bank, No. 85-1873 (9th Cir.); and United

States v. Hunter Engineers & Constructors, Inc., No. 84-2652

(9th Cir. argued Nov. 20, 1985).

appropriate for judicial determination that this Court

should summarily deny the petition and leave the matter

with Congress. The government’s basic thesis is that ‘‘the

practical effect of the decision below would be to nullify

... an important part of the tax collection scheme.’’ (Pe-

tition, p. 5). Whether the unambiguous general notice

rule of § 6303(a), provided by Congress prior to adoption

of § 3505, places an intolerable administrative burden on

the government or not, Congress is the forum from which

relief through statutory revision of the real or imagined

burden should be addressed. Review by this Court is

therefore inappropriate.

1. As revealed by the clear and well reasoned dissent

of Judge Weis, the majority in Jersey Shore ignored the

clear and unambiguous language of §6303(a) and im-

properly concerned itself with the context of enforcement

procedures under Subtitle F to reach its conclusion. The

majority began with an examination of the statute itself,

stating that the court would look beyond the express lan-

guage of §6303(a) to give force to presumed Congres-

sional intent in only two circumstances: ‘‘where the stat-

utory language is ambiguous; and where a literal inter-

pretation would thwart the purpose of the overall statu-

tory scheme or lead to an absurd result.’’ Jd. at 977.

The majority in Jersey Shore engaged in a painful

convoluted analysis of § 6303(a) to then declare it ‘‘less

than wholly unambiguous’’, id. at 978, focusing primarily

not on the notice aspects of § 6303(a), but on the demand

(for payment) aspects of the statute.

This focus on the demand aspects of § 6303(a) recog-

nized the obvious: that the employer may have a different

6

numerical tax liability then the lender under §§ 3505(a)

and (b). By such an analysis, the Third Cireuit could find

the statute ‘‘less than wholly unambiguous’’ only in the /

context of the government’s internal administrative tax

collection procedures, and not from the language of the

statute itself. Id. at 978. However, the procedure by which

the government conducts its tax collection activities can-

not be allowed to rewrite the tax laws; the tax laws must

control the procedures of the government.

The phrase ‘‘each person liable for the unpaid tax’’

is not ‘‘less than wholly unambiguous’’ unless ‘‘person’’

could mean only the ‘‘taxpayer’’. Congress obviously

meant to include others, and the use of ‘‘person’’ unde-

niably confirms Congress’ intent that, as a general rule,

the minimum procedural safeguard under Subtitle F for

collection of any tax liabilities, whether by administrative

means or civil proceedings, must be notice of potential li-

ability to all persons liable, whether direct or derivative,

after assessment.* As Judge Weis pointed out, the ‘‘net

effect of the Code revision urged by [the government]

is to give less procedural protection to one secondarily

4As was stated in Dixieline, ‘[a]ssessment of tax as defined

consists of no more than the ascertainment of the amount due

and the formal entry of that amount on the books of the sec-

retary. See Rambo v. United States, 492 F.2d 1060 (6th Cir. j

1974), cert. denied 423 U.S. 1091, 96 S.Ct. 886, 47 L.Ed.2d 103

(1976); Cohen v. Gross, 316 F.2d 521 (3rd Cir. 1963). As was

stated by the court in United States v. Walker, 217 F. Supp. 888,

890 (W.D.S.C. 1963); ‘The Commissioner is required to assess

the tax . . . rather than assess the taxpayer.’ ’’ 594 F.2d at 1312

(footnote omitted). The government, in having chosen to assess

the tax and asserting that MNB is liable for the assessed tax,

cannot escape the conclusion that MNB should receive § 6303(a)

notice.

liable than to the primary obligor’’ who actually knows

that the taxes have not been paid, producing an ‘‘anam-

alous result.’ Jd. at 984.

2. Petitioner’s and the Third Circuit majority’s focus

on the Legislative History of §6303(a) is misplaced, sim-

ply because it provides no enlightment to their conclusions.

Because §6303(a) applies after assessment of the tax

‘‘unless otherwise provided’’, the majority should have

focused on the Legislative History of §3505 to determine

if Congress had ‘‘otherwise provided’’ therein. A review

of such Legislative History shows that Congress was silent

on the issue of exemption from § 6303(a) notice when en-

acting § 3505. As Judge Weis noted, ‘‘Congressional si-

lence, no matter how cianging, cannot override the words

of the statute.’’ Id. at 984, citing Sedima, S.P.R.L. v. Im-

rex Co., Inc., 473 U.S. —, 105 S.Ct. —, 87 L.Ed.2d 346, 358

n. 13 (1985).

The interrelationship of §6303(a) and § 3505 is high-

ly significant. Without assessment, the statute of limi-

tations against a lender for § 3505 liability is three (3)

SWith notice, the employer is specifically apprised of the

assessment, the nonpayment of taxes and the extension of the

statute of limitations. The lender, on the other hand, would

have no notice of the nonpayment of taxes, the extension of the

statute of limitations, the need to preserve records, preserve

testimony, prepare memoranda of events and circumstances

concerning the loans, maintain contacts with lending officers

or otherwise prepare a defense to said potential liability, nor

would it have an opportunity to assure that its own liability were

not exposed. Although the government recognizes that ‘‘notice

and demand under section 6303(a) are chiefly designed to pro-

tect the taxpayer from surprise collection activity’, (Petition, p.8),

it does not explain its justification for taxation by ambush after

five and one-half (5'/2) years herein.

8

years under § 6501. Upon assessment, the statute of lim-

itations against a lender for § 3505 liability is extended

for six (6) years under § 6502.

Congress acknowledged this distinction and clearly

recognized the need for notice under § 6303(a) by not

‘‘otherwise providing’’ for notice under § 3505. As Judge

Weis indicated, ‘‘[t]he likelihood of prejudice because of

the loss or destruction of records. by one secondarily liable

is real and substantial.’’ Jd. at 984. :

To this simple and logical statutory construction, the

Third Circuit majority simply states that service of the

summons and complaint is sufficient notice to the lender

because the lender must have made direct payments in vi-

olation of §3505(a) or made loans with knowledge that

the taxes would not be paid, establishing liability under

§ 3505(b). Id. at 980.

This response appears to rest on a presumption of

guilt: the lender violated the law, knew or had notice of

his violation of the law, and thus, needs no notice from

the government even though the lender is called upon to

defend itself from such allegations years after the trans-

actions in issue. Moreover, this rationale fails to recog-

nize practical commercial transactions, as the lender has

merely loaned money to its customer.®

6This theory of “presumed guilt” is in diametric opposition

to the concept of fundamental fairness and notice from the gov-

ernment to a person liable for unpaid taxes. Congress specific-

ally rejected this theory of “presumed guilt’ by not granting

the government the power of separate notice and assessment

for § 3505 liability, as in the case of penalties under § 6672 f@

certain responsible officers and § 6901 for certain transferees.

9

Petitioner’s reliance on the Third Circuit’s reasoning

that the government’s failure to assess taxes or to give

notice thereof does not preclude it from exercising its

common law right to sue a lender for the taxes is sim-

ilarly misplaced.

As the Eleventh Cireuit declared, § 3505 does not

codify a common law liability, rather, it creates a second-

ary liability enforceable by the statutory procedure, stat-

ing:

The United States alse argues that even if § 6303(a)

requires notice to third-party such as MNB, the fail-

ure to give notice does not preclude suit to collect on

MNB’s alleged § 3505 liability. The United States con-

tends that it has an inherent common law right to sue

to collect debts which is entirely independent of the

assessment process. Appellant, however, ignores the

fact that third-party derivative liability of the sort

set forth in § 3505 is a creature of statutory, not com-

man law. This argument is therefore untenable.

772 F.2d at 1524, n. 1.

3. The most compelling part of the government’s

argument adopted by the Third Circuit majority is indeed

the one most clearly reserved for Congress and not

for this Court. The government argues that the require-

ment of §6303(a) notice would result in an unworkable

enforcement scheme that would largely nullify an im-

portant part of the tax collection process. Such notice,

the government continues, would impose a prohibitory

investigative burden on the government.

Whatever merit this argument may have in a hypo-

thetical case, MNB submits that it has no place before

a judicial forum and clearly has no merit under the facts

—

10

in the present case. The government was investigating

MNB as early as October 3, 1977, approximately ninety-

six (96) days before notice of the assessment should have

been given to MNB, (Supplemental Record, Deposition

of Andreadas, p. 12, Exhibit 1), and actually prohibited

MNB and Dri-Mix from paying the taxes in question from

funds advanced by MNB once the government learned the

taxes had not been paid. (Supplemental Record, Deposi-

tion of Tovar, pp. 36-58, 62, 73; Exhibits 14, 15; Deposition

of Patrick, pp. 89-91).

The government argues, nevertheless, that the Com-

missioner ‘‘would find it virtually impossible to provide

. . notice of the sort that the court [has] ordered.’’ (Pe-

tition, p. 13). Such a broad, unsupported statement clear-

ly shows that the government fails to appreciate its own

resources.’

Perhaps the most troubling aspect of the efforts of

the government to have this Court, rather than Congress,

rewrite § 6303(a) is that it results in taxation by ambush

against lenders and other secondarily liable parties under

7For example, the government could commence an imme-

diate investigation to determine if there are parties secondarily

liable, assess the taxes, and then give appropriate § 6303(a) no-

tice; reform the employer’s withholding tax return pursuant to

§ 6011(a) such that lenders must be listed thereon and could be

given a § 6303(a) notice as a matter of course; delay its assess-

ment for any amount of time within three (3) years of the filing

of the return, conduct an investigation, assess the taxes and

then give the § 6303(a) notice; or perhaps make a supplemental

assessment under § 6204, since the original assessment could

be deemed incorrect “in any way” by failure of the employer

to identify its lenders or the government to adhere to the

§ 6303(a) notice requirements to secondarily liable parties, and

then give the required § 6303(a) notice.

Oe -~

11

the § 6502 extended statute of limitations. Such a unilat-

eral and secret extension of the statute of limitations

through failure to give notice to lenders of the underlying

assessment against the employer may raise the serious

Fifth Amendment due process concerns: the threat of tak-

ing of property without minimal due process. There is no

basis to believe the government’s assertion that the rule

adopted by the Seventh and Eleventh Circuits constitutes

an unworkable enforcement scheme, or will encourage lend-

ers to return to net payroll financing, but there are funda-

mental rules of fair play and procedural due process rec-

ognized by Congress that mandate § 6303(a) notice to

those lenders.

o

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

Brock B. Gorpon

/s/ AuaN C, CHRISTIAN

P.O. Box 1988

Mobile, Alabama 36633

(205) 432-7682

Attorneys for Respondent,

Merchants National Bank

of Mobile

April 1986