|
6331 - Bankruptcy Page 2 |
||
|
|
||
|
|
6331 Bankruptcy page 2 |
|
|
[99-2 USTC ¶50,917] In re Floyd W. Beam, Elaine M. Beam,
Debtors. Floyd W. Beam, Elaine M. Beam, Appellants v. Internal
Revenue Service, Appellee (CA-9), U.S. Court of Appeals, 9th Circuit,
98-35576, Floyd W. Beam, Elaine Marie Beam, pro per, Before: ALDISERT, *
KLEINFELD and FLETCHER, Circuit Judges. ** OPINION ALDISERT, Circuit Judge: Appellants Floyd W. Beam and Elaine M. Beam filed a petition for
bankruptcy reorganization under Chapter 13 and deposited $24,000
towards a proposed plan with the trustee in bankruptcy. They
subsequently filed a motion to withdraw their bankruptcy petition
and demanded return of the money they had deposited into their
unconfirmed Chapter 13 plan. Upon dismissal of their petition, the
Internal Revenue Service served a notice of levy on the trustee in
bankruptcy, directing him to distribute the deposited funds
directly to the The bankruptcy court had subject-matter jurisdiction under 11 U.S.C.
§157. The district court had jurisdiction under 28 U.S.C. §158(a).
We have jurisdiction under 28 U.S.C. §1291. The appeals were
timely filed. Rule 4(a), Federal Rules of Appellate Procedure. Appellants contend that the district court erred because (1)
distribution of the deposited funds directly to the This court reviews the bankruptcy court's interpretation of
statutory language de novo. In re Claremont Acquisition
Corp., 113 F.3d 1029, 1031 (9th Cir. 1997); In re Maya Constr.
Co., 78 F.3d 1395, 1398 (9th Cir. 1996). I. In January 1993, the Beams sought relief from their outstanding
debts by filing a petition for Chapter 13 bankruptcy in the
Bankruptcy Court for the District of Oregon. Over the next four
years, the Beams deposited approximately $24,000 towards their
proposed Chapter 13 plan with the trustee in bankruptcy. In April 1993, the In June 1997, the bankruptcy court denied confirmation of the
Beams' Chapter 13 plan, but allowed them to pay all creditors and
administrative expenses in full by In response to the The On II. The provisions of 26 U.S.C. §6331, when read in conjunction with
§6334, authorize the The payment distribution clause of section 1326(a)(2) provides: [If a debtor's] plan is not confirmed, the trustee shall return any
such payment to the debtor, after deducting any unpaid claim
allowed under section 503(b) of this title. 11 U.S.C. §1326(a)(2). Notwithstanding any other law of the 26 U.S.C. §6334(c). Resolution of this statutory conflict directly impacts upon
collection and enforcement policies of the We are persuaded that Congress clearly intended to exclude from Moreover, courts have construed the plain language of §6334
literally and have refused to exempt property from Accordingly, we reject Appellants' argument that the specific
construct of §1326(a)(2) trumps the general language of §6334(c).
While specific statutes normally trump conflicting, general
statutes, see Green v. Bock Laundry Mach. Co., 490 U.S.
504, 524 (1989), such an argument ignores the specifically stated
intent of Congress to limit the instances where an Appellants contend also that the A. We reject Appellants' contention that the Here, the B. Appellants contend also that the AFFIRMED. *
Ruggero J. Aldisert, Senior Judge, United States Court of Appeals
for the Third Circuit, sitting by designation. **
The panel unanimously finds this case suitable for decision
without oral argument. Rule 34(a), Federal Rules of Appellate
Procedure; 9th Cir. R. 34-4. 1
The specific exemptions include wearing apparel and school books,
fuel, necessary personal expenses up to $6250, books and tools up
to $3125, unemployment benefits, undelivered mail, certain annuity
and pension payments, workmen's compensation, judgments in support
of minor children, minimum exemptions for wages and salary,
certain service-connected disability payments, certain public
assistance payments, assistance under the Job Training Partnership
Act, residences exempt in small deficiency cases and principal
residences and certain business assets exempt in absence of
certain approval or jeopardy. 26 U.S.C. §6334(a)(1)-(13) [97-2 USTC ¶50,670] In re Susan Milto, Debtors U.S. Bankruptcy Court, Dist. Md., at Greenbelt;
96-1-9019-DK, KEIR, Bankruptcy Judge: Debtor filed a Motion to hold the Internal Revenue Service in
Contempt for intentional violation of the automatic stay. The
Internal Revenue Service appeared and defended raising two
defenses. The first defense raised was that the Internal Revenue
Service, as an agency of the United States of America, was
protected by the Doctrine of Sovereign Immunity. As discussed by
the court on the record at a hearing held on this matter on The court finds that the United States of America, acting by
legislation enacted by Congress and by the President abrogated
sovereign immunity for the purposes of finding liability against
the United States of America in actions brought by parties against
the United States of America for violations of 11 U.S.C. §362. As
explained by the court in its remarks on the record, this action
was brought for violation of the stay and hence is governed by 11
U.S.C. §362(h). The facts are not disputed. After the filing of the bankruptcy case
but before the Internal Revenue Service had notice of the case,
the Internal Revenue Service served a levy upon a banking
institution and by that levy attached three bank accounts of the
debtor. Further, the Internal Revenue Service received payment of
the account balances by the financial institution through this
levy thus depriving the debtor of the use of the funds in these
accounts. Although the initial violation of 11 U.S.C. §362(a) was
unwitting, what happened next constituted an intentional violation
of this statute. Upon learning of the Internal Revenue Service
garnishment, debtor's counsel contacted the agent of the Internal
Revenue Service whose phone number was inscribed upon the notice
of levy to the banking institution. That agent refused to return
the funds levied upon post-petition, notwithstanding the clear
violation which had occurred. The court finds that there is no dispute of fact, the Internal
Revenue Service having not disputed the facts in its post-hearing
memorandum. The facts include that as a result of the Internal
Revenue Service wrongful levy of the accounts, the debtor was
unable to pay mortgage payments post-petition in this case.
Because of the post-petition default, the mortgagee commenced a
motion for relief from stay and incurred the sum of $450.00 in
attorney's fees to the mortgagee's attorney which, under the terms
of the mortgage contract are due and payable by the debtor. The
debtor has also incurred the sum of approximately $750.00 in
attorney's fees to debtor's attorney to defend that action and to
bring the action before the court in this motion. Finally, the
debtor incurred a charge of $75.00 by the banking institution for
processing the Internal Revenue Service levies. Under the authority of 11 U.S.C. §362(h), and further under the
Internal Revenue Service Code as discussed in the case of Grewe
v. United States (In re Grewe) [93-2 USTC ¶50,535], 4 F.3d
299 (4th Cir. 1993), the Internal Revenue Service is responsible
for all of the consequential damages including the reasonable
attorney's fees as identified above. For this reason, it is this
5th day of March, 1997, by the United States Bankruptcy Court for
the District of Maryland, ORDERED, that the Internal Revenue Service shall pay to Susan Milto,
the sum of $2,275.00 as actual damages for violation of the
automatic stay; and the Internal Revenue Service, to the extent
not already accomplished, shall immediately refund to Susan Milto
all funds levied and collected after the date of petition in
bankruptcy from accounts of Susan Milto. [97-1 USTC ¶50,408] In re Cheryl Jones, Debtor. Cheryl
Jones, Plaintiff v. Internal Revenue Service, Defendant U.S. Bankruptcy Court, D.C., 94-01296, Carol Waite, P.O. Box 3223, Oakton, Va. 22124, for (Jones, C.). DECISION RE DEFENDANT'S MOTION FOR SUMMARY
JUDGMENT TEEL, JR., Bankruptcy Judge: On stipulated facts, the defendant Internal Revenue Service (" The plaintiff, Cheryl Jones, filed her bankruptcy petition under
chapter 13 of the Bankruptcy Code and later filed this adversary
proceeding to determine the amount of the I The account is subject to the protections of 5 U.S.C. §8437(e)(2),
enacted on A. Under 26 U.S.C. §6321, the assessment of a tax liability gives
rise to a tax lien on all of the taxpayer's property and rights to
property. The This follows from well settled principles of repeal by implication.
See generally Chamber of Commerce v. Reich, 74 F.3d 1322,
1333 (D.C. Cir. 1996). It is a "cardinal rule . . . that
repeals by implication are not favored." Posadas v.
National City Bank, 296 U.S. 497, 503 (1936). This should
particularly be so in the case of federal tax collection remedies
because the Supreme Court has recognized that the collection of
taxes is the "life-blood of government." Franchise
Tax Board v. USPS, 467 U.S. 512, 523 (1984) (quoting Bull
v. United States [35-1 USTC ¶9346], 295 U.S. 247, 259-60
(1935)). Repeal by implication should be allowed here only if the two
statutes' provisions are in irreconcilable conflict. Radzanower
v. Touche Ross & Co., 426 U.S. 148, 155 (1976). That is to
say, the provision of §6321 that the tax lien attaches to all of
the debtor's property should be deemed repealed in the case of B. A The debtor points to earlier bills in Congress that would have
included "debts owed by the individual to the United
States" as an additional exception to the proscriptions of 5
U.S.C. §8437(e)(2). See S. 1527, 99th Cong., 1st Sess.
(1985) (proposed 5 U.S.C. §8426(d)(1)) and H.R. 3660, 99th Cong.,
1st Sess. (1985) (proposed 5 U.S.C. §8434(d)(1)). That language
was dropped from the final statute. 4
That deletion is inconsequential. The plain language of 26 U.S.C.
§6334(c) made it unnecessary to retain the deleted language
(which applied to all claims of the United States) or some
modification thereof in order for Having concluded that a federal tax levy is not barred by
the proscriptions of 5 U.S.C. §8437(e)(2), it is doubtful that
Congress intended that the attaching of a federal tax lien,
a much less drastic and invasive collection enforcement measure,
is barred by §8437(e)(2). Particularly in light of the adjunct
role a levy plays to a tax lien, Congress would not likely have
intended that a Under §6321 the federal tax lien attaches to "all property
and rights to property, whether real or personal, belonging to
[the taxpayer]." This language "is broad and reveals on
its face that Congress meant to reach every interest in property
that a taxpayer might have." United States v. Nat'l Bank
of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985)
(citation omitted). "A federal tax lien, however, is not
self-executing. Affirmative action by the Concededly, by the terms of §6331 itself, a levy can be made on
either property belonging to the taxpayer or on property subject
to a tax lien (as in the case of property the debtor has conveyed
to another before levy has been attempted). 5
But because Congress wanted to preserve the Two examples of how a tax lien maximizes the effectiveness of a
levy suffice. First, consider those instances in which other
creditors execute on a Indeed, some courts have held that a federal tax levy does not
serve to accord the Congress did not intend in enacting the Concededly, a lien is not a levy. For example, property can be
subject to a lien which is exempt from a levy. In re Voelker
[95-1 USTC ¶50,028], 42 F.3d 1050, 1052 (9th Cir. 1994); United
States v. Barbier [90-1 USTC ¶50,107], 896 F.2d 377, 379 (9th
Cir. 1990). It does not follow from this that a This is because Section 8437(e)(2) addresses a goal of guarding
against unwise assignments by the employee beneficiary of a Thus, the It is evident that by providing that Accordingly, it might be possible to argue that the C. A close examination of the anti-alienation provisions of the 1. General Definition of Alienation The definition of "alienate" in Black's Law Dictionary
and other dictionaries limits alienation to acts resulting in a
change in title. For example, Webster's Third New International
Dictionary defines alienate as "to convey or transfer to
another (as title, property, or right): part voluntarily with
ownership of." Cases interpreting "alienate" in
federal pension statutes have looked to this definition. Rodney
L. Powell [ 2. Comparison to ERISA Anti-Alienation Provisions The Employee Retirement Income Security Act of 1974 ("ERISA"),
as amended, contains an anti-assignment and anti-alienation
provision similar to the As in the case of Admittedly those cases cite as well cases holding that state law
exemptions cannot immunize property from federal tax collection.
But the anti-alienation provision an ERISA plan must contain is
federally mandated. Indeed, when an ERISA-required anti-alienation
provision does not suffice under state law to qualify the trust as
a spendthrift trust, the ERISA anti-alienation provision is
enforceable as a matter of federal law. See Patterson v.
Shumate, 504 U.S. 753 (1992). It must be further acknowledged that some cases rest as well on the
fact that ERISA contains a provision that it shall not be
"construed to alter, amend, modify, invalidate, impair, or
supersede any law of the United States. . . ." 29 U.S.C. §1144(d).
Ameritrust Co., N.A. v. Derakhshan [94-1 USTC ¶50,007],
830 F. Supp. 406, 410 (N.D. Ohio 1993); In re Schreiber
[94-1 USTC ¶50,202], 163 B.R. 327, 334 (Bankr. N.D. Ill. 1994).
Regardless, there is no evidence that Congress intended to
abrogate long-standing federal tax lien law and to make a
different result apply in the case of the For sound reasons, the fact that a tax claim is already enforceable
by levy against either ERISA pension benefits or a D. Enforcing the lien in the debtor's chapter 13 bankruptcy case is
similarly not barred by §8437(e)(2). That enforcement would be
via allowing the The lien acts to hold the E. This interpretation of the statutes does not create the result,
probably unintended by Congress, of subjecting a Nevertheless, as this court has held on slightly different facts,
the II The debtor's second argument is that the anti-alienation clause
renders the To the extent that Taylor rests on an assumption that
federal tax liens do not attach to ERISA accounts, it is in error
for the reasons discussed in part I(C)(2) of this decision and has
been expressly criticized on this score by Schreiber [94-1
USTC ¶50,202], 163 B.R. at 333-34. To the extent that Taylor
rests on the assumption that levy or judgment is necessary to make
a federal tax lien choate, it is similarly in error. United
States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81,
84 (1954) (lien is choate "when the identity of the lienor,
the property subject to the lien, and the amount of the lien are
established" and the federal tax lien, as a general lien
which attached at the time of assessment to all of the taxpayer's
property, was thus perfected). Conclusion For all of these reasons, the court will grant summary judgment in
favor of the 1
The statute under which the debtor holds the account as an
employee of the federal government--5 U.S.C. §8431, et seq.--refers
to such accounts as Thrift Savings Fund accounts, but they are
more commonly known as Thrift Savings Plan accounts. 2
Assessed in 1991 and early 1993 for the years 1989 through 1990,
these taxes are of a non-priority character in her bankruptcy case
(that is, not of a character entitled to priority under 11 U.S.C.
§507(a)) and hence not accorded the protection of 11 U.S.C. §1322(a)(2)
(requiring full payment of priority claims). The debtor's
confirmed plan, without objection, did not provide for payment of
any general unsecured claims of the 3
The balance in the account on the petition date was $19,375.00,
but the debtor had a loan charge against the account of
approximately $11,000 pursuant to 5 U.S.C. §8433(I). Counsel for
the 4
The debtor's counsel was unable to uncover any committee reports
or floor statements explaining this change. 5
26 U.S.C. §6331(a) provides in relevant part: (a) Authority of Secretary.--If
any person liable to pay any tax neglects or refuses to pay the
same within 10 days after notice and demand, it shall be lawful
for the Secretary to collect such tax . . . by levy upon all
property and rights to property (except such property as is exempt
under section 6334) belonging to such person or on which there is
a lien provided in this chapter for the payment of such tax. . . . 6
7
International Fidelity Insurance Co. V. United States [92-1
USTC ¶50,004], 949 F.2d 1042, 1047 (8th Cir. 1991); Southern
Rock. Inc. v. B & B Auto Supply [83-2 USTC ¶9529], 711
F.2d 683, 686-88 (5th Cir. 1983); United States v. Jenison
[80-1 USTC ¶9195], 484 F. Supp. 747 (D.R.I. 1980). 8
If the 9
American Acceptance Corp. v. Glendora Better Builders, Inc.
[77-1 USTC ¶9348], 550 F.2d 1220, 1222 (9th Cir. 1977); First
National Bank of Norfolk v. Norfolk & Western Ry. [71-1
USTC ¶9458], 327 F. Supp. 196, 199 (E.D. Va. 1971). A tax levy is
tantamount to a judgment execution, reducing the seized property
to the 10
See footnote 11, infra. 11
Arguably the 12
It suffices for purposes of this decision to note that a
state-created lien cannot be presently enforced against funds in
the 13
Treating the property as non-estate property would have the
unintended result, for example, of depriving a chapter 7 trustee
of resort to the lien under 11 U.S.C. §724(b). 14
Indeed, even if the [96-2 USTC ¶50,590] In re James T. Sanchez, Debtor. James T.
Sanchez, Plaintiff v. United States of America, Internal Revenue
Service, Defendant U.S. Bankruptcy Court, No. Dist. Calif.,
95-53192-ASW, David A. Boone, Elizabeth M. Pappy, 152 N. 3rd St., San Jose,
Calif., for plaintiff. John Y. Chinnapongse, Special Assistant
United States Attorney, for defendant. MEMORANDUM DECISION GRANTING PARTIAL SUMMARY
JUDGMENT FOR PLAINTIFF WEISSBRODT, Bankruptcy Judge: Before the Court are a motion for summary judgment filed by
Defendant above-named (" BACKGROUND The complaint filed by Debtor seeks turnover of property of the
estate (consisting of funds collected by I. Except as may be otherwise noted, the following facts are not in
dispute. Debtor filed a voluntary petition under Chapter 7 of Title 11,
United States Codes, on On the date of the petition filing, Debtor had funds on deposit in
an account at the Bank of America; Debtor listed the balance of
that account in the amount of $3,282.33 in his bankruptcy
schedules. Pre-bankruptcy, on No funds were turned over to The taxes sought to be collected by levy are stated in the notices
of levy to be for the calendar years 1982, 1983, 1984, and 1985. Debtor claims that all such taxes are dischargeable in bankruptcy,
which contention II. A threshold issue in this case is whether the funds in Debtor's
bank account on the day he filed his Chapter 7 petition
constituted property of his bankruptcy estate under 11 U.S.C. §541(a)
, i.e., whether Debtor had any "legal or
equitable interest" in them on Moreover, under the Bankruptcy Code, a trustee or
debtor-in-possession in a bankruptcy case may seek turnover of
property of the estate that consists of cash. Neither §542(a)
(which pertains to property of the estate under §541(a)
that is subject to use by the trustee under §363 or to
exemption by the debtor under §522), nor §541(a)
, nor §363, nor §522 contains any exception for
turnover of property that consists of cash, see generally,
4 Collier on Bankruptcy (15th ed. 1995) ¶542.01, ¶542.02. The parties have concentrated on United States v. Whiting Pools
[83-1
USTC ¶9394 ], 462 U.S. 198, 103 S.Ct. 2309 (1983)
("Whiting Pools"), which The Internal Revenue Code's levy and seizure provisions, 26 U.S.C. §§6331
and 6332
, are special procedural devices available to the Whiting Pools, [83-1 USTC ¶9394 ] 462 U.S. at 210-211, 103 S.Ct. at
2316-2317. Since Whiting Pools, a line of cases has developed, holding
that the rationale of Whiting Pools does not apply when the
property seized is cash or cash equivalents in an amount less than
the amount of tax owed. The Bankruptcy Court in In re Rose,
112 B.R. 12 (Bkrtcy.E.D.Mo. 1987) ("Rose")
distinguished between "tangible" property (such as the
truck in Whiting Pools) and "intangible" property
such as cash. The Rose Court viewed Whiting Pools as
depending upon whether a taxpayer had a right to redeem seized
property prior to sale, and noted that the concept of redemption
has no meaning when the property to be redeemed is
cash--redemption of property seized by the holder of a tax lien
requires the taxpayer to pay the delinquent tax, at which time the
seized property is returned; therefore, redemption of cash would
require the taxpayer to pay the tax by giving money to the
lienholder so that the lienholder would then return the seized
cash to the taxpayer--redemption of cash consists only of the
exchange of fungible currency in equal amounts so that both
parties possess the same property after redemption as they did
prior to redemption, which futile transaction creates no
"right" sufficient to constitute an interest in property
under 11 U.S.C. §541(a)
. Under such circumstances, the Rose Court
considered that there were no steps remaining for Another line of cases declines to recognize a dispositive
distinction between the seizure of "tangible" and/or
"saleable" property versus "intangible"
and/or "non-saleable" property, and applies Whiting
Pools to seizure of cash: In re Challenge Air International
[92-1
USTC ¶50,090 ], 952 F.2d 384 (11th Cir. 1992) ("Challenge
Air"); In re Dunne [83-2 USTC ¶9534 ], 32 B.R. 182 (Bkrtcy.N.D.Iowa 1983); In
re Davis, 35 B.R. 795 (Bkrtcy.W.D.Wa. 1983); In re Kirk,
100 B.R. 871 (Bkrtcy.D.Nev. 1991); In re Flynn's Speedy
Printing, 136 B.R. 299 (Bkrtcy.M.D.Fla. 1992). These cases
recognize, as did Whiting Pools, that an The enforcement provisions of [IRC §§6321
-6326] "do not transfer ownership of the property
to the In support of its position that its constructive possession of the
right to payment obliterates all rights of the debtor, the
government relies on United States v. Nat'l Bank of Commerce
[85-2 USTC ¶9482 ], 472 U.S. 713, 105 Ct. 2919, 86 L.Ed.2d 565
(1985). We believe that case is more persuasive to support the
trustee's position that the constructive possession by the The administrative levy has been aptly described a a 'provisional
remedy.' ... In contrast to the lien-foreclosure suit, the levy
does not determine whether the government's rights to the seized
property are superior to those of other claimants; it, however,
does protect the government against diversion or loss while such
claims are being resolved. (Citations omitted). Id. at 721. Challenge Air, at 384. This Court agrees with the Challenge Air line of cases that,
given the limited provisional effect of a tax levy--merely to
transfer possession and custody of property--it is irrelevant
whether the property taken into custody by For example, California law provides an avenue by which a lessee of
real property can seek relief from forfeiture of a lease after a
judgment has been issued in an unlawful detainer action:
California Code of Civil Procedure ("CCP") §1179, which
requires that an application for relief be made within thirty days
post-judgment, that the lessee demonstrate "hardship",
that all delinquent rent be paid in full, and that all conditions
or covenants of the lease be fully performed to the extent
practicable. The Ninth Circuit has held that a lessee of
commercial real property against whom an unlawful detainer
judgment has been issued pre-bankruptcy, but who has not lost all
rights to proceed under CCP §1179 by the date of bankruptcy,
holds a lease that was not fully terminated pre-bankruptcy, so
that such lease remains capable of being assumed in bankruptcy
pursuant to 11 U.S.C. §365: In re Waterkist Corp., 775
F.2d 1089 (9th Cir. 1985) "Waterkist"); In re
Windmill Farms, Inc., 841 F.2d 1467 (9th Cir. 1988) ("Windmill
Farms"). For purposes of the rationale of these cases,
the merits of a particular lessee's claim for relief under CCP §1179
are irrelevant. In applying Waterkist and Windmill
Farms, a bankruptcy court need not assess whether the lessee
in question would have prevailed in an application for relief from
forfeiture under CCP §1179 (i.e., was the lesse in a
position to demonstrate the requisite hardship in the state court,
and/or to cure all monetary delinquencies, and/or to perform fully
all conditions and covenants of the lease?)--it is enough for a
bankruptcy court to determine that no CCP §1179 application was
denied, and that the time within which to bring one did not expire
pre-bankruptcy. If a remedy was available under CCP §1179 on the
date a lessee filed a bankruptcy petition, the mere existence of
that potential remedy (whether or not it could ultimately be
realized by a given lessee) operates to prevent the lease from
having been extinguished pre-bankruptcy and to preserve it for
assumption under 11 U.S.C. §365. The rationale of Waterkist and Windmill Farms applies
equally to the issue before this Court. Regardless of whether
Debtor could have prevailed in asserting the various remedies that
are provided by the IRC, it is clear that he had remedies
available by which, if he did prevail on the merits, he could have
retrieved the funds subject to the levy; and, under the Bankruptcy
Code, Debtor may seek return of these funds by way of turnover.
Just as the interest of a lessee in a lease is not fully
extinguished while the lease remains subject to CCP §1179, so is
a debtor's interest in seized funds not fully extinguished (or
"obliterated", in the words of the Challenge Air
Court) as long as the funds are subject to recovery by virtue of
the remedies provided to taxpayers by the IRC. B. Other Issues As property in which Debtor held a legal or equitable interest when
this Chapter 7 case was commenced, the funds in question
constitute property of the estate under 11 U.S.C. §541(a)
. Although the parties have briefed these other issues to some
extent, their efforts have focused upon the issue of whether Whiting
Pools applies to levies upon cash. None of these other issues
was addressed by either party in oral argument. In post-argument
briefing, Debtor stated (in the form of a declaration by his
attorney Elizabeth Pappy) that The Court wishes to receive further briefs concerning the validity
and extent of CONCLUSION For the reasons hereinabove set forth, Debtor's counter-motion for
summary judgment is granted as to the issue of whether the funds
levied upon by The parties are directed to devise a mutually agreeable briefing
schedule as to the issues hereinabove referred to, and then
jointly restore their respective summary judgment motions to
calendar for further oral argument at least two weeks after
conclusion of the briefing schedule. 1
The Chapter case herein was filed after October 22, 1994, the
effective date of the amendments [94-2 USTC ¶50,477] In the Matter of Commonweal, Inc.,
Debtors. Commonweal, Inc., Plaintiffs v. Internal Revenue Service,
Defendants U.S. Bankruptcy Court, Mid. Dist. Fla., Tampa
Div., 92-6411-8B1, Wade R. Wetherington, P.O. Box 2177, Tampa, Fla. 33601, for debtor. ORDER ON MOTION FOR SUMMARY JUDGMENT BAYNES, JR., Bankruptcy Judge: THIS MATTER came on for consideration upon the Motion for Summary
Judgment filed by the Plaintiff/Debtor, and Cross-Motion for
Summary Judgment filed by the United States of America in the
above captioned case. This Court has considered all arguments and
evidence consistent with a ruling on a motion for summary
judgment. See Celotex v. Catrett, 477 U.S. 317 (1986); Anderson
v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).
The Court having considered the Motion, together with the record,
finds the undisputable facts as follows: Debtor filed for relief under Chapter 11, of Title 11, of the
United States Code (Bankruptcy Code) Debtor's brush with the Internal Revenue Service stems from
involvement with an admitted tax protestor, Stoecklin. Stoecklin
has been assessed for tax deficiencies of more than $330,000. The
tax assessments were created during 1988 for tax liabilities
during 1978, 1979, 1980, 1981, and 1982. From the time Stoecklin
became involved with Debtor to date, he has successfully gained
control, and maintained an indirect interest in Debtor. Debtor was created as a small real estate investment corporation. A
small group of original investors incorporated and purchased a
tract of land for the purpose of development and resale. 1
Throughout Debtor's history it has maintained its small form and
continues to act as a real estate development corporation. Debtor employed Stoecklin in 1984 to maintain the corporate books
and records. Soon after, in October 1985, Stoecklin's company
Kennedy Financial Investment Company (Kennedy) purchased shares of
Debtor. On Each of the original shareholder's were adequately compensated for
redemption or sale of their stock interests in Debtor. The only
remaining original investor is Robert Petrelli, a shareholder
unrelated to Stoecklin. Debtor redeemed 40 of 100 of Petrelli's
stock on Stoecklin purchased shareholder interests of three original
shareholders on Other relevant facts include: Stoecklin attended all shareholders'
and directors' meetings from In addition, Debtor purchased property adjacent to Stoecklin's
homestead property, subdivided it, and retained a one half section
contiguous to Stoecklin's home. All actions of Debtor appear to be
initiated by Stoecklin whether originally approved or subsequently
adopted and ratified by Debtor's Board of Directors. In addition,
Stoecklin testified the wire transfer was not for Debtor's purpose
and that he placed personal funds of his own into the corporate
account for the sole design of utilizing the wire transfer
technology. Debtor has otherwise followed all corporate
formalities as required under Florida law. The Internal Revenue Service recorded a notice of federal tax lien
against Debtor in Citrus County, Florida, on This Court is submitted the question of whether Debtor, in its own
fashion, is the nominee of Stoecklin, and therefore liable for
Stoecklin's individual tax obligations. An analysis of the record and Stoecklin's past dealings with the
Internal Revenue Service reveals this is not Stoecklin's first
endeavor at removing himself from the federal government's tax
system. See Stoecklin v. Comm'r [CCH
Dec. 44,179(M) ], 54 T.C.M. 452 (1987). 3
In 1977, Stoecklin established the Kenneth A. Stoecklin Equity
Trust (Trust) and a professional corporation for himself as a
certified public accountant. The Trust was created as an
irrevocable trust for Stoecklin's children and an unrelated 20%
shareholder. The Trust provided for three trustees one of which
was unrelated. Stoecklin and his wife transferred certain tangible
property and his lifetime services as an accountant to the Trust.
Prior litigation ensued when Stoecklin was determined to have tax
deficiencies for 1978, 1979, 1980, and 1981. In addition,
Stoecklin's professional corporation was claimed to be deficient
in taxes for 1981 and 1982. Stoecklin conceded the issue with
respect to his professional corporation, but claimed the Trust was
a bona fide entity which must be recognized for federal income tax
respects, and thereby excluding application of I.R.C. §671
et seq. 4 Throughout Stoecklin's tax protestor career, he has been successful
at thwarting the Internal Revenue Service's attempts of
collection. Stoecklin's pursuit paints the picture of a contest
with the Internal Revenue Service. The contest persists as long as
Stoecklin can avoid paying taxes, while living in a comfortable
home, and receiving a stipend to meet his daily expenses of his
existence. Stoecklin's work for the Trust and now the Debtor
allows him to do what he is best at; investment research,
accounting, and planning for his children's future all without
paying income, estate, or gift tax. In comparison, Stoecklin's design of the trust and utilization of
Debtor in the instant case are strikingly similar. Stoecklin's
basic strategy is to manage Debtor as in the Trust, with powers
such as signing checks, and making all management decisions. Aside
from Stoecklin's initiation, the two trustees in the Trust never
exercised independent judgment, and were treated as no more than
mere nominees. None of Debtor's directors or officers act with
independent judgment. Stoecklin makes all the decisions. In
addition, the trust provided Stoecklin a salary fixed at 250
silver dollars per month and full benefits including adequate
transportation. Debtor's arrangement with Stoecklin is the same
except payment is in cash not appreciated silver coins having a
lower book value. Stoecklin's Trust was designed to allow him a
guaranteed income to meet day-to-day expenses, while affording him
the opportunity to avoid payment of taxes and developing an estate
plan for his family. Debtor seeks to bring about the same result
as the Trust. There are however, some differences between Debtor and the Trust.
During the life of the trust, and until the trust released
Stoecklin of his indenture, the trust would commonly purchase
silver dollars and deduct the expenses. To make matters more
interesting, these coins were paid to Stoecklin and a deduction
was taken for their book value. Gain was not recognized on the
appreciated value of the coins. This afforded Stoecklin
compensation with appreciated market value coins while claiming
the lower book value as compensation. Stoecklin lost the
book/market value argument when defending his Trust. In the
instant case, Stoecklin is not receiving assets subject to gain
from Debtor. The Trust was created with an assignment of all Stoecklin's
services as accountant to the trust. The courts found an
assignment of income and rejected Stoecklin's argument he had no
income to tax. There are no assignment of income issues in the
instant case. As one would imagine, and however clever Stoecklin's Trust design
was, the Tax Court saw right through it and found a violation of
assignment of income principles which made Stoecklin's objectives
too much for the scheme to endure. The court went on to find the
Trust was a "sham" transaction. Stoecklin, as settlor,
would be taxed on trust income under I.R.C. §671
et seq. I.R.C. §482 applied to reallocate all income, deductions, and
credits claimed by the Trust to Stoecklin. The Tax contest
however, is far from over. Now before this Court is a similar plan
devised by Stoecklin which paradoxically seeks to eliminate the
failures of the trust. More specifically, there are no issues with
respect to distribution of appreciated assets, assignment of
income, and Stoecklin is not the settlor. While it is true Stoecklin did not form Debtor as he did the equity
trust, the two plans have strikingly similar objectives. Stoecklin
is still in contest with the Internal Revenue Service having
systematically created What his prior trust could not. In looking
back at Stoecklin's prior transactions, it is no wonder he had the
intuition to reconstitute Debtor in such a manner. In general terms, a corporate entity is distinct and respected
under a state's corporate laws. See Moline Properties, Inc. v.
Comm'r [43-1 USTC ¶9464 ], 319 U.S. 436 (1943). However, the concept
of a corporate entity's separateness from an individual owner can
be abused and yield a result contrary to the aim of the law. The
inability of the Government to satisfy a delinquent income tax
obligation clearly forms a consideration for disregard of the
corporate entity. See G.M. Leasing Corp. v. United States [75-1
USTC ¶9435 ], 514 F.2d 935 (10th Cir. 1975), rev'd
in part on other grounds, [77-1 USTC ¶9140 ], 429 U.S. 338 (1977). A party may move to
look past a corporate identity by showing nominee status, alter
ego, or by piercing the corporate veil. In the instant case,
Defendant asserts Debtor is the nominee or alter ego of Stoecklin. With respect to disregard of a corporate entity, a federal court
must apply the law of that jurisdiction. See Bendix Home
Systems, Inc. v. Hurston Enterprises, Inc., 566 F.2d 1039 (5th
Cir. 1978) (applying Florida law); Tato Int'l Corp. v. Comm'r,
1989 WL 104789, 89-2
U.S.T.C. ¶9485 (S.D. Fla. 1989) (tax obligations and
nominee liability). Under Florida law, the corporation's separate
identity will be disregarded if it is a "mere
instrumentality" of another individual or another corporation
created to mislead or an existence for fraudulent purposes. Id.
Tato, 1989 WL 104789, at 4. There is no requirement of fraud,
only a "mere instrumentality" used to mislead a
creditor. Bendix, 566 F.2d at 1042. Florida's courts
recognize elements such as personally utilizing the assets of the
corporation for the payment of personal obligations and
investments; failing to maintain either the de jure or de
facto existence of the corporate entity; and generally
treating the corporation as a sham. Bermil Corporation v.
Sawyer, 353 So. 2d 579 (Fla. 3rd D.C.A. 1978); Levenstein
v. Shapiro, 279 So. 2d 858 (Fla. 1973). Defendant cites authority for applying "alter ego" or
"nominee" status in Florida and asserts there is little
if no difference with respect to the criteria federal law
dictates. In Shades Ridge Holding Co., Inc. v. United States
[89-2 USTC ¶9472 ], 888 F.2d 725 (11th Cir. 1989), the court
held Alabama law and federal law were so similar as to the
application of "nominee" status, "that the
distinction was of little movement." Id. at 728.
"The issue under either state or federal law depends upon who
has 'active' or 'substantial' control." Id. citing Valley
Finance, Inc. v. United States [80-2 USTC ¶9554 ], 629 F.2d 162, 172 (D.C. Cir. 1980), cert.
denied sub nom., Pacific Development, Inc. v. United States,
451 U.S. 1018 (1981). The court in Shades Ridge, named
distinct elements of a corporation being a taxpayer's nominee: (1) the control taxpayer exercises over the nominee and its assets;
(2) the use of the corporate funds to pay taxpayer's personal
expenses; and (3) the family relationship, if any, between the
taxpayer and the corporate officers. [Citations omitted]. Shades Ridge [89-2 USTC ¶9472 ], 888 F.2d at 729. This Court finds the
federal law and Florida law to be consistent with this view. Shades Ridge in no way limits this Court's power to ignore
the fiction of separateness in the interests of equity or justice.
No uniform standard for determining whether a corporation is an
"alter ego" or "nominee" exists, only a
reading of the particular factual circumstance in light of a
creditor's claim. The gravamen herein is: does the materiality of
Stoecklin's efforts cause a jaundiced view of Debtor's existence?
Because Shades Ridge does not limit a court's power to
ignore the fiction of separateness, this Court may ignore the form
of Debtor where Debtor is nothing more than a clever scheme
predicated on evading payment of assessed taxes. This view is not
contrived to pierce the corporate veil or simply disregard its
existence, but used where assignment of liabilities is necessary
to those who have designed a method to evade liability. From the record, all corporate formalities were observed with some
minor twists the Internal Revenue Service may have over
emphasized. For example, Debtor paid for Stoecklin's son, K.W.
Stoecklin, to attend a corporate meeting which was alleged to be a
vacation for Debtor's president. However, K.W. Stoecklin did
attend a meeting regardless of the length of such meeting. In
addition, there does not appear to be a history of corporate
waste, and the costs to accomplish what was suggested to be a
corporate purpose were not extravagant or frivolous. The record
supports a finding all the corporate formalities were met.
However, the fact that Stoecklin caused all the corporate
formalities to be observed still does not give credence to his
overwhelming control of Debtor. Debtor is passive in nature, 84.4%
indirectly controlled and facilitated by Stoecklin. As stated above, the law is well settled with respect to nominee
status or the alter ego doctrine. Whether this Court applies Shades
Ridge or Florida law, a corporation's separate identity will
be disregarded if it is found to be a "mere
instrumentality" of another individual created to mislead or
exists for fraudulent purposes. There is no requirement of fraud
per se, even though fraud may satisfy a court's inquiry into a
nominee or alter ego grievance. Bendix, 566 F.2d at 1042.
To determine if Debtor is a mere instrumentality created to
mislead Defendant's efforts to collect taxes from Stoecklin, this
Court may view the controlling interests of Debtor. It is clear,
in the instant case, Stoecklin has devised a plan predicated upon
not paying prior tax obligations. The law does not preclude
application of nominee status where one has devised a scheme to
avoid payment or collection of taxes in this manner. Debtor, in substance, is nothing more than a clever and elaborate
estate planning scheme employed to avoid the collection of a
income tax liability of Stoecklin. Notwithstanding Stoecklin's
prior dealings with the Internal Revenue Service, this Court finds
Debtor is the nominee of Stoecklin for the reasons set out above. Accordingly, it is ORDERED, ADJUDGED ORDERED, ADJUDGED DONE [This table is part of footnote 2.-- Shareholder Original Shares Redemption/Sale Redemption/Sale Shares Reissued
Date Price
B.D. Taylor .... 100
Financial--redeemed
T.W. Smith ..... 100
*
Waldo T. 100
Bramlett .......
David S. Carr .. 100
Liv I. and 100
Charles W.A. Financial--redeemed
Travis, Jr. ....
Evelyn Smith ... 100 6/ 3/87--34 Shares N/A Redeemed to Debtor
8/ 1/88--32 Shares
Robert Petrelli 100
Elmer Eugene 100
Willis .........
* These shares were gifted 100 each to Stoecklin's children.
1
Debtor was incorporated as a land development business under the
laws of Florida on or about May 17, 1979. At its inception, Debtor
had eight hundred (800) shares issued to several investors. An
original investor, Robert Petrelli remains a shareholder to date
and holds the title of Secretary/Director. There are presently 360
shares outstanding. 2
On June 9, 1979, the Shareholder's Agreement set out the owners of
Debtor and their respective share in Debtor. The following table
outlines disposition of Debtor's shares: [Table produced at end of case.-- 3
See also Stoecklin v. United States [89-1
USTC ¶9177 ], 865 F.2d 1221 (11th Cir. 1989) (family
trust income attributable to taxpayer); Stoecklin v. United
States [91-2
USTC ¶50,520 ], 943 F.2d 42 (11th Cir. 1991) (United
States may be a named party, but taxpayer could not challenge
merits of underlying assessments): Stoecklin v. United States
[92-2
USTC ¶50,525 ], 1992 WL 315548 (M.D. Fla.) (action for
wrongful disclosure of tax return information dismissed); Stoecklin
v. Hovland, 1992 WL 206394 (M.D. Fla.) (complaint for writ of
mandamus dismissed); Stoecklin v. Comm'r [CCH
Dec. 44,258(M) ], 54 T.C.M. 860 (1987) (dismissal of
compliant for award of reasonable litigation costs; government
position substantially justified). 4
Trust Income, Deductions, and Credits Attributable to Grantors and
Other Substantial Owners. [93-2 USTC ¶50,538] In re Larry L. Eisenbarger, Debtor U.S. Bankruptcy Court, East. Dist. Va.,
Alexandria Div., 93-11055-AT, Richard Hall, 7004 Little River Turnpike, Annandale, Va. 22003, for
debtor. Russell W. Craig, Special Assistant United States
Attorney, Alexandria, Va. 22314, for U.S. Gerald M. O'Donnell, 211
S. Alfred St., Alexandria, Va. 22314, trustee. MEMORANDUM OPINION TICE, JR., Bankruptcy Judge: This case comes before the court on motion by the Internal Revenue
Service (" Hearing was held on the Facts The facts are not disputed by the parties. As of On Position of the Parties The DEBTOR. Debtor's sole argument is that United States v. Whiting Pools
[83-1
USTC ¶9394 ], 462 U.S. 198 (1982), effectively
overruled Cross Electric. In Whiting Pools the Court
held that tangible saleable property seized by the Discussion and Conclusions of Law EFFECT OF Before determining whether the disputed funds are property of the
bankruptcy estate, and therefore subject to turnover, the court
must address the issue of when levies on cash or cash equivalents
are legally complete. If the Courts have differed on the question, some holding that notice of
levy alone is enough to transfer the debtor's interests in
property, 2
while others have held that something more is required. 3 Support for the position that service of the notice of levy is
insufficient has generally been found in the language of the
Internal Revenue Code procedures themselves. Internal Revenue Code
§6335
directs that, after seizure of property, notice of
seizure and notice of sale must be served upon the owner or holder
of rights before a valid sale can take place. 26 U.S.C.A. §6335
(1989). Section
6502(b) provides that notices of seizure shall be given
on the same day as any levies. 26 U.S.C.A. §6502(b)
. Dunne Trucking, Co. v. Internal Revenue Service
(In re Dunne Trucking, Co.) [83-2
USTC ¶9534 ], 32 B.R. 182, 185 (Bankr. N.D.Iowa 1983),
involved an The analysis of Dunne Trucking, however, fails to consider
the distinction between tangible and intangible property.
Intangibles, such as bank accounts or accounts receivable, cannot
be "seized" in the same manner as tangible property.
"The Levy upon tangible property is normally effected by service of
forms of levy or notice of levy and physical seizure of the
property. Where that is not feasible, the property is posted or
tagged. Because intangible property is not susceptible of physical
seizure, posting, or tagging, levy upon it is effected by serving
the appropriate form upon the party holding the property or rights
to property. See Treas.Reg. §301.6331-1(a)(a), 26 C.F.R. §301.6331-1(a)(1)
(1976). 4 G.M. Leasing [77-1 USTC ¶9140 ], 429 U.S. at 350. Citing G.M. Leasing,
the Ninth Circuit reached a similar conclusion in United States
v. Donahue Indust., Inc. [90-2
USTC ¶50,343 ], 905 F.2d 1325, 1330 (9th Cir. 1990). In short, notice of levy on intangibles is tantamount to actual
physical seizure of tangible property. Therefore, once notice of
levy has been served on cash or a cash equivalent, nothing more is
required to transfer ownership to the government, and the
taxpayer's interest in the levied property will have been
extinguished. 5 In the present case, the debtor's commissions for the February
period became the Service's from the moment that Cardio Concepts
received the TURNOVER ISSUE. Having determined that the From the time a debtor files a petition in bankruptcy, an estate is
created "comprised of all of the following property, wherever
located and by whomever held: . . . [including] all legal or
equitable interests of the debtor in property as of the
commencement of the case." 11 U.S.C.A. §541(a)(1)
. "The scope of this paragraph is broad. It
includes all kinds of property, including tangible or intangible
property, causes of action . . . and all other forms of property
currently specified in section 70a of the Bankruptcy Act."
H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 367 (1977); S. Rep.
No. 95-989, 95th Cong., 2nd Sess. 89 (1978), U.S. Code Cong. &
Admin. News, pp. 5787, 6323. Section
542(a) of the Bankruptcy Code, in conjunction with §541
, requires all entities, other than custodians,
"in possession, custody or control, during the case, of
property that the trustee may use, sell, or lease under section
363" to deliver that property to the trustee. 11 U.S.C.A. §542(a)
. The same holds true of debts that are property of the
estate and which are matured, payable on demand, or payable on
order. 11 U.S.C.A. §542(b)
. Thus, if property is deemed "property of the
estate" under §541
, it must be turned over to the bankruptcy estate under
§542
. The question thus becomes whether debtor retained any right or
interest in his February commissions after the pre-petition Section
6331 of the Internal Revenue Code is the chief
provision governing the levy power of the (a) Authority of Secretary.--If any person liable to pay any tax
neglects or refuses to pay the same within 10 days after notice
and demand, it shall be lawful for the Secretary to collect such
tax . . . by levy upon all property and rights to property . . .
belonging to such person . . . (b) Seizure and sale of property.--The term "levy" as
used in this title includes the power of distraint and seizure by
any means . . . In any case in which the Secretary may levy upon
property or property rights to property, he may seize and sell
such property or rights to property (whether real or personal,
tangible or intangible). 26 U.S.C.A. §6331
(1989). A considerable number of courts have held that when the However, nonsaleable assets (i.e., cash or cash equivalents)
are a different matter. "A pre-petition levy on cash or its
equivalent is distinguishable from a pre-petition levy on personal
property." Northwest Commons, Inc. v. Northwest Commons,
Inc. (In re Northwest Commons), 136 B.R. 215, 219 (Bankr.
E.D.Mo. 1991). When the Almost without exception, the case law holds that pre-petition
levies on cash exclude it from the bankruptcy estate. 9
The case law is not uniform, however, with regard to other forms
of intangible property. Disagreement has arisen over the question
of which intangibles constitute cash equivalents. To the extent
the debtor's levied commissions here can be considered an
intangible other than cash, it is necessary to address the case
law on analogous property interests, such as bank accounts and
accounts receivable. Although the courts are divided, 10
in my opinion those cases which have held that the debtor retains
a sufficient property interest in such intangibles either fail to
identify the debtor's remaining interest or simply state that bank
accounts and accounts receivable are always theoretically saleable
properties so that redemption and surplus rights apply. However,
as the court in Professional Technical Services pointed
out, an equitable interest exists in these type assets only where
the property value exceeds the tax levy or the amount is disputed,
leaving the possibility of surplus. 71 B.R. at 950; see also In
re Brown, 126 B.R. at 773. As with cash, where the tax levy is
greater than the value of the cash equivalent property, no equity
interest is possible. This was also the logic employed by the
Fourth Circuit in Cross Electric where the court held that
a prepetition levy on an account receivable, the tax debt being
greater than the value of the receivable, transferred the debtor's
property interest to the government. Cross Electric Co., Inc.
v. United States [81-2
USTC ¶9786 ], 664 F.2d 1218, 1220-21 (4th Cir. 1981). Moreover, in the cases where the tax debt exceeds the cash
equivalent property the right of redemption is meaningless. Common
sense suggests that debtors will redeem levied property only when
they believe the property is worth more than the tax debt. This
would be the case if the debt actually were less than the value of
the property at the time of the levy, if future appreciation of
the property were expected to make it worth more than the debt, or
if the property were part of an operating business whose value to
the business as a going concern would be greater than if
"sold for scrap." Whiting Pools [83-1 USTC ¶9394 ], 462 U.S. at 203 (1982) (citing H.R.Rep.
No. 95-595, p.220 (1977), U.S. Code Cong. & Admin.News 1978,
p. 5787). Hence, the mere fact that redemption and surplus rights are
theoretically applicable to property such as bank accounts or
accounts receivable is not dispositive. The particular facts of
each case must be examined. Following the reasoning of Cross
Electric and In re Professional Technical Services, the
right to redeem levied funds makes no sense if doing so requires
an equal or greater amount of money. The debtor here would have to
satisfy his tax liability of $39,746.58 in order to redeem a check
worth $6,800. As the Fourth Circuit in Cross Electric
noted, such a concept is "incredible." [81-2 USTC ¶9786 ], 664 F.2d at 1221. To be applicable, the
right of redemption must have substance. Here, the debtor obviously did not have a meaningful redemption or
surplus right exceeding his levied earnings at the time he filed
for bankruptcy. Under the above analysis, the This court therefore holds that the debtor is not entitled to a
turnover of the funds recovered by the The debtor relies exclusively on the Supreme Court decision, United
States v. Whiting Pools, to support his position that the
levied funds at issue properly belong to the bankruptcy estate. In
Whiting Pools, the There are, however, substantial differences between the facts in Whiting
Pools and this case. Key to the Supreme Court's decision was
the fact that the value of the tangible property levied upon was
greater than the tax levy. Whiting Pools [83-1
USTC ¶9394 ], 462 U.S. at 211. Accordingly, Whiting
Pools stands for the proposition that a debtor's interest in tangible
property is not extinguished by a prepetition government levy
which is in an amount less than the value of the property seized.
See DiFlorio v. United States [83-2
USTC ¶9492 ], 30 B.R. 815, 818 (N.D.N.Y. 1983); but
see SPS Technologies, Inc. v. Baker Material Handling Corp.
(In re E.C. Campbell, Inc.), 153 B.R. 148, 152-53 (E.D.Pa.
1993) Moreover, the Whiting Pools opinion contemplates saleable
property and does not speak to the effect of prepetition levies on
property not amenable to sale, specifically cash and cash
equivalents. In re Brown, 126 B.R. at 772. For example,
addressing the tax sale provision of the Internal Revenue Code,
the Supreme Court stated that "until such a sale takes place,
the property remains the debtor's and thus is subject to the
turnover requirement of §542(a)
." Whiting Pools [83-1 USTC ¶9394 ], 462 U.S. at 211. Because divesting a
debtor of a property interest in cash or cash equivalents does not
require a sale and since the Supreme Court in Whiting Pools
focused entirely on saleable forms of property, the case does not
support the debtor's position here that he retains post-levy
rights in cash or cash equivalent property, the sales commissions.
In re Brown, 126 B.R. at 772. 11 Therefore, Whiting Pools does not apply to this case.
Contrary to the debtor's assertion, it is not controlling when
cash or cash equivalents are involved. In sum, this court finds
that the Fourth Circuit's decision in Cross Electric
remains binding precedent in this district. 12 Accordingly, the A separate order will be entered. ORDER For the reasons stated in the memorandum opinion entered
simultaneously, IT IS ORDERED that the funds levied upon by the Internal Revenue
Service prepetition do not constitute property of the debtor's
bankruptcy estate, IT IS FURTHER ordered that the funds being held in escrow by
counsel for the debtor which constitute the proceeds of funds
levied upon prepetition shall be turned over to the United States
Attorney's Office for the Eastern District of Virginia, on behalf
of the Internal Revenue Service. 1
It is unclear why the debtor has conceded the first payment. It
would seem consistent with debtor's argument that both
checks constitute property of the estate since both were issued
after his bankruptcy petition. As a practical matter it makes no
difference, since the reasoning of the court with regard to the
second contested check applies equally to the first. 2
See McLaughlin v. Internal Revenue Service (In re McLaughlin)
139 B.R. 9, 11 (N.D.Ohio 1991); Brown v. Evanston Bank (In re
Brown), 126 B.R. 767, 774-75 (N.D. Ill. 1991); DiFlorio v.
United States [83-2 USTC ¶9492 ], 30 B.R. 815, 816 (N.D.N.Y. 1983); Silverman
v. Johnson Controls, Inc. (In re Sigmund London, Inc.), 139
B.R. 765, 771-72 (Bankr. E.D.N.Y. 1992); Northwest Commons,
Inc. v. Northwest Commons, Inc. (In re Northwest Commons, Inc.),
136 B.R. 215, 219 n.4 (Bankr. E.D.Mo.1991); Professional
Technical Services v. Internal Revenue Service (In re Professional
Technical Services, Inc.), 71 B.R. 946, 950-51 (Bankr. E.D.Mo.
1987). 3
See AIC Industries, Inc., 83 B.R. 774, 777 (Bankr. Colo.
1988); Rouse v. United States (In re Suppliers) [84-2
USTC ¶9626 ], 41 B.R. 520, 522-23 (Bankr. E.D.Ky.
1984); Davis v. Internal Revenue Service (In re Davis), 35
B.R. 795, 797-98 (Bankr. W.D.Wa. 1983); Dunne Trucking Co. v.
Internal Revenue Service (In re Dunne Trucking, Co.) [83-2 USTC ¶9534 ], 32 B.R. 182, 187-88 (Bankr. N.D.Iowa
1983). 4
Treasury Regulation
301.6331-1(a)(1) states: Levy may be made by serving a notice of levy on any person in
possession of, or obligated with respect to, property or rights to
property subject to levy, including receivables, bank accounts,
evidences of debt, securities, and salaries, wages, commissions,
or other compensation. Treas. Reg.
301.6331-1(a)(1) (emphasis added). 5
It should be noted that, although notice of seizure is unnecessary
for intangibles, many forms of intangibles are nevertheless
saleable. The rights of redemption and surplus might still be
applicable to these, unlike cash or cash equivalents. In such
cases, only a sale would transfer ownership away from the debtor. 6
See e.q., In re McLaughlin, 139 B.R. at 9, 11; Rose v.
Commercial National Bank (In re Rose), 112 B.R. 12, 15 (Bankr.E.D.Tex.
1989); In re Professional Technical Services, 71 B.R. 946,
949 (Bankr. E.D.Mo. 1987). 7
See 26 U.S.C.A. §6337
. The debtor may redeem levied-upon real estate at any
time within 180 days after the sale. 26 U.S.C.A. §6337(b)
. 8
See 26 U.S.C.A. §6342
for the full text of this provision. 9
See In re Anaheim Elec. Motor, Inc., 137 B.R. 791, 796-97 (Bankr.
C.D.Cal. 1992); In re Sigmund London, Inc., 139 B.R. at
770; In re Brown, 126 B.R. at 771; In re Northwest
Commons, 136 B.R. at 219-220 n.4; In re McLaughlin, 139
B.R. at 11; In re Rose, 112 B.R. at 15; In re
Professional Technical Services, 71 B.R at 950; DiFlorio
[83-2 USTC ¶9492 ], 30 B.R. at 818; but see, SPS
Technologies, Inc. v. Baker Material Handling Corp. (In re E.C.
Campbell, Inc.), 153 B.R. 148, 152-53 (E.D.Pa. 1993); In re
Cleveland Graphic Reproduction, Inc., 78 B.R. 819, 824 (Bankr.
N.D.Ohio 1987) (prepetition levy on cash was property of the
estate where such cash was essential to chapter 11 debtor's
rehabilitation efforts). 10
Some courts have held that levies on pre-petition bank accounts
are immune from turnover. See DiFlorio [83-2
USTC ¶9492 ], 30 B.R. 815; In re Brown, 126 B.R.
767; and In re Rose, 112 B.R. 12. Other courts have reached
the opposite conclusion. See In re Davis, 35 B.R. 795; In
re Dunne Trucking Co. [83-2
USTC ¶9534 ], 32 B.R. 182; Debmar Corp. v. United
States (In re Debmar Corp.) [82-2 USTC ¶9504 ], 21 B.R. 858 (Bankr. S.D.Fl. 1982). An 11
Additionally, a prominent consideration for the Court in Whiting
Pools was the legislative purpose behind chapter 11
bankruptcy. The Court noted that the goal of chapter 11
reorganization was to resuscitate "troubled
enterprises," enabling them to operate successfully in the
future. [83-1 USTC ¶9394 ], 462 U.S. at 201. The Court recognized that
the property levied in Whiting Pools was essential to the
functioning of the business, and liquidating such property would
undermine Congress' purpose in enacting chapter 11. Whiting
Pools [83-1 USTC ¶9394 ], 462 U.S. at 203-4. This concern, however,
has no bearing on the chapter 13 case involved here. There is
nothing to suggest that levying this individual debtor's check
will impair his ability to generate income in the future or
reorganize his finances. See In re Brown, 126 B.R. at 772.
Moreover, "to hold that a debtor may evade an administrative 12
Recently, Chief Judge Bostetter of this district issued a bench
opinion that is very similar in its conclusions. Panas &
Smith v. Commissioner of Revenue, Arlington County, et. al.,
Case No. 93-11837-AB, Ad. Pro. No. 93-1186 (Bankr. E.D.Va. The Supreme Court in Whiting Pools did not say that it was
overruling Cross Electric. Rather, the Supreme Court noted
only that the Second Circuit believed its ruling was contrary to Cross
Electric. Whiting Pools [83-1
USTC ¶9394 ], 462 U.S. at 202. Specifically, the Second Circuit stated: The question on this appeal is whether a debtor in possession . . .
is entitled to an order, under §§542
or 543
of the Code, requiring the Internal Revenue Service ( United States v. Whiting Pools, Inc.
[82-1 USTC ¶9269 ], 674 F.2d 144, 145 (2nd Cir. 1982)
(emphasis added). It seems that the Second Circuit erroneously assumed that Cross
Electric involved "tangible assets." In some cases
creditors have attempted to argue that Cross Electric
extends beyond levies on cash and cash equivalents. See e.g.,
In re Montgomery, 29 B.R. 609, 610-11 (Bankr. E.D.N.C. 1983)
(relying on Cross Electric, creditor argued that
repossessed automobile was no longer property of the estate, but
court disagreed). Stated simply, in my view Cross Electric is not in conflict
with Whiting Pools. Contra In re E.C. Campbell, Inc.,
153 B.R. 148 (E.D.Pa. 1993). 13
Even a definition of property as broad as that in §541
of the Bankruptcy Code "cannot bring property
within the ambit of the debtor's estate if the debtor has no
property interests at the commencement of . . . [the] . . .
proceeding." In re Professional Technical Services, 71
B.R. at 949. Finally, it should be noted that while the court has determined
that the $6,800.00 payment received by [93-2 USTC ¶50,671] In re National Center for the Employment
of the Disabled, Debtor U.S. Bankruptcy Court, West. Dist. Tex., El Paso
Div., 93-30172-C, 7/15/93, 157 BR 291
CLARK, Bankruptcy Judge: CAME ON for hearing the motion of debtor to use cash collateral.
The Internal Revenue Service appeared in opposition, contending
that at least some of the monies in question were no longer even
property of the debtor and so could not be used. Upon
consideration thereof, it is the ruling of the court that the
position of the The National Center for the Employment of the Disabled is a
nonprofit corporation which offers a place of employment for
disabled and disadvantaged persons. Despite its laudable work, the
organization has fallen far behind on its 940 and 941 tax
obligations, and now owes the United States nearly $250,000. Prior
to filing, the United States levied on certain accounts receivable
of the debtor, sending out notices to various companies for whom
the debtor does assembly work. 1
While only a small part of the monies intended to be trapped by
the levy were actually sent in to the The debtor counters that this court should retreat from its
position in Roland, because the case was wrongly decided.
The debtor argues that this court should instead follow the recent
decision of the Eleventh Circuit in In re Challenge Air
Intern., Inc. [92-1
USTC ¶50,090 ], 952 F.2d 384 (11th Cir. 1992), in
which that court held that a levy did not transfer ownership of an
account to the BACKGROUND FACTS The debtor is a nonprofit organization that offers job
opportunities to the developmentally disabled. Contracting with a
variety of companies, including major toy manufacturers such as
Hasbro, the debtor does simple assembly work and packaging at a
favorable rate for its vendors, in the process giving gainful
employment to many who would otherwise have to rely solely on
public assistance. Laudable as are the goals of the enterprise, it has also
experienced some cash flow problems over the years, and the
debtor's principal, Irving Handlin, has demonstrated an
uncomfortable predilection for covering cash flows by not paying
940 and 941 employment taxes. This pattern has been repeated by
Mr. Handlin over a number of years, with the result that the
Internal Revenue Service has lost all patience. 3
No matter the fine public service the enterprise offers, the After the notices of levy had been sent (and after many were
received), but before most account debtors had actually paid any
money to the At hearing, the court determined that approximately $40,000 of the
total funds due the account debtor as of the hearing date were
funds trapped by the notice of levy prior to the filing of the
petition. The court also heard substantial evidence regarding
whether the This memorandum decision addresses that preliminary question only,
and is published for the reasons discussed above. The remaining
questions (relating to adequate protection) are relatively
unremarkable and were adequately addressed by the court on the
record in its oral ruling and deserve no further elaboration here. ANALYSIS This court, in In re Roland, had ruled that a notice of
levy, when made on monies due the debtor which are less than the
total amount of the levy, eliminates any residual or reversionary
interest the debtor might have in the funds, so that no
"interest in property" is left if a bankruptcy is filed
after the notice of levy is actually received by the account
debtor. 6
The court there concluded that Whiting Pools did not
control because that case involved only "goods, not
cash." Roland, supra. Instead, the court found the
case to be controlled by Phelps v. United States [72-1
USTC ¶9467 ], 421 U.S. 330 (1975), which in turn
premised its ruling on whether there remained any equity of
redemption after the levy. Phelps, supra. The Eleventh Circuit, in Challenge Air, entertained
precisely the same argument from the [T]he direct conflict between Cross Electric and Whiting
Pools [82-1
USTC ¶9269 ], 674 F.2d 144 (2d Cir. 1982), was the
basis for granting certiorari to review Whiting Pools. [83-1 USTC ¶9394 ], 462 U.S. at 202, 103 S.Ct. at 2312. Had
the Supreme Court intended to restrict its holding to situations
involving tangible saleable property, it either would have not
recognized a conflict between [the two cases] and refused to grant
certiorari, or it would have, at the very least, indicated that no
conflict existed between the two decisions in view of the
different types of property involved. The Whiting Pools decision authorized turnover of the
debtor's property held by the Challenge Air [92-1
USTC ¶50,090 ], 952 F.2d at 386-87. This court agrees
with this analysis, and rejects any reliance on Cross Electric,
on grounds that that decision has now been overruled by Whiting
Pools. Next, the court disposed of the The administrative levy has been aptly described as a
"provisional remedy." . . . In contrast to the lien
foreclosure suit, the levy does not determine whether the
government's rights to the seized property are superior to those
of other claimants; it, however, does protect the government
against diversion or loss while such claims are being resolved. National Bank of Commerce
[85-2 USTC ¶9482 ], 472 U.S. at 721. Phelps was decided under the old Bankruptcy Act, where jurisdiction
of the bankruptcy court was dependent on the possessory
interest of the debtor in property. In addition, because Phelps
involved a liquidation situation, it is not controlling on the
question of use of property in a reorganization proceeding. Challenge Air [92-1
USTC ¶50,090 ], 952 F.2d at 387; see also Whiting
Pools [83-1
USTC ¶9394 ], 103 S.Ct. at 2314 n. 13. Property of the
debtor under the Bankruptcy Code extends to all legal or equitable
interests of the debtor in property, without regard to whether the
debtor is or is not in possession of the property. 11 U.S.C. §541
; see Whiting Pools [83-1 USTC ¶9394 ], 103 S.Ct. at 2314 & n. 11; H. §542(a)
modifies the procedural rights available to creditors
to protect and satisfy their liens. [citations omitted] In effect,
§542(a)
grants to the estate a possessory interest in certain
property of the debtor that was not held by the debtor at the
commencement of reorganization proceedings. Whiting Pools [83-1 USTC ¶9394 ], 103 S.Ct. at 2314. 8 Turnover actions are necessary precisely in order to recover
property of the debtor which is in the hands of secured creditors
as of the filing of the bankruptcy case. K. Klee, Legislative
History of the New Bankruptcy Code, 54 AM.BANKR.L.J. 275,
279-81 (1980). Such property is not limited just to tangible
property (like repossessed cars, for example), and Whiting
Pools made no such distinction in its analysis of section
542 . Indeed, the Court analogized to the Uniform
Commercial Code, which also gives secured creditors procedural
rights to take possession of collateral on a debtor's default, in
order to protect the secured creditor's interests, subject to
certain restrictions on the creditors' use of the property, yet
such collateral is vulnerable to turnover actions. 9
The Court then commented that "[w]e see no reason why a
different result should obtain when the Recognizing full well that Title 26 gives enforcement powers to the
Suppose a taxpayer pays the CONCLUSION For all of the foregoing reasons, the court concludes that the 1
NCED employees do assembly and packing work for a wide variety of
companies, to the mutual benefit of NCED and its customers, the
largest of which is Hasbro, the toy manufacturer. 2
The decision is evidently "reported" at 3
Mr. Handlin has had difficulties both with his personal taxes and
with the employment taxes for prior non-profit organizations which
he directed. He is so effective as a director of such
organizations, however, that the 4
The 5
The court, upon the conclusion of the evidence, agreed that Mr.
Handlin had indeed been quite irresponsible--so much so, in fact,
that the court ordered that he no longer be permitted to handle
the estate's money, or to sign checks. The court withheld the
ultimate determination of adequate protection on a report from the
debtor's accountant regarding the likelihood of the debtor's being
able to propose a feasible plan for paying off its debts (a report
to be prepared independently of Mr. Handlin, but with his
cooperation). 6
The term "account debtor" as used in this decision is
intended to be generic, and can extend not only to entities such
as Hasbro that owe money to entities such as the debtor here for
goods shipped or services performed by the debtor, but also to
banks, which "owe" the debtor whatever demand deposits
the debtor might keep at that bank, in the form of checking
accounts, savings accounts, certificates of deposit, and the like. 7
The court re-emphasizes its dismay that it should even have to go
through this exercise, for had the 8
A number of courts, beginning with Whitting Pools, have
also observed that Phelps, being an Act case, was decided
oil the issue of plenary versus summary jurisdiction a distinction
abolished under the Bankruptcy Code. Whitting Pools [83-1
USTC ¶9394 ], 462 U.S. at 209 n. 18, 103 S.Ct. at 2316
n. 18; Matter of Kirk, 100 B.R. 85, 90 (Bankr. M.D.Fla.
1989); Flynn's Speedy Printing, Inc., 136 B.R. at 300 n. 1.
The definition of property amenable to estate administration in section
541(a) of the Bankruptcy Code is substantially broader
than it was under the Act, in order to, among other things,
eliminate the very sorts of disputes and jurisdictional conundrums
that led to cases like Phelps. See H.R. Doc. 137, 93rd
Cong., 1st. Sess. 16-17 (1973). 9
The Court made no distinction between a secured creditor's
possessory rights in tangible property and intangible property. 10
Indeed, section
6332(c) of the Internal Revenue Code gives a 21-day
window between levy and liability ("any bank . . . shall
surrender . . . any deposits . . . only after 21 days after
service of levy"). The interest earned on that fund for that
21 days is treated as income to the taxpayer, which of
course would be quite impossible if the levy transferred ownership
of the account to the United States effective the date of the
levy. See Matter of Flynn's Speedy Printing, Inc., 136 B.R.
299, 301 (Bankr. M.D.Fla. 1992). 11
The rule might indeed be different with respect to monies already
paid to the 12
Said the Senior District Judge Kane in responding to the very
argument the While there is a certain Machiavellian charm to this argument, I
reject it as contrary to the Court's teaching in United States
v. Whiting Pools, Inc. [83-1
USTC ¶9394 ], 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d
515 (1983). . . . It matters not, as the government suggests, that
the property is cash or a cash equivalent instead of tangible
property. In re Challenge Air Intern., Inc. [92-1
USTC ¶50,090 ], 952 F.2d 384 (11th Cir. 1992). The tax
code permits the Id. [94-2 USTC ¶50,315] In re Material Corporation, Inc., Debtor
U.S. Bankruptcy Court, No. Dist. Ill., East.
Div., 90 B 10097, [Code
Sec.
6331 ] KATZ, Bankruptcy Judge: Before the Court is the United States' motion to dismiss
("Motion") Debtor's supplemental objection
("Objection"), filed April 5, 1993, to its claim for
unpaid employment taxes ("Claim"). Under 11 U.S.C. §106(b)
and Fed. R. Bankr. P. 3007, Debtor has included as part
of its objection a counterclaim in setoff against damages Debtor
allegedly suffered from the government's allegedly tortious acts
pre- and post-petition to collect the taxes forming the basis of
its claim. See 11 U.S.C. §106(b)
(1993); Fed. R. Bankr. P. 3007. The government has set
forth several responses to the Objection: First, the government
has not waived its sovereign immunity under 11 U.S.C. §106
. Second, Debtor has failed to file its action as an
adversary proceeding under Fed. R. Bankr. P. 7001. Third, the
government has not been properly served. Fourth, the Objection
improperly refers to the claimant as the Internal Revenue Service
rather than the United States. Fifth, the Objection is
jurisdictionally deficient to the extent that it demands a refund
of taxes already collected in satisfaction of the government's
claim. Sixth, Debtor's counterclaim is time-barred pursuant to 26
U.S.C. §7433(d)
. Seventh, Debtor has not complied with the remaining
prerequisites for filing an action as set forth in 26 U.S.C. §7433(d)
. Last, Debtor is estopped, by the Stipulation and
Order of this Court entered without prejudice on August 10, 1990,
from raising allegations stemming from the government's treatment
of certain accounts receivable. After considering the arguments
and exhibits presented by counsel, the Court finds that Debtor has
stated a proper counterclaim for an offset against the
government's claim. Debtor is estopped, however, from claiming any
damages arising from the government's treatment of its accounts
receivable. The Court's jurisdiction to hear this matter derives from 28 U.S.C.
§1334 and General Rule 2.33(A) of the United States District
Court for the Northern District of Illinois. It is a core
proceeding under 28 U.S.C. §157(b)(2)(C). With the exception of a claim for damages arising from the
government's treatment of certain of its accounts receivable
treated in a previous stipulation and order of this Court, Debtor
may assert a counterclaim as an offset to the government's claim.
11 U.S.C. §106(b)
provides: (b) There shall be offset against an allowed
claim or interest of a governmental unit any claim against such
governmental unit that is property of the estate. 11 U.S.C. §106(b)
(1993). Subsection (b) provides the basis for any
complaint Debtor may have against the government that (1) is
property of the estate and (2) is limited to a setoff against the
government's claim. The government's argument that the only
possible basis for Debtor's action is 26 U.S.C. §7433
1
is therefore mistaken. Debtor has not brought its action under
that section, nor alleged that the government disregarded any
provisions of Title 26, the basis for a 7433 suit. The
government's corollary arguments--that Debtor's action is
time-barred under §7433(d)
, and that Debtor has not complied with the other
requirements for actions brought under that section--must also
fall by the wayside. Section
106(b) of the Bankruptcy Code provides a sufficient
basis for Debtor's suit. 2 The government waived its sovereign immunity to Debtor's
counterclaim when it filed its proof of claim. Section
106(b) waives sovereign immunity with respect to a
debtor's counterclaim, limited to the amount that may be set off
against the government's claim. See U.S. v. Nordic Village,
Inc. [92-1
USTC ¶50,109 ], 112 S.Ct. 1011, 1015 (1992)
(government waives sovereign immunity with respect to
"permissive counterclaims to governmental claims capped by a
setoff limitation"); Ashbrook v. Block, 917 F.2d 918,
924 (6th Cir. 1990) ("the legislative history of section
106(b) evinces Congress' intent that the mere filing of
a proof of claim by [a] governmental agency permits a [debtor] to
file a counterclaim against that agency"); In re Price,
130 B.R. 259, 271 (N.D. Ill. 1991) (section
106(b) reflects a waiver of the government's sovereign
immunity as to a counterclaim in the form of an offset against the
government's allowed claims). The government filed a proof of
claim in Debtor's bankruptcy, dated Because the Court finds that Debtor is not entitled to the
affirmative relief it seeks, Debtor's supplemental objection to
claim need not comply with the Bankruptcy Rules pertaining to
adversary complaints. 3
Debtor is estopped from seeking the affirmative relief it has
requested in its counterclaim that would necessitate an adversary
proceeding. In its prayer for relief, Debtor asks the Court to
"order the 1. The accounts levied upon by the United States on or about May
23, 1990 and before June 1, 1990, are not property of the estate.
(A listing of said accounts are attached hereto as Exhibit A). 2. The United States will seek to collect said accounts receivable
and the proceeds received from said accounts receivable will be
applied in satisfaction of the tax liabilities of Material
Corporation Inc. as set forth as secured claims in the United
States amended proof of claim. Once the amounts due and owing the
United States, including accrued interest, have been fully
collected, the United States shall release the remaining accounts
receivable from its levy. The United States retains the right to
release any and all accounts from its levy should it, in its sole
discretion, deem the accounts to be uncollectible. After having admitted that the accounts were not property of the
estate, Debtor is estopped from claiming payments the government
collected on them. Because the Court finds that Debtor is not
entitled to the affirmative relief it seeks, and is allowing the
counterclaim to proceed only to the extent of a setoff, the rules
pertaining to adversary complaints do not apply. Therefore, this
proceeding may continue as a contested matter. See Fed. R.
Bankr. P. 3007; Fed. R. Bankr. P. 9014. CONCLUSION The government's motion to dismiss Debtor's Supplemental Objection
to Claim is denied with respect to Debtor's counterclaim for
setoff, and granted with respect to any recovery of payments the
government collected on certain of Debtor's accounts receivable. 1
26 U.S.C. §7433
provides in pertinent part: (a) In general.--If, in connection with any collection of Federal
tax with respect to a taxpayer, any officer or employee of the
Internal Revenue Service recklessly or intentionally disregards
any provision of this title, or any regulation promulgated under
this title, such taxpayer may bring a civil action for damages
against the United States in a district court of the United
States. Except as provided in section
7432 , such civil action shall be the exclusive remedy
for recovering damages resulting from such actions. (d) Limitations.-- (1) Requirement that administrative remedies be exhausted.--A
judgment for damages shall not be awarded under subsection (b)
unless the court determines that the plaintiff has exhausted the
administrative remedies available to such plaintiff within the
Internal Revenue Service. (3) Period for bringing action.--Notwithstanding any other
provision of law, an action to enforce liability created under
this section may be brought without regard to the amount in
controversy and may be brought only within 2 years after the date
the right of action accrues. 2
The Senate Report on section
106(b) states: [T]he estate may offset against the allowed claim of a governmental
unit, up to the amount of the governmental unit's claim, any claim
that the debtor, and thus the estate, has against the governmental
unit, without regard to whether the estate's claim arose out of
the same transaction or occurrence as the government's claim.
Under this provision, the setoff permitted is only to the extent
of the governmental unit's claim. No affirmative recovery is
permitted. Subsection (a) governs affirmative recovery. S.Rep. No. 989, 95th Cong., 2d Sess. 29-30 (1978), reprinted in
1978 U.S. Code & Admin. News 5815-16. 3
Fed. R. Bankr. P. 7001 provides in pertinent part: "An
adversary proceeding is governed by the rules of this Part [93-2 USTC ¶50,494] Martin B. Quillen, et al., Plaintiffs v.
United States of America, et al., Defendants U.S. District Court, West. Dist. Va., Big Stone
Gap Div., Civ. 92-0097-B, Joseph E. Wolfe, Wolfe & Farmer, P.O. Box. 625, Norton, Va.
24273-0625, for plaintiff. Richard A. Lloret, Poff Bldg., 4th Flr.,
Roanoke, Va. 24008-1709, Angelo A. Frattarelli, Department of
Justice, Washington, D.C. 20530, for defendant (I.R.S.) Mark L.
Esposito, Penn, Stuart, Eskridge & Jones, Abington, Va. 24210,
for defendant (Hamilton Bk. of Upper E. Tenn.) MEMORANDUM OPINION WILSON, District Judge: Plaintiffs Martin B. Quillen, Sr. and Marlene C. Quillen bring this
action against the United States and Hamilton Bank of Upper East
Tennessee ("Hamilton Bank"). Liberally construed, the
Quillens' complaint alleges that the Internal Revenue Service
(" I. On April 3, 1986, the Quillens filed for reorganization under
chapter 11 of the Bankruptcy Code. They subsequently opened a bank
account at Hamilton Bank for use as an operating account while in
reorganization. On March 1, 1988, the bankruptcy court confirmed
their chapter 11 plan and granted discharge. On October 10, 1989, the II. Initially, the court finds no jurisdictional basis for the Quillens'
claim under title 11 that the United States violated the automatic
stay from the Quillens' prior bankruptcy. To assert a claim
against the United States, the Quillens must show a waiver of
sovereign immunity. In their amended complaint the Quillens assert
jurisdiction for all of their claims under 26 U.S.C. §§7430
--7433. However, §7430
contains no waiver of immunity for any kind of claim; §7431
waives immunity only for unauthorized disclosure
claims; §7432
waives immunity only for claims alleging failure to
release a lien; and §7433
waives immunity only for claims alleging a violation of
title 26. Clearly, none of those sections waives immunity for the
claim that the The Quillens also allege violations of 26 U.S.C. §§6103
and 6331--6343 by the United States, which they
maintain are actionable under 26 U.S.C. §7433(a)
. The court finds that those claims fail as a matter of
law. 3
The Quillens' claims for alleged violation of §§6331
--6343, a subchapter of the Internal Revenue Code
concerning the procedures by which the The Quillens' claim that the to the extent that such disclosure is necessary in obtaining
information, which is not otherwise reasonably available, with
respect to the correct determination of tax, liability for tax, or
the amount to be collected or with respect to the enforcement of
any other provision of this title. Such disclosures shall be made
only in such situations and under such conditions as the Secretary
may prescribe by regulation. 26 U.S.C. §6103(k)(6)
. Treasury Regulations promulgated under the section
allow disclosure "to apply the provisions of the [Internal
Revenue] Code relating to the establishment of liens against [a
taxpayer's] assets, or levy on, or seizure, or sale of, the assets
to satisfy any . . . liability" under the Code. Treas. Reg.
§301.6103(k)(6)-1(b) (1980). There is no evidence, and
indeed the Quillens do not even allege, that confidential
information was disclosed in any context other than that described
in the statute and regulation. The court therefore finds that any
disclosures made by the All of the Quillens' claims against Hamilton Bank are based upon
Hamilton Bank's compliance with the Any person in possession of . . . property . . . subject to levy
upon which a levy has been made who, upon demand by the Secretary,
surrenders such property . . . to the Secretary . . . shall be
discharged from any obligation or liability to the delinquent
taxpayer and any other person with respect to such property . . .
arising from such surrender or payment. 26 U.S.C. §6332(e)
(West Supp. 1993). That section clearly discharges
Hamilton Bank from any liability to the Quillens based on its
compliance with the levies. See Burroughs v. Wallingford [86-1 USTC ¶9173 ], 780 F.2d 502, 503 (5th Cir. 1986); Schiff
v. Simon & Schuster, Inc. [86-1 USTC ¶9204 ], 780 F.2d 210, 212 (2nd Cir. 1985); DiEdwardo
v. First Nat'l Bank of Bath [78-1 USTC ¶9380 ], 442 F.Supp. 499, 500 (E.D. Pa. 1977).
Accordingly, the court finds that the Quillens' claims in that
respect are deficient as a matter of law. For reasons stated, the court will grant summary judgment to the
United States and will grant Hamilton Bank's motion to dismiss. An appropriate order will issue. 1
See Gay v. Wall, 761 F.2d 175, 177 (4th Cir. 1985). 2
26 U.S.C. §7433(a)
provides: If, in connection with any collection of Federal tax with respect
to a taxpayer, any officer or employee of the Internal Revenue
Service recklessly or intentionally disregards any provision of
this title . . ., such taxpayer may bring a civil action for
damages against the United States in a district court of the
United States. 26 U.S.C.A. §7433(a)
(West 1989). As framed, the Quillens' complaint alleges
violations of title 26, and the court therefore has jurisdiction
over those claims under §7433(a)
. However, their claims under 26 U.S.C. §§6331
--6343 are ultimately premised on alleged violations of
the automatic stay provision, 11 U.S.C. §362
. The court expresses no opinion as to whether there
might be circumstances under which a levy in violation of the
automatic stay provision would somehow contravene the procedures
set forth in §§6331
--6343 and, by that fact, become actionable under §7433(a)
. It is unnecessary to reach that question because, as
stated in Part 3
The court finds that issues of material fact preclude entry of
summary judgment based upon the limitations periods provided in 26
U.S.C. §§7431(d)
and 7433(d)(3)
. 4
The Quillens' amended complaint does not specify any facts
pertaining to the alleged unlawful disclosure, but merely consists
of the bare allegation that the [93-2 USTC ¶50,454] In re Federation of Puerto Rican
Organizations of Brownsville, Inc., Debtor. United States of
America, Plaintiff v. Federation of Puerto Rican Organizations of
Brownsville, Inc., Finkel, Goldstein, Berzow & Rosenbloom,
Attorneys for the Creditors Committee, Defendants
M. David Graubard, Kera & Graubard, |