2000-2 USTC ¶50,613] In re Jerry W. McIntyre and Waltrout McIntyre, Debtors. Waltrout McIntyre, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 98-17192, 7/13/2000, Affirming an unreported District Court decision

[Code Secs. 6331 and 6871 ]

Tax levies: Pension plans: Assignment or alienation of benefits: California: Community property: Bankruptcy.--A debtor's claim that the IRS lacked authority to levy her community interest in her husband's and co-debtor's pension fund in order to satisfy outstanding federal income taxes incurred by her husband was properly denied. Her contention that state (California) law gave her an "exclusive" half-interest in the husband's pension benefits was rejected because that law refers to equal interests in the whole of the community property rather than exclusive interests in only half of the community property. Further, by granting creditors recourse against the whole community estate on the debts of only one spouse, California law implicitly establishes that spouse's interest in the whole of the community property, at least to a degree sufficient for the IRS to impose tax liens under the Code. Babb (CA-9), 74-1 USTC ¶9476 , followed. BACK REFERENCES: ¶38,187.15 , 38,187.173 and 40,630.0246

[Code Sec. 401 ]

Tax levies: Pension plans: Assignment or alienation of benefits: ERISA.--The IRS was entitled to levy on a debtor's pension fund to collect outstanding federal income taxes even though it was a qualified retirement plan under ERISA because the bar against assignment or alienation of an individual's interest in a qualified retirement plan did not preclude the IRS from enforcing its tax levy. Moreover, ERISA contains a savings clause that prohibits construction of the anti-alienation provision to alter, amend or supersede other federal laws, and a prohibition against the alienation of ERISA funds to satisfy a federal levy would limit the scope of Code Sec. 6321 . BACK REFERENCES: ¶17,733.72

Waltrout McIntyre, Stockton, Calif., pro se. Loretta C. Argrett, William S. Estabrook and Janet A. Bradley, Department of Justice, Washington, D.C. 20530, for the defendant-appellee.

Before: O'SCANNLAIN, LEAVY and RYMER, Circuit Judges.

OPINION

O'SCANNLAIN, Circuit Judge:

We must decide whether the Internal Revenue Service may levy upon ERISA-regulated pension benefits to satisfy a husband's tax debt against the claim that the wife has a vested interest in half of those benefits under community property laws.

I.

Waltrout McIntyre's husband and co-debtor, Jerry McIntyre, owed almost $300,000 in overdue federal income taxes for the years 1983-1995. In 1996, the Internal Revenue Service ("IRS") served a Notice of Federal Tax Levy upon Jerry's pension plan, the California Field Iron Worker Pension Trust Fund, which is governed by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§1001 et seq. Pursuant to the IRS levy, the pension plan began paying Jerry's pension benefits directly to the IRS in August 1996.

In May 1997, the McIntyres filed a joint bankruptcy petition under Chapter 13 of the Bankruptcy Code, 11 U.S.C. §1301 et seq. In June 1997, Mrs. McIntyre initiated within the bankruptcy proceedings an adversary proceeding against the United States under 26 U.S.C. §7426, claiming that the IRS's levy of Jerry's pension benefits was wrongful insofar as it seized her one-half interest in those benefits (which she purported to hold under California's community property regime).

The bankruptcy court granted the IRS's motion for summary judgment, rejecting her contentions both that the IRS lacked authority to levy her interest in the pension benefits in satisfaction of her husband's tax debt and that ERISA precluded the use of those benefits to discharge a federal tax liability.

II.

"We review the bankruptcy court's . . . conclusions of law de novo." Levin v. Maya Constr. (In re Maya Constr. Co.), 78 F.3d 1395, 1398 (9th Cir. 1996). On appeal from the district court, "we independently review the bankruptcy court's decision and do not give deference to the district court's determinations." Robertson v. Peters (In re Weisman), 5 F.3d 417, 419 (9th Cir. 1993).

A.

There is no dispute that the IRS may levy on a delinquent taxpayer's property for the enforcement of his federal tax obligations. See, e.g., United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719, 86 L.Ed.2d 565, 105 S.Ct. 2919 (1985). Broad authority to do so is granted by statute:

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.

26 U.S.C. §6331(a). ¹ Nonetheless, Mrs. McIntyre maintains (and the United States does not contest) that this provision authorizes the IRS to levy on property only insofar as the interest of the delinquent taxpayer extends and no further. It is well established that "state law controls in determining the nature of the legal interest which the taxpayer has in property." Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82, 60 S.Ct. 424, 84 L.Ed. 585 (1940).

Mrs. McIntyre objects to the IRS's levy of the whole of her husband's pension benefits because, under California law, the interest of her husband (the delinquent taxpayer) in those benefits extends only to half of their face value. This is so, she argues, because the pension benefits are subject to California 's community property regime, which gives husband and wife "present, existing, and equal interests" in community property "during continuance of the marriage relation." Cal. Fam. Code §751 (West 2000). ² Mrs. McIntyre contends that, under §751, she has an "exclusive" half-interest in her husband's pension benefits, that her husband's own interest in those benefits thus extends only to half of their value, and that the other half (her half) is therefore beyond the IRS's levy power pursuant to 26 U.S.C. §6331.

B.

There is no authority for Mrs. McIntyre's characterization of her property interest in her husband's pension benefits as "exclusive" of any that he may retain. As an initial matter, Family Code §751 does not speak in terms of any "exclusive" divisions of community property: That provision refers to "equal interests" in the whole of the community property rather than in terms of "exclusive" interests in only half of the community property. Family Code §910 further undermines Mrs. McIntyre's characterization. That section establishes that:

the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

Cal. Fam. Code §910(a) (emphases added). We have held before that, by granting creditors recourse against the whole community estate on debts of only one spouse, California law "implicitly" establishes that spouse's "interest" in the whole of the community property, at least to a degree sufficient for the IRS to impose tax liens under the Internal Revenue Code. See Babb v. Schmidt [74-1 USTC ¶9476], 496 F.2d 957, 960 (9th Cir. 1974).

As both the bankruptcy court and the district court indicated, our decision in Babb must foreclose Mrs. McIntyre's claim, at least to the extent that she bases it on California 's community property regime. Like her, the plaintiff in Babb was a wife who brought suit for wrongful levy under 26 U.S.C. §7426 because the IRS had sought recourse against community property for satisfaction of tax debts owed by the husband alone. See id. at 958. The wife argued that, because California law gave her a vested interest in half of the moneys in the couple's bank accounts, "her husband [could] not be said to have 'property or rights to property' " in that half, and the IRS thus could not attach it. Id. We rejected the wife's argument. We held that California law has "implicitly given the husband rights in [the wife's share] sufficient to meet the requirements" for tax liens against the property of delinquent taxpayers. Id.

The plaintiff in Babb contended, just as Mrs. McIntyre does here, that California 's provision of recourse for one spouse's creditors against the other spouse's share of the community property is merely a rule regulating creditors' rights and does not define the first spouse's "rights to property" for purposes of federal tax law. See id. at 959. We dismissed this contention, however, and our reasoning plainly disposes of Mrs. McIntyre's further argument that the scope of the federal authority to attach a wife's property for the satisfaction of a husband's tax debt should be uniform across states. See id. at 958-59 (distinguishing contrary holdings from cases in Washington and Arizona by noting that those states defined the husband's property interests differently by "denying premarital creditors of the husband access to the wife's share of the community").

1.

Mrs. McIntyre's efforts to distinguish Babb are unavailing. She first asserts that Babb turned on the extent of a federal tax lien against a wife's share under 26 U.S.C. §6321 rather than the IRS's authority to levy thereon pursuant to 26 U.S.C. §6331. This observation is irrelevant, for the provisions for the federal tax lien and the IRS's levy power are both explicitly limited to "all property and rights to property . . . belonging to" the delinquent taxpayer, 26 U.S.C. §§6321, 6331. The Supreme Court has thus acknowledged the similarity in the scope of the provisions. See National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 719, 720 (1985) ("The statutory language 'all property and rights to property,' appearing in §6321 (and, as well, in §6331(a) . . . ), is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have."). ³

2.

Mrs. McIntyre next argues that our holding in Babb is inapplicable because the property at issue in that case, a bank account, was not regulated by ERISA whereas the pension payments at issue in this case are. Her distinction of Babb based on the role of ERISA in this case appears to rest on one of two arguments; neither of them is valid.

The first argument is that ERISA effectively preempts Cal. Fam. Code §910 and thereby preempts California law to the extent that it gives Mrs. McIntyre's husband any interest in her share of his pension benefits (by giving to his creditors recourse against her share). Because Mrs. McIntyre's husband has no interest in her share under the remaining, non-preempted provisions of California law, the argument goes, the scope of the IRS's levy authority cannot extend to her share.

This argument relies on an over-exuberant interpretation of ERISA's anti-alienation provision, which requires only that any ERISA-governed pension plan "provide that benefits provided under the plan may not be assigned or alienated." 29 U.S.C. §1056(d)(1). The underlying premise is that, because ERISA's anti-alienation provision would preclude the operation of §910 to the extent that it would permit creditors to proceed against the pension benefits at issue, cf. Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 107 L.Ed.2d 782, 110 S.Ct. 680 (1990); Ablamis v. Roper, 937 F.2d 1450, 1458 (9th Cir. 1991), the same provision also must preclude the operation of §910 to the extent it "implicitly" grants an interest in the same benefits to her husband. We reject this premise. Although the creditors' recourse guaranteed by §910 may be ineffective against Mrs. McIntyre's share of her husband's pension benefits, it does not follow that the husband's property interest therein has been similarly vitiated. ERISA's anti-alienation provision plainly does not preempt the operation of California law insofar as it vests in the husband a continuing property interest in his own pension benefits, for less is being alienated from the plan beneficiary (the husband) in this circumstance than if his interest in those benefits were entirely foreclosed. Mrs. McIntyre's argument based upon ERISA's preemption of §910 thus must fail.

The bankruptcy and district courts interpreted Mrs. McIntyre's argument to be simply that ERISA's anti-alienation provision prevents the IRS from levying on the benefits from any ERISA-governed pension plan. As an initial matter, the Internal Revenue Code expressly indicates that no other federal law shall exempt property from the IRS's authority to levy a delinquent taxpayer's property under §6331. See 26 U.S.C. §6334(c). Moreover, ERISA's anti-alienation clause cannot prevent the IRS from undertaking what would otherwise be a valid exercise of its levy authority under 26 U.S.C. §6331, because ERISA itself has a saving clause that states: "Nothing in this subchapter [which includes the anti-alienation provision] shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States." 29 U.S.C. §1144(a). The only other circuit that has addressed this issue reached the same conclusion, which authority we find persuasive. See Shanbaum v. United States [94-2 USTC ¶50,512], 32 F.3d 180, 182-83 (5th Cir. 1994); cf. United States v. Sawaf [96-1 USTC ¶50,063], 74 F.3d 119, 123-24 (6th Cir. 1996) (upholding the treasury regulation that authorizes the IRS to levy on the benefits of an ERISA-governed plan and applying that regulation to uphold the IRS's collection against such benefits); Anderson v. United States, 149 B.R. 591, 595 (9th Cir. BAP 1992) (upholding a tax lien against benefits from an ERISA-governed plan). ⁴ We think it is plain that the IRS's authority to proceed against a delinquent taxpayer's interest in benefits from an ERISA-governed plan is not constrained by ERISA's anti-alienation provision.

AFFIRMED.

¹ There is no claim that Jerry's pension benefits fall under an exemption enumerated in 26 U.S.C. §6334.

² The government concedes that the pension benefits are community property, and thus we shall not address that claim here.

³ It is true that the IRS's levy power is somewhat narrower in that it does not extend to property exempted under §6334, but those exemptions are not relevant to Mrs. McIntyre's case.

⁴ Treasury regulations interpreting the same language used in ERISA's anti-alienation provision also suggest that the IRS's levy authority is not restricted thereby. See 26 C.F.R. §1.401(a)-13(B)(2) ("A plan provision satisfying the [anti-alienation] requirements . . . shall not preclude the following: (i) The enforcement of a Federal tax levy made pursuant to section 6331.").

[99-1 USTC ¶50,227] Joan S. Leaks, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 97-17036, 1/14/99 , Reversing an unreported District Court decision

[Code Sec. 6331 ]

Levy and distraint: Spousal property: Who is the taxpayer: Community property: Property acquired during marriage: Wages.--A divorced wife was entitled to a return of property levied upon by the IRS in satisfaction of her ex-husband's tax liability. The IRS 's reliance on a state ( Nevada ) law presumption that all property acquired during marriage is community property was misplaced. Since the government offered no evidence to show that the wife acquired the seized property during the marriage, the presumption that it qualified as community property never came into play. However, the wife could not recover wages seized before the divorce since the levy in that instance was specifically limited to property acquired during the marriage..

Before: FARRIS, REINHARDT and HAWKINS, Circuit Judges. ^*

MEMORANDUM ^**

Dr. Joan Leaks ("Leaks") sued the government after the Internal Revenue Service levied her assets and salary in an effort to collect the tax debts of her ex-husband, George Leaks. The Leakses were married in 1969 and lived in South Carolina , a non-community property state, until 1990. At some point during the time they lived in South Carolina , George Leaks failed to pay employment taxes for his optometry practice, and the IRS assessed him but was unable to levy any of Leaks' separate property. In 1990, the Leakses moved to Nevada , a community property state. They divorced in November, 1995.

In the weeks before the divorce became final, the IRS seized Leaks' bank accounts, salary, and other assets, arguing that her funds were subject to seizure because they were community property under Nevada law. The property taken from her included: First Interstate Bank, $628.00; Nevada State Bank, $9,573.62; Western Reserve Life Insurance Co., $2,700.53. In addition, her employer, Premier Family Medical Center remitted $2,181.82 from her salary. Shortly thereafter, Leaks filed suit in federal district court to recover her money, contending that these sums were her separate property and not subject to seizure.

The district court granted summary judgment for the government on the theory that Leaks failed to rebut the presumption under Nevada law that all property acquired during marriage is community property. The order issued by the district court noted that she "offered no affidavits or other evidence to support her contention that a material question of fact remains as to the characterization of the property levied on by the government."

There is indeed a presumption under Nevada law that property acquired during coverture is community property. 1989 Nev. Stat. 123.130, 123.220. There is, however, no presumption that property acquired before marriage is community property or even that property possessed by a spouse was acquired during marriage. Campbell v. Campbell, 101 Nev. 380, 383 (1985) ("[T]he community property presumption did not even come into operation" until it was proved that the property was acquired during the marriage.).

The government has failed to come forward with a shred of evidence that $12,902.15 of the money seized from Joan Leaks was acquired during her marriage to George Leaks. Thus the presumption does not come into play, and Leaks had nothing to rebut. Moreover, in the absence of any evidence supporting the government's claim, its case must fail. Dr. Leaks is thus entitled to summary judgment with respect to the $12,902.15 seized without any evidence that it was marital property. She is not, however, entitled to the return of the $2,181.82 from her salary, because the levy in that case was specifically limited to amounts earned between October 4, 1995 and the date of the Leakses' divorce.

The judgment of the district court is REVERSED in part and AFFIRMED in part, and the case is REMANDED for further action in accordance with this disposition. Costs on appeal are awarded to appellant.

^* The panel unanimously finds this case suitable for decision without oral argument. Fed. R. App. P. 34(a); (2)

^** This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

93-2 USTC ¶50,605] Onie L. Hyde, Plaintiff v. United States of America, Defendant

U.S. District Court, Dist. Ariz., Civ. 90-1258 PHX EHC, 9/1/93

[Code Secs. 401 , 6331 and 6334 ]

Pension plans: Assignment or alienation prohibited: Levy and distraint: Community property.--The IRS was permitted to levy 100% of a widow's retirement benefits to satisfy her husband's liability for the 100% penalty for failure to pay over withholding taxes owed by the company of which he had been an officer. As set forth in O.L. Hyde (93-2 USTC ¶50,432 ), under state ( Arizona ) community property law, the husband owned a 50% interest in the portion of his wife's retirement plan earned during the marriage. Because the husband's interest in the plan was considered "property" under state law, it was proper to attach a lien to that interest. Since the debt incurred by the husband was deemed a "community debt" for which both spouses were liable, the husband's subsequent death did not terminate the wife's obligation to pay the debt. Further, the community debt classification subjected the entire interest in the plan to IRS levy. Moreover, the regulation that prohibits alienation of a benefit plan did not preclude the enforcement of a federal tax levy under Code Sec. 6331 . Because the wife's retirement plan was subject to the Code Sec. 6331 levy, the IRS was authorized to collect from it, even after the husband's death.

ORDER

Background

CARROLL, District Judge:

Plaintiff Onie L. Hyde filed a complaint on August 15, 1990, seeking an injunction against an Internal Revenue Service levy on her portion of the United Dairymen of Arizona Trust, a benefit plan sponsored by her place of employment. The levy was initiated after the I.R.S. assessed a 100% penalty tax on her husband, Farrell Hyde. Plaintiff contended that Farrell's debt was a separate debt and that, because he could exercise no present property interest or rights in the trust, the levy should be enjoined.

Defendant moved for summary judgment on the grounds that the attachment of the lien to the property was an issue of law and not of fact. The Court granted this motion on June 7, 1993. The Court held that Arizona 's community property laws gave Farrell Hyde a present interest in the money accrued in his wife's benefit plan after their marriage. Since the language in 26 U.S.C §6331 mandates a levy on all property and rights to property belonging to a person who is delinquent in their taxes, the trust was subject to Farrell's debts. ¹

Plaintiff now seeks to have the Court reconsider its Order of Summary Judgment pursuant to Federal Rule of Civil Procedure 60(b) because new evidence was discovered after its issuance. Plaintiff states that her husband's death on May 5, 1993 has a direct bearing on the issue decided by the Court.

Discussion

Because state laws govern the ownership of property, U.S. v. Mitchell [71-1 USTC ¶9451 ], 91 S.Ct 1763, 1767 (1971), Arizona community property laws must be applied to the [sic] determine the Hydes' property subject to the levy. In Arizona , community property interests terminate upon death of a spouse; therefore, Farrell Hyde's death dissolved the Hydes' community. Tway v. Payne, 55 Ariz. 343, 345, 101 P.2d 455, 456 (1940); In re Estate of Pfeffer, 16 Ariz.App. 147, 10, 492 P.2d 27, 30 (1972). However, Plaintiff may be liable for any debts incurred by her husband during their marriage even after the community has ceased to exist. Johnson v. Johnson, 131 Ariz. 38, 45, 638 P.2d 705, 711 (1981). If a debt is deemed to be a "community debt" then both partners are obligated to pay it back. Johnson at 44; citing Donato v. Fishburn, 90 Ariz. 210, 213, 367 P.2d 245, 246 (1961). Conversely, a "separate debt" only binds that party which incurs it. A.R.S. §21 -215(a); Johnson at 45. To determine if Plaintiff's benefit plan will continue to be subject to the assessed tax levy, the Court must classify the debt incurred by her husband.

Arizona courts have defined community debts as an obligation incurred during marriage for the benefit of the community. Johnson at 44. A.R.S. §25 -214(b) gives spouses equal power to bind the community; section (c) further provides that either spouse may separately bind the community without their partner's consent or knowledge. ² Thus, if a husband acts "with the object of benefitting the community, . . . the obligations incurred by him are community in nature, whether or not the wife approved thereof." Ellsworth v. Ellsworth, 5 Ariz.App. 89, 92, 423 P.2d 364, 367 (1967).

In this case, Farrell failed to collect, truthfully account for and pay over to the government the withheld income and FICA taxes of J.B. Architectural and Mechanical, Inc., the company in which he was an officer. The marital community is not liable for debts contracted by the husband which are in no way connected with the community and from which the community receives no benefit. Hamada v. Valley National Bank, 27 Ariz.App. 433, 436, 555 P.2d 1121, 1124 (1976). Here, it is undisputed that Farrell Hyde's unreported income was used for the benefit of the Hydes' marital community. Stipulation of Facts, Defendant's Motion to Dismiss or in the Alternative for Summary Judgment at para. 12. Since the debt is a community debt, both Farrell and Onie Hyde are liable and Farrell's death did not terminate his wife's obligation to the I.R.S.

In granting Defendant's Motion to Dismiss, the Court held that Onie Hyde's benefit plan could be levied to satisfy her husband's debt because it was community property. Since Defendant sought only 50% of the trust, that which it surmised to be Farrell's interest, the Court approved the levy of precisely that amount. However, the Court also noted that the entire amount of the benefit plan could be levied, contingent upon its classification as either a community or separate debt. Because the Court now classifies Farrell Hyde's obligation to the I.R.S. as being a community debt, Onie's entire plan can be levied.

Plaintiff directs the Court to Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991). However, the issue before the Ablamis court was "whether a wife who dies while her husband is still living may leave half his current or future pension benefits to a third party in her will." Id. at 1452. Ablamis is inapposite to the matters currently before the Court, which concern the relationship between federal tax levy powers and state law community property interests.

Moreover, 27 C.F.R. §1.401(a)-13(b)(2)(i) provides that the laws against alienation of a benefit plan do not preclude the enforcement of a Federal tax levy pursuant to 26 U.S.C. §6331 . Since Onie Hyde's benefit plan is subject to the §6331 levy, the I.R.S. is authorized to collect from it even after her husband's death.

Accordingly,

IT IS ORDERED denying Plaintiff's Rule 60(b) Motion for Reconsideration of Order of Summary Judgment (dkt. #21).

¹ The Court found that the Plaintiff's trust was not exempt from the levy because it did not fall under those categories specified in 26 U.S.C. §6334(a) .

² The joinder of both spouses is necessary only in limited cases. Such cases include the following: (1) any transaction for the acquisition, disposition, or encumbrance of an interest in real property other than an unpatented mining claim or a lease of less than one year; (2) any transaction of guaranty, indemnity, or suretyship.

[95-2 USTC ¶50,601] IBEW Local Union No. 640, et al., Plaintiffs v. Howard E. Forman, et al., Defendants

U.S. District Court, Dist. Ariz., CIV . 94-2431 PHX PGR , 9/20/95

[Code Sec. 6103 ]

Disclosure of return information.--The IRS did not improperly disclose an individual's return information because the information disclosed in the notices of levy was necessary to the collection activity.

[Code Sec. 6201 ]

Assessment authority: Liabilities reported on returns.--The IRS was not required to issue a notice of deficiency for several of the tax years at issue because it was authorized to assess liabilities based on the liabilities reported on the taxpayer's joint return without the deficiency assessment procedure.

[Code Sec. 6203 ]

Method of assessment: Validity.--An assessment was valid despite the IRS 's failure to provide the taxpayer with the actual record of assessment because the taxpayer received all the pertinent information. Furthermore, a notice of assessment mailed a few days prior to the actual assessment did not invalidate the assessment.

[Code Secs. 6331 , 6332 and 6334 ]

Levy and distraint: Surrender of property: Pension benefits: Community property: Property exempt from levy.--A local union was entitled to protection from liability for honoring levies against an individual because the individual's pension benefits were properly the subject of a tax levy and no exemption applied. Under state (Arizona) law, the benefits were community property, and the individual's tax debts were community debts. .

ORDER

ROSENBLATT, District Judge:

The Court, having considered the various motions pending before it in light of the entire record and the oral argument of the parties, finds that the plaintiffs' and the United States' cross-motions for summary judgment should be granted and that the Formans' motions should be denied.

The Court initially concludes that Howard Forman's pension benefits are subject to levy pursuant to 26 U.S.C. §6331 in their entirety since under Arizona law those benefits are community property, Johnson v. Johnson, 131 Ariz. 38, 638 P.2d 705, 708 (1981); Hyde v. United States, 93-2 USTC ¶50,432 (D.Ariz. 1993), aff'd without op., 26 F.3d 130 (9th Cir. 1994), Howard Forman's tax debts to the United States are community debts, Hyde v. United States, 93-2 USTC ¶50,433 (D.Ariz. 1993), aff'd without op., 26 F.3d 130 (9th Cir. 1994), and those benefits are not exempt from levy pursuant to any exemption set forth in 26 U.S.C. §6334(a) . Shanbaum v. United States, 32 F.3d 180, 183 (5th Cir. 1994); Hyde v. United States, 93-2 U.S.T.C. ¶50,432 at 89,325. Since the pension benefits are properly the subject of a tax levy, the plaintiffs are entitled to the protection from liability for honoring the levies afforded by 26 U.S.C. §6332(e) .

The Court also concludes that the Formans have not established that they are entitled to a continuance pursuant to Fed.R.Civ.P. 56(f) in order to obtain discovery with which to rebut the presumption of procedural regularity enjoyed by the Certificates of Assessments and Payments submitted by the United States in support of its summary judgment motion. Under Rule 56(f), the burden is on the Formans to set forth by affidavit the particular material facts expected to be uncovered through discovery that would preclude summary judgment and to identify specific facts tending to show that the evidence sought actually exists. Klingele v. Eikenberry, 849 F.2d 409, 412 (9th Cir. 1988). A Rule 56(f) continuance is not appropriate if further discovery could not elicit evidence that would raise genuine issues of material fact. Id. The "irregularities" pointed out in Forman's affidavits are insufficient to preclude summary judgment in the United States' favor. First, a notice of assessment mailed a few days prior to the actual assessment does not invalidate the assessment. See United States v. Friedman [84-2 USTC ¶9639 ], 739 F.2d 252, 256 (7th Cir. 1984) ("We hold that the failure to provide notice within sixty days after the making of an assessment will not bar suit [by the government] where the government has provided complete notice shortly before the making of the assessment.") Second, the validity of an assessment is not affected by the United States' failure to provide the taxpayer with the underlying "actual record of assessment". Although 26 U.S.C. §6203 provides that "[u]pon request of the taxpayer, the Secretary shall furnish the taxpayer a copy of the record of assessment[,]" the enabling regulation, 26 CFR §301.6203-1 , provides that

[i]f the taxpayer requests a copy of the record of assessment, he shall be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of the assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.

The Formans have been provided with all of this information. Third, no warrant for distraint is necessary under 26 U.S.C. §6331 as it was under the 1939 version of the Internal Revenue Code. Stuart v. United States, 1993 WL 590383 (D.Nev. 1993). Fourth, the Formans' contention that 26 U.S.C. §6331 required a notice of seizure of the pension payments, as opposed to merely a notice of levy, is meritless since it is based on their incorrect belief that notices of levy are only proper with regard to levies on government employees. James v. United States [92-2 USTC ¶50,389 ], 970 F.2d 750, 755 n.9 (10th Cir. 1992) (Taxpayer's argument that the levy was invalid under §6331(a) because he wasn't a government employee was frivolous since §6331(a) "empowers the IRS to levy the property of all taxpayers.") Fifth, the references in Forman's affidavit regarding his study of GAO reports and media stories of IRS computer problems are too speculative to warrant discovery to determine if the Formans are "victims of accounting problems."

The Court also concludes that there is no merit to the Formans' motion seeking to strike on evidentiary grounds the Certificates of Assessments and Payments attached as Exhibits A and B to the United States' summary judgment motion. The admissibility of these documents if firmly established. Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531, 539-40 (9th Cir. 1992). There is also no merit to the Formans' contention that the IDRS computer printout attached as Exhibit C to David Glasser's declaration should be stricken since the printout was property authenticated as a public record.

The Court further concludes that the United States is entitled to judgment on the First, Second and Third Causes of Action of the cross-claim. First, there is no merit to the Formans' contention that the tax liens are procedurally invalid because no notices of deficiency were sent to the crossclaimant "marital community of Howard E. and Maria D. Forman". Under Arizona community property law, the marital community is not an entity of juristic person separate and apart from the spouses composing the marital community. See Mortensen v. Knight, 81 Ariz. 325, 305 P.2d 463, 466-68 (1956). Second, the Internal Revenue Service properly issued individual o Howard Forman for the 1985-1991 tax years and to Maria Forman for the 1985-1989 tax years since they were required to include half of the community income in their gross income for the years in which they did not file joint returns. See Edwards v. Commissioner of Internal Revenue [82-2 USTC ¶9472 ], 680 F.2d 1268, 1271 (9th Cir. 1982) ("A married individual is taxable on the earning of his or her spouse to the extent that the laws of the state of residence grants the individual a vested property or ownership interest in the spouse's earnings. The community property laws of Arizona grant such an interest.") Third, the IRS was not required to issue a notice of deficiency for the 1992 and 1993 tax years because the IRS is authorized by 26 U.S.C. §6201(a)(1) to assess tax liabilities based on liabilities reported in the joint returns filed by the Formans without resort to the deficiency assessment procedure.

The Court also concludes that the United States is entitled to judgment on the Fourth, Fifth and Sixth Causes of Action in the cross-claim pursuant to the protection afforded by 26 U.S.C. §6103(k)(6) since the information disclosed in the notices of levy were necessary to the collection activity. Farr v. United States [93-1 USTC ¶50,229 ], 990 F.2d 451, 455 (9th Cir.), cert. denied, 114 S.Ct. 634 (1993); Huff v. United States [93-2 USTC ¶50,633 ], 10 F.3d 1440, 1447 (9th Cir. 1993), cert. denied, 114 S.Ct. 2706 (1994) ("In Farr, ... the court concluded that even though the collection procedures at issue may have been defective, Farr could not bring an action under §7431(a)(1) based on information disclosed to Farr's employer in a levy notice. The court held that the levy notices fell 'squarely within the exemption under §6103(k) ' despite the possible procedural lapses involving the actual levy.") Therefore,

IT IS ORDERED that the United States' Motion for Summary Judgment, filed June 2, 1995 (doc. #31), is granted.

IT IS FURTHER ORDERED that the plaintiffs' Motion for Summary Judgment, filed June 2, 1995 (doc. #38), is granted.

IT IS FURTHER ORDERED that Howard and Maria Forman's Motion for Summary Judgment and Motion for Partial Summary Judgment, filed June 2, 1995 (doc. #40), are both denied.

IT IS FURTHER ORDERED that Howard and Maria Forman's Motion to Strike Certificates of Assessments and Payments, filed July 5, 1995 (doc. #51), is denied.

IT IS FURTHER ORDERED that Howard and Maria Forman's Motion to Continue Consideration of the United States' Motion for Summary Judgment, filed July 10, 1995 (doc. #53), is denied.

IT IS FURTHER ORDERED that the United States shall submit a form of judgment resolving the entirety of this action no later than October 9, 1995.

[93-2 USTC ¶50,432] Onie L. Hyde, Plaintiff v. United States of America, Defendant

U.S. District Court, Dist. Ariz., CIV 90-1258 PHX EHC, 6/7/93

[Code Secs. 6331 and 6334 ]

Levy and distraint: Retirement plans: Community property.--The IRS could levy one-half of an individual taxpayer's interest in a retirement plan to satisfy delinquent taxes owed by the taxpayer's husband. The husband, as a responsible corporate officer, was assessed a tax deficiency and penalty tax for his company's failure to collect FICA taxes. Under state (Arizona) community property law, the husband owned a one-half interest in the portion of his wife's retirement plan earned during the marriage. Because the husband's interest in the plan was considered "property" under state law, it was proper to attach a lien to that interest under Code Sec. 6331 .

James Benham, James Benham, P.C. 1144 E. Jefferson St., Phoenix, Ariz. 85034, for plaintiff. James P. Loss, Richard Glenn Patrick, 230 N. 1st Ave., Phoenix, Ariz. 85025, J. Scott Moede, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

Re: Motion for Summary Judgment

I. Background

CARROLL, District Judge:

This is a wrongful levy action brought pursuant [to] 26 U.S.C. §7426(a)(1) through which plaintiff Onie L. Hyde seeks an injunction against enforcement of an Internal Revenue Service (I.R.S.) levy. The parties have stipulated to the following facts: ¹

At the time of bringing this action the plaintiff, Onie Hyde, was a resident of the State of Arizona and had been for over forty years. On March 1, 19 65, plaintiff commenced her employment with United Dairymen of Arizona. On September 30, 19 67, Onie L. Hyde became a participant in the United Dairymen of Arizona Trust (hereafter referred to as the benefit plan). On August 21, 1971, plaintiff married Farrell W. Hyde in Las Vegas, Nevada. Both Onie L. Hyde and Farrell W. Hyde were residents of the State of Arizona at the time of their marriage and have been at all times since. Onie L. Hyde's participant interest in the benefit plan was $506.36 at the time of her marriage to Farrell W. Hyde.

Farrell W. Hyde was an officer of J.B. Architectural and Mechanical, Inc., located at 6807 N. 17th Street, Phoenix, Arizona, from January 1, 1983 through and including March 31, 1985. As a responsible officer of J.B. Architectural and Mechanical, Inc., Farrell W. Hyde was assessed a 100% penalty tax pursuant to 26 U.S.C. §6672 for his willful failure to collect, truthfully account for and pay over to the government the withheld income and FICA taxes of J.B. Architectural and Mechanical's employees. The assessment was for $242,693.50 representing all of 1983 and 1984, and the first quarter of 1985. This penalty tax was assessed on April 11, 1988.

The income made by Onie L. Hyde as an employee of United Dairymen was used for the benefit of the marital community. The income made by Farrell W. Hyde as an employee of J.B. Architectural and Mechanical, Inc., was used for the benefit of the marital community. There are no premarital agreements which extinguish the couples' community property rights.

In order to collect the §6672 penalty assessed to Farrell Hyde, on June 26, 1990, an I.R.S. officer prepared a notice of levy to be served on the United Dairymen. On July 10, 1990, the I.R.S. mailed the notice of levy for Farrell W. Hyde's one-half community interest in Onie L. Hyde's participant interest in the benefit plan. On August 21, 1990, in response to the notice of levy, the I.R.S. received a check from the United Dairymen in the amount of $39,493.26.

II. Argument

On May 16, 1991 the government filed a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the basis that the plaintiff has failed to state a claim upon which relief can be granted, and in the alternative for summary judgment pursuant to Rule 56, Fed. R. Civ. P. Because the government relies on stipulated facts outside of the pleadings, the Court will treat its motion as one for summary judgment. See Rule 12(b), Fed. R. Civ. P. ²

The government argues that under Arizona property law, Farrell W. Hyde has a present one-half community interest in the defined benefit plan of his wife. Because Arizona recognizes this interest as a property right, the government argues that his interest in the benefit plan is subject to I.R.S. levy for delinquent taxes pursuant to 26 U.S.C. §6331 . In addition, the government claims that the tax debt owed by Farrell W. Hyde is a debt of the marital community, thus giving the I.R.S. the power to levy the entire account. ³

In response, plaintiff argues that because her husband could not exercise any "present" property interest or rights, the defined benefit plan was beyond the reach of Government levy. Plaintiff also contends that the tax debt of Farrell Hyde as a "penalty" is his sole and separate debt and, as such, the property of Onie L. Hyde is not subject to levy. Plaintiff further contends that a levy on the retirement plan rights would force a divestiture of the plan participant's interest, which would incur unnecessary taxes and result in the loss of accrued benefit. ⁴

III . Discussion

Mr. Hyde's Interest in the Defined Benefit Plan

Property rights are determined by state law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513, 80 S.Ct. 1277, 1280 (1960); United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142, 1146 (9th Cir. 1970). Under Arizona law, property acquired during marriage is presumed to be community property. A.R.S. §25 -211. Employee pension plans are considered a deferred form of compensation and, as such, any portion earned during marriage is community property. Koelsch v. Koelsch, 148 Ariz. 176, 181, 713 P.2d 1234, 1239 (1986); Johnson v. Johnson, 131 Ariz. 38, 41, 638 P.2d 705, 708 (1981). In the context of retirement benefits, the Arizona Supreme Court has stated that "during marriage a husband and wife have an equal, immediate, present, and vested interest in the community assets." Koelsch, 713 P.2d at 1239 citing Hatch v. Hatch, 113 Ariz. 130, 131, 547 P.2d 1044, 1045 (1976).

Arizona recognizes property held prior to marriage as separate property. A.R.S. §25 -213. Accordingly, Farrell Hyde has an immediate, present, and vested one-half interest in the portion of the benefit plan accrued after August 21, 1971 , the date of his marriage to plaintiff.

Applicability of Tax Assessments to Retirement Plans

The amount of a delinquent taxpayer's liability results in a "lien in favor of the United States upon all property and rights to property." 26 U.S.C. §6321 . The levy provisions of the Internal Revenue Code provide that the government may levy "all property and rights to property (except such property as is exempt under section 6334 )" belonging to delinquent taxpayers. ⁵

The statutory language "all property and rights to property" appearing in §6321 "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719, 105 S.Ct. 2919, 2924 (1985). Internal Revenue Code §6334(c) states in no uncertain terms that notwithstanding other laws of the United States, "no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)." The plaintiff's retirement account does not fall within any of the exceptions provided by the Code.

Plaintiff contends that because Farrell W. Hyde could not quit, demand distribution, or alienate any benefit, the government could not levy the benefit plan of the plaintiff. Plaintiff argues that by doing so the I.R.S. wrongfully exercised a property right superior to that of Farrell Hyde.

If Arizona law raises the delinquent taxpayer's interest to the status of property or rights to property, federal law will cause a lien to attach to that interest. United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir. 1970). "It is of no statutory moment how extensive may be those rights under state law, or what restrictions exist on the enjoyment of those rights." Id. at 1145. I.R.S. levy of the community property of a taxpayer for separate tax debts is proper to the extent that the levy does not exceed the taxpayer's interest in the community. Id.

The question of whether Mr. Hyde's interest in the benefit plan is subject to I.R.S. levy involves the application of a statute and Arizona law to an undisputed set of facts; it is strictly a question of law. Based upon Arizona community property law, Mr. Hyde has a present, immediate, and vested one-half interest in the benefit plan property that his wife accrued after their marriage. Federal tax liens attach to all property and rights to property. The levy of Mr. Hyde's interest in the benefit plan is proper and the government is entitled to judgment as a matter of law. ⁶

Accordingly,

IT IS ORDERED granting defendant's Motion for Summary Judgment (Dkt. #10).

IT IS FURTHER ORDERED that plaintiff's complaint is dismissed with prejudice.

¹ See Stipulation of Facts, Defendant's Motion to Dismiss or in the Alternative for Summary Judgment, Exhibit A.

² As plaintiff has treated the government's motion at one for summary judgment, there is no issue as to whether plaintiff has been given reasonable opportunity to present all material made pertinent to a motion by Rule 56.

³ As stated supra, the government has sought to levy only one-half, or what it defines as Farrell Hyde's community property interest, in the pension plan.

⁴ Plaintiff's assertion that the penalty itself is invalid will not be discussed because plaintiff does not have standing to contest this issue. Accord, Pottorf v. United States, 738 F.Supp. 1369, 1371 (D. Kan. 1990). Farrell Hyde may challenge the underlying tax assessment against him in a suit for refund under 28 U.S.C. §1346(a).

⁵ Section 6334(a) provides for certain property to be exempt from levy: (1) wearing apparel and school books; (2) fuel, provisions, furniture, and personal effects; (3) books and tools of a trade, or business profession; (4) unemployment benefits (5) undelivered mail; (6) certain annuity and pension payments; (7) workmen's compensation; (8) judgments for support of minor children; (9) minimum exemptions for wages, salary, and other income; (10) certain service-connected disability payments. U.S.C. 26. None of these exceptions is applicable to the circumstances before the Court.

⁶ Depending on whether the tax penalty is determined to be a separate or community tax debt, the Government could arguably levy the entire amount of the benefit plan. However, as the government only seeks to levy Farrell Hyde's interest in the benefit plan, this issues is not currently before the Court.

[88-1 USTC ¶9106] Terrie Lynne Venie, Plaintiff v. United States of America, Defendant

U.S. District Court, East. Dist. Wash., C-86-1012-JLQ, 11/3/87

[Code Sec. 6331 --Equal Access to Justice Act--Result unchanged by the Tax Reform Act of 1986 ]

Collection of taxes: Levy and distraint: Community property: Attorneys' fees: Equal Access to Justice Act.--An oral agreement to consider employment income as the separate property of the spouse who earned it was sufficient under state (Washington) law to convert what would normally be community property into separate property. Thus, the wife's earnings were separate income that could not be levied upon to pay her husband's separate tax debts. The wife's request for an award of attorneys' fees, beyond what had been previously awarded, was denied because the IRS 's litigation position was substantially justified.

Robert E. Kovacevich, 530 Lincoln Bldg., Spokane, Wash. 99201-0995, for plaintiff. John E. Lamp, United States Attorney, Spokane, Wash. 99201, Patricia C. Brennan, Department of Justice, Washington, D.C. 20530, for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

QUACKENBUSH, District Judge:

This matter came regularly on for trial before the court on October 26, 1987 . The plaintiff, Terrie Lynne Venie, appeared in person and with her attorneys, Robert E. Kovacevich and Christopher J. Coffman. The government appeared by attorneys Patricia C. Brennan and Michael Powell.

Mrs. Venie, the plaintiff herein, brought this action pursuant to 28 U.S.C. §2410 for a declaration that by reason of an agreement between she and her husband, reached in 1976 when Mrs. Venie started work after the birth of the couple's two daughters, her income from that employment was and is her separate property, and therefore not subject to recent IRS levies for penalties separately assessed against Mr. Venie.

FINDINGS OF FACT

The plaintiff, Terrie Lynne Venie, and Glennon Venie were married in 1969 and since that time have been and are now wife and husband. Two daughters have been born as issue of that marriage. These children are now ages 15 and 12. Prior to 1976, the sole source of support of the family was provided by Mr. Venie, who was attending school on the G.I. Bill and, in addition, worked in a greenhouse.

In 1976, Mrs. Venie attended a grocery store checker's course. Thereafter, she was offered a position with Rosauer's Supermarkets as a checker. Mr. and Mrs. Venie discussed this job opportunity. There was no evidence introduced which indicated that it was financially necessary for Mrs. Venie to become employed to support the family. Mrs. Venie had been raised in what she described as a "poor" family and this was her first opportunity to become employed and have her own income. Mrs. Venie had completed high school, but had no further education.

Mrs. Venie informed her husband that she would like to go to work, but that she wanted the income to be "her own". At this time, Mr. and Mrs. Venie orally agreed that if Mrs. Venie accepted the employment, the income would belong to her, i.e., her separate property. At this time, the parties further orally agreed that Mr. Venie's income would be his own, i.e., his separate property. The parties agreed that they would total the basic bills for family necessities on a monthly basis and each party would contribute one-half thereof from their separate earnings. Under this agreement, each party would retain their earnings as their own property and would be free to spend their income as each saw fit. The parties further agreed that no personal or real property would be acquired as community property unless both parties agreed thereto, in which event each party would contribute one-half of the cost of the property from their separate earnings.

In reliance upon the agreement of the parties, Mrs. Venie accepted the employment offer and commenced work as a checker. It appears that at this time Mr. and Mrs. Venie had a joint checking account. Mr. and Mrs. Venie only used this account as a depository for their respective one-half contributions for the family necessities. Mrs. Venie retained her monthly check and each month contributed therefrom her one-half share for the family necessities. The parties did not commingle their income. The joint checking account evidently was closed around 1981.

Since the oral agreement reached in 1976, the parties, and particularly Mrs. Venie, have studiously and consistently complied with the agreement. Mr. and Mrs. Venie have strictly observed the terms of the agreement for the ensuing 11 years and for 10 years prior to the attempted levy by the I.R.S. Mrs. Venie has maintained sole control and dominion over her monthly income. Each month the parties would add up the bills for family necessities and each party would pay one-half thereof. Mrs. Venie would cash her payroll check and pay her one-half of the bills in cash or through the purchase of money orders. In the early years of this agreement, Mrs. Venie deposited her payroll check in her own separate checking account and paid her one-half share of the bills for family necessities therefrom. Mrs. Venie closed that account many years ago.

Since 1976, the parties have not jointly purchased any real or personal property. In 1981, Mrs. Venie determined to buy an automobile from Wendle Ford, utilizing her separate income and separate property. Wendle Ford would not sell the car to Mrs. Venie without Mr. Venie's signature. Therefore, both parties signed the purchase order; however, all payments on the car were made by Mrs. Venie from her separate earnings and all costs of operation of the car, including insurance and maintenance, were paid by Mrs. Venie from her separate earnings.

In 1979, after completion of his education, Mr. Venie entered into the landscaping business as a sole proprietor. Mrs. Venie had serious reservations as to the economic reality of this venture and, therefore, Mr. and Mrs. Venie agreed that this business would be Mr. Venie's separate property and that the income and debts arising from this business would be solely Mr. Venie's, as his sole and separate property. The business was incorporated in 1981 with two other business partners. Mrs. Venie played no role in the operation of the business. At the time of the incorporation, Mrs. Venie was named as the initial Secretary-Treasurer; however, she held no stock in the corporation and all income was received solely by Mr. Venie as his sole and separate property. From this income Mr. Venie contributed on a monthly basis one-half of the cost of the family necessities through cash or the purchase of money orders. The business required the posting of performance bonds and Mrs. Venie signed documents pledging the family home as indemnification to the bonding company. This family home was purchased prior to the 1976 agreement between Mr. and Mrs. Venie that Mrs. Venie's income would be her separate property.

Mrs. Venie's concerns about the economic viability of Mr. Venie's landscaping business were apparently well founded. The business failed to pay federal withholding taxes and, as a result, the I.R.S. assessed the 100 percent penalties against Mr. Venie. It appears there is a balance owing on these taxes for the year 1979 in the amount of $1,627.63; for 1981 in the amount of $9,573.13. The I.R.S. levied on the cash value of life insurance on Mr. Venie's life from a New York Life Insurance Company policy on which the premiums were paid from Mr. Venie's separate property. This policy was treated as Mr. Venie's separate property and Mrs. Venie made no claim of ownership therein at the time of the I.R.S. levy. Mr. Venie became indebted to the bonding company on defaulted landscaping contracts and the bonding company foreclosed on the family home in partial satisfaction of Mr. Venie's indebtedness to it. In 1982, Mr. Venie filed for bankruptcy. Mrs. Venie signed some of the schedules at Mr. Venie's request; however none of the separate property assets or debts of Mrs. Venie were included in the bankruptcy, except for the Ford automobile.

Thereafter, the I.R.S. assessed the 100 percent penalties against Mr. Venie individually. Collection efforts against Mr. Venie commenced in 1983 and, as stated, supra, levy was made against the cash value in Mr. Venie's life insurance policies. The I.R.S. treated the assessments against Mr. Venie as his separate obligations (See Exhibits 2 and 4). In November 1986, the I.R.S. attempted to levy against Mr. Venie's alleged undivided one-half community interest in Mrs. Venie's wages. The Venies had previously advised the I.R.S. of the oral separate property agreement as to Mrs. Venie's wages. An attorney had prepared a written agreement which attempted to set forth the oral agreement of the parties (See Exhibit 1). This written agreement will be discussed, infra.

When the I.R.S. attempted to levy on Mrs. Venie's wages based upon Mr. Venie's alleged undivided one-half interest in Mrs. Venie's wages, Mrs. Venie instituted this action seeking a declaration that her wages are, in fact, her separate property, and not subject to levy to satisfy Mr. Venie's debt to the I.R.S.

ANALYSIS

In deciding this case, this court is guided by United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir. 1970). Overman is factually distinct from this action in that in Overman the I.R.S. levied upon the taxpayer's undivided one-half interest in admittedly community property in an effort to satisfy the separate tax liability of one member of the community. In the action sub judice, the issue is whether Mrs. Venie's earnings are her separate property. The government concedes that Mrs. Venie's wages are not subject to levy if, in fact, the earnings are Mrs. Venie's separate property. The nature of the property interests must be determined under the law of the State of Washington. Overman, at 1146.

RCW 26.16.030 provides that except as specified in RCW 26.16.010 and .020, property acquired after marriage is community property. RCW 26.16.140 provides that the earnings of a husband or wife, while living separate and apart, are the separate property of the party earning the wages. RCW 26.16.200 provides that the separate property and earnings of one spouse are not liable for the separate debts of the other spouse.

The courts of the State of Washington have further established that even though there is no applicable statutory provision, a husband and wife may orally convert what would normally be community property into the separate property of one of the spouses. "Married persons may orally agree, whether they are living together or not, that their respective earnings shall be separate property." In re Estate of Janssen, 56 Wn.2d 150, 152, 351 P.2d 510 (1960) (citing Togliatti v. Robertson, 29 Wn.2d 844, 190 P.2d 575 (1948), and numerous other Washington cases); see also 33 Wash. L. Rev. 112, 113 (1958).

In this case, the court finds Mrs. Venie to be a most credible witness. The court finds that in fact when Mrs. Venie accepted employment in 1976, the parties agreed that her earnings would be and would remain her separate property. While the law of the State of Washington presumes that property acquired during marriage is community property, this presumption can be overcome if the proof to the contrary is clear and convincing. In re Marriage of Janovich, 30 Wn. App. 169, 171, 632 P.2d 889 (1981). From the time of the agreement of the parties in 1976, Mrs. Venie maintained and disposed of her earnings as her separate property. She at no time commingled her earnings with those of her husband. She spent and maintained her earnings as she chose, after she had paid one-half of the family necessities as agreed by the parties. This process has been strictly followed from 1976 to date. Appropriate discovery procedures by counsel for the government failed to disclose a single instance of commingling or variance from the 1976 agreement from the date of the agreement to present. The cosigning of the 1981 automobile purchase by her husband was required only by reason of the policy of the auto dealer. The car was, in fact, purchased and paid for by Mrs. Venie from her separate earnings.

Mr. Powell, on behalf of the government, appropriately argues the presumption as to the community nature of a spouse's earnings. Counsel for the government further points out that the written agreement of the parties (Ex. 1), prepared in 1986, which attempted to memorialize the 1976 oral agreement, could be construed to mean that only that portion of Mrs. Venie's earnings, after the payment of one-half of the family necessities, was to be her separate property. A strict construction of one of Mrs. Venie's answers to such a question put to Mrs. Venie by counsel for the government could result in such a finding. The court does not reach this conclusion. To the extent that one might construe the 1986 written agreement and the one response of Mrs. Venie as admissions of the government's position, the court finds to the contrary. The attorney's language in the 1986 written document was somewhat ambiguous, just as the affidavit prepared by the attorney dated December 19, 1986 , incorrectly stated that Mrs. Venie was the sole source of her family's support. Mrs. Venie frankly admitted this error. Mrs. Venie, throughout her testimony, was frank and honest. The testimony of Mrs. Venie was corroborated by the testimony of her husband and her brother. The court finds that the evidence was clear and convincing that not only did the parties enter into the 1976 oral agreement, but that they have consistently conformed and complied therewith from that date to this.

The trier of fact should be concerned about the legitimacy of such agreements where creditors are involved. Such agreements, even if found to exist, cannot be utilized to avoid creditors in existence at the time of the agreement. In this case, the I.R.S. penalty debt of Mr. Venie did not arise until a number of years after the separate property agreement was made and complied with. There is no evidence that the agreement was a device to defraud or avoid creditors.

The agreement reached by Mr. and Mrs. Venie is recognized by State of Washington law and is not contrary to public policy. While this court did not decide this case based upon a public policy analysis, the court observes that a separate property agreement, such as was reached by the Venies, in fact supports a legitimate public policy of keeping families together. RCW 26.16.140 provides in part that if a husband and wife live separate and apart, their respective earnings are their separate property. This court can take judicial notice of the fact that in some circumstances, a separation of husband and wife has taken place by reason of economic necessity to protect the earnings of one spouse from attachment or garnishment by a separate property creditor of the other spouse. The law of the State of Washington recognizing oral separate property agreements between a husband and wife living together supports the public policy of keeping families together, particularly where, as here, the agreement was bona fide and was not entered into in an effort to avoid or defraud creditors existing at the time the agreement was reached.

The plaintiff seeks recovery of attorney fees from the government under the Equal Access to Justice Act (28 U.S.C. §2412). While the court has found against the government, I do not find that its position was unjustified. The court finds that in view of the presumptive community nature of Mrs. Venie's income, the government's position was substantially justified. As such, the request for attorney fees must be DENIED except those previously awarded in the discovery process in the amount of $444.00.

CONCLUSIONS OF LAW

1. Pursuant to the 1976 oral agreement of Mr. and Mrs. Venie, the court finds that Mrs. Venie has established by clear and convincing evidence that her wages are her separate property and an Order to that effect should be entered.

2. The plaintiff's request for attorney fees should be DENIED, except for the sum of $444.00 previously awarded, for which judgment should be entered in favor of the plaintiff and against the defendant.

IT IS SO ORDERED. The Clerk is directed to enter this Order and forward copies to counsel.

JUDGMENT

On the basis of the Findings of Fact and Conclusions of Law, IT IS ADJUDGED:

1. Defendants are restrained from attempting to collect from plaintiff's separate property the unpaid employment taxes now owing by Glennon Venie.

2. Plaintiff is awarded judgment against the defendant in the amount of $444.00 pursuant to the court's Order of July 1, 1987.

IT IS SO ORDERED. The Clerk is directed to enter this Order and forward copies to counsel.

69-1 USTC ¶9233]John T. Dalton and Dorothea C. Dalton, a marital community under the laws of the State of Washington, Plaintiff v. United States of America, Defendant

U. S. District Court, West. Dist. Wash., No. Div., Civil No. 7117, 2/17/69

[Code Secs. 6321 and 6331]

Tax liens: Levy and distraint: Community property: Washington: Husband's salary: Irreparable damage.--Even though the separation of husband and wife for more than two years is grounds for divorce under Washington law, such, in the absence of the commencement of divorce proceedings, or entry into a property settlement, or other evidences indicating an intention of the parties to permanently and legally terminate the marriage relationship, does not operate to dissolve the marriage relationship. Therefore, the earnings of the taxpayer-husband were marital community property. The Government's tax lien based upon an unpaid tax obligation of the taxpayer-husband did not attach to his interest in the community property. The taxpayer's wife and children had an economic interest in the taxpayer's earnings and the enforcement of a levy against such salary would cause them to suffer irreparable damage.

James F. McAteer, 1115 Norton Bldg., Seattle, Wash., for plaintiff. Eugene G. Cushing, United States Attorney, Albert E. Stephan, Assistant United States Attorney, 1012 U. S. Courthouse, Seattle, Wash., for defendant.

Findings of Fact and Conclusions of Law

BEEKS, District Judge:

This case was regularly tried before the above-entitled Court on January 15, 19 69. In addition to the admitted facts established by pre-trial Orders entered herein on October 18, 19 68, and on January 14, 19 69, the Court, after hearing testimony (including testimony taken by deposition of John T. Dalton), admitting exhibits into evidence, and being fully advised, now makes the following:

Findings of Fact

I. During the calendar year 1963, John T. Dalton expended the sum of $840.18 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

II. During the calendar year 1964, John T. Dalton expended the sum of $1,228.05 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

III . During the calendar year 1965, John T. Dalton expended the sum of $2,685.50 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

IV. During the calendar year 1966, John T. Dalton expended the sum of $3,779.57 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

V. During the calendar year 1967, John T. Dalton expended the sum of $4,851.41 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

VI. During the calendar year 1968, John T. Dalton expended the sum of $5,243.66 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

[Family Financial Requirements]

VII . John T. Dalton and Dorothea C. Dalton regularly consult together as to the financial requirements for the maintenance of the home in which Dorothea C. Dalton and the children of John T. Dalton and Dorothea C. Dalton reside and the medical and educational expenses of the children.

[Marriage Not Terminated]

VIII. Neither John T. Dalton nor Dorothea C. Dalton sought to legally terminate the marriage relationship by divorce proceedings. John T. Dalton and Dorothea C. Dalton have not entered into a property settlement agreement.

IX. The marriage of John T. Dalton and Doroteha C. Dalton was not dissolved in 1959 or at any point in time thereafter.

X. The children of John T. Dalton and Dorothea C. Dalton, and Dorothea C. Dalton have an economic interest in the earnings of John T. Dalton.

[Irreparable Damage]

XI. The children of John T. Dalton and Dorothea C. Dalton, and Dorothea C. Dalton would suffer irreparable injury if the defendant is permitted to levy on those wages and earnings of John T. Dalton which is the subject of this civil action.

From the foregoing Findings of Fact, the Court now enters the following:

Conclusions of Law

I. Plaintiff constitutes a marital community under the law of the State of Washington and this Court has jurisdiction under the statutory authority of 28 U. S. C. 1346(e) and 26 U. S. C. 7426.

II. The plaintiff marital community would suffer irreparable injury if enforcement of the levy made on Pioneer Industries, Inc. on the salary of John T. Dalton is not enjoined.

[Earnings as Community Property]

III . The earnings of John T. Dalton during the years 1963, 1964, 1965, 1966, 1967 and 1968, constitute community property under the law of the State of Washington.

[Salary Not Subject to Levy]

IV. The interest of the taxpayer John T. Dalton in his salary paid by Pioneer Industries, Inc., may not be levied upon for collection of income tax assessed against the separate taxpayer John T. Dalton even if the identical plaintiff marital community existed both at the time the separate tax liability was incurred and at the time of the levy.

[Marital Community Not Dissolved]

V. The physical separation of husband and wife for more than two years which would constitute grounds for divorce under the law of the State of Washington (RCW 26.08.020(9)) in the absence of commencement of divorce proceedings, or entry into an agreement of property settlement between spouses, or other evidence indicating an intention of the parties to permanently and legally terminate the marriage relationship does not operate to dissolve the marriage relationship under the law of the State of Washington, nor for purposes of collection of internal revenue taxes.

VI. The marital community of John T. Dalton and Dorothea C. Dalton was not dissolved in 1959 or at any point in time thereafter.

VII . The marital community of John T. Dalton and Dorothea C. Dalton has an economic interest in the earnings of John T. Dalton.

VIII. The earnings of John T. Dalton constitute marital community property under the law of the State of Washington.

IX. The marriage of John T. Dalton was emotionally defunct from and after John T. Dalton's release from prison when he did not return to live in the family home, nevertheless the marriage continued for all other legal purposes.

[67-1 USTC ¶9163]Frances Joe Preston, Plaintiff v. Ellis Campbell, Jr., District Director, Internal Revenue Service, Dallas, Texas, Defendant

U. S. District Court, No. Dist. Tex., Fort Worth Div., Civil Action No. 4-590, 11/14/66

[1954 Code Sec. 6331]

Tax levy: Community property state: Husband's tax liability: Wife's separate property.--The salary of a teacher, a Texas resident, and rents payable to her were found to be her separate property and were not subject to levy for the tax debt of her husband. .

Elton M. Hyder, W. T. Waggoner Bldg., Fort Worth, Tex., for plaintiff. Melvin M. Diggs, United States Attorney, Fort Worth, Tex., Kenneth J. Mighell, Assistant United States Attorney, Dallas, Tex., for defendant.

Judgment

BREWSTER, District Judge:

On this date came on to be considered the captioned cause and it appearing to the Court that the parties have agreed to the entry of a judgment and have stipulated the following findings, and the Court being fully advised in the premises, it is, therefore

[Salary]

ORDERED, ADJUDGED AND DECREED that the salary of the plaintiff, Frances Joe Preston, paid by the Fort Worth Independent School District is her separate property and is not subject to the tax debt of her husband, W. C. Preston, Jr., and further that the levy heretofore made by the defendant upon the Fort Worth Independent School District for the salary of the plaintiff, Frances Joe Preston, be cancelled and held null and void, and the said Fort Worth Independent School District is hereby directed to pay to the said Frances Joe Preston any and all sums of money belonging to the said Frances Joe Preston heretofore held and impounded and belonging to the said plaintiff, and it is further

[Rent]

ORDERED, ADJUDGED AND DECREED that the rent payable to the plaintiff, Frances Joe Preston, by D. H. Ritzwoller is the separate property of the plaintiff, Frances Joe Preston, is not subject to the tax debt of her husband, W. C. Preston, Jr., and it is further ORDERED, ADJUDGED AND DECREED that the levy heretofore made by the defendant upon D. H. Ritzwoller for rent due the plaintiff, Frances Joe Preston, be cancelled and held null and void and the said D. H. Ritzwoller is hereby directed to pay to the said Frances Joe Preston any and all sums of money belonging to the said Frances Joe Preston, heretofore held and impounded by the said D. H. Ritzwoller with his attorney, Milton Mehl, and it is further

ORDERED, ADJUDGED AND DECREED that the defendant shall forthwith issue releases of levy to the Fort Worth Independent School District and to the said D. H. Ritzwoller.