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UNITED STATES v. GILBERT

September 20, 1979

UNITED STATES OF AMERICA, Plaintiff, against EDWARD M. GILBERT, et al., Defendants.


The opinion of the court was delivered by: COOPER

IRVING BEN COOPER, D.J.

The dispute underlying this case originated in 1962, when Edward M. Gilbert ("Gilbert"), then President of E. L. Bruce Co. ("Bruce") made an unauthorized withdrawal of approximately $2 million from the coffers of Bruce, to cover his own financial transactions. *fn1"

 Subsequently, Gilbert made a full disclosure of these withdrawals to the Board of Directors of Bruce, and on May 28, 1962 (and again on November 5, 1962), Gilbert executed Assignments to Bruce of all his real and personal property (as security for the payment of "loans and advances and/or extensions of credit"), amounting to well in excess of the approximately $2 million owed. *fn2"

 Bruce failed to file the May 28th Assignment with the County Clerk's Office, and on June 22, 1962, the United States filed its tax liens against the assets of Edward and Rhoda Gilbert for the tax years of 1958, 1959, 1960 and 1962, alleging deficiencies of approximately $3.3 million dollars. *fn3"

 The filing of the IRS liens prevented Bruce from realizing on the assigned assets until the issue of priority between the liens and the Assignments was adjudicated or settled. Heller Affidavit, filed November 20, 1978, p.3.

 This action was instituted in 1964 by the United States against Gilbert, Bruce and other creditors of Gilbert, pursuant to 26 U.S.C. §§ 7401 and 7403. The United States sought judgment against Gilbert for the amount of tax claimed and sought to establish that the Government's lien was prior in right to the assignment of Gilbert's assets to Bruce and to the claims of Gilbert's other creditors. *fn4"

 In 1970, the litigation concerning priority was resolved in a series of Settlement Agreements between Gilbert, the United States and the various other creditors. Certain of the assigned assets were used to pay other creditors; and a Settlement Agreement (the "1970 Agreement") between the United States and Bruce divided up the remainder. *fn5"

 Bruce then moved for partial summary judgment, which relief was granted on July 13, 1970. The partial summary judgment Order, entered by Judge Ryan, compelled the turnover of certain of Gilbert's assets to Bruce and others, subject only to the 1970 Agreement and the right of Gilbert to have Bruce apply the proceeds received from the 1970 Agreement and the summary judgment distribution toward Gilbert's indebtedness to Bruce.

 Subsequently, the issue of Gilbert's tax liability was transferred to the Tax Court. By order dated June 24, 1975, we approved a Stipulation dismissing the Government's actions as to all parties except the United States and Bruce, and transferring this action to the suspense calendar of this court. *fn6"

 The Tax Court held Gilbert liable for the tax on the 1962 withdrawals, by a decision entered April 1, 1976. Gilbert v. Commissioner, 35 TCM 451 [CCH Dec. 33,745(M)](1976). The Second Circuit Court of Appeals reversed and remanded, in a decision dated April 5, 1977. Gilbert v. Commissioner of Internal Revenue, 552 F.2d 478 (2d Cir. 1977). That court held that:

 [Where] a taxpayer withdraws funds from a corporation which he fully intends to repay and which he expects with reasonablecertainty he will be able to repay, where he believes that his withdrawals will be approved by the corporation, and where he makes a prompt assignment of assets sufficient to secure the amount owed, he does not realize income on the withdrawals....

 Id., p. 481

 As for the Assignments, the Court stated that: "Bruce's failure to make an appropriate filing to protect itself against the claims of third parties, such as the IRS, did not relieve Gilbert of the binding effect of the assignment." Id., p. 481. The thrust of the Court's ruling was that although Gilbert had made an unlawful withdrawal, the transaction was "in the nature of a loan."

 The Court of Appeals then remanded the case to the Tax Court for a determination of the amount of liability outstanding in light of the Court's opinion. The Tax Court determined that there had been an overpayment for 1962, based on the proceeds realized by the United States from the sale of Gilbert's property. On October 25, 1978, Gilbert reached a settlement with the IRS by which it was agreed that the Government was then holding $67,000 plus interest plus 700 shares of West Indies and Caribbean Ltd., all in excess of Gilbert's tax liability.

 In accordance with the 1970 Agreement, the IRS gave Bruce 30 days notice of its intent to repay the excess to Gilbert, whereupon Bruce moved by order to show cause for immediate prevention of the transfer of assets to Gilbert by the Government, and for a temporary stay pending the Court's determination of Bruce's entitlement to the excess; which relief this Court granted. *fn7"

 Bruce, claiming that Gilbert still owes $1.5 million plus interest on the original $1.95 million withdrawal, has moved for summary judgment under Rule 56, Federal Rules of Civil Procedure, for an order directing payment to Bruce of the $67,000 plus interest and the 700 shares of stock. Gilbert has crossmoved for dismissal for lack of jurisdiction, Rule 12(b)(1), F.R.Civ.P.; or alternatively, for summary judgment directing payment of the excess fund over to Gilbert.

 The Government takes the position that it is obligated under the tax laws to make the refund to "the person who made the overpayment," 26 U.S.C. § 6402(a), but takes no position on the entitlements of Bruce or Gilbert, and maintains that the refund must be issued to the taxpayer; however, the Government would not oppose a protective order to guarantee Bruce's claim, should this Court decide in Bruce's favor.

 The threshold issue facing this Court is whether it retains jurisdiction over the issue of entitlement as between Bruce and Gilbert, in light of the final adjudication of the Government's claim.

 Once jurisdiction is found, there is the matter of the interpretation, as a matter of law, of the various Agreements and Orders which, it is claimed, settle the rights and entitlements of the parties before us.

 Finally, there is the question under 26 U.S.C.§ 6402, of repayment and the issuance of a protective order, if necessary.

 JURISDICTION OF THE COURT

 This action was commenced in 1964 by the United States to enforce United States tax liens for the years 1958, 1959, 1960 and 1962 against Gilbert, and to establish the priority of the Government's lien over the claims of other creditors, including Bruce.

 26 U.S.C. § 7403(a) (Internal Revenue Code) permits the United States to bring a civil action in the District Court to enforce its lien or "to subject any property, of whatever nature, of the delinquent, or in which he has any right, title or interest, to the payment of such tax or liability."

 Section 7403(b) says that: "All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto."

 Section 7403(c) further provides: "The court shall... proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property...."

 Thus, subject-matter jurisdiction in this case derived originally from the fact that this suit was commenced by the United States, pursuant to 28 U.S.C. § 1345, and that it arose under the internal revenue laws, 26 U.S.C. § 7402(f).

 Gilbert argues that all rights and interests of the United States have been fully adjudicated and that the claim of a state creditor does not warrant our attention and must be dismissed for lack of jurisdiction.

 We disagree with the view that this Court lacks such jurisdiction, and conclude that the Court retains its original jurisdiction over the matter under 26 U.S.C. § 7403(c) and 28 U.S.C. § 1340; that the Court has the ancillary power to determine the cross-claim between Bruce and Gilbert, co-defendants in the original suit; we conclude also that the Court is compelled to interpret, as a matter of law, its partial summary judgment Order issued in 1970 and the 1970 Settlement Agreement approved by this Court.Finally, we hold that considerations of fairness to the litigants and of judicial economy require us to retain jurisdiction here and finally dispose of the assets within the control of the Court.

 Original Jurisdiction

 Section 7403(c) of the Internal Revenue Code provides that: "The court shall... proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property...."

 The IRS lien reaches all property in which the taxpayer has an interest, subject to certain exemptions, and the United States has the power of sale over property in which persons other than the taxpayer have an interest. Chommie, Federal Income Taxation § 305; U.S. v. Mosolowitz, 269 F.Supp. 12 (D. Conn. 1967).

 As stated by the court in U.S. v. Overman, 424 F.2d 1142, 1146 (9th Cir. 1970):

 We emphasize that section 7403 is cast in mandatory terms only in respect of the establishment of the Government's lien, the joinder of all persons interested in the property involved, and the determination of their respective interests. The remainder of the section confers broad discretionary powers upon the court in shaping a decree designed to work substantial justice among all interested persons. "Congress [in enacting § 7403] intended that the Court function with the full traditional flexibility of the Chancellor." (citations omitted).

 The Government's right to share in the proceeds of sale does not exceed the taxpayer's interest in the property subjected to the lien.

 Gilbert did not deny this Court's power, under 26 U.S.C. § 7403(c), to authorize the previous Settlement Agreements and to issue the partial summary judgment Order which finally determined the rights of certain parties to this action as originally filed. To say that we have no power to decide the final disposition of the very assets in contention between the parties all this time would be to leave the job half-finished and would overlook the mandate of § 7403(c) and the intent and purpose of the prior dispositions by this Court.

 Ancillary Jurisdiction

 Gilbert's argument against ancillary jurisdiction over the dispute between Gilbert and Bruce relies heavily on the case and doctrine of Pettyjohn v. Pettyjohn, 192 F.2d 322 (8th Cir. 1951). In Pettyjohn, the Eighth Circuit Court of Appeals prohibited the District Court from retaining jurisdiction over cross-claims between co-defendants, in an action brought by the United States under 26 U.S.C. § 3678, the predecessor of 26 U.S.C. § 7403. Each co-defendant claimed title to the properties against which the United States sought to impose its lien. The District Court had consolidated the cases finding that they "[involved] the same parties and in large part identical facts, claims and issues of law." Id., at 324. The District Court entered a decree finally determining the rights of the United States and then proceeded to trial on the cross-claims.

 The Court of Appeals held that the court below had exceeded the scope of the jurisdiction granted by § 3678(c) [ § 7403(c)], finding that there was no diversity between the remaining parties, and that the United States had made no claim to the disputed property. The Court further held: "The controversies between the cross-claimants... were not thereafter within the ancillary or auxiliary jurisdiction of the District Court as incidental or necessary to its jurisdiction and complete determination of the main action."

 Finally, the Pettyjohn court noted: "While it is said that a Federal Court which has taken possession of property acquires exclusive jurisdiction of claims against the property in its possession, that jurisdiction is exclusive only so far as ...


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