Alternatively, the Government argues that even if § 6303(a) requires notice, failure to provide it precludes only administrative levies or liens, but not the institution of civil proceedings.
For the reasons set forth in United States v. Associates Commercial Corporation, 721 F.2d 1094 (7th Cir. 1983) and United States v. Jersey Shore State Bank, 628 F. Supp. 15 (M.D.Pa. 1985), the Government's failure to provide American Bank with timely notice of the taxpayer assessment precludes it from maintaining this action. American Bank is a person liable within the definition of § 6303(a) and nothing in § 3505(b) exempts lenders from § 6303(a) notice. The court rejects the Government's argument that requiring § 6303 notice for lenders subject to § 3505(b) liability will impose a prohibitory investigatory and economic burden on the Government and make § 3505(b) unenforceable as speculative. The Government has offered no proof that it could not have provided American Bank with notice of the assessment against Eastern. Even if there is an administrative burden to the Government in providing notice, any potential burden is outweighed by the possibility of prejudice to the lender not receiving notice. In this case the possibility is an undeniable reality.
The Government argues that even if the statute requires that the Government provide American Bank with notice of the assessment, failure to provide such notice does not preclude suit against the Bank under § 3505. The United States has essentially two methods available to collect taxes. One method is the administrative collection of taxes by the IRS through use of liens and levies. The second method is by suit brought by the United States in federal district court for the collection of tax debts owed to the United States. The Government maintains that the notice requirement of § 6303(a) applies only to administrative proceedings, not to actions in federal court. It contends that its right of action in district court is independent of the assessment process; Jenkins v. Smith, 99 F.2d 827 (2d Cir. 1938) and United States v. Erie Forge, 191 F.2d 627 (3d Cir. 1951). In those cases, the courts interpreted 26 U.S.C. § 1545, the predecessor to § 6303, and held that failure to give notice did not bar the United States from instituting civil proceedings.
However, those cases were decided under a statutory scheme different from the present Code. Under the prior statute, the tax collector was required to give notice of assessment. However, the tax collector had the power to collect taxes only by administrative levy. Civil proceedings for the collection of taxes were instituted by a different official, the tax commissioner. Since the notice requirement applied only to the tax collector, not to the commissioner, the courts found that the failure to provide notice did not bar the institution of civil proceedings by the commissioner.
Under the current Code, the Secretary of the Treasury or his delegate may collect the unpaid tax by levy or civil proceeding. "By necessary implication, then, where . . . the same official . . . has power both to collect the levy and to authorize civil collection proceedings, Jenkins supports the conclusion that failure to provide statutorily required notice bars both recovery methods." United States v. Associates Commercial Corporation, 751 F.2d at 1100. We agree with the view expressed in Associates that there is no sound basis for making a distinction between administrative levies and civil collection proceedings. Nothing in § 6303(a) nor any other statute suggests the present notice requirement is limited to administrative collection proceedings.
American Bank has presented an even more compelling case for requiring notice than the defendant in Associates. American Bank has shown actual prejudice as a result of the Government's failure to provide notice. The Bank did not learn until more than six years after it provided money to Eastern that the Government claimed it was liable for a portion of Eastern's unpaid taxes. After six years, records and personnel may no longer be available. The obligation to mitigate damages by voluntary payment is lost and interest is assessed. Also, the possibility of indemnification from the borrower diminishes. In this case, American Bank compromised and settled rights against the Peckhams who would have been liable over to it. Such claims may not have been settled had the Bank been aware of its potential secondary tax liability for which Eastern, Conly and Peckham were primarily liable. American Bank has suffered actual prejudice as a result of the Government's failure to provide timely notice.
Because the court finds that the Government was required to give timely notice to American Bank of its potential liability under § 6303(a) of the Code and because the Bank suffered prejudice as a result of not learning of its potential liability until six years after the assessment, summary judgment will be granted in favor of American Bank.
AND NOW, this 9th day of August, 1985, upon consideration of defendant's motion for summary judgment, plaintiff's response and defendant's reply thereto, and for the reasons set forth in the foregoing Memorandum, it is ORDERED that:
1. Defendant's motion for summary judgment is GRANTED.
2. FINAL JUDGMENT is hereby entered in favor of defendant American Bank & Trust Company of Pennsylvania, and against plaintiff United States of America.
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