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33 F.(2d) 961

FELLAND v. WILKINSON, Collector of In- sin. On defendant's motion to dismiss.

ternal Revenue for the District of

Wisconsin.

Granted.

On August 8, 1927, complainant filed his District Court, W. D. Wisconsin. November 22, bill, seeking to have set aside assessments

1928.

No. 80-G.

1. Internal revenue 28 (3)-Bill disclosing that taxpayer had its business examined by internal revenue agent held insufficient to constitute exceptional case entitling transferee

to sue for injunction (26 USCA § 154; Rev. enue Act 1926, § 280; and Revenue Act 1928, § 604 [26 USCA §§ 1069, 2604]).

In suit to set aside assessment against complainant under Revenue Act 1926, § 280 (26 USCA $ 1069) as transferee of association against which a deficiency tax had been assessed and to enjoin collection thereof, allegations in bill disclosing that prior to its dissolution association had its current year's business examined by field man of Internal Revenue Department to determine amount of its income tax

liability, with view to avoiding the very difficulty in which complainant found himself, held insufficient to constitute one of those exceptional cases which make inapplicable Rev. St. § 3224 (26 USCA § 154) or Revenue Act 1928, §604 (26 USCA § 2604), prohibiting suits to restrain assessment or collection of tax.

2. Internal revenue 4 - Statute prohibit ing suits to restrain collection of tax against taxpayer's transferee held applicable to suits commenced before its passage (Revenue Act 1928, § 604 [26 USCA § 2604]).

Revenue Act 1928, § 604 (26 USCA § 2604), prohibiting suits to restrain assessment or collection of amount of liability of transferee of property of a taxpayer in respect of income, war profits, excess profits, or estate tax, held applicable to suit commenced before its pas

sage.

3. Internal revenue 28(3)-Statutes prohibiting injunctions against tax collection held applicable to suit to enjoin collection against taxpayer's transferee, even if assessment was under invalid statute (26 USCA § 154; Revenue Act 1926, § 280 and Revenue Act 1928, § 604 [26 USCA §§ 1069 and 2604]).

Rev. St. § 3224 (26 USCA § 154), prohibiting injunction against collecting tax claimed to have been unjustly assessed, and Revenue Act 1928, § 604 (26 USCA $ 2604), prohibiting

suits to restrain assessment or collection of

amount of liability of transferee of taxpayer's property, held applicable to suit to restrain collection of assessment of deficiency tax against transferee of taxpayer's property under Revenue Act 1926, § 280 (26 USCA § 1069), even if latter act is invalid, where transferee had realty unincumbered save for lien of claim involved on which he could raise money to ex

tinguish tax lien; his remedy being by paying tax liability and thereafter seeking to recover it back.

In Equity. Suit by Carl J. G. Felland against Alonzo H. Wilkinson, Collector of Internal Revenue for the District of Wiscon33 F. (2d)-61

made against him as the transferee of Stoughton Lumber Association of a deficiency tax against the association, amounting to $109.65 for the year 1918 and $2,948.48 for the year 1919, and seeking to enjoin the defendant from collecting such assessment by distraint or otherwise. The assessments were made by the Commissioner of Internal Revenue under the provisions of section 280 of the Revenue Act of 1926 (26 USCA § 1069), providing that the liability at law or in equity of a transferee of property of a taxpayer in respect of the tax shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in the tax imposed by that title. Section 280 of the Revenue Act of 1926 is attacked by the complainant as unconstitutional, in that it attempts to vest the Commissioner of Internal Revenue with judicial functions; in that it deprives plaintiff of his property without due process of law; deprives him of the right of trial by jury, and undertakes to vest judicial power in the Commissioner-contrary to section 1 of article 3 of the Constitution. The bill alleges that neither of the sums involved is claimed to be or is in any way a tax due from the plaintiff to the United States, but, on the contrary, is claimed to be due from complainant on account of his alleged legal and equitable liability as transferee of the assets of the Stoughton Lumber Association; that said association, in which the complainant held 66 shares out of 200 shares of the capital stock, was dissolved November 7, 1921, in which dissolution the assets of the corporation were distributed in proportion to their respective stock holdings. How much property or money was received by the complainant in that transaction is not disclosed. As ground for equitable jurisdiction, complainant says that he has no money with which to pay the alleged claims; that his property consists of real estate which can only be disposed of with great sacrifice, and standing and growing crops and a small quantity of live stock; that there is no market for standing and growing crops; and that the live stock would, under market conditions then existing, produce but a very small portion of the amount required to pay the claims in question. The bill alleges that complainant is indebted for money borrowed in excess of $6,000, but also discloses that his real estate consists of 260 acres of agricultural land, besides two dwelling houses in the city of Stoughton, Dane county, Wis., all of which are free and clear of incumbrances except the lien created by filing the tax claim involved.

On August 8, 1927, a restraining order. was issued returnable 10 days thereafter, but no hearing was had, and same continued in effect until August 23, 1928, at which time respondent filed a motion to dismiss, setting up the grounds: (1) That plaintiff has a plain, adequate, and complete remedy at law; (2) that section 604 of the Revenue Act of 1928 (26 USCA § 2604) prohibits the maintenance of this suit; and (3) that the petition sets forth no facts which would entitle complainant to the relief prayed for.

Erling K. Loverud and Alvin M. Loverud, both of Stoughton, Wis., for plaintiff.

Stanley M. Ryan, U. S. Dist. Atty., of Janesville, Wis., and Harold E. Hanson, Asst. U. S. Dist. Atty., of Madison, Wis. (C. M. Charest, General Counsel Bureau of Internal Revenue, of Washington, D. C., and Donald V. Hunter, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for defendant.

LUSE, District Judge (after stating the facts as above). [1] The bill discloses that prior to its dissolution the Stoughton Lumber Association was careful to have its 1919 business examined by a field man of the Internal Revenue Department to determine the amount of income tax for which the association might be liable, apparently with a view to avoiding the very difficulty which now presents itself, and that fact naturally enlists the sympathy of a court of equity but is deemed insufficient to constitute one of those exceptional cases which would make section 3224, Rev. St. (26 USCA § 154), inapplicable to a tax case, or section 604 of the Internal Revenue Act of 1928 (26 USCA § 2604) inapplicable to this case if valid and otherwise applicable. Complainant apparently has real estate which is unincumbered save for the lien of the claim here involved, and the court is unable to perceive why complainant could not, without difficulty, make a loan on the security of such real estate notwithstanding the existence of such lien if money so raised was applied to the extinguishment of the lien. Section 604 of the Revenue Act of 1928 is quite manifestly a companion section to section 3224, Rev. St., and no doubt if the former section is valid and otherwise applicable, it limits the equitable jurisdiction of courts to enjoin the collection of a liability at law or in equity of a transferee of the

assets of a taxpayer as effectively as the latter section did in the case of a tax. Section 3224, Rev. St., has been applied in all its rigor in numerous cases, some of which are cited and reviewed in Graham v. Du Pont, 262 U. S. 234, 254, 43 S. Ct. 567, 67 L. Ed. 965. Only extraordinary and exceptional circumstances make inapplicable the provisions of section 3224, Rev. St. Bailey v. George, 259 U. S. 16, 42 S. Ct. 419, 66 L. Ed. 816; Dodge v. Osborn, 240 U. S. 118, 36 S. Ct. 275, 60 L. Ed. 557; Hill v. Wallace, 257 U. S. 310, 42 S. Ct. 168, 66 L. Ed. 253.

Section 604 of the Revenue Act of 1928 (26 USCA § 2604) provides, so far as material, that: "No suit shall be maintained in any court for the purpose of restraining the assessment or collection of (1) the amount of the liability, at law or in equity, of a transferee of property of a taxpayer in respect of any income, war-profits, excess-profits, or estate tax.

."

[2] Manifestly the foregoing section is applicable by its terms to this suit notwithstanding it was passed after action was commenced. Smallwood et al. v. Gallardo, 275 U. S. 56, 48 S. Ct. 23, 72 L. Ed. 152. [3] Complainant strongly urges the reasoning and conclusions of Judge Dawson in Owensboro Ditcher & Grader Co. v. Lucas (D. C.) 18 F. (2d) 798, in support of his contention. The cogent reasoning of Judge Dawson leading to his conclusion that section 280 of the Act of 1926 (26 USCA § 1069), in so far as it assigns to administrative officers the power to determine the liability of a transferee of a taxpayer, is invalid as a grant of judicial power, seems well-nigh inescapable. However, assuming such invalidity, we have to deal in the instant case with section 604 of the act of 1928, and there is no escaping the conclusion that it was intended by Congress to apply to just such cases as we now have before us. It is well settled that section 3224, Rev. St., applied so as to prevent injunctions issuing to restrain the collection of a tax, even though the law imposing such tax was unconstitutional. Bailey v. George, 259 U. S. 16, 42 S. Ct. 419, 66 L. Ed. 816. The only exceptions to that rule are cases where the so-called tax was in reality a penalty "in the nature of punishment for a criminal offense," as in Lipke v. Lederer, 259 U. S. 557, 42 S. Ct. 549, 66 L. Ed. 1061, and those wherein extraordinary circumstances existed making section 3224 inapplicable, as in Hill v. Wallace, 259 U. S. 44, 42 S. Ct. 453, 66 L. Ed. 822. See Graham v. Du Pont, 262 U. S. 234, 257, 43 S. Ct. 567, 67 L. Ed. 965. The instant case is not such an one as would constitute such an exception. The question presented, then, is whether section 604 of the 1928 Revenue Act should be given the same effect in its field as section 3224, Rev. St., had heretofore been given in its.

33 F.(2d) 963

It is true that in determining the liability "at law or in equity" of a transferee of a taxpayer, the taxing authorities exercise a power not exercised in determining and collecting a tax from a taxpayer. The determination of the taxing authorities, however, is not final, nor is it made so by the section in question. It is intended thereby to insurə the government a continuance and uninterrupted revenue, leaving to the transferee the duty to pay and then sue to recover. It must be borne in mind that while the liability of a transferee may not be a tax liability in the ordinary sense, nevertheless it is a liability for a tax; in other words, the government is seeking to collect what is primarily a tax and continues to be a tax although, because of the inability to collect from the taxpayer proper, it seeks to require his transferee to pay. From the standpoint of the government the money sought in this case is as much an item of revenue as it would be were the proceedings to collect directed toward the Stoughton Lumber Association. Hence from its standpoint the same necessity exists for the collection of tax liabilities resting upon transferees as exists in the case of taxpayers. As restated in Graham v. Du Pont, 262 U. S. 234, at page 255, 43 S. Ct. 567, 569 (67 L. Ed. 965): "The system prescribed by the United States in regard to both customs duties and internal revenue taxes, of stringent measures not judicial, to collect them, with appeals to specified tribunals and suits to recover back moneys illegally exacted, was a system of corrective justice intended to be complete, and enacted under the right belonging to the government to prescribe the conditions on which it would subject itself to the judgment of the courts in the collection of its revenues. In the exercise of that

right, it declares by section 3224 that its officers shall not be enjoined from collecting a tax claimed to have been unjustly assessed, when those officers, in the course of general jurisdiction over the subject-matter in question, have made the assessment and claim that it is valid."

In this view, it seems that section 604 may and should be given effect according to its terms in the same manner as has section 3224, as a part of the "system of corrective justice, intended to be complete," placing

the transferee in the same category as a taxpayer in so far as he is required to first pay the tax liability and thereafter seek recovery back.

The motion to dismiss will be granted.

In re CATTS. In re MERCHANTS' & MANUFACTURERS' EXCHANGE OF NEW YORK. Claim of PAVIA.

District Court, S. D. New York. June 25, 1929. 1. Landlord and tenant79(2)-Where vendors contracted to sell leasehold held by third party, and trustee after vendor's bankruptcy failed to assume contract, bankruptcy constituted breach entitling purchaser to recover installments paid.

Where vendors contracting to sell leasehold to which they did not have title but which they contemplated acquiring subsequently, were adjudicated bankrupts prior to any default by purchaser, and where trustee in bankruptcy for period of a year and one-half refrained from assuming contract, there was an anticipatory breach of the agreement, releasing the purchaser from liability for future payments and entitling him to recover installments already paid. 2. Contracts 310-Bankruptcy amounts to repudiation of contract, subject to trustee's right to assume bankrupt's contract.

Bankruptcy is a complete disablement from

performance of a contract and amounts to a repudiation, subject to the right of the trustee in bankruptcy to carry out the contract for the benefit of the bankrupt estate.

In Bankruptcy. In the matter of Robert M. Catts, bankrupt, and the Merchants' & Manufacturers' Exchange of New York, bankrupt. Proceedings by Antonio Melian Pavia to establish a claim, opposed by the trustee in bankruptcy. The referee allowed the claim in full, and the trustee petitions for review of the referee's order. Order affirmed.

Leo Oppenheimer and Samuel H. Kaufman, both of New York City, for trustee Morris.

Ernst & Gale, of New York City, for trustee Weiss.

Gotthold, Pitkin, Rosensohn & Travieso and Samuel J. Rosensohn, all of New York City, for Antonio Melian Pavia.

GODDARD, District Judge. This matter comes before the court on a petition to review an order of the referee in bankruptcy allowing a claim of $125,000 and interest against the trustee in bankruptcy of the estate of the Merchants' & Manufacturers' Exchange of New York, and the trustee in bank

ruptcy of the estate of Robert M. Catts, paid by the claimant under a contract entered into on January 5, 1927, between Joseph L. Greenberg, as party of the first part, and Antonio Melian Pavia, the claimant, as party of the second part. In substance, the contract provided for the sale of the leasehold of the premises bounded by Lexington and Park avenues and Forty-Sixth and Forty-Seventh streets, in the city of New York, upon which the building known as the Grand Central Palace is located. The Merchants' & Manufacturers' Exchange and Catts did not own the leasehold, but the contract contemplated that it should be acquired by them and conveyed to Pavia. Pavia had paid $125,000 on the contract and was to make other payments. It has been stipulated that Robert M. Catts and the Merchants' & Manufacturers' Exchange were the real parties to the contract with Pavia, and that Greenberg was merely a nominal party acting in their behalf. On February 3, 1927, the Merchants' & Manufacturers' Exchange of New York and Robert Catts were adjudicated bankrupts, and Mr. Robert C. Morris was elected trustee for the estate of the Merchants' & Manufac

same, and were not able to convey to the deponent the property purchased by deponent and agreed to be sold and conveyed by them;

"That the deponent has elected to rescind and has rescinded said agreement because of the failure of the bankrupt and Robert M. Catts, bankrupt, to make such conveyance, and has demanded of the bankrupt and Robert M. Catts, bankrupt, and of Joseph L. Greenberg, agent for the said bankrupt and for Robert M. Catts, bankrupt, the repayment of the said sum of One hundred twentyfive thousand dollars ($125,000) and interest; that the bankrupt, and Robert M. Catts, bankrupt, and Joseph L. Greenberg have refused to repay to deponent any portion of said sum, and that said payment is now due to deponent."

The respective trustees in bankruptcy have filed objections to the claims on the ground "that the bankrupt is not indebted to the claimant in any sum whatever." [1,2] An important feature of the case at bar is that it is not the ordinary contract for the sale of real estate where the seller has title and the purchaser, by reason of the

turers' Exchange of New York, and Mr. equitable theory of specific performance, has

Louis S. Weiss was elected trustee of the estate of Robert M. Catts.

On August 2, 1927, Pavia filed with the referee proofs of claims against the trustees of the respective estates, which stated the nature of the claim as follows:

acquired an equitable interest in the property. There was no existing res in the possession of the bankrupts. It was an executory contract and contemplated that the property should be acquired by the seller and subsequently transferred to the purchaser.

In Conway v. White, 292 F. 837, at page 843, Judge Rogers, in the opinion of the Circuit Court of this circuit, stated: "We think that it is not open to question in the federal courts that the bankruptcy of a party to an executory contract operates to discharge it. In Central Trust Co. v. Chicago Auditorium Association, 240 U. S. 581, 591, 36 S. Ct. 412, 415 (60 L. Ed. 811, L. R. A. 1917B, 580), Mr. Justice Pitney, speaking for the Court, said: 'In short, it must be deemed an implied term of every contract that the promisor will not permit himself, through insolvency or acts of bankruptcy, to be disabled from making performance.' And it was concluded that proceedings, whether voluntary or involuntary, resulting in an adjudication of bankruptcy, are the equivalent of an anticipatory breach of an executory agreement. Conceding that the trustee in bankruptcy had a right to elect to assume performance of the contract, he did not elect to assume it, 'and so the matter is left as if the law had conferred no such election."

"That on or about the 5th day of January, 1927, deponent entered into an agreement with one Joseph L. Greenberg, as agent for the bankrupt, and Robert M. Catts, whereby the deponent agreed to buy and the bankrupt and Robert M. Catts, who has since been adjudicated bankrupt, agreed to sell, for the sum of Ten Million Six hundred thousand dollars ($10,600,000) a certain lease dated May 22, 1922, made by the New York State Realty and Terminal Company, a New York Corporation, as lessor, covering property situated in the Borough of Manhattan, City and State of New York, comprising the entire block bounded by Lexington Avenue, Park Avenue, 46th Street and 47th Street, in said City, with the buildings thereon, as in said lease more particularly set forth, and deponent then and there paid the sum of One hundred twenty five thousand dollars ($125,000) on account of the purchase price thereof, pursuant to said agreement. That in violation of their duties under said contract, the bankrupt and Robert M. Catts did not then nor at any time prior to June 11, 1927, have See, also, Roehm v. Horst, 178 U. S. 1, 20 title to such lease, and did not acquire the S. Ct. 780, 44 L. Ed. 953.

33 F.(2d) 963

Certainly, unless the trustee assured the purchaser by affirming the contract that the trustee adopted it and would carry it out, the purchaser was not required to make further payments. Upon the adjudication of the bankrupts, the title to all their assets, as well as the right to acquire the property which the bankrupts had contracted to obtain and transfer to the purchaser, passed to the trustee. Therefore, it is apparent that they (the bankrupts) were not then able to carry out their end of the contract and they had failed to maintain the usual contractual relations which they were required to maintain up to the time of its performance.

Bankruptcy is a complete disablement from performance of a contract and the equivalent of an out and out repudiation, subject, of course, to the right of the trustee to carry out the contract for the benefit of the bankrupt estate. In re Neff (C. C. A.) 157 F. 57, 61, 28 L. R. A. (N. S.) 349. See, also,

In re Stern (C. C. A.) 116 F. 664; Collier on Bankruptcy (13th Ed.) vol. 2, p. 1410.

If the trustee felt that he was in a position to do so and that it was an advantageous contract for the estate to adopt, he might have done so and thereby obligated the estate. But it is evident from the record that the trustee has carefully refrained from assuming the contract, although upwards of a year and a half has passed, apparently fearing that by so doing he might subject the estate to liability for a real estate broker's commission, when it was not likely that the contract for the sale of the property could be carried through.

The referee has found, and I agree with him, that up to the time of the adjudication neither side had violated the contract. Claimant now seeks to recover his damages, which I think he is clearly entitled to, and therefore the order of the referee allowing his claim is affirmed.

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