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Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

'rENTH CIRCUIT 

UNITED STATES OF AMERICA, 

Plaintiff-Appellant, 

FILED 

United States Court of Appeals 

Tenth Circuit 

JAN 2 71989 

ROBERT L. HOECKER 

Clerk 

v. 

., 

) 

) 

) 

) NC o 86-2432 ' · 

CACHE · VALLEY BANK;. INTERMOUNTAIN . REGION CONCRETE CONSTRUCTION CO., 

Defendants-Appellees. 

' ) 

) 

INC. I } 

. ) 

} 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF UTAH 

(D.C. No. 84-0030J) 

Robert L. Baker, Attorney, Tax Division, (Roger M. Olsen, 

Assistant Attorney General, Michael L. Paup. William S. Estabrook, 

Attorneys, Tax Division, Department of Justice, Washington, D.C., 

and Brent D. Ward, United States Attorney for the District of 

Utah, of counsel, with him on the brief) , for Plaintiff-Appellant. 

N. George Daines, of Daines & Kane, 

Defendant-Appellee Cache V~lley Bank. 

Logan, 

Before ANDERSON, TACHA, and BRORBY, Circuit Judges. 

PER CURIAM. 

Utah, for 

The issue presented in this appeal is whether a federal tax 

lien will defeat a bank's right of setoff irrespective of the 

timing of the fi~ing of an administrative levy. 

Appellate Case: 86-2432 Document: 01019724624 Date Filed: 01/27/1989 Page: 1 
· We begin with the factual back9round taken from the district 

court's opinion in United States v. Intermountain. Region Concrete 

Co., 636 F. Supp: 280, 281-82 (D. Utah 1986): 

The facts are undisputed.. The defendant 

Intermountain Region Concrete Company ("Intermountain" 

or "the taxpayer") was involuntarily dissolved on 

December 31, 1983. Prior to that time, the Internal 

Revenue Service made · a series of tax assessments against 

Intermountain for unpaid federal employment taxes. The 

assess~erits to~alled $92,256.70. The first assessment . 

was made on September 1, 1980. The government properly 

filed notice of a .tax lien arising from that assessment 

on December 17, . 1980. Intermountain failed to pay the 

assessments upon demand. · 

More than two years before the first tax 

assess ment, on May 5, 1978, the North Park Bank of 

Commerce, the defendant bank's predecessor in interest, 

authorized a secured loan to Intermountain for $70,000 

(the "secured loan"). A financing statement listing the 

collateral for the secured loan was duly filed with the 

Secretary of State of Utah on May 15, 1978. The 

collateral included equipment, inventory and accounts 

receivable, as well as the proceeds thereof. On 

October 8, 1980, and on January 16, 1981, the North Park 

Bank authorized two more loans of $12,500 and $25,000 

(respectively, loans "269 U" and "270 U", or, 

collectively, the "unsecured loans")(footnote omitted). 

The loan documents for the unsecured loans provide that 

the bank "may offset" against those loans "any bank 

account or any other amounts owed by Bank in any 

capacity" to Intermountain. Intermountain maintained 

both a checking account and a savings account with the 

defendant bank. The bank claims the right to apply any 

balance in those accounts toward the balance of the 

unsecured loans. 

At -or about 9:20 a.m. on July 27, 1981, the bank 

received notice of an IRS levy purporting to attach all 

property of Intermountain then in the bank's possession. 

The bank's vice president, Michael Gomm, examined 

Intermountain 1 s accounts and determined that its funds 

on deposit at that time were negligible (footnote 

omitted). Accordingly, Mr. Gomm returned the not.ice of 

levy to the IRS with the notation, 11 7/27/81, 9:30 a.m.-; 

MG, NO FUNDS AVAILABLE. 11 Later that same day, deposits 

totalling $28,416.06 were made to Intermountain's 

checking account. Those ~eposits included a check for 

$27,000 from Interwest Construction Company in payment 

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Appellate Case: 86-2432 Document: 01019724624 Date Filed: 01/27/1989 Page: 2 
for services rendered by Intermountain. 

alarmed by the notice of levy, the 

19ffl, offset the entire amount in 

checking account-_-$ 29; 614. 41--against 

'270 u ( foo.tnote omitted).· The IRS now 

that ~mount from the bank. 

Understandaqly 

bank on July 28, 

Intermountain's 

loans 269 U and 

seeks to recover 

The government filed this action to enforce the tax lien 

. under 26 u.s.c. § 7401, et ~' cla~ming the $29,614.41 as 

subject to the tax lien . The bank's position is that both the tax 

lien and the levy. must attac? or be served before the bank has 

exercised the right of offset and that if the setoff occurs after . ' 

the lien is filed but before the levy is served, the. bank is 

entitled to keep the funds . 

In applying the Federal Revenue Act, state law controls in 

determining the nature of the legal interest which the taxpayer 

has in the property. United States v. National Bank of Commerce, 

472 u.s. 713, 722 (1985); Aguilino v. United States, 363 u.s. 509, 

513 (1960); Bigheart PiEeline CorE• v. United States (IRS), 835 

F. 2d 766 , 767 (lOth Cir. 1987}. Once the court rules that 

property or the rights to it exist under state law, the 

consequences are governed by federal law, National Bank of 

Commerce, 472. U.S·. at 727; Aquilino, 363 u.s .. at 513-14; United 

States v. Bel1 Credit Union, 860 F.2d 365, 367 (lOth Cir. 1988); 

United States v . Central Bank of Denver, 843 F.2d 1300, 1304 (lOth 

Cir . 1988)(Central Bank) , including the p riority of a tax lien 

against other claims to the property . United States v . Wingfield , 

822 F.2d 1466, 1473 (lOth Cir. 1987) . 

. The district court determined that under Utah law the 

relationship. between a bank and a depositor is generally that o£ a 

3 

Appellate Case: 86-2432 Document: 01019724624 Date Filed: 01/27/1989 Page: 3 
debtor to a credito~, citing Walker Bank & Trust Co. v. First 

Security Corp., 341 P.2d 944, 94~ (Utah 1959)'. United States v. 

Int~rmountain Region C6ncrete Co., 636 F. Supp. at 28~. Under 

this widely accepted principle, the deposito~ retains a right to 

withdraw those funds, · which is usually described · as a chose in 

action. ·rd.: see also Central' Bank, 843 F.2d at 1304; United 

Stat€s v. Third Nat'l Bank, 589 F. Supp. 155, 157 (M~D. Tenn. 

1984). A chose in action is property or rights to property within 

the meahin9 of 26 u.s.c . . §§ 6321 ~nd · 6331. United States v. 

Citizens and Southern Nat'l Bank, 538 F.2d 1101, 1105-07 (5th _Cir. 

1976), cert. denied, 430 u.s.· 945 (1977). See also United States 

v. Bank of Celina, 721 F.2d 163, 167 (6th Cir. 1983); Trust Co. of 

Columbus v. United States, 735 F.2d 447, 449 (11th Cir. 1984). 

The federal tax lien arises when unpaid taxes are assessed, 

United States v. Bell Credit Union, 860 F.2d at 367, and continues 

until the resulting liability is either satisfied or becomes 

unenforceable through lapse of time. 26 u.s.c. § 6322. One 

effect of the t ax lien is that a third party (here the bank) holds 

the property subject to the lien unless the third party has a 

prior lien or comes witriin one of· the exceptions of 26 U.S.C. 

§ . 632 3 . United States v. Bank of Celina, 721 F.2d at 166. The 

lien also attaches to after-acquired property. Glass City Bank v. 

United States, 326 U.S. 265 (1945). The transfer of property 

subsequent to the attachment of the lien (here the bank's setoff} 

does not affect the lien because no matter into whose hands the 

property goes, the property passes cum onere, or with the lien 

attached. United States v. Bess, 357 U.S. 51, 57 (1958); United 

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Appellate Case: 86-2432 Document: 01019724624 Date Filed: 01/27/1989 Page: 4 
States v. Bank of Celina, 721 F.2d at 167 ; .United States v. Oil 

Resouices, Inc., 817 F.2d 1 429, 1433 n.3 (9th Ci~. 1987)~ see also 

.Gram~rcy Enters. v. United States, 643 F. Supp. 687, 689 n.2 (D. 

Utah Y986)(citing Treas.·Reg. § 301.6321-1). 

The deposit made to taxpayer's account on July 27, 1981, was 

made al re.ady impressed with the federal tax lien. United States 

v. Bank of Celina, 721 F.2d at 167. The question then becomes 

whether the Sank possessed 'a claim or interest su~ficient to 

defeat the federal lien. The bank does not argue and the district 

court did not determine that the bank was possessed of a lien 

interest superior to the federal lien. Rather, the district court 

held that the taxpayer, because of its loans from the bank, did 

not have an unrestricted right to withdraw funds on deposit. 

United States v. Intermountain Region Concrete Co., 636 F. Supp. 

at 285. The court then concluded that because the bank could have 

offset any funds in the taxpayer's account against the outstanding 

loans, the bank's interest was superior to that of the government.· 

We disagree. 

The levy itself is effective only against those funds present 

in the taxpayer's account at the time the levy was received. 

United States v. Bank of Celina, 721· F.2d at 166; 26 u.s.c. 

§ 633l(b) . But this does not alter the fact that the lien 

at ta ched to the deposits in the taxpayer's account before the bank 

exercise d its right of setoff. As we noted in Central Bank, 843 

F.2d at 1310: 

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Appellate Case: 86-2432 Document: 01019724624 Date Filed: 01/27/1989 Page: 5 
Absent some . discrete act by [the bank) to proscribe 

the· taxpayer's control or constructive possession of the 

account, the Government could attach the account and 

"s-tep into- the shoes of the taxpayer"· with regard to the 

property right to the account; (Citation omitted.) 

See also United States v. Wingfield, 822 F.2d.at 1475 (at ·instant 

tax lien attached, ·taxpayer had cognizable interest in property); 

United States Bank of Celina, 721 F.2d at 167; United States v. 

Sterling Nat'l Bank & Trus~ Co., 494 F.2d 919, 922 (2d Cir. 

1974)(until bank restricts customer's right to· withdraw funds, 

bank holds customer's property or tight to property). 

In Central Bank, the court was confronted with both a 

properly filed tax lien and a notice of levy served on the bank at 

the time there were funds on deposit in the taxpayer's account and · 

before the bank had exercised its setoff rights. In this case, 

only the fi ling of the government's lien prior to the bank's 

setoff is at issue . However, as in Central Bank, the loan 

agr eements in this case place no restrictions on the taxpayer's 

right to withdraw funds from its bank account. United States v. 

Cen tral Bank, 843 F.2d at 1302; see also United States v. Bell 

Credit Union , 860 F.2d at 368. Where a deposit account is 

currently vulnerable to a bank's setoff right but the bank has not 

chosen to exercise this ~ight, the depositor's interest is still 

property or the rights to property within the meaning of 26 u.s.c. 

§§ 6321 and 6331. Peoples Nat'l Bank v. United States, 608 F. 

Supp. 672, 676 (W.O. Wash. 1984), aff'd, 777 F.2d 459, 462 (9th 

Cir. 19B5)(unexecuted right of setoff does not defeat tax l~en). 

See al~o United States v. Third Nat'l Bank, 589.F. Supp. at ~58 

n.3 (court in dicta would have found government's lien had 

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Appellate Case: 86-2432 Document: 01019724624 Date Filed: 01/27/1989 Page: 6 
priority over bank's inte~est) . Finally, we note that under 26 

o.s.c. § 7403(a) an action t<? foreclose a tax lien may be filed 

."whether or not levy has been-made." 

We hold that when the bank exercised its right to offset 

taxpayer's deb~ against tqe bank deposits, the lien had already 

attached. Thus, the bank took the deposits subject to the tax 

lien. United States v. Bank of . Celina, 721 F.2d at 167-68. 

Because the , · tax lien arose prior to the bank's exercise of its 

. . 

right to offset, the government is ~nt i tled to the amount sought 

in the lien foreclosure action. United States· v. ·Bank of Celina, 

supra; Central Bankr supra. 

The judgment of the United States District Court for the 

District of Utah is REVERSED, and the matter is REMANDED for 

det ermination of the interest to which the government is entitled. 

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