Annotations- Corporations Obligations

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6332 Annotations: Corporations Obligations- Levy

 

Penalty for Failure to Surrender Property: Corporation's obligation

 

Rev. Rul. 75-554, 1975-2 CB 478


Section 6332.--Surrender of Property Subject to Levy

26 CFR 301.6332-1: Surrender of property subject to levy.
(Also Section 6331; 301.6331-1.)

[IRS Headnote] Levy; corporation transfer of security titles or payments after service.--
Questions and answers are presented relating to a corporation's obligations under section 6332 of the Code concerning the transfer of title in stocks and bonds by registered owners and the payment of dividends and interest after the service of a notice of levy.

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Various questions have been asked as to the obligation of a corporation under section 6332 of the Internal Revenue Code of 1954, to surrender property subject to levy upon which a notice of levy has been made.

In order to provide a clear statement of a corporation's obligation under section 6332 of the Code, several questions with the answers thereto concerning the transfer of title in stocks and bonds by the registered owner and the payment of dividends and interest after the service of a notice of levy are presented.

Section 6331(a) of the Code provides that if any person liable to pay tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful to collect such tax by levy upon all property and rights to property belonging to such person or on which there is a lien for the payment of such tax.

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 surrender such property or rights (or discharge such obligation) to the Secretary or his delegate.

Section 6332(c) of the Code sets forth the extent of personal liability and the penalty for failure of any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand.

Section 301.6331-1(a)(1) of the Regulations on Procedure and Administration provides that a levy extends only to property possessed and obligations which exist at the time of the levy. Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date. Similarly, a levy only reaches property subject to levy in the possession of the person levied upon at the time the levy is made.

Question 1. In the case of a corporation's shareholder, would the Service assert liability against the corporation under section 6332 of the Code if--

(a) A notice of levy is served on the corporation before the share is received by the corporation for transfer on its books, or the notice of levy is served after the share is received by the corporation for transfer on its books but before the transfer is completed on the corporation's books? Is it relevant whether the transferee is a purchaser without actual notice or knowledge of the existence of the Federal tax lien?

Answer: The Service cannot assert any liability against the corporation for transferring the stock regardless of whether the notice of levy is served before or after the share is received by the corporation for transfer on its books. The share that is received by the corporation for transfer is no longer the property of the shareholder that is indebted to the government for taxes but would be the property of that person to whom the share of stock was transferred. It is irrelevant to the corporation whether the transferee had actual notice of the Federal tax lien.

(b) The corporation makes a dividend payment to the dividend payee of a share of stock registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made before the declaration date for that specific dividend?

Answer: Section 301.6331-1 of the regulations provides that a levy extends only to property possessed and obligations that exist at the time of the levy. Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date.

When a notice of levy is served before the declaration date, the liability of the obligor is not fixed and determinable. Therefore, since the corporation has no obligation which exists at the time of the levy, the Service could not assert liability against the corporation under section 6332 of the Code. Neither would the Service assert any tort liability against the corporation if a dividend was paid in the ordinary course of business before another notice of levy was served even though the corporation possessed actual notice or knowledge of the existence of a Federal tax lien.

(c) The corporation makes a dividend payment to the dividend payee of a share of stock registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made on or after the declaration date but before the record date for that specific dividend?

Answer: State law determines the nature and extent of the taxpayer's property or rights to property. The Internal Revenue Code does not create property rights, but rather attaches consequences to property or rights to property created by state law. Aquilino v. United States , 363 U.S. 509 (1960), Ct. D. 1856, 1960-2 C.B. 477.

In a majority of states no vested right to a declared dividend arises until the record date. In those states a stockholder may become a creditor of the corporation on the declaration date but does not acquire a vested property right to the dividend. If the stockholder transfers the stock prior to the record date, the corporation is obligated to pay the dividend to whoever is the registered owner of stock on the record date. Upon purchase the transferee acquires a property right in the dividend to be paid at a future time and the corporation would not be liable under section 6332 of the Code on payment of the dividend to the transferee.

On the other hand, if under state law a vested right to a dividend arises on the declaration date, the corporation would be liable under section 6332 of the Code if a dividend payment was made.

Question 2. In the case of a corporation's registered bondholder, would the Service assert liability against the corporation if--

(a) A notice of levy is served on the corporation before the bond had been received by the corporation for transfer on its books, or the notice of levy is served after the bond is received by the corporation for transfer on its books, but before the transfer is completed on the corporation's books? Is it relevant whether the transferee is a purchaser without actual notice or knowledge of the existence of the Federal tax lien?

Answer: The bond that is received by the corporation for transfer on its books is no longer the property of the bondholder that is indebted to the government for taxes, but would be the property of that person to whom the bond was transferred. In United States v. Davis, 61-1 USTC 80,022 (N.D. Ill. 1961), it was held that the corporate issuer of debenture bonds, that were subject to the government tax liens, was in no way involved in the determination of ownership except as its records reflect the holder of the bond.

Therefore, the government could not assert any liability against the corporation for transferring the bond regardless of whether the notice of levy is served before or after the bond is received by the corporation for transfer on its books. It is irrelevant to the corporation whether the transferee had actual notice of the Federal tax lien.

(b) The corporation makes an interest payment to the interest payee of a bond registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made before the record date for that interest payment?

Answer: As previously indicated, a notice of levy extends only to property possessed and obligations that exist at the time of the levy. However, obligations exist when the obligor's liability is fixed and determinable although the right to receive payment may be deferred until a later date. Generally, when a corporation issues a bond, the bondholder has an unqualified fixed right through a chose in action to receive periodic payments. Thus, a present obligation is created when the bond is issued. In such a situation, a Federal tax lien attaches to the taxpayer's entire right and, if a notice of levy is served, it is effective to reach, in addition to payments due at the time the notice of levy is served, existing rights to receive any subsequent payments that become due under the obligation. See, section 301.6331-1(a)(1) of the regulations and Rev. Rul. 55-210, 1955-1 C.B. 544. The taxpayer's right to periodic payments will terminate only under certain conditions, e.g., when the bond matures or it is transferred.

Therefore, if the corporation makes an interest payment to the interest payee of a bond registered in the name of a person with respect to whom a notice of levy was served on the corporation, and service had been made before the record date for that interest payment, the corporation would be liable under section 6332 of the Code for failure to honor a notice of levy.

Question 3. In the case of the corporation's shareholder or bondholder, if the share or bond is registered in more than one name, for example, as tenants in common, tenants by the entireties, or joint tenants with right of survivorship, and the notice of levy relates to less than all the registered owners, what is the position of the Service with respect to the corporation's responsibility under section 6332 of the Code?

Answer: As previously mentioned, the nature and extent of the taxpayer's property or rights to property are determined by state law. If the notice of levy relates to less than all the registered owners, the law of the state in which the registered owners are domiciled will determine their rights in respect to the share of stock or the bond. Their rights under state law will determine the position of the Service with respect to the corporation's responsibility under section 6332 of the Code.

 

 

 

[80-2 USTC ¶9474] United States of America , Plaintiff v. Plantation Corporation, Defendant

U. S. District Court, Dist. of Mass., Civil Action No. 79-344-S, 492 FSupp 612, 5/5/80

[Code Sec. 6332]

Levy and distraint: Collection: Failure to surrender: Property: Purchased and retired stock.--A corporation was required to surrender the value of stock in satisfaction of the tax liability of a previous owner of the stock. Compliance with the prior levy was required, since the corporation had adequate notice of the government's interest in the stock prior to its purchase and the purchase and retirement of the stock as treasury stock of the corporation gave the corporation a possessory interest under applicable state law. Moreover, a penalty was assessed for failure to surrender the levied property.

Vincent James Ferraro, Department of Justice, Washington , D. C. 20530, for plaintiff. Marshall F. Newman, Newman & Newman, 50 Congress St. , Boston , Mass. 02103 , for defendant.

Memorandum and Order

SKINNER, District Judge:

The United States brought this action against the defendant, Plantation Corporation (Plantation), pursuant to 26 U. S. C. §6332(c), for its failure to honor a tax levy served on it on March 9, 1977, 26 U. S. C. §6332(a). The government seeks recovery of the value of the property levied, 300 shares of defendant's common stock, 26 U. S. C. §6332(c)(1), and an additional amount equal to 50% of that sum as a penalty. 26 U. S. C. §6332(c)(2). Jurisdiction is based upon 28 U. S. C. §§ 1340, 1345 and 26 U. S. C. §7402; the facts are not in dispute and both parties have cross moved for summary judgment. Fed. R. Civ. P. 56.

In 1974 the Internal Revenue Service assessed a tax deficiency against Charles T. Sanderson III (Sanderson) in the amount of $46,864.20, plus interest; notice of the tax lien was properly filed on February 28, 1975. On May 12, 1975 the Internal Revenue Service filed a tax lien against Sanderson for an additional $5,643.74 in unpaid taxes for 1974. At all times prior to and during 1975, Sanderson owned 300 shares of common stock in Plantation which were apparently held by the corporation. Notice of both levies was served on Plantation of March 6, 1975 and January 9, 1976, respectively.

On December 1, 1975, William Herbits obtained a state court judgment against Sanderson which ordered Plantation to turn over Sanderson's shares to Herbits; Plantation complied and on March 12, 1976 turned over Sanderson's stock certificate. On December 27, 1976, after notice was published, Herbits sold the 300 shares at a public auction. Plantation was the only bidder and purchased the shares for $15,000. Thereafter, it retired the shares as treasury stock. Plantation has never received the stock certificates.

On March 9, 1977, the IRS served Plantation with the levy in suit demanding that the corporation surrender the shares in satisfaction of Sanderson's tax liability, currently $59,915.12. Plantation instituted a wrongful levy action, pursuant to 26 U. S. C. §7426, seeking a permanent injunction against its enforcement. Plantation Corporation v. United States , CA No. 77-791-G. After a trial on the merits, Judge Garrity concluded that the levy was proper as Plantation had had abundant notice of the government's interest in the stock prior to the time of sale. Tr. 34-35. Since Plantation has failed to honor the levy and surrender the shares, the current suit is for their value and the statutory penalty.

Defendant's liability turns on whether, by its purchase of the 300 shares of stock on December 27, 1976, it received possession or rights to possession of the levied property. If Plantation received such an interest, it was required to "surrender such property or rights" to the Secretary of the Treasury, 26 U. S. C. §6332(a), and failing to do so would be liable to the United States under §6332(c).

By filing suit challenging the levy, Plantation necessarily "claim[ed] an interest in" the shares. 26 U. S. C. §7426(a); Henry Vlietstra Plastering & Acoustical Co. v. Internal Revenue Service [75-1 USTC ¶9598], 401 F. Supp. 829, 833 (D. Mich. 1975); see also J. A. Wynne Co., Inc. v. R. D. Phillips Construction Co. [79-1 USTC ¶9336], 468 F. Supp. 5 (M. D. Fla. 1977) (contractual right to set-off is an interest allowing a suit to challenge a levy). This interest, arising out of the purchase of the shares, is itself a "right to property" under Massachusetts law and creates an equitable title in the transferee. M. G. L. A. c. 106 §8-309, Massachusetts Code Comment; Good Fellows Associates, Inc. v. Silverman, 283 Mass. 173 (1933); Stuart v. Sargent, 283 Mass. 536 (1933).

Moreover, in the prior action, the parties had stipulated that "[t]he shares so purchased by [Plantation] were then retired as treasury stock, and have not been reissued," Stipulation of Facts, ¶9, C. A. No. 77-791-G. Plantation must necessarily have asserted some possessory interest in order to retire the stock. Defendant now argues that retirement could not have been effected as it never received a valid transfer of the shares from Herbits, or his estate. See Affidavit of Robert Benea. It asserts the stipulation should therefore have no application in the present case. This is manifestly not so under Massachusetts law. M. G. L. A. c. 156B §29 provides that the directors of a corporation may issue a replacement certificate for shares "alleged to have been lost, mutilated or destroyed." Under this provision Plantation could have reissued Sanderson's lost certificate and then voted to retire the shares.

At a minimum, Plantation had the power to secure actual possession of the shares purchased from Herbits. Having never surrendered its interest to the government, Plantation has failed to comply with §6332(a).

Accordingly, the government's motion for summary judgment under §6332(c) is ALLOWED as to liability. The case will be set for trial on the issue of the valuation of Plantation 's interest in the shares.

[93-1 USTC ¶50,073] United States of America , Plaintiff v. Metro Interior, Inc. and Charles Benigar, Defendants

U.S. District Court, West. Dist. Mo. , West. Div., 90-0889-CV-W-1, 10/5/92

[Code Secs. 6332 and 6334 ]

Tax levies: Failure to comply: Penalties: Calculation.--A corporation and its president were liable for their failure to comply with tax levies on the wages of corporate employees. Both the corporation and its president were "persons" in possession of property subject to levy and neither had a permissible defense for failing to honor a tax levy. In addition, a penalty was imposed because there was not reasonable cause for failure to honor the levies. However, the amount of the levy for each employee was uncertain and the extent of personal liability and of the penalty could not be determined until the levy had been recalculated. A motion to join the employees was denied for lack of jurisdiction.

 

ORDER

WHIPPLE, District Judge:

There are three motions before the Court: plaintiff's and defendants' Motion for Summary Judgment and defendants' Motion to Join Additional Parties. For the reasons set forth below, defendants' Motion for Summary Judgment and Motion to Join Additional Parties is denied. Plaintiff's Motion for Summary Judgment is granted as to liability.

I. Background

Plaintiff is suing defendants Charles Benigar (Benigar) and Metro Interior, Inc. (Metro) for failing to honor numerous tax levies. Metro is a Missouri corporation with its principal place of business in Missouri . Benigar, a resident of Missouri , supervises and controls all financial aspects of Metro.

The present case stems from events that occurred in October, 1983. At that time Harry Carr (Carr), Steve Garrett (Garrett) and John Holmes (Holmes) agreed with Dasta Corporation (Dasta) to form two subcontracting companies: Division Nine and Union Drywall. Dasta was to provide Division Nine and Union Drywall all of their business. Although Dasta did provide Division Nine and Union Drywall with business, it filed for bankruptcy while owing the subcontracting companies $257,000. Carr, Garrett and Holmes state that because Division Nine and Union Drywall were owed $257,000, the three employees were not able to pay the companies' payroll taxes. All three employees were responsible for withholding and paying payroll taxes to the IRS. Presumably, both Division Nine and Union Drywall are no longer in business.

All three employees later joined Metro between July and September of 1986. In 1987, the United States Treasury made a 100% penalty assessment under 26 U.S.C. §6672 against Carr, Garrett and Holmes for not withholding payroll taxes. Specifically, the Treasury assessed Carr for $153,120.44, Garrett for $80,005.94 and Holmes for $73,114.50. Plaintiff states, and defendants do not dispute that the IRS gave Carr, Garrett and Holmes notices and demands for payment of the assessments. The assessments were not paid. On February 1, 1990, the Treasury served a Notice of Levy on Metro demanding that it give the IRS all wages in Metro's possession that it was obligated to Carr. The Treasury also served Notice of Levy on Metro in regards to Garrett and Holmes on August 23, 1988 and September 9, 1988 respectively. Later the Treasury served a Final Demand upon Metro to honor the levies upon Carr, Holmes and Garrett. Each of the three employees worked for Metro until March 23, 1990.

Metro has not complied with the levies. Not including interest and penalties, the balance on the assessments is $151,984.44, $75,551.44 and $67,878.11 for Carr, Garrett and Holmes respectively. Plaintiff seeks to hold defendants liable for the failure to honor the levies. Additionally, plaintiff seeks penalties against defendants for their failure to honor the levies.

II. Plaintiff's Motion for Summary Judgment

A. Summary Judgment Basics

A movant is entitled to summary judgment under Fed. R. Civ. P. 56(c), "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Thus, the moving party bears the burden of proof. Aetna Life Ins. Co. v. Great Nat'l Corp., 818 F.2d 19, 20 (8th Cir. 1987). When considering a motion for summary judgment, the Court must scrutinize the evidence in the light most favorable to the non-moving party and the non-moving party "must be given the benefit of all reasonable inferences." Mirax Chemical Products Corp. v. First Interstate Commercial Corp., 950 F.2d 566, 569 (8th Cir. 1991) (citation omitted). If the moving party meets its burden of proof, the burden shifts to the non-moving party who must set forth specific facts showing that there is a genuine issue for trial to defeat a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

B. A Road Map to Collecting Unpaid Taxes

If a person does not pay her taxes, a lien automatically arises upon assessment, 26 U.S.C. §6322 , on all ¹ her property. 26 U.S.C. §6321 ("If any person liable to pay any tax neglects or refuses to pay the same after demand . . . [there] shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."). The lien continues until the taxes are fully paid. 26 U.S.C. §6322 . If the tax remains unpaid, then within ten days after notice and demand, "it shall be lawful for the Secretary to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person . . . ." 26 U.S.C. §6331(a) . ²

When, as in the present case, a third-party holds property of the taxpayer, the IRS may serve notice on the third-party. This notice gives the "IRS the right to all property levied upon . . . and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (citation omitted). See also, 26 U.S.C. §6332(a) . If the third-party honors the levy, the third-party is discharged from liability. §6332(e) . If the third-party does not honor the levy, the third-party is personally liable for the amount of the levy, §6332(d)(1) , and unless "reasonable cause" is shown for not honoring the levy, the third-party is also liable for a penalty of 50% of the levy. §6332(d)(2) .

C. Application of the Law

In the present case, plaintiff served a Notice of Levy on Metro demanding that it give the IRS all wages in Metro's possession that it was obligated to Carr, Holmes and Garrett. Metro did not honor the levy. Before determining whether defendants' were justified in not honoring the levy and if not, the consequences, the Court must determine if defendants, Benigar and Metro, are "persons" under §6332 .

Section 6332(f) states that a person "includes an officer or employee of a corporation . . . under a duty to surrender the property or rights to property . . . ." In his deposition, Benigar stated that he currently is, and at the time of the levy was, President of Metro and in sole control of Metro's finances. Deposition of Charles Benigar, p. 12-13. It was Benigar who, on the advice of counsel, decided not to honor the levies. Thus, Benigar is a "person" under §6332 . Section 6332(f) does not expressly include Metro as a "person," but it also does not exclude it. The word "includes" does not exclude other individuals or entities from being "persons" under §6332 . §7701(c) ("The terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined."). The Tax Code generally defines the term "person" as including a corporation such as Metro. 26 U.S.C. §7701(a)(1) . Thus, Metro is also a "person" under §6332 .

1. No Defense for Not Honoring the Levies

Defendants offer two defenses for not honoring the levies. The first defense is that the IRS did not follow its own procedures before it levied on Metro. Defendants argue that Carr, Garrett and Holmes each made an offer of compromise to the IRS and that the IRS's policy is to withhold all collection efforts during the consideration of the offers of compromise. Defendants suggest that the policy of the IRS is to conduct a financial investigation of a taxpayer's ability to pay before it rejects any offer of compromise. A financial investigation was not conducted before Carr's, Garrett's or Holmes's offer of compromise was rejected. Defendants state that given the three employees' ability to pay, the offers of compromise are reasonable. Because the offers were reasonable and were rejected without a financial investigation, defendants argue that the IRS did not follow its own procedures and thus, the levies are invalid. The second defense is that the three employees would have left Metro if the levies were honored. This, defendants contend, would have been "devastating to the business." Suggestions in Opposition to United States ' Motion for Summary Judgment, p. 5.

The United States Supreme Court holds that there are only two defenses for failing to honor a levy. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 721-22. The first defense is that the person levied does not hold property or rights to property of the taxpayer. Id. The second defense is that the property is "subject to a prior judicial attachment or execution." Id. Defendants do not meet either of the two defenses available.

As to the first defense, defendants do not deny that Metro was holding the accrued wages of Carr, Garrett and Holmes; Metro's payroll records indicate that it did hold the accrued wages. Further, accrued wages are "property or rights to property" to which a lien can attach and thus be subject to levy. As the Supreme Court states: "it is quite clear, generally, that accrued salaries are property and rights to property subject to levy." Sims v. United States [59-1 USTC ¶9338 ], 359 U.S. 108, 111, 79 S.Ct. 641, 3 L.Ed.2d 667 (1959). Defendants do not suggest any reason why accrued wages are not "property" subject to levy. Defendants do not meet the first defense.

As to the second defense, the only accrued wages subject to garnishment was a state garnishment on Garrett for child support. Plaintiff does not claim to levy on these wages, rather, plaintiff claims to levy on the wages remaining after the state garnishment. Defendants also fail to meet the second defense.

In summary, even if plaintiff did indeed fail to follow its own procedures, ³ this is not a recognized defense for not honoring the tax levies. Likewise, not honoring a levy because it might hurt or ruin Metro's business is not a valid defense. Thus, defendants are personally liable for the amount of Carr's, Garrett's and Holmes's wages that were levied upon.

2. No Reasonable Cause

Section §6332 , in addition to holding a third-person personally liable, also imposes a penalty of 50% of the amount the person is held personally liable for unless there is "reasonable cause" for not honoring a tax levy. §6332(d)(2) . Generally, there are two situations that constitute "reasonable cause" under the statute: (1) "a bona fide dispute over the amount owing to the taxpayer" or, (2) a bona fide dispute over the "legal effectiveness of the levy itself." S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1978 U.S. Code Cong. & Admin. News 3722, 3740.

Defendants do not dispute the amount of wages they owed to Carr, Garrett or Holmes, thus the first situation is not applicable. Defendants do not state why the penalty should not apply to them, but presumably they attempt to fall into the second situation. Defendants argue that the levies were invalid because the IRS did not follow its own procedures. This argument denies that the levies were legally effective. There must be, however, a bona fide legal dispute as to the legal effectiveness of the levies. Defendants do not point to any case law or other authority that states that the failure of the IRS to follow its own procedures is a defense for not honoring a tax levy. Further, they are unable to characterize their defense as falling under one of the two defenses the Supreme Court articulated in National Bank of Commerce.

Generally, in the cases that refuse to apply the penalty, there is an unsettled question of law. See, United States v. Sterling Nat'l Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 919, 923 (2nd Cir. 1974) (unsettled questions of law--no penalty applies); State Bank of Fraser v. United States [88-2 USTC ¶9592 ], 861 F.2d 954, 962 (6th Cir. 1988) (no unsettled questions of law--penalty applies); United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1331-32 (9th Cir. 1990) (no unsettled questions of law--penalty applies); United States v. Metropolitan Life Ins. [89-1 USTC ¶9362 ], 874 F.2d 1497, 1501 (11th Cir. 1989) (no unsettled questions of law--penalty applies). Defendants do not point to and the Court is at a loss to find any unsettled questions of law in the present case. Therefore, plaintiff is entitled under §6332(d)(2) to the 50% penalty.

3. Ambiguity as to Damages

The government can not levy on all of the wages of Carr, Garrett and Holmes that the lien attached to. Wages subject to child support orders, 26 U.S.C. §6334(a)(8) , as in the case of Garrett are exempt. Also, a statutory minimum portion of the three employees's wages is exempt from levy. §6334(a)(9) & (d).

The computation of the minimum amount of wages that are exempt from levy is specified in §6334(d) which was amended in 1988. Based on the numbers that plaintiff furnished the Court, it appears that plaintiff is following the pre-1988 computation. ⁴ If plaintiff is using the pre-1988 computation, plaintiff has not given the Court any reason why that computation should be used in a case filed in 1990. It is unclear what the amount of the levy for each of the three employees is. Until the amount of the levies is determined, the extent of defendants' personal liability and the penalty cannot be determined. The parties must brief this issue in a stipulation or, if necessary, individually.

III. Defendants' Motions

For the same reasons that plaintiff's Motion for Summary Judgment is granted on the issue of liability, defendants' Motion for Summary Judgment and Motion to Join are denied. Even if summary judgment is not granted for plaintiff, the Motion to Join would still be denied.

Defendants ask the Court to join Carr, Garrett and Holmes to the present suit. Unless the Court determines the validity of the underlying taxes, defendants argue, it is possible that defendants and the three employees will be subject to inconsistent decisions. The Court rejects the motion on jurisdictional grounds.

This Court has original, concurrent jurisdiction in civil cases:

against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws;

28 U.S.C. §1346(a)(1). However, the Court does not have jurisdiction until a claim for a refund has been filed. 26 U.S.C. §7422(a) ("No suit shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . until a claim for a refund . . . has been duly filed . . . ."). A claim for a refund cannot be filed until the disputed amount has been fully paid. Flora v. United States [60-1 USTC ¶9347 ], 362 U.S. 145 149-50, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). Defendants have not paid the full amount of the tax assessment, thus the Court does not have jurisdiction over questions of tax liability. Because the Court does not have jurisdiction over questions of tax liability, joiner would be improper. Therefore, defendants' Motion to Join Carr, Garrett and Holmes is denied even without plaintiff's summary judgment.

V. Conclusion

Therefore, it is ORDERED that plaintiff's Motion for Summary Judgment is GRANTED as to liability. It is further

ORDERED that plaintiff and defendants brief the Court as to the amount of wages that are subject to levy in a stipulation or, if necessary, individually. It is further

ORDERED that defendants' Motion for Summary Judgment is DENIED. It is further

ORDERED that defendants' Motion to Join Carr, Garrett and Holmes is DENIED.

¹ The reach of the tax lien is very broad. Congress intended "to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (citation omitted).

² Another method of collecting the tax is through a lien-foreclosure suit. 26 U.S.C. §7403 . This method, by its nature, requires judicial intervention.

In the present case the government chose to collect the taxes using §6331 . This method is referred to as an administrative remedy and does not require any judicial intervention. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (citation omitted).

³ Assuming the failure to follow IRS procedures is a valid defense, the Court is not persuaded that the IRS did fail to follow its own procedures. In support of their proposition that collection activity is supposed to stop from the time an offer of compromise is made to the time a financial investigation is completed, defendants quote the IRS's Manual: "Collection activity will be withheld on any open accounts if it is determined that the offer merits consideration and there is no reason to believe that collection will be jeopardized." Internal Revenue Manual, Administration, p. 7337 (emphasis added). This language only states that if the IRS decides the offer of compromise is worth considering, then collection activity will stop. It does not state that collection activity will stop until a financial investigation is completed. If this were true then the IRS would be required to conduct a financial investigation for every offer of compromise it receives. There is no evidence that the IRS is under such a requirement.

Further, even if the IRS Manual states that all collection activity will stop until a financial investigation is completed, procedures in the Manual are not binding on the IRS. See e.g., Estate of Jones v. Commissioner [86-2 USTC ¶13,675 ], 795 F.2d 566, 571 (6th Cir. 1986) The Court is unpersuaded by defendants' citation to The Tax Lawyer given the precedent in several circuits.

⁴ For example, plaintiff calculates that it is entitled to a levy on Holmes's 1990 wages as follows:

13 weeks at $650.00/week gross pay ........................ $8,450.00

Less authorized deductions ................................  1,928.70

Less Personal exemption at $75/week ........................   975.00

                                                              ---------

Subtotal ................................................... $5,546.30

 

Under pre-1988 §6334 , the calculation of the weekly exempt amount is $75 plus $25 for each individual specified in the statute. The current calculation of the weekly exempt amount is the "sum of the standard deduction and the aggregate amount of the deductions for personal exemptions," divided by 52. There are also other considerations such as whether Carr, Garrett or Holmes filed anything with the Secretary "specifying the facts necessary to determine" the above computation. §6334 .

 

[93-2 USTC ¶50,389] United States of America, Plaintiff v. Metro Interior, Inc. and Charles Benigar, Defendants

U.S. District Court, West. Dist. Mo., West Div., 90-0889-CV-W-1, 6/1/93, On motion for reconsideration of a District Court decision, 93-1 USTC ¶50,073

[Federal Rules of Civil Procedure 60 and Code Secs. 6332 and 6334 , prior to amendment by P.L. 100-647 ]

Motion for reconsideration: Levied wages: Employer's duty: Damages.--A corporation's payment of FICA taxes, rather than FUTA taxes, made so that the district court would obtain subject matter jurisdiction over three employees, did not warrant reconsideration of an earlier decision. The employees' wages were levied upon, but the employer failed to honor the levies and was held liable for the amount of wages subject to them, plus a 50-percent penalty. The employer sought reconsideration when the employees were not joined to this case, claiming that its payment of FICA taxes was a mistake or excusable neglect. The wrong payment was deemed carelessness; thus, the court had no jurisdiction over the employees, and the motion for reconsideration was denied. The court did alter the calculation of damages to reflect the employer's incorrect use of net wages and the IRS's overcounting of the number of payroll periods.

ORDER

WHIPPLE, District Judge:

The matters before the Court are defendant's Motion for Reconsideration and their Motion to Stay Final Judgment. For the reasons stated below, the motions are denied and the Court will determine the amount of damages plaintiff is entitled to.

I. Background

The United States Treasury made a 100% penalty assessment against Harry Carr, Steve Garrett and John Holmes for unpaid taxes. When the assessments were not paid, the Treasury served levies on defendants for wages that they were obligated to pay to Carr, Garrett and Holmes. Defendants failed to honor the levies.

The Court, on October 5, 1992, held defendants personally liable for the amount of wages that were subject to levy and also for a penalty of 50% of the amount of the levy. The Court also refused to allow Carr, Garrett and Holmes to join in the present case.

II. Motion to Reconsider or in the Alternative to Stay

Defendants ask the Court to reconsider its October 5, 1992 Order which refused to allow Carr, Garrett and Holmes to join in the present case. Defendants argue that the three taxpayers are not liable for the underlying taxes and thus, defendants were never required to honor the levies. Unless the Court determines the validity of the underlying taxes, defendants argue, it is possible that defendants and the three taxpayers will be subject to inconsistent decisions.

A. The Standard for Evaluating a Motion to Reconsider

The Federal Rules of Civil Procedure do not recognize a motion to reconsider, but the Court will treat such a motion as either a motion to alter or amend under Rule 59(e) or a motion for relief from judgment under Rule 60(b) depending on whether the motion was filed within 10 days of the Court's Order. In re Trout v. Trout, 984 F.2d 977, 978 (8th Cir. 1993) (citing Sanders v. Clemco Indus., 862 F.2d 161 (8th Cir. 1988)). See also, Lavespere v. Niagara Mach. & Tool Works, Inc., 910 F.2d 167, 173 (5th Cir. 1990). Defendants and the three taxpayers filed their first motion for reconsideration on October 19, 1992, or ten days after the Court's October 5, 1992 Order excluding weekends and holidays. See, Fed. R. Civ. P. 6(a). Defendants and the three taxpayers withdrew their motion on October 26, 1992. On November 3, 1992, they filed the motion for reconsideration that is presently before the Court. The Court will treat the motion as a motion for relief from judgment under Rule 60(b) because excluding holidays and weekends, the motion was not filed within ten days of the Court's October 5, 1992 Order.

Rule 60(b) reads in part:

[T]he court may relieve a party . . . from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud . . . misrepresentation . . . or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, . . . or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment.

Not only do defendants need to meet one of the six reasons listed in Rule 60(b), but also they have a difficult burden to meet because Rule 60(b) "provides for extraordinary relief which may be granted only upon an adequate showing of exceptional circumstances." Sanders, 862 F.2d at 169 n.14 (citation omitted).

B. Application of Rule 60(b)

The Court's October 5, 1992 Order explains that although the Court does have concurrent jurisdiction to hear a taxpayer case, the taxpayer must first pay the disputed taxes and file a claim for a refund. The Court notes that although its Order states that the taxpayers would need to pay all of the disputed taxes before filing for a refund, there is an exception that allows the taxpayers to pay only a portion of the tax if the tax is divisible. Flora v. United States [60-1 USTC ¶9347 ], 362 U.S. 145, 171-75 nn.37 & 38, 80 S.Ct. 630, 4 L. Ed. 2d 623 (1960); Steele v. United States [60-1 USTC ¶9573], 280 F.2d 89, 90-91 (8th Cir. 1960). The three taxpayers did pay Federal Unemployment taxes (FUTA), but as the three taxpayers admit, payment of FUTA taxes does not give this Court subject matter jurisdiction to hear their claims. The three taxpayers admit that as of the Court's October 5, 1992 Order, they had not paid any taxes which would give this Court subject matter jurisdiction to determine whether the taxpayers actually owed the amount that the Treasury assessed. There is no doubt that the Court did not have jurisdiction to hear the taxpayers' claims at the time of the Court's October 5, 1992 Order.

On November 3, 1992, the attorney for defendants and presumably also for the three taxpayers, sent the Court a letter stating that "we have corrected the jurisdictional flaw in the refund suit by Carr, Holmes and Garrett by paying FICA and withholding taxes and having the amended claim for refund and abatement denied by the Internal Revenue Service." Because they have fixed the jurisdiction flaw almost a month after the Court's Order, defendants and the three taxpayers ask the Court to reconsider its October 5, 1992 Order refusing to allow the three taxpayers to join in the present case.

The only reasons listed in Rule 60(b) that might apply to the present case are the first and sixth reasons. Arguably the first reason, "mistake, inadvertence, surprise, or excusable neglect," is applicable because defendants paid the wrong tax in an attempt to obtain subject matter jurisdiction with this Court. However, the first reason is not available when the attorney was simply careless. Cline v. Hoogland, 518 F.2d 776, 779 (8th Cir. 1975) (Neglected to file because busy with other matters); United States v. Thompson, 438 F.2d 254, 256 (8th Cir. 1971) (Failed to bring statute to court's attention); Fenix v. Finch, 436 F.2d 831, 837 (8th Cir. 1971) (Stipulated to 6% interest even though there was no statutory provision for the government to pay interest.); Hoffman v. Celebrezze, 405 F.2d 833, 835 (8th Cir. 1969) ("Government counsel cannot obtain relief by pointing to his carelessness or negligence."). In the present case, paying the wrong taxes in an attempt to obtain subject matter jurisdiction with the Court amounts to carelessness, thus the first reason is unavailable for Rule 60(b) relief in the present case.

The sixth reason, "any other reason justifying relief from the operation of the judgment," is also not applicable to the present case. Arguably, attorney error in advising the taxpayers to pay FUTA tax instead of Federal Insurance and Contribution Act tax (FICA) and withholding taxes in their attempt to obtain subject matter jurisdiction with this Court is such as to justify "relief from the operation of judgment." However, Rule 60(b)(6) is mutually exclusive from the first five reasons and the first reason, which includes neglect or mistake, covers this argument. See also, Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 863, 108 S. Ct. 2194, 100 L. Ed. 2d 855 (1988) (Rule 60(b)(6) relief is available if it is "made within a reasonable time and is not premised on one of the grounds for relief enumerated in clauses (b)(1) through (b)(5)."); In re Dakota Cheese, Inc., 923 F.2d 576, 577 (8th Cir. 1991) (Defendant characterized the motion as a 60(b)(6) motion, but it was actually a 60(b)(2) motion.). Thus, Rule 60(b)(6) is not applicable to the present case and as explained earlier, attorney carelessness is not a proper ground for relief under the first reason.

The Court will deny defendants' "Motion to Reconsider" the Court's October 5, 1993 Order because they do not meet the test for Rule 60(b) relief. There is also no reason to stay a final judgment.

III. Determination of Damages

The Court's October 5, 1992 Order held defendants personally liable for the amount of wages that were subject to levy and also for a penalty of 50% of the levy. Neither party had correctly calculated the amount of wages that were subject to levy, so the Court did not make a determination as to damages and directed the parties to brief the Court as to the amount of wages that were subject to levy.

Defendants calculate that the amount of wages subject to levy was $51,069.96. Defendants' calculation is incorrect for several reasons, two of which should be noted. First, plaintiff can levy on "[a]ny amount payable to or received by an individual as wages" that is not exempt. The initial determination is whether to use net or gross wages. Defendants use net wages, but using net wages, in effect, exempts health and life insurance payments which were subtracted from the three taxpayers' paychecks before calculating net wages. The only items that are exempt from levy are listed in Title 26, section 6334(a) of the United States Code; health and life insurance payments are not among the listed exempt items. Allowing defendants to use net wages would circumvent the determination of Congress that only the listed items should be exempt from levy. §6334(c) ("Notwithstanding any other law of the United States . . . no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."). Second, Congress amended section 6334 in 1988 making the amended version effective to levies issued on or after July 1, 1989. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, §6236(h)(1), 102 Stat. 3342 (1968). Thus, contrary to defendants' calculation, for a levy served before July 1, 1989, the pre-1988 version of section 6334 is applicable even if the levy continues beyond July 1, 1989. The 1988 version of section 6334 is applicable only for those levies served on or after July 1, 1989.

Plaintiff calculates that the amount of wages subject to levy was $56,380.41. Plaintiff's method of calculating the amount of wages subject to levy results in a smaller levy than plaintiff is entitled to, but there is no reason why plaintiff cannot choose to collect less than it is entitled to. Following plaintiff's method of calculation, however, plaintiff over-counted the number of payroll periods by one period for each of the three taxpayers. The Court agrees that plaintiff is entitled to b