Annotations- Effect of Honoring Levy Page1

---

 

  6332 Annotations: Effect of Honoring Levy- Levy

 

Penalty for Failure to Surrender Property: Effect of Honoring Levy

 

[68-1 USTC ¶9116]Bolling v. Samples et al.

State of Ga., Court of Appeals, 42977, 159 SE2d 727, 12/5/67

[1954 Code Sec. 6332, prior to amendment by P. L. 89-719]

Levy and collection of tax: Debt subject to levy: Payment to government: Effect of honoring levy.--Payment by a debtor to the government under a levy properly asserted against a debt owed to the delinquent taxpayer is a complete defense to the debtor against any action brought against him on account of the debt.

[1954 Code Sec. 6323(a), prior to amendment by P. L. 89-719]

Lien for taxes: Priorities: Assignee.--The Government's lien for taxes was superior to the rights of an assignee to funds due a delinquent taxpayer.

B. Carl Buice, Robinson, Thompson, Buice & Harben, 401 First Nat'l Bank Bldg., Gainesville, Ga., for appellant. Leon Bolling, Law Bldg., Cumming , Ga. , for appellee.

POPE, JR., Judge:

H. C. Bolling, as assignee of an account receivable, brought this action on the account against R. D. Samples and Milton Woods.

The parties filed a stipulation showing the following facts: Defendant owed National Landscaping Corporation, the taxpayer, the sum of $2,726.42. On April 11, 1961, the District Director of Internal Revenue issued a levy on form 668-A directed to the defendants, asserting a lien upon any indebtedness owed by defendants to the taxpayer up to the sum of $3,383.82 and demanding payment to the United States Internal Revenue Service. On May 5, 1961, before the notice of levy was served, the taxpayer assigned the indebtedness to plaintiff. The notice of levy was served on July 14, 1961, and defendants thereafter paid the amount of the indebtedness to the Internal Revenue Service pursuant to the levy.

The trial court, sitting without a jury, rendered judgment for defendants on the basis of the stipulated facts.

BELL , Presiding Judge: 26 U. S. C. §6321 provides for a lien on all property and rights to property belonging to a taxpayer who neglects or refuses to pay internal revenue taxes after demand. This lien is effective from the time the assessment is made (26 U. S. C. §6322), and may be enforced by levy pursuant to 26 U. S. C. §6331 upon all property and rights to property belonging to the taxpayer, or on which there is a lien provided, with the exception of specific exemptions provided by 26 U. S. C. §6334, which is not applicable here. 26 U. S. C. §6332(a) provides: "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 or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process." Anyone failing to comply with the foregoing provision "shall be liable in his own person and estate." 26 U. S. C. §6332(b).

The effect of a levy directed to a debtor of the taxpayer was discussed in United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d (4th Cir.) 118, 121. The court there held: "There can be no question, we think, but that the lien for taxes provided by the statute can be asserted against intangible property such as a debt. . . . And we think it equally clear that the proper way to assert the lien is by levy and notice such as was served here. . . . The effect of the federal taxing statutes is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. There is no necessity for adjudicating the amount of the tax under the statutory proceeding . . . and, consequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt." See also, United States v. Metropolitan Life Ins. Co. [58-2 USTC ¶9630], 256 F. 2d (4th Cir.) 17, 23; Hoye v. United States [60-1 USTC ¶9365], 277 F. 2d (9th Cir.) 116, 120.

The notice of levy in the instant case was executive process, comparable to judicial process, valid on its face against any indebtedness owed by the defendant debtor to the taxpayer as of the date of issuance of the levy, providing the indebtedness had not been paid before service of the notice upon the debtor. Thus the levy was effective against the debt sued for notwithstanding that the taxpayer had transferred all its interest to plaintiff between the date of issuance and the date of service. This is true because 26 U. S. C. §6331 provides for levy not only on property belonging to the taxpayer, but also on property on which a lien is provided by 26 U. S. C. Ch. 64.

While a debtor is protected by compliance with the notice of levy, he may act in definance of the levy only at his own peril, 26 U. S. C. §6332(b). The Internal Revenue Code makes no provision for the debtor to contest the correctness of the assessment or the validity of the lien. Thus these issues are immaterial to him. The judgment therefore was not unauthorized although the stipulated facts failed to show that demand had been made on the taxpayer prerequisite to a valid lien against the obligation owed by defendant.

For the same reason the judgment was not unauthorized although notice of the lien had not been filed pursuant to 26 U. S. C. §6323(a), which provides: "Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate. . . . In the office designated by the law of the State or Territory in which the property subject to the lien is situated. . . ." See Code §67-2601. Moreover, the stipulated facts showed merely that the plaintiff's status in relation to the obligation was that of an assignee. A mere assignee is not within the class of persons protected by 26 U. S. C. §6323(a). Bankhead v. Maryland Casualty Co. [62-1 USTC ¶9229], 197 F. Supp. 879, 882. And this section has reference to liens on tangible property having a situs, not to the levy upon or the transfer of debts. United States v. Eiland, 223 F. 2d 118, 122, supra; United States v. Jacobs [57-2 USTC ¶9918], 155 F. Supp. 182, 190; United States v. Salerno [64-1 USTC ¶9130], 222 F. Supp. 664, 670.

Judgment Affirmed. PANNELL and WHITMAN, Judges, concur.

[70-1 USTC ¶9133]United States of America, Plaintiff v. Samuel Dreier, Rudolph, Neuss, Jack L. Holland, Francis X. Mascola, Harold L. Bassen, Nathan L. Weingrad, Raymond Corbett, William T. Mims, William F. Gruff, Gerald C. Place, Paul S. Rockhold, Individually and as Trustees of the Vacation Fund of the International Association of Bridge, Structural and Ornamental Iron Workers Locals 40, 361 and 417, Defendants

U. S. District Court, So. Dist. N. Y., 68 Civ. 704MP, 307 FSupp 810, 12/17/69

[Code Secs. 6331 and 6332]

Liens for taxes: Enforcement of liens: Levy and distraint: Union vacation fund: Ownership: Effect of honoring levy.--There was no merit to the contention of the trustees of a union vacation fund that they could not determine whether the taxpayers had made the required contributions until a stamp book was presented for collection and that they had no records or information which indicated that they held any funds to the benefit of the taxpayer. Furthermore, payment by the fund to the government under the levy is a complete defense to the fund against any action brought against it by the taxpayers. Accordingly, the government was entitled to judgment for the amounts in the fund that were due taxpayers that were subject to the tax liens.

Robert M. Morgenthau, United States Attorney, Brian J. Gallagher, Richard S. Rudick, Assistant United States Attorneys, New York, N. Y., for plaintiffs. Doran, Colleran, O'Hara & Dunne, 330 Madison Ave., New York, N. Y., Robert A. Kennedy, 1399 Franklin Ave., Garden City, N. Y., for defendants.

Findings and Opinion

POLLACK, District Judge:

In this action, the government sues to enforce income tax liens on money set aside for the delinquent taxpayers in a Vacation Fund which was contributed thereto by their employers pursuant to a collective bargaining agreement with their union. The trustees of the Fund, who are the defendants herein, resist payment on the ground that there is no clear evidence that the taxpayers have a vested monetary interest in the Fund on which the government's levy attaches.

The case originally sought to collect from the Vacation Fund trustees the sum of $2,050.91 claimed as the aggregate amount of delinquent taxes owed by 18 Ironworkers--members of the International Association of Bridge, Structural and Ornamental Iron Workers, AFL-CIO Locals 40, 361 and 417 (The Union). Since the inception of this action, the tax liens against 10 of the 18 employees have been satisfied by payment of amounts due from the Fund to those employees. The unpaid taxes due from the remaining eight employees (The "Eight") which the plaintiff seeks to recover from their interests in the Fund is $458.25. The Eight, are members of the Union .

Under collective bargaining agreements between the Allied Metal Industries ("Allied") and the Union, Allied's members agreed to pay a certain percentage of the gross weekly pay of its members' union employees into a special trust fund to be used to provide vacation benefits to eligible employees ("the Vacation Fund").

The rate of payment by Allied's members during the years 1960, 1961, 1962 and the first half of 1963 was 4% of the gross wages paid to Iron Workers under the Union's jurisdiction; during the second half of 1963 and the first half of 1964 the rate was 5%; and during the second half of 1964 and thereafter, the rate was 6%.

At various times during the course of a calendar year, Allied's members purchased from the trustees large blocks of vacation fund stamps. Those stamps were to be distributed by Allied's members to their individual employees on a weekly basis. Upon receipt of the stamps, the individual employee would paste them in a vacation fund book which is very similar to a savings bank passbook. When the employee wished to draw down his vacation pay, he would present his passbook to the trustees. The trustees would then issue to the employee a check in an amount equal to the stamps turned in by him.

The employer could not fulfill its obligation to provide the agreed vacation benefits by paying the amount to the employees in cash rather than stamps.

The employers were obligated to report the gross amount of wages paid each employee to the Union and to the administratrix of the Vacation and other funds. The stamps were non-transferable and these reports were used by the Vacation Fund as a source from which to verify that a given employee could have earned the stamps he surrendered to the Fund for payment. The reports made to the defendants indicated the payment of gross wages by Allied's members to the Eight during the years of their employment between 1960-1966 and these were sufficient in amount to require the deposits in the Vacation Fund of the amounts to which the levies attach as found hereinafter.

The defendants, as Trustees of the Vacation Fund were served with Notices of Levy with respect to the Eight on May 24, 1966 or January 11, 1967.

The defendants have failed and refused to honor these Notices of Levy on the grounds that they cannot determine whether or not the employer had made the required contributions until a stamp book is presented for collection and that they have no records or information which would indicate that they hold any funds to the benefit of the taxpayers. The Court finds that there is no merit to these contentions and holds that the plaintiff has sustained its burden of proof to show that the required contributions have been made as to the Eight; and that the defendants have sufficient records and information to indicate they hold funds for the benefit of the Eight as stated hereafter.

The following schedule shows as of October 24, 1969 the amount of income taxes still owed by the named taxpayer, the amount in the Vacation Fund to his credit as a result of his earnings and subject to the government's levy mentioned above and the amount collectible by the government from the Vacation Fund as of said date:

                           Owed to         Credit in         Subject to

Employee-Taxpayer            Gov't              Fund           the levy

Frank D. 

Albany

 ......    $ 568.28           $ 77.80            $ 77.80

Peter Alfred .........       15.06             44.40              15.06

Peter D. Angus .......      441.73             37.90              37.90

Dave Beauvais ........       53.45             82.40              53.45

Mike Dearhouse .......      479.79             10.00              10.00

Frank T. Horn ........       89.26             28.30              28.30

Thomas Morris ........      140.25            157.55             140.25

Patrick F. Stacey ....    1,018.49             48.20              48.20

                         $2,806.31                              $410.96

 

The defendants have admitted that the taxpayers had withdrawn from the Vacation Fund approximately 85% of the amount of the contributions required from their employers under the governing collective bargaining agreement. It is highly probable under the effects established herein that the employers contributed the remaining 1/8 of their obligations to the Vacation Fund. The proof was that none of the employers of the Eight was ever delinquent in providing the requisite Vacation Fund stamps.

The Court observes that the defendants in the case at bar, after honoring the levies (and after satisfying the judgment of this Court) are protected from any double liability to the taxpayers or their estates for the amounts paid. Section 6332(d) of Title 26 U. S. C. A. provides that the effect of honoring a levy discharges the person "from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment."

The institution of this action has been duly authorized by a delegate of the Secretary of the Treasury of the United States and directed by the Attorney General of the United States as required pursuant to Section 7401 of the Internal Revenue Code of 1954, 26 U. S. C. A. §7401.

The Court has jurisdiction over this action under Title 28 §§ 1340 and 1345.

Plaintiff is entitled to judgment against defendants for the amounts of their debts to the Eight--the taxpayers--that are subject to plaintiff's liens, in the sum of $410.96 with interest [T. 26 §6332(c)] at the rate of 6% from the dates of the levies respectively on the several amounts due, with costs. The Clerk shall forthwith enter judgment accordingly.

The foregoing shall constitute the findings and conclusions required by Rule 52(a), F. R. Civ. P.

[82-2 USTC ¶9504]In re: Debmar Corp., Debtor Debmar Corp., Debtor, and Jeannette Tavormina, as trustee for the estate of Debmar Corp. Plaintiffs v. United States of America, Internal Revenue Service, Defendant

U. S. Bankruptcy Court, So. Dist. Fla., Case No. 81-01883-BKC-SMW, 21 BR 858, 7/19/82

[Code Sec. 6332(d)]

Lien for taxes: Surrender of property: Effect of honoring a levy.--

The Bankruptcy Court concluded that an IRS levy of a federal tax lien on debts due a debtor prior to filing a petition under Chapter 11 of the Bankruptcy Code did not divest the debtor of ownership of the debts. However, this conclusion could not apply where the accounts receivable due the debtor from his account debtor and his bank accounts were paid to the IRS, pre-petition, in satisfaction of the debtor's tax liability, thereby discharging the account debtor's and bank's liabilities to the debtor. As a result, a nonexistent bank account and account receivable could not become "property of the estate" subject to turnover. As such, the payments to the IRS were not characterized as a conveyance of the debtor's intangibles, but neither were they the property of the debtor at the time of the filing of the petition. In addition, the pre-petition satisfaction or payment of the debts secured by an unavoidable lien was not a preferential tax transfer, because there was more than enough unencumbered assets and generated revenue for the IRS to get paid at least the amount it received, and no diminution of the estate.

Louis Phillips, 14 N. E. First Ave., Miami, Fla. 33132, Martin L. Sandler, 1200 Brickell Ave., Miami, Fla., for plaintiffs. Martin L. Sandler, 1200 Brickell Ave. , Miami , Fla. , for debtor. Ira F. Gropper, Assistant United States Attorney, Miami, Fla. 33130, William M. Smith, Attorney General, Department of Justice, Washington, D. C. 20530, for defendant.

Findings of Fact and Conclusions of Law

WEAVER, Bankruptcy Judge:

This cause came to be heard upon Plaintiffs' complaint to recover property and was tried by the Court. The Court, having heard the testimony and examined the evidence presented, having observed the candor and demeanor of the witnesses, having considered the argument and stipulations of counsel, and being otherwise fully advised in the premises, does hereby make the following findings of fact and conclusions of law:

On November 13, 1981, Debmar Corp. ("Debmar") filed a petition in this Court under Chapter 11 of the Bankruptcy Code. On November 20, 1981, Debmar ¹ instituted this action pursuant to 11 U. S. C. §§ 542 and 543 seeking a turnover of property from the Internal Revenue Services. The complaint later was amended to add a claim for the avoidance of a preferential transfer under 11 U. S. C. §547. This civil action arises in a case under title 11, United States Code, and therefore this Court has jurisdiction pursuant to 28 U. S. C. §1471. ²

This dispute arose from the levy by the IRS on Debmar's bank accounts and on a debt owed to Debmar. Debmar asserts that the funds paid to the IRS from the bank account and by Debmar's account debtor are "property of the estate" subject to turnover pursuant to 11 U. S. C. §542 or alternatively that the IRS is a custodian of Debmar's property under 11 U. S. §543 or finally that the transfers to the IRS are preferences voidable under 11 U. S. C. §547.

On various dates from November 18, 1980, to November 13, 1981, the IRS duly filed six notices of federal tax lien against Debmar pursuant to §6323 of the Internal Revenue Code for unpaid taxes totalling $233,380.79. On November 13, 1981, Debmar filed a petition under Chapter 11 and was continued in possession until the Trustee was appointed. However, on or about November 6, 1981, the IRS served notices of levy upon Systems Development Corporation, which owed funds to the Debtor, and on Commercial Bank and Trust Company, where Debmar had bank accounts. By a check dated November 10, 1981, Systems Development Corporation paid funds it owed Debmar to the Internal Revenue Service, which received the check after the petition was filed. Commercial Bank and Trust Company also paid the amount in Debmar's bank accounts to the IRS prior to the petition being filed; when the IRS received the check is not shown by the evidence. The funds received were applied to Debmar's tax liability to the government.

The Trustee asserts that the IRS is a custodian of the funds paid to it and should return them pursuant to 11 U. S. C. §543. However, the definition of custodian in 11 U. S. C. §101(10) belies that argument. This Court finds Judge Friendly's discussion of this point in United States v. Whiting Pools, Inc. [82-1 USTC ¶9269], 674 F. 2d 144, 148-149 (2d Cir. 1982), to be both persuasive and complete, and this Court concludes that the IRS is not a custodian subject to the turnover provisions of 11 U. S. C. §543.

The Trustee also has asserted that the funds should be turned over pursuant to 11 U. S. C. §542. The amounts seized clearly are not of inconsequential value, and the Trustee could use them if she provided the IRS with adequate protection of its interests and received the consent of the IRS or authorization of this Court pursuant to 11 U. S. C. §363(c)(2), as the funds clearly would be cash collateral if they were property of the estate. See e.g., In re Bristol Convalescent Home, Inc. [81-2 USTC ¶9639], 12 B. R. 448, 451 (Bkrtcy. D. Conn. 1981). Accordingly, the crucial issue is whether or not the funds paid to the IRS are property of the estate of Debmar.

Two recent U. S. Court of Appeals decisions have dealt with this issue, albeit in different factual patterns. In In re Cross Electric Co. [81-2 USTC ¶9786], 664 F. 2d 1218 (4th Cir. 1981), the Fourth Circuit Court of Appeals held that an account receivable of a debtor subject to a pre-petition levy of a federal tax lien was not "property of the estate" and reversed lower court orders directing the account debtor to pay the account to the debtor. ³ The Fourth Circuit held that the levy operated as a virtual transfer of the debtor's property to the government and that the only right remaining to the debtor was to redeem the property by paying the tax due, which would not be done because the amount of the tax exceeded the amount of the account receivable levied upon. The Second Circuit, in United States v. Whiting Pools, Inc. [82-1 USTC ¶9269], 674 F. 2d 144 (2d Cir. 1982), rejected that approach in a case involving different facts. In Whiting Pools, the IRS levied upon and seized all of the debtor's tangible property, which had a going concern value substantially in excess of the tax due and a liquidation value substantially less than the tax due. Prior to the sale of the property by the IRS, the debtor filed a Chapter 11 petition. In a very cogent analysis of the relationship of the lien provisions of §6331 et seq. of the Internal Revenue Code with the "property of the estate" and turnover concepts in §§ 541 and 542 of the Bankruptcy Code, Judge Friendly concluded that the IRS's position with respect to tangible property seized but not sold prior to the filing of a bankruptcy petition is analogous to that of a secured creditor in possession, that the IRS's interpretation would prevent a debtor in possession or trustee from obtaining a turnover of property levied upon by the IRS as well as property repossessed by a secured creditor or held by a pledgee after a default, and that the tangible property levied upon remained "property of the estate." See Whiting Pools at 149-160.

While Judge Friendly clearly limited the opinion in Whiting Pools to a situation involving "an IRS levy on tangible property in which the debtor has an equity" (674 F. 2d at 159), the opinion in In Re Bristol Convalescent Home, Inc. [81-2 USTC ¶9639], 12 B. R. 448 (Bkrcy. D. Conn. 1981) applied the same basic analysis to a levy upon intangible property, a debt owed to the debtor. For the reasons expressed in Whiting Pools and Bristol Convalescent Home, this Court concludes that a pre-petition levy by the IRS on debts due the debtor which are not paid pre-petition does not divest the debtor of ownership of the debts and thus that bank accounts and accounts receivable subject to an IRS levy are "property of the estate" within the meaning of 11 U. S. C. §541 and are subject to turnover under 11 U. S. C. §542, subject, of course, to the trustee or debtor in possession providing adequate protection and complying with the safeguarding provisions for cash collateral found in 11 U. S. C. §363(c)(2).

However, this conclusion does not resolve the dispute here. The facts are that the amounts due from the account debtor and the bank to the debtor were paid to the IRS before the Chapter 11 petition was filed. The effect of the payment to the IRS was to discharge the account debtor's and the bank's liabilities to Debmar. Section 6332(d), Internal Revenue Code. Thus, when the petition was filed, there were no bank account balances in Debmar's name and no account due from the account debtor, and thus the nonexistent bank accounts and account receivable could not become "property of the estate." The effect of paying the IRS was to reduce Debmar's tax liability, a situation completely different from that in Whiting Pools where the IRS would have to sell the levied-upon property and apply the proceeds to reduce the tax liability. ⁴ Since the payments served to reduce Debmar's tax liability by being applied to that liability, the payments are best characterized as a partial satisfaction of the the tax liens rather than a conveyance of Debmar's intangibles. In common parlance, the IRS was paid pre-petition; there is no suggestion in the record before this Court or in reason that the IRS held the funds in trust rather than applying them to the tax liability. Accordingly, the account and bank accounts upon which the IRS levied were not property of the debtor at the time of the filing of the petition and thus did not become "property of the estate" under 11 U. S. C. §541.

This conclusion that the pre-petition payment to the IRS resulted in there not being "property of the estate" to be turned over pursuant to 11 U. S. C. §542 leads to the Trustee's next claim, that the payment was a preferential transfer avoidable under 11 U. S. C. §547.

Section 547(b) contains the five elements of an avoidable preferential transfer, while §547(c) sets forth six transfers which are not avoidable even if the five elements of §547(b) are established. The facts are that the transfer of funds to the IRS was a transfer of Debmar's property to one of its creditors made within ninety days of the filing of the petition on account of an antecedent debt owed by Debmar. Two elements remain, the preferential effect of the transfer and insolvency. Although not briefed by the parties, a third issue is significant in this action--§547(c)(6) provides that the "fixing" of a statutory lien not avoidable under §545 is not avoidable under §547.

To determine the effect of §547(c)(6) requires an analysis of 11 U. S. C. §545 and §6323 of the Internal Revenue Code. Briefly, as it applies to federal tax liens, §545(2) permits a trustee to avoid the fixing of a statutory lien on property of the debtor which is not perfected or enforceable on the date of the petition against a hypothetical bona fide purchaser. Section 6323(b) of the Internal Revenue Code protects certain types of transactions (such as transfers of securities, purchases of personal property at retail or in a casual sale, and miscellaneous other transactions) from the effect of a duly filed federal tax lien, such as those involved in this action. Thus, if the federal tax lien on the account due from Systems Development Corporation or another bank account is not perfected or enforceable against a bona fide purchaser as a result of §6323(b) of the Internal Revenue Code, then the federal tax lien on those accounts could be avoided. Subsection (1) of §6323(b) protects a bona fide purchaser of "securities" from the effect of the tax lien; "security" is defined in §6323(h)(4) to mean stocks and bonds, negotiable instruments, and "money". It is clear that the accounts are not stocks or bonds and are not negotiable instruments. Unfortunately for the Trustee, the term "money" within the definition of "security" has been interpreted as meaning not "the right to receive money" but "the kind that one could bite, feel or pinch." Worely v. United States [65-1 USTC §9160], 340 F. 2d 500, 502 (9th Cir. 1965). Likewise, a commercial checking account has been held not to be within the definition of "security." United States v. Asher, 54-2 USTC ¶9454 (S. D. Cal. 1954). Since there are no other exceptions in §6323(b) which conceivably could include an account receivable or checking account the transfer of which to a bona fide purchaser would be valid against the federal tax lien, then the conclusion naturally follows that the fixing of the federal tax liens on the account receivable and on the checking account is not avoidable under §545 and thus, by virtue of §547(c)(6), is not avoidable under §547(b).

Ordinarily, the pre-petition satisfaction of or payment on a debt secured by an unavoidable lien is not a preference, since the transferee would receive as much in liquidation as it actually received (i.e., no preferential effect) or, put another way, there has been no diminution of the estate. See generally 4 Collier on Bankruptcy ¶547.21 (15th ed. 1979). However, the argument is made that the satisfaction of a federal tax lien can have a preferential effect. The theory is that if there were a liquidation under Chapter 7 of the Bankruptcy Code, the property would be distributed first to claimants accorded priority by §507(a)(1)-(5) and only then to the payment of the federal tax lien; in other words, the tax lien would be subordinated to those priority claims. See 11 U. S. C. §724(b). Thus, the IRS conceivably could get more of its claim paid by keeping the pre-petition payment than if it surrendered the payment and was paid in accordance with §724(b). Accordingly, if the other four elements of a preferential transfer were met, the satisfaction of a federal tax lien could have a preferential effect. See generally 4 Collier on Bankruptcy ¶547.42 (15th ed. 1979); Nowak, "Turnover Following Prepetition Levy of Distraint under Bankruptcy Code §542", 55 Am. Bankr. L. J. 313, 318-322 (1981). This argument is premised upon the literal wording of §547 and the legislative history which shows that an earlier version of §547(c)(6) would have protected both the fixing and the satisfaction of a statutory lien not avoidable under §545. See Nowak, 55 Am. Bankr. L. J. at 318. However, this Court has substantial doubts that Congress intended to require the IRS to disgorge payments received on account of tax liens within the preference period, based upon such a complicated legal analysis, without a clear statement of intent in the legislative history, although this Court agrees that the literal wording of §§ 547 and 724(b) can reach that result.

This Court does not need to reach a decision on that argument, however. First, there is no clear and convincing proof of preferential effect even applying §724(b). The Schedules of Liabilities and Assets disclose no claims entitled to priority under §507(a)(2)-(5). Schedule B-2 discloses in excess of $25,000 of personal property unencumbered other than perhaps by the federal tax liens (excluding the funds paid to the IRS). Furthermore, the Trustee testified that some $4,000 per month would be available to pay the IRS as "adequate protection" payments if a turnover were ordered. While the Court recognizes that there probably will be administrative claims entitled to priority under §507(a)(1), there was no evidence elicited to show the extent of those claims, and the Court finds that there will be more than enough unencumbered assets and revenue generated to pay the Trustee's fee as well as fees for professionals. Thus, even if the federal tax liens were subordinated to the sixth priority enjoyed by unsecured tax claims (§507(a)(6)), the evidence indicates that the IRS still would get paid at least the amount it received, approximately $70,000 out of a total claim for $233,000. Accordingly, the Court finds that the payments to the IRS were not proven to have a preferential effect within the terms of 11 U. S. C. §547(b)(5).

Secondly, the Debtor, who participated in the trial, offered the Schedules of Liabilities and Assets into evidence without objection from any party. The Schedules reflect that Debmar was solvent on the date of the filing of the petition, and thus the clear inference from that evidence is that Debmar was solvent within the week preceding the filing of the petition. See generally 4 Collier on Bankruptcy ¶547.27 (15th ed. 1979). Although the Trustee, who is very experienced in the liquidation of property, testified to liquidation valus of certain of the property, there was no testimony about the value of other assets which are listed in Schedule B-2. Furthermore, there was no evidence to contradict the going concern valuation placed upon Debmar's business by an appraiser, and Florida law appears to allow the sale of a business such as the one engaged in by Debmar. See §400.179, Florida Statutes.

Ordinarily, a trustee would rely upon the presumption in §547(e)(4) that the debtor was insolvent on and during the ninety days preceding the filing of the petition. Here, however, evidence was introduced that Debmar was solvent on the date of the filing of the petition. Under the "bursting bubble" theory of the effect of presumptions, applicable here, if evidence of the contrary fact is admitted, the presumption disappears and the burden of proof is on the plaintiff to establish the fact. See Cleary, McCormick's Handbook of the Law of Evidence, §345 (2d ed. 1972); 4 Collier on Bankruptcy ¶547.26 (15th ed. 1979). With the destruction of the presumption, the fact of insolvency had to be established by clear and convincing proof, which was not done. Accordingly, this Court finds that the fact of insolvency was not established.

Since two elements of a preferential transfer were not established, the Trustee is not entitled to avoid the partial satisfaction of the federal tax liens, even if such satisfaction is theoretically possible under the arguments discussed above.

In summary, the IRS is not a custodian within the meaning of 11 U. S. C. §543; the funds transferred to the IRS were not proven to be "property of the estate", since payment occurred pre-petition, and thus are not subject to turnover under 11 U. S. C. §542; and there was insufficient proof to establish all of the elements of a preferential transfer, even if the transfers were not protected by 11 U. S. C. §547(c)(6).

The Court will enter a judgment in conformity with these findings of fact and conclusions of law.

Final Judgment

This action came on for trial before the Court and the issues having been duly tried and a decision having been duly rendered, it is

ORDERED and ADJUDGED that the plaintiffs take nothing, that the action be dismissed on the merits, and that the defendant, the United States of America , recover of the plaintiffs, Debmar Corp. and Jeanette Tavormina as trustee for the estate of Debmar Corp., its costs of action upon appropriate application.

¹ Jeanette Tavormina was appointed trustee of Debmar's estate pursuant to 11 U. S. C. §1104. By Order dated May 18, 1982 she was joined as a plaintiff in this action.

² This Court's reading of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., Case No. 81-150 (U. S. June 28, 1982) (holding the grant of jurisdiction to the Bankruptcy Courts unconstitutional) reaches the conclusion that the Supreme Court means its decision to have effect only from October 4, 1982, the date to which its judgment is stayed, and that matters presently pending before the Bankruptcy Courts are not to be affected.

³ On essentially the same pattern of facts, In re Bristol Convalescent Home, Inc. [81-2 USTC ¶9639], 12 B. R. 448, 450 (Bkrtcy. D. Conn. 1981) held , to the contrary that "the IRS levy, no matter how extraordinary under the Internal Revenue Code, remains a lien, prior to actual sale of the property, and does not prevent the property levied upon from becoming property of the estate" subject to turnover under §542. The court held that the account due the debtor was property of the estate subject to §542 turnover.

⁴ For purposes of determining when the transfer to the IRS occurred, this Court concludes that the date the account debtor or bank draws a check payable to the IRS and constructively delivers it to the IRS by putting it in the mails addressed to the IRS is the date of transfer to the IRS and the effective date of the discharge of liability to the taxpayer-debtor, since the drawer of the check presumably would be liable on the check to the IRS if its bank dishonored the check. See §673.413(2), Florida Statutes. This situation is different from that of a bank's payment of a check drawn by the debtor, where the transfer of the debtor's property is considered to have occurred at the time of the bank's payment of the check and not at the time the debtor drew the check, at least when a preferential transfer is sought to be avoided. See, e.g., In re Duffy, 3 B. R. 263 (Bkrtcy. S. D. N. Y. 1980). Policy reasons support this conclusion: A person who complies with the IRS levy should not be exposed to potential liability to the IRS because he honored the levy and then stopped payment on the check and should not be exposed to liability to a debtor for not stopping payment on the check. To allow that possibility would impede the efficient collection of taxes and thus would be contrary to the public good.

 

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

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

[Code Secs. 6331 and 6332 ]

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

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

ORDER

BACKGROUND

SILVER, District Judge:

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

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

Id.

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

This case is distinguishable from Whiting Pools because Debtor had no legal or equitable interest in the mon