supplying of information necessary for the Government to determine on what employee's behalf the payments are being made.

A lender, etc., who pays withholding taxes as a result of this provision (who is not the "employer") is not liable for the employer's portion of payroll taxes.

(b) Liability where a lender, etc., supplies funds to an employer for the purpose of paying wages.-The bill provides that if two conditions exist, a lender, etc., is to be personally liable for any unpaid withholding taxes even though he does not himself directly pay the wages of employees of the employer (the borrower). First, for this to be true, the lender, etc., must know that the funds he advances are to be used specifically for the payment of wages. This does not include an ordinary working capital loan even though the lender, etc., knows that part of the funds may be used to make wage payments in the ordinary course of business. Second, for this provision to apply, the supplier of the funds must have actual notice or knowledge that the employer does not intend to, or will not be able to, make timely payment or deposit of the withholding taxes. The burden of establishing actual notice or knowledge in such cases is on the Government. The liability of the lender, etc., under this provision may not in any event exceed 25 percent of the amount he supplies the employer for the specific purpose of paying wages. Where a supplier of funds is liable for withholding taxes under this provision, his liability (with the exception of the fact that the amount involved is limited to 25 percent of the funds supplied) is the same as that of a lender who pays the wages directly. He also is subject to the same requirements as to the furnishing of information, etc.

(c) Effect of payment by lenders, etc.-Under the bill, payments by the lender of withholding taxes reduces the liability of an employer. Similarly, payments by an employer of the withholding taxes reduces the liability of the lender, etc.

(2) Bonds on public works contracts (sec. 1 of the Miller Act; 49 Stat. 793)

In the cases discussed above, sureties can protect themselves against any losses attributable to withholding taxes by including this risk of liability in establishing their premiums, and lenders by their including the amounts in their loans and taking adequate security. Where they do so, losses now borne by the Government will fall (as it should) on the employers in the form of a larger bonding, or other fee or cost they must pay. Since the withholding taxes are, in true character, a part of the wages, it seems only appropriate that this cost be borne by the employers in the same manner as is true of the net wage costs. Because of this, your committee has concluded that, in the case of a contractor having a public works contract with the Federal Government, it is appropriate that the performance bond required by the Government specifically provide coverage for the withholding taxes payable by the contractor in carrying out the contract. The bill amends the Miller Act to achieve this result.

Under the bill, a surety is obligated to pay the withholding taxes only if the Government gives him a written notice of the contractor's failure to pay the taxes. Separate notices are required for each taxable period. The Government must give the surety notice of a contractor's failure to pay the withholding taxes within 90 days after the contractor files his return, or, if the contractor fails to file this

return, files it late, or obtains an extension of time for filing, the Government must in any event give the surety this notice within 180 days of the time the return was first required to be filed. In addition, the Government, if it is to bring suit for the failure on the part of the surety to pay the withholding taxes, must do so within 1 year of the time the notice is given to the surety of the unpaid tax liability.

F. SUSPENSION OF RUNNING OF PERIOD OF LIMITATION (SEC. 106 OF THE BILL AND SEC. 6503 OF THE CODE)

Generally, under present law, a tax may be collected by the levy procedure, previously discussed, or by a proceeding in court, at any time within 6 years after the assessment of the tax, or a longer period of time if agreed to by the Treasury Department and the taxpayer or by reason of suspending the running of the period. The running of this period of limitations on collections, however, under present law, is suspended where the assets of a taxpayer are in the custody or control of a court and for 6 months thereafter except in the case of an estate of a decedent or of an incompetent. Also the running of the period of limitations, under present law, is suspended for any period that collection is hindered because the assets of the taxpayer are out of the country. The bill modifies these two exceptions to the running of the statute of limitations. It also provides for the suspension of the period of limitations in another type of situation; namely, where the Government erroneously holds the property of a third person. These changes are discussed below.

(1) Assets of estate of a decedent or of an incompetent (sec. 6503(b) of the code)

As indicated above, the period of limitations is generally suspended where the assets of a taxpayer are in the control or the custody of a court; however, under present law, the statute continues to run in the case of the estate of a decedent or of an incompetent. The statute generally is suspended where assets are in the control or custody of a court because during this time they are not subject to administrative collection procedures. However, it appears that this reason applies equally well in the case of the estate of a decedent and in the case of an incompetent.

For the reason given above, the bill provides for the suspension of the running of the period of limitations on collections in the case of an estate of a decedent and an incompetent during the period their assets are in the control or the custody of a Federal or State court. (2) Period taxpayers are outside the country (sec. 6503 (c) of the code)

In addition to the staying of the period of limitations while the assets of a taxpayer are in control or the custody of a court, present law also provides for the suspension of this period of limitations where collection of the tax is hindered or delayed because a taxpayer's property is outside of the United States.

This rule has been difficult to apply both because of problems in making the determination as to whether collection has been "hindered or delayed" because property is outside of the country and also because of the factual problem in knowing when property is outside of the country and for precisely how long.

To remove these problems, the bill provides for the suspension of the period of limitations during the period of the taxpayer's absence from the country rather than that of the property. It is believed that the collection of the tax is most likely to be hindered during the period of a taxpayer's absence. However, there are administrative problems in keeping track of short periods of time the taxpayer may be out of the country. The bill meets this problem by not suspending the running of the period of limitations except when the taxpayer is continuously out of the country for 6 months or more. To be sure that the Government has an opportunity to collect the tax after his return, it is provided that in any event, the period is not to expire (where the taxpayer has been out of the country for 6 months or more) until 6 months after the taxpayer's return to the country. (3) Property of third persons wrongfully held by the Government (sec. 6503(g) of the code)

Under present law, the running of the period of limitations with respect to a taxpayer is not suspended where the Government erroneously holds the property of a third person. In a situation of this type the Treasury Department normally halts its collection procedures in the belief that the taxpayer's liability has been satisfied. On occasion where this has occurred, the taxpayer has waited until the period of limitations has run and then helped the third party recapture his property after the Government had no recourse, as far as the taxpayer was concerned.

Your committee believes that it is undesirable to encourage actions of the type described above. For that reason, the bill provides that the running of the period of limitations on collections is to be suspended during the period the Treasury Department holds property of a third person wrongfully seized or received, and for 30 days afterward.

The suspension of the period of limitations under this provision begins at the time of the wrongful seizure or receipt of the property by the Government. It ends 30 days after the Treasury Department determines the levy was wrongful and returns the property, or if the third party goes to court, it ends 30 days after the entry of a final judgment to the effect that the levy was wrongful.

Where the period of limitations is suspended under this provision, it is suspended only as to that part of an assessment equal to the amount of money or the value of specific property which initially has wrongfully been taken from a third party and subsequently is returned to him. This amount or value is to be determined as of the date of return.

G. PROCEEDINGS WHERE UNITED STATES HAS TITLE TO PROPERTY (SEC. 107 OF THE BILL AND SECS. 7402 AND 7403 OF THE CODE) ·

(1) Action to quiet title (sec. 7402(e) of the code)

Under present law, the United States has the right to acquire title to property through the enforcement of a Federal tax lien, but it is not clear, at the present time, that it has authority to bring action to quiet title to property which it has acquired through the enforcement of the tax lien. This uncertainty as to whether the Government has the right to bring action to quiet title hinders collection efforts since, unless the Government can give clear title to property, the marketability of property is severely limited, and the Government is likely to

receive substantially less than the true value of the property in any subsequent sale.

For the reasons indicated above, your committee's bill gives the Government express authority to bring an action to quiet title to property it has acquired through the enforcement of a tax lien. Jurisdiction in cases of this type is given to the Federal district courts. (2) Sale bids (sec. 7403 (c) of the code)

Where property is sold at a tax lien foreclosure sale, the Internal Revenue Code contains no specific authority authorizing the Federal Government to bid at these sales where it believes that less than full consideration is being offered for the property. Such authority is contained elsewhere, however, in the public statutes (see sec. 195 of title 31 of the United States Code).

It is desirable for the Federal Government to bid in property to prevent its sale at distress prices in order to assure that the Government receives the full value of the property sold or the amount of the Government's tax claim, as well as to protect the interests of the delinquent taxpayer whose property is being sold.

For the reason indicated above, the bill codifies the rule that where the Government brings an action to enforce a tax lien, the Government can bid on the property where the Government holds a first lien. The amount which it may bid under the bill is limited to the amount of its lien, plus selling expenses. Whether or not the Government exercises this authority to bid within the limit set forth in the bill is a matter within the discretion of the Treasury Department.

H. INTERVENTION BY UNITED STATES (SEC. 108 OF THE BILL AND SEC. 7424 OF THE CODE)

Under present law, some questions have arisen as to whether the Government can intervene in a court proceeding to assert a tax lien against property. The Government is not expressly authorized to do so, and the opinions of the courts which have considered the issue are divided.

The absence of express authority for the Government to intervene to assert a tax lien has resulted in the Government attempting to achieve the same result by other means, such as by bringing a separate action to assert its lien.

The bill grants the Government authority to intervene in a court proceeding to assert a tax lien against property to avoid the result described above. In these cases where the Government intervenes, the same procedural rules, to the extent applicable, are to apply as where the Government is initially joined properly as a party. Where the Government's application to intervene is denied, the proceedings are to have no effect on the Government's tax lien on the property. This is consistent with the results which follow where the Government is not joined as a party.

I. DISCHARGE OF LIENS HELD BY UNITED STATES (SEC. 109 OF THE bill AND SEC. 7425 OF THE CODE)

Under present law, a junior Federal tax lien may be discharged on foreclosure of a senior security interest. Such foreclosure may occur in a plenary judicial action, or, under the law of some States, by non

judicial foreclosure pursuant to a power of sale contained in the senior security instrument. In addition, in some States, foreclosure of a senior security interest may be accomplished by sale of the property by a judicial officer pursuant to a judgment entered under a "confession of judgment" signed by the debtor (typically in the security interest instrument itself). Where State law so provides, a junior Federal tax lien may be extinguished without the United States either being made a party to the proceeding or having any actual notice. As a result, under current law tax liens are sometimes extinguished without the United States having actual notice of the proceedings, under circumstances where it is not possible for the Internal Revenue Service to take steps to protect the United States in the collection of its tax revenues.

Where there is a plenary judicial proceeding and the Government, as a junior lienor, must be joined for its interests to be discharged in the proceeding, the present procedure works well. However, in other cases where the interests of junior lienors may be eliminated without notice, it appears that the interests of the Government are not presently sufficiently protected. Although legitimate local considerations may preclude requiring the Government (in other than plenary proceeding) to be joined as a party for its interests under a tax lien to be discharged, there does not appear to be any reason why in these cases there should not be a timely notice of the proceedings to the Government where notice of its tax lien is on file. The requirement of notice gives the Government an opportunity to review its position and determine the appropriate action without placing an undue burden on a foreclosing creditor.

As explained below, the bill adds a new provision to the internal revenue laws requiring the Government to be made a party in a plenary proceeding to discharge a tax lien. The bill also makes provision for a timely notice to the Government where it has the status of a junior lienor and there is no plenary proceeding.

(1) Plenary foreclosure actions (sec. 7425(a) of the code)

The bill provides that in a plenary judicial proceeding where the Government has properly filed notice of a tax lien before the proceedings commence, but the Government is not joined as a party in the court proceeding, a judgment as to the property is not to disturb a tax lien or claim of a tax lien of the Government on this property. The same result is to occur when the property is sold pursuant to the judgment; the lien on the property continues into the hands of the third person. Where the Government is joined in these proceedings no change is made by the bill in the present operation of local law. Where a notice of tax lien is not filed before a plenary proceeding commences—even in those cases where the filing is not required, such as in the case of a special lien for estate and gift taxes a judicial sale is to have the same effect with respect to a tax lien as local law provides with respect to such matters. One exception is provided to this rule: where the Government is not joined as a party and the sale discharges the tax lien, the Government may still assert its claim against the proceeds of the sale at any time before their distribution is ordered with the same force as the lien had against the property sold.