Annotations-
Commissions
6332
Annotations: Commissions-Levy
Penalty
for Failure to Surrender Property: Commissions
Rev.
Rul. 73-365 1,
1973-2 CB 407
Section 6331.--Levy and Distraint
26 CFR 301.6331-1: Levy and distraint.
(Also Section 6332; 301.6332-1.)
[IRS Headnote] Levy; commissions applied against employee's overdrawn
account and "expense money."--
Commissions earned which are applied by the employer as a credit against
an employee's overdrawn account and "expense money" advanced
under an arrangement whereby it must be accounted for by the employee
are not subject to levy and distraint for unpaid taxes; G.C.M. 5251
superseded.
[Text]
The purpose of
this Revenue Ruling is to update and restate, under the current statute
and regulations, the position set forth in G.C.M. 5251, V11-2 C.B. 73
(1928).
Advice has
been requested whether, under the circumstances described below,
commissions earned by an employee-taxpayer and "expense money"
advanced to him by his employer, are subject to levy and distraint for
unpaid taxes under section 6331 of the Internal Revenue Code of 1954.
The employer
has been crediting commissions earned by the taxpayer to his overdrawn
account. The employer also advanced weekly sums of money designated as
"expense money" to the taxpayer for the taxpayer's actual
expenses that had to be accounted for to the employer. A Notice of Levy,
Form 668-A, has been served on the employer.
Section
301.6331.-1(a)(1) of the Regulations on Procedure and Administration
provides that levy may be made by serving a notice of levy on any person
in possession of, or obligated with respect to, property or rights to
property subject to levy including receivables, bank accounts, evidences
of debt, securities, and accrued salaries, wages, commissions, and other
compensation. A levy extends only to property possessed and obligations
which exist at the time of the levy. Obligations exist when the
liability of the obligor is fixed and determinable, although the right
to receive payment thereof may be deferred until a later date.
Section
6332(a) of the Code provides that any person in possession of (or
obligated with respect to) property or rights to property subject to
levy upon which a levy has been made shall, upon demand of the District
Director, surrender such property or rights (or discharge such
obligation) to the District Director.
Commissions
earned by the taxpayer but retained in his employer's possession are in
the nature of contract debts, within the purview of section 6331 of the
Code, and pursuant to the provisions thereof are subject to levy under a
warrant of distraint.
With respect
to an employer who makes a practice of either paying commissions of
employee taxpayer in advance or crediting such commissions to his
account, the employer has the right to set off any debt due the employer
from such employee against any accrued salary, wages, or commissions due
the employee.
United States
v. Long Island Drug Co., 115 F.2d 983 (4th Cir. 1940). Thus,
when an employee has overdrawn his account with his employer so that he
is indebted to such employer, commissions earned by the employee may be
applied by the employer to reduce this debt, and not until the debt is
paid may commissions earned by the employee be subject to levy.
Accordingly,
the amounts applied to the overdrawn accounts are not subject to levy.
The second
question presented is whether the weekly sums paid as "expense
money" may be distrained upon. The answer to this question depends
upon the nature of the contract of employment between the taxpayer and
the company.
Since the
"expenses money" was advanced to the taxpayer for his actual
expenses and had to be accounted for by the taxpayer, the money advanced
is the company's money given to the taxpayer for expenditure in its
business and may not be distrained upon.
If the
taxpayer is to be reimbursed for expenses actually incurred by him in
connection with his duties as a salesman, the "expense money"
is money due from the company to the taxpayer and therefore is subject
to distraint. Likewise, if the taxpayer is to receive a stipulated
amount weekly which is designated as "expense money" but for
which he is not required to render any account to the company, the
so-called expense money is merely compensation and as such may be
distrained upon.
In both of the
above-mentioned situations, if the amounts due the taxpayer were applied
by his employer against the employee's overdrawn account and not
actually paid to him, the same right of set-off by the employer would
prevail as held above with respect to the commissions.
G.C.M. 5251 is
hereby superseded, since the position stated therein is restated under
the current law in this Revenue Ruling.
----------
[Footnotes] ----------
1 Propared
pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.
[97-1 USTC ¶50,130] United States of
America
, Plaintiff-Appellee v. Andrea A. Ruff, Individually and as Trustee for
the Bankruptcy Estate of Central Micrographic Corporation d/b/a Hospital
Cooperative Assn., Defendant-Appellant
(CA-11),
U.S.
Court of Appeals, 11th Circuit, 95-2665, 11/21/96, 99 F3d 1559, 99 F3d
1559. Affirming a District Court decision, 95-1
USTC ¶50,147 , 179 BR 967
[Code
Sec. 6332 ]
Levy and distraint: Bankruptcy estate: Broker's commission: Trustee
in possession: Surrender of property: Levy and demand: Tax liens.--A
trustee in bankruptcy who was in possession of a commission belonging to
a business broker who was employed to sell certain assets of the
bankruptcy estate and who had unpaid taxes was personally liable for
failure to pay over the commission to the IRS. The broker's right to the
commission represented property or rights to property at the time the
notice of levy was served on the trustee. The commission was fixed
because the bankruptcy court approved the broker's employment by the
estate and the broker completed the required performance. Also, the
commission was determinable because it had been established by previous
court order. Finally, the bankruptcy court could not have reduced or
eliminated the broker's commission.
Before:
HATCHETT, Chief Judge, ANDERSON, Circuit Judge, and WOOD, * Senior
Circuit Judge.
ANDERSON,
Circuit Judge:
Defendant-appellant
Andrea A. Ruff appeals the judgment of the district court, on summary
judgment, in favor of plaintiff-appellee the
United States of America
in the amount of $20,000, arising from Ruff's failure to honor an
Internal Revenue Service ("IRS") levy on property or rights to
property of a delinquent taxpayer in her possession. United States v.
Andrea A. Ruff [95-1 USTC ¶50,147], 179 B.R. 967 (M.D.Fla.1995).
Because we find that judgment was properly awarded to the government, we
affirm.
I.
STATEMENT OF THE CASE
A.
Facts 1
The facts in
this case are not in dispute. At all times relevant to this controversy,
Ruff served as the Chapter 7 Trustee in the bankruptcy case In re
Central Micrographic Corporation d/b/a Hospital Cooperative Association,
case no. 88-2577-BKC-6S7, filed in the United States Bankruptcy Court
for the Middle District of Florida. During the pendency of the
bankruptcy case, Harold Gene Artrip approached Ruff and informed her
that he had a prospective buyer for the debtor's assets. On February 24,
1989, Ruff filed an application with the bankruptcy court to employ
Artrip as a business broker for the bankruptcy estate, under which he
would receive a 10% commission to be shared by Artrip and two other
brokers previously employed by the estate. On March 2, 1989, the
bankruptcy court entered an order granting that application. The order
stated that the commission would be paid "only if his prospect is
the successful buyer of the debtor's business, in which case any awarded
broker commission would be shared equally" with the two other
brokers. The order also stated that payment of the commission was
subject to final approval by the bankruptcy court.
On April 17
and 18, 1989, Ruff, on behalf of the bankruptcy estate, entered into an
Agreement of Sale and Purchase of Real and Personal Property with the
prospective purchasers identified by Artrip. The agreement was signed by
Ruff, as trustee for the estate, by the purchasers, and by NCNB National
Bank of
Florida
, which held liens on the debtor's assets. The property thus sold was
that property for which Ruff had employed Artrip as a business broker.
On April 26, 1989, Artrip, filed an Application for Allowance of
Broker's Fee for Broker for the Trustee. The parties agree that at the
time he filed this application, Artrip had completed all of the services
for which he was hired pursuant to the bankruptcy court's March 2 order.
Artrip sought $20,000, which represented one-third of the broker's fee
derived from the sale of the bankruptcy estate's assets, consistent with
the March 2 order. He noted in the application that if the sale to his
prospects were not consummated, he was not entitled to the commission.
On May 24, 1989, the bankruptcy court authorized the sale contemplated
by the April 17 and 18 agreement. The closing of that sale occurred on
June 16, 1989.
On July 13,
1989, the bankruptcy court entered a Notice of Hearing, setting August
3, 1989, as the date for the hearing on Artrip's fee application. Ruff
received this notice before July 27, 1989. Prior to the events discussed
above, the IRS assessed a federal tax liability against Artrip, pursuant
to 26 U.S.C. §6672. On July 27, 1989, the IRS served on Ruff a Notice
of Levy for Artrip's outstanding tax liabilities, which the Service
indicated exceeded $230,000. The levy sought,
[a]ll
property, rights to property, money, credits, and bank deposits now in
your possession and belonging to this taxpayer (or for which you are
obligated), and all money or obligations you owe this taxpayer....
Ruff
indicated on the reverse of the Notice of Levy that she held no funds
due Artrip. In response to the question on that same form asking when
Ruff would next owe Artrip money, Ruff wrote "unknown." On the
day that Ruff received the Notice of Levy, she possessed as Trustee in
the Central Micrographics case, funds sufficient to pay Artrip's
commission.
On August 10,
1989, the bankruptcy court entered an order granting Artrip's
application for fees in the amount of $20,000, thus authorizing payment
thereof. On August 11, Ruff, acting as Trustee for the bankruptcy
estate, executed a check payable to Artrip in the amount of $20,000 for
his share of the commission derived from the sale of the assets of
Central Micrographics.
B.
Issue on appeal
26 U.S.C. §6332(a)
requires that "any person in possession of (or obligated with
respect to) property or rights to property subject to levy upon which a
levy has been made shall, upon demand of the Secretary, surrender such
property or rights to property" to the Secretary. 26 U.S.C. §6332(d)(1)
provides that any person who fails to surrender property subject to levy
shall be held personally liable for the value of the property not
surrendered. The sole issue in this case is whether Ruff was "in
possession of (or obligated with respect to) property or rights to
property subject to levy," meaning in this case any property or
rights to property belonging to Artrip, at the time she received the
Notice of Levy from the IRS on July 27, 1989.
II.
ANALYSIS
A.
Standard of review
We review the
district court's grant of summary judgment de novo, Hutton v.
Strickland, 919 F.2d 1531, 1536 (11th Cir. 1990), viewing the facts
in the light most favorable to the non-movant. N.A.A.C.P. v. Hunt,
891 F.2d 1555, 1559-60 (11th Cir.1990).
B.
Discussion
The IRS is
empowered to levy on the property or rights to property of a delinquent
taxpayer in the hands of a third party pursuant to 26 U.S.C. §6331(a).
The levy itself does not determine whether the government's claim is
superior to those of other claimants. Instead, the levy power is
designed to enable the government "promptly to secure its
revenues" while competing claims are resolved. United States v.
National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721,
728, 105 S.Ct 2919, 2924, 2928, 86 L.Ed.2d 565 (1985). Upon receipt of a
notice of levy, such third parties are required to surrender that
property to the IRS. 26 U.S.C. §6332(a). The notice of levy "gives
the IRS the right to all property levied upon ... and creates a
custodial relationship between the person holding the property and the
IRS so that the property comes into constructive possession of the
Government." National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 720, 105 S.Ct. at 2924. Those individuals who fail to honor the
Service's levy incur liability to the government equal to the full value
of the property not surrendered. 26 U.S.C. §6332(d)(1); United
States v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497,
1499 (11th Cir.1989).
A third party
may raise only two defenses to excuse its failure to surrender levied
property to the government. First, it can show that it was not, pursuant
to the language in 26 U.S.C. §6332(a), "in possession of" any
of the delinquent taxpayer's property or rights to property at the time
that it received the notice of levy. National Bank of Commerce [85-2
USTC ¶9482], 472
U.S.
at 722, 105 S.Ct. at 2925; Metropolitan Life [89-1 USTC ¶9362],
874 F.2d at 1499. Second, it can show that when it received the notice
of levy, the property in question was subject to attachment or execution
under judicial process. National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 722, 105 S.Ct. at 2925; Metropolitan Life [89-1 USTC ¶9362],
874 F.2d at 1499. Ruff raises only the first of these defenses.
Ruff argues
that she was not "in possession of" any of Artrip's property
or rights to property on July 27, 1989, the day on which she received
the Notice of Levy. In order to determine if Ruff was in possession of
Artrip's property, specifically the $20,000 commission he eventually
received as compensation for his services as a business broker in the
Central Micrographics sale, we employ a two-step analysis.
A court
assessing a levy on a taxpayer's intangible interest in property held by
third parties must determine first the nature of the taxpayer's interest
in the property. This is a question of state law.... Once the court has
determined that a delinquent taxpayer has rights to property, federal
law determines whether the custodian of the property is obligated to
surrender the property to the IRS.
Metropolitan
Life [89-1 USTC ¶9362 ],
874 F.2d at 1500 (citing National Bank of Commerce [85-2 USTC ¶9482 ],
472
U.S.
at 724 n. 8, 105 S.Ct. at 2926 n. 8).
1.
Artrip's right to property under
Florida
law
Under
Florida
law, a property has been sold, for the purpose of establishing
entitlement to a commission, once the purchaser executes a binding
contract to purchase the property at issue. Hagans Co. v. Manla,
534 So.2d 750, 751 (Fla. 3d DCA 1988). However, the broker and the party
responsible for payment of the commission may record in the broker's
commission agreement express conditions precedent to the broker's
entitlement to that commission, and these conditions must be met before
the broker is legally entitled to payment.
Id.
at 751-52; Harding Realty, Inc. v. Turnberry Towers Corp., 436
So.2d 983, 984 (Fla. 3d DCA 1983). Significantly, there is a distinction
under
Florida
law between a condition precedent to the entitlement to a commission and
a condition precedent to the payment of a commission. See Harding
Realty, 436 So.2d at 984 (broker was not entitled to commission
because commission agreement "expresse[d] that entitlement to the
commission, as opposed to just payment of the commission, [was] to occur
at closing," and closing never occurred).
On April 17
and 18, 1989, Ruff, on behalf of the bankruptcy estate, entered into a
binding contract of sale for the assets of the estate to the prospect
identified by Artrip. The sale was approved by the bankruptcy court, and
was consummated. However, Ruff argues that Artrip's appointment by the
bankruptcy court as a business broker and the commission agreement were
subject to an express condition precedent to his entitlement to the
commission. That order states:
[A] fee will
only be paid upon application, general notice and approval of the
Bankruptcy Court.
In
re Central Micrographic Corp., No.
88-2577-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989) (Order appointing Artrip
business broker). Ruff argues that Artrip was not entitled to those fees
until the bankruptcy court gave its final approval, which occurred on
August 10, 1989.
As noted
above, there is a difference under
Florida
law between entitlement to a commission and payment of a commission. The
broker in Harding Realty was denied his commission because the
commission agreement specifically stated that entitlement to the
commission would occur at closing, and the buyers never closed on the
properties. Harding Realty, 436 So.2d at 984. In this case,
Artrip's commission was agreed upon and approved on March 2, 1989, by
the bankruptcy court. Under that order, Artrip was the successful buyer
of the property, which was in fact the case. It is true that the order
also stated that Artrip's commission would be "paid" only upon
subsequent application to and approval by the bankruptcy court. The
court's order conditioned payment, not entitlement, upon
further approval. Under
Florida
law, condition as to payment did not undermine Artrip's entitlement.
Thus, Artrip was entitled to payment, at the latest, when the sale of
the property was consummated pursuant to the April 17 and 18, 1989,
contract for sale. Hagans Co., 534 So.2d at 751. The district
court properly concluded that, under
Florida
law, Artrip had an entitlement, and thus had a property interest in the
commission.
2.
Ruff's obligation to surrender Artrip's commission to the IRS
Once it is
determined that a state law property interest exists, Federal law
determines the tax consequences of that interest. National Bank of
Commerce [85-2 USTC ¶9482], 472
U.S.
at 722, 105 S.Ct. at 2925. State law is not relevant to this inquiry.
Id.
Federal law, specifically the Treasury regulations governing the levy
power, establishes the nature of this determination.
[A] levy
extends only to property possessed and obligations which exist at the
time of the levy. Obligations exist when the liability of the obligor is
fixed and determinable although the right to receive payment thereof may
be deferred until a later date.
26
C.F.R. §301.6331-1(a)(1). The issue of whether Ruff was obligated to
surrender Artrip's commission to the IRS is really a question of whether
the liability of the bankruptcy estate to Artrip was "fixed and
determinable" at the time that the Notice of Levy was served on
Ruff. United States v. Hemmen [95-1
USTC ¶50,210 ], 51 F.3d 883, 888 (9th Cir.1995).
At the outset,
it is important to note that the quoted regulations include among
obligations which are "fixed and determinable" those
obligations for which the right to receive payment has been deferred.
Thus, even if the right to receive payment does not arise until a later
time. The court in Hemmen analogized a fixed and determinable
obligation of this type to "an ordinary contract with an executory
duty to pay for a completed performance by the obligee."
Id.
at 890.
The situation
confronted by the court in Hemmen is very similar to that in the
case at bar. In Hemmen, the president of a Chapter 11 debtor,
Al-Hadid (hereinafter referred to as taxpayer) performed certain
services for the estate by working to preserve the assets of the estate.
He filed a claim with the bankruptcy court for administrative expenses.
The case was converted into a Chapter 7 liquidation, and Hemmen was
appointed trustee.
Id.
at 886. The district court entered two separate orders allowing the
taxpayer's claim for administrative expenses. The second of these
orders, dated October 16, 1984, indicated that payment would not be made
"except upon further order of the court."
Id.
The underlying performance by the taxpayer was complete at all relevant
times. Approximately one year before the issuance of these orders, the
IRS assessed a civil tax penalty against the taxpayer. Pursuant to that
assessment, on December 17, 1985, after allowance of the claim for
administrative expenses but before the bankruptcy court had finally
approved payment thereof, IRS agents served a notice of levy on Hemmen
demanding the surrender of any of the taxpayer's property or rights to
property in Hemmen's possession as a result of his status as trustee.
Id.
However, instead of surrendering the money owed by the estate to the
taxpayer, Hemmen paid those funds to the taxpayer. The IRS sued Hemmen,
arguing that he was personally liable for the funds paid to the
taxpayer.
The court in Hemmen
held that the allowed administrative expenses were fixed and
determinable as of the date on which the Secretary's notice of levy was
served. It reached this conclusion despite the fact that actual payment
of those expenses by the trustee had to await authorization from the
bankruptcy court, and the fact that the claims for expenses could be
reduced to money only if there were sufficient assets left in the estate
to satisfy them.
Id.
at 890. Additionally, the court noted that the trustee retained the
power to move the bankruptcy court to disallow the claims. Id
These factors failed to sway the court.
None of these
conditions to payment, however, undermines the proposition that the
obligation of the estate to [the taxpayer] was "fixed" within
the meaning of §301.6331-1(a)(1) after the underlying performance was
completed and the claim was allowed by the court.... At best, the
factors Hemmen cites establish only that the estate's liability was
fixed but that [the taxpayer's] interest was still subject to possible
defeasance due to factors having no bearing on the underlying
performance.
Id.
Further, the court held that the sum due the
taxpayer was determinable because, although there was some uncertainty
as to whether there would be sufficient funds remaining in the estate to
pay the taxpayer's claims, the sums were still capable of precise
measurement in the future.
Id.
(citing Reiling v. United States, 77-1 USTC ¶9269 ,
1977 WL 1094 (N.D.Ind.1977)). Thus, according to the Hemmen
court, the administrative expenses due the taxpayer were fixed and
determinable because they had been allowed by the bankruptcy court and
the underlying performance had been completed. The fact that payment
might not be made due to a shortfall in the estate or subsequent
disallowance by the bankruptcy court had no impact on the Hemmen
court's determination that they were fixed and determinable as of the
date of the levy.
Similarly,
Artrip's commission was fixed and determinable on July 27, 1989, the
date that Ruff received the Secretary's Notice of Levy. 2 It was fixed
because the bankruptcy court in its March 2, 1989, order approved
Artrip's appointment as broker for the estate with a 10% commission (to
be shared equally with two other brokers), and because the underlying
performance required of Artrip was complete. The buyer identified by
Artrip entered into an agreement with Ruff to purchase those assets in
April of 1989, and the sale was authorized by the bankruptcy court on
May 24, 1989. The closing occurred on June 16, 1989. The commission was
determinable because it was capable of precise measurement, having been
established by previous court order. See In re Central Micrographics
Corp., No. 88-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989) (Order
appointing Artrip business broker). The bankruptcy court set a date for
Artrip's fee hearing by notice to the parties almost two weeks before
Ruff received the Notice of Levy. The fact that Artrip was entitled to a
commission of $20,000 was never in dispute, and this is unaffected by
the potential unavailability within the bankruptcy estate of the
resources needed to pay that amount. Common sense dictates that the
Treasury regulations at issue here be read this way. 3 If the
regulations were meant to require, as Ruff argues, that the commission
must be paid to the broker before it can be fixed and determinable, then
they would have been written to so require.
Our holding is
consistent with the purpose of the levy. The levy is not designed, as
noted above, to give the government's claims superiority over the claims
of others. Instead, the levy is intended only to protect the
government's statutory interest in "property or rights to
property," see 26 U.S.C. §6332(a), and to assure the
availability of the assets at issue once a final ordering of claims is
made. National Bank of Commerce [85-2 USTC ¶9482], 472
U.S.
at 721, 728, 105 S.Ct. at 2924-25, 2928. The resolutions reached in Hemmen
and in the case at bar merely insure that this interest is protected by
putting the burden of monitoring the progress of the bankruptcy estate
on the party who can most easily and efficiently carry it, the trustee.
The
interpretation of the statute urged upon us by Ruff would read out of
the statute the phrase "rights to property," and thus would
strictly limit an IRS levy to "property" actually in the
possession of the party upon whom the levy is served. Ruff's
interpretation is also inconsistent with the regulations, and would
eliminate from the property subject to levy "obligations which
exist at the time of the levy." 26 C.F.R. §301.6331-1(a)(1). It
would render superfluous the regulation's elaboration to the effect that
those obligations upon which levy may be made are those which are
"fixed and determinable" although the right to receive payment
thereof may be deferred. Ruff's interpretation would seriously undermine
the Service's ability to protect the government's statutory interest.
Analysis of
the relevant bankruptcy provisions governing the payment of
professionals from the assets of the estate reinforces our conclusion
that Artrip's commission was fixed and determinable as of the date of
the levy. Section 328 of the Bankruptcy Code states:
(a) The
trustee ..., with the court's approval, may employ ... a professional
person ... on any reasonable terms and conditions of employment,
including on a retainer, on an hourly basis, or on a contingent fee
basis. Notwithstanding such terms and conditions, the court may
allow compensation different from the compensation provided under such
terms and conditions after the conclusion of such employment, if such
terms and conditions prove to have been improvident in light of
developments not capable of being anticipated at the time of the fixing
of such terms and conditions.
******
(c) [Subject
to exceptions not relevant here], the court may deny allowance of
compensation for services and reimbursement of expenses of a
professional person employed under section 327 ... if at any time during
such professional person's employment ... such professional person
person is not a disinterested person, or represents or holds an interest
adverse to the interest of the estate with respect to the matter on
which such professional person is employed.
11
U.S.C. §328 (emphasis added).
The bankruptcy
court in this case approved Artrip's fee arrangement, including the
provision setting his commission percentage, on March 2, 1989, well
before the Secretary served the Notice of Levy on Ruff. Because Artrip's
prospect was the ultimate purchaser of the Central Micrographics
property, and because the sale had been consummated, he had completed
the tasks required of him to establish his entitlement to that
commission as of the date of the levy. Section 328 significantly
curtails the bankruptcy court's discretion with respect to the final
payment of previously approved fees to professionals.
The bankruptcy
court's power to alter the fee arrangement in no way diminishes the
fixed and determinable nature of Artrip's commission arrangement, which
was approved by the bankruptcy court on March 2, 1989. The district
court noted that there were no facts upon which the bankruptcy court
could have based a decision to reduce or eliminate Artrip's commission. Ruff
[95-1 USTC ¶50,147], 179 B.R. at 972. There was no evidence that Artrip
was no longer a disinterested person, nor that the bankruptcy court felt
that the fee arrangement was improvident. The fact that the court
scheduled a hearing on the fee indicates that there was money left in
the estate with which to pay it. Thus, the district court concluded that
Ruff could not have seriously questioned whether Artrip would receive
his fee at the time that she received the Notice of Levy.
Id.
III.
CONCLUSION
We conclude
that Ruff was, within the meaning of 26 U.S.C. §6332(a), "in
possession of ... property or rights to property subject to levy"
on July 27, 1989, the date on which she received the Secretary's notice
of levy for Artrip's outstanding tax liabilities. She was therefore
required to surrender that property or the rights thereto to the
Secretary. She did not do so, and, pursuant to 26 U.S.C. §6332(d)(1),
is therefore personally liable to the Secretary for the value of the
property not surrendered, in this case $20,000. We affirm the ruling of
the district court.
AFFIRMED. 4
* Honorable
Harlington Wood, Senior
U.S.
Circuit Judge, Seventh Circuit, sitting by designation.
1 Our
statement of the facts is taken in large measure (verbatim in
considerable part) from the district court's excellent opinion.
2 Ruff argues
that the facts of this case are more similar to those found in Tull
v. United States [95-2 USTC ¶50,602], 69 F.3d 394 (9th Cir.1995),
and that therefore we should adopt the logic of that case. However, Tull
is entirely consistent with the reasoning of Hemmen, and is
distinguishable on its facts from both Hemmen and the case at
bar. In Tull, the IRS served a notice of levy on the
Secretary/Treasurer of a corporation with significant outstanding tax
liabilities, including both payroll withholding and trust fund
liabilities. At the time, the corporation was experiencing financial
difficulties, and sought to auction off some of its equipment. The IRS
served the notice prior to the auction, but after a contract to auction
the property had been made between the corporation and an auction house.
Id.
at 395. The court held that the property of the corporation, in this
case the right to the proceeds of the auction, was not fixed and
determinable on the date of the levy.
Id.
at 397. It noted that the actual property to be sold had not been
finally set as of the date of the levy. nor had a buyer come forward to
purchase that property. Thus, the auction house "had an obligation
to attempt to sell some as yet undetermined amount of property for an as
yet undetermined price to as yet undetermined buyers."
Id.
The court reasoned, however, that "[a]n actual sale of property
would establish both the price of that property and the duty of the
buyer to pay the price, even if the date of payment were deferred."
Id.
at 398.
The court in Tull
noted that the situation in Hemmen was quite different. In Hemmen,
"the performance of the taxpayer had been completed and the amount
he was owed for that performance had been determined, subject to a
possible later defeasance in whole or part if funds were not
available." Tull [95-2 USTC ¶50,602], 69 F.3d at 398. The
situation in the instant case and in Hemmen are quite different
from that in Tull. Here, as of the date of the levy, the sale was
complete, and thus the underlying performance required of Artrip was
complete. The amount of the commission due was firmly established,
having been set by previous court order. The possibility of "later
defeasance," as in Hemmen, has an impact on the fixed and
determinable nature of the commission due Artrip.
3 This common
sense reading of 26 C.F.R. 301.6331-1(a)(1) is consistent with that
found in cases interpreting other parts of the Treasury regulations
governing the Service's levy power. In In re Quakertown Shopping
Center, Inc. [66-2 USTC ¶9655], 366 F.2d 95 (3rd Cir.1966), the
court, interpreting section 301.6331-1(a)(3), held valid and enforceable
a levy served on a receiver in bankruptcy against any property or rights
to property due a creditor of the estate. The levy sought to secure
assessed tax liabilities of the creditor. As of the date of the levy,
however, the creditor had only filed a claim against the bankruptcy
estate, but the bankruptcy court had not yet allowed the claim. The
court reasoned that the levy in this instance operated like an
involuntary assignment of the creditor's claim against the estate to the
United States
.
Id.
at 98. Because the creditor was free to make a voluntary assignment of
his claim without the permission of the bankruptcy court, the court
found that it was similarly free to transfer its claim in this instance,
albeit involuntarily. Thus, the receiver did have in his possession
property of the taxpayer, namely the claim against the estate, and the
levy validly functioned to transfer that property to the
United States
.
Id.
4 We agree
with the district court that the bankruptcy court case of In re
Ceafco [77-2 USTC ¶9760], 28 700, 1977 WL 1273 (S.D.Ala.Dist.Tax
Sept. 21, 1977), was wrongly decided. Ceafco involved facts
almost identical to Hemmen, in that the IRS served a levy upon
the trustee in bankruptcy seeking property of a taxpayer whose claims
for administrative expenses had been allowed. The bankruptcy court judge
reasoned that only the bankruptcy court had the authority to determine
how the assets of the bankruptcy estate were to be distributed, and
because that determination had not yet been made, the trustee held no
right to property belonging to the taxpayer, and therefore the levy was
premature. The Ceafco court overlooked the fact that an IRS levy
does not determine that the government's claim is superior to that of
other claimants. National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 721, 728, 105 S.Ct. at 2924-25, 2928. Thus, the levy does not
interfere with a bankruptcy court's determination of how the assets of
the estate are to be distributed.
[98-1 USTC ¶50,369] American Trust,
Plaintiff v. American Community Mutual Insurance Company, Defendant
American Community Mutual Insurance Company, Plaintiff v. United States
of America, Internal Revenue Service, Defendant-Appellee. Edgar F.
Bradley II, Defendant-Appellant, Richard A. Davidson, Defendant
(CA-6),
U.S. Court of Appeals, 6th Circuit, 97-3385, 4/27/98, 142 F3d 920,
Affirming a District Court decision, 97-2
USTC ¶50,759
[Code
Secs. 6321 , 6332 and 6334 ]
Lien for taxes: Attachment: Interpleader action: Property subject to
lien: Administrative levies: Exemption from levy: Judicial proceedings:
Statutory authority: Collection process.--A tax lien that the
government sought to enforce against an insurance agent's commissions in
an interpleader action attached to all of his property, including
amounts that would have been exempt from the IRS's administrative levy
that preceded the interpleader action. Rather than complying with the
levy, the insurance company with which the agent was affiliated and the
trust to which he assigned his commissions filed suit to determine
ownership of the commissions. Thus, the lien arose from judicial, rather
than administrative, proceedings. Accordingly, its scope was determined
by Code
Sec. 6321 , and the exemptions from administrative levy were
inapplicable.
Richard John
Donovan, Richard J. Donovan & Assocs.,
Worthington
,
Ohio
, for defendant-appellant. Pamela C. Berry, William S. Estabrook,
Department of Justice,
Washington
,
D.C.
20530
, for defendant-appellee.
Before:
KENNEDY and SILER, Circuit Judges; COHN, District Judge. *
OPINION
KENNEDY,
Circuit Judge:
Defendant
Edgar F. Bradley, II, appeals the District Court's order granting
summary judgment in favor of the
United States
in these consolidated breach of contract and interpleader actions. In
its complaint in the interpleader action, the
United States
sought enforcement of tax liens against insurance sales commissions
attributable to defendant. The District Court held that the Government
had valid tax liens under 26 U.S.C. §6321 and that these liens gave the
United States
the first priority claim to the commissions. On appeal, defendant
contends he is entitled to the exemptions allowed taxpayers during
administrative levy proceedings under 26 U.S.C. §6331. For the
following reasons, we affirm the District Court.
I.
Facts
The facts
underlying this case are undisputed. Between 1988 and 1992 Bradley, an
agent authorized to sell insurance policies for American Community
Mutual Insurance Company (hereinafter, "American Community"),
entered into agreements with three other American Community insurance
agents. Under these agreements, the three other agents assigned to
Bradley their rights to the commissions that resulted from their sales
of American Community policies. On December 4, 1992, Bradley assigned
the rights to all of the commissions, including his own, to a trust
identified as "American AMB 06044 Irrevocable Trust" (the
"Trust"). From this date, American Community paid all monthly
commissions directly to the Trust. 1
On August 9,
1993, the Internal Revenue Service ("IRS") issued assessments
against Bradley for deficiencies in income tax for his 1987, 1988, and
1989 taxable years. In October of 1993, the IRS, claiming a lien for tax
deficiencies, penalties, and statutory additions totaling $85,617.55,
issued a Notice of Levy to American Community. Through this notice, the
IRS asked American Community to pay over to the IRS all property or
rights to property belonging to Bradley. American Community responded by
stating that it had no funds in its possession payable to Bradley, and
that all commissions had been assigned to the Trust. In April of 1994,
the IRS issued a second Notice of Levy to American Community, claiming a
lien for taxes and statutory additions owed by Bradley in the amount of
$90,406.74. American Community continued to pay Bradley's commissions,
as well as the commissions assigned to him by the other agents, to the
Trust, until June of 1994, when the IRS issued a Final Demand to
American Community for payment of all "property, rights to
property, money, credits, and bank deposits . . . to the credit of,
belonging to, or owned by [Bradley]" and in American Community's
possession or owed to Bradley as of the first Notice of Levy.
The final
payment to the Trust represented commissions earned through March 31,
1994. Upon receiving this Final Demand, American Community withheld
payment of additional commissions to the Trust. The insurance agents and
representatives of the Trust told American Community that the liens
asserted by the IRS were invalid. Rather than comply with the Final
Demand to pay the commissions to the IRS, American Community withheld
the commissions from both claimants, and eventually deposited them,
along with interest earned thereon, in the registry of the Clerk of the
Court of Common Pleas in
Hamilton County
,
Ohio
.
This case
embodies two separate actions that were filed in the Court of Common
Pleas in
Hamilton County
,
Ohio
. First, the Trust brought a breach of contract claim against American
Community, asserting that American Community had a contractual
obligation to pay the commissions to the Trust. Second, American
Community filed an action in interpleader to determine ownership of
accumulated commissions. The defendants named in the second action
included the Trust, the IRS, Bradley, and the other agents. The Court of
Common Pleas consolidated the cases, and the
United States
removed the consolidated case to the United States District Court for
the Southern District of Ohio. The funds in question were transferred to
the registry of the Clerk of the District Court.
In the
District Court, American Community moved for summary judgment on the
breach of contract claim, and the
United States
moved for summary judgment in the interpleader action, asserting that,
by virtue of its tax lien, the
United States
had a superior claim to the funds in dispute. On March 11, 1997, the
District Court granted summary judgment in favor of American Community
on the contract claim and the
United States
on the interpleader action.
II.
Discussion
We review de
novo the District Court's grant of summary judgment in favor of the
Government. E.g., Roush v. Weastec, Inc., 96 F.3d 840, 843 (6th
Cir. 1996). The facts underlying this case are undisputed and Bradley's
appeal raises a single question of law: whether an exemption from levy
that is listed in Internal Revenue Code ("I.R.C.") §6334, 26
U.S.C. §6334, applies when the IRS seeks enforcement of a tax lien in
an interpleader action.
To answer this
question we look to the relationship of several sections of the Internal
Revenue Code. Section 6321 of the I.R.C. provides that the amount of
unpaid taxes, interest, and penalties that any person neglects or
refuses to pay "shall be a lien in favor of the
United States
upon all property and rights to property, whether real or personal,
belonging to such person." 26 U.S.C. §6321. The Supreme Court has
stated that "[t]he statutory language all property and rights to
property, appearing in §6321. . . is broad and reveals on its face that
Congress meant to reach every interest in property that a taxpayer might
have." United States v. National Bank of Commerce [85-2 USTC
¶9482], 472 U.S. 713, 719-20 (1985). This tax lien arises at the time
the unpaid taxes are assessed and persists until the liability for the
amount assessed is satisfied. 26 U.S.C. §6322.
The Government
has several separate procedures through which it can recover the tax
deficiency. As the Supreme Court explained in United States v.
Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 682 (1983), the Government
is authorized under 26 U.S.C. §7403 to file a lien-foreclosure suit in
a district court of the
United States
to enforce the tax lien. In other cases, the Government may decide
simply to sue for the amount of unpaid taxes, "and, on getting a
judgment, exercise the usual rights of a judgment creditor." 461
U.S.
at 682 (citing 26 U.S.C. §§6502(a), 7401, 7402(a)). Section 6331 of
the I.R.C., 26 U.S.C. §6331, provides an additional, administrative
avenue for recovery:
If
any person liable to pay any tax neglects or refuses to pay same within
10 days after notice and demand, it shall be lawful for the Secretary to
collect such tax (and such further sum as shall be sufficient to cover
the expenses of the levy) by levy upon all property and rights to
property (except such property as is exempt under section 6334)
belonging to such person or on which there is a lien provided in this
chapter for the payment of such tax.
26
U.S.C. §6331(a). As the Court explained, "[t]he common purpose of
this formidable arsenal of collection tools is to ensure the prompt and
certain enforcement of the tax laws in a system relying primarily on
self-reporting." 461
U.S.
at 683.
The
"[a]dministrative levy, unlike an ordinary lawsuit, and unlike the
procedure described in §7403, does not require any judicial
intervention, and it is up to the taxpayer, if he so chooses, to go to
court if he claims that the assessed amount was not legally owing."
Rodgers [83-1 USTC ¶9374], 461
U.S.
at 682-83. Third parties who may have been aggrieved by an
administrative levy against a recalcitrant taxpayer also must wait until
a post-seizure proceeding to assert their rights to disputed property. See
National Bank of Commerce [85-2 USTC ¶9482], 472
U.S.
at 731. "In contrast to the lien-foreclosure suit, the levy does
not determine whether the Government's rights to the seized property are
superior to those of other claimants; it, however, does protect the
government against diversion or loss while such claims are being
resolved."
Id.
at 721. In sum, §6331 provides the Government with a mechanism to
secure expeditiously property that might satisfy tax deficiencies and
postpones the resolution of property rights until after the seizure. See
id.
Although the
Code authorizes the IRS to execute an administrative levy without prior
judicial approval, it also provides some protection to the taxpayer.
Internal Revenue Code §6334, 26 U.S.C. §6334, exempts specific types
of property from attachment by levy. Most relevant to the instant case,
§6334(a)(9) provides that the following income is exempt from levy:
Any
amount payable to or received by an individual as wages or salary for
personal services, or as income derived from other sources, during any
period, to the extent that the total of such amounts payable to or
received by him during such period does not exceed the amount determined
under subsection (d).
This
exemption prevents the IRS from seizing all of a taxpayer's paycheck
through a purely administrative proceeding, and allows the taxpayer to
retain from his wages or salary an amount that is determined in relation
to the sum of the standard personal income tax deduction and the
taxpayer's aggregate number of personal income tax exemptions. See
26 U.S.C. §6334(d).
In the instant
case, the IRS first selected the administrative levy from its arsenal of
collection tools and demanded that American Community pay over any of
Bradley's property or rights to property that it had in its possession.
Instead of complying, American Community filed an interpleader action to
resolve the competing claims to the withheld commissions. After removing
the interpleader to the District Court, the Government successfully
filed a claim for enforcement of its tax lien against the accumulated
commissions. Bradley now contends that the judgment in favor of the
United States
should have been reduced by the amount of money that, pursuant to §6334(a)(9),
he would have been entitled to claim as exempt from the original levy.
In response, the
United States
argues that the judicial enforcement of a lien is independent of and
distinct from an administrative levy, and that a valid tax lien may
attach property that is exempted from levy.
We have yet to
decide whether the Government may enforce a tax lien created by 26
U.S.C. §6321 against property that §6334 would exempt from levy. 2 The
United States
Courts of Appeals that have considered the relationship between
administrative levies and tax liens have recognized that a tax lien
under §6321 can attach to property that would be exempt from a §6331
administrative levy. In United States v. Barbier [90-1 USTC ¶50,107],
896 F.2d 377 (9th Cir. 1990), the Ninth Circuit considered an appeal
from a bankruptcy proceeding in which debtor-taxpayers argued that §6334
prohibited the attachment of a federal tax lien on property that was
exempt from an administrative levy. The court rejected the taxpayers'
argument, holding that "for the purposes of the Barbiers' Chapter
13 plan, the IRS's claim against the Barbiers for their income tax
deficiencies, including interest and penalties, may be secured by a lien
on property exempt under section 6334(a)." [90-1 USTC ¶50,107],
896 F.2d at 378. It reasoned that restricting the scope of a tax lien's
reach would be inconsistent with both Supreme Court precedent and the
statutory purpose of promoting tax collection.
Id.
at 378-79 (citing National Bank of Commerce [85-2 USTC ¶9482],
472
U.S.
at 720-21). It also reasoned that "[t]he IRS's levying power is
limited because a levy is an immediate seizure not requiring judicial
intervention."
Id.
at 379. The court, however, confined its opinion to the determination of
the scope of a tax lien in a bankruptcy proceeding, stating in a
footnote that they "need not consider here whether exempt assets
are subject to judicial foreclosure and express no view on that
question."
Id.
at 380 n.3.
The Seventh
Circuit has also considered, in a case arising out of bankruptcy,
whether a tax lien can reach property exempt from levy. See In re
Voelker [95-1 USTC ¶50,028], 42 F.3d 1050 (7th Cir. 1994). Relying
heavily on the Ninth Circuit's analysis in Barbier, the Seventh
Circuit held that "[t]he language of the statute unambiguously
shows that the federal tax lien attaches to all of a debtor's property,
without exception. Thus, we agree with the district court, and the
majority of the other courts addressing the issue, that the lien
attached to Voelker's [exempt personal property]." [95-1 USTC ¶50,028],
42 F.3d at 1051.
Finally, the
Fifth Circuit has considered this issue, again in the context of a
bankruptcy proceedings, in Sills v.
United States
(In re Sills) [96-1 USTC ¶50,282], 82 F.3d 111 (5th Cir. 1996). In Sills,
the taxpayers purchased a house with workers' compensation proceeds. In
the bankruptcy proceeding, they sought to insulate that house from a tax
lien, arguing that property purchased with workers' compensation
benefits is exempt from levy under 26 U.S.C. §6334(a)(7). The Fifth
Circuit rejected their arguments and held that tax liens may reach
property exempt from levy. Although the court did not decide if the
taxpayers' house actually qualified under §6334(a)(7), it reasoned as
follows:
Even
if the Sills' house were exempt from levy, the tax lien still may be
valid and enforceable. For example, the IRS may enforce the lien by
foreclosure action under I.R.C. §7403; it may seek to have its lien
satisfied in proceeding brought by third parties, in which the IRS is
brought pursuant to 28 U.S.C. §2410; or it may exercise redemption
rights provided by I.R.C. §7425(d) if another party forecloses on the
property.
[96-1
USTC ¶50,282], 82 F.3d at 114. This reasoning emphasizes the myriad of
mechanisms that the IRS can employ to collect taxes through the
enforcement of tax liens that reach property that would be exempt from
attachment by levy.
Bradley relies
heavily on Don King Productions, Inc. v. Thomas [90-2 USTC ¶50,524],
749 F. Supp. 79 (S.D.N.Y. 1990), rev'd in part [91-2 USTC ¶50,474],
945 F.2d 529 (2d Cir. 1991), a case in which the court reached the
opposite conclusion. There, the District Court held, in an interpleader
action, that "a lien cannot attach to child support monies that are
exempt from levy." [90-2 USTC ¶50,524], 749 F. Supp. at 84. The
court based its decision purely on policy grounds, reasoning that
"exemption allows the delinquent taxpayer to fulfil his court
ordered obligation to support his children."
Id.
Although
Bradley acknowledges that exemptions under §6334 would not apply if the
United States
had sought enforcement of its tax lien by instituting judicial
proceedings under §7403, he argues that this case is different because
the
United States
was responding to an interpleader action that resulted from its levies.
He asserts that it is unfair to allow third parties to negate taxpayers'
claims to exemptions from levy under §6334 whenever third parties
refuse to surrender property that is the object of an IRS levy and then
bring an interpleader action to determine the priority of rights to that
property. Appellant's argument can be distilled to the claim that once
the IRS files a levy, the taxpayer is entitled to claim exemptions under
§6334, unless it is the IRS that initiates the action for judgment on
its lien under §7304.
Bradley's
argument conflicts with the statutory scheme of the Internal Revenue
Code, which has created a "number of distinct enforcement tools
available to the
United States
for the collection of delinquent taxes." Rodgers [83-1 USTC
¶9374], 461
U.S.
at 682. An administrative levy, one such tool, is a "provisional
remedy," without judicial intervention, in which the Government
seeks to secure quickly and inexpensively property to satisfy a tax
deficiency. See National Bank of Commerce [85-2 USTC ¶9482], 472
U.S.
at 720-21. Although administrative recovery may be relatively quick and
inexpensive, the IRS's powers to levy are limited by the exceptions in
26 U.S.C. §6334. These exemptions make sense in an administrative
proceeding, where no court has found that taxes are even due.
Enforcement of a tax lien is another distinct mechanism for tax
collection. Such a proceeding has different characteristics: it requires
judicial intervention, but the lien created by 26 U.S.C. §6321 "is
broad and reveals on its face that Congress meant to reach every
interest in property that a taxpayer might have." National Bank
of Commerce [85-2 USTC ¶9482], 472
U.S.
at 719-20. The statute exempts certain property from a levy but not from
a lien, and we decline to alter this allocation.
Bradley's
argument also relies heavily on the order in which the Government uses
its distinct enforcement tools. In this case, although the Government
first sought to recover tax deficiencies by administrative levy, the
interpleader action changed the nature of the proceedings. The parties
were then in court, and the remedy the
United States
sought was no longer "provisional" in nature. Bradley fails to
explain why it should make a difference whether the
United States
seeks to enforce a tax lien in a proceeding that it initiated or whether
it seeks enforcement of the lien in an action that was initiated by
another party. The scope of the lien remains the same in either
instance. If we were to adopt Bradley's arguments, we would create the
odd situation where a tax lien created under §6321 would reach all of
Bradley's commissions if the Government had immediately sought
enforcement by filing suit under §7403, but the same lien would be
subject to certain exemptions if the Government sought judicial
enforcement of the lien after the quicker and less expensive levy
procedure had failed and led to an interpleader. To do so would not only
re-write the broad language of §6321, it would also lessen the
incentive of taxpayers to comply with an administrative levy. This would
conflict with "the policy inherent in the tax statutes in favor of
the prompt and certain collection of delinquent taxes."
Id.
at 694.
III.
Conclusion
For the
foregoing reasons we affirm the District Court's order granting summary
judgment in favor of the United States.
* The
Honorable
Avern Cohn
,
United States
District Judge for the Eastern District of Michigan, sitting by
designation.
1 The District
Court found that the Trust, which named the four agents as its
beneficiaries, was created to evade income taxation.
2 In Woods
v. Simpson [95-1 USTC ¶50,079], 46 F.3d 21 (6th Cir. 1995), we
considered a case with the same procedural history as the instant case:
the IRS sought to enforce a tax lien against interpleaded funds that the
taxpayer inherited, and the taxpayer's former wife argued that her child
support claims were exempted under §6334(a)(8) from the federal tax
lien. In considering their claims, we explicitly declined to reach the
question before us today: "Given our conclusion that 26 U.S.C. §6334(a)(8)
does not exempt an inheritance from levy, we need not decide whether 26
U.S.C. §6334 also operates to exempt certain property from a 26 U.S.C.
§6321 federal lien for taxes." [95-1 USTC ¶50,079], 46 F.3d at
24. Thus, despite his assertions to the contrary, Woods does not
provide any support for Bradley's argument that exemptions under §6334
should provide him some protection from federal tax liens.
[97-2 USTC ¶50,759] American Trust,
Plaintiff v. American Community Mutual Insurance Company, Inc.,
Defendant American Community Mutual Insurance Company, Inc., Plaintiff
v. United States of America, et al., Defendants
U.S.
District Court, So. Dist.
Ohio
, West. Div., Civ. C-1-95-691, 3/12/97
[Code
Sec. 6321 ]
Tax liens: Property subject to lien: Commissions: Property
transferred to third parties: Priority of tax lien.--The IRS was
entitled to obtain funds assigned to a trust that was created by an
insurance agent to hold both his commissions and other agents'
commissions that were assigned to him. The tax lien against the taxpayer
and one of the other agents extended to the commissions paid on their
behalf and those commissions assigned to the taxpayer by the remaining
agents. Further, since the commissions were earned and paid after the
tax lien became effective and since the trust's interest in the
commissions did not become choate until they were paid, the tax lien had
priority over the trust's interest.
[Code
Sec. 6332 ]
Levies: Surrender of property: Liability of payor: Third parties:
Commissions.--Code
Sec. 6332(e) barred a breach of contract action by insurance
agents and a trust, which was created by one of the agents to hold both
his commissions and other agents' commissions that were assigned to him,
against the insurance company, which stopped paying the commissions into
the trust upon receiving IRS notices of levy regarding the commissions.
In light of those notices, the insurance company had no obligation to
continue paying out the commissions. Since the other agents' commissions
were first assigned to the taxpayer and then to the trust, those
commissions became the taxpayer's property or right to property.
MEMORANDUM AND ORDER
BECKWITH,
District Judge:
This matter
comes before the Court to consider the motions for summary judgment
filed by the
United States
and American Community Mutual Insurance Company ("ACMIC"),
pursuant to Rule 56 of the Federal Rules of Civil Procedure. While other
dispositive motions have also been filed in this case, the Court finds
the
United States
' and ACMIC's motions for summary judgment to be dispositive.
Background
This case
consists of two separate actions that were filed in the Hamilton County
Court of Common Pleas. The cases were consolidated by the Court of
Common Pleas, and the
United States
removed the cases to this Federal Court. In order to establish the
context within which the cases arose, the Court will first identify the
parties and transactions which form the basis of the dispute.
Edgar Bradley
("Bradley"), Richard Davidson ("Davidson"), Brian
Hollon and Jennifer Duytschaever (referred to collectively as "the
Agents") were insurance agents who were authorized to sell
insurance policies for ACMIC. Until their agency agreements with ACMIC
were terminated on June 2, 1995, the Agents received commissions on
premium payments which resulted from the Agents' sale of ACMIC's
insurance policies. Between 1988 and early 1992, Richard Davidson, Brian
Hollon and Jennifer Duytschaever each assigned their insurance sales
commissions to Agent Bradley. On December 4, 1992, Bradley assigned the
Agents' commissions, including his own, to a trust entitled
"American AMB 06044 Irrevocable Trust" ("American
Trust" or "the Trust"). 1 Thereafter,
ACMIC paid the Agents' commissions directly into the Trust, pursuant to
the aforementioned assignments.
However, ACMIC
received a number of Notices of Levy from the Internal Revenue Service
(IRS) between October, 1993, and June 30, 1994, effective against Agents
Bradley and Davidson. 2 The Notices
of Levy ordered ACMIC to pay over all property or rights to property
belonging to Agents Bradley and Davidson. Upon receiving Final Demands
regarding the levies, ACMIC stopped paying commissions into the Trust.
ACMIC made its final payment into the Trust in May, 1994. Thereafter,
ACMIC initially allowed the Agents' commissions to accumulate. Later, it
deposited the accumulated commissions into the registry of the Hamilton
County Clerk of the Court of Common Pleas.
The first suit
in this case was filed by American Trust against ACMIC. The Trust
alleged that ACMIC had a contractual obligation to pay the Agents'
commissions into the Trust, and that it breached its contractual duty by
failing to continue making payments. ACMIC filed the second action, in
interpleader, to determine the true owner of the accumulated
commissions. The parties to the second action include the Agents, the
Trust, and the IRS. 3 The cases
were consolidated in the
Common Pleas Court
, and
United States
removed the case to this Court. The sums that ACMIC deposited in the
registry of the Court of Common Pleas have been transferred to the
registry of this Court.
ACMIC has
moved for summary judgment on the Trust's breach of contract claim, as
well as the Agents' counterclaim in the interpleader action. In
addition, the
United States
has moved for summary judgment in the interpleader action, asserting
that the government has a right to the commissions which have been (and
continue to be) deposited into the registry of this Court. As will be
discussed below, these motions for summary judgment dispose of this case
in its entirety.
Standard
of Review
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 judgment as a matter of law."
Fed. R. Civ. P. 56(c). The evidence presented on a motion for summary
judgment is construed in the light most favorable to the non-moving
party.
United States
v. Diebold, Inc., 369
U.S.
654 (1962). "The mere existence of some alleged factual
dispute between the parties will not defeat an otherwise properly
supported motion for summary judgment; the requirement is that there be
no genuine issue of material fact." Anderson v.
Liberty Lobby, Inc., 477
U.S.
242, 248 (1986) (emphasis in original).
Summary
judgment is clearly proper "against a party who fails to make a
showing sufficient to establish the existence of an element essential to
the 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). Significantly, the Supreme Court also instructs that
the "the plain language of Rule 56(c) mandates the entry of summary
judgment, after adequate time for discovery and upon motion"
against a party who fails to make that showing with significantly
probative evidence.
Id.
; Anderson, 477
U.S.
at 250. Rule 56(e) requires the non-moving party to go beyond the
pleadings and designate "specific facts showing that there is a
genuine issue for trial."
Id.
Analysis
The Court will
first address ACMIC's motion for summary judgment regarding the Trust's
and the Agents' breach of contract claims. The Trust and the Agents
allege that ACMIC breached a contractual duty by refusing to continue
making commission payments into the Trust. However, ACMIC properly
asserts that, upon receiving Notices of Levy, it had no obligation to
pay the commissions to the Trust.
The statute
which governs parties' rights with respect to a tax levy can be found at
26 U.S.C. §6332(e). Section 6332(e) provides:
Any person in
possession of . . . property or rights to property subject to
levy upon which a levy has been made who, upon demand by the Secretary,
surrenders such property or rights to property . . . to the Secretary .
. . shall be discharged from any obligation or liability to the
delinquent taxpayer and any other person with respect to such
property or rights to property arising from such surrender or payment.
Id.
(emphasis added). ACMIC contends that this
statute prevents the Trust and Agents from asserting a breach of
contract claim, as ACMIC withheld the commissions payments pursuant to
the IRS' Notices of Levy.
The Court
agrees with ACMIC's conclusion that Section 6332(e) bars the Trust and
the Agents from bringing a breach of contract claim. The Agents'
commissions were first assigned to Agent Bradley, and then to the Trust.
Upon being assigned to Bradley, the commissions became his
"property or right [] to property," as governed by Section
6332(e). See generally State Bank of Frasier v. United States
[88-2 USTC ¶9592], 861 F.2d 954, 967 (6th Cir. 1988) (where the court
recognized that commissions could be "property or rights to
property subject to levy," pursuant to 26 C.F.R. S
301.6331-1(a)(1)). Further, Section 6332(a) imposed a statutory
obligation upon ACMIC to cease its payment of commissions into the
Trust. See 26 U.S.C. 6332(a) ("[A]ny person in possession of
. . . property or rights to property subject to levy . . . shall . . .
surrender such property or rights . . . to the Secretary."). 4 In acting
pursuant to the Notices of Levy, ACMIC was "discharged from any
obligation or liability to the delinquent taxpayer and any other
person." Id.; see, e.g., Thomsen v. Chevron Research Co.,
1987 LEXIS 14909 (N.D. Cal. 1987) (where the court dismissed an action
brought by an employee against an employer who complied with federal tax
levies and withheld payment from the employee); cf. Bright v. Bechtel
Petroleum, Inc., 780 F.2d 766, 770 (9th Cir. 1986) ("[A]n
employer is not liable to an employee for complying with its legal duty
to withhold tax."). Therefore, ACMIC is entitled to summary
judgment with respect to the Agents' and the Trust's breach of contract
claims.
Second, the
United States
moves for summary judgment in the interpleader action, alleging that the
government is entitled to all of the commissions held by the Court. The
United States
argues that its tax liens are superior to any claims that the Trust or
the Agents have regarding the commissions. For the reasons set forth
below, the Court agrees that the
United States
is entitled to the funds.
The IRS relies
upon its tax lien power in asserting first priority to the commissions. See
the
United States
' memorandum in support of its motion for summary judgment, at 4-5. The
IRS's lien power is established in 26 U.S.C. §6321. That section
provides that, "[i]f any person liable to pay any tax neglects or
refuses to pay the same after demand, the amount . . . shall be a lien
in favor of the United States upon all property and rights to property,
whether real or personal, belonging to such person." The Secretary
of the Treasury made an assessment against Agent Bradley in the amount
of $90,406.76, and made assessments against Agent Davidson in the amount
of $28,534.05. Agents Bradley and Davidson are liable to the
United States
in these amounts, and Section 6321 provides that the government has a
lien against all property and rights to property against them. See
id. This lien extends to the commissions held in the registry of
this Court that were paid on behalf of Agents Bradley and Davidson. See,
e.g., Dever v. United States [81-1 USTC ¶9163], 1980 WL 1729, *5
(S.D. Oh. 1980) (unpublished opinion) (where the Court recognized that
"property or rights to property" exist in sales commissions,
and that the commissions can therefore be subject to federal tax liens).
In addition, Agents Hollon and Duytschaever assigned their commissions
to Agent Bradley. See discussion supra, at 2. Thus, the
portions of the commissions held in the registry earned by them are also
subject to Bradley's tax lien.
Counsel for
American Trust argues that the Trust's claim to the commissions is
superior to that of the government's liens. In cases involving federal
tax liens, the issue of priority is governed by federal law. Aquilino
v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513-14 (1960).
Federal tax liens arise on the date of the assessment and generally
remain in force until the assessments are fully satisfied. See United
States v. Big Value Supermarkets, Inc. [90-1 USTC ¶50,160], 898
F.2d 493, 496 (6th Cir. 1990). In order for a state law claim to defeat
a later-arising federal tax lien, the state interest must become
"choate" prior to the effectiveness of the federal lien.
United States
v. Pioneer American Insur.
Co.
[63-2 USTC ¶9532], 374 U.S. 84, 88 (1962). A state interest
becomes choate "when the identity of the lienor, the property
subject to the lien, and the amount of the lien are established." United
States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 84
(1954); accord 26 C.F.R. §301.6323(h)-1(g) ("A judgment
lien is not perfected until the identity of the lienor, the property
subject to the lien, and the amount of the lien are established.").
American Trust asserts that the Trust instrument created a choate
interest, which is superior to the federal tax lien. However, the Court
concludes that the Trust's interest in the commissions did not become
choate until said commissions were paid. The commissions were earned and
paid after the federal tax liens became effective, and therefore
the tax lien has priority over the Trust's interest in the commissions.
The
assessments against Agent Davidson became effective in 1988, 1989 and
1990. The assessment against Agent Bradley became effective on August 9,
1993. The federal tax liens against Bradley and Davidson arose on the
date of the assessments. Aquilino [90-1 USTC ¶50,160], 898 F.2d
at 496. Meanwhile, the assignment of the Agents' commissions to the
Trust became effective on December 4, 1992. The Trust asserts that the
assignment became effective prior to Bradley's federal tax lien, and
that, therefore, the Trust's interest in the commissions is superior to
that of the tax lien. However, the commissions held in this Court's
registry reflect commissions earned by the Agents from March 31, 1994,
until the present time. The Trust's interest in these commissions only
became choate when "the property subject to the [interest] . . .
and the amount of the [interest we]re established."
New Britain
[54-1 USTC ¶9191], 347
U.S.
at 84. The Trust's interest in commissions did not become choate until
they were paid; 5 until that
time, the commissions did not exist and the amounts of the commissions
could not be determined. See id.; accord Don King Productions,
Inc. v. Thomas [91-2 USTC ¶50,474], 945 F.2d 529, 534-35 (2d Cir.,
1991) (where the court found the state interest to be inchoate, and
therefore subordinate to the federal tax lien, because the property
subject to the lien did not come into existence until after the
government's lien); Denver [81-1 USTC ¶9163], 1980 WL 1729, at
*5 ("the United States' federal tax lien attached to . . .
commissions when they came into existence. . . ."). Therefore, the
Trust's interest in the commissions only became choate after the
government liens had attached, and the
United States
is entitled to all funds held in the registry of this Court.
The Court
notes that the Trust and the Agents have made a number of frivolous
arguments based on the alleged unconstitutionality of the Federal Tax
Code, as well as the government's alleged failure to comply with
statutory and regulatory provisions set forth in the Code and
Regulations. However, the Agents and counsel for the Trust fail to cite
legal or factual support for their arguments. The Court finds these
arguments, as well as the numerous dispositive motions filed on behalf
of the Trust and the Agents, to be wholly lacking in merit. This Court
can only conclude that the Trust and the Agents have abused the judicial
process in litigating this lawsuit, and have caused two years of
needless legal wrangling. The Court calls the parties' attention to the
Sixth Circuit Court of Appeals' precedent which allows the imposition of
attorneys' fees and other sanctions in suits which are frivolous or
brought in bad faith. See e.g., Val-Land Farms, Inc. v. Third Nat'l
Bank in Knoxville, 937 F.2d 1110, 1117 (6th Cir. 1991); Abrahamsen
v. Trans-State Express, Inc., 92 F.3d 425, 430 (6th Cir. 1996). For
the foregoing reasons, the
United States
' motion for summary judgment in the interpleader action shall be
granted.
Conclusion
For the
foregoing reasons, ACMIC's motion for summary judgment (Doc. 59) is
hereby GRANTED; the Trust's claim for breach of contract, as well
as the Agents' counter-claim in the interpleader suit, are DISMISSED
WITH PREJUDICE. In addition, the
United States
' motion for summary judgment (Doc. 64) is GRANTED, and the Court
orders the Clerk of Courts to pay all monies deposited in this case to
the
United States
, pursuant to the government's liens against Agents Bradley and
Davidson. Finally, the Court hereby orders ACMIC to pay all future
commissions earned on behalf of Agents Bradley and Davidson to the
Secretary of the Treasury, until the tax liens against them are
satisfied in full. 6. All other
motions pending before this Court are hereby deemed MOOT, and
this case is DISMISSED WITH PREJUDICE.
IT IS SO
ORDERED.
1 The IRS
asserts that Bradley created the Trust in an attempt to unlawfully evade
federal income taxation. This assertion is supported by the record.
Specifically, the instrument purports to be an irrevocable inter-vivos
trust; yet, Mr. Bradley's assignment of commissions to the Trust can be
revoked at will.
The parties
stipulate that the Agents purport to be named beneficiaries of the
Trust.
2 Edgar
Bradley and Richard Davidson are noted tax protestors. The Notices of
Levy were issued against them pursuant to assessments made by the
Secretary of the Treasury for unpaid federal income taxes; Bradley and
Davidson have neglected, failed or refused to pay the assessed
liabilities. Notices of Federal Tax Liens have been filed in the
Hamilton County Recorder's Office with respect to Bradley and Davidson.
3 The Agents
filed a counterclaim against ACMIC in the interpleader action, alleging
breach of contract.
4 Indeed,
ACMIC had not only a duty to cease making commission payments to the
Trust, but also an obligation to make the payments to the Secretary. See
26 U.S.C. 6332(a). However, the Agents persuaded ACMIC not to pay the
Secretary, claiming that the underlying tax liens were invalid. ACMIC
gave the Agents the benefit of the doubt, and accumulated the
commissions rather than turning them over to the Secretary; it later
deposited the commissions with the registry of the Court.
In any event,
the Trust and the Agents cannot now argue that the exculpatory provision
in 26 U.S.C. 6332(e) does not apply to ACMIC because it failed to
transfer the commissions to the Secretary. The Agents and the Trust
cannot enjoy the benefits of ACMIC's circumspection, and later use it as
a sword to establish liability.
5 Indeed,
Ohio
law also dictates that, when money is assigned pursuant to an existing
contract, the assignment of the future payments becomes effective only
when the money "becomes due and payable to the assignor." See
General Excavator Co. v. Judkins, 190 N.E. 389, 391 (Oh. 1934).
6 Under their
contracts with ACMIC, the Agents were entitled to commissions on
insurance premiums paid within the first year of the sale of ACMIC
policies, provided that the agency agreements remained in effect. As
stated above, the Agents' contracts with ACMIC were terminated as of
June 2, 1995. Therefore, the Agents' "first year" commissions
related to sales of ACMIC policies are no longer accruing. However, the
agency agreements also entitle the agents to "renewal
commissions" on insurance premiums paid by policyholders, even
after the agency agreements are terminated. Indeed, these renewal
commissions account for a small portion of the money which has
accumulated in the registry of this Court.
Agents Hollon
and Duytschaevers' assignment of commissions to Agent Bradley were
revocable upon their giving 30 days notice of revocation to ACMIC.
Agents Hollon and Duytschaever gave notice to ACMIC on February 18,
1997. Therefore, any commissions which accrues on their behalf after
March 20, 1997 (i.e., 30 days after their giving notice), shall
be paid directly to them. However, Agents Davidson and Bradleys' future
commissions shall continue to be paid to the Secretary of the Treasury,
as they are directly liable to the
United States
pursuant to the tax liens against them.
The Court
further orders the IRS to subtract commissions earned by Mr. Davidson
(to date, and in the future) from those of the other Agents', and use
Mr. Davidson's commissions to first satisfy the liens against him. Mr.
Davidson's federal tax liens attached to his commissions prior to his
assignment of the commissions to Mr. Bradley; in other words, Agent
Bradley's interest in Davidson's commissions (pursuant to the assignment
between Davidson and Bradley) in inferior to the federal tax liens
against Davidson. See Discussion supra, at 8-9. Therefore,
Mr. Davidson's commissions should first be used to satisfy his federal
tax liens. In the event that Mr. Davidson's commissions exceed his tax
liability, then the remainder of his commissions can be applied to Mr.
Bradley's tax liability. However, on February 18. 1997, Mr. Davidson
also gave notice of revocation to ACMIC regarding his assignment to
Bradley. Therefore, any commissions which accrue on his behalf after
March 20, 1997, shall be paid directly to him, provided that his
liability pursuant to the tax lien against him has bee satisfied in
full.
As a final
matter, ACMIC has indicated that one final commission payment may be in
process to the Clerk of the Court. ACMIC is hereby permitted to make any
final deposits to the Clerk of the Court within twenty-one (21) days of
the date of this Order, and the Court hereby orders the Clerk to forward
any final payments made by ACMIC to the
United States
. In addition, ACMIC has no duty to provide accounting information
concerning such final payments to any party other than the
United States
.
