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United States v. Balanovski

decided: August 14, 1956.


Author: Clark

Before CLARK, Chief Judge, and HINCKS and WATERMAN, Circuit Judges.

CLARK, Chief Judge.

This is an appeal by defendants and a cross-appeal by the United States of America from a decision of Judge Palmieri, sitting without a jury, adjudging defendant-taxpayers liable for almost $1,000,000 in income taxes and interest for the year 1947, and directing two New York banks to pay over funds belonging to the defendant partnership in part payment of the judgment. D.C.S.D.N.Y., 131 F.Supp. 898. In our view the recovery granted was insufficient, and we are therefore reversing on the appeal of the United States only.

Defendants Balanovski and Horenstein were copartners in the Argentine partnership, Compania Argentina de Intercambio Comercial (CADIC), Balanovski having an 80 per cent interest and Horenstein, a 20 per cent interest. Balanovski, an Argentinian citizen, came to the United States on or about December 20, 1946, and remained in this country for approximately ten months, except for an absence of a few weeks in the spring of 1947 when he returned to Argentina. His purpose in coming here was the transaction of partnership business; and while here, he made extensive purchases and sales of trucks and other equipment resulting in a profit to the partnership of some $7,763,702.20.

His usual mode of operation in the United States was to contact American suppliers and obtain offers for the sale of equipment. He then communicated the offers to his father-in-law, Horenstein, in Argentina. Horenstein, in turn, submitted them at a markup to an agency of the Argentine Government, Instituto Argentino de Promocion del Intercambio (IAPI), which was interested in purchasing such equipment. If IAPI accepted an offer, Horenstein would notify Balanovski and the latter would accept the corresponding original offer of the American supplier. In the meantime IAPI would cause a letter of credit in favor of Balanovski to be opened with a New York bank. Acting under the terms of the letter of credit Balanovski would assign a portion of it, equal to CADIC's purchase price, to the United States supplier. The supplier could then draw on the New York bank against the letter of credit by sight draft for 100 per cent invoice value accompanied by (1) a commercial invoice billing Balanovski, (2) an inspection certificate, (3) a nonnegotiable warehouse or dock receipt issued in the name of the New York bank for the account of IAPI's Argentine agent, and (4) an insurance policy covering all risks to the merchandise up to delivery F.O.B. New York City. Then, if the purchase was one on which CADIC was to receive a so-called quantity discount or commission, the supplier would pay Balanovski the amount of the discount. These discounts, paid after delivery of the goods and full payment to the suppliers, amounted to $858,595.90, constituting funds which were delivered in the United States.

After the supplier had received payment, Balanovski would draw on the New York bank for the unassigned portion of the letter of credit, less 1 per cent of the face amount, by submitting a sight draft accompanied by (1) a commercial invoice billing IAPI, (2) an undertaking to ship before a certain date, and (3) an insurance policy covering all risks to the merchandise up to delivery F.A.S. United States Sea Port. The bank would then deliver the non-negotiable warehouse receipt that it had received from the supplier to Balanovski on trust receipt and his undertaking to deliver a full set of shipping documents, including a clean on board bill of lading issued to the order of IAPI's Argentine agent, with instructions to notify IAPI. It would also notify the warehouse that Balanovski was authorized to withdraw the merchandise. Upon delivery of these shipping documents to the New York bank Balanovski would receive the remaining 1 per cent due under the terms of the letter of credit. Although Balanovski arranged for shipping the goods to Argentina, IAPI paid shipping expenses and made its own arrangement there for marine insurance. The New York bank would forward the bill of lading, Balanovski's invoice billing IAPI, and the other documents required by the letter of credit (not including the supplier's invoice billing Balanovski) to IAPI's agent in Argentina.

Twenty-four transactions following substantially this pattern took place during 1947. Other transactions were also effected which conformed to a substantially similar pattern, except that CADIC engaged the services of others to facilitate the acquisition of goods and their shipment to Argentina. And other offers were sent to Argentina, for which no letters of credit were opened. Several letters of credit were opened which remained either in whole or in part unused. In every instance of a completed transaction Balanovski was paid American money in New York, and in every instance he deposited it in his own name with New York banks. Balanovski never ordered material from a supplier for which he did not have an order and letter of credit from IAPI.

Balanovski's activities on behalf of CADIC in the United States were numerous and varied and required the exercise of initiative, judgment, and executive responsibility. They far transcended the routine or merely clerical. Thus he conferred and bargained with American bankers. He inspected goods and made trips out of New York State in order to buy and inspect the equipment in which he was trading. He made sure the goods were placed in warehouses and aboard ship. He tried to insure that CADIC would not repeat the errors in supplying inferior equipment that had been made by some of its competitors. And while here he attempted "to develop" "other business" for CADIC.

Throughout his stay in the United States Balanovski employed a Miss Alice Devine as a secretary. She used, and he used, the Hotel New Weston in New York City as an office. His address on the documents involved in the transactions was given as the Hotel New Weston. His supplier contacted him there, and that was the place where his letters were typed and his business appointments arranged and kept. Later Miss Devine opened an office on Rector Street in New York City, which he also used. When he returned to Argentina for a brief time in 1947 he left a power of attorney with Miss Devine. This gave her wide latitude in arranging for shipment of goods and in signing his name to all sorts of documents, including checks. When he left for Argentina again at the end of his 10-month stay, he left with Miss Devine the same power of attorney,*fn1 which she used throughout the balance of 1947 to arrange for and complete the shipment of goods and bank the profits.

When Balanovski left the United States in October 1947 he filed a departing alien income tax return, on which he reported no income. In March 1948 the Commissioner of Internal Revenue assessed $2,122,393.91 as taxes due on income for the period during which Balanovski was in the United States. In May 1953 the Commissioner made a jeopardy assessment against Balanovski in the amount of $3,954,422.41 and gave him notice of it. At the same time a similar jeopardy assessment, followed by a timely notice of deficiency, was made against Horenstein in the amount of $1,672,209.90, representing his alleged share of CADIC's profits on the above-described sales of United States goods.

The government brought the present action to foreclose a federal tax lien on $511,655.58 and $42,529.49 - amounts of partnership funds held in two United States banks - and to obtain personal judgments against Balanovski and Horenstein in the sums of $6,722,625.54 (of which $5,050,415.64 is now sought on appeal) and $1,672,209.90 respectively.Balanovski and Horenstein were served with process by mail in Argentina pursuant to 28 U.S.C. § 1655; and Miss Devine, the purported agent of Balanovski, was personally served in New York. Defendants then appeared by their attorneys and proceeded to defend the action.

Jurisdiction of the District Court

Defendants challenge the court's jurisdiction (1) quasi-in-rem, because the assets levied upon were the property of the partnership, rather than of the individual taxpayers, and (2) in personam, because the defendants were not personally served with process and they contend that Miss Devine was not Balanovski's agent "authorized by appointment or by law to receive service of process" under F.R.C.P., rule 4(d) (1).

Quasi-in-rem jurisdiction in this case is based on enforcement of a tax lien under §§ 3670 and 3678(a) of the Internal Revenue Code of 1939. These sections permit an action quasi-in-rem against named defendants to recover any "property owned by the delinquent, or in which he has any right, title, or interest." This grant of jurisdiction is sufficient to reach a partner's interest in partnership property. See Kamen Soap Products Co. v. C. I. R., 2 Cir., 230 F.2d 565; N.Y.Partnership Law, McK. Consol.Laws, c. 39, §§ 50-52; United States v. Dallas Nat. Bank, 5 Cir., 152 F.2d 582; United States v. Dickerson, D.C.E.D.Mo., 101 F.Supp. 262. Cf. United States v. Kensington Shipyard & Drydock Corp., 3 Cir., 169 F.2d 9, 12. Whether the government can gain execution on any portion of the partnership assets is not a question of jurisdiction, but one of ...

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