6332 Annotations: Corporations
for Failure to Surrender Property: Corporation's obligation
Rul. 75-554, 1975-2 CB 478
Section 6332.--Surrender of Property Subject to Levy
26 CFR 301.6332-1: Surrender of property subject to levy.
(Also Section 6331; 301.6331-1.)
[IRS Headnote] Levy; corporation transfer of security titles or
payments after service.--
Questions and answers are presented relating to a corporation's
obligations under section 6332 of the Code concerning the transfer of
title in stocks and bonds by registered owners and the payment of
dividends and interest after the service of a notice of levy.
questions have been asked as to the obligation of a corporation under
section 6332 of the Internal Revenue Code of 1954, to surrender property
subject to levy upon which a notice of levy has been made.
In order to
provide a clear statement of a corporation's obligation under section
6332 of the Code, several questions with the answers thereto concerning
the transfer of title in stocks and bonds by the registered owner and
the payment of dividends and interest after the service of a notice of
levy are presented.
6331(a) of the Code provides that if any person liable to pay tax
neglects or refuses to pay the same within 10 days after notice and
demand, it shall be lawful to collect such tax by levy upon all property
and rights to property belonging to such person or on which there is a
lien for the payment of such tax.
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 surrender such
property or rights (or discharge such obligation) to the Secretary or
6332(c) of the Code sets forth the extent of personal liability and the
penalty for failure of any person who fails or refuses to surrender any
property or rights to property, subject to levy, upon demand.
301.6331-1(a)(1) of the Regulations on Procedure and Administration
provides that 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. Similarly, a
levy only reaches property subject to levy in the possession of the
person levied upon at the time the levy is made.
In the case of a corporation's shareholder, would the Service assert
liability against the corporation under section 6332 of the Code if--
(a) A notice
of levy is served on the corporation before the share is received by the
corporation for transfer on its books, or the notice of levy is served
after the share is received by the corporation for transfer on its books
but before the transfer is completed on the corporation's books? Is it
relevant whether the transferee is a purchaser without actual notice or
knowledge of the existence of the Federal tax lien?
The Service cannot assert any liability against the corporation for
transferring the stock regardless of whether the notice of levy is
served before or after the share is received by the corporation for
transfer on its books. The share that is received by the corporation for
transfer is no longer the property of the shareholder that is indebted
to the government for taxes but would be the property of that person to
whom the share of stock was transferred. It is irrelevant to the
corporation whether the transferee had actual notice of the Federal tax
corporation makes a dividend payment to the dividend payee of a share of
stock registered in the name of a person with respect to whom a notice
of levy was served on the corporation, and service had been made before
the declaration date for that specific dividend?
Section 301.6331-1 of the regulations provides that a levy extends only
to property possessed and obligations that 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.
When a notice
of levy is served before the declaration date, the liability of the
obligor is not fixed and determinable. Therefore, since the corporation
has no obligation which exists at the time of the levy, the Service
could not assert liability against the corporation under section 6332 of
the Code. Neither would the Service assert any tort liability against
the corporation if a dividend was paid in the ordinary course of
business before another notice of levy was served even though the
corporation possessed actual notice or knowledge of the existence of a
Federal tax lien.
corporation makes a dividend payment to the dividend payee of a share of
stock registered in the name of a person with respect to whom a notice
of levy was served on the corporation, and service had been made on or
after the declaration date but before the record date for that specific
State law determines the nature and extent of the taxpayer's property or
rights to property. The Internal Revenue Code does not create property
rights, but rather attaches consequences to property or rights to
property created by state law. Aquilino v.
509 (1960), Ct. D. 1856, 1960-2 C.B. 477.
In a majority
of states no vested right to a declared dividend arises until the record
date. In those states a stockholder may become a creditor of the
corporation on the declaration date but does not acquire a vested
property right to the dividend. If the stockholder transfers the stock
prior to the record date, the corporation is obligated to pay the
dividend to whoever is the registered owner of stock on the record date.
Upon purchase the transferee acquires a property right in the dividend
to be paid at a future time and the corporation would not be liable
under section 6332 of the Code on payment of the dividend to the
On the other
hand, if under state law a vested right to a dividend arises on the
declaration date, the corporation would be liable under section 6332 of
the Code if a dividend payment was made.
In the case of a corporation's registered bondholder, would the Service
assert liability against the corporation if--
(a) A notice
of levy is served on the corporation before the bond had been received
by the corporation for transfer on its books, or the notice of levy is
served after the bond is received by the corporation for transfer on its
books, but before the transfer is completed on the corporation's books?
Is it relevant whether the transferee is a purchaser without actual
notice or knowledge of the existence of the Federal tax lien?
The bond that is received by the corporation for transfer on its books
is no longer the property of the bondholder that is indebted to the
government for taxes, but would be the property of that person to whom
the bond was transferred. In United States v. Davis, 61-1 USTC
80,022 (N.D. Ill. 1961), it was held that the corporate issuer of
debenture bonds, that were subject to the government tax liens, was in
no way involved in the determination of ownership except as its records
reflect the holder of the bond.
government could not assert any liability against the corporation for
transferring the bond regardless of whether the notice of levy is served
before or after the bond is received by the corporation for transfer on
its books. It is irrelevant to the corporation whether the transferee
had actual notice of the Federal tax lien.
corporation makes an interest payment to the interest payee of a bond
registered in the name of a person with respect to whom a notice of levy
was served on the corporation, and service had been made before the
record date for that interest payment?
As previously indicated, a notice of levy extends only to property
possessed and obligations that exist at the time of the levy. However,
obligations exist when the obligor's liability is fixed and determinable
although the right to receive payment may be deferred until a later
date. Generally, when a corporation issues a bond, the bondholder has an
unqualified fixed right through a chose in action to receive periodic
payments. Thus, a present obligation is created when the bond is issued.
In such a situation, a Federal tax lien attaches to the taxpayer's
entire right and, if a notice of levy is served, it is effective to
reach, in addition to payments due at the time the notice of levy is
served, existing rights to receive any subsequent payments that become
due under the obligation. See, section 301.6331-1(a)(1) of the
regulations and Rev. Rul. 55-210, 1955-1 C.B. 544. The taxpayer's right
to periodic payments will terminate only under certain conditions, e.g.,
when the bond matures or it is transferred.
the corporation makes an interest payment to the interest payee of a
bond registered in the name of a person with respect to whom a notice of
levy was served on the corporation, and service had been made before the
record date for that interest payment, the corporation would be liable
under section 6332 of the Code for failure to honor a notice of levy.
In the case of the corporation's shareholder or bondholder, if the share
or bond is registered in more than one name, for example, as tenants in
common, tenants by the entireties, or joint tenants with right of
survivorship, and the notice of levy relates to less than all the
registered owners, what is the position of the Service with respect to
the corporation's responsibility under section 6332 of the Code?
As previously mentioned, the nature and extent of the taxpayer's
property or rights to property are determined by state law. If the
notice of levy relates to less than all the registered owners, the law
of the state in which the registered owners are domiciled will determine
their rights in respect to the share of stock or the bond. Their rights
under state law will determine the position of the Service with respect
to the corporation's responsibility under section 6332 of the Code.
[80-2 USTC ¶9474]
United States of America
, Plaintiff v. Plantation Corporation, Defendant
S. District Court, Dist. of Mass., Civil Action No. 79-344-S, 492 FSupp
[Code Sec. 6332]
Levy and distraint: Collection: Failure to surrender: Property:
Purchased and retired stock.--A corporation was required to
surrender the value of stock in satisfaction of the tax liability of a
previous owner of the stock. Compliance with the prior levy was
required, since the corporation had adequate notice of the government's
interest in the stock prior to its purchase and the purchase and
retirement of the stock as treasury stock of the corporation gave the
corporation a possessory interest under applicable state law. Moreover,
a penalty was assessed for failure to surrender the levied property.
Ferraro, Department of Justice,
, D. C. 20530, for plaintiff. Marshall F. Newman, Newman & Newman,
50 Congress St.
, for defendant.
States brought this action against the defendant, Plantation Corporation
(Plantation), pursuant to 26 U. S. C. §6332(c), for its failure to
honor a tax levy served on it on March 9, 1977, 26 U. S. C. §6332(a).
The government seeks recovery of the value of the property levied, 300
shares of defendant's common stock, 26
C. §6332(c)(1), and an additional amount equal to 50% of that sum as a
penalty. 26 U. S. C. §6332(c)(2). Jurisdiction is based upon 28
C. §§ 1340, 1345 and 26 U. S. C. §7402; the facts are not in dispute
and both parties have cross moved for summary judgment. Fed. R. Civ. P.
In 1974 the
Internal Revenue Service assessed a tax deficiency against Charles T.
Sanderson III (Sanderson) in the amount of $46,864.20, plus interest;
notice of the tax lien was properly filed on February 28, 1975. On May
12, 1975 the Internal Revenue Service filed a tax lien against Sanderson
for an additional $5,643.74 in unpaid taxes for 1974. At all times prior
to and during 1975, Sanderson owned 300 shares of common stock in
which were apparently held by the corporation. Notice of both levies was
of March 6, 1975 and January 9, 1976, respectively.
On December 1,
1975, William Herbits obtained a state court judgment against Sanderson
to turn over Sanderson's shares to Herbits;
complied and on March 12, 1976 turned over Sanderson's stock
certificate. On December 27, 1976, after notice was published, Herbits
sold the 300 shares at a public auction.
was the only bidder and purchased the shares for $15,000. Thereafter, it
retired the shares as treasury stock.
has never received the stock certificates.
On March 9,
1977, the IRS served
with the levy in suit demanding that the corporation surrender the
shares in satisfaction of Sanderson's tax liability, currently
instituted a wrongful levy action, pursuant to 26
C. §7426, seeking a permanent injunction against its enforcement. Plantation
, CA No. 77-791-G. After a trial on the merits, Judge Garrity
concluded that the levy was proper as
had had abundant notice of the government's interest in the stock prior
to the time of sale. Tr. 34-35. Since
has failed to honor the levy and surrender the shares, the current suit
is for their value and the statutory penalty.
liability turns on whether, by its purchase of the 300 shares of stock
on December 27, 1976, it received possession or rights to possession of
the levied property. If
received such an interest, it was required to "surrender such
property or rights" to the Secretary of the Treasury, 26
C. §6332(a), and failing to do so would be liable to the
By filing suit
challenging the levy,
necessarily "claim[ed] an interest in" the shares. 26 U. S. C.
§7426(a); Henry Vlietstra Plastering & Acoustical Co. v.
Internal Revenue Service [75-1 USTC ¶9598], 401 F. Supp. 829, 833
(D. Mich. 1975); see also J. A. Wynne Co., Inc. v. R. D. Phillips
Construction Co. [79-1 USTC ¶9336], 468 F. Supp. 5 (M. D. Fla.
1977) (contractual right to set-off is an interest allowing a suit to
challenge a levy). This interest, arising out of the purchase of the
shares, is itself a "right to property" under
law and creates an equitable title in the transferee. M. G. L. A. c. 106
Code Comment; Good Fellows Associates, Inc. v. Silverman, 283
173 (1933); Stuart v. Sargent, 283
the prior action, the parties had stipulated that "[t]he shares so
purchased by [Plantation] were then retired as treasury stock, and have
not been reissued," Stipulation of Facts, ¶9, C. A. No.
77-791-G. Plantation must necessarily have asserted some possessory
interest in order to retire the stock. Defendant now argues that
retirement could not have been effected as it never received a valid
transfer of the shares from Herbits, or his estate. See Affidavit of
Robert Benea. It asserts the stipulation should therefore have no
application in the present case. This is manifestly not so under
law. M. G. L. A. c. 156B §29 provides that the directors of a
corporation may issue a replacement certificate for shares "alleged
to have been lost, mutilated or destroyed." Under this provision
could have reissued Sanderson's lost certificate and then voted to
retire the shares.
At a minimum,
had the power to secure actual possession of the shares purchased from
Herbits. Having never surrendered its interest to the government,
has failed to comply with §6332(a).
the government's motion for summary judgment under §6332(c) is ALLOWED
as to liability. The case will be set for trial on the issue of the
's interest in the shares.
[93-1 USTC ¶50,073]
United States of America
, Plaintiff v. Metro Interior, Inc. and Charles Benigar, Defendants
District Court, West. Dist.
, West. Div., 90-0889-CV-W-1, 10/5/92
6332 and 6334 ]
Tax levies: Failure to comply: Penalties: Calculation.--A
corporation and its president were liable for their failure to comply
with tax levies on the wages of corporate employees. Both the
corporation and its president were "persons" in possession of
property subject to levy and neither had a permissible defense for
failing to honor a tax levy. In addition, a penalty was imposed because
there was not reasonable cause for failure to honor the levies. However,
the amount of the levy for each employee was uncertain and the extent of
personal liability and of the penalty could not be determined until the
levy had been recalculated. A motion to join the employees was denied
for lack of jurisdiction.
three motions before the Court: plaintiff's and defendants' Motion for
Summary Judgment and defendants' Motion to Join Additional Parties. For
the reasons set forth below, defendants' Motion for Summary Judgment and
Motion to Join Additional Parties is denied. Plaintiff's Motion for
Summary Judgment is granted as to liability.
suing defendants Charles Benigar (Benigar) and Metro Interior, Inc.
(Metro) for failing to honor numerous tax levies. Metro is a
corporation with its principal place of business in
. Benigar, a resident of
, supervises and controls all financial aspects of Metro.
case stems from events that occurred in October, 1983. At that time
Harry Carr (Carr), Steve Garrett (Garrett) and John Holmes (Holmes)
agreed with Dasta Corporation (Dasta) to form two subcontracting
companies: Division Nine and Union Drywall. Dasta was to provide
Division Nine and Union Drywall all of their business. Although Dasta
did provide Division Nine and Union Drywall with business, it filed for
bankruptcy while owing the subcontracting companies $257,000. Carr,
Garrett and Holmes state that because Division Nine and Union Drywall
were owed $257,000, the three employees were not able to pay the
companies' payroll taxes. All three employees were responsible for
withholding and paying payroll taxes to the IRS. Presumably, both
Division Nine and Union Drywall are no longer in business.
employees later joined Metro between July and September of 1986. In
1987, the United States Treasury made a 100% penalty assessment under 26
against Carr, Garrett and Holmes for not withholding payroll
taxes. Specifically, the Treasury assessed Carr for $153,120.44, Garrett
for $80,005.94 and Holmes for $73,114.50. Plaintiff states, and
defendants do not dispute that the IRS gave Carr, Garrett and Holmes
notices and demands for payment of the assessments. The assessments were
not paid. On February 1, 1990, the Treasury served a Notice of Levy on
Metro demanding that it give the IRS all wages in Metro's possession
that it was obligated to Carr. The Treasury also served Notice of Levy
on Metro in regards to Garrett and Holmes on August 23, 1988 and
September 9, 1988 respectively. Later the Treasury served a Final Demand
upon Metro to honor the levies upon Carr, Holmes and Garrett. Each of
the three employees worked for Metro until March 23, 1990.
Metro has not
complied with the levies. Not including interest and penalties, the
balance on the assessments is $151,984.44, $75,551.44 and $67,878.11 for
Carr, Garrett and Holmes respectively. Plaintiff seeks to hold
defendants liable for the failure to honor the levies. Additionally,
plaintiff seeks penalties against defendants for their failure to honor
Plaintiff's Motion for Summary Judgment
A. Summary Judgment Basics
A movant is
entitled to summary judgment under Fed. R. Civ. P. 56(c), "if the
pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law." Thus, the moving party
bears the burden of proof. Aetna Life Ins. Co. v. Great Nat'l Corp.,
818 F.2d 19, 20 (8th Cir. 1987). When considering a motion for summary
judgment, the Court must scrutinize the evidence in the light most
favorable to the non-moving party and the non-moving party "must be
given the benefit of all reasonable inferences." Mirax Chemical
Products Corp. v. First Interstate Commercial Corp., 950 F.2d 566,
569 (8th Cir. 1991) (citation omitted). If the moving party meets its
burden of proof, the burden shifts to the non-moving party who must set
forth specific facts showing that there is a genuine issue for trial to
defeat a motion for summary judgment.
v. Liberty Lobby, Inc., 477
242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
A Road Map to Collecting Unpaid Taxes
If a person
does not pay her taxes, a lien automatically arises upon assessment, 26
U.S.C. §6322 , on all 1 her
property. 26 U.S.C. §6321 ("If any person liable to pay
any tax neglects or refuses to pay the same after demand . . . [there]
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."). The lien continues until the taxes are fully paid. 26
U.S.C. §6322 . If the tax remains unpaid, then
within ten days after notice and demand, "it shall be lawful for
the Secretary to collect such tax . . . by levy upon all property and
rights to property . . . belonging to such person . . . ." 26
U.S.C. §6331(a) . 2
When, as in
the present case, a third-party holds property of the taxpayer, the IRS
may serve notice on the third-party. This notice 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 the constructive possession of the
Government." United States v. National Bank of Commerce [85-2 USTC ¶9482 ],
472 U.S. 713, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (citation
omitted). See also, 26 U.S.C. §6332(a)
. If the third-party honors the levy, the third-party is
discharged from liability. §6332(e)
. If the third-party does not honor the levy, the third-party
is personally liable for the amount of the levy, §6332(d)(1) , and unless
"reasonable cause" is shown for not honoring the levy, the
third-party is also liable for a penalty of 50% of the levy. §6332(d)(2) .
Application of the Law
In the present
case, plaintiff served a Notice of Levy on Metro demanding that it give
the IRS all wages in Metro's possession that it was obligated to Carr,
Holmes and Garrett. Metro did not honor the levy. Before determining
whether defendants' were justified in not honoring the levy and if not,
the consequences, the Court must determine if defendants, Benigar and
Metro, are "persons" under §6332 .
Section 6332(f) states that
a person "includes an officer or employee of a corporation . . .
under a duty to surrender the property or rights to property . . .
." In his deposition, Benigar stated that he currently is, and at
the time of the levy was, President of Metro and in sole control of
Metro's finances. Deposition of Charles Benigar, p. 12-13. It was
Benigar who, on the advice of counsel, decided not to honor the levies.
Thus, Benigar is a "person" under §6332 . Section 6332(f) does not
expressly include Metro as a "person," but it also does not
exclude it. The word "includes" does not exclude other
individuals or entities from being "persons" under §6332 . §7701(c) ("The terms
'includes' and 'including' when used in a definition contained in this
title shall not be deemed to exclude other things otherwise within the
meaning of the term defined."). The Tax Code generally defines the
term "person" as including a corporation such as Metro. 26
U.S.C. §7701(a)(1) . Thus, Metro
is also a "person" under §6332
No Defense for Not Honoring the Levies
offer two defenses for not honoring the levies. The first defense is
that the IRS did not follow its own procedures before it levied on
Metro. Defendants argue that Carr, Garrett and Holmes each made an offer
of compromise to the IRS and that the IRS's policy is to withhold all
collection efforts during the consideration of the offers of compromise.
Defendants suggest that the policy of the IRS is to conduct a financial
investigation of a taxpayer's ability to pay before it rejects any offer
of compromise. A financial investigation was not conducted before
Carr's, Garrett's or Holmes's offer of compromise was rejected.
Defendants state that given the three employees' ability to pay, the
offers of compromise are reasonable. Because the offers were reasonable
and were rejected without a financial investigation, defendants argue
that the IRS did not follow its own procedures and thus, the levies are
invalid. The second defense is that the three employees would have left
Metro if the levies were honored. This, defendants contend, would have
been "devastating to the business." Suggestions in
' Motion for Summary Judgment, p. 5.
States Supreme Court holds that there are only two defenses for failing
to honor a levy. National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. at 721-22. The first defense is that
the person levied does not hold property or rights to property of the
taxpayer. Id. The second defense is that the property is
"subject to a prior judicial attachment or execution." Id.
Defendants do not meet either of the two defenses available.
As to the
first defense, defendants do not deny that Metro was holding the accrued
wages of Carr, Garrett and Holmes; Metro's payroll records indicate that
it did hold the accrued wages. Further, accrued wages are "property
or rights to property" to which a lien can attach and thus be
subject to levy. As the Supreme Court states: "it is quite clear,
generally, that accrued salaries are property and rights to property
subject to levy." Sims v. United States [59-1 USTC ¶9338 ],
359 U.S. 108, 111, 79 S.Ct. 641, 3 L.Ed.2d 667 (1959). Defendants do not
suggest any reason why accrued wages are not "property"
subject to levy. Defendants do not meet the first defense.
As to the
second defense, the only accrued wages subject to garnishment was a
state garnishment on Garrett for child support. Plaintiff does not claim
to levy on these wages, rather, plaintiff claims to levy on the wages
remaining after the state garnishment. Defendants also fail to meet the
even if plaintiff did indeed fail to follow its own procedures, 3 this is not
a recognized defense for not honoring the tax levies. Likewise, not
honoring a levy because it might hurt or ruin Metro's business is not a
valid defense. Thus, defendants are personally liable for the amount of
Carr's, Garrett's and Holmes's wages that were levied upon.
No Reasonable Cause
Section §6332 , in
addition to holding a third-person personally liable, also imposes a
penalty of 50% of the amount the person is held personally liable for
unless there is "reasonable cause" for not honoring a tax
levy. §6332(d)(2) . Generally,
there are two situations that constitute "reasonable cause"
under the statute: (1) "a bona fide dispute over the amount owing
to the taxpayer" or, (2) a bona fide dispute over the "legal
effectiveness of the levy itself." S. Rep. No. 1708, 89th Cong., 2d
Sess., reprinted in 1978 U.S. Code Cong. & Admin. News 3722,
not dispute the amount of wages they owed to Carr, Garrett or Holmes,
thus the first situation is not applicable. Defendants do not state why
the penalty should not apply to them, but presumably they attempt to
fall into the second situation. Defendants argue that the levies were
invalid because the IRS did not follow its own procedures. This argument
denies that the levies were legally effective. There must be, however, a
bona fide legal dispute as to the legal effectiveness of the
levies. Defendants do not point to any case law or other authority that
states that the failure of the IRS to follow its own procedures is a
defense for not honoring a tax levy. Further, they are unable to
characterize their defense as falling under one of the two defenses the
Supreme Court articulated in National Bank of Commerce.
the cases that refuse to apply the penalty, there is an unsettled
question of law. See, United States v. Sterling Nat'l Bank &
Trust Co. [74-1 USTC ¶9336 ],
494 F.2d 919, 923 (2nd Cir. 1974) (unsettled questions of law--no
penalty applies); State Bank of Fraser v. United States [88-2 USTC ¶9592 ],
861 F.2d 954, 962 (6th Cir. 1988) (no unsettled questions of
law--penalty applies); United States v. Donahue Industries, Inc.
USTC ¶50,343 ], 905 F.2d 1325, 1331-32 (9th Cir. 1990) (no
unsettled questions of law--penalty applies); United States v.
Metropolitan Life Ins. [89-1 USTC ¶9362 ],
874 F.2d 1497, 1501 (11th Cir. 1989) (no unsettled questions of
law--penalty applies). Defendants do not point to and the Court is at a
loss to find any unsettled questions of law in the present case.
Therefore, plaintiff is entitled under §6332(d)(2)
to the 50% penalty.
Ambiguity as to Damages
can not levy on all of the wages of Carr, Garrett and Holmes that the
lien attached to. Wages subject to child support orders, 26 U.S.C. §6334(a)(8)
, as in the case of Garrett are exempt. Also, a statutory
minimum portion of the three employees's wages is exempt from levy. §6334(a)(9) & (d).
computation of the minimum amount of wages that are exempt from levy is
specified in §6334(d) which was amended
in 1988. Based on the numbers that plaintiff furnished the Court, it
appears that plaintiff is following the pre-1988 computation. 4 If plaintiff
is using the pre-1988 computation, plaintiff has not given the Court any
reason why that computation should be used in a case filed in 1990. It
is unclear what the amount of the levy for each of the three employees
is. Until the amount of the levies is determined, the extent of
defendants' personal liability and the penalty cannot be determined. The
parties must brief this issue in a stipulation or, if necessary,
For the same
reasons that plaintiff's Motion for Summary Judgment is granted on the
issue of liability, defendants' Motion for Summary Judgment and Motion
to Join are denied. Even if summary judgment is not granted for
plaintiff, the Motion to Join would still be denied.
the Court to join Carr, Garrett and Holmes to the present suit. Unless
the Court determines the validity of the underlying taxes, defendants
argue, it is possible that defendants and the three employees will be
subject to inconsistent decisions. The Court rejects the motion on
This Court has
original, concurrent jurisdiction in civil cases:
United States for the recovery of any internal-revenue tax alleged to
have been erroneously or illegally assessed or collected, or any penalty
claimed to have been collected without authority or any sum alleged to
have been excessive or in any manner wrongfully collected under the
U.S.C. §1346(a)(1). However, the Court does not have jurisdiction until
a claim for a refund has been filed. 26 U.S.C. §7422(a) ("No suit
shall be maintained in any court for the recovery of any internal
revenue tax alleged to have been erroneously or illegally assessed or
collected . . . until a claim for a refund . . . has been duly filed . .
. ."). A claim for a refund cannot be filed until the disputed
amount has been fully paid. Flora v. United States [60-1
USTC ¶9347 ], 362 U.S. 145 149-50, 80 S.Ct. 630, 4 L.Ed.2d
623 (1960). Defendants have not paid the full amount of the tax
assessment, thus the Court does not have jurisdiction over questions of
tax liability. Because the Court does not have jurisdiction over
questions of tax liability, joiner would be improper. Therefore,
defendants' Motion to Join Carr, Garrett and Holmes is denied even
without plaintiff's summary judgment.
is ORDERED that plaintiff's Motion for Summary Judgment is GRANTED as to
liability. It is further
plaintiff and defendants brief the Court as to the amount of wages that
are subject to levy in a stipulation or, if necessary, individually. It
defendants' Motion for Summary Judgment is DENIED. It is further
defendants' Motion to Join Carr, Garrett and Holmes is DENIED.
1 The reach of
the tax lien is very broad. Congress intended "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, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (citation
method of collecting the tax is through a lien-foreclosure suit. 26
U.S.C. §7403 . This method, by its nature,
requires judicial intervention.
In the present
case the government chose to collect the taxes using §6331
. This method is referred to as an administrative remedy and
does not require any judicial intervention. United States v. National
Bank of Commerce [85-2 USTC ¶9482 ],
472 U.S. 713, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (citation
3 Assuming the
failure to follow IRS procedures is a valid defense, the Court is not
persuaded that the IRS did fail to follow its own procedures. In support
of their proposition that collection activity is supposed to stop from
the time an offer of compromise is made to the time a financial
investigation is completed, defendants quote the IRS's Manual:
"Collection activity will be withheld on any open accounts if
it is determined that the offer merits consideration and there is no
reason to believe that collection will be jeopardized." Internal
Revenue Manual, Administration, p. 7337 (emphasis added). This
language only states that if the IRS decides the offer of compromise is
worth considering, then collection activity will stop. It does not state
that collection activity will stop until a financial investigation is
completed. If this were true then the IRS would be required to conduct a
financial investigation for every offer of compromise it
receives. There is no evidence that the IRS is under such a requirement.
if the IRS Manual states that all collection activity will stop until a
financial investigation is completed, procedures in the Manual are not
binding on the IRS. See e.g., Estate of Jones v. Commissioner [86-2
USTC ¶13,675 ], 795 F.2d 566, 571 (6th Cir. 1986) The Court
is unpersuaded by defendants' citation to The Tax Lawyer given
the precedent in several circuits.
4 For example,
plaintiff calculates that it is entitled to a levy on Holmes's 1990
wages as follows:
13 weeks at $650.00/week gross pay ........................ $8,450.00
Less authorized deductions ................................ 1,928.70
Less Personal exemption at $75/week ........................ 975.00
Subtotal ................................................... $5,546.30
§6334 , the calculation of the weekly
exempt amount is $75 plus $25 for each individual specified in the
statute. The current calculation of the weekly exempt amount is the
"sum of the standard deduction and the aggregate amount of the
deductions for personal exemptions," divided by 52. There are also
other considerations such as whether Carr, Garrett or Holmes filed
anything with the Secretary "specifying the facts necessary to
determine" the above computation. §6334 .
[93-2 USTC ¶50,389] United States of
America, Plaintiff v. Metro Interior, Inc. and Charles Benigar,
District Court, West. Dist. Mo., West Div., 90-0889-CV-W-1, 6/1/93, On
motion for reconsideration of a District Court decision, 93-1
[Federal Rules of Civil Procedure 60 and Code Secs. 6332 and 6334 , prior to amendment by P.L. 100-647
Motion for reconsideration: Levied wages: Employer's duty: Damages.--A
corporation's payment of FICA taxes, rather than FUTA taxes, made so
that the district court would obtain subject matter jurisdiction over
three employees, did not warrant reconsideration of an earlier decision.
The employees' wages were levied upon, but the employer failed to honor
the levies and was held liable for the amount of wages subject to them,
plus a 50-percent penalty. The employer sought reconsideration when the
employees were not joined to this case, claiming that its payment of
FICA taxes was a mistake or excusable neglect. The wrong payment was
deemed carelessness; thus, the court had no jurisdiction over the
employees, and the motion for reconsideration was denied. The court did
alter the calculation of damages to reflect the employer's incorrect use
of net wages and the IRS's overcounting of the number of payroll
before the Court are defendant's Motion for Reconsideration and their
Motion to Stay Final Judgment. For the reasons stated below, the motions
are denied and the Court will determine the amount of damages plaintiff
is entitled to.
States Treasury made a 100% penalty assessment against Harry Carr, Steve
Garrett and John Holmes for unpaid taxes. When the assessments were not
paid, the Treasury served levies on defendants for wages that they were
obligated to pay to Carr, Garrett and Holmes. Defendants failed to honor
The Court, on
October 5, 1992, held defendants personally liable for the amount of
wages that were subject to levy and also for a penalty of 50% of the
amount of the levy. The Court also refused to allow Carr, Garrett and
Holmes to join in the present case.
Motion to Reconsider or in the Alternative to Stay
the Court to reconsider its October 5, 1992 Order which refused to allow
Carr, Garrett and Holmes to join in the present case. Defendants argue
that the three taxpayers are not liable for the underlying taxes and
thus, defendants were never required to honor the levies. Unless the
Court determines the validity of the underlying taxes, defendants argue,
it is possible that defendants and the three taxpayers will be subject
to inconsistent decisions.
The Standard for Evaluating a Motion to Reconsider
Rules of Civil Procedure do not recognize a motion to reconsider, but
the Court will treat such a motion as either a motion to alter or amend
under Rule 59(e) or a motion for relief from judgment under Rule 60(b)
depending on whether the motion was filed within 10 days of the Court's
Order. In re Trout v. Trout, 984 F.2d 977, 978 (8th Cir. 1993)
(citing Sanders v. Clemco Indus., 862 F.2d 161 (8th Cir. 1988)).
See also, Lavespere v. Niagara Mach. & Tool Works, Inc., 910
F.2d 167, 173 (5th Cir. 1990). Defendants and the three taxpayers filed
their first motion for reconsideration on October 19, 1992, or ten days
after the Court's October 5, 1992 Order excluding weekends and holidays.
See, Fed. R. Civ. P. 6(a). Defendants and the three taxpayers withdrew
their motion on October 26, 1992. On November 3, 1992, they filed the
motion for reconsideration that is presently before the Court. The Court
will treat the motion as a motion for relief from judgment under Rule
60(b) because excluding holidays and weekends, the motion was not filed
within ten days of the Court's October 5, 1992 Order.
reads in part:
may relieve a party . . . from a final judgment, order, or proceeding
for the following reasons: (1) mistake, inadvertence, surprise, or
excusable neglect; (2) newly discovered evidence which by due diligence
could not have been discovered in time to move for a new trial under
Rule 59(b); (3) fraud . . . misrepresentation . . . or other misconduct
of an adverse party; (4) the judgment is void; (5) the judgment has been
satisfied, released, or discharged, . . . or it is no longer equitable
that the judgment should have prospective application; or (6) any other
reason justifying relief from the operation of the judgment.
only do defendants need to meet one of the six reasons listed in Rule
60(b), but also they have a difficult burden to meet because Rule 60(b)
"provides for extraordinary relief which may be granted only upon
an adequate showing of exceptional circumstances." Sanders,
862 F.2d at 169 n.14 (citation omitted).
B. Application of Rule 60(b)
October 5, 1992 Order explains that although the Court does have
concurrent jurisdiction to hear a taxpayer case, the taxpayer must first
pay the disputed taxes and file a claim for a refund. The Court notes
that although its Order states that the taxpayers would need to pay all
of the disputed taxes before filing for a refund, there is an exception
that allows the taxpayers to pay only a portion of the tax if the tax is
divisible. Flora v. United States [60-1 USTC ¶9347 ],
362 U.S. 145, 171-75 nn.37 & 38, 80 S.Ct. 630, 4 L. Ed. 2d 623
(1960); Steele v. United States [60-1 USTC ¶9573], 280 F.2d 89,
90-91 (8th Cir. 1960). The three taxpayers did pay Federal Unemployment
taxes (FUTA), but as the three taxpayers admit, payment of FUTA taxes
does not give this Court subject matter jurisdiction to hear their
claims. The three taxpayers admit that as of the Court's October 5, 1992
Order, they had not paid any taxes which would give this Court subject
matter jurisdiction to determine whether the taxpayers actually owed the
amount that the Treasury assessed. There is no doubt that the Court did
not have jurisdiction to hear the taxpayers' claims at the time of the
Court's October 5, 1992 Order.
On November 3,
1992, the attorney for defendants and presumably also for the three
taxpayers, sent the Court a letter stating that "we have corrected
the jurisdictional flaw in the refund suit by Carr, Holmes and Garrett
by paying FICA and withholding taxes and having the amended claim for
refund and abatement denied by the Internal Revenue Service."
Because they have fixed the jurisdiction flaw almost a month after the
Court's Order, defendants and the three taxpayers ask the Court to
reconsider its October 5, 1992 Order refusing to allow the three
taxpayers to join in the present case.
reasons listed in Rule 60(b) that might apply to the present case are
the first and sixth reasons. Arguably the first reason, "mistake,
inadvertence, surprise, or excusable neglect," is applicable
because defendants paid the wrong tax in an attempt to obtain subject
matter jurisdiction with this Court. However, the first reason is not
available when the attorney was simply careless. Cline v. Hoogland,
518 F.2d 776, 779 (8th Cir. 1975) (Neglected to file because busy with
other matters); United States v. Thompson, 438 F.2d 254, 256 (8th
Cir. 1971) (Failed to bring statute to court's attention); Fenix v.
Finch, 436 F.2d 831, 837 (8th Cir. 1971) (Stipulated to 6% interest
even though there was no statutory provision for the government to pay
interest.); Hoffman v. Celebrezze, 405 F.2d 833, 835 (8th Cir.
1969) ("Government counsel cannot obtain relief by pointing to his
carelessness or negligence."). In the present case, paying the
wrong taxes in an attempt to obtain subject matter jurisdiction with the
Court amounts to carelessness, thus the first reason is unavailable for
Rule 60(b) relief in the present case.
reason, "any other reason justifying relief from the operation of
the judgment," is also not applicable to the present case.
Arguably, attorney error in advising the taxpayers to pay FUTA tax
instead of Federal Insurance and Contribution Act tax (FICA) and
withholding taxes in their attempt to obtain subject matter jurisdiction
with this Court is such as to justify "relief from the operation of
judgment." However, Rule 60(b)(6) is mutually exclusive from the
first five reasons and the first reason, which includes neglect or
mistake, covers this argument. See also, Liljeberg v. Health Servs.
Acquisition Corp., 486 U.S. 847, 863, 108 S. Ct. 2194, 100 L. Ed. 2d
855 (1988) (Rule 60(b)(6) relief is available if it is "made within
a reasonable time and is not premised on one of the grounds for relief
enumerated in clauses (b)(1) through (b)(5)."); In re Dakota
Cheese, Inc., 923 F.2d 576, 577 (8th Cir. 1991) (Defendant
characterized the motion as a 60(b)(6) motion, but it was actually a
60(b)(2) motion.). Thus, Rule 60(b)(6) is not applicable to the present
case and as explained earlier, attorney carelessness is not a proper
ground for relief under the first reason.
The Court will
deny defendants' "Motion to Reconsider" the Court's October 5,
1993 Order because they do not meet the test for Rule 60(b) relief.
There is also no reason to stay a final judgment.
Determination of Damages
October 5, 1992 Order held defendants personally liable for the amount
of wages that were subject to levy and also for a penalty of 50% of the
levy. Neither party had correctly calculated the amount of wages that
were subject to levy, so the Court did not make a determination as to
damages and directed the parties to brief the Court as to the amount of
wages that were subject to levy.
calculate that the amount of wages subject to levy was $51,069.96.
Defendants' calculation is incorrect for several reasons, two of which
should be noted. First, plaintiff can levy on "[a]ny amount payable
to or received by an individual as wages" that is not exempt. The
initial determination is whether to use net or gross wages. Defendants
use net wages, but using net wages, in effect, exempts health and life
insurance payments which were subtracted from the three taxpayers'
paychecks before calculating net wages. The only items that are exempt
from levy are listed in Title 26, section 6334(a) of the
United States Code; health and life insurance payments are not among the
listed exempt items. Allowing defendants to use net wages would
circumvent the determination of Congress that only the listed items
should be exempt from levy. §6334(c) ("Notwithstanding
any other law 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)."). Second, Congress amended section 6334 in 1988 making
the amended version effective to levies issued on or after July 1, 1989.
Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, §6236(h)(1),
102 Stat. 3342 (1968). Thus, contrary to defendants' calculation, for a
levy served before July 1, 1989, the pre-1988 version of section 6334 is applicable
even if the levy continues beyond July 1, 1989. The 1988 version of section 6334 is applicable
only for those levies served on or after July 1, 1989.
calculates that the amount of wages subject to levy was $56,380.41.
Plaintiff's method of calculating the amount of wages subject to levy
results in a smaller levy than plaintiff is entitled to, but there is no
reason why plaintiff cannot choose to collect less than it is entitled
to. Following plaintiff's method of calculation, however, plaintiff
over-counted the number of payroll periods by one period for each of the
three taxpayers. The Court agrees that plaintiff is entitled to begin
levy on the first payroll period after the employer receives the levy.
Plaintiff argues, for example, that because the Treasury served a levy
on defendants to collect the wages of Carr on February 1, 1990, that the
first payroll period that it could begin levy on was February 2, 1990.
However, the payroll ledger states that the payroll period ended
on February 2, 1990. The first payroll period following the levy was
from February 3, 1990 to February 9, 1990, and noted on the payroll
ledger as the payroll period ending February 9, 1990. Thus, the levy
attached to seven and not eight weeks of Carr's wages. Similarly, the
first levy on Holmes's wages was served on September 8, 1988, and was
effective starting the payroll period ending September 16, 1988, not the
payroll period ending September 9, 1988. The levy attached to eighty and
not eighty-one weeks of Holmes's wages. There is an additional
complication with the calculation of Garrett's wages because although
the "effect of a levy on salary or wages" is continuous, §6331(e) , plaintiff
levied on Garrett's wages a second time. The first levy on Garrett's
wages was served on August 23, 1988, and was effective starting the
payroll period ending September 2, 1988. The second levy on Garrett's
wages was served on January 10, 1990, and was effective starting the
payroll period ending January 19, 1990. The first levy thus includes the
payroll period ending September 2, 1988, to the payroll period ending
January 12, 1990, or 72 weeks; the second levy includes the payroll
period ending January 19, 1990, to the payroll period ending March 23,
1990, or ten weeks.
plaintiff's calculations with an adjustment in the number of payroll
periods, the amount of wages subject to levy was $55,343.58. Defendants
are personally liable for the $55,343.58 that was subject to levy plus
$27,671.79 in penalties for a total of $83,015.37. §§6332(d) (1 & 2).
Plaintiff is also entitled to interest and costs, §6332(d)(1) . 1
therefore ORDERED that defendants' Motion to Reconsider is DENIED. It is
defendants' Motion to Stay is DENIED. It is further
defendants pay plaintiff $83,015.37 plus interest and costs.
1 The Court
notes without deciding that arguably plaintiff may be entitled to
interest and costs, §6332(d)(1) , plus a
penalty of fifty percent of the sum of the interest and costs. §6332(d)(2) (The penalty
applies to the entire amount recovered under §6332(d)(1) and because
interest and costs are recoverable under §6332(d)(1) , the penalty
applies to interest and costs as well.). The Court does not decide this
issue because plaintiff does not ask for these damages.
95-2 USTC ¶50,621] United States of
America, Plaintiff v. Risque Management of Florida, Inc., Defendant
District Court, No. Dist. Fla., Gainesville Div., 94-10149-MMP, 10/5/95
Property subject to levy: Failure to surrender: Personal liability:
Penalties: Accrued interest: Dummy corporation: Director's wages.--A
corporation that was established by a delinquent taxpayer to hold her
assets was liable for the taxpayer's unpaid taxes, accrued interest, and
a punitive charge because it refused to honor an IRS levy that attached
to the corporation's payments to, or for the benefit of, the taxpayer.
The payments were deemed compensation to the taxpayer for her management
services as a director, rather than dividends, because the taxpayer was
not a shareholder of the corporation. The levy therefore attached to
every payment made to the taxpayer since a notice of levy on wages,
salary, and other income was served upon the corporation. The
corporation was also liable for a punitive charge because it had no
reasonable cause to ignore the government's levy. The corporation was
liable for interest accrued since the date of the levy.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
came for non-jury trial on September 14, 1995 before the undersigned.
FINDINGS OF FACT
1. Ms. Clyde
Smith ("Smith") is indebted to the United States for unpaid
federal income taxes for the year 1992. On June 23, 1993 a tax liability
in excess of $111,000 was assessed against her.
2. On July 6,
1993, a Notice of Federal Tax Lien was filed with the Clerk of the
Circuit Court, Alachua County, Florida. On July 10, 1993, a Notice of
Federal Tax Lien was filed with the Clerk of the Circuit Court, Suwanee
3. On or about
August 26, 1993, the United States served a Notice of Levy on Wages,
Salary, and Other Income upon Risque Management of Florida, Inc.
("Defendant"), making demand for payment of funds due from
Smith by virtue of her 1992 tax liability.
4. At the time
of this levy, Smith was indebted to the United States in the amount of
$111,505.17, exclusive of the interest and statutory additions thereto
as allowed by law.
September 7, 1993, Mr. John Chambers ("Chambers"), on behalf
of Defendant, responded to the levy by stating that "no monies
[are] owed" to Smith by Defendant.
6. On or about
March 4, 1994, the United States made final demand upon Defendant for
payment of Smith's liability--which was, at that point, $77,622.34 plus
interest and statutory additions.
did not make the payment.
was formed in June of 1993. Its original directors were Smith's son, Mr.
Asher Sullivan; Mr. Sullivan's ex-wife, Ms. Lillie Sullivan; Smith's
granddaughter, Ms. Misty Leahy ("Leahy"); and Chambers.
9. Some time
after the levy, Smith became a director of Defendant. Smith was never a
shareholder of Defendant.
10. Since its
inception, Defendant has been paying Smith's personal expenses,
including payments for her mobile home, a mortgage debt, credit card
bills, telephone bills, and local taxes. Prior to August 1993, Defendant
made payments to the Internal Revenue Service on behalf of Smith to
reduce her tax liability.
August 1993 and until Smith filed a petition in bankruptcy in March
1994, Defendant disbursed in excess of $180,130 to Smith at regular and
frequent intervals. These disbursements occurred approximately 4 times
Defendant's 1993 bank records reflect deposits totalling in excess of
$241,191 from June 1993 through December 1993.
operators of Defendant corporation included Leahy, who signed checks to
her grandmother and into whose account Smith's checks were frequently
Defendant's 1993 federal income tax return reflects income of $143,059
and no expenditures. Defendant's total claimed income was disbursed to
Leahy, Lillie Sullivan, and Chambers based on their percentage of stock
ownership. Smith was not a shareholder. No dividends were reported paid
recent bankruptcy filing reflects that she receives monthly dividend
income of some $2,210 from her ownership interests in Cafe 207, Inc.,
and Stagecoach Cafe, Inc. That filing reflects no such dividend income
son has testified that Smith manages several companies, including
Defendant corporation; he also said that he serves as Smith's
Smith is not a shareholder of Defendant, this Court cannot--as Defendant
has urged it to do--consider direct cash payments from Defendant to
Smith to be in the nature of dividends. These payments must be deemed to
be salary or wages.
[18.] On her
1993 tax return, Smith classified all of her income (with the
sole exception of income attributed to Social Security benefits) as
[19.] It is a
logical presumption, therefore, that a portion of Smith's income for
1993 is attributable to compensation for managerial duties at Defendant
[20.] As of
the date of trial, the balance of Smith's tax liability was $66,899.39.
CONCLUSIONS OF LAW
Pursuant to 26
U.S.C. §6321 , if a taxpayer fails to pay any
federal income tax after notice and demand therefore, a lien attaches to
"all property and rights to property, whether real or personal,
belonging to such person." Such a lien arises upon assessment. 26
U.S.C. §6322 . Once notice of a federal tax lien
is filed, the interest of either a subsequent purchaser or a subsequent
holder of a security interest cannot take priority over the federal tax
lien. See Rice Investment Company v. United States [80-2 USTC ¶9654 ],
625 F.2d 565, 567-68 (5th Cir. 1980); 26 U.S.C. §6232(a) .
encumbered assets is made by serving a notice of levy. Treas. Reg.
§301.6331-1(a)(1) . The levied property need not be in the
hands of the taxpayer or even belong to the taxpayer at the time of the
levy. It need only be encumbered by a federal tax lien. United States
v. Donahue Industries, Inc. [90-2
USTC ¶50,343 ], 905 F.2d 1325, 1331 (9th Cir. 1990). The
notice of levy gives the United States the right to all property levied
upon. United States v. Eiland [55-1 USTC ¶9487 ],
223 F.2d 118 (4th Cir. 1955). This right creates a custodial
relationship between the person holding the property and the federal
government such that the property is considered to be in the
Government's constructive possession. United States v. Whiting Pools,
Inc. [83-1 USTC ¶9394 ],
462 U.S. 198 (1983); Phelps v. United States [75-1 USTC ¶9467 ],
421 U.S. 330, 334 (1975).
A levy extends
only to "property possessed and obligations existing" at the
time of the levy. 26 U.S.C. §6331(b) . Obligations
exist when the liability of the obligor is fixed and determinable,
regardless of the fact that the right to payment is deferred until a
later date. Treas. Reg.
§301.6331-1(a) . There is an exception to this rule,
however. A levy on salary, wages or similar income payable to or
received by a taxpayer is continuous from the date the levy is released
pursuant to Section 6343 . 26 U.S.C. §6331(e) . 1 Section 6332(a) of the
Internal Revenue Code ("IRC") requires a person in possession
of, or obligated with respect to, property levied upon to surrender that
property to the Government upon demand. The only exception to this
requirement is where the levied property is already subject to judicial
attachment or execution. United States v. National Bank of Commerce
[85-2 USTC ¶9482 ],
472 U.S. 713, 721 (1985); United States v. Metropolitan Life Ins.
[89-1 USTC ¶9362 ],
874 F.2d 1497, 1499 (11th Cir. 1989). 2
At trial, no
factual testimony was introduced which convinced this Court that the
tens of thousands of dollars paid by Defendant either directly to Smith
or to third parties for her benefit after the August 1993 levy were
dividends and not wages. As noted above, Smith was not a shareholder of
Defendant corporation; she was the managing director. The Government's
contention that those payments must be considered to fall within the
category of "wages, salary or other income" 3 was
therefore persuasive. Hence, the Government's levy attached to every
payment by Defendant to--or for the benefit of--Smith as of August 26,
1993 and thereafter. 26 U.S.C. §6331(e) . Because
Defendant did not honor the levy, it is now liable to the United States
in the amounts pled.
6332(d)(1) of the IRC imposes personal liability upon an
entity that fails or refuses to surrender property subject to levy after
demand has been made. Here, Defendant is personally liable to the United
States for its failure to honor the Internal Revenue Service levy. It is
liable in the amount of $66,899.39--the amount, that is, of Smith's
unpaid tax liability at the time that this matter was tried.
6332(d)(2) of the IRC imposes additional liability--punitive
liability--upon the entity if, without reasonable cause, it fails to
surrender property subject to the levy. The Court finds that Defendant
had no reasonable cause to ignore the Government's levy. 4 The penalty
is in an amount equal to fifty percent of the actual liability. Here, at
appears that punitive liability is $33,449.70.
In addition to
$100,349.09 (the actual liability plus penalty amount), Defendant is
liable for interest dating back to August 26, 1993, the date of the
levy. The amount of this interest liability is prescribed by 26 U.S.C. §6621
. No evidence was introduced at trial concerning the amount
of interest liability in this case. The Court, deferring to the capable
expertise of the IRS and its revenue agents, directs those trained in
these matters to calculate the applicable amount of interest in
accordance with the statute.
As a final
observation, the Court notes that in reaching its conclusions in this
matter it did not find it necessary to address the issue of whether
Defendant is in reality nothing more than an "alter-ego" of
Ms. Smith. The Court withholds judgment on this alternative theory of
it is hereby
1. The Court
finds in favor of the PLAINTIFF, the United States of America.
2. The Clerk
of the Court is directed to enter judgment in favor of the Plaintiff,
and to close the case.
Risque Management is liable to the United States for the balance of Ms.
Clyde Smith's tax liability to the Government, plus a punitive charge of
fifty percent (50%) of that amount, plus interest dating back to August
Government is directed to file a document with the Court enumerating the
specific damages owed by Plaintiff by Friday, October 27, 1995.
Defendant will be allowed to file a document in response to the
Government's damages calculation; such document must be filed with the
Court by Friday, November 10, 1995.
5. The Clerk
of the Court is directed to refer this file to the Court on November 11,
1 The term
"salary or wages" includes compensation for services paid in
the form of fees, commissions, bonuses, and similar items. Treas. Reg.
§301.6331-1(b)(1) . A levy on salary, wages or similar
income reaches funds earned but not yet paid, funds advanced, and funds
earned subsequent to the levy. Id. The funds are payable to the
Government on the same day they would generally be payable to the
has never argued that the cash at issue in this case is already subject
to judicial attachment or execution. Clearly, therefore, this exception
3 Testimony at
the bench trial indicated that Smith, in her own personal tax filings
for tax year 1993, classified all income received that year from various
S Corporation sources as "non-passive income." See
Plaintiff's Trial Exhibit 9. It is clear that Smith received
considerable income from Defendant in that tax year. See
Plaintiff's Trial Exhibits 4, 5, 6, 7. Hence, this Court must conclude,
as did Smith and her accountants when they filed her personal income tax
returns, that her income from Defendant was "non-passive."
"non-passive income" is, of course, to be distinguished from
its opposite: "passive income." Under the IRC, a passive
activity is defined as one "which involves the conduct of any trade
or business, and in which the taxpayer does not materially
participate." 26 U.S.C. §469(c)
. Passive income is derived from such passive activities.
Non-passive income, conversely, is derived from non-passive
activities--i.e., business ventures in which the taxpayer did
classification of Smith's income as "non-passive" denotes that
the income was derived from sources in which she materially
participated. The conclusion that must be drawn from this
classification, combined with the knowledge that Smith was not a
shareholder in Risque Management, Inc., is that payments from Risque
Management to Smith should be classified as "wages, salary or other
income" for purposes of this levy.
4 The reason
given by Defendant for its decision to contest the Government's levy is
that it owed no wages, salary or other income to Smith at the time the
levy was served, nor has it owed any such wages, salary or income to her
since the time of service. It has claimed that Defendant's payments to
Smith represent dividend payments--if not dividends from Defendant, then
dividends from Cafe 207, Inc. and OOO, Inc. which were simply funnelled
through Defendant on their way to Smith.
finds that this explanation falls far short of a "reasonable
cause" for ignoring the Government's levy. Evidence indicated that
from August 26, 1993 until March 9, 1994, checks from Defendant's
accounts in the amount of $195,429.96 were written to Smith. Defendant
provided no factual basis for its claim that these consistent, almost
daily, payments were dividends rather than wages, salary or similar
income. The facts demonstrated that Defendant, rather, was obligated to
Smith for continuing payments in the nature of wages, salary or other
[2001-2 USTC ¶50,667] United States,
Plaintiff v. Park Forest Care Center, Inc., Defendant
District Court, Dist. Colo., CIV. 99-S-2461, 9/13/2001
Secs. 6331 and 6332 ]
Liens and levies: Wages: Levy and demand, notice of: Service:
Employer's obligation to surrender wages: Summary judgment.--The
employer of a delinquent individual failed to surrender the individual's
wages pursuant to an IRS tax levy and, as a result, the government's
motion for summary judgment was granted. The employer offered no
evidence or testimony to rebut the government's prima facie showing
of proper service and failed to establish either that the company was
not in possession of the levied property or that the property was
subject to a prior judicial attachment or execution. Moreover, the
employer failed to support its contention that the bookkeeper forwarded
the notice to the delinquent individual, who was the company
comptroller, in the normal course of business.
THIS MATTER is
before the court on the United States' Motion for Summary Judgment
(filed April 10, 2001). The court has reviewed the motion; the Amendment
to Motion for Summary Judgment (filed May 7, 2001), Defendant's Response
(filed May 8, 2001), the entire case file, and the applicable law and is
sufficiently advised in the premises.
1992 through March 1996 the Defendant employed Joanie B. Carlton as
their financial comptroller. Upon Ms. Carlton's failure to pay personal
income tax for the 1988 and 1989 tax years, a lien was imposed on her
personal property. 26 U.S.C. §6321. Pursuant to 26 U.S.C. §6331(a),
collection of the unpaid tax was authorized by levy upon Ms. Carlton's
wages. Accordingly, a notice of the levy was personally served on Ms.
Carlton's employer (the Defendant) by handing a copy of the "Notice
of Levy on Wages, Salary and Other Income" to Defendant's
bookkeeper, Ms. Bruner. The United States later brought this action
against the Defendant for failure to surrender Ms. Carlton's wages
pursuant to the Notice of Levy. See 26 U.S.C. §6332(d)(1).
judgment is appropriate if "the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter of law."
Fed. R. Civ. P. 56(c); Kimber v. Thiokol Corp., 196 F.3d 1092,
1097 (10th Cir. 1999). The moving party bears the initial burden of
showing an absence of any genuine issues of material fact. Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986); Hicks v. City of
Watonga, 942 F.2d 737, 743 (10th Cir. 1991). Once the moving party
meets this burden, the party resisting summary judgment must "come
forward with specific facts showing that there is a genuine issue for
trial." Celotex, 477 U.S. at 320; Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). "The mere
existence of some alleged factual dispute will not defeat an
otherwise properly supported motion for summary judgment." FDIC
v. Hulsey, 22 F.3d 1472, 1481 (10th Cir. 1994) (emphasis in
this standard, the court construes the factual record and any reasonable
inferences therefrom in the light most favorable to the party opposing
summary judgment. Blue Circle Cement, Inc. v. Board of County
Comm'rs., 27 F.3d 1499, 1503 (10th Cir. 1994). At the summary
judgment stage, the court's function is not to weigh the evidence or
find the truth, but to determine whether there is a genuine issue of
material fact for trial. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 249 (1986). "[T]he relevant inquiry is whether the
evidence presents a sufficient disagreement to require submission to a
jury or whether it is so one-sided that one party must prevail as a
matter of law.' " Bingaman v. Kansas City Power & Light Co.,
1 F.3d 976,980 (10th Cir. 1993) (quoting Anderson, 477 U.S. at
U.S.C. §6331(a), the United States is authorized to Collect unpaid tax
liabilities through levy on a taxpayer's wages. A levy on wages is
accomplished by serving a Notice of Levy on the taxpayer's employer. 26
U.S.C. §6331(a). To avoid personal liability, the employer (or any
other third party in possession of property subject to levy) must, upon
demand, surrender the property subject to levy. Kane v. Capital
Guardian Trust Co. [98-2 USTC ¶50,491], 145 F.3d 1218, 1221-22
(10th Cir. 1998).
Any person who
fails or refuses to surrender any property or rights to property,
subject to levy, upon demand by the Secretary, shall be liable in his
own person and estate to the United States in a sum equal to the value
of the property or rights not so surrendered, but not exceeding the
amount of taxes for the collection of which such levy has been made,
together with costs and interest on such sum at the underpayment rate
established under section 6621 from the date of such levy.
recognized only two defenses to an action under 26 U.S.C. §6332(d): (1)
that the defendant was not in possession of the property; and (2) that
the property was subject to a prior judicial attachment or execution. United
States v. Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713,
721-22 (1985); Kane [98-2 USTC ¶50,491], 145 F.3d at 1221-22; Texas
Commerce Bank-Fort Worth, N.A. v. United States [90-1 USTC ¶50,155],
896 F.2d 152, 157 (5th Cir. 1990); State Bank of Fraser v. United
States [88-2 USTC ¶9592], 861 F.2d 954, 958-59 (6th Cir. 1988); United
States v. Sterling Nat'l Bank & Trust Co. Of New York [74-1 USTC
¶9336], 494 F.2d 919, 921 (2d Cir. 1974); Bank of Nevada v. United
States [58-1 USTC ¶9228], 251 F.2d 820, 824 (9th Cir. 1957). In
this case,Defendant has not asserted either of the two recognized
defenses. Instead, Defendant maintains that it lacked knowledge of the
levy because the unopened Notice of Levy was forwarded directly to the
Defendant's financial comptroller, Ms. Carlton, for enforcement and Ms.
Carlton never informed the Defendant that a levy on her wages existed.
A levy may be
imposed upon a taxpayer's intangible personal property (including salary
and wages) "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." 26 C.F.R. §301.6331-1(a)(1). "The IRS effectuates a
levy upon intangible property . . . by the sole act of serving notice of
levy upon the third party holding the property." Kane [98-2
USTC ¶50,491], 145 F.3d at 1218 (citing G.M. Leasing Corp. v. United
States [77-1 USTC ¶9140], 429 U.S. 338, 350 (1977)). Here, service
was accomplished on March 2, 1995 by personally handing the Notice of
Levy and Final Demand to Mary Anne Bruner, Defendant's bookkeeper.
See Return of Service. (Government Exhibit B, Attachment to
Plaintiff's Motion.) A return of service is prima facie evidence
that service was accomplished. See Home-Stake Prod. Co. v. Talon
Petroleum, C.A., 907 F.2d 1012, 1017 (10th Cir. 1990). Indeed,
Defendant admits that Ms. Bruner accepted service of the Notice of Levy.
Nevertheless, Defendant argues that Ms. Bruner forwarded the unopened
notice to Ms. Carlton in the normal course of business, and Ms. Carlton
never informed the company of its existence. See Defendant's
Response pp. 4-5.
summary judgment, the nonmoving party may not rest upon the allegations
in the pleadings. Fed. R. Civ. P. 56(e). Nor may a party defeat summary
judgment by generalized, unsubstantiated affidavits or testimony that
would be inadmissible at trial. Celotex, 477 U.S. at 324. When a
motion for summary judgment is supported by depositions and affidavits,
the party opposing it must respond with specific facts showing the
existence of a genuine issue for trial as to the elements essential to
the non-moving party's case. Matsushita Elec. Indus. Co., 475
U.S. at 586-87; Stevens v. Barnard, 512 F.2d 876, 879 (10th Cir.
1975). In this case, Defendant has not presented a single affidavit or
deposition, or any other admissible facts, to rebut the sufficiency of
the service on Ms. Bruner or to substantiate Defendant's assertion that
she forwarded the unopened notice to Ms. Carlton.
While it is
unfortunate that the employee responsible for enforcement of the levy is
the taxpayer against whose wages the levy was imposed, Defendant admits
that service was accomplished,in a manner that comports with the
applicable rules and statutory restrictions. Defendant has not asserted
either of the two recognized defenses to an action under 26 U.S.C. §2336.
Therefore, the court finds, as a matter of law, that Defendant failed to
surrender property subject to an IRS levy.
IT IS ORDERED
that the United States' Motion for Summary Judgment is GRANTED as to
IT IS FURTHER
ORDERED that, pursuant to Fed. R. Civ. P. 72, this matter is hereby
referred to United States Magistrate Judge Schlatter for determination
of the amount of judgment and, in particular, any applicable interest
and/or penalties to be assessed.