Catherine Beverly v. Commissioner.

Dkt. No. 10774-03L , TC Memo. 2005-41, March 7, 2005 .

[Appealable, barring stipulation to the contrary, to CA-7. -- CCH .]

[Code Secs. 6331 and 6871]
Procedure and administration: Seizure of property: Levy and distraint: Bankruptcy: Automatic stay. --

A final notice of intent to levy that the IRS issued to a taxpayer after she filed a bankruptcy petition violated an automatic stay in bankruptcy and was invalid. Consequently, the IRS abused its discretion in determining to proceed with a collection action. The final notice, which dealt with unpaid income taxes from more than five years earlier, violated the automatic stay under 11 U.S.C. section 362(a)(1) because the IRS could have issued it before the taxpayer filed her bankruptcy petition. In addition, the final notice constituted the commencement of an administrative proceeding covered by that provision. Finally, the taxpayer's failure to inform the IRS during the administrative proceedings that she had filed a bankruptcy petition did not estop her from arguing that the final notice violated the automatic stay. She was acting pro se, and the court presumed that she acted in good faith and was unaware that the final notice violated the automatic stay. In contrast, IRS guidance had concluded that issuing a final notice to a person with an open bankruptcy case would violate the automatic stay. --.

[Code Secs. 6330 and 7442]
Procedure and administration: Bankruptcy: Automatic stay: Tax Court jurisdiction. --

The Tax Court had jurisdiction over an individual's petition challenging an IRS notice of determination. The taxpayer had filed a bankruptcy petition, but the petition had been dismissed prior to the issuance of the notice of determination. Thus, the Tax Court distinguished D.D. Smith, Dec. 55,921, 124 TC --, No. 3, in which it held that it lacked jurisdiction where an invalid notice of determination under Code Sec. 6330 was issued while the automatic bankruptcy stay was in effect. In contrast, the IRS issued the notice of determination on which the present case was based well after the automatic stay was terminated; thus, the notice was valid on its face. --.

Catherine Beverly, pro se; Karen Baker and Michael W. Bitner, for respondent.

P filed a bankruptcy petition. R subsequently issued to P a Final Notice of Intent to Levy and Notice of Your Right to Hearing (final notice of intent to levy) under sec. 6330, I.R.C. After P's bankruptcy case was closed, R issued to P a Notice of Determination Concerning Collection Action(s). P filed with the Court a Petition for Lien or Levy Action. R filed a Motion for Summary Judgment, and a supplement thereto.

Held: The final notice of intent to levy was issued to P in violation of the automatic stay imposed under 11 U.S.C. sec. 362(a) (2000) and was invalid and of no effect. Held, further, R's Motion for Summary Judgment, as supplemented, is denied, and a decision will be entered that respondent may not proceed with the proposed collection action.

MEMORANDUM OPINION

PANUTHOS, Chief Special Trial Judge: This collection review case is before the Court on respondent's Motion for Summary Judgment, as supplemented, filed pursuant to Rule 121.¹ Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner [Dec. 44,689], 90 T.C. 678, 681 (1988); Naftel v. Commissioner [Dec. 42,414], 85 T.C. 527 (1985). Summary judgment may be granted with respect to all or any part of the legal issues in controversy "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b); Sundstrand Corp. v. Commissioner [Dec. 48,191], 98 T.C. 518, 520 (1992), affd. [94-1 USTC ¶50,092] 17 F.3d 965 (7th Cir. 1994); Zaentz v. Commissioner [Dec. 44,714], 90 T.C. 753, 754 (1988). The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be read in a manner most favorable to the party opposing summary judgment. Dahlstrom v. Commissioner [Dec. 42,486], 85 T.C. 812, 821 (1985); Jacklin v. Commissioner [Dec. 39,278], 79 T.C. 340, 344 (1982).

Based upon our review of the record, we are satisfied that there is no genuine issue as to any material fact and that judgment may be rendered as a matter of law. However, as discussed in detail below, we conclude that the law does not support respondent's position. We hold that the final notice of intent to levy was issued to petitioner in violation of the automatic stay arising from her case in bankruptcy and therefore is invalid. Accordingly, we shall deny respondent's Motion for Summary Judgment, as supplemented, and we shall enter a decision that respondent may not proceed with the proposed collection action.

Background ²

On November 2, 2001 , petitioner filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Illinois. On November 26, 2001 , respondent issued to petitioner a Final Notice of Intent to Levy and Notice of Your Right to a Hearing Under Section 6330 (final notice of intent to levy) with regard to her unpaid Federal income taxes for 1985 to 1988 and 1994 and 1995. On November 27, 2001 , the bankruptcy court issued an order dismissing petitioner's bankruptcy case due to her failure to file required schedules. On December 6, 2001 , the bankruptcy court entered an order closing petitioner's case.

In the meantime, on December 5, 2001 , petitioner filed a second bankruptcy petition.

On December 19, 2001 , petitioner filed with respondent a Form 12153, Request for a Collection Due Process Hearing, challenging the proposed levy.

On May 17, 2002 , the bankruptcy court dismissed petitioner's second bankruptcy case.

On June 5, 2003 , respondent issued to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination) which stated that respondent intended to proceed with the proposed levy. On July 7, 2003 , petitioner filed with the Court a Petition for Lien or Levy Action challenging respondent's notice of determination.³ At the time the petition was filed, petitioner resided in Collinsville, Illinois.

As indicated, respondent filed a Motion for Summary Judgment. Respondent contends that the Court should sustain the notice of determination on the ground that the Appeals officer did not abuse her discretion in rejecting petitioner's offer in compromise--the sole issue that petitioner purportedly raised during the administrative proceedings--because petitioner was not current in filing her tax returns at that time.

Respondent's motion was called for hearing at the Court's motions session held in Washington, D.C. During the hearing, counsel for respondent informed the Court that respondent had recently discovered that the final notice of intent to levy was issued to petitioner while petitioner's first bankruptcy case remained open. The Court subsequently directed respondent to file a supplement to his motion addressing the question whether the final notice of intent to levy was issued to petitioner in violation of the automatic stay imposed under 11 U.S.C. section 362(a)(2000). Respondent filed a supplement, as directed, and the matter was called for further hearing at the Court's motions session. Respondent maintains that while the issuance of the final notice of intent to levy may have violated the automatic stay, petitioner should nevertheless be estopped from arguing that the final notice of intent to levy was issued in violation of the automatic stay because she failed to inform respondent during the administrative proceedings that she had filed a bankruptcy petition.⁴

Discussion

Section 6331(a) provides that, if any person liable to pay any tax neglects or refuses to pay such tax within 10 days after notice and demand for payment, the Secretary is authorized to collect such tax by levy upon property belonging to the person. Section 6331(d) provides that the Secretary is obliged to provide the person with notice, including notice of the administrative appeals available to the person, before proceeding with collection by levy on the person's property.

Section 6330 generally provides that the Commissioner cannot proceed with the collection of taxes by way of a levy on a person's property until the person has been given notice of, and the opportunity for, an administrative review of the matter (in the form of an Appeals Office hearing), and if dissatisfied, with judicial review of the administrative determination.

Section 6330(d) provides for judicial review of the administrative determination in the Tax Court or a Federal District Court, as may be appropriate. To obtain judicial review, the person must file a petition with the appropriate court within 30 days of the mailing of the notice of determination. Sec. 6330(d)(1).⁵

There is no dispute in this case that respondent issued to petitioner a final notice of intent to levy after petitioner filed her bankruptcy petition and while the automatic stay remained in effect. Under the circumstances, we must evaluate respondent's position in light of the provisions governing the automatic stay.

Title 11 of the United States Code provides uniform procedures designed to promote the effective rehabilitation of the bankrupt debtor and, when necessary, the equitable distribution of his or her assets. See H. Rept. 95-595, at 340 (1977). One key to achieving these aims is the automatic stay which generally operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy estate. See Allison v. Commissioner [Dec. 47,739], 97 T.C. 544, 545 (1991); Halpern v. Commissioner [Dec. 47,424], 96 T.C. 895, 897-898 (1991).

The automatic stay provisions are set forth in 11 U.S.C. section 362(a) (2000), which provides in pertinent part:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, * * * operates as a stay, applicable to all entities, of --

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

* * * * * * *

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

* * * * * * *

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; * * *

Unless relief from the automatic stay is granted by order of the bankruptcy court, see 11 U.S.C. sec. 362(d) (2000), the automatic stay generally remains in effect until the earliest of the closing of the case, dismissal of the case, or the grant or denial of a discharge, 11 U.S.C. sec. 362(c)(2); see Allison v. Commissioner, supra at 545; Smith v. Commissioner [Dec. 47,113], 96 T.C. 10, 14 (1991); Neilson v. Commissioner [Dec. 46,301], 94 T.C. 1, 8 (1990).

Analysis

As previously discussed, the automatic stay under 11 U.S.C. section 362(a)(1) bars "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title". Based upon the plain language of 11 U.S.C. section 362(a)(1), we conclude that respondent violated the automatic stay when he issued to petitioner the final notice of intent to levy dated November 26, 2001. In particular, there is no dispute in this case that respondent could have issued a final notice of intent to levy to petitioner regarding her unpaid income taxes for 1985 to 1988, and 1994 and 1995 before petitioner filed her bankruptcy petition. Moreover, we are satisfied that the issuance of the final notice of intent to levy constituted the commencement of an administrative proceeding against petitioner within the meaning of 11 U.S.C. section 362(a)(1). See, e.g., Smith v. Commissioner [Dec. 55,921], 124 T.C. __ (2005) (holding that a notice of determination issued under section 6330 to a taxpayer/debtor in bankruptcy constituted the continuation of an administrative collection action against the debtor within the meaning of 11 U.S.C. section 362(a)(1)). In particular, when the Commissioner issues to a person a final notice of intent to levy, that person is entitled to invoke the administrative and judicial procedures prescribed under section 6330. Id. at __. Indeed, should such person fail to timely request an administrative hearing, the Commissioner generally is free to proceed with the proposed levy. Consistent with the foregoing, we conclude that 11 U.S.C. section 362(a)(1) barred respondent from issuing to petitioner the final notice of intent to levy dated November 26, 2001.⁶

Our holding that the issuance to petitioner of the final notice of intent to levy violated the automatic stay is consistent with both bankruptcy case law and respondent's administrative guidance. See In re Parker, 279 Bankr. 596, 602-603 (Bankr. S.D. Ala. 2002) (The Commissioner conceded, and the bankruptcy court held, that the issuance of a final notice of intent to levy under section 6330 violated the automatic stay.); In re Covington, 256 Bankr. 463, 465-466 (Bankr. D.S.C. 2000) (The bankruptcy court held that a final notice of intent to levy did not constitute a notice and demand for payment within the meaning of 11 U.S.C. section 362(b)(9)(D)) and that such notice was issued to the debtor in violation of the stay); see also Chief Counsel Adv. 00-18-005 (May 5, 2000) (A Final Notice of Intent to Levy issued to a person who had filed a bankruptcy petition violated the automatic stay and was void).

At this point, a brief comment regarding the Court's jurisdiction is warranted. We recently held in Smith v. Commissioner [Dec. 55,921], 124 T.C. __, that a notice of determination under section 6330 issued to a taxpayer/debtor while the automatic stay was in effect was invalid, and we dismissed the case for lack of jurisdiction on that ground. The facts in the present case are distinguishable from those in Smith v. Commissioner [Dec. 55,921], 124 T.C. __. Specifically, the notice of determination upon which this case is based was issued to petitioner well after the automatic stay was terminated. Because the petition was timely filed in response to a notice of determination that is valid on its face, we conclude that petitioner properly invoked our jurisdiction under section 6330. See Sarrell v. Commissioner [Dec. 54,494], 117 T.C. 122, 125 (2001); Moorhous v. Commissioner [Dec. 54,316], 116 T.C. 263, 269 (2001); Offiler v. Commissioner [Dec. 53,912], 114 T.C. 492, 498 (2000); see also Rule 330(b).

Respondent maintains that petitioner should be estopped from asserting that the final notice of intent to levy violated the automatic stay because she failed to inform respondent during the administrative proceedings that she had filed a bankruptcy petition. Respondent cites Matthews v. Rosene, 739 F.2d 249 (7th Cir. 1984), for the proposition that a debtor may be barred by the equitable doctrine of laches from challenging an action that arguably violated the automatic stay.

We are not persuaded by respondent's argument. The record suggests that petitioner was acting pro se throughout the administrative proceedings. Without more, we presume that petitioner acted in good faith and that she was unaware that respondent's issuance of the final notice of intent to levy violated the automatic stay. Respondent, on the other hand, had previously issued administrative guidance in the form of a Chief Counsel Advisory (cited above) concluding that the issuance of a final notice of intent to levy to a person with an open bankruptcy case would violate the automatic stay. Considering respondent's administrative guidance on this specific point, we disagree with respondent that petitioner should be estopped. Considering all the circumstances, we decline to apply an equitable principle to bar consideration of the validity of the final notice of intent to levy.

We recently noted that collection activity undertaken in violation of the automatic stay generally is considered void or invalid. See Smith v. Commissioner [Dec. 55,921], 124 T.C. __ (2005) (citing 9B Am. Jur. 2d, Bankruptcy, sec. 1756 (1999)). The U.S. Court of Appeals for the Seventh Circuit, the court to which an appeal in this case would lie, adheres to this view. See Middle Tenn. News Co. v. Charnel of Cincinnati, Inc., 250 F.3d 1077, 1082 (7th Cir. 2001).

In sum, we conclude that the final notice of intent to levy was issued to petitioner in violation of the automatic stay, and therefore, it was invalid. It follows that respondent abused his discretion by concluding in the notice of determination that the proposed levy should proceed.

To reflect the foregoing,

An Order denying respondent's Motion for Summary Judgment, as supplemented, and a decision will be entered for petitioner.

¹ Unless otherwise indicated, section references are to the Internal Revenue Code, as amended. Rule references are to the Tax Court Rules of Practice and Procedure.

² The record establishes and/or the parties do not dispute the following.

³ The petition arrived at the Court in an envelope bearing a timely U.S. Postal Service postmark dated July 1, 2003. See sec. 7502(a).

⁴ Upon questioning by the Court, respondent was hesitant to acknowledge that the final notice of intent to levy violated the automatic stay. In a footnote to his supplement to the motion for summary judgment, respondent states that "it is not clear whether the providing of a notice of right to a hearing under section 6330 is an `act to collect' in violation of the automatic stay". Respondent further states that the final notice of intent to levy required under sec. 6331(a) is in the same document as the notice of a right to hearing. Respondent concludes in the footnote that "Arguably, in contrast to the notice of intent to levy and the notice of levy, the mere notice of a right to a pre-levy hearing does not violate the stay."

⁵ Sec. 6330 is effective with respect to collection actions initiated more than 180 days after July 22, 1998 (Jan. 19, 1999). See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3401(d), 112 Stat. 750.

⁶ Respondent does not contend that the final notice of intent to levy qualified under any of the exceptions to the automatic stay prescribed in 11 U.S.C. sec. 362(b)(2000).

[2002-2 USTC ¶50,614] In re J. Greg Goodykoontz and Toni B. Goodykoontz, Debtors. J. Greg Goodykoontz and Toni B. Goodykoontz, Plaintiffs v. United States of America on behalf of its agency, the Internal Revenue Service, and The State of West Virginia on behalf of its agency, The WV Dept. of Tax and Revenue, Defendants

U.S. Bankruptcy Court, No. Dist. W.Va., 00-10902, 5/30/2001

[Code Secs. 6321 , 6331 and 6871 ]

Tax liens: Property subject to tax liens: Bankruptcy: Levy and distraint: Property exempt from levy: Lien v. levy.--

Federal tax liens issued against the property of married debtors applied to property that was exempt from levy. The taxpayers unsuccessfully contended that the terms "lien" and "levy" had the same meaning under Code Sec. 6331 and, thus, the liens did not reach their exempt property. Although the Fourth Circuit had not addressed the issue, the court noted that the issue had arisen before courts within the Fourth Circuit, and those courts issued findings consistent with Seventh and Ninth Circuit opinions that liens and levy should be treated dissimilarly under the statute. Consequently, the tax liens attached to the debtors' exempt, as well as non-exempt, assets.

MEMORANDUM OPINION AND ORDER

FRIEND II, Bankruptcy Judge:

This matter is before the Court pursuant to the Plaintiffs' motion for summary judgment. The Plaintiffs, who are debtors in possession, filed this adversary proceeding to establish the validity of tax liens and to value property subject thereto. The Court has jurisdiction by virtue of 28 U.S.C. §1334 and the standing order of reference in this District. The matter before the Court is a core proceeding pursuant to 28 U.S.C. §157(b).

FACTS

The plaintiffs, J. Greg Goodykoontz and Tori B. Goodykoontz, ("debtors") filed for relief under Chapter 11 of the Bankruptcy Code on April 6, 2000 and were authorized to continue operating as debtors in possession. The parties have stipulated to the value of property owned by the debtors at the time of filing. Neither the prior consensual liens on this property nor the claimed exemptions are in dispute.

Property                    Value  Claimed Exemption  Prior Consensual Liens

Residence ................ 175,000            0             150,713.36

Cash .....................      50           50                      0

Checking, City Nat'l .....   1,000        1,000                      0

Checking, One Valley .....      75           75                      0

Household Goods ..........   7,420        7,420                      0

Pictures .................   3,000        3,000                      0

Jewelry ..................  24,160        1,000                 24,000

Tea Set ..................   1,500            0                  7,500

Wearing apparel ..........   2,500        2,500                      0

Firearms .................     250          250                      0

401(k) ...................  20,000       20,000                 39,548

IRA ......................  15,000       15,000                  9,295

Partnership ..............  17,000       15,000                      0

Miata ....................   3,500        3,500                      0

Honda ....................  18,000            0              18,120.94

Audi .....................  13,000            0                 14,000

Prior to the bankruptcy filing, tax liens were filed by the United States of America on behalf of the Internal Revenue Service (" IRS "), and by the State of West Virginia on behalf of the Department of Tax and Revenue ("State Tax Department"). On August 21, 2000 , the debtors filed an adversary proceeding against the IRS and the State Tax Department seeking to determine the validity of the tax liens. By agreed order entered November 8, 2000 , the debtors and the West Virginia State Tax Department stipulated that the value of the assets involved was such that after the satisfaction of the consensual secured debt and the tax liens of the IRS , ¹ the state tax liens would be unsecured. The Court ordered that all tax liens filed pre-petition by the State Tax Department against the plaintiffs are of no further effect. The adversary proceeding continued with the IRS as the sole defendant.

The tax liens of the IRS are as follows:

Lien Amount  Period Ending  Assessed   Filed

$49,388.20      
12/31/90
     
5/20/91
   
7/24/91

 49,762.17      
12/31/91
     
5/25/92
   
7/23/92

 65,100.78      
12/31/92
     
5/31/93
    
7/9/93

 92,281.29      
12/21/93
     
5/30/94
   
2/15/95

 97,769.79      
12/31/94
     
6/15/95
   
8/18/95

 68,296.08      
12/31/96
      
2/2/99
   
6/21/99

Following a pretrial hearing on October 12, 2000 , the plaintiffs and the IRS stipulated to the property values and were to submit briefs setting forth whether the liens of the IRS are limited to the value of the property subject to levy, or whether the value of property which may not be levied against should support the tax lien. The debtors filed a motion for summary judgment, and the IRS filed an objection to the motion and a cross motion for summary judgment. The Court then took this matter under advisement.

DISCUSSION

The Internal Revenue Code ("I.R.C.") provides that

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) 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.

28 U.S.C. §6321.

The Code further provides that the lien imposed by §6321 "shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322. The United States 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, 719-720 (1985), cited by In re Voelker [95-1 USTC ¶50,028 ], 42 F.3d 1050 (7th Cir. 1994) ("The language of the statute unambiguously shows that the federal tax lien attaches to all of a debtor's property, without exception.").

The debtors argue that under 26 U.S.C. §6331, the tax lien does not apply to exempt property. Section §6331 provides that

(a) . . . If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

(b) The term "levy" as used in this title includes the power of distraint and seizure by any means.

(Emphasis added).

The debtors' position is based upon the equation of the terms "lien" and "levy." However, the Seventh and the Ninth Circuits have found that the two terms have distinctly different meanings, and should be treated dissimilarly under the statute. The Seventh Circuit Court of Appeals stated that

This dissimilarity in treatment makes sense, for as the Ninth Circuit discussed in Barbier, a lien and levy are different things. "A levy forces debtors to relinquish their property. It operates as a seizure by the IRS to collect delinquent incomes taxes." [citation omitted]. On the other hand, "a lien . . . is merely a security interest and does not involve the immediate seizure of property. A lien enables the tax payer to maintain possession of protected property while allowing the government to preserve its claim should the status of [the] property later change." [citation omitted]. Thus, if a debtor later sells the exempt property, the IRS could move to collect the proceeds from the sale.

Voelker [95-1 USTC ¶50,028 ], 42 F.3d at 1052, quoting United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990).

The court followed this analysis to the conclusion that a federal tax lien attached to all of a Chapter 13 debtor-taxpayer's property, without exception, even to personal property exempt from levy. Id. The Ninth Circuit Court of Appeals had previously reached a similar conclusion in United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.2d 377, holding that the IRS ' priority tax claim could be secured by Chapter 13 debtors' household effects and other property which were otherwise exempt from administrative levy.

The Fourth Circuit Court of Appeals has not addressed this issue. The issue has, however, arisen before several courts within the Fourth Circuit. The findings of these courts are consistent with the Seventh and Ninth Circuit opinions on the matter. See In re O'Gorman-Sykes [2000-1 USTC ¶50,174 ], 245 B.R. 815 (Bankr. E.D. Va. 1999) (tax refunds claimed exempt by debtor nevertheless subject to IRS ' secured claim); In re Evans, Bankruptcy 94-00785-5- ATS , WL 760821 (Bankr. E.D. N.C. Nov. 7, 1999) (summary non-judicial seizure of property available to the IRS under the levy provision of §6331 is separate and discrete from the IRS power to create a lien on property of the debtor); In re Dinatale, 235 B.R. 569 (Bankr. D. Md. 1999) (federal tax liens can properly attach to exempt assets); In re Deel, No. 7-93-02602-HPB-13, WL 571997 (W.D. Va. June 20, 1995 ) (debtors could not avoid federal tax lien on exempt property, but IRS could not levy on property).

The Court finds, therefore, that the liens of the IRS attach to the debtors' exempt assets, as well as their non-exempt assets. The motion for summary judgment of the debtors is DENIED and the cross motion for summary judgment of the IRS is GRANTED.

It is accordingly SO ORDERED.

¹ The IRS tax liens were undisputedly prior in time to those of the State Tax Department.

[2002-2 USTC ¶50,547] In re Alice Sharon Roberts, Debtor

U.S. Bankruptcy Court, So. Dist. Ala., So. Div., 01-14849-13, 6/18/2002

[Code Secs. 6331 and 6871 ]

Bankruptcy: Levy and distraint: Right to payment.--

A Chapter 13 bankruptcy trustee was required to honor an IRS notice of levy upon funds left in a debtor's bankruptcy estate following the dismissal of her case notwithstanding language in section 1326 of the Bankruptcy Code requiring that the funds be returned to the debtor. The Eleventh Circuit's decision A.A. Ruff (CA-11), 97-1 USTC ¶50,130 , was binding precedent and required the trustee to follow the command of Code Sec. 6331 and to remit to the IRS all funds remaining in the bankruptcy estate after administrative expenses were paid.

ORDER ON TRUSTEE'S TO MOTION FOR INSTRUCTION

MAHONEY, Chief Bankruptcy Judge:

The standing Chapter 13 trustee has filed Motion For Instruction in regard to a United States Internal Revenue Service levy served on him after this case was dismissed.

FACTS

Debtor filed this case on September 24, 2001 . The United States Internal Revenue Service filed a proof of claim showing a secured claim of $227,961.05. On March 7, 2002 , the Court entered its Order on Dismissal of Chapter 13 Case. On March 28, 2002 , the Court denied Debtor's motion to alter or amend. The Standing Chapter 13 Trustee states that he is holding $13,271.25. The Chapter 13 Trustee was served with a 26 U.S.C. §6331 Notice of Levy after this case was dismissed.

LAW

"The Internal Revenue Service is empowered to levy on the property of a tax delinquent in the hands of a third party by 26 U.S.C. §6331. . . . Upon receipt or a notice of levy, such third parties are required to surrender that property to the I.R.S." United States v. Ruff [97-1 USTC ¶50,130 ], 99 F.3d 1559, 1563 (1996). Ruff held that a Chapter 7 Trustee who had failed to honor a levy, instead paying the funds to an administrative claimant, was personally liable to the Government for the property not surrendered. Ruff [97-1 USTC ¶50,130 ], 99 F.3d at 1567. Ruff went on to hold a contrary case from this District, In re Ceafco [77-2 USTC ¶9760 ], No. 28,700, 1977 WL 1273 (S.D. Ala. Sept. 21, 1977 ), to have been wrongly decided.

Ruff has been applied to require a Chapter 13 Trustee to honor a Title 26 Notice of Levy. In re Mishler [98-2 USTC ¶50,652 ], 223 B.R. 17, 19-20 (Bankr. M.D. Fla. 1998). This requirement applies notwithstanding language in 11 U.S.C. §1326(a) calling for return of funds to the debtor. Mishler [98-2 USTC ¶50,652 ], 223 B.R. at 20; In re Schlapper, 195 B.R. 805, 806 (Bankr. M.D. Fla. 1996). This Court has followed the logic of Schlapper in a case affirmed by the District Court and Court of Appeals. In re Kiper, Case No. 98-14655-WSS-13 (April 26, 2000) at 5, aff'd, In re Kiper, Case No. 00-670-BJ-L (September 26, 2000), aff'd, Kiper v. McAleer, No. 00-15595 (July 5, 2001).

The Court of Appeals decision in Ruff [97-1 USTC ¶50,130 ], 99 F.3d 1559, and the decisions of the District Court and Court of Appeals in Kiper, are binding precedent. United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015,1018 (11th Cir. 1989), cert. denied, 493 U.S. 498. The Trustee is instructed to follow the command of 26 U.S.C. §6331 and hand over all funds remaining after his administrative expenses to the counsel for the United States.

[2001-2 USTC ¶50,665] Neil T. Nordbrock, Plaintiff v. United States of America, Defendant

U.S. District Court, Dist. Ariz., CV-99-444- TUC -JMR, 7/30/2001, 2001 U.S. Dist. LEXIS 13135. On a motion to reconsider a District Court decision, 2000-2 USTC ¶50,790

[Code Secs. 6103 and 6502 ]

Refund suit: Collection: Penalties, civil: Statute of limitations: Amendment to.--A motion to reconsider a tax return preparer's suit for refund of the proceeds from the forced sale of his wife's property by the IRS in satisfaction of two penalties assessed against him for willfully refusing to turn over copies of tax returns was granted but any relief was denied. The IRS properly initiated a proceeding against the individual to collect tax within six years after the assessment. An amendment to Code Sec. 6502(a) that substituted a ten-year statute of limitations for the six-year statute of limitations did not apply. There was no express provision, either in the amendment or its legislative history, that it was to apply retroactively and revive time-barred claims.
[Code Sec. 7433 ]

Refund suit: Collection: Penalties, civil: Damages: Wrongful levy: IRS employees.--An individual's claim of fraud against two IRS employees was without merit. The erroneous date on the notice to levy was not an attempt to harass or circumvent the statute of limitations on collection, but was merely a typographical error.
[Code Sec. 6065 ]

Refund suit: Collection: Liens: Certification.--An individual could not base his claim for the refund of proceeds generated by the forced sale of his wife's property on the fact that the IRS did not certify the tax liens that were placed against it to collect penalties he owed. Code Sec. 6065 applies to tax returns, not liens, and state (Arizona) law did not require that a federal lien be certified before being filed.
[Code Sec. 6331 ]

Notice of seizure: Bankruptcy petition.--A taxpayer's bankruptcy petition did not invalidate a notice of seizure sent against him since the notice was mailed before he filed for bankruptcy.

Neil T. Nordbrock, Tucson, Ariz., pro se. Robert P. McIntosh, Department of Justice, Washington, D.C. 20530, for defendant.

ORDER

ROLL , District Judge:

Pending before the Court are Plaintiff's Motion to Reconsider the Court's order dated September 27, 2000 and Defendant's Response to the Court's order, which also requests reconsideration.

BACKGROUND

This case arises from Plaintiff's refusal to turn over copies of tax returns he prepared from 1978-1981. As a result of his refusal, the IRS , pursuant to 26 U.S.C. §6659(d), assessed the maximum penalty, $25,000, against Plaintiff for each of the three years he refused to turn over information. The first penalty was assessed on June 28, 1982 and the second and third penalties were assessed on December 28, 1982 . The IRS filed notices of federal tax liens with the Pima County Recorder against Plaintiff and Swan Business Organization as nominee of Plaintiff. ¹

In August 1983, the government filed an action in federal court seeking an injunction against Plaintiff to compel him to disclose the requested tax return information. In December 1983, after paying $250.00 towards the penalties, Plaintiff filed a separate suit in federal court seeking a refund of the $250.00 and an abatement of the remainder of the penalties. In the lawsuit initiated by Plaintiff, the government filed a counterclaim for $74,750, the balance of the assessment still owed by Plaintiff.

In the government's action for injunctive relief, the district court issued summary judgment in favor of the government. Summary judgment was also issued in favor of the government in Plaintiff's action for refund and abatement. Plaintiff appealed both decisions.

The cases were consolidated on appeal. The Ninth Circuit reversed and remanded both cases, finding that a material issue of fact existed with respect to whether Plaintiff acted wilfully in refusing to turn over the requested tax return information to the IRS . See United States v. Nordbrock [87-2 USTC ¶9538], 828 F.2d 1401 (9th Cir. 1987).

On remand, the cases were consolidated. (83-CV-553 TUC WDB). A bench trial was held. On January 17, 1990 , the district court entered judgment in favor of the government and against Plaintiff. The court concluded that Plaintiff had acted wilfully in refusing to turn over the requested information to the IRS . The court enjoined Plaintiff from preparing tax returns for other taxpayers and sustained the $75,000 in penalties assessed against Plaintiff. Plaintiff appealed.

On appeal, the Ninth Circuit again reversed and remanded. The Court found that Plaintiff was entitled to a trial by jury. See United States v. Nordbrock [91-2 USTC ¶50,391], 941 F.2d 947 (9th Cir. 1991).

On remand, a jury trial was conducted. The jury found that Plaintiff had not acted in good faith and wilfully had failed to comply with the law. Pursuant to 26 U.S.C. §7407(b), the court issued a lifetime injunction against Plaintiff prohibiting him from preparing tax returns for other taxpayers. In addition, the court found that Plaintiff was not entitled to a refund or an abatement. At that time, however, the court did not enter judgment on the government's counterclaim for the unpaid balance of the penalties. ² Plaintiff appealed.

On October 11, 1994 , the Ninth Circuit affirmed the jury's verdict, the district court's issuance of the lifetime injunction, and the penalties assessed against Plaintiff. See United States v. Nordbrock [94-2 USTC ¶50,532], 38 F.3d 440 (9th Cir. 1994).

During the pendency of these lawsuits, in October 1992, the IRS seized the Swan Road Property. A notice of seizure was sent to Swan Business Organization as Plaintiff's nominee. The IRS also began proceedings to sell the property. However, these proceedings were stayed due to Swan Business Organization and Plaintiff separately filing for bankruptcy. Swan Business Organization's and Plaintiff's bankruptcy petitions were dismissed on August 2, 1994 and December 4, 1995 , respectively.

Once the bankruptcy actions were dismissed, the IRS proceeded to sell the Swan Road Property pursuant to a sealed bid sale. The property was sold on April 25, 1996 for $62,501.10. On September 7, 1999 , Plaintiff filed the instant case. Plaintiff seeks a refund of $62,501.10, the amount realized from the sale of the Swan Road Property, reasonable attorneys' fees and costs and whatever further relief the Court deems justified. On December 15, 1999 , Defendant filed a motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted.

On September 27, 2000 , the Court issued an order denying Defendant's motion to dismiss for lack of subject matter jurisdiction. The Court denied Defendant's motion to dismiss for failure to state a claim with respect to the June 28, 1982 assessment but granted the motion as to the December 28, 1982 assessments and all other claims raised in Plaintiff's complaint. The Court concluded that Plaintiff was entitled to a refund of that portion of the sale proceeds used to satisfy the June 1982 penalties. Because the record was unclear as to what portion of the sale proceeds was applied to the June 1982 penalties, if any, the Court ordered Defendant to supply the Court with this information so the Court could enter judgment in Plaintiff's favor accordingly.

Thereafter, Plaintiff filed a motion to reconsider and Defendant filed a response to the Court's order. In Defendant's response, it also requests reconsideration.

PLAINTIFF'S MOTION TO RECONSIDER

In Plaintiff's motion to reconsider, Plaintiff states he wishes to clarify some of the footnotes in the Court's order. Plaintiff also contends that the Court erred in 1) concluding that the statute of limitations for collection of the December 28, 1982 assessments had not expired, 2) determining that the bankruptcies did not nullify the October 1992 seizure, 3) finding that the liens were valid and 4) accepting the government's "self-serving lie" that changing the date of an assessment was a typographical error. The Court will address each of Plaintiff's arguments.

1. Footnotes

Footnote 3 of the Court's September 27, 2000 order states that according to Plaintiff's exhibits, only the federal tax liens against Plaintiff were released by the IRS , not the liens against Swan Business Organization. Plaintiff now submits three exhibits stating that the liens against Swan Business Organization were released on September 15, 1990 . The exhibits submitted by Plaintiff in his motion to reconsider do not demonstrate that the liens against Swan Business Organization were released. In fact, they demonstrate the opposite. Exhibit A demonstrates that only the lien recorded on April 11, 1988 was released. The lien recorded on September 16, 1983 against Swan Business Organization was re-filed. ³ Exhibit B demonstrates that the release of the liens against Swan Business Organization was revoked and the liens were re-instated.

Plaintiff states that footnote 4 in the Court's order should be changed to reflect that Swan Business Organization is not owned by Plaintiff alone but instead is owned equally by Plaintiff and his wife. That Plaintiff's wife was an equal owner of Swan Business Organization was not clear in Plaintiff's original pleadings. The Court notes this factual clarification but because it was not relevant to the Court's decision, the September 27, 1999 order will not be amended.

Plaintiff also argues that footnote 5 is inconsistent with footnote 7. The Court disagrees. Although the government counterclaimed for the unpaid penalties in Plaintiff's December 1983 lawsuit, Footnote 7 correctly states that Defendant has not counterclaimed for the unpaid penalties in this case.

2. Statute of Limitations

In his motion to reconsider, Plaintiff argues that the Court incorrectly ruled that the statute of limitations for collection of the December 28, 1982 assessment had not expired. He states that the IRS relied on the district court's January 17, 1990 judgment against Plaintiff as the basis of its seizure of Plaintiff's property. However, Plaintiff contends this judgment was overturned by the Ninth Circuit.

Plaintiff relies on Exhibit D, attached to his motion to reconsider. This exhibit appears to be a summary and recommendation from William Keebler, an appeals officer, as to whether a seizure of Plaintiff's property was necessary. As to whether the statute of limitations had expired on the preparer penalties, Mr. Keebler's recommendation was "No." Within this recommendation, he states that the IRS must initiate a proceeding in court to collect the tax within 6 years after the assessment. He then states that a proceeding against Plaintiff was timely filed and a judgment was issued by the United States District Court for the District of Arizona on January 17, 1990 .

Plaintiff is correct that the district court's January 17, 1990 decision was reversed by the Ninth Circuit. However, after a jury trial was held, the jury reached the same conclusion, finding that Plaintiff had acted wilfully in refusing to turn over the requested information to the IRS . Judgment was issued in favor of the government and against Plaintiff. The jury's verdict was affirmed by the Ninth Circuit. In addition, the reference to the January 17, 1990 judgment had no effect on Mr. Keebler's recommendation. The relevant factor was that a proceeding was initiated against Plaintiff to collect the tax within six years after the assessment. Accordingly, Plaintiff's arguments lack merit.

3. Bankruptcy Issue

Plaintiff argues that in order to have had a valid seizure of the Swan Road Property in this case, Defendant would have had to re-seize the property after termination of the bankruptcy proceedings initiated by Plaintiff and Swan Business Organization. As explained in the Court's September 27, 2000 order, Defendant levied on the Swan Road Property and filed its notice of seizure before Plaintiff or Swan Business Organization filed their bankruptcy petitions. Defendant did not sell the property until after the bankruptcy petitions had been dismissed.

The Court has found no law to support Plaintiff's argument that the filing of bankruptcy somehow invalidates a notice of seizure served before the bankruptcy proceedings were initiated. The case law cited by Plaintiff in his motion to reconsider does not support Plaintiff's position either. It merely states that a creditor who knowingly retains a bankruptcy debtor's property violates the automatic stay provisions of bankruptcy law. Here, Defendant did not have possession of the Swan Road Property at the time the bankruptcy petitions were filed. It merely had filed a notice of seizure. In fact, when Defendant became aware of the pending bankruptcy proceedings, all seizure activity stopped. The property was not sold until after the bankruptcy petitions were dismissed.

4. Invalid Liens

Plaintiff argues that the liens issued in this case were invalid because they did not contain a written declaration that they were made under the penalty of perjury as required under 26 U.S.C. §6065. He states that the Court incorrectly applied this statute only to citizen filers. In addition, Plaintiff contends that Defendant improperly relies on Revenue Ruling 71-466 for the proposition that liens need not be certified. He states revenue rulings are not the law.

The congressional intent in enacting §6065 was to permit a verified return to be substituted for a notarized return. Cohen v. United States [53-1 USTC ¶9165], 201 F.2d 386, 393 (9th Cir.) (construing §6065's predecessor provision), cert. denied, 345 U.S. 951, 97 L.Ed. 1374, 73 S.Ct. 864 (1953). Section 6065 applies to returns and other written declarations filed by taxpayers. The statute does not require that a lien or other notice issued by the IRS be verified by a written declaration that it is made under penalty of perjury. See Thompson v. I.R.S. [98-2 USTC ¶50,556], 23 F.Supp.2d 923, 925 (N.D. Ind. 1998); Morelli v. Alexander [96-1 USTC ¶50,292], 920 F.Supp. 556, 558 (S.D.N.Y. 1996); Davis v. Comm'r of Internal Revenue [ CCH Dec. 53,969], 115 T.C. 35, 42 (2000).

5. Typographical error

Plaintiff argues that two IRS employees committed fraud by changing the first penalty assessment date from June 28, 1982 to June 28, 1992 on a levy form in an attempt to subvert the statute of limitations. The Court concluded that it was merely a typographical error. Plaintiff alleges that the error was not simply a typographical error. He states that the computer is programmed to recognize the statute of limitations and the alteration of dates was needed in order to record the notice of liens within the statute of limitations. Plaintiff further states that this fraudulent act led him to issue a lien draft to the IRS for $398,000. Plaintiff requests the Court to order a criminal prosecution of the IRS employees who changed the dates or at least order them to show cause why they should not be prosecuted for their criminal acts.

The Court affirms its conclusion that the change of dates was a typographical error. As stated in its September 27, 2000 order, all other documents contain the correct date and Defendant has never stated that the first assessment occurred on a date other than June 28, 1982 .

DEFENDANT'S RESPONSE TO THE COURT'S ORDER AND REQUEST FOR RECONSIDERATION

In its September 27, 2000 order, the Court determined that the levy on the Swan Road Property, to the extent the sale proceeds were used to satisfy the penalties assessed against Plaintiff on June 28, 1982 , was outside the statute of limitations and therefore, Plaintiff was entitled to a refund of that portion of the sale proceeds applied to the June 1982 assessment. In making this determination, the Court concluded that 26 U.S.C. §6502(a), as it existed prior to its amendment in 1988, applied. However, as to the December 28, 1982 penalty assessments, the Court concluded that the 1988 amendment to §6502(a) applied and the levy on the Swan Road Property, to the extent the sale proceeds were used to satisfy the penalties assessed on December 28, 1982 , was within the statute of limitations. Because it was unclear as to how the sale proceeds were applied to the June 28, 1982 assessment, the Court ordered Defendant to provide the Court with detailed information on how the proceeds from the sale of the Swan Road Property applied to Plaintiff's penalty assessments.

In response to the Court's order, Defendant states that the entire sale proceeds of the Swan Business Property were credited to the June 1982 assessment. However, Defendant contends that because Plaintiff had notice and demand for payment, Defendant should be permitted to exercise its statutory and common law rights of setoff.

Despite providing the Court with information regarding how the proceeds were applied to the June 28, 1982 assessment, Defendant requests that the Court reconsider its September 27, 2000 order. Defendant argues that Congress can, and did, extend the right to collect the liabilities at issue by levy. It contends that even though the statute of limitations as to the June 1982 assessment had expired, the 1988 amendment to 26 U.S.C. §6502(a) revived the time-barred claim. The Court disagrees.

The pre-1988 version of 26 U.S.C. §. 6502(a) provided that a tax could be collected by levy or a proceeding in court as long as the levy or proceeding in court was begun within six years after the assessment of the tax. This six-year period could not be extended or curtailed based upon a judgment against the taxpayer. In 1988, Congress amended §6502(a) to provide that if a timely proceeding in court for collection of the tax was commenced, the six-year period to collect on the tax by levy was extended until the liability for the tax was satisfied or became unenforceable.

The statutory history of §6502(a) provides that the 1988 amendment was to apply to all levies issued after the date of its enactment, November 10, 1988 . Here, the levy on the Swan Road Property was issued in October, 1992. Therefore, technically, the 1988 amendment to §6502(a) would apply. However, Congress did not specifically provide that the 1988 amendment would apply to levies issued after November 10, 1988 , which were already time-barred under the earlier version of §6502(a).

The Court agrees with Defendant that Congress has the authority to extend a statute of limitations, even if this extension results in revival of time-barred claims. "The length and indeed the very existence of a statute of limitations upon a federal cause of action is entirely subject to congressional control. . . . [A] statute of limitations . . . can be extended, without violating the Due Process Clause, after the cause of action arose and even after the statute itself as expired." Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 228-29, 131 L.Ed.2d 328, 115 S.Ct. 1447 (1995) (citing Chase Securities Corp. v. Donaldson, 325 U.S. 304, 89 L.Ed. 1628, 65 S.Ct. 1137 (1945)). Congress has exercised this power in the area of student loans and courts have upheld the exercise of this power. See e.g. United States v. Phillips, 20 F.3d 1005 (9th Cir. 1994). In addition, when Congress amended §6502(a) in 1990, substituting a 10-year statute of limitations for the 6-year limitations period, Congress provided that the 1990 amendment would apply to taxes assessed after November 15, 1990, unless the period for collection of the tax had not expired. However, unlike the student loan cases and the 1990 amendment to §6502(a), Congress did not expressly provide in the 1988 amendment or its legislative history that its intent was to apply the amendment retroactively and revive time-barred claims. ⁴ In fact, the amendment is not retroactive as it applies to levies issued after, not before, the date of its enactment.

Based on the above, the Court re-affirms its September 27, 2000 order.

DEFENDANT'S RIGHTS OF SETOFF

Defendant informs the Court that the entire proceeds from the sale of the Swan Road Property were applied to the June 28, 1982 assessment. Accordingly, Plaintiff would be entitled to a refund of the entire sale proceeds. However, Defendant states that it should be permitted to exercise its statutory rights to setoff. Defendant shall provide a brief to the Court regarding this issue within 30 days of its receipt of this order. Plaintiff may respond to this brief within 20 days of his receipt of Defendant's brief.

Accordingly,

IT IS ORDERED that Plaintiff's Motion to Reconsider is GRANTED but relief is DENIED.

IT IS FURTHER ORDERED that Defendant's Request for Reconsideration is GRANTED but relief is DENIED, except as to the issue regarding rights of setoff.

IT IS FURTHER ORDERED that Defendant shall provide the Court with a brief regarding the issue of setoff within 30 days of its receipt of this order. Plaintiff may respond to Defendant's brief within 20 days of his receipt of Defendant's brief.

¹ Swan Business Organization is owned by plaintiff and his wife. In 1983, Plaintiff and his wife conveyed property (Swan Road Property) to Swan Business Organization.

² On June 3, 1993, the district court issued an amended judgment, entering judgment in favor of the government and against Plaintiff on the government's counterclaim for the unpaid balance of the penalties. This amended judgment was entered nunc pro tunc as of October 28, 1992.

³ The veracity of Exhibit A is questionable as Plaintiff failed to submit the actual release form. Exhibit A contains a computer-generated list of liens against Plaintiff and Swan Business Organization. To the right of each lien, an individual wrote "released 9-15-90" or "refiled." The identification of the individual is unknown.

⁴ "The traditional rule [is] that statutes do not apply retroactively unless Congress expressly states that they do." Plaut, 514 U.S. at 237 (citing Landgraf v. USI Film Products, 511 U.S. 244 at 277, 128 L.Ed.2d 229, 114 S.Ct. 1483 (1994)).

[2000-2 USTC ¶50,691] Harold J. Balzer and David G. Balzer, Plaintiffs v. United States of America, Defendant

U.S. District Court, No. Dist. Calif., C 98-1606 SI, 8/7/2000

[Code Secs. 6323, 6331 and 6871 ]

Tax liens: Priority against third parties: Bankruptcy: Trust fund recovery penalty: Dominion or control: Accounts receivable: Payment of creditors.--Officers of a bankrupt corporation were not entitled to summary judgment with respect to their claim that the IRS improperly exercised dominion and control over the corporation's prepetition receivable proceeds by virtue of the IRS 's status as a secured creditor and, thus, were denied a refund. The contention that the IRS 's lien did not extend to the collection of a trust fund recovery penalty because it was an exercise of control over the corporation's accounts receivable and caused inferior creditors to be paid before the IRS was unsupported. Whiting Pools, Inc., (SCt), 83-1 USTC ¶9394, distinguished. BACK REFERENCES: 2000 FED ¶38,160.0351, 2000 FED ¶38,187.15 and 2000 FED ¶40,630.08

[Code Secs. 6672 and 6871 ]

Penalties, civil: Trust fund recovery penalty: Bankruptcy: Payment of creditors: Willfulness: IRS conduct.--The willful failure of officers of a bankrupt corporation to pay a trust fund recovery penalty was not vitiated by the IRS 's failure to assert its superior interest in the corporation's prepetition receivable proceeds. As persons responsible for the penalty, the taxpayers failed to reach a repayment agreement with the IRS and there was no evidence that they relied on the advice of their attorneys in failing to pay the outstanding tax liability. Moreover, the IRS was entitled to pursue collection from the taxpayers before the corporation. BACK REFERENCES: 2000 FED ¶39,780.25, 2000 FED ¶39,780.853 and 2000 FED ¶40,630.0785

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT

ILLSTON, District Judge:

On July 28, 2000 , this Court heard argument on defendant United States' motion for summary judgment and plaintiffs' cross-motion for summary judgment. Having carefully considered the argument of the parties ¹ and the papers submitted, the Court hereby GRANTS defendant's motion for summary judgment, and DENIES plaintiffs' cross-motion for summary judgment.

BACKGROUND

On April 20, 1998 , plaintiffs filed this action for recovery of internal revenue taxes and penalties erroneously or illegal assessed or collected pursuant to 26 U.S.C. §7422(a). The complaint alleges the following facts: plaintiffs Harold and David Balzer were president and vice-president, respectively, of Balzer/Shopes, Inc. Beginning with the second quarter of 1993, Balzer/Shopes, Inc. failed to pay all required federal employment tax deposits due to "cash flow difficulties." Although in November 1993, Balzer/Shopes, Inc. was eventually able to obtain financing from Silicon Valley Financial Services ("SVFS"), a division of Silicon Valley Bank ("SVB"), the corporation failed to pay employment taxes for the second, third, and fourth quarters of 1993 and the first quarter of 1994.

On February 18, 1994 , the IRS recorded a Notice of Federal Tax Lien against Balzer/Shopes, Inc. for delinquent taxes totaling $ 404,399.09 for the second and third quarters of 1993. On April 1, 1994 , Balzer/Shopes, Inc. made a proposal to the IRS for payment of its delinquent taxes, which it accompanied with payment totaling $ 289,879.13. Balzer/Shopes, Inc. designated that this sum be applied against its Trust Fund liability in reverse chronological order, and proposed several future installment payments to satisfy the remainder of the tax obligation. Although the IRS accepted payment of $ 289,879.13, no agreement regarding future payments was ever reached. Instead of designating the corporation's payment of $ 289,879.13 to the first quarter of 1994 and the fourth quarter of 1993, the IRS applied the corporation's payment to the second and third quarters of 1993.

On June 10, 1994 , Balzer/Shopes, Inc. filed for Chapter 11 bankruptcy protection. On June 22, 1994 , the IRS filed a proof of claim in the bankruptcy, claiming a secured claim of $ 141,303.07. On July 7, 1994 , the bankruptcy court issued an order which plaintiffs allege granted the IRS adequate protection for its claim in the amount of $ 141,303.07. After reapplying the corporation's payments to reverse chronological order as designated by Balzer/Shopes, Inc., the IRS filed an amended proof of claim asserting a secured claim of $ 428,447.04 on October 3, 1994 .

The Bankruptcy Court issued an order on October 28, 1994 approving a stipulation between SVFS and Balzer/Shopes, Inc. (debtor) regarding the use of cash collateral to fund liquidation expenses of the Chapter 11 estate. See Declaration of David M. Kirsch ("Kirsch Decl") Exhibit F. On December 19, 1994 , the corporation's bankruptcy was converted to a Chapter 7 proceeding. See Declaration of Harold J. Balzer ("Balzer Decl.") ¶4. The parties agree that in January 1995 funds designated to secure the IRS 's secure claim of $ 141,303 were transferred to the Chapter 7 trustee. However, there is a dispute between the parties over whether this amount has been paid to the IRS . Plaintiffs allege that the IRS received payment of $ 141,303.07, in full satisfaction of Balzer/Shopes, Inc.'s tax obligations. Plaintiffs contend that the IRS "admitted" it received the amount of the secured claim in a suit by the IRS against SVFS on the government secured claim. Plaintiffs' Cross-Motion for Summary Judgment and Opposition ("Pl. Cross-Motion & Opp'n") at 4:7-8. However, defendant contends the IRS received only two payments: a $50,000 payment pursuant to the settlement of Adversary Procedure, which the IRS credited to the Balzer/Shopes, Inc.'s non-trust fund employment tax liabilities; and a $10,640.27 payment which the IRS credited to Balzer/Shopes, Inc.'s post-petition employment tax liabilities. See Declaration of Jane Allen ¶¶4-6. Defendant claims the funds segregated to secure the IRS 's secured lien were used to "pay claims senior to the IRS 's secured claim and claims entitled to priority." Def. Mot. for Summary Judgment at 3:26-28, 4:1-2.

On January 8, 1996 , the IRS assessed $156,700.51 each against plaintiffs Harold Balzer and David Balzer for unpaid employment taxes from the second and third quarters of 1993, the quarters covered by the lien discussed above. On March 7, 1996 , plaintiffs each paid $150 of the assessments against them; they each filed claims for refund on that same day. On or about July 19, 1996 , David Balzer paid $ 163,753.27 in full payment of the balance of the assessment against him, including interest to the date of payment.

Plaintiff Harold Balzer seeks a judgment that he has overpaid his taxes in the amount of $150, and abatement of the balance of the assessment against him in the amount of $156,700.51. Plaintiff David Balzer seeks a judgment that he has overpaid his taxes in the amount of $156,700.51, together with interest as provided by law.

Presently before the Court is defendant's motion for summary judgment and plaintiffs' cross-motion for summary judgment. There are two primary issues raised by the parties' motions, namely whether plaintiffs' willful failure to pay the corporation's tax obligation was vitiated by the actions of the IRS and whether the IRS exercised dominion and control over the plaintiffs' prepetition accounts receivable thereby entitling the plaintiffs to credit for the value of the assets.

On April 21, 2000 , the parties stipulated that plaintiffs were responsible persons required to collect, truthfully account for, and pay over the employment taxes of Balzer/Shopes, Inc. for the second and third tax periods of 1993 and that plaintiffs wilfully failed to do so for these periods. Plaintiffs' willful failure to collect, truthfully account for, and pay over the employment taxes of Balzer/Shopes, Inc. continued until June 10, 1994 , when the corporation filed a Chapter 11 bankruptcy petition.

In regard to the issue of willfulness, plaintiffs contend that their willfulness in originally failing to pay the tax obligation was vitiated by the IRS 's failure to pursue the full amount of its claim in the bankruptcy proceedings. Plaintiffs argue that had the IRS filed a proper claim, there would have been sufficient assets to satisfy the unpaid taxes. Under these circumstances, plaintiffs argue, their failure to pay the taxes was excused and thus, they are entitled to a refund from the IRS .

Defendant contends that plaintiffs' allegations concerning the IRS 's unsuccessful efforts to collect unpaid taxes from the corporation during its bankruptcy are irrelevant because the IRS may still seek recovery of unpaid trust fund taxes from responsible persons who willfully failed to pay the taxes, namely Harold and David Balzer, under 26 U.S.C. §6672.

In the alternative, plaintiffs contend the IRS exercised dominion and control over the accounts receivable--either as a matter of law as a secured creditor or through its participation in the bankruptcy proceedings. Plaintiffs argue that the corporation should receive credit for the value the IRS would have received if (1) it had not erred by failing to properly seek the true amount of its interest; or (2) it had not allowed inferior creditors to be paid first. Defendant argues that the IRS 's participation in the bankruptcy proceedings does not constitute the government's dominion and control over the funds under the protection of the bankruptcy court and that the unsuccessful exercise of a lien does not prohibit the IRS from still pursuing §6672 taxes from responsible officers.

LEGAL STANDARD

Summary judgment is proper "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 a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553 (1986). The moving party, however, has no burden to negate or disprove matters on which the non-moving party will have the burden of proof at trial. The moving party need only point out to the Court that there is an absence of evidence to support the non-moving party's case. See id. at 325, 106 S.Ct. at 2554.

The burden then shifts to the non-moving party to "designate 'specific facts showing that there is a genuine issue for trial.' " Id. at 324, 106 S.Ct. at 2553 (quoting Fed. R. Civ. P. 56(e)). To carry this burden, the non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2519 (1986). "In meeting their burdens of proof, each party must come forward with admissible evidence. Conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and defeat summary judgment." Cabo Distributing Co., Inc. v. Brady, 821 F.Supp. 601, 608 (N.D. Cal. 1992).

In deciding a motion for summary judgment, the evidence is viewed in the light most favorable to the non-moving party, and all justifiable inferences are to be drawn in its favor. Anderson, at 255, 106 S.Ct. at 2513. "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge [when she] is ruling on a motion for summary judgment." Id.

DISCUSSION

1. Plaintiffs' Cross-Motion for Summary Judgment Based on IRS 's Alleged Dominion and Control Over Plaintiffs' Prepetition Assets.

Plaintiffs' primary argument as to why they are entitled to summary judgment and thus, a refund, is that they are "entitled to a refund because the corporation should have been treated as having paid the taxes in full." Plaintiff's Reply at 3:12-13. Plaintiffs contend that the IRS exercised dominion and control as a matter of law over the prepetition receivable proceeds by virtue of its secured claim. Plaintiffs also allege that defendant exercised dominion and control over the corporation's assets by "participating in the post petition proceedings and permitting funds which it had superior, secured rights to be distributed to inferior creditors." Pl. Cross-Motion & Opp'n at 11:2-4. Plaintiffs justify their entitlement to refund and an abatement of the §6672 penalty on the grounds that the IRS , having exercised dominion and control over the receivables is itself at fault for not having collected the receivables because of its own errors: (1) the IRS "incorrectly computed the amount of its secured claim"; (2) the IRS "failed to account for the priming rules of Bankruptcy Code §724"; and (3) the IRS "failed to comprehend that its rights were superior to all others." See id. at 6:6-9.

In reference to plaintiffs' contention that the IRS exercised control and dominion over the corporation's accounts receivable, the IRS argues that Ninth Circuit precedent clearly establishes that the "unsuccessful exercise of [the IRS 's] lien in bankruptcy court will not estop the government from collecting §6672 taxes from responsible officers." Reply Memorandum and Opposition to Pls.' Cross-Motion for Summary Judgment at 4:13-16.

First, plaintiffs cite United States v. Whiting Pool [83-1 USTC ¶9394], 462 U.S. 198, 207, 103 S.Ct. 2309, 2315 (1983), as authority for their argument that the IRS exercised dominion and control over the corporation's accounts receivable as a matter of law by virtue of the IRS 's position as a secured creditor. The issue before the Court in Whiting Pool was whether §542 ² of the Bankruptcy Code "authorized the Bankruptcy Court to subject the IRS to a turnover order with respect to [] seized property." Id. at 199, 103 S.Ct. at 2311 (emphasis added). The Supreme Court held that the Chapter 11 "reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization." Id. at 209, 103 S. Ct. at 2315 (emphasis added). In the course of the opinion, the Court stated that:

As does all bankruptcy law, §542(a) modifies the procedural rights available to creditors to protect and satisfy their liens. In effect, §542(a) grants to the estate a possessory interest in certain property of the debtor that was not held by the debtor at the commencement of reorganization proceedings. The Bankruptcy Code provides secured creditors various rights, including the right to adequate protection, and these rights replace the protection afforded by possession. Id. at 207, 103 S.Ct. at 2314-15.

Plaintiffs argue that in essence, bankruptcy proceedings "are a substitute for the possessory rights afforded secured creditors," Pl. Cross-Motion & Opp'n at 8:9-10. Therefore, the bankruptcy proceeding serves as a substitute for the "levy and seizure rights" of the IRS and when plaintiffs filed for Chapter 11, the IRS was placed in the same legal position "as if it had seized the accounts receivable before the corporation filed its Chapter 11 petition." Id. at 8:10-13 (emphasis added).

Here, the Court finds plaintiffs' analysis of Whiting Pools unpersuasive. As stated above, the holding in Whiting Pools dealt with the interpretation of §542 and the issue of whether assets seized by the IRS are subject to a turnover in reorganization. ³ 462 U.S. at 202, 103 S.Ct. 2312. Whiting Pools does not explicitly state, nor can it reasonably be construed to mean, that the IRS should be treated as having seized and exercised dominion and control over a corporation's assets merely because of its status as a secured creditor. While the Bankruptcy Code provides "various rights that replace the protection afforded by possession," it does not follow under the facts of this case that because the IRS had a lien against the corporation's assets, it should be deemed to have "seized" those assets sufficient to exercise dominion and control. ⁴ Whiting Pools [83-1 USTC ¶9394], 462 U.S. at 207, 103 S.Ct. 2315.

Accordingly, plaintiffs' cross-motion for summary judgment based on the IRS 's alleged dominion and control over the prepetition account receivables is DENIED.

2. Was Plaintiffs' Willfulness Vitiated by the IRS 's Conduct?

The second issue between the parties is whether the IRS 's failure to collect the corporation's unpaid employment taxes from the bankruptcy estate relieves plaintiffs of their personal liability for the Section 6672 trust fund recovery taxes assessed against them. Defendant argues that plaintiffs are persons responsible to collect, truthfully account for, and pay over federal employment taxes, completely independent of the corporation's obligation to pay such taxes. Consequently, plaintiffs are liable for the corporation's obligation to pay over the employee withholdings to the government and the failure of the IRS to collect in bankruptcy proceedings does not relieve plaintiffs as responsible persons.

Plaintiffs do not dispute their status as responsible persons. Nor do plaintiffs contest that they willfully failed to collect, truthfully account for, and pay over employment taxes of Balzer/Shopes, Inc. for the second and third tax periods of 1993 and that this willful failure continued until June 10, 1994 . Instead, plaintiffs argue that they are not liable because "their prior willfulness was vitiated due to the IRS 's conduct." Pl. Cross-Motion & Opp'n at 11:12-13. Plaintiffs contend that had the IRS correctly applied the corporation's payment initially, there would have been sufficient secured assets to pay the secured tax claim in fall. Specifically, plaintiffs argue that because the IRS filed an incorrect claim; and because the amount secured by the claim the IRS did file was "squandered" by the IRS 's failure to assert its superior secured interest, plaintiffs cannot be said to have willfully failed to pay the tax obligation and thus, the IRS cannot impose a §6672 penalty against plaintiffs.

Under 26 U.S.C. §6672, liability for a penalty equal to the amount of a corporation's unpaid federal employment taxes "attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government." Monday v. United States [70-1 USTC ¶9205], 421 F.2d 1210, 1214 (7th Cir. 1970). In this circuit,

[i]n order for a party to be liable for a penalty for failure to pay over taxes under 26 U.S.C. §6672, two things must be true: one, that the party assessed was a 'responsible person' i.e. one required to collect, truthfully account for and pay over the tax, and two, that he willfully refused to pay the tax.

Teel v. United States [76-1 USTC ¶9190], 529 F.2d 903, 905 (9th Cir. 1976) (citing Pacific Nat'l Ins, v. United States [70-1 USTC ¶9238], 422 F.2d 26 (9th Cir. 1970)). Section 6672 "deals with a totally independent liability from that of the corporation" Teel [76-1 USTC ¶9190], 529 F.2d at 906.

Plaintiffs rely on Anderson v. United States, 77-2 U.S.T.C. ¶9701 (W.D. La 1977.), Tozier v. United States, 65-2 U.S.T.C. ¶9621 (W.D. Wash. 1965), McCarty v. United States [71-1 USTC ¶9232], 437 F.2d 961 (Ct. Cl. 1971), and Mangeri v. United States, 86-2 U.S.T.C. ¶9824 (D. Md. 1986) to support their argument that the IRS 's conduct vitiates the plaintiffs' willfulness. However, the cases relied upon by plaintiff are distinguishable. In each case, either the plaintiff formed an agreement with the IRS to resolve the trust fund obligation, or the plaintiff's attorney assured the plaintiff that the debt would be satisfied by IRS 's actions and the plaintiff took steps to ensure that it would be. In all these cases, the courts concluded the failure to pay taxes was not willful because the plaintiffs relied on the advice of their attorneys or an agreement with the IRS , believing that they had taken sufficient actions to ensure the taxes would be paid.

However, in this case plaintiffs admit that although they attempted to negotiate a repayment agreement with the IRS , no agreement was ever reached. Cf. Tozier, 65-2 U.S.T.C. ¶9621; Mangeri, 86-2 U.S.T.C. ¶9824. Moreover, plaintiffs do not contend that they relied on the advice of their attorneys in failing to pay the outstanding tax obligation, or that they notified the IRS of the bankruptcy proceedings or encouraged the IRS to submit a correct claim of secured interest. Cf. Anderson, 77-2 U.S.T.C. ¶9701. Since plaintiffs fail to allege facts that would bring them into these recognized exceptions where willfulness is vitiated, plaintiffs are still responsible persons liable for the unpaid tax.

It is well-established that "the liability of a responsible person imposed by §6672 is separate and distinct from [that] imposed upon the employer." Turchon v. United States [87-2 USTC ¶9541], 77 B.R. 398, 401 (E.D.N.Y. 1987); see also Teel [76-1 USTC ¶9190], 529 F.2d at 906. Furthermore, the IRS is not obligated to pursue the assets of the corporation before pursuing responsible persons. Turchon [87-2 USTC ¶9541], 77 B.R. at 401; Bernardi v. United States, 74-1 U.S.T.C. ¶9170 (N.D. Ill. 1973) ("It is unnecessary for the Internal Revenue Service even to attempt collection from the corporate employer, before asserting the personal liability of the responsible persons."). Nor does the IRS 's alleged compromise in bankruptcy of the corporation's obligation preclude it from subsequent recovery from the responsible corporate officers. Turchon [87-2 USTC ¶9541 ], 77 B.R. at 401. Accordingly, the IRS was not required to attempt collection from the corporation before attempting collection from plaintiffs as responsible persons and the IRS 's conduct in the corporation's bankruptcy proceedings preclude recovery from plaintiffs.

Here, the IRS has pursued plaintiffs as responsible persons for Balzer/Shopes, Inc.'s outstanding tax obligations. Since pursuant to §6672, the government can seek to recover trust fund employment taxes from the person responsible for paying over such amount, and because plaintiffs do not allege sufficient facts to show that the conduct of the IRS vitiates their willful failure to pay the employment taxes, the defendant's motion for summary judgment is GRANTED and plaintiffs' cross-motion for summary judgment is DENIED.

CONCLUSION

For the reasons set forth above, defendant's motion for summary judgment is GRANTED and defendant's cross-motion for summary judgment is DENIED.

IT IS SO ORDERED.

JUDGMENT

In accordance with this Court's Order Granting Defendant's Motion for Summary Judgment and Denying Plaintiffs' Cross-Motion for Summary Judgment dated August 4, 2000 , judgment is hereby entered in favor of defendant and against plaintiffs.

IT IS SO ORDERED AND ADJUDGED.

¹ Plaintiffs cited Cheatam v. Central Carolina and Trust Comp., 91 B.R. 382 (1988) and In re Life Imaging Corp., 131 B.R. 174 (1991) at oral argument in support of plaintiffs' cross-motion for summary judgment. However, the Court finds plaintiffs' authority unpersuasive since the cases cited do not address the issues presently before the Court.

² Section 542 of the Bankruptcy Code authorizes the turnover of property to a bankruptcy estate. Section 542 provides:

(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate. 11 U.S.C. §542

³ The statement in Whiting Pools regarding protection for secured creditors' interests within bankruptcy proceedings referred to a Congressional preference of including property subject to a secured interest in the reorganization estate, allowing the reorganized corporation to continue to operate while allowing for "adequate protection" of the secured creditors' interests through bankruptcy laws. Id. at 204, 103 S. Ct. at 2313. Thus, the IRS by "virtue of its tax lien" holds a secured interest in plaintiffs' property,--but must seek protection under §363, rather than "the nonbankruptcy remedy of possession." Id. Whiting Pools did not address, and does not support plaintiffs' notion that the IRS constructively seized and thus exercises control and dominion over the secured interest as a matter of law by its position as a secured creditor.

⁴ Plaintiffs rely on a series of cases holding that once the IRS seizes an asset and exercises dominion and control over that asset, a taxpayer is entitled to credit for the value of assets seized by the IRS . See United States v. Pittman [71-2 USTC ¶9650], 449 F.2d 623, 624 (7th Cir. 1971) (holding that where the government actually seized control and dominion over taxpayer's property, the taxpayer is entitled to credit for the property seized); see also In re Barlows, Inc. [84-1 USTC ¶9233], 36 B.R. 826 (1984). Cash v. United States [92-1 USTC ¶50,298], 961 F.2d 562 (5th Cir. 1992). Since the Court does not find that the IRS seized the corporation's assets, these cases are inapposite. Plaintiffs' contention that IRS exercised dominion and control over the assets by participating in the bankruptcy proceedings presumes that the IRS is in the same legal position as if it had seized the corporation's assets. As discussed above, the IRS 's actions did not constitute a seizure and therefore, the IRS could not have exercised dominion and control over the assets.

[99-1 USTC ¶50,322] In re Jerome M. Kohout and Sharon L. Kohout, Debtors. Jerome M. Kohout and Sharon L. Kohout, Plaintiffs v. United States of America, Department of Treasury-Internal Revenue Service, Defendants

U.S. Bankruptcy Court, No. Dist. Ohio, 97-40146, 2/11/99, 236 BR 365, 236 BR 365

[Code Secs. 6321 and 6323 ]

Liens and levies: Bankruptcy: Perfected lien: Recorded lien.--

Prepetition levies against bankrupt taxpayers were made pursuant to a valid lien. The government's statutory lien against the taxpayers was perfected without filing as soon as their deficiencies were assessed. Moreover, the taxpayers did not qualify for protection against unrecorded tax liens because they were not third-party creditors. Finally, their status as debtors in possession did not allow them to avoid the lien since it was recorded before they filed their bankruptcy petition.
[Code Sec. 6331 ]

Liens and levies: Bankruptcy: Preferential transfers: Amount received: Chapter 11: Chapter 7: Post-petition transfers: Automatic stay.--

Prepetition levies that were made against bankrupt taxpayers less than 90 days before they filed their Chapter 11 bankruptcy petition could not be avoided as preferential transfers. The levies did not allow the government to receive more than it would have under a Chapter 7 bankruptcy because the government's fully secured and perfected claim exceeded the amounts that were collected. However, the taxpayers could avoid post-petition garnishments because they were issued in violation of the automatic stay. BACK REFERENCES: ¶38,187.15

[Code Sec. 6871 ]

Liens and levies: Bankruptcy: Preferential transfers: Amount received: Chapter 11: Chapter 7: Post-petition transfers: Automatic stay.--

Prepetition levies that were made against bankrupt taxpayers less than 90 days before they filed their Chapter 11 bankruptcy petition could not be avoided as preferential transfers. The levies did not allow the government to receive more than it would have under a Chapter 7 bankruptcy because the government's fully secured and perfected claim exceeded the amounts that were collected. Also, the taxpayer's status as debtors in possession did not allow them to avoid the lien since it was recorded before they filed their bankruptcy petition. However, they could avoid post-petition garnishments that were issued in violation of the automatic stay. BACK REFERENCES: ¶40,630.0245 and 40,630.0246

Andrew W. Suhar, 1100 Bank One Bldg., Youngstown, Ohio 44503, for plaintiffs. Donald M. Robiner, U.S. Trustee, Cleveland, Ohio 44114, William M. Kostak, Department of Justice, Washington, D.C. 20530, for defendants.

MEMORANDUM OPINION

BODOH, Bankruptcy Judge:

This cause is before the Court on the cross-motions for summary judgment and respective responses of Jerome M. and Sharon L. Kohout ("Plaintiffs") and the United States of America Department of the Treasury-Internal Revenue Service ("Defendant"). Plaintiffs filed an adversary complaint under 11 U.S.C. §547(b) seeking avoidance of alleged preferential transfers of their property which were levied upon by Defendant within the 90-day period preceding the filing of their bankruptcy petition. The parties have filed a stipulation of fact with the Court and there is no dispute as to the material and operative facts supporting this cause. Thus, the Court is left only to decide whether either party is entitled to summary judgment as a matter of law. This is a core proceeding over which the Court has jurisdiction pursuant to 28 U.S.C. §157(b)(2)(E), (F) and (K). The following constitutes the Court's findings and conclusions pursuant to FED . R. BANKR. P. 7052.

STANDARD OF REVIEW

The procedure for granting summary judgment is found in FED . R. CIV . P. 56(c), made applicable to this proceeding through FED . R. BANKR. P. 7056, which provides in part that

[t]he judgment sought shall be rendered forthwith 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 a judgment as a matter of law.

The evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970). Summary judgment is not appropriate if there is a material dispute over the facts, "that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is appropriate, however, if the opposing party fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). See also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986).

The Sixth Circuit has recognized that Liberty Lobby, Celotex and Matsushita effected "a decided change in summary judgment practice," ushering in a "new era" in summary judgments. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476 (6th Cir. 1989). In responding to a proper motion for summary judgment, the nonmoving party "cannot rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact, but must 'present affirmative evidence in order to defeat a properly supported motion for summary judgment.' " Street, 886 F.2d at 1479 (quoting Liberty Lobby, 477 U.S. at 257). The nonmoving party must introduce more than a scintilla of evidence to overcome the summary judgment motion. Street, 886 F.2d at 1479. It is also not sufficient for the nonmoving party merely to "show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. Moreover, "[t]he trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact." Street, 886 F.2d at 1479. That is, the nonmoving party has an affirmative duty to direct the court's attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact.

This line of cases emphasizes the point that when one party moves for summary judgment, the nonmoving party must take affirmative steps to rebut the application of summary judgment. Courts have stated that:

Under Liberty Lobby and Celotex, a party may move for summary judgment asserting that the opposing party will not be able to produce sufficient evidence at trial to withstand a directed verdict, and if the opposing party is thereafter unable to demonstrate that he can do so, summary judgment is appropriate. "In other words, the movant could challenge the opposing party to 'put up or shut up,' on a critical issue [and] . . . if the respondent did not 'put up,' summary judgment was proper."

Fulson v. City of Columbus, 801 F. Supp. 1, 4 (S.D. Ohio 1992) (quoting Street, 886 F.2d at 1478).

DISCUSSION

A. Facts

This adversary action arises out of a dispute whether levies by Defendant against Plaintiffs' individual retirement accounts ("IRAs") and wages within the 90-day period preceding the filing of Plaintiffs' petition in bankruptcy may be avoided as preferential transfers. The parties stipulated to the following facts for purposes of this proceeding:

1. The plaintiffs, Jerome M. Kohout and Sharon L. Kohout, filed a petition in bankruptcy under Chapter 11 of the Bankruptcy Code on January 23, 1997 .

2. The date ninety days prior to the filing of the plaintiff's [sic] petition in bankruptcy was October 25, 1996 .

3. On November 12, 1996 , the Internal Revenue Service filed a Notice of Federal Tax Lien with regard to plaintiffs' tax liability, including interest and penalties, for the years 1982, 1983 and 1984 in the amount of $74,999.57 (Exhibit "A").

4. On the following dates, the Internal Revenue Service levied upon the plaintiffs' individual retirement accounts and received the corresponding amounts. Said amounts were received by the Internal Revenue Service prior to its filing of the Notice of Federal Tax Lien with the Recorder of Mahoning County, Ohio, on November 12, 1996 :

November 4, 1996
 ................................................. $ 5,022.07

November 5, 1996
 ................................................. $ 4,438.39

November 5, 1996
 ................................................. $ 4,438.39

November 8, 1996
 ................................................. $ 3,545.77

November 8, 1996
 ................................................. $ 3,671.82

                                                                   ----------

Total: ........................................................... $21,116.44

5. On the following dates the Internal Revenue Service levied upon additional individual retirement accounts held by the plaintiffs and received the corresponding amounts. The checks received by the Internal Revenue Service from the entity which was levied upon, Federal Kemper Life Insurance Company, were dated November 4, 1996 , prior to the filing of the Notice of Federal Tax Lien, but said checks were negotiated by the Internal Revenue Service after the November 12, 1996 filing of the Notice of Federal Tax Lien with the Recorder of Mahoning County, Ohio:

November 15, 1996
 ................................................ $ 5,064.86

November 15, 1996
 ................................................ $ 5,063.97

                                                                   ----------

Total: ........................................................... $10,128.83

6. Wages of the plaintiffs were levied upon within ninety days of the filing date of the plaintiff's [sic] petition in bankruptcy on the following dates and corresponding amounts:

November 18, 1996
 ................................................. $  772.06

November 22, 1996
 ................................................. $  630.12

December 02, 1996
 ................................................. $  772.06

December 09, 1996
 ................................................. $  630.12

December 16, 1996
 ................................................. $  772.06

December 20, 1996
 ................................................. $  731.63

January 02, 1997
 .................................................. $  772.06

January 03, 1997
 .................................................. $  630.12

January 10, 1997
 .................................................. $  772.06

January 16, 1997
 .................................................. $  630.12

                                                                    ---------

Total: ............................................................ $7,112.41

7. On February 3, 1997 , the Internal Revenue Service levied upon the wages of the plaintiffs in the amount of $772.06. This levy occurred after the date the plaintiffs filed their petition in bankruptcy (post-petition levy).

8. No proofs of claim were filed in plaintiffs' bankruptcy proceeding within the prescribed time period for filing claims which set forth claims described in Sections 507(a)(2) through (a)(7) of the Bankruptcy Code.

9. On the date of the filing of the bankruptcy petition in this proceeding, the bankruptcy estate contained assets with a minimum value of $3,158.00 which were not exempt property and which did not otherwise secure any interest of any creditor of the plaintiffs. Accordingly, this amount, at a minimum, on the date the plaintiffs filed their petition in bankruptcy, was available to pay administrative claims described in section [sic] 507(a)(1) of the Bankruptcy Code.

10. On the date the plaintiffs filed their petition in bankruptcy, there were no claims described in section [sic] 507(a)(1) against the bankruptcy estate.

B. Issue

The primary issue before us is whether transfers of an interest of a debtor in property, specifically tax levies on Plaintiffs' IRAs and the garnishment of Plaintiffs' wages, are avoidable preferences if such transfers take place within the 90-day period set forth in 11 U.S.C. §547(b)(4)(A).

In Defendant's motion for summary judgment and supplements filed thereto, Defendant first argues that the filing of the notice of federal tax lien within the 90-day preference period is not itself an avoidable transfer. Defendant asserts that the filing of the notice of federal tax lien is the fixing of a statutory lien and thus is an unavoidable preferential transfer pursuant to §547(c)(6).

Defendant next argues that it should be treated as a secured creditor with regard to Plaintiffs' IRAs and wages because (a) the federal tax liens attached to Plaintiffs' IRAs when the 1982, 1983 and 1984 federal income taxes were assessed and notice and demand for payment were made upon Plaintiffs; (b) the federal tax liens on Plaintiffs' IRAs survive bankruptcy if Defendant had not levied; (c) treating Defendant as an unsecured creditor with respect to Plaintiffs' IRAs leads to an anomalous result since Defendant had a perfected federal tax lien on all of Plaintiffs' property at the time Plaintiffs filed for bankruptcy; and (d) Defendant had a perfected security interest in Plaintiffs' levied wages via statutory lien and as such the levied wages are an unavoidable preference.

Plaintiffs are not attempting to avoid the November 12, 1996 lien. They argue that under §547(b) both the wage garnishments and the IRA levies enabled Defendant to receive more than it would have received as an unperfected secured creditor had Plaintiffs filed under Chapter 7 for Plaintiffs' tax liabilities for the tax years 1982, 1983 and 1984. See Plaintiffs' Motion for Summary Judgment, page 6.

C. Discussion

A lien arises in favor of Defendant upon all property and rights to property, real or personal, belonging to a taxpayer who neglects or refuses to pay any federal tax after demand. 26 U.S.C. §6321. The lien imposed by §6321 arises at the time the assessment is made and continues until the assessed liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322. Here, Defendant obtained a valid statutory lien ¹ on all property of Plaintiffs on May 13, 1996, the date of assessment of Plaintiffs' tax liability for the years 1982, 1983 and 1984. Thus, as of May 13, 1996, Defendant had a valid statutory lien in the amount of $39,572.37. ² Furthermore, this statutory lien was perfected against Plaintiffs without the necessity of filing a notice of federal tax lien. In re Berg [95-2 USTC ¶50,634], 188 B.R. 615 (9th Cir. BAP 1995). See also 15 LAWRENCE P. KING, COLLIER ON BANKRUPTCY ¶TX4.04[1] at TX4-34 (15th ed. rev. 1995).

During the period of November 4-8, 1996, Defendant levied upon Plaintiffs' IRAs in the total sum of $21,116.44 pursuant to its authority under 26 U.S.C. §6331. ³ On November 12, 1996 , Defendant filed a notice of federal tax lien with the Recorder of Mahoning County, Ohio, with respect to Plaintiffs' tax liability, including interest and penalties, for the years 1982, 1983 and 1984 in the amount of $74,999.57. Subsequent to the filing of the notice of federal tax lien, Defendant levied upon additional IRAs as well as wages ⁴ of Plaintiffs totaling $17,241.24 between November 15, 1996 and January 16, 1997 . Plaintiffs filed their petition for relief under Chapter 11 of Title 11, United States Code, on January 23, 1997 .

We must now determine whether this valid lien was perfected and secured as to Plaintiffs' IRAs and wages under §6321 in light of §6323. In doing so, we briefly examine the history and purpose behind this legislation. The purpose behind the enactment of §§6321 and 6323 was twofold. First, Congress intended to ensure prompt revenue collection. United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). Second, Congress intended to provide protection, i.e., constructive notice, to would-be purchasers and others against the harmful effects of secret tax liens. At first blush, it would appear that 26 U.S.C. §6323(a) would work to invalidate the lien against Plaintiffs' property and thereby allow Plaintiffs to avoid the levies that occurred prior to November 12, 1996 . However, the problem with this analysis is that §6323(a) only limits the imposition of §6321's lien under certain circumstances, and thereby creates limited exceptions that require Defendant to file notice in the proper office. Specifically, §6323(a) states that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed. . . ." 26 U.S.C. §6323(a) [emphasis added]. In other words, §6323(a) requires a notice of federal tax lien to be filed before a tax lien is effective against third parties.

Notwithstanding the foregoing, Plaintiffs fail to qualify as being in the class of persons intended to be protected by Congress' filing requirement of §6323(a). Plaintiffs are not a third party attempting to avoid a secret lien and thus cannot seek the protection afforded to such parties under §6323. Moreover, although a debtor-in-possession has all the rights and powers of a trustee under §1107, including those rights and powers of a lien creditor or of a successor to certain creditors and purchasers to avoid transfers of property of the debtor under the strong arm clause of §544, Plaintiffs do not fall under the ambit of §544. Section 544 grants a trustee/debtor-in-possession the powers that state law would confer upon a hypothetical creditor of the debtor who, as of the commencement of the case, had perfected a judicial lien on the debtor's property. In re Paramount Int'l, 154 B.R. 712 (Bankr. N.D. Ill. 1993). In the instant case, Defendant had perfected its lien prior to the filing of Plaintiffs' petition for relief. Under §6321, Defendant's lien was effective and not subject to avoidance under §544. A strict reading of §544 reveals that it operates to give a debtor-in-possession the status of a judicial lien creditor only as of the date a petition for relief is filed. Here, §544 was not operative until the petition for relief was filed. At that point, Defendant already had a perfected lien and §544 would have no application. Thus, Plaintiffs are unable to claim the status of a judicial lien creditor prior to the petition date in order to effectuate the exception under §6323. Accordingly, Defendant has a valid perfected and secured lien against all of Plaintiffs' property pursuant to §6321.

We must now inquire whether the levies upon Plaintiffs' IRAs and wages by the perfected and secured Defendant within the 90-day period preceding the filing of Plaintiffs' petition are avoidable as preferential transfers. All of the transfers by Defendant of Plaintiffs' property fall within the preference period with the exception of one post-petition levy. ⁵ If the transfers of Plaintiffs' property satisfy the elements set forth in 11 U.S.C. §547(b), they may be avoided. ⁶

11 U.S.C. §547(b) grants the trustee the power to avoid certain transfers of interest of the debtor in property if five elements are met subject to the exceptions provided in subsection (c) which states in relevant part:

(c) The trustee may not avoid under this section a transfer--

(6) that is the fixing of a statutory lien that is not avoidable under section 545 of this title.

11 U.S.C. §545(2) declares that the trustee may avoid a statutory lien on the debtor's property to the extent that the lien is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser, whether or not such a purchaser exists. However, §545(2) is inapplicable to the factual situation before us.

Thus, we must look to see if the requirements of 11 U.S.C. §547(b) are satisfied. An avoidable preference under §547(b) requires the transfer of an interest of the debtor in property (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt; (3) made while the debtor was insolvent; (4) made on or within 90 days before the date of the filing of a petition; and (5) that enables the creditor to receive more than such creditor would have received under Chapter 7 of Title 11. Defendant submits that all of these elements are met except 11 U.S.C. §547(b)(5). ⁷

The crucial question before us then is whether Defendant's levies upon Plaintiffs' IRAs and the wage garnishments enabled Defendant to receive more than it would have received had the case been one under Chapter 7. For the reasons set forth below, we find that Defendant did not receive more than it would have under a Chapter 7 when it levied upon Plaintiffs' IRAs and garnished Plaintiffs' wages during the 90 days preceding Plaintiffs' petition for Chapter 11 relief.

In its decision of In re C-L Cartage Co., Inc., 899 F.2d 1490 (6th Cir. 1990), the Sixth Circuit held that payments to a creditor who is fully secured are not preferential since the creditor would receive payment up to the full value of his collateral in a Chapter 7 liquidation. Id. at 1493. We are bound by this Sixth Circuit decision. In the instant case, Defendant had a secured claim in the amount of $39,572.37 in Plaintiffs' property for the tax years 1982, 1983 and 1984. See Defendant's Proof of Claim (filed 01/08/98 ). Defendant was fully secured in this amount by Plaintiffs' property, of which the pre-petition levies upon Plaintiffs' IRAs and wages for the tax years 1982, 1983 and 1984 totaled $38,357.68. Therefore, because Defendant was a fully secured creditor up to the amount of $39,572.37 for Plaintiffs' tax liabilities for the years 1982, 1983 and 1984, its pre-petition levies upon Plaintiffs' IRAs and wages did not allow it to receive more than it would have in a Chapter 7. Accordingly, the transfers of Plaintiffs' property by Defendant, specifically tax levies on Plaintiffs' IRAs and the garnishment of Plaintiffs' wages, are not avoidable as preferences under 11 U.S.C. §547(b)(4)(A).

The only issue remaining is whether the post-petition levy of Plaintiffs' wages in the amount of $772.06 violated the automatic stay of §362. Defendant concedes in its motion that this levy was improper. Such a post-petition levy violates the automatic stay provision and Plaintiffs may avoid that transfer.

CONCLUSION

Consistent with the foregoing, the Court grants summary judgment to Defendant in part, and denies Plaintiffs' cross-motion for summary judgment in part. The pre-petition levies upon Plaintiffs' IRAs in the amount of $31,245.27 and the pre-petition wage garnishments in the amount of $7,112.41 by Defendant are not avoidable as preferential transfers under §547(b). As such, Defendant is entitled to summary judgment on that issue and may retain the funds levied upon Plaintiffs' IRAs and wages in the amount of $38,357.68. Plaintiffs' cross-motion for summary judgment is granted in part with regard to the post-petition levy on Plaintiffs' wages. The post-petition wage garnishment in the amount of $772.06 was in violation of the automatic stay afforded Plaintiffs by §362. Accordingly, Defendant is required to return the amount of $772.06 to Plaintiffs within 30 days from the date of entry of the following order.

An appropriate order shall enter.

ORDER

For the reasons set forth in the Court's memorandum opinion entered this date, the Court grants summary judgment to Defendant United States of America Department of the Treasury-Internal Revenue Service in part, and denies Plaintiffs Jerome M. and Sharon L. Kohout's motion for summary judgment in part. The pre-petition levies upon Plaintiffs' IRAs in the amount of $31,245.27 and the pre-petition wage garnishments in the amount of $7,112.41 by Defendant are unavoidable as preferential transfers under §547(b). As such, the Court finds Defendant is entitled to summary judgment on this issue and overrules Plaintiffs' request for relief in Paragraph 15 of their complaint to the extent it seeks to avoid the above transfers as preferential. Plaintiffs' request for relief in their complaint in the amount of $32,684.21 is overruled. However, Plaintiffs are granted summary judgment with respect to the post-petition wage garnishment by Defendant in the amount of $772.06. This particular levy violated the automatic stay afforded to Plaintiffs by §362. Accordingly, Defendant is required to return the amount of $772.06 within 30 days from the date of entry of this order.

IT IS SO ORDERED.

¹ A federal tax lien is a statutory lien. 11 U.S.C. §101(53).

² On May 13, 1996 , Defendant assessed Plaintiffs for their tax liability for the tax year 1984 in the amount of $16,289.97. Prior to this date, Defendant had assessed Plaintiffs on October 9, 1995 in the amount of $18,510.00 and $1,061.59 for tax years 1983 and 1982 respectively.

³ Individual retirement accounts are not one of the enumerated properties exempt from levy under 26 U.S.C. §6334.

⁴ Plaintiffs make no assertion in either their motion or their response that the levies upon their wages were in excess of the allowable amount pursuant to 26 U.S.C. §6334(d). Plaintiffs do, however, assert that the post-petition levy upon their wages by Defendant in the amount of $772.06 on February 3, 1997 violated the automatic stay. See discussion in text infra.

⁵ Defendant levied upon Plaintiffs' wages on February 3, 1997 in the amount of $772.06. Defendant concedes this specific post-petition levy was improper.

⁶ Plaintiffs do not seek to avoid the federal tax lien filed by Defendant on November 12, 1996 with regard to Plaintiffs' tax liability. Plaintiffs concede that the filing of the notice of federal tax lien is not an avoidable transfer.

⁷ Defendant, however, does not stipulate that Plaintiffs ever were, or are insolvent. Rather, Defendant relies on the presumption under 11 U.S.C. §547(f) that the Plaintiffs are presumed to have been insolvent on and during the 90 days immediately preceding the date of filing the petition only for purposes of 11 U.S.C. §547(b)(3).

98-2 USTC ¶50,875] In re Jay M. Anderson, Debtor. Jay M. Anderson, Plaintiff v. Internal Revenue Service, Defendant

U.S. Bankruptcy Court, West. Dist. Va., Roanoke Div., 7-86-01281, 11/9/98 , 228 BR 844

[Code Secs. 6331 and 6871 ]

Tax claims: Levy and distraint: Bankruptcy: Discharge of debt: Proof of claim: Failure to file.--

An individual's liability for unpaid withholding taxes incurred in connection with his operation of an auto repair business, first as a corporation and later as a sole proprietorship, was not extinguished merely because the IRS failed to file a proof of claim for the taxes in his prior bankruptcy proceeding. The taxpayer acknowledged liability for the unpaid taxes in both his bankruptcy petition and pleadings. Although he was granted a hardship discharge pursuant to Sec. 1328(b) of the Bankruptcy Code, the scope of that discharge was limited and did not apply to withholding tax obligations. Accordingly, the IRS was entitled to levy against his bank account in satisfaction of the unpaid taxes.

Jay M. Anderson, pro se. Melissa L. Holton, Roanoke, Va. 24008, for I.R.S.

DECISION AND ORDER

KRUMM, Bankruptcy Judge:

The matter before the court is a motion for summary judgment filed by the Internal Revenue Service (herein IRS ) pursuant to Fed. R. Bankr. P. 7056 and Fed. R. Civ. P. 56. The court took the matter under advisement after argument from both parties during a telephonic hearing. The motion is ripe for decision. In deciding the IRS ' motion for summary judgment, the court has considered the Plaintiff's complaint, the IRS ' answer, the memoranda and exhibits of both parties, and the parties' argument. For the reasons stated in this Decision and Order, the IRS ' motion for summary judgment will be granted.

Background and Facts

Plaintiff operated Williams Auto Alignment, Inc. (herein WAA), a Virginia corporation incorporated on February 1, 1984 and dissolved by operation of law on September 1, 1985 . ¹ Upon WAA's dissolution, Plaintiff assumed all of the corporation's assets and liabilities and continued to operate the business as a sole proprietorship until November 1985. At various times while Plaintiff operated WAA as a corporation and later as a sole proprietorship, Plaintiff failed to remit some or all of the 941 withholding taxes due to the IRS .

On August 19, 1986 , Plaintiff filed a petition for relief under chapter 13 as "Jay M. Anderson f/d/b/a Williams Auto Alignment". Plaintiff's schedules listed debts owed to the IRS for personal income taxes and for 941 withholding taxes. The IRS subsequently filed a timely proof of claim for the personal income taxes and for a 100% penalty on the trust-fund portion of the 941 withholding taxes. ² The IRS however, did not file a proof of claim for the 941 withholding taxes. Plaintiff's chapter 13 plan, confirmed without objection on December 1, 1986 , proposed to satisfy the Plaintiff's liability for the 941 withholding taxes and the personal income taxes upon the filing of a proper proof of claim by the IRS . On February 3, 1992 , before completing his plan, Plaintiff was granted a hardship discharge under §1328(b) and his case was closed.

On May 9, 1997 , Plaintiff filed a motion to reopen his case after the IRS levied his bank account for nonpayment of the 941 withholding taxes arising from the Plaintiff's operation of WAA prior to his 1986 bankruptcy filing. After the motion was granted on July 1, 1997 , Plaintiff filed this adversary proceeding asking the court to find that all of Plaintiff's tax liabilities arising prior to August 8, 1986 , ³ were either paid through Plaintiff's chapter 13 plan or discharged through Plaintiff's subsequent hardship discharge in 1992. The complaint also seeks to enjoin the IRS from further assessment, seizure or levy upon his property for collection of taxes which have been paid or discharged, and requests that compensatory and punitive damages be awarded.

After a hearing and by agreement of the parties, an order was entered on November 21, 1997 , enjoining the IRS from taking any collection activities against the Plaintiff pending further order from the court. The IRS subsequently filed the motion for summary judgment presently being considered by the court.

Discussion and Law

Fed. R. Civ. P. 56, which is made applicable to this proceeding by Fed. R. Bankr. P. 7056 and 9014, governs in determining whether to grant summary judgment to a moving party. Rule 56 provides that a motion for summary judgment shall be granted if two requirements are met. First, "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." Fed. R. Civ. P. 56(c). Second, the moving party must be "entitled to a judgment as a matter of law." Id.

No genuine issue of material fact exists between the parties and the parties present a single issue for determination. The Plaintiff argues that his 1992 hardship discharge under Section 1328(b) completely discharged his liability for the 941 withholding taxes which he had scheduled on his bankruptcy petition. The IRS argues that a discharge under Section 1328(b) does not discharge the Plaintiff's liability for 941 withholding taxes.

To determine if the Plaintiff's liability for the 941 withholding taxes was discharged through §1328(b), the court should look first to the language of the applicable statutes. If the language of a statute is unambiguous and there is no clear Congressional intent to the contrary, the language is conclusive. In re JKJ Chevrolet, Inc., 26 F.3d 481, 483 (4th Cir. 1994). The court's inquiry ends if the statutory language is unambiguous and "the statutory scheme is coherent and consistent." United States v. Murphy, 35 F.3d 143, 145 (4th Cir. 1994), cert. denied, 513 U.S. 1135, 115 S.Ct. 954, 130 L.Ed.2d 897 (1995) (quoting United States v. Ron Pair Enters., Inc. [89-1 USTC ¶9179], 489 U.S. 235, 240-41, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989).

The Plaintiff was granted a hardship discharge in 1992 under 11 U.S.C. §1328(b). Subsection (c) of §1328 limits the effect of a discharge received under §1328(b). As it did in 1992 when Debtor received his hardship discharge, §1328(c) currently provides:

A discharge granted under subsection (b) of this section discharges the debtor from all unsecured debts provided for by the plan or disallowed under section 502 of this title, except any debt--

. . .

(2) of a kind specified in section 523(a) of this title.

11 U.S.C. §1328(c) (emphasis added).

11 U.S.C. §523(a) provides in relevant part:

(a) a discharge under section . . . 1328(b) of this title does not discharge an individual from any debt--

(1) for a tax or customs duty--

(A) of the kind . . . specified in section . . . 507(a)(8) ⁴ of this title, whether or not a claim for such tax was filed or allowed;

11 U.S.C. §523(a) (emphasis added).

Section 507(a)(8)(C) covers "tax[es] required to be collected or withheld and for which the debtor is liable in whatever capacity". 11 U.S.C. §507(a)(8)(C). More specifically, the Congressional Record Statements (Reform Act of 1978) provide that §507(a)(8)(C) is intended to cover trust-fund taxes, the employees' share of social security taxes, and the liability of a responsible person for taxes which that person was required to withhold from wages and pay to the Treasury. See, 124 Cong. Rec. H11112-13 (daily ed. Sept. 28, 1978 ); S17429-30 (daily ed. Oct. 6, 1978 ); (remarks of Rep. Edwards and Sen. DeConcini) as reported in Norton Bankruptcy Rules Pamphlet 1997-1998 Edition, p.457.

Plaintiff previously acknowledged his liability for the unpaid 941 withholding taxes incurred while operating WAA as a corporation and later as a sole proprietorship by scheduling the debts on his 1986 bankruptcy petition and by providing for payment of such debts in his chapter 13 plan. In addition. Plaintiff also admitted in his pleadings that he was liable for such taxes. See generally, Plaintiff's Exhibits 4 and 4a, and Plaintiff's Reply to the IRS ' Motion for Summary Judgment.

However, while Plaintiff acknowledges that he was liable for the 941 withholding taxes, he argues that his liability was extinguished by virtue of the IRS ' failure to file a proof of claim for the taxes in his previous bankruptcy combined with his subsequent discharge. In support of his position, Plaintiff relies primarily on In re Osborne for authority that a priority tax claim not timely filed is disallowed and dischargeable in bankruptcy. In re Osborne, 159 B.R. 570, (Bankr. C.D. Cal. 1993), affirmed by 167 B.R. 698 (9th Cir. BAP 1994), affirmed by 76 F.3d. 306 (9th Cir. 1996). Plaintiff also relies on In re Tomlan, in which the court held that an IRS proof of claim for priority taxes filed after the bar date was disallowed as untimely and therefore was dischargeable upon the debtor's completion of performance under the plan. In re Tomlan [89-2 USTC ¶9459], 102 B.R. 790 (E.D. Wash 1989), affirmed by [90-2 USTC ¶50,403], 907 F.2d 114 (9th Cir. (Wash.) 1990) (emphasis added).

The cases upon which Plaintiff relies are not applicable to a decision in the case at bar because they were decided under §1328(a) which discharges a broader range of debt than does §1328(b). Section 1328(c)(2) limits the scope of the Plaintiff's discharge and specifically captures the indebtedness which IRS seeks to collect in this case.

Conclusion

The clear and unambiguous language of §507(a)(8)(C) made applicable to a discharge received under §1328(b) through §523(a), denies discharge of the Plaintiff's liability for 941 withholding taxes in this case. Accordingly, it is

ORDERED:

That the IRS ' Motion for Summary Judgment be GRANTED. It is

FURTHER ORDERED:

That nothing further being required this matter be stricken from the court's docket for November 9, 1998 , in Roanoke, Virginia.

Copies of this order are directed to be sent to Jay M. Anderson, pro se, and Melissa L. Holton, Esquire, counsel for the Internal Revenue Service.

¹ Although the pleadings are not clear as to Plaintiff's precise role in operating WAA while a corporation, Plaintiff admits liability for the 941 withholding tax liabilities incurred by WAA while operating as both a corporate entity and as a sole proprietorship. See generally, Plaintiff's Exhibits 4 and 4a, and Plaintiff's Reply to the IRS ' Motion for Summary Judgment.

² The IRS ' initial proof of claim, filed November 18, 1986 estimated a portion of both the personal income taxes and the 100% penalty on the trust-fund portion of the 941 taxes. The IRS subsequently filed an amended proof of claim on September 12, 1988 claiming a sum certain for both the personal income taxes and the 100% penalty on the trust-fund portion of the 941 taxes.

³ Plaintiff signed his petition for bankruptcy on August 18, 1986 and filed it on August 19. Based on representations made in his pleadings, Plaintiff appears to mistakenly believe he filed his petition on August 8, 1986.

⁴ Section 507 was amended by §304(c) of the Bankruptcy Reform Act of 1994, Pub. L. 103-394 (Oct. 22, 1994) which added current subsection (a)(7). In 1992, when Plaintiff received his hardship discharge, §523(a)(1)(A) referenced then subsection §507(a)(7) which was renumbered as §507(a)(8) as a result of the 1994 addition of new §507(a)(7).

98-2 USTC ¶50,652] In re Jerry D. Mishler, Jr., Debtor

U.S. Bankruptcy Court, Mid. Dist. Fla., Jacksonville Div., 96-5566-3P3, 7/13/98, 223 BR 17, 223 BR 17

[Code Sec. 6331 ]

Levy and distraint: Bankruptcy: Bankruptcy estate: Trustee in possession: Surrender of property: Remittance to debtor: Property in custodia legis.--

The IRS could levy upon funds held by a bankruptcy trustee that were due the debtor. The doctrine of custodia legis did not bar the levy because there was no jurisdictional conflict between the court's custody and control of the funds and the government's levy upon the trustee. [Code Sec. 6332 ]

Levy and distraint: Bankruptcy: Bankruptcy estate: Trustee in possession: Surrender of property: Remittance to debtor.--

The IRS could levy upon funds held by a bankruptcy trustee that were due the debtor. The trustee was not required to return the funds to the debtor in accordance with 11 USC 1326(a)(2) because the plan was confirmed and, accordingly, that provision of the Bankruptcy Code was inapplicable. [Code Sec. 6871 ]

Levy and distraint: Bankruptcy: Bankruptcy estate: Trustee in possession: Surrender of property: Remittance to debtor.--

The IRS could levy upon funds held by a bankruptcy trustee that were due the debtor. The trustee was not required to return the funds to the debtor in accordance with 11 USC 1326(a)(2) because the plan was confirmed and, accordingly, that provision of the Bankruptcy Code was inapplicable. The plan was not analogous to an unconfirmed plan merely because the IRS appealed from an order overruling its objection to the debtor's plan. BACK REFERENCES: ¶41,430.0246 .

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PROCTOR, Bankruptcy Judge:

This case is before the Court upon Jerry D. Mishler, Jr.'s ("Debtor") Motion to Enforce Court Order Pursuant to 11 U.S.C. §1326(a)(2). A hearing on Debtor's Motion was held on June 3, 1998 , at which time the Court requested briefs on the law and proposed findings of fact and conclusions of law from both parties. The Court now enters the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. Debtor filed his petition pursuant to Chapter 13 of the Bankruptcy Code on September 11, 1996 .

2. On May 12, 1997 the United States of America, Internal Revenue Service ("Service"), filed an objection to Debtor's Chapter 13 plan. (Doc. 21.)

3. Following a confirmation hearing on May 29, 1997 and August 14, 1997 this Court entered an Order Overruling United States' Objection to Confirmation along with Findings of Fact and Conclusions of Law dated November 18, 1997 . (Doc. 44, 45.)

4. On February 17, 1998 the Service filed its Notice of Appeal from the November 18, 1997 order overruling its objection to the debtor's plan. (Doc. 51.)

5. On March 3, 1998 the Court entered an order of confirmation. (Doc. 54.)

6. Debtor's case was subsequently dismissed by order dated March 16, 1998 due to Debtor's failure to make confirmed plan payments. (Doc. 48, 57.)

7. The March 16, 1998 Order of Dismissal directed the Chapter 13 Trustee to "retain $500.00 from funds deposited by debtor(s) pursuant to 11 U.S.C. §503(b) as expenses and refund to the debtor(s) the balance of $14,289.58, as required by 11 U.S.C. §1326." (Doc. 57.)

8. On March 17, 1998 the Service served a Notice of Levy on the Chapter 13 Trustee demanding that she surrender any funds in her possession due the debtor.

9. Following the dismissal of Debtor's case the Service filed a Motion to Dismiss Appeal on March 20, 1998 contending that their appeal from the November 18, 1997 Order was now moot. (Doc. 59.)

10. The Service's Motion to Dismiss Appeal was granted by order dated March 24, 1998 . (Doc. 60.)

11. On April 7, 1998 Debtor filed a Motion to Enforce Court Order Pursuant to 11 U.S.C. §1326(a)(2). (Doc. 61.) Debtor's Motion requested that the Court enforce the March 16, 1998 Order of Dismissal by directing the Trustee to remit $14,289.58 to the debtor as required by the Court's Order. (Id.)

Conclusions of Law

The parties agree that the sole issue before the Court is whether it is permissible for the Service to levy upon funds held by the Chapter 13 Trustee which are due the debtor.

The United States has the authority to levy upon property and rights to property belonging to a taxpayer in order to collect a delinquent tax. 26 U.S.C. §6331(a) (1994). ¹ Unless the subject property or rights is subject to attachment or execution under judicial process, surrender is required of any person in possession of the property or rights upon demand of the United States. 26 U.S.C. §6332(a) (1994). ²

Although apparently conceding the right of the Service to levy pursuant to its statutory authority, the debtor argues that in the instant case the funds held by the Chapter 13 Trustee must be distributed to the debtor in accordance with the plain meaning of 11 U.S.C. §1326(a)(2). Debtor also asserts that the Service may not levy upon the funds held by the Chapter 13 Trustee due to the status of those funds as property within the custody and control of the bankruptcy court.

Section 1326(a)(2) provides in relevant part as follows: "If a plan is not confirmed, the trustee shall return any such payment to the debtor. . . ." 11 U.S.C. §1326(a)(2) (1998). Debtor contends that the plan in the case at bar is analogous to an unconfirmed plan due to the Service's appeal from the order overruling its objection to Debtor's plan which effectively held the confirmation order in abeyance. Consequently, the debtor asserts that pursuant to the plain meaning of §1326(a)(2) the Chapter 13 Trustee is required to return the subject funds to the debtor.

Construing §1326(a)(2) in accordance with its plain meaning, as requested by Debtor, the Court finds that the statute unequivocally requires a plan which has not been confirmed. The statute is not phrased in terms of an order overruling an objection to confirmation from which appeal is taken. A plan was confirmed in the instant case by order dated March 3, 1998 . Hence, §1326(a)(2) is inapplicable.

Notwithstanding the Court's finding that §1326 does not apply in this case, an outstanding order exists which requires the Chapter 13 Trustee to return certain funds to the debtor. The Debtor therefore argues that those funds are not subject to levy because they are within the bankruptcy court's custody and control.

In B & G Ltd. v. Levin (In the Matter of Meter Maid Indus.) [72-2 USTC ¶9574], 462 F.2d 436, 438 (5th Cir. 1972), the court addressed the issue of custodia legis in the context of the Internal Revenue Service's levy upon a trustee.

The doctrine of custodia legis refers to the power of the bankruptcy court to assume complete control over the assets of a bankrupt estate and to prevent any action that would tend to embarrass the court in the equitable distribution of the estate. 1 Collier on Bankruptcy, ¶2.06 (14th ed. 1971). Property in custodia legis is not attachable because of 'the desirability of avoiding a clash between judicial jurisdictions which would result from any attempt to use the process of one to seize assets in the control of another judicial authority. . . .

Id. (quoting In re Quakertown Shopping Center, Inc. [66-2 USTC ¶9655], 366 F.2d 95, 97-98 (3d Cir. 1966)).

Relying on the Third Circuit Court of Appeals' decision, the Meter Maid court declined to find the doctrine of custodia legis a bar to the levy. Id. (citing In re Quakertown Shopping Center, Inc. [66-2 USTC ¶9655], 366 F.2d 95, 97-98 (3d Cir. 1966) (holding that a levy by the United States on a Chapter XI receiver was valid and enforceable)). The court found that the absence of a judicial attachment issuing out of another court prevented the application of custodia legis. Id.

As in Meter Maid there is no jurisdictional conflict in this case. Without such a conflict the application of custodia legis serves no purpose. The Court therefore finds that Debtor's argument that the funds held by the Chapter 13 Trustee are not subject to levy based on custodia legis is without merit.

In opposition to Debtor's Motion the Service relies upon case law which it interprets to permit a levy upon funds held by a bankruptcy trustee. See, e.g., United States v. Ruff [97-1 USTC ¶50,130], 99 F.3d 1559 (11th Cir. 1996); In re Schlapper, 195 B.R. 805 (Bankr. M.D. Fla. 1996). The debtor suggests that the Service's reliance on these cases is misplaced and argues that they are inapplicable to the case at bar for the following reasons: first, the present case involves a Chapter 13 trustee obligated to comply with §1326(a)(2), as opposed to a Chapter 7 trustee; second, the cited cases failed to address the plain meaning of §1326(a)(2) ³; and third, none of the cases contained a court order which mandated the disbursement of funds to the respective debtors.

United States v. Ruff, a case decided by the Eleventh Circuit Court of Appeals, concerned the validity of a levy by the Internal Revenue Service on funds held by a Chapter 7 Trustee and owed to a broker for the bankruptcy estate. Ruff [97-1 USTC ¶50,130], 99 F.3d at 1562. The Eleventh Circuit concluded that the trustee was in possession of property subject to levy which she was required to surrender upon demand by the Internal Revenue Service. Id. at 1567. The facts of Ruff differ from those in the instant case in that Ruff involved a levy upon a Chapter 7 Trustee for property belonging to a third party rather than the debtor. However, the Court finds Ruff supportive of the Service's position that a Chapter 13 Trustee is required to honor a notice of levy. ⁴

Debtor erroneously contends that none of the cases cited by the Service involve a Chapter 13 trustee or an order mandating the dispersal of funds to the debtor. In re Schlapper, 195 B.R. 805 (Bankr. M.D. Fla. 1996), a case decided by this Court, involved a levy by the Internal Revenue Service on a Chapter 13 trustee as well as an Order of Dismissal requiring the Chapter 13 Trustee to return over $12,000 to the debtor. Id.

The facts of Schlapper are precisely on point with the facts of the instant case. The debtor in Schlapper filed a Motion to Enforce Order Dismissing Case requesting that the Court enforce its order requiring the Chapter 13 Trustee to return funds to the debtor. The Court denied the motion, explaining:

While this Court has jurisdiction to enforce its order, the Court finds that, once the order of dismissal is entered, and the stay has been lifted, and the Trustee has been ordered to turn over funds to the Debtor, she becomes a debtor of the Debtor to that extent. The funds held by the Trustee are subject to levy or garnishment by creditors of the Debtor, pursuant to applicable law. The Trustee is bound to accept the levy if she has any money that belongs to the Debtor.

This Court concurs with the reasoning in Schlapper and holds that it is permissible for the Service to levy upon funds held by the Chapter 13 Trustee even in the face of an order directing the Trustee to return those funds to the debtor. The Court therefore declines to enforce the portion of its Order of Dismissal, dated March 16, 1998 , which requires the Trustee to refund $14,289.58 to the debtor and will accordingly deny Debtor's Motion to Enforce Court Order. A separate order will be entered in accordance with these Findings of Fact and Conclusions.

ORDER DENYING DEBTOR'S MOTION TO ENFORCE COURT ORDER PURSUANT TO 11 U.S.C. & 1326(a)(2)

This case is before the Court upon Debtor's Motion to Enforce Court Order Pursuant to 11 U.S.C. §1326(a)(2). In accordance with Findings of Fact and Conclusions of Law separately entered, it is

ORDERED:

Debtor's Motion to Enforce Court Order is denied.

¹ "If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (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) (1994).

² "Except as otherwise provided in this section, 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 (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process." 26 U.S.C. §6332(a) (1994).

³ The Court has previously addressed Debtor's argument concerning the "plain meaning" of §1326(a)(2) and will not do so again here. The failure of the cited cases to address a similar argument is irrelevant to the propositions for which they are cited.

⁴ The Court in Ruff ultimately held the trustee personally liable to the Internal Revenue Service for the value of the property not surrendered pursuant to 26 U.S.C. §6332(d)(1). Ruff [97-1 USTC ¶50,130], 99 F.3d at 1567.

[98-2 USTC ¶50,585] In re Carol Lynn Coghlan, Debtor. United States of America, Appellant v. Carol Lynn Coghlan, Appellee

U.S. District Court, Dist. Ariz., CIV -97-2590- PHX - ROS , 6/26/98 , 227 BR 304, Reversing and remanding an unreported Bankruptcy Court order

[Code Secs. 6331 and 6332 ]

Bankruptcy: Turnover order, property subject to: Debtor's property in IRS 's possession: Levy and distraint: Property in possession of third parties: Money: Transfer of ownership.--A bankruptcy court erred in ordering the IRS to turn over funds that it had obtained by levy from the client of an attorney before the attorney filed her bankruptcy petition. Although a debtor's property ordinarily remains subject to a bankruptcy court turnover order even if the IRS had levied against it prior to the bankruptcy filing due to the requirement of sale, no sale is required when the property at issue is cash. Case law uniformly holds that once the money is both levied upon and collected by the IRS the transfer is complete. Therefore, once the IRS obtained the cash, the debtor's interest in the property was terminated. Thus, she had neither a legal nor an equitable interest in the funds when she filed her bankruptcy petition, and the IRS could not be compelled to return the money to her bankruptcy estate. Whiting Pools, Inc. (SCt), 83-1 USTC ¶9394 , distinguished; In re Debmar Corp. (BC-DC Fla.), 82-2 USTC ¶9504 , followed.

Mi Johns, Phoenix, Ariz. 85025, Robert P. McIntosh, Department of Justice, Washington, D.C. 20530, for appellant. Wade Frank lin Waldrip, P.O. Box 11719, Phoenix, Ariz. 85319-1719, for debtor-appellee.

ORDER

BACKGROUND

SILVER, District Judge:

The following facts are not in dispute. Prior to October 2, 1997 , the Internal Revenue Service ( IRS ) served a notice of levy on the Maricopa County Board of Supervisors ("the Board") demanding the surrender of all property, rights to property, money, credits, and bank deposits of Debtor. (United States' Brief at 3.) At the time of service, the Board owed Debtor on invoices previously tendered by her for legal services she provided to Maricopa County. (Debtor's Mot. for Order Compelling Turnover of Property ¶1.) In accordance with the levy, between October 2 and October 16, 1997 , the Board paid the IRS a total of $10,367.00 that it owed to Debtor. Id. ¶2. On October 30, 1997 , Debtor filed for reorganization under the Bankruptcy Code's Chapter 13. Id. ¶3. On that same day, the IRS issued a release of its levy to the Board. Id.

On November 17, 1997 , Debtor filed a motion in United States Bankruptcy Court to compel the IRS to comply with the turnover provisions in 11 U.S.C. §542(a), by immediately returning the money it had obtained through the notice of levy served upon the Board. On December 4, 1997 , Judge Robert G. Mooreman granted the motion and ordered the IRS to turn the money over to Debtor's bankruptcy estate. On December 12, 1997 , the United States appealed his decision to this Court.

DISCUSSION

This Court can only set aside the bankruptcy court's findings of fact if they were clearly erroneous. In re Gionis, 170 B.R. 675, 678 (9th Cir. BAP 1994). The bankruptcy court's conclusions of law, however, are subject to review de novo. Id. at 678-79.

The sole issue before the Court is whether money paid to the IRS pursuant to a federal tax levy is subject to turnover pursuant to 11 U.S.C. §542, when the money was not only levied, but also paid to the IRS before Debtor filed her Chapter 13 petition.

Debtor argues that Judge Mooreman was correct in finding that the facts of this case are indistinguishable from those in United States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198 (1983), and that return of her pre-petition assets is proper. The Appellant argues that Whiting Pools does not control the instant case because Debtor had no legal or equitable interest in money that was levied and paid to the IRS prior to her filing for bankruptcy. The Appellant further contends that because Debtor's bankruptcy estate is comprised only of property in which Debtor has a legal or equitable interest, the return of money in which Debtor no longer has any interest is improper.

Section 541(a)(1) provides that the bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. §541(a)(1). In Whiting Pools, the Supreme Court noted that the scope of §541(a)(1) is "broad" and "is intended to include in the estate any property made available to the estate by other provisions of the Bankruptcy Code." Whiting Pools [83-1 USTC ¶9394], 462 U.S. at 205. Section 542(a) is the turnover provision, and requires that "an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease . . . shall deliver to the trustee, and account for, such property or the value of such property." 11 U.S.C. §542(a). Construing §542(a) in light of §541(a)(1), the Supreme Court determined that §542(a)(1) does not require "that the debtor hold a possessory interest in the property at the commencement of the reorganization proceedings." Whiting Pools [83-1 USTC ¶9394], 462 U.S. at 206. For that reason, the bankruptcy estate "includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization." Id. at 209.

The Supreme Court's interpretation of §541(a) ensures that virtually all property in which the debtor has an identifiable interest will result in that property's inclusion in the debtor's bankruptcy estate. Nevertheless, neither §541 nor Whiting Pools addresses whether a debtor has an underlying interest in cash that was paid to the IRS prior to a debtor's filing for bankruptcy.

In Whiting Pools, the IRS had seized all of Whiting's tangible property, not cash, after Whiting refused to satisfy an IRS tax lien. Id. at 200. The day after the seizure, Whiting filed a petition for reorganization, under Chapter 11 of the Bankruptcy Code, and moved for an order compelling the IRS to return the seized property to the bankruptcy estate. Id. at 201. In reaching its conclusion, the Supreme Court stated that "if a tax levy or seizure transfers to the IRS ownership of the property seized, §542(a) may not apply." Id. at 209. The Supreme Court then held that the IRS levy and seizure provisions "are provisional remedies that do not determine the Service's rights to the seized property" and that ownership is transferred "only when property is sold to a bona fide purchaser at a tax sale." Id. at 211. Because the IRS had not sold Whiting's property, the property remained subject to the turnover requirements of §542(a) as long as the debtor provided adequate protection to the IRS . Id. at 212.

Whiting Pools does not control this case. The Supreme Court in Whiting Pools held that a debtor's interest in property seized by a creditor pre-petition is terminated at some point. Id. at 211. While the Supreme Court determined that Whiting's interest in the tangible property seized by the IRS terminated at the tax sale, it did not determine when the property interest in cash terminates. Id. In fact, the Supreme Court held "[o]f course if a tax levy or seizure transfers to the IRS ownership of the property seized, §542(a) may not apply." Id. at 209.

As both sides discussed in their briefs, in post-Whiting Pools cases involving levies on cash the courts have split over whether a pre-petition levy operates to transfer ownership to the creditor, thus taking the property out of the bankruptcy estate. The majority of cases have held that the debtor retains rights in the levied money. See e.g., In re Hunter, 201 B.R. 959, 961 (Bankr. E.D. Ark. 1996) (where IRS levies on cash pre-petition, but is not entitled to cash until after petition, cash is property of the estate); In re Giaimo, 194 B.R. 210, 213 (Bankr. E.D. Mo. 1996) (under the current IRC, the levy procedures in §6331 and §6332 are not complete until the bank surrenders the money 21 days after service of the levy); In re AIC Industries, Inc., 83 B.R. 774, 777 (Bankr. D. Colo. 1988) (sufficient residual property interest retained in account). A minority of cases, however, have held that a notice of levy extinguishes a debtor's interest in the money. See e.g., In re Abercrombie, 156 B.R. 782, 783-85 (Bankr. N.D. Tex. 1993) (pre-petition levy on the debtors' cash or cash equivalent deposits divested the debtors of any interest in that property); Brown v. Evanston Bank (In re Brown), 126 B.R. 767, 776 (Bankr. N.D. Ill. 1991) (a debtor's interest in cash equivalent property is extinguished when the IRS properly executes a levy on the property); DiFlorio v. United States [83-2 USTC ¶9492], 30 B.R. 815, 818 (Bankr. N.D.N.Y. 1983) (with cash, property need not be sold to transfer). The Ninth Circuit has recognized this split of authority, but has not resolved the issue for the Circuit. See In re Contractors Equipment Supply Co., 861 F.2d 241, 244, fn. 6 (9th Cir. 1988). This Court need not resolve the conflict here because the cases concern only pre-petition levy, not pre-petition levy and payment as in the instant case.

Debtor asserts that she retained a property interest in the levied account receivable even after the money had been collected by the IRS , and cites to 26 U.S.C. §317(a) for the proposition that the Internal Revenue Code (IRC) defines property for all purposes under the code as money, securities, and other property. (Resp. at 3.) Debtor then contends that 26 U.S.C. §6337(a) establishes that a taxpayer retains an interest in property, including cash, seized pre-petition. Id. Section 6337(a) states in part "[a]ny person whose property has been levied upon shall have the right to pay the amount due . . . to the Secretary at any time prior to the sale thereof, and upon such payment the Secretary shall restore such property to him. . . ." 26 U.S.C. §6337. Debtor argues that because cash is property, §6337 of the IRC establishes that she had a pre-petition interest in the money, and thus, the IRS was required by Whiting Pools to release it to the estate.

Debtor's interpretation of the IRC is unpersuasive. Section 317(a) of the IRC specially states "[f]or purposes of this part, [referring to the part of the IRC dealing with corporate distributions], the term 'property' means money, securities, and other property . . ." 26 U.S.C §317(a). Even assuming that the IRC intended this definition of property to control throughout the IRC, §6337 can only be interpreted as referring to property, other than cash, because the IRS obviously does not need to hold a sale to convert cash into a useable form. ¹ Because the IRS has no sale when the property levied is cash, it makes no sense for a person to post a bond to redeem something that will never be sold.

Finally, the case law is uniform in holding that a debtor's property interest in cash terminates when the monies have been both levied and collected. The facts of the instant case are indistinguishable from those of In re Debmar Corp. [82-2 USTC ¶9504], 21 B.R. 858, 859-60 (Bankr. S.D. Fla. 1982). In Debmar, the IRS served notices of levy upon Systems Development Corporation, which owed funds to the debtor, and Commercial Bank and Trust, where the debtor had bank accounts. Id. at 860. Both entities complied with the notice of levy and paid debtor's money to the IRS before the debtor filed for Chapter 11. Id. The court held that "when the petition was filed, there were no bank account balances in Debmar's name and no account due from the account debtor, and thus the nonexistent bank accounts and account receivable could not become 'property of the estate' " Id. at 861. The court further held:

The effect of paying the IRS was to reduce Debmar's tax liability, a situation completely different from that in Whiting Pools where the IRS would have to sell the levied-upon property and apply the proceeds to reduce the tax liability. Since the payments served to reduce Debmar's tax liability by being applied to that liability, the payments are best characterized as a partial satisfaction of the tax liens rather than a conveyance of Debmar's intangibles.

Id.

Subsequent case law supports the holding of Debmar. In Giaimo, the court held "the debtor retains sufficient interest in the intangible property before it is surrendered to the IRS such that the money is properly included in the bankruptcy estate. . . ." 194 B.R. at 213 (emphasis added). In reaching its decision, the court stated, "[i]n the case of tangible property, money is generally realized at the sale, . . . with respect to bank accounts, the money is realized by the IRS when surrendered 21 days after the levy." Id. at 214. In the case of In re Davis, 35 B.R. 795, 798 (Bankr. W.D. Wash. 1983) the court stated, "[t]his language (the actual language of the 'notice of levy') indicates that more is required than merely serving the notice of levy and suggests that a payment or release of the funds by the bank is necessary." (emphasis added). In the case of In re Wolensky, 163 B.R. 629, 636 (Bankr. D.D.C. 1994) the court found that, "even though the IRS served its notice of levy . . . prior to the filing of the bankruptcy petition, until those proceeds were turned over by Kemper to the IRS , the levy did not transfer ownership of those proceeds to the IRS ." (emphasis added). All three of the cases are consistent with Debmar that once cash is turned over to the IRS , the Debtor's interest in that property is terminated. Finally, while the Ninth Circuit has not ruled directly on this matter, they have implicitly endorsed the holding of Debmar. In discussing the split of authority that exists over a levy's power to terminate property interests in cash, the Ninth Circuit stated that "[s]ome [cases] have held that the debtor retains a right in the monies until an actual transfer occurs." In re Contractors Equipment Supply Co., 861 F.2d at 244, fn. 6 (emphasis added).

This case is distinguishable from Whiting Pools because Debtor had no legal or equitable interest in the money when she filed for bankruptcy. The Board complied with the notice of levy and paid the IRS the money it owed Debtor before she filed for bankruptcy. The IRS had no need to conduct a sale or take further action in order to use the money to reduce Debtor's tax liability. Consequently, Debtor's property interest in the money terminated once the Board turned it over to the IRS . Because Debtor retained neither a legal nor equitable interest in the money when she filed her petition for bankruptcy, the IRS cannot be compelled to turn the money over to Debtor's bankruptcy estate.

Accordingly,

IT IS ORDERED that the Bankruptcy Court's order (Doc. #2) is reversed.

IT IS FURTHER ORDERED that the case is remanded to the Bankruptcy Court for further proceedings consistent with this order.

¹ The IRC provides that any money realized under §6332 (surrender of property subject to levy) will be directly applied first to the expense of levy and sale, then to the specific tax liability on the seized property, and finally to the liability of delinquent taxpayer. Any surplus proceeds are then returned to the debtor. 26 U.S.C. §6432.

[2002-2 USTC ¶50,639] In re Johnnie L. Brown, Debtor

U.S. Bankruptcy Court, East. Dist. Wis., 1998-31716, 7/2/2002 , 280 BR 231, 280 BR 231, 2002 Bankr. LEXIS 702

[Code Secs. 6321 , 6323 and 6331 ]

Liens and levies: Enforcement of lien: Bankruptcy: Levy, property subject to.--

The IRS was entitled to uncollected funds that had been paid over to the bankruptcy court after a debtor's Chapter 13 case was dismissed for failure to submit a confirmation plan. A valid prepetition lien for the debtor's outstanding tax liabilities existed on all of his nonexempt property, including the funds in possession of the bankruptcy court, and the IRS 's lien and levy superceded the debtor's right to return of the funds. F.W. Beam (CA-9), 99-2 USTC ¶50,917 , followed. BACK REFERENCES: ¶38,136.535 , ¶38,160.115 and ¶38,187.15

[Code Sec. 6331 ]

Liens and levies: Notice of levy, sufficiency of.--

No notice of levy needed to be served on a bankruptcy court holding the funds of a debtor whose Chapter 13 case had been dismissed because the government's challenge to the debtor's right to the funds was the functional equivalent of a levy. The debtor had the opportunity to challenge the claim and, thus, was not denied due process. BACK REFERENCES: ¶38,187.221

Larry Moses, Assignee of Debtor, pro se. Susan M. Knepel, Mark D. Petersen, for I.R.S.

MEMORANDUM DECISION ON PETITION FOR PAYMENT OF UNCLAIMED FUNDS

MCGARITY, Bankruptcy Judge:

This proceeding involves a dispute over unclaimed funds held by the Clerk of Bankruptcy Court after the debtor's chapter 13 case was dismissed without confirmation of a plan, and the trustee was unable to return the funds to the debtor. This court has jurisdiction under 28 U.S.C. §1334. Because the issues in this matter involve the administration of a case filed under Title 11 of the United States Code, and also a claim against the debtor, it is a core proceeding under 28 U.S.C. §157(b)(2)(A) and (B).

The debtor filed a chapter 13 petition on November 20, 1998 , and after failing to file a feasible plan, his case was dismissed on June 23, 1999 . After the case was dismissed, the trustee attempted to return the undistributed payments made to him by the debtor. The check to the debtor in the amount of $ 916.42 was returned to the trustee by the postal service as unclaimed. The trustee then paid the unclaimed funds to the Clerk of Bankruptcy Court. 11 U.S.C. §347(a); Fed. R. Bankr. P. 3011.

On December 4, 2001 , The Financial Resources Group filed a petition for payment of unclaimed monies on behalf of the debtor. Notice of such request was given to the United States Attorney. 28 U.S.C. §2042. At the hearing on the Internal Revenue Service's request for additional time to review the request for unclaimed funds, the IRS asserted its position that it was entitled to receive the unclaimed funds from the estate because the debtor had outstanding tax liabilities, which were well in excess of the amount to be returned to the debtor. The court provided the parties with an opportunity to file briefs on their positions, and the court received a brief from the IRS only.

According to the IRS , the debtor owes federal income taxes for the years 1992, 1994 and 1995 in the amounts of $6,863.38, $1,559.67 and $3,956.20, respectively. Liens attached to all property of the debtor, pursuant to 28 U.S.C. §6321, when he did not pay those amounts after notice and demand. The liens arose on September 18, 1995 , for the 1992 federal income tax liability, on September 25, 1995 , for the 1994 federal income tax liability, and on February 23, 1998 , for the 1995 federal income tax liability. Notices of Federal Tax Lien, giving the IRS priority as to third parties, were filed for those periods on August 17, 2000 .

Resolution of this matter depends upon the interplay between two federal statutes, 11 U.S.C. §1326(a)(2) and 26 U.S.C. §6321. Section 1326(a)(2) of the Bankruptcy Code provides that

A payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan.. . . If a plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.

11 U.S.C. §1326(a)(2). Section 6321 of the Tax Code provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any cost that may accrue in addition thereto) 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.

Thus, the court must determine whether the funds can only be turned over to the debtor pursuant to 11 U.S.C. §1326(a)(2), or whether the monies may be turned over to the IRS under 26 U.S.C. §6321 because of the federal tax liens that have attached to all property of the debtor. No notice of levy has been served on the Clerk because, as the IRS stated in its brief, levy was considered unnecessary for funds held by the court. See also Treas. Reg. §301.6331-1(a)(3) (taxes cannot be collected by levy upon assets in custody of court); Gulf Coast Galvanizing, Inc. v. Steel Sales Co. [93-2 USTC ¶50,398 ], 826 F.Supp. 197, 205 (S.D. Miss. 1993) (noting that levy is administrative).

The IRS cites In re Beam [99-2 USTC ¶50,917 ], 192 F.3d 941 (9th Cir. 1999), in support of its position that the funds do not have to be returned to the debtor. In Beam, the Ninth Circuit held the IRS could levy on funds paid to the trustee under the debtor's proposed chapter 13 plan and held by the trustee following dismissal of the case. The Beam court held that provisions of the Internal Revenue Code superseded §1326(a)(2) of the Bankruptcy Code.

The court noted that §6334(a) ¹ of the Internal Revenue Code provided 13 categories of property exempt from levy under a federal tax lien, and those categories did not include funds held by the chapter 13 trustee after dismissal of a bankruptcy case. Beam [99-2 USTC ¶50,917 ], 192 F.3d at 944. Because §6334(c) further specified that no other property or rights were exempt from IRS levy except as specifically set forth in §6334(a), and §1326(a)(2) of the Bankruptcy Code was not listed among the 13 items exempt from levy, the Ninth Circuit concluded that the Internal Revenue Code modified the operation of §1326(a)(2). Id.

Other cases have allowed a creditor to assert state law liens against funds in the possession of the chapter 13 trustee upon dismissal of the case; however, the majority of those cases require the creditor to pursue their rights against the property in state court. See, e.g., In re Oliver, 222 B.R. 272 (Bankr. E.D. Va. 1998); In re Walter, 199 B.R. 390 (Bankr. C.D. Ill. 1996); In re Clifford, 182 B.R. 229 (Bankr. N.D. Ill. 1995). In effect, the trustee does not make distributions to creditors when a plan has not been confirmed, notwithstanding the creditors' state law rights in the funds held by the trustee. As the IRS points out, these cases are distinguishable in that none of them involved the reach of a federal tax lien.

This view is not unanimous, however. One court determined that judicial economy favored resolving the disposition of the creditor's lien in bankruptcy court, even though no plan was confirmed. In re Doherty, 229 B.R. 461 (Bankr. E.D. Washington 1999). The court concluded that the chapter 13 trustee's costs primed both the debtors' claim to the funds as well as any state tax lien interest. Nevertheless, the state department of revenue had a lien on the funds that were not necessary to pay the administrative costs, i.e., the debtor's funds, and the trustee was required to comply with the levy. The Doherty court noted that leaving the lien creditor with the obligation to complete its pursuit of the funds in state court was not an attractive solution. Id. at 466. Requiring the IRS to chase its liened funds in the debtor's possession is similarly unattractive.

One treatise, Mertens Law of Federal Income Taxation, takes the position that the funds should be turned over to the IRS :

When a taxpayer files for bankruptcy, that action will operate as an automatic stay to prevent collection efforts until there is a court hearing. Although a bankrupt taxpayer may possess property not subject to a levy because of the automatic stay provision, a tax lien will extend to such property. When a bankruptcy petition is filed, the Service will also maintain whatever tax liens that it has against the bankrupt's non-exempt property. If a bankruptcy case is dismissed, the bankrupt [sic] trustee is then obligated to either honor a notice of levy related to the non-exempt property or be subject to a penalty.

14 Mertens Law of Fed. Income Tax'n §54A:10 (citing In re Beam [99-2 USTC ¶50,917 ], 192 F.3d 941 (9th Cir. 1999)).

This court is satisfied that the IRS ' position is correct with respect to both substance and procedure. Cases dealing with state law created liens, which required return of assets to the debtor, seem to require state court procedure for enforcement of those liens, a result that is not necessary in the instant case involving a federal tax lien. The IRS had a valid prepetition lien on all nonexempt property of the debtor, including the debtor's funds in possession of the trustee, and the lien followed those funds when they were transferred to the Clerk of Bankruptcy Court. As the Beam court found, the IRS ' lien and levy superceded the debtor's right to return of the funds under 11 U.S.C. §1326(a)(2). While the IRS has not served the Clerk with a notice of levy, an administrative act preliminary to seizing a particular asset or fund subject to a tax lien, the IRS has issued the functional equivalent of a levy by challenging the debtor's right to the funds held by the Clerk. The debtor has had the opportunity to challenge that claim and thus is in no way denied due process. Just as the trustee in Beam was required to honor the IRS levy, the Clerk of Bankruptcy Court is likewise required to honor the IRS ' claim to the funds on which it has a lien.

This decision stands as the court's findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052. A separate order consistent with this decision will be entered.

ORDER DIRECTING PAYMENT OF UNCLAIMED FUNDS

For the reasons stated in the court's memorandum decision entered on this date, the Clerk of Bankruptcy Court for the Eastern District of Wisconsin is ordered to pay the unclaimed funds due the debtor in the above referenced case to the Internal Revenue Service.

¹ The specific exemptions include wearing apparel and school books, fuel, necessary personal expenses, books and tool, unemployment benefits, undelivered mail, certain annuity and pension payments, workers' compensation, judgments in support of minor children, minimum exemptions for wages and salary, certain service-connected disability payments, certain public assistance payments, assistance under the Job Training Partnership Act, residences exempt in small deficiency cases and principal residences and certain business assets exempt in absence of certain approval or jeopardy. 26 U.S.C. §6334(a)(1)-(13).