simply has no lien on the excess property, which has been converted into cash, and it cannot avail itself of the set-off provisions of section 68.' 1955 Annual Survey of Amer.Law, 31 N.Y.U.Law R. 515, 529.
Attention is directed to the retention by the defendant of proceeds from accounts receivable of Brokol. Although defendant denied in his answer that he collected these accounts, evidence was submitted which establishes the fact that such collections constitute part of the monies received by the District Director.
Counsel argued the question of whether or not accounts receivable were subject to distraint and sale and to levy. Section 3692, 26 U.S.C.A., states that:
'In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize the deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists * * *.'
The courts which have had occasion to construe the scope of this section are not in agreement. Generally the question arises from an attempted levy upon the proceeds of the delinquent taxpayer's insurance policy. Judge Hincks in United States v. Aetna Life Ins. Co of Hartford, Conn., D.C.Conn.1942, 46 F.Supp. 30, 36, has stated that 3692 does not broadly subject 'all property,' which under § 3670 is subject to lien, also to levy. He concludes that the levy under § 3692 is limited to corporeal personal property except as otherwise provided in the same section. By contrast, the court in Cannon v. Nicholas, 10 Cir., 1935, 80 F.2d 934, 936, observed:
'We do not believe, in the light of the sweeping language used throughout these statutes, that Congress intended to limit distraint to tangible property and to the specified classes of intangibles. No reason is apparent why 'stocks and securities' should be subject to levy and an annuity contract not.'
See also United States v. Metropolitan Life Ins. Co., 2 Cir., 1942, 130 F.2d 149. There is abundant authority holding, however, that a lien for taxes provided for by 26 U.S.C.A. 1 3670 can be asserted against intangible property, such as a debt.
As with corporeal personal property, the problems of the procedure of acquiring possession of intangible property subject to federal tax lien are found in this area of the law. There is conflict among the circuits as to the proper way to assert the lien. The Fourth Circuit, disagreeing with the Sixth
has ruled that where the Government has made a levy upon an indebtedness to the taxpayer, service of notice by the Government upon the taxpayer's debtor is sufficient United States v. Eiland, 4 Cir., 1955, 223 F.2d 118, 121. The cases of the circuits noted in opposition insist that a warrant for distraint is necessary in addition to the notice to the debtor. In the view of the courts taking the latter position, a levy is a jurisdictional prerequisite.
Judge Smith of this District has subscribed to the view that a levy is a jurisdictional prerequisite. He has noted that 'where, as here, the subject matter is an account receivable or chose in action, the seizure may be effected by a levy and the service of a warrant of distraint upon the debtor.' In re Holdsworth, D.C.N.J.1953, 113 F.Supp. 878, 880, citing the O'Dell and Cripe cases.
In the case at bar, defendant asserts that the filing of the liens in the Register's Office of Essex County constituted adequate notice to the debtors of Brokol. There was no notice to the taxpayer's debtors, which the Eiland case demanded as a minimum, to say nothing of warrants for distraint accompanying such notice which the courts in the O'Dell and Cripe cases deemed indispensable. It should also be mentioned that the accounts receivable were not listed on the inventory compiled and signed by the Collector.
I am constrained to conclude that a levy upon both tangible and intangible property under § 3692 requires the execution of a warrant for distraint and then effective only to the amounts affixed thereon. As noted above, the Court of Appeals for this Circuit declared when this matter was before it that § 3690-3697 'require that a levy by a deputy collector be accompanied by warrants of distraint.' [ 221 F.2d 642.] The warrant for distraint itself recites on its face that it shall be the 'warrant,' i.e., authority for the Deputy Collector to execute it 'in the amount or amounts named above.'
The distress authorized by § 3690 is different from anything known to the common law, both because it authorizes a sale of the property seized, and because it extends to other personalty than chattels. By its very nature it requires that the demands of procedural due process of law be rigorously honored. In the case at bar there was no lawful acquisition of possession of the property representing the surplus funds held by defendant, whether those funds were derived from the corporeal or intangible resources of Brokol. The surplus should be returned to the Trustee to be administered under the Bankruptcy Act.
The foregoing opinion shall constitute findings of fact and conclusions of law as required by Rule 52, Fed.Rules Civ.Proc. 28 U.S.C.A.
An order may be submitted in conformity with the opinion herein expressed.