Annotations- Subsequently Received Wages

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6334 Annotations: Subsequently Received Wages- Levy

 

Property Exempt from Levy: Subsequently Received Wages

 

[99-2 USTC ¶50,814] United States of America , Plaintiff-Appellee v. Billie Tarnove, Defendant-Appellant

(CA-11), U.S. Court of Appeals, 11th Circuit, 97-07444-CV-WJZ, 8/20/99 , Affirming an unreported District Court decision

[Code Secs. 6332 and 6334 ]

Penalties, civil: Failure to surrender property: Levy, failure to honor: Attorney: Reasonable cause.--An attorney who was in possession of a monetary award from a client's personal injury lawsuit was liable for the 50% penalty for failing to honor a tax levy. The funds were not exempt from levy as subsequently received wages since they had been deposited in the attorney's trust account prior to her receipt of the levy. Therefore, the attorney had an obligation to release the funds to the IRS and she did not show reasonable cause for withholding the funds. Furthermore, the numerous lawsuits filed by the attorney to determine whether the funds were subject to levy did not establish reasonable cause for refusing to release the funds because all of the suits were dismissed after she failed to respond to the government's motions to dismiss.

Before: ANDERSON , Chief Judge, and BIRCH and DUBINA, Circuit Judges.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

Per Curiam"

EC: Billie Tarnove ("Tarnove"), an attorney proceeding pro se, appeals the district court's grant of summary judgment holding her personally liable for the tax levy imposed on her client and imposing a 50 percent penalty against her for failing to honor the levy pursuant to 26 U.S.C. §6332(a) and (b). Because Tarnove has not shown reasonable cause to withhold the funds from the Internal Revenue Service ("IRS"), we AFFIRM the district court's ruling.

I. BACKGROUND

Alfred Palladino ("Palladino") was awarded about $377,000.00 in a personal-injury matter. Before final judgment in the personal-injury matter, however, Palladino's attorney was served with a notice of levy by the IRS relating to Palladino's tax deficiencies. Because disagreement existed as to the amount Palladino owed the IRS, the attorneys' in the personal injury matter, Palladino's accountant, and Tarnove, agreed, via letter, that the levied funds should be placed in Tarnove's trust account until the exact amount Palladino owed in back taxes was determined. Once the funds were placed in her trust account, Tarnove instituted a bankruptcy action on behalf of Palladino to determine whether the funds should be released to the IRS. The bankruptcy court held that the levy was not dischargeable in bankruptcy. After the ruling, the IRS served Tarnove with a notice of levy. Tarnove released $68,000.00 of the approximately $102,000.00 she held in her trust account to the IRS contending that the remainder of the levy was exempt as wages.

Tarnove then filed several lawsuits on behalf of Palladino in different courts seeking to dissolve the levy. She filed a petition in tax court which was dismissed. She then filed a petition for declaratory judgment in district court which was dismissed for failure to prosecute after Tarnove did not respond to the government's motion to dismiss for lack of jurisdiction. Tarnove filed another petition for declaratory judgment in district court, including her name on the petition as a plaintiff, and added a count seeking to interplead the funds. The district court dismissed this petition for lack of jurisdiction.

The government moved for summary judgment or alternatively, for entry of a default judgment against Tarnove. The government argued that a third party has only two defenses at its disposal for failing to honor a tax levy. One, that the party possesses neither the property nor rights to the property belonging to the delinquent taxpayer at the time the notice of levy was served. Two, that the property in question was subject to judicial attachment or process. Because Tarnove could not successfully avail herself of either defense, the government argued that she was obligated to honor the entire tax levy. Additionally, the government argued that because Tarnove could not successfully assert the above defenses, she did not have reasonable cause to withhold the funds. Accordingly, the government argued that the district court should impose a penalty of 50 percent of the value of the lien on Tarnove.

Tarnove argued that she honored the tax levy by paying the government $68,000.00 of Palladino's funds. She argued that the remaining $35,559.54 were exempt from levy as wages. Additionally, Tarnove argued that the district court should not impose a 50 percent penalty because she had reasonable cause for withholding the remaining funds and cites in support the numerous lawsuits she filed on behalf of Palladino and herself to determine whether the $35,559.54 was exempt from levy.

II. DISCUSSION

On appeal, Tarnove argues that the district court erred when it imposed a 50 percent penalty against her because she had reasonable cause to withhold the levied funds. Tarnove argues that the table attached to the notice of levy, directing the recipient to calculate exempt funds, and the various legal actions she instituted to determine the validity of the levy demonstrated a genuine concern as to whether the $35,559.54 was subject to levy and thus, she had reasonable cause to withhold the funds.

To permit the government to secure its revenues promptly while competing claims are resolved, Congress granted the IRS the power to levy on the property or the rights to the property of a delinquent taxpayer even when the property is possessed by a third party. See 26 U.S.C. §6332(a). "[A]ny 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" the property to the Secretary. See id. A person who possesses such property and does not deliver it to the IRS can be held personally liable for the value of the property not surrendered. See 26 U.S.C. §6332(d)(1). A third party honoring a levy imposed against a delinquent taxpayer, however, is immune from suit by said taxpayer or any other person "with respect to such property or rights to property arising from such surrender or payment." 26 U.S.C. §6332(e).

Third parties have only two defenses at their disposal for failing to honor a tax levy. First, they can show that they were not in possession of a delinquent taxpayer's property when they received the notice of levy. See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985). Second, they can show that the property was subject to judicial attachment or execution at the time the notice of levy was received. See id. If a third party cannot meet these defenses and it does not have reasonable cause for refusing to honor the levy, a court may impose a penalty of 50 percent of the value of the levied property. See 26 U.S.C. §6332(c)(2); see also United States v. Metropolitan Life Insurance [89-1 USTC ¶9362], 874 F.2d 1497, 1498 (11th Cir. 1989) (upholding the penalty for failure to surrender the funds to the IRS). Because Tarnove was in possession of the property when she received the notice of levy and this property was not subject to judicial attachment or execution, the above defenses are not available to her. The only other viable argument left is whether Tarnove had reasonable cause for refusing to honor the levy.

The treasury regulations state that the penalty provision does not apply in situations where a "bona fide dispute exists concerning the amount of the property to be surrendered pursuant to a levy or concerning the legal effectiveness of the levy." 26 C.F.R. §301.6332-1(b)(2). The regulations explain that "if a court in a later enforcement suit sustains the levy, then reasonable cause would usually not exist to refuse to honor a later levy made under similar circumstances." Id.

The IRS may not, in certain circumstances, levy against a delinquent taxpayer's entire property. See 26 U.S.C. §6334(a) (listing property exempt from levy). Wages, salary and other income are amongst the property exempt from levy. See 26 U.S.C. §6334(a)(9). The subsection states that "[a]ny amount payable to or received by an individual as wages or salary for personal services, or as income derived from other sources . . ." are exempt from levy. Id. The above provision applies only to wages, salary, or other income payable to the taxpayer after the levy is served. See 26 C.F.R. §301.6334-2(a). "No amount of wages, salary, or other income that is paid to the taxpayer before levy is made on the payor will be so exempt from levy under section 6334(a)(9)." Id. (emphasis added). Accordingly, even if we considered the personal-injury proceeds to be wages, Palladino received the personal-injury judgment prior to Tarnove's receipt of the notice of levy and these proceeds were deposited in Tarnove's trust account prior to her receipt of the levy. See R1-1. Contrary to Tarnove's contention that these proceeds were exempt as wages, she had an obligation to release the funds.

Tarnove also argues that the numerous law suits she filed to determine whether the $35,559.54 was subject to levy, and her fear of exposure to liability from Palladino constitutes reasonable cause to withhold the funds. This argument, however, is without merit because these lawsuits were repeatedly dismissed for either lack of jurisdiction or failure to prosecute, R1-14 at unnumbered page 4, and, as previously illustrated, fear of exposure to liability is not one of the two defense available to Tarnove.

Also in support of her reasonable-cause argument, Tarnove alleges that the interpleader action she attempted to file should exempt her from liability under 26 U.S.C. §6332(d). Tarnove also contends that the table attached to the notice of levy, explaining how to calculate which funds are exempt from levy, should prohibit the imposition of the 50 percent penalty because the table served as notice that certain funds were in fact exempt.

Tarnove relies on nonbinding authority in support of her argument that an interpleader action grants a third party immunity from the 50 percent penalty. See Kurland v. United States [96-1 USTC ¶50,242], 919 F.Supp. 419, 422 (M.D. Fla. 1996) (holding attorney exempt from 50 percent penalty because he filed an interpleader action); see also Hoye v. United States [60-1 USTC ¶9365], 277 F.2d 116, 120 (9th Cir. 1960) (holding that third party seeking a judicial determination regarding his obligation to honor a tax levy is not personally liable for a penalty). Kurland is, however, distinguishable because the attorney's interpleader action, unlike Tarnove's, was not dismissed for lack of subject-matter jurisdiction. R1-14 at unnumbered page 4. Additionally, the attorney in Kurland actively participated in the interpleader action. Tarnove, on the other hand, filed numerous lawsuits in different courts, all of which were dismissed after she failed to respond to the government's motions to dismiss. See R1-9, Exh. 1, 2, 3; R1-14 at 2-5.

Tarnove's argument that the table attached to the levy put her on notice that she should not release all of the funds has no merit because, as discussed earlier, these proceeds are not exempt wages. Accordingly, Tarnove did not have reasonable cause to refuse to surrender the funds.   AFFIRMED