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HOME INDEM. CO. v. BRENNAN

January 11, 1977

THE HOME INDEMNITY COMPANY, on behalf of itself and on behalf of all other persons entitled to share in certain funds received by the United States of America, Internal Revenue Service, from Marvac Industries Corporation in connection with a public improvement known as the BOCES #3 Special Education School located at Carman Road, Dix Hills, New York, Plaintiff,
v.
CHARLES H. BRENNAN, District Director, Brooklyn, INTERNAL REVENUE SERVICE, and THE UNITED STATES OF AMERICA, DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, Defendants.



The opinion of the court was delivered by: DUFFY

KEVIN THOMAS DUFFY, D.J.

Plaintiff seeks the recovery of monies claimed to have been wrongfully accepted by defendants, the United States, Department of the Treasury, Internal Revenue Service ("IRS") and Charles H. Brennan ("Brennan"), District Director thereof, in satisfaction of certain tax liabilities of Marvac Industries Corporation ("Marvac"), on whose behalf plaintiff acted as surety. Defendants have moved, pursuant to Rule 12(b)(1), F.R.Civ.P., to dismiss the amended complaint for lack of subject matter jurisdiction, or in the alternative, for summary judgment pursuant to Rule 56(b), F.R.Civ.P. *fn1"

 On or about May 8, 1972, Marvac contracted with the Dormitory Authority of the State of New York ("the State") to construct a school to be used by the Board of Cooperative Educational Services No. 3, located on Long Island ("the BOCES #3 Project"). At the same time, plaintiff, as surety on behalf of Marvac as obligor, issued performance and payment bonds to the State, as obligee, in connection with the BOCES #3 Project. On March 22, 1973, while the project was under way, the State made a progress payment by check of $104,562 to Marvac, which check Marvac endorsed over and remitted to the IRS. The IRS apparently accepted the check in payment of payroll taxes incurred by Marvac on the project. The check was cashed and proceeds paid to the IRS. Marvac subsequently defaulted on the construction contract causing plaintiff, pursuant to its surety obligation, to pay out $1,864,000 in completing the BOCES #3 Project and discharging the claims of subcontractors, laborers and materialmen.

 It is plaintiff's contention that, under the New York Lien Law Article 3A, *fn2" / the funds represented by the State check constituted assets of a trust to be held and applied by Marvac for the payment, inter alia, of subcontractors, laborers, materialmen and payroll taxes on the BOCES #3 Project; that some or all of the payroll taxes paid by this check were not incurred in connection with the BOCES #3 Project; and that defendants were aware of this fact. Plaintiff asserts that Marvac's delivery of the State payment to defendants, in violation of the New York Lien Law, thus constituted a diversion of the trust funds; and, by refusing to honor the claim of trust and return the proceeds on demand, defendants not only converted the funds but also participated in the breach of such trust. As subrogee of the rights of the BOCES #3 subcontractors, laborers and materialmen whose claims it discharged, plaintiff maintains that it is entitled to recover such trust assets in the hand of Brennan and the IRS.

 Under the doctrine of sovereign immunity, the United States may be sued only with its consent. Plaintiff contends that the expression of consent contained in 28 U.S.C. § 1346(a)(1), or alternatively, 28 U.S.C. § 1346(b), permit the instant action against the IRS. Defendants posit, however, that plaintiff is a non-taxpayer seeking to recover for a tort committed in the collection of taxes and, as such, is without the scope of applicable statutory consent.

 Essentially, 28 U.S.C. § 1346(a)(1) permits suit against the United States in the district court to recover taxes which have been allegedly wrongfully collected or assessed. *fn3" / The prevailing view is that § 1346(a)(1) authorizes suits by taxpayers only, so that even one with an interest in property levied upon to satisfy another's tax liability is not a taxpayer within the meaning of this section. Phillips v. United States, 346 F.2d 999 (2d Cir. 1965); First National Bank of Emlenton, Pa. v. United States, 265 F.2d 297 (3rd Cir. 1959); Mill Factors Corp. v. United States, 391 F. Supp. 387 (S.D.N.Y. 1975); Ceravolo & Comis, Inc. v. United States, 266 F. Supp. 215 (N.D.N.Y. 1967). By claiming that assets of the trust of which plaintiff, as subrogee, is the beneficiary were improperly diverted, plaintiff seeks to characterize itself as an "involuntary taxpayer" so as to fit within the broad minority reading of the term "taxpayer" recognized in Adams v. United States, 380 F. Supp. 1033 (D.Mont. 1974) and McMahon v. United States, 172 F. Supp. 490 (D.R.I. 1959).

 Several factors cause me to reject this interpretation. Mill Factors Corp. v. United States, supra, conceded by plaintiff to be virtually indistinguishable from the instant case, expressly rejected both Adams and McMahon, 389 F. Supp. at 389 n.2; and I am not aware of any Court of Appeals case in any circuit which has approved or adopted that minority view. Moreover, a waiver of sovereign immunity is to be strictly construed. Phillips v. United States, 346 F. Supp. at 1000; Hammond-Knowlton v. United States, 121 F.2d 192 (2d Cir. 1941).Given the tenuous connection between plaintiff as subrogee and the monies collected from Marvac as tax revenues, I find this an inappropriate case to do violence to that construction. Accordingly, § 1346(a)(1) is an insufficient jurisdictional predicate.

 Turning to plaintiff's alternative basis, I reach the same result. The Federal Tort Claims Act, 28 U.S.C. § 1346(b) is a waiver of sovereign immunity in certain tort actions against the United States. *fn4" / This waiver, however, is circumscribed by exceptions contained in 28 U.S.C. § 2680. One such exception is 28 U.S.C. § 2680(c), which precludes the applicability of § 1346(b) to "any claim arising in respect of the assessment or collection of any tax...." Plaintiff submits that since it is a non-taxpayer, this exception cannot be a bar to the instant suit against the IRS. I am not aware of any such limitation on the plain language of the statute. *fn5" / See United States v. Worley, 213 F.2d 509 (6th Cir. 1954); Broadway Open Air Theatre v. United States, 208 F.2d 257 (4th Cir. 1953); Pargament v. Fitzgerald, 272 F. Supp. 553 (S.D.N.Y. 1967), aff'd 391 F.2d 934 (2d Cir. 1968).

 The gravamen of plaintiff's complaint is that it suffered a loss of property as a result of the wrongful act of the IRS in accepting, in payment of unrelated taxes, a check representing trust assets. *fn6" / As such, it is clearly a "claim arising in respect of the... collection" of taxes, since without such collection, no claim would exist.

 Since I have determined that § 2680(c) renders § 1346(b) unavailable as a basis for jurisdiction over the IRS, it is unnecessary to reach defendants' other contentions relating to the applicability of the discretionary function exception of 28 U.S.C. § 2680(a), the interference with contract rights exclusion of 28 U.S.C. § 2680(b), and the administrative tort claim filing requirement of 28 U.S.C. § 2675.

 Plaintiff jurisdictionally bases its claim against Brennan on 28 U.S.C. § 1340. This section grants to district courts "original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue..."; it does not, however, constitute an independent waiver of sovereign immunity where applicable. DeMasters v. Arend, 313 F.2d 79, 84 (9th Cir. 1963); Ceravolo & Comis, Inc. v. United States, 266 F. Supp. at 218.

 The Court of Appeals has recently recognized that federal officials sued for actions taken in their official capacity enjoy a qualified immunity in the absence of a lack of good faith and reasonable grounds for such actions. Black et al. v. United States et al., 534 F.2d 524 (2d Cir. 1976); Economou v. United States Dept. of Agriculture, et al., 535 F.2d 688 (2d Cir. 1976). This recognition stemmed from the Supreme Court's expansion of liability of this class of defendants in suits brought under 42 U.S.C. § 1983. Imbler v. Pachtman, 424 U.S. 409, 47 L. Ed. 2d 128, 96 S. Ct. 984 (1976); Wood v. Strickland, 420 U.S. 308, 43 L. Ed. 2d 214, 95 S. Ct. 992 (1976); Scheuer v. Rhodes, 416 U.S. 232, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Pierson v. Ray, 386 U.S. 547, 18 L. Ed. 2d 288, 87 S. Ct. 1213 (1967).

 Plaintiff argues that no immunity attaches in this case since Brennan acted outside the scope of his official authority by accepting trust funds, with notice of their nature, for a purpose for which they could not be legally used; that is, in payment of taxes unrelated to the BOCES #3 Project. In light of the decision in Black et al. v. United States et al., supra, I find this assertion untenable. *fn7"

 Black was a class action brought against the United States, the Secretary of the Treasury, the Commissioner and District Director Brennan of the IRS and other unknown IRS agents by the owner of an income tax preparation service and his taxpaying clients. The suit arose out of a claim that the defendants were conducting a tax investigation in violation of the plaintiffs' constitutional and statutory rights. The plaintiffs contended that no immunity attached to the actions of the named officials since the allegations of numerous violations sufficed to place those defendants outside of the scope of their authority. The district court summarily concluded, however, that the defendants were being sued solely in their official capacities and, as ...


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