The opinion of the court was delivered by: ELFVIN
ELFVIN, District Judge: Plaintiff seeks to reduce to judgment the unpaid balance of a one-hundred percent tax penalty assessed against the defendant taxpayer. The matter is currently pending before me on two separate motions to dismiss. The first, filed January 13, 1982, is based on defendant's contention that the Complaint is barred by the appropriate statute of limitations. The second, filed February 1, 1982, seeks to dismiss the Complaint for lack of personal jurisdiction and insufficiency of service of process and failure to state a claim upon which relief may be granted, as well as untimeliness. A motion by defendant to set aside a default entered against him by the Clerk is also implicit in the latter. For the reasons set out below, I have concluded that the default must be vacated and that the Complaint must be dismissed because it is time-barred.
The penalty assessment in dispute was made against the taxpayer July 8, 1974 pursuant to section 6672 of the Internal Revenue Code ("IRC") based on his failure, as a responsible person, to collect and pay over income tax withholding and Federal Insurance Contributions Act taxes for Elgin Concrete, Inc. for the third and fourth quarters of 1972.
The amount of the assessment was $24,681.22, of which $23,605.86 remains unpaid. Defendant filed a petition in bankruptcy September 24, 1973. The first meeting of creditors was held October 29, 1973, and defendant was discharged from his debts January 17, 1974. The bankruptcy estate was formally closed October 24, 1975.
Defendant had previously field an action, CV-81-193E, to enjoin plaintiff's collection of the penalty assessment on the grounds that such collection was barred by the statute of limitations. However, in a Memorandum and Order entered June 12, 1981, I dismissed that action for lack of jurisdiction under section 7421 of the IRC. See, Tomasello v. United States, 81-2 USTC P9510.
Plaintiff commenced this action by filing its Complaint November 18, 1981. Service of the Summons and Complaint was effected November 30, 1981 by delivery of copies thereof to defendant's wife. Inasmuch as defendant failed to answer or otherwise appear in the action within the required time period, the Clerk entered a default against him January 13, 1982.
Turning initially to defendant's motion to vacate the default, I find that defendant has demonstrated good cause for such relief under Fed. R. Civ. P. rule 55(c). Plaintiff will not be unduly prejudiced by a setting aside of the default and (as discussed more fully below) defendant has a meritorious defense to the action. See, Meehan v. Snow, 652 F.2d 274, 277 (2d Cir. 1981) (per curiam ). Therefore, defendant's motion to set aside the default entered by the Clerk January 13, 1982 is hereby ordered granted.
I must also deal with the preliminary matter of service of process before addressing the statute of limitations question. Defendant challenges the sufficiency of service accomplished by delivery of copies of the Summons and Complaint to his wife on the grounds that he and his wife were and are separated and that the address where service was effected was not and is not his usual place of adode. Then, he contends that service on his wife was not proper under Fed. R. Civ. P. rule 4(d) and that the Complaint should be dismissed under Fed. R. Civ. P. rule 12(b)(4) and 12(b)(5). Defendant raised defenses based on lack of personal jurisdiction, insufficiency of process and insufficiency of service of process in his first motion to dismiss. His failure to assert such defenses in his first motion to dismiss constitutes a waiver thereof. Fed. R. Civ. P. rule 12(h).
The statute of limitations question raised by defendant's motions concerns the effect of the bankruptcy proceedings on the six-year statute of limitations for the collection of tax assessments established by section 6502 of the IRC.
Although the Complaint in this action was filed more than seven years after the penalty assessment was made, plaintiff relies on two separate tolling provisions, section 6503(b) of the IRC and section 11(f) of the Bankruptcy Act of 1898 (former 11 U.S.C. § 29(f)), to support its contention that the Complaint is timely.
Section 6503(b) of the IRC provides:
"The period of limitations or collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States or of any State or of the District of Columbia, and for 6 months thereafter."
Judicial interpretation of section 6503(b) has produced a substantial split of authority concerning the duration of the suspension of the limitations period set by section 6502 which arises when the taxpayer files a petition in bankruptcy.
In United States v. Malkin, 317 F. Supp. 612 (E.D.N.Y. 1970), the court held that the limitations period under section 6502 is tolled until the bankruptcy case is formally closed. The court reasoned that the assets of the taxpayer are in the control or custody of the bankruptcy within the meaning of section 6503(b) from the time the petition is filed until the referee signs an order closing the estate. United States v. Malkin, supra, at 616, n. 9. If Malkin was to be applied in this case, the statute of limitations under section 6502 would not have begun to run until six months after the bankruptcy estate was formally closed, inasmuch as the assessment was made during the pendency of the bankruptcy proceedings. Thus, the limitations period would expire six years and six months after October 24, 1975, or April 24, 1982. Under Malkin, the institution of this action would therefore be timely.
However, Malkin does not appear to have been followed by any other court which has interpreted section 6503(b).In United States v. Verlinsky, 459 F.2d 1085 (5th Cir. 1972), a case arising under identical circumstances as Malkin, the United States Court of Appeals for the Fifth Circuit expressly rejected Malkin and held that the suspension of the limitations period under section 6503(b) operates until six months after the taxpayer's debts are discharged, not after the bankruptcy estate is formally closed. The court reasoned that, once the taxpayer's debts were discharged, the taxpayer lost all interest in assets in the custody of the bankruptcy court. The court also noted that the purpose of section 6503(b) is to toll the limitations period during the time when the government would be unable to collect the tax assessment because the taxpayer did not have control or custody of his property. United States v. Verlinsky, supra, at 1087. Because the taxpayer was subject to suit, levy and execution on debts which were not discharged as of the date of the discharge, suspending the statute of limitations until the bankruptcy estate was formally closed would unduly "delay the hour when [the taxpayer] could finally divorce himself from his former holdings and debts." Id., at 1088. Verlinsky has been followed by at least one other court in this circuit. U.S. v. Levasseur, 80-1 USTC P9349 (D. Vt. 1980). If Verlinsky were to be applied in this case, the Complaint would be untimely, inasmuch as the limitations period would have been tolled until six months after the date of discharge -- i.e., until July 17, 1974. Thus, under Verlinsky, the statute of limitations would have expired July 17, 1980.
The United States Court of Appeals for the Ninth Circuit has also refused to follow Malkin's holding, but has construed section 6503(b) differently than did the Fifth Circuit in Verlinsky. In McAuley v. United States, 525 F.2d 1108 (9th Cir. 1975), the court held that section 6503(b) tolls the limitations period set by section 6502 for one year after the first meeting of creditors relating to the bankruptcy proceedings. The court in McAuley agreed with Verlinsky that Malkin would toll the statute of limitations "for unjustifiably long periods" because the government would not be prevented from collecting the assessment during ...