Annotations-
Commissions
6332
Annotations: Commissions-Levy
Penalty
for Failure to Surrender Property: Commissions
Rev.
Rul. 73-365 1,
1973-2 CB 407
Section 6331.--Levy and Distraint
26 CFR 301.6331-1: Levy and distraint.
(Also Section 6332; 301.6332-1.)
[IRS Headnote] Levy; commissions applied against employee's overdrawn
account and "expense money."--
Commissions earned which are applied by the employer as a credit against
an employee's overdrawn account and "expense money" advanced
under an arrangement whereby it must be accounted for by the employee
are not subject to levy and distraint for unpaid taxes; G.C.M. 5251
superseded.
[Text]
The purpose of
this Revenue Ruling is to update and restate, under the current statute
and regulations, the position set forth in G.C.M. 5251, V11-2 C.B. 73
(1928).
Advice has
been requested whether, under the circumstances described below,
commissions earned by an employee-taxpayer and "expense money"
advanced to him by his employer, are subject to levy and distraint for
unpaid taxes under section 6331 of the Internal Revenue Code of 1954.
The employer
has been crediting commissions earned by the taxpayer to his overdrawn
account. The employer also advanced weekly sums of money designated as
"expense money" to the taxpayer for the taxpayer's actual
expenses that had to be accounted for to the employer. A Notice of Levy,
Form 668-A, has been served on the employer.
Section
301.6331.-1(a)(1) of the Regulations on Procedure and Administration
provides that 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 accrued salaries, wages, commissions, and other
compensation. A levy extends only to property possessed and obligations
which exist at the time of the levy. Obligations exist when the
liability of the obligor is fixed and determinable, although the right
to receive payment thereof may be deferred until a later date.
Section
6332(a) of the Code provides that any person in possession of (or
obligated with respect to) property or rights to property subject to
levy upon which a levy has been made shall, upon demand of the District
Director, surrender such property or rights (or discharge such
obligation) to the District Director.
Commissions
earned by the taxpayer but retained in his employer's possession are in
the nature of contract debts, within the purview of section 6331 of the
Code, and pursuant to the provisions thereof are subject to levy under a
warrant of distraint.
With respect
to an employer who makes a practice of either paying commissions of
employee taxpayer in advance or crediting such commissions to his
account, the employer has the right to set off any debt due the employer
from such employee against any accrued salary, wages, or commissions due
the employee.
United States
v. Long Island Drug Co., 115 F.2d 983 (4th Cir. 1940). Thus,
when an employee has overdrawn his account with his employer so that he
is indebted to such employer, commissions earned by the employee may be
applied by the employer to reduce this debt, and not until the debt is
paid may commissions earned by the employee be subject to levy.
Accordingly,
the amounts applied to the overdrawn accounts are not subject to levy.
The second
question presented is whether the weekly sums paid as "expense
money" may be distrained upon. The answer to this question depends
upon the nature of the contract of employment between the taxpayer and
the company.
Since the
"expenses money" was advanced to the taxpayer for his actual
expenses and had to be accounted for by the taxpayer, the money advanced
is the company's money given to the taxpayer for expenditure in its
business and may not be distrained upon.
If the
taxpayer is to be reimbursed for expenses actually incurred by him in
connection with his duties as a salesman, the "expense money"
is money due from the company to the taxpayer and therefore is subject
to distraint. Likewise, if the taxpayer is to receive a stipulated
amount weekly which is designated as "expense money" but for
which he is not required to render any account to the company, the
so-called expense money is merely compensation and as such may be
distrained upon.
In both of the
above-mentioned situations, if the amounts due the taxpayer were applied
by his employer against the employee's overdrawn account and not
actually paid to him, the same right of set-off by the employer would
prevail as held above with respect to the commissions.
G.C.M. 5251 is
hereby superseded, since the position stated therein is restated under
the current law in this Revenue Ruling.
----------
[Footnotes] ----------
1 Propared
pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.
[97-1 USTC ¶50,130] United States of
America
, Plaintiff-Appellee v. Andrea A. Ruff, Individually and as Trustee for
the Bankruptcy Estate of Central Micrographic Corporation d/b/a Hospital
Cooperative Assn., Defendant-Appellant
(CA-11),
U.S.
Court of Appeals, 11th Circuit, 95-2665, 11/21/96, 99 F3d 1559, 99 F3d
1559. Affirming a District Court decision, 95-1
USTC ¶50,147 , 179 BR 967
[Code
Sec. 6332 ]
Levy and distraint: Bankruptcy estate: Broker's commission: Trustee
in possession: Surrender of property: Levy and demand: Tax liens.--A
trustee in bankruptcy who was in possession of a commission belonging to
a business broker who was employed to sell certain assets of the
bankruptcy estate and who had unpaid taxes was personally liable for
failure to pay over the commission to the IRS. The broker's right to the
commission represented property or rights to property at the time the
notice of levy was served on the trustee. The commission was fixed
because the bankruptcy court approved the broker's employment by the
estate and the broker completed the required performance. Also, the
commission was determinable because it had been established by previous
court order. Finally, the bankruptcy court could not have reduced or
eliminated the broker's commission.
Before:
HATCHETT, Chief Judge, ANDERSON, Circuit Judge, and WOOD, * Senior
Circuit Judge.
ANDERSON,
Circuit Judge:
Defendant-appellant
Andrea A. Ruff appeals the judgment of the district court, on summary
judgment, in favor of plaintiff-appellee the
United States of America
in the amount of $20,000, arising from Ruff's failure to honor an
Internal Revenue Service ("IRS") levy on property or rights to
property of a delinquent taxpayer in her possession. United States v.
Andrea A. Ruff [95-1 USTC ¶50,147], 179 B.R. 967 (M.D.Fla.1995).
Because we find that judgment was properly awarded to the government, we
affirm.
I.
STATEMENT OF THE CASE
A.
Facts 1
The facts in
this case are not in dispute. At all times relevant to this controversy,
Ruff served as the Chapter 7 Trustee in the bankruptcy case In re
Central Micrographic Corporation d/b/a Hospital Cooperative Association,
case no. 88-2577-BKC-6S7, filed in the United States Bankruptcy Court
for the Middle District of Florida. During the pendency of the
bankruptcy case, Harold Gene Artrip approached Ruff and informed her
that he had a prospective buyer for the debtor's assets. On February 24,
1989, Ruff filed an application with the bankruptcy court to employ
Artrip as a business broker for the bankruptcy estate, under which he
would receive a 10% commission to be shared by Artrip and two other
brokers previously employed by the estate. On March 2, 1989, the
bankruptcy court entered an order granting that application. The order
stated that the commission would be paid "only if his prospect is
the successful buyer of the debtor's business, in which case any awarded
broker commission would be shared equally" with the two other
brokers. The order also stated that payment of the commission was
subject to final approval by the bankruptcy court.
On April 17
and 18, 1989, Ruff, on behalf of the bankruptcy estate, entered into an
Agreement of Sale and Purchase of Real and Personal Property with the
prospective purchasers identified by Artrip. The agreement was signed by
Ruff, as trustee for the estate, by the purchasers, and by NCNB National
Bank of
Florida
, which held liens on the debtor's assets. The property thus sold was
that property for which Ruff had employed Artrip as a business broker.
On April 26, 1989, Artrip, filed an Application for Allowance of
Broker's Fee for Broker for the Trustee. The parties agree that at the
time he filed this application, Artrip had completed all of the services
for which he was hired pursuant to the bankruptcy court's March 2 order.
Artrip sought $20,000, which represented one-third of the broker's fee
derived from the sale of the bankruptcy estate's assets, consistent with
the March 2 order. He noted in the application that if the sale to his
prospects were not consummated, he was not entitled to the commission.
On May 24, 1989, the bankruptcy court authorized the sale contemplated
by the April 17 and 18 agreement. The closing of that sale occurred on
June 16, 1989.
On July 13,
1989, the bankruptcy court entered a Notice of Hearing, setting August
3, 1989, as the date for the hearing on Artrip's fee application. Ruff
received this notice before July 27, 1989. Prior to the events discussed
above, the IRS assessed a federal tax liability against Artrip, pursuant
to 26 U.S.C. §6672. On July 27, 1989, the IRS served on Ruff a Notice
of Levy for Artrip's outstanding tax liabilities, which the Service
indicated exceeded $230,000. The levy sought,
[a]ll
property, rights to property, money, credits, and bank deposits now in
your possession and belonging to this taxpayer (or for which you are
obligated), and all money or obligations you owe this taxpayer....
Ruff
indicated on the reverse of the Notice of Levy that she held no funds
due Artrip. In response to the question on that same form asking when
Ruff would next owe Artrip money, Ruff wrote "unknown." On the
day that Ruff received the Notice of Levy, she possessed as Trustee in
the Central Micrographics case, funds sufficient to pay Artrip's
commission.
On August 10,
1989, the bankruptcy court entered an order granting Artrip's
application for fees in the amount of $20,000, thus authorizing payment
thereof. On August 11, Ruff, acting as Trustee for the bankruptcy
estate, executed a check payable to Artrip in the amount of $20,000 for
his share of the commission derived from the sale of the assets of
Central Micrographics.
B.
Issue on appeal
26 U.S.C. §6332(a)
requires that "any person in possession of (or obligated with
respect to) property or rights to property subject to levy upon which a
levy has been made shall, upon demand of the Secretary, surrender such
property or rights to property" to the Secretary. 26 U.S.C. §6332(d)(1)
provides that any person who fails to surrender property subject to levy
shall be held personally liable for the value of the property not
surrendered. The sole issue in this case is whether Ruff was "in
possession of (or obligated with respect to) property or rights to
property subject to levy," meaning in this case any property or
rights to property belonging to Artrip, at the time she received the
Notice of Levy from the IRS on July 27, 1989.
II.
ANALYSIS
A.
Standard of review
We review the
district court's grant of summary judgment de novo, Hutton v.
Strickland, 919 F.2d 1531, 1536 (11th Cir. 1990), viewing the facts
in the light most favorable to the non-movant. N.A.A.C.P. v. Hunt,
891 F.2d 1555, 1559-60 (11th Cir.1990).
B.
Discussion
The IRS is
empowered to levy on the property or rights to property of a delinquent
taxpayer in the hands of a third party pursuant to 26 U.S.C. §6331(a).
The levy itself does not determine whether the government's claim is
superior to those of other claimants. Instead, the levy power is
designed to enable the government "promptly to secure its
revenues" while competing claims are resolved. United States v.
National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721,
728, 105 S.Ct 2919, 2924, 2928, 86 L.Ed.2d 565 (1985). Upon receipt of a
notice of levy, such third parties are required to surrender that
property to the IRS. 26 U.S.C. §6332(a). The notice of levy "gives
the IRS the right to all property levied upon ... and creates a
custodial relationship between the person holding the property and the
IRS so that the property comes into constructive possession of the
Government." National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 720, 105 S.Ct. at 2924. Those individuals who fail to honor the
Service's levy incur liability to the government equal to the full value
of the property not surrendered. 26 U.S.C. §6332(d)(1); United
States v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497,
1499 (11th Cir.1989).
A third party
may raise only two defenses to excuse its failure to surrender levied
property to the government. First, it can show that it was not, pursuant
to the language in 26 U.S.C. §6332(a), "in possession of" any
of the delinquent taxpayer's property or rights to property at the time
that it received the notice of levy. National Bank of Commerce [85-2
USTC ¶9482], 472
U.S.
at 722, 105 S.Ct. at 2925; Metropolitan Life [89-1 USTC ¶9362],
874 F.2d at 1499. Second, it can show that when it received the notice
of levy, the property in question was subject to attachment or execution
under judicial process. National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 722, 105 S.Ct. at 2925; Metropolitan Life [89-1 USTC ¶9362],
874 F.2d at 1499. Ruff raises only the first of these defenses.
Ruff argues
that she was not "in possession of" any of Artrip's property
or rights to property on July 27, 1989, the day on which she received
the Notice of Levy. In order to determine if Ruff was in possession of
Artrip's property, specifically the $20,000 commission he eventually
received as compensation for his services as a business broker in the
Central Micrographics sale, we employ a two-step analysis.
A court
assessing a levy on a taxpayer's intangible interest in property held by
third parties must determine first the nature of the taxpayer's interest
in the property. This is a question of state law.... Once the court has
determined that a delinquent taxpayer has rights to property, federal
law determines whether the custodian of the property is obligated to
surrender the property to the IRS.
Metropolitan
Life [89-1 USTC ¶9362 ],
874 F.2d at 1500 (citing National Bank of Commerce [85-2 USTC ¶9482 ],
472
U.S.
at 724 n. 8, 105 S.Ct. at 2926 n. 8).
1.
Artrip's right to property under
Florida
law
Under
Florida
law, a property has been sold, for the purpose of establishing
entitlement to a commission, once the purchaser executes a binding
contract to purchase the property at issue. Hagans Co. v. Manla,
534 So.2d 750, 751 (Fla. 3d DCA 1988). However, the broker and the party
responsible for payment of the commission may record in the broker's
commission agreement express conditions precedent to the broker's
entitlement to that commission, and these conditions must be met before
the broker is legally entitled to payment.
Id.
at 751-52; Harding Realty, Inc. v. Turnberry Towers Corp., 436
So.2d 983, 984 (Fla. 3d DCA 1983). Significantly, there is a distinction
under
Florida
law between a condition precedent to the entitlement to a commission and
a condition precedent to the payment of a commission. See Harding
Realty, 436 So.2d at 984 (broker was not entitled to commission
because commission agreement "expresse[d] that entitlement to the
commission, as opposed to just payment of the commission, [was] to occur
at closing," and closing never occurred).
On April 17
and 18, 1989, Ruff, on behalf of the bankruptcy estate, entered into a
binding contract of sale for the assets of the estate to the prospect
identified by Artrip. The sale was approved by the bankruptcy court, and
was consummated. However, Ruff argues that Artrip's appointment by the
bankruptcy court as a business broker and the commission agreement were
subject to an express condition precedent to his entitlement to the
commission. That order states:
[A] fee will
only be paid upon application, general notice and approval of the
Bankruptcy Court.
In
re Central Micrographic Corp., No.
88-2577-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989) (Order appointing Artrip
business broker). Ruff argues that Artrip was not entitled to those fees
until the bankruptcy court gave its final approval, which occurred on
August 10, 1989.
As noted
above, there is a difference under
Florida
law between entitlement to a commission and payment of a commission. The
broker in Harding Realty was denied his commission because the
commission agreement specifically stated that entitlement to the
commission would occur at closing, and the buyers never closed on the
properties. Harding Realty, 436 So.2d at 984. In this case,
Artrip's commission was agreed upon and approved on March 2, 1989, by
the bankruptcy court. Under that order, Artrip was the successful buyer
of the property, which was in fact the case. It is true that the order
also stated that Artrip's commission would be "paid" only upon
subsequent application to and approval by the bankruptcy court. The
court's order conditioned payment, not entitlement, upon
further approval. Under
Florida
law, condition as to payment did not undermine Artrip's entitlement.
Thus, Artrip was entitled to payment, at the latest, when the sale of
the property was consummated pursuant to the April 17 and 18, 1989,
contract for sale. Hagans Co., 534 So.2d at 751. The district
court properly concluded that, under
Florida
law, Artrip had an entitlement, and thus had a property interest in the
commission.
2.
Ruff's obligation to surrender Artrip's commission to the IRS
Once it is
determined that a state law property interest exists, Federal law
determines the tax consequences of that interest. National Bank of
Commerce [85-2 USTC ¶9482], 472
U.S.
at 722, 105 S.Ct. at 2925. State law is not relevant to this inquiry.
Id.
Federal law, specifically the Treasury regulations governing the levy
power, establishes the nature of this determination.
[A] levy
extends only to property possessed and obligations which exist at the
time of the levy. Obligations exist when the liability of the obligor is
fixed and determinable although the right to receive payment thereof may
be deferred until a later date.
26
C.F.R. §301.6331-1(a)(1). The issue of whether Ruff was obligated to
surrender Artrip's commission to the IRS is really a question of whether
the liability of the bankruptcy estate to Artrip was "fixed and
determinable" at the time that the Notice of Levy was served on
Ruff. United States v. Hemmen [95-1
USTC ¶50,210 ], 51 F.3d 883, 888 (9th Cir.1995).
At the outset,
it is important to note that the quoted regulations include among
obligations which are "fixed and determinable" those
obligations for which the right to receive payment has been deferred.
Thus, even if the right to receive payment does not arise until a later
time. The court in Hemmen analogized a fixed and determinable
obligation of this type to "an ordinary contract with an executory
duty to pay for a completed performance by the obligee."
Id.
at 890.
The situation
confronted by the court in Hemmen is very similar to that in the
case at bar. In Hemmen, the president of a Chapter 11 debtor,
Al-Hadid (hereinafter referred to as taxpayer) performed certain
services for the estate by working to preserve the assets of the estate.
He filed a claim with the bankruptcy court for administrative expenses.
The case was converted into a Chapter 7 liquidation, and Hemmen was
appointed trustee.
Id.
at 886. The district court entered two separate orders allowing the
taxpayer's claim for administrative expenses. The second of these
orders, dated October 16, 1984, indicated that payment would not be made
"except upon further order of the court."
Id.
The underlying performance by the taxpayer was complete at all relevant
times. Approximately one year before the issuance of these orders, the
IRS assessed a civil tax penalty against the taxpayer. Pursuant to that
assessment, on December 17, 1985, after allowance of the claim for
administrative expenses but before the bankruptcy court had finally
approved payment thereof, IRS agents served a notice of levy on Hemmen
demanding the surrender of any of the taxpayer's property or rights to
property in Hemmen's possession as a result of his status as trustee.
Id.
However, instead of surrendering the money owed by the estate to the
taxpayer, Hemmen paid those funds to the taxpayer. The IRS sued Hemmen,
arguing that he was personally liable for the funds paid to the
taxpayer.
The court in Hemmen
held that the allowed administrative expenses were fixed and
determinable as of the date on which the Secretary's notice of levy was
served. It reached this conclusion despite the fact that actual payment
of those expenses by the trustee had to await authorization from the
bankruptcy court, and the fact that the claims for expenses could be
reduced to money only if there were sufficient assets left in the estate
to satisfy them.
Id.
at 890. Additionally, the court noted that the trustee retained the
power to move the bankruptcy court to disallow the claims. Id
These factors failed to sway the court.
None of these
conditions to payment, however, undermines the proposition that the
obligation of the estate to [the taxpayer] was "fixed" within
the meaning of §301.6331-1(a)(1) after the underlying performance was
completed and the claim was allowed by the court.... At best, the
factors Hemmen cites establish only that the estate's liability was
fixed but that [the taxpayer's] interest was still subject to possible
defeasance due to factors having no bearing on the underlying
performance.
Id.
Further, the court held that the sum due the
taxpayer was determinable because, although there was some uncertainty
as to whether there would be sufficient funds remaining in the estate to
pay the taxpayer's claims, the sums were still capable of precise
measurement in the future.
Id.
(citing Reiling v. United States, 77-1 USTC ¶9269 ,
1977 WL 1094 (N.D.Ind.1977)). Thus, according to the Hemmen
court, the administrative expenses due the taxpayer were fixed and
determinable because they had been allowed by the bankruptcy court and
the underlying performance had been completed. The fact that payment
might not be made due to a shortfall in the estate or subsequent
disallowance by the bankruptcy court had no impact on the Hemmen
court's determination that they were fixed and determinable as of the
date of the levy.
Similarly,
Artrip's commission was fixed and determinable on July 27, 1989, the
date that Ruff received the Secretary's Notice of Levy. 2 It was fixed
because the bankruptcy court in its March 2, 1989, order approved
Artrip's appointment as broker for the estate with a 10% commission (to
be shared equally with two other brokers), and because the underlying
performance required of Artrip was complete. The buyer identified by
Artrip entered into an agreement with Ruff to purchase those assets in
April of 1989, and the sale was authorized by the bankruptcy court on
May 24, 1989. The closing occurred on June 16, 1989. The commission was
determinable because it was capable of precise measurement, having been
established by previous court order. See In re Central Micrographics
Corp., No. 88-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989) (Order
appointing Artrip business broker). The bankruptcy court set a date for
Artrip's fee hearing by notice to the parties almost two weeks before
Ruff received the Notice of Levy. The fact that Artrip was entitled to a
commission of $20,000 was never in dispute, and this is unaffected by
the potential unavailability within the bankruptcy estate of the
resources needed to pay that amount. Common sense dictates that the
Treasury regulations at issue here be read this way. 3 If the
regulations were meant to require, as Ruff argues, that the commission
must be paid to the broker before it can be fixed and determinable, then
they would have been written to so require.
Our holding is
consistent with the purpose of the levy. The levy is not designed, as
noted above, to give the government's claims superiority over the claims
of others. Instead, the levy is intended only to protect the
government's statutory interest in "property or rights to
property," see 26 U.S.C. §6332(a), and to assure the
availability of the assets at issue once a final ordering of claims is
made. National Bank of Commerce [85-2 USTC ¶9482], 472
U.S.
at 721, 728, 105 S.Ct. at 2924-25, 2928. The resolutions reached in Hemmen
and in the case at bar merely insure that this interest is protected by
putting the burden of monitoring the progress of the bankruptcy estate
on the party who can most easily and efficiently carry it, the trustee.
The
interpretation of the statute urged upon us by Ruff would read out of
the statute the phrase "rights to property," and thus would
strictly limit an IRS levy to "property" actually in the
possession of the party upon whom the levy is served. Ruff's
interpretation is also inconsistent with the regulations, and would
eliminate from the property subject to levy "obligations which
exist at the time of the levy." 26 C.F.R. §301.6331-1(a)(1). It
would render superfluous the regulation's elaboration to the effect that
those obligations upon which levy may be made are those which are
"fixed and determinable" although the right to receive payment
thereof may be deferred. Ruff's interpretation would seriously undermine
the Service's ability to protect the government's statutory interest.
Analysis of
the relevant bankruptcy provisions governing the payment of
professionals from the assets of the estate reinforces our conclusion
that Artrip's commission was fixed and determinable as of the date of
the levy. Section 328 of the Bankruptcy Code states:
(a) The
trustee ..., with the court's approval, may employ ... a professional
person ... on any reasonable terms and conditions of employment,
including on a retainer, on an hourly basis, or on a contingent fee
basis. Notwithstanding such terms and conditions, the court may
allow compensation different from the compensation provided under such
terms and conditions after the conclusion of such employment, if such
terms and conditions prove to have been improvident in light of
developments not capable of being anticipated at the time of the fixing
of such terms and conditions.
******
(c) [Subject
to exceptions not relevant here], the court may deny allowance of
compensation for services and reimbursement of expenses of a
professional person employed under section 327 ... if at any time during
such professional person's employment ... such professional person
person is not a disinterested person, or represents or holds an interest
adverse to the interest of the estate with respect to the matter on
which such professional person is employed.
11
U.S.C. §328 (emphasis added).
The bankruptcy
court in this case approved Artrip's fee arrangement, including the
provision setting his commission percentage, on March 2, 1989, well
before the Secretary served the Notice of Levy on Ruff. Because Artrip's
prospect was the ultimate purchaser of the Central Micrographics
property, and because the sale had been consummated, he had completed
the tasks required of him to establish his entitlement to that
commission as of the date of the levy. Section 328 significantly
curtails the bankruptcy court's discretion with respect to the final
payment of previously approved fees to professionals.
The bankruptcy
court's power to alter the fee arrangement in no way diminishes the
fixed and determinable nature of Artrip's commission arrangement, which
was approved by the bankruptcy court on March 2, 1989. The district
court noted that there were no facts upon which the bankruptcy court
could have based a decision to reduce or eliminate Artrip's commission. Ruff
[95-1 USTC ¶50,147], 179 B.R. at 972. There was no evidence that Artrip
was no longer a disinterested person, nor that the bankruptcy court felt
that the fee arrangement was improvident. The fact that the court
scheduled a hearing on the fee indicates that there was money left in
the estate with which to pay it. Thus, the district court concluded that
Ruff could not have seriously questioned whether Artrip would receive
his fee at the time that she received the Notice of Levy.
Id.
III.
CONCLUSION
We conclude
that Ruff was, within the meaning of 26 U.S.C. §6332(a), "in
possession of ... property or rights to property subject to levy"
on July 27, 1989, the date on which she received the Secretary's notice
of levy for Artrip's outstanding tax liabilities. She was therefore
required to surrender that property or the rights thereto to the
Secretary. She did not do so, and, pursuant to 26 U.S.C. §6332(d)(1),
is therefore personally liable to the Secretary for the value of the
property not surrendered, in this case $20,000. We affirm the ruling of
the district court.
AFFIRMED. 4
* Honorable
Harlington Wood, Senior
U.S.
Circuit Judge, Seventh Circuit, sitting by designation.
1 Our
statement of the facts is taken in large measure (verbatim in
considerable part) from the district court's excellent opinion.
2 Ruff argues
that the facts of this case are more similar to those found in Tull
v. United States [95-2 USTC ¶50,602], 69 F.3d 394 (9th Cir.1995),
and that therefore we should adopt the logic of that case. However, Tull
is entirely consistent with the reasoning of Hemmen, and is
distinguishable on its facts from both Hemmen and the case at
bar. In Tull, the IRS served a notice of levy on the
Secretary/Treasurer of a corporation with significant outstanding tax
liabilities, including both payroll withholding and trust fund
liabilities. At the time, the corporation was experiencing financial
difficulties, and sought to auction off some of its equipment. The IRS
served the notice prior to the auction, but after a contract to auction
the property had been made between the corporation and an auction house.
Id.
at 395. The court held that the property of the corporation, in this
case the right to the proceeds of the auction, was not fixed and
determinable on the date of the levy.
Id.
at 397. It noted that the actual property to be sold had not been
finally set as of the date of the levy. nor had a buyer come forward to
purchase that property. Thus, the auction house "had an obligation
to attempt to sell some as yet undetermined amount of property for an as
yet undetermined price to as yet undetermined buyers."
Id.
The court reasoned, however, that "[a]n actual sale of property
would establish both the price of that property and the duty of the
buyer to pay the price, even if the date of payment were deferred."
Id.
at 398.
The court in Tull
noted that the situation in Hemmen was quite different. In Hemmen,
"the performance of the taxpayer had been completed and the amount
he was owed for that performance had been determined, subject to a
possible later defeasance in whole or part if funds were not
available." Tull [95-2 USTC ¶50,602], 69 F.3d at 398. The
situation in the instant case and in Hemmen are quite different
from that in Tull. Here, as of the date of the levy, the sale was
complete, and thus the underlying performance required of Artrip was
complete. The amount of the commission due was firmly established,
having been set by previous court order. The possibility of "later
defeasance," as in Hemmen, has an impact on the fixed and
determinable nature of the commission due Artrip.
3 This common
sense reading of 26 C.F.R. 301.6331-1(a)(1) is consistent with that
found in cases interpreting other parts of the Treasury regulations
governing the Service's levy power. In In re Quakertown Shopping
Center, Inc. [66-2 USTC ¶9655], 366 F.2d 95 (3rd Cir.1966), the
court, interpreting section 301.6331-1(a)(3), held valid and enforceable
a levy served on a receiver in bankruptcy against any property or rights
to property due a creditor of the estate. The levy sought to secure
assessed tax liabilities of the creditor. As of the date of the levy,
however, the creditor had only filed a claim against the bankruptcy
estate, but the bankruptcy court had not yet allowed the claim. The
court reasoned that the levy in this instance operated like an
involuntary assignment of the creditor's claim against the estate to the
United States
.
Id.
at 98. Because the creditor was free to make a voluntary assignment of
his claim without the permission of the bankruptcy court, the court
found that it was similarly free to transfer its claim in this instance,
albeit involuntarily. Thus, the receiver did have in his possession
property of the taxpayer, namely the claim against the estate, and the
levy validly functioned to transfer that property to the
United States
.
Id.
4 We agree
with the district court that the bankruptcy court case of In re
Ceafco [77-2 USTC ¶9760], 28 700, 1977 WL 1273 (S.D.Ala.Dist.Tax
Sept. 21, 1977), was wrongly decided. Ceafco involved facts
almost identical to Hemmen, in that the IRS served a levy upon
the trustee in bankruptcy seeking property of a taxpayer whose claims
for administrative expenses had been allowed. The bankruptcy court judge
reasoned that only the bankruptcy court had the authority to determine
how the assets of the bankruptcy estate were to be distributed, and
because that determination had not yet been made, the trustee held no
right to property belonging to the taxpayer, and therefore the levy was
premature. The Ceafco court overlooked the fact that an IRS levy
does not determine that the government's claim is superior to that of
other claimants. National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 721, 728, 105 S.Ct. at 2924-25, 2928. Thus, the levy does not
interfere with a bankruptcy court's determination of how the assets of
the estate are to be distributed.
[98-1 USTC ¶50,369] American Trust,
Plaintiff v. American Community Mutual Insurance Company, Defendant
American Community Mutual Insurance Company, Plaintiff v. United States
of America, Internal Revenue Service, Defendant-Appellee. Edgar F.
Bradley II, Defendant-Appellant, Richard A. Davidson, Defendant
(CA-6),
U.S. Court of Appeals, 6th Circuit, 97-3385, 4/27/98, 142 F3d 920,
Affirming a District Court decision, 97-2
USTC ¶50,759
[Code
Secs. 6321 , 6332 and 6334 ]
Lien for taxes: Attachment: Interpleader action: Property subject to
lien: Administrative levies: Exemption from levy: Judicial proceedings:
Statutory authority: Collection process.--A tax lien that the
government sought to enforce against an insurance agent's commissions in
an interpleader action attached to all of his property, including
amounts that would have been exempt from the IRS's administrative levy
that preceded the interpleader action. Rather than complying with the
levy, the insurance company with which the agent was affiliated and the
trust to which he assigned his commissions filed suit to determine
ownership of the commissions. Thus, the lien arose from judicial, rather
than administrative, proceedings. Accordingly, its scope was determined
by Code
Sec. 6321 , and the exemptions from administrative levy were
inapplicable.
Richard John
Donovan, Richard J. Donovan & Assocs.,
Worthington
,
Ohio
, for defendant-appellant. Pamela C. Berry, William S. Estabrook,
Department of Justice,
Washington
,
D.C.
20530
, for defendant-appellee.
Before:
KENNEDY and SILER, Circuit Judges; COHN, District Judge. *
OPINION
KENNEDY,
Circuit Judge:
Defendant
Edgar F. Bradley, II, appeals the District Court's order granting
summary judgment in favor of the
United States
in these consolidated breach of contract and interpleader actions. In
its complaint in the interpleader action, the
United States
sought enforcement of tax liens against insurance sales commissions
attributable to defendant. The District Court held that the Government
had valid tax liens under 26 U.S.C. §6321 and that these liens gave the
United States
the first priority claim to the commissions. On appeal, defendant
contends he is entitled to the exemptions allowed taxpayers during
administrative levy proceedings under 26 U.S.C. §6331. For the
following reasons, we affirm the District Court.
I.
Facts
The facts
underlying this case are undisputed. Between 1988 and 1992 Bradley, an
agent authorized to sell insurance policies for American Community
Mutual Insurance Company (hereinafter, "American Community"),
entered into agreements with three other American Community insurance
agents. Under these agreements, the three other agents assigned to
Bradley their rights to the commissions that resulted from their sales
of American Community policies. On December 4, 1992, Bradley assigned
the rights to all of the commissions, including his own, to a trust
identified as "American AMB 06044 Irrevocable Trust" (the
"Trust"). From this date, American Community paid all monthly
commissions directly to the Trust. 1
On August 9,
1993, the Internal Revenue Service ("IRS") issued assessments
against Bradley for deficiencies in income tax for his 1987, 1988, and
1989 taxable years. In October of 1993, the IRS, claiming a lien for tax
deficiencies, penalties, and statutory additions totaling $85,617.55,
issued a Notice of Levy to American Community. Through this notice, the
IRS asked American Community to pay over to the IRS all property or
rights to property belonging to Bradley. American Community responded by
stating that it had no funds in its possession payable to Bradley, and
that all commissions had been assigned to the Trust. In April of 1994,
the IRS issued a second Notice of Levy to American Community, claiming a
lien for taxes and statutory additions owed by Bradley in the amount of
$90,406.74. American Community continued to pay Bradley's commissions,
as well as the commissions assigned to him by the other agents, to the
Trust, until June of 1994, when the IRS issued a Final Demand to
American Community for payment of all "property, rights to
property, money, credits, and bank deposits . . . to the credit of,
belonging to, or owned by [Bradley]" and in American Community's
possession or owed to Bradley as of the first Notice of Levy.
The final
payment to the Trust represented commissions earned through March 31,
1994. Upon receiving this Final Demand, American Community withheld
payment of additional commissions to the Trust. The insurance agents and
representatives of the Trust told American Community that the liens
asserted by the IRS were invalid. Rather than comply with the Final
Demand to pay the commissions to the IRS, American Community withheld
the commissions from both claimants, and eventually deposited them,
along with interest earned thereon, in the registry of the Clerk of the
Court of Common Pleas in
Hamilton County
,
Ohio
.
This case
embodies two separate actions that were filed in the Court of Common
Pleas in
Hamilton County
,
Ohio
. First, the Trust brought a breach of contract claim against American
Community, asserting that American Community had a contractual
obligation to pay the commissions to the Trust. Second, American
Community filed an action in interpleader to determine ownership of
accumulated commissions. The defendants named in the second action
included the Trust, the IRS, Bradley, and the other agents. The Court of
Common Pleas consolidated the cases, and the
United States
removed the consolidated case to the United States District Court for
the Southern District of Ohio. The funds in question were transferred to
the registry of the Clerk of the District Court.
In the
District Court, American Community moved for summary judgment on the
breach of contract claim, and the
United States
moved for summary judgment in the interpleader action, asserting that,
by virtue of its tax lien, the
United States
had a superior claim to the funds in dispute. On March 11, 1997, the
District Court granted summary judgment in favor of American Community
on the contract claim and the
United States
on the interpleader action.
II.
Discussion
We review de
novo the District Court's grant of summary judgment in favor of the
Government. E.g., Roush v. Weastec, Inc., 96 F.3d 840, 843 (6th
Cir. 1996). The facts underlying this case are undisputed and Bradley's
appeal raises a single question of law: whether an exemption from levy
that is listed in Internal Revenue Code ("I.R.C.") §6334, 26
U.S.C. §6334, applies when the IRS seeks enforcement of a tax lien in
an interpleader action.
To answer this
question we look to the relationship of several sections of the Internal
Revenue Code. Section 6321 of the I.R.C. provides that the amount of
unpaid taxes, interest, and penalties that any person neglects or
refuses to pay "shall be a lien in favor of the
United States
upon all property and rights to property, whether real or personal,
belonging to such person." 26 U.S.C. §6321. The Supreme Court has
stated that "[t]he 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, 719-20 (1985). This tax lien arises at the time
the unpaid taxes are assessed and persists until the liability for the
amount assessed is satisfied. 26 U.S.C. §6322.
The Government
has several separate procedures through which it can recover the tax
deficiency. As the Supreme Court explained in United States v.
Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 682 (1983), the Government
is authorized under 26 U.S.C. §7403 to file a lien-foreclosure suit in
a district court of the
United States
to enforce the tax lien. In other cases, the Government may decide
simply to sue for the amount of unpaid taxes, "and, on getting a
judgment, exercise the usual rights of a judgment creditor." 461
U.S.
at 682 (citing 26 U.S.C. §§6502(a), 7401, 7402(a)). Section 6331 of
the I.R.C., 26 U.S.C. §6331, provides an additional, administrative
avenue for recovery:
If
any person liable to pay any tax neglects or refuses to pay same within
10 days after notice and demand, it shall be lawful for the Secretary to
collect such tax (and such further sum as shall be sufficient to cover
the expenses of the levy) 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.
26
U.S.C. §6331(a). As the Court explained, "[t]he common purpose of
this formidable arsenal of collection tools is to ensure the prompt and
certain enforcement of the tax laws in a system relying primarily on
self-reporting." 461
U.S.
at 683.
The
"[a]dministrative levy, unlike an ordinary lawsuit, and unlike the
procedure described in §7403, does not require any judicial
intervention, and it is up to the taxpayer, if he so chooses, to go to
court if he claims that the assessed amount was not legally owing."
Rodgers [83-1 USTC ¶9374], 461
U.S.
at 682-83. Third parties who may have been aggrieved by an
administrative levy against a recalcitrant taxpayer also must wait until
a post-seizure proceeding to assert their rights to disputed property. See
National Bank of Commerce [85-2 USTC ¶9482], 472
U.S.
at 731. "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."
Id.
at 721. In sum, §6331 provides the Government with a mechanism to
secure expeditiously property that might satisfy tax deficiencies and
postpones the resolution of property rights until after the seizure. See
id.
Although the
Code authorizes the IRS to execute an administrative levy without prior
judicial approval, it also provides some protection to the taxpayer.
Internal Revenue Code §6334, 26 U.S.C. §6334, exempts specific types
of property from attachment by levy. Most relevant to the instant case,
§6334(a)(9) provides that the following income is exempt from levy:
Any
amount payable to or received by an individual as wages or salary for
personal services, or as income derived from other sources, during any
period, to the extent that the total of such amounts payable to or
received by him during such period does not exceed the amount determined
under subsection (d).
This
exemption prevents the IRS from seizing all of a taxpayer's paycheck
through a purely administrative proceeding, and allows the taxpayer to
retain from his wages or salary an amount that is determined in relation
to the sum of the standard personal income tax deduction and the
taxpayer's aggregate number of personal income tax exemptions. See
26 U.S.C. §6334(d).
In the instant
case, the IRS first selected the administrative levy from its arsenal of
collection tools and demanded that American Community pay over any of
Bradley's property or rights to property that it had in its possession.
Instead of complying, American Community filed an interpleader action to
resolve the competing claims to the withheld commissions. After removing
the interpleader to the District Court, the Government successfully
filed a claim for enforcement of its tax lien against the accumulated
commissions. Bradley now contends that the judgment in favor of the
United States
should have been reduced by the amount of money that, pursuant to §6334(a)(9),
he would have been entitled to claim as exempt from the original levy.
In response, the
United States
argues that the judicial enforcement of a lien is independent of and
distinct from an administrative levy, and that a valid tax lien may
attach property that is exempted from levy.
We have yet to
decide whether the Government may enforce a tax lien created by 26
U.S.C. §6321 against property that §6334 would exempt from levy. 2 The
United States
Courts of Appeals that have considered the relationship between
administrative levies and tax liens have recognized that a tax lien
under §6321 can attach to property that would be exempt from a §6331
administrative levy. In United States v. Barbier [90-1 USTC ¶50,107],
896 F.2d 377 (9th Cir. 1990), the Ninth Circuit considered an appeal
from a bankruptcy proceeding in which debtor-taxpayers argued that §6334
prohibited the attachment of a federal tax lien on property that was
exempt from an administrative levy. The court rejected the taxpayers'
argument, holding that "for the purposes of the Barbiers' Chapter
13 plan, the IRS's claim against the Barbiers for their income tax
deficiencies, including interest and penalties, may be secured by a lien
on property exempt under section 6334(a)." [90-1 USTC ¶50,107],
896 F.2d at 378. It reasoned that restricting the scope of a tax lien's
reach would be inconsistent with both Supreme Court precedent and the
statu
