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Adler v. Nicholas

Rehearing Denied March 29 1948.: March 5, 1948.

ADLER ET AL.
v.
NICHOLAS, COLLECTOR OF INTERNAL REVENUE, ET AL.



Huxman

Before PHILLIPS, BRATTON, and HUXMAN, Circuit Judges.

HUXMAN, Circuit Judge.

Appellants, Jacques Adler and May E. Adler, husband and wife, were engaged as partners in the jewelry business after January 1, 1944, in Colorado Springs, Colorado, and in Denver, Colorado. Prior thereto, Jacques Adler had been engaged individually in such business. He owned 60% and his wife owned 40% of the partnership business. In 1946, apparently it became necessary for the partnership to sell its partnership business in Colorado Springs, Colorado, to pay its partnership debts. It accordingly sold its Colorado Springs jewelry business to Martin Jewelers, Incorporated, hereinafter called Martins, for $78,289.75. Fifty Thousand Dollars was paid in cash and a note in the sum of $28,289.75, due in thirty days, was given for the balance. The cash was deposited in the Exchange National Bank of Colorado Springs, and checks were drawn against the account for the payment of the partnership debts. The $50,000 so deposited was insufficient to pay the outstanding claims against the partnership. The Adlers accordingly borrowed $9,000 from the First National Bank for the purpose of depositing it in the account in the Exchange National Bank to provide sufficient funds to pay all of the partnership claims. After the deposit of $50,000 in the Exchange National Bank and after the $9,000 had been borrowed, but before it could be deposited in the account in the Exchange National Bank, the Collector of Internal Revenue for Colorado levied a jeopardy assessment against the partnership for unpaid excise taxes in the amount of $19,129.10; a jeopardy assessment against Jacques Adler, individually, for unpaid excise taxes in the sum of $10,424.02; a jeopardy assessment against Jacques Adler, individually, for income taxes in the sum of $55,389.43; and a jeopardy assessment against May E. Adler for income taxes in the sum of $7,196.56. A warrant of distraint was served on the Exchange National Bank, the First National Bank, and upon Martins. Some of the checks drawn by the partnership on the account in the Exchange National Bank for payment of partnership debts were outstanding at the time the warrant of distraint was served. To provide for the payment of these outstanding checks, the Adlers arranged with Augusta B. Evans to place sufficient of her individual funds with the Exchange National Bank to be used in the payment of these outstanding checks. Under this arrangement, Mrs. Evans deposited $38,000 with the Exchange National Bank. The Adlers gave Mrs. Evans separate orders on the Exchange National Bank, on the First National Bank, and on Martins for the balance of any funds due the partnership, subject to the lien of the Collector.

On August 30, the Collector issued a second notice of levy of jeopardy assessment and served it on the banks and on Martins. On September 4, 1946, the Adlers brought this action against the Collector, the Director of Revenue for Colorado, the First National Bank, the Exchange National Bank, Martins, and Augusta B. Evans. The relief sought was that the Exchange National Bank pay into the registry of the court the sum of $31,366.36, or so much thereof as was in its hands; that the First National Bank pay into the court the sum of $9,126.11, or so much thereof as was in its hands; that Martins pay into the court the sum of $28,289.75, or so much thereof as was due and owing on its promissory note; that Martins also pay into the court any sums collected on accounts receivable of the partnership; and that the Collector pay into the court all sums received by him from the debtors of the partnership or from the plaintiffs individually.

The remedial relief which plaintiffs sought was that the $9,000 which plaintiffs had borrowed from the First National Bank be paid over to that bank as a credit on their note for that amount, and that the collateral given the bank to secure such note be returned to May E. Adler, subject only to the payment of the note, as her sole property. Of the funds which plaintiffs sought to have placed in the registry of the court, they asked the following accounting:

(a) That there be held in the registry of the court the sum of $20,555.01, until the tax liability of the partnership, if any, due the Federal Government and the State of Colorado was determined;

(b) That out of the funds remaining in the registry of the court, Mrs. Evans be paid such sum of money as the court may find she had paid out because of checks issued by the plaintiffs as copartners;

(c) That the remaining portion of the funds be segregated at 40 per cent to May E. Adler and 60 per cent to Jacques Adler, and that such sums be retained in the registry of the court for the payment of income taxes found to be due against the plaintiffs;

(d) That the court direct that such sums of money as it determined the partnership, or either or both of the plaintiffs, may owe as sales tax to the State of Colorado, be deducted by way of marshaling all assets from the $28,289.75 which would be paid into the court by virtue of the promissory note executed to the plaintiffs by Martins;

(e) That after the above payments had been made, the balance to be paid over to the plaintiffs according to their respective ownership in such money.

The Exchange National Bank answered that it had paid the sum of $31,366.36 in its possession to the Collector, in response to the warrant of distraint. The First National Bank answered that it had paid the sum of $9,126.11 in its possession to the Collector, in response to the jeopardy assessment. Martins answered stating that it had paid into court $28,289.75, the amount due on its note and accounts receivable collected by it, and asked for an accounting of all of its dealings with the partnership and that the proceeds be used first to pay any sales tax due the State of Colorado. Mrs. Evans answered asking that the funds in the registry of the court and in the hands of the Collector be first applied to the payment of the partnership obligations before they be resorted to for the payment of individual obligations of Jacques Adler and May E. Adler, and that she be paid the sum of $37,846.47 from the moneys in the hands of the Collector. The Director of Revenue for the State of Colorado answered that by virtue of its laws, there was due the State of Colorado for sales taxes the sum of $1,638.43.

The Collector did not pay the amount in his possession into court as directed, but filed his response setting up his right to such funds. He also filed a motion to dismiss the complaint as to him. The trial court heard the motion and entered an order dismissing the complaint as to the Collector. Thereafter, an amended complaint was filed setting out substantially the same facts as were contained in the original complaint and praying that the court decree that the partnership funds in the hands of the Collector and in the registry of the court totaling $70,013.67, be first applied to the payment of partnership obligations; that no portion of the funds of either partner be subjected to the tax liability of the other partner; that the sales taxes due the State of Colorado be paid; that the Collector be ordered to pay to Mrs. Evans $37,846.47; that the Collector be required to mark the note of Martins paid; and that the remainder be paid to the Collector to be disposed of by him as he may be authorized.

Martins and Mrs. Evans filed amended answers and cross-petitions to the amended complaint. The Collector filed a motion to dismiss the amended complaint. The trial court entered an order dismissing the action holding that the court was without jurisdiction over the funds in the hands of the Collector, and that the Government's jeopardy assessment was superior to all claims and was a lien upon all funds until the amounts due the Government were adjusted and settled. This appeal followed.

The Collector's position is that this is an action to enjoin the collection of a tax and that the court was without jurisdiction to entertain such an action by reason of Section 3653 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, ยง 3653, which forbids such actions. He cites a line of authorities including the case of Anniston Manufacturing Company v. Davis, 301 U.S. 337, 57 S. Ct. 816, 81 L. Ed. 1143, in support of his contentions. These cases all sustain this principle of law. There is no need to analyze and discuss them. ...


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