Annotations- Salary

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6332 Annotations: Salary- Levy

 

Penalty for Failure to Surrender Property: Salary

 

[67-1 USTC ¶9402] United States of America , Plaintiff v. Harry Penn and Louis Zunin

U. S. District Court, Dist. Ariz., Civil Action File No. 2190 Tucson, 266 FSupp 655, 3/31/67

Levy: Surrender of property subject to levy: Salary advances: Future earnings.--Where the delinquent taxpayer had collected his salary in advance (it was not shown that the salary advances were intended to frustrate the collection of taxes), Government levies on the taxpayer's employer to collect unpaid withholding and social security taxes were ineffective. Since a levy does not affect future earnings, the employer did not hold property which he had to surrender to the U. S.

Jo Ann D. Diamos, Ass't U. S. Attorney, Tucson , Ariz. , for plaintiff. Dowdall and Harris, Tucson , Ariz. , for defendants.

SMITH, District Judge:

May a wage earner who is indebted to the United States for federal withholding and Federal Insurance Contribution Act taxes frustrate the efforts of the United States to recover those taxes by collecting his wages in advance? Motions for summary judgment made by the plaintiff and the defendants pose this problem.

From the pleadings, answers to interrogatories and depositions it appears that Gerald Boucher, during the year 1961 as an owner of a water conditioning business, became indebted to the United States for withholding taxes and FICA contributions. Later and on December 1, 1961 Boucher was employed by the defendants Penn and Zunin in their drug store. In February, 1962, at the request of Boucher the defendants started paying him his weekly salary in advance. They were unaware of his tax liability and did not learn of it until July 9, 1964. At that time the United States served the first of a series of notices of levy on the defendants for the purpose of securing for the United States the unpaid wages due to Boucher. Had Boucher not been paid in advance there would have been due to him as of the time of the various levies an amount of $529.00 which the defendants as debtors of Boucher, would have been required to hold for the United States . The record does not show, and the complaint does not allege, that the advance salary arrangement was made by defendants for the purpose of frustrating the efforts of the United States to collect the taxes.

Defendants take the position that at the time the various levies were made they owed Boucher nothing, and that hence there was nothing upon which the levy could operate. Factually the defendants' contention is true. At the time all the levies were made Boucher was still obligated to defendants for some work to satisfy salary advances theretofore made. Since a levy under Section 6332, Title 26 U. S. C. A., does not affect future earnings, ¹ the defendants had no property or rights in property which they were obligated to surrender to the United States.

Plaintiff's motion for summary judgment is denied.

Defendants' motion for summary judgment is granted, and the court directs that all relief be denied to the plaintiff.

¹ United States v. Long Island Drug Co. , 2 Cir. 1940 [41-1 USTC ¶9140], 115 F. 2d 983; United States v. Newhard, W. D. Penn. 1955 [55-1 USTC ¶9234], 128 F. Supp. 805.

[40-1 USTC ¶9278]Samuel A. Neidich, Petitioner, v. Harry L. Maloney, Collector of Internal Revenue, and Underwood Elliott Fisher Company, a corporation, Respondents

United States District Court, District of New Jersey, Civil Action C-252, Filed February 27, 1940

On Amended Petition, etc., on Order to Show Cause.

Restraint of collection by distraint.--The court grants an order restraining the Collector from making any collection from taxpayer's employer on distraint issued against taxpayer's salary of $1,000 a month. The court holds, however, that it is not empowered to direct the release of the salary to petitioner, and suggests that the employer's liability be established by proper proceedings in some competent court.

Powell & Parker, Mount Holly , N. J., for petitioner. John J. Quinn, United States Attorney, W. Orvyl Schalick, Assistant U. S. Attorney, James W. Morris, Assistant Attorney General, and Andrew D. Sharpe, and Frederic G. Rita, Special Assistants to the Attorney General, for respondent Maloney. Simpson, Thacter & Bartlett, for respondent Underwood Elliott Fisher Company.

Memorandum

AVIS, District Judge:

Petitioner is indebted to the United States for income taxes in the sum of $135,905.41, as determined by the Commissioner of Internal Revenue and ordered and decided by the United States Board of Tax Appeals, in accordance with a deficiency assessment for the year 1929. A petition for review of this determination is now pending in the United States Circuit Court of Appeals for the Third Circuit. [This opinion is reported at 39-2 USTC ¶9618.]

[Distraint Against Salary]

No supersedeas bond was filed, and on March 2, 1939 the respondent Collector made formal written demand on petitioner for the payment within ten days of the amount so found to be due. Petitioner was unable to make payment, and on or about March 24, 1939 the Collector issued a distraint and levied on petitioner's salary due and to become due from Underwood Elliott Fisher Company. The amount of salary is $1000 per month, and the Collector demanded and insisted that that Company immediately pay over the full amount due petitioner, to be applied on account of said judgment.

It is claimed by counsel for petitioner that the action of the Collector is without authority of law and contrary to the statutes of New Jersey with relation to the garnishment of salary or wages, and prays that the distraint or execution and levy aforesaid be vacated, and that Collector be required to proceed in accordance with the statutes of New Jersey in such case made and provided.

The statement of facts is taken from the verified petition of petitioner; no answer being filed, and no affidavits presented challenging the statements made therein.

[The Law]

The statutes relating to the lien, distraint and enforcement of tax claims are as follows:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with such interest and other additional amounts as are required by law, by distraint and sale, in the manner provided in this subchapter, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid.

In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy.

(The above quotations are from Internal Revenue Code, approved February 10, 1939, and are Sections 3670, 3690 and 3692, respectively.)

It will be noted that the lien covers "all property and rights to property, whether real or personal, belonging to such person"; the second section authorizes the collector or his deputy to collect said taxes by distraint and sale of "goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid;" and the third section authorizes levy upon "all property and rights to property, except such as are exempt by the preceding section".

So far as I have been able to find, there is no case passing upon the question of the right of lien, distraint or levy directly against wages or salaries. I have grave doubt as to whether a salary can be reached by a direct levy against the employer under these statutes. As a matter of fact, the Federal statute relating thereto provides only for "distraint and sale".

[Cases Analyzed]

In the case of Trapp v. Brown, 91 N. J. L. 481 there was at issue the question of construction of the New Jersey statute relating to the right of plaintiff to obtain an ex parte order for payment by a third party of accrued and accruing rent from a property owned by a defendant. The court decided the main question in that case upon the ground that the plaintiff had not exhausted his right under execution, in view of the fact that defendant apparently owned a property from which a large revenue was annually received, and no explanation was made why it was not sufficient to satisfy the judgment. The court also concluded that "rent" was not contemplated by the Legislature in passing the act providing for an order "where any wages, debts, earnings, salary, income from trust funds or profits are due and owing to the judgment debtor."

The court, on pages 485-6, said:

It will be presumed, therefore, that where the legislature in its enactment distinctly classifies one species of property, peculiarly personal to the debtor, and fails to enumerate another species, non ejusdum generis, and not distinctively personal to the debtor, that its omission of the latter species was due to an intent to eliminate it from the purview of the act. Livermore v. Freeholders, 29 N. J. L. 245.

A rule equally cogent, since the days of Lord Hale, is that of "noscitu a socits," which construes the specific language employed with reference to its subject associates, so that when a subject-matter of distinctive characteristics is specifically mentioned, to the exclusion of another species of equally well-defined characteristics, in the absence of some general provision sufficiently comprehensive to include it, the latter class will not be included in the generic designation.

The assessment for income taxes is given the force of a judgment. See, Bull, Executor v. United States , 295 U. S. 247, 260 [35-1 USTC ¶9346].

The distraint is in the nature of an execution, but it is not issued out of any court, and it is difficult to see how the statutes of the State of New Jersey can apply at the present time to these proceedings.

Garnishment, or proceeding in equity for discovery, are the only methods to enforce a recovery against a person or corporation holding assets or other property belonging to a debtor. See, 28 Corpus Juris, p. 170, sec. 216; 28 Corpus Juris, p. 92, secs. 118, 119; 23 Corpus Juris, p. 334, sec. 62.

Section 3678(a) of Internal Revenue Code, approved February 10, 1939, authorizes the Attorney General, at the request of the Commissioner, to enforce the lien for taxes in a district court of the United States .

The Congress has by Chapter 7 of the Internal Revenue Code, approved February 10, 1939, sections 1250 to 1253, inclusive, provided for the enforcement of taxes on transfers, and has also, in section 3653 of the said Code, prohibited restraints as to transfers and fiduciaries, but has enacted no law that I can find of that character relating to garnishment. It is evident that Congress anticipated that situation would arise, such as in the instant case, where civil court proceedings would be required.

[Restraint of Collection]

Counsel for respondent Collector has filed a motion to dismiss the proceedings based upon the provisions of Rev. Stat. sec. 3224 (26 USCA sec. 1543) which states:

No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.

That statute undoubtedly precludes this Court from issuing any restraint on the ground that the assessment was illegal; that question is now before the Circuit Court of Appeals for the Third Circuit. I believe there are extraordinary and exceptional circumstances in the instant case, such as the utter impossibility of the petitioner paying the tax and suing to recover; the fact that the salary attempted to be distrained is his means of livelihood, and, as I have stated, the method of attempted collection under distraint is not authorized by any Federal statute.

In Graham v. duPont, 262 U. S. 234 [1 USTC ¶78], it was held that the taxpayer could not obtain a restraint under the circumstances in that case, and it seems to be general in its application. However, in the case of Bailey, &c. v. George, &c., 259 U. S. 16, the Supreme Court opinion appeared to justify a court in granting restraint under "extraordinary and exceptional circumstances". This latter doctrine is sustained by several cases set out in Note 16, 26 USCA sec. 1543.

However, the issue in the instant case is not the legality of the assessment. The legality of the method of enforcement is the question for determination. In my opinion, Congress did not intend to take from the court their jurisdiction in cases involving due process under the Fourteenth Amendment to the Constitution. As an instance, the courts can restrain where property of one person is seized for payment of the debt of another, or extraordinary or exceptional circumstances are involved. See, Long v. Rasmussen, D. C., 281 F. 236; Owensboro Ditcher & Grader Co. v. Lucas, Collector, D. C., 18 F. 2d 798, 802 [1 USTC ¶228]; Trinacia Real Estate Co., Inc., v. Clarke, Collector, D. C., 34 F. 2d 325, 328 [1 USTC ¶422]; Regents of University System of Georgia v. Page, 5 Cir., 81 F. 2d 577 [36-1 USTC ¶9088]; Page, Collector, v. Regents of University System of Georgia, 5 Cir., 93 F. 2d 887 [37-2 USTC ¶9607]; Allen, Collector, v. Regents of the University System of Georgia, 304 U. S. 439, 445 [38-2 USTC ¶9321].

Proceedings to collect must be regular and in accordance with legal authority. Congress did not provide any methods of recovery by distraint as against a person possessed of rights or credits belonging to a debtor. Relief of that character can only be obtained by court action.

In Phillips, et al., Executors, v. Commissioner of Internal Revenue, 283 U. S. 589 [2 USTC ¶743], the court sustained the Commissioner in the enforcement by distraint of an assessment against transferees under the provision of the statute covering that subject. However, the court on page 592 said: "Before the enactment of Section 280(a)(1), such payment by the stockholders could be enforced only by bill in equity or action at law." (Section 280(a)(1) is superseded by sections 1250 and 1253 of the aforesaid Code.)

This conclusion seems to be authority for my conclusions in the instant case; that is, unless Congress clearly determines the method of collection, it must be by court action.

[Conclusion]

I am satisfied that I should sign an order restraining the Collector from making any collection from the Underwood Elliott Fisher Company on the distraint issued and under which a levey was made because the law does not authorize such a collection, but that I am not empowered to direct the release of the salary or the discharge of the Company from the notice given by reason of the service of the distraint. The Company's liability may be later established by proper proceedings in some competent court. See , United States v. Canfield, D. C., 29 F. Supp. 734 [39-2 USTC ¶9641].

Terms of order to be settled upon notice.

 

[54-1 USTC ¶9194]Lucius Antrum, Plaintiff v. United States of America , James Graham, Director of Internal Revenue for the District of Connecticut, and the Seymour Manufacturing Company, Defendants

In the United States District Court for the District of Connecticut, Civil Action No. 4590, December 14, 1953

Distraint: Levy on wages: Injunction.--A suit to enjoin the District Director from levying upon taxpayer's wages, apparently on the ground that they were not subject to garnishment under state law, and to recover wages already paid over to the government was dismissed for lack of jurisdiction. Suits to restrain collection of taxes are prohibited; suit for refund cannot be brought without filing a claim for refund or credit, and federal law gives the District Director authority to distrain.

Frank S. Meadow, 152 Temple Street , New Haven , Conn. , for plaintiff. Raymond E. Hackett and Edward F. Snyder, 1 Atlantic Street , Stamford , Conn. , for defendants.

Memorandum of Decision on Motion to Dismiss

SMITH, District Judge:

Plaintiff taxpayer sues to enjoin the Director of Internal Revenue from continuing a levy upon his wages in the hands of his employer, to vacate the existing levy, to recover the wages from the employer, and so far as already paid over, to recover them from the United States and from the Director of Internal Revenue.

All parties defendant move to dismiss.

The motions to dismiss are well taken. So far as the action seeks to enjoin the Director, it is barred by 26 USC 3653. So far as it seeks to recover from the United States and the Director the sums paid, it is barred by 26 USC 3772 since no claim for refund or credit has been filed.

It fails to state a claim against the employer, Seymour Manufacturing Company, on which relief may be granted, for it sets up payment or surrender by the employer upon a valid distraint for taxes due. Plaintiff relies upon the statutory limitations on garnishment of wages under the Connecticut law.

No such garnishment or foreign attachment under Connecticut law was here attempted, however, the Director relying upon the additional remedy of distraint given him by the federal internal revenue law itself. This course is within the power of the Director. U. S. v. Long Island Drug Co., CA 2 (1940) 115 Fed. (2d) 983, 985-6 [41-1 USTC ¶9140]. U. S. v. Manufacturers Trust Co., CA 2 (1952) 198 Fed. (2d) 366, 368 [52-2 USTC ¶9417].

Judgment may be entered dismissing the action. 

 

[96-1 USTC ¶50,253] United States of America, Plaintiff v. Giffels Associates, Black & Veatch, and Comerica Bank, N.A. as successor in interest of Manufacturers National Bank, Defendants

U.S. District Court, East. Dist. Mich. , So. Div., 95-CV-71316-DT, 4/3/96

[Code Sec. 6331 ]

IRS levy: Bankrupt taxpayer: Account receivables: Assignments to bank: Security interest.--Two consulting firms improperly failed to surrender to the IRS funds owed to a bankrupt company, which performed services for the firms as a subcontractor, upon receipt of a notice of levy relating to the company's outstanding tax liabilities. Although the firms had received notices instructing them to pay funds owed the company to the company's bank, the notices were meaningless since they referred to nonexistent assignments of the company's accounts receivable to the bank. The company had merely granted the bank a security interest in its accounts receivable, not its entire rights to the receivables. Thus, because the firms had possessed property of the company, they were liable to the IRS for the amounts they surrendered to the bank.

[Code Sec. 6502 ]

IRS levy: Statute of limitations: Collection: Time levy served: Filing of suit: Bankruptcy: Tolling.--The statute of limitations did not bar an IRS suit to enforce a levy against two consulting firms that failed to surrender funds owed to a bankrupt company. The levy was served within six years of the date the tax assessments were made against the company. Even if the IRS had to file suit within the six-year period rather than merely serve a levy, the limitations period was suspended as long as the company was in bankruptcy proceedings and for six months thereafter. The firms' argument that the limitations period should not have been tolled because the IRS could have sued the firms or the bank to which the funds were paid once they surrendered the funds to the bank was rejected. Since a tax collection suit against the company would have been timely, the suit against the firms that were derivatively liable for the tax debt was also timely. Further, laches did not bar the IRS's suit since there is no time limit on the government's right to pursue claims against those who fail to honor levies.
[Code Sec. 6332 ]

IRS levy: Bankrupt taxpayer: Account receivables: Surrender of property to third party: 50% penalty: Interest.--Two consulting firms that failed to surrender to the IRS funds owed to a bankrupt company upon receipt of a notice of levy relating to the company's tax liabilities were not liable for the 50% penalty imposed under Code Sec. 6332 because they had reasonable cause for not honoring the levy. The firms argued that they surrendered the funds to the company's bank upon receiving notices from the bank that the company had assigned its interest in the receivables to the bank. Even though the notices were meaningless since the assignments were nonexistent, there was no great weight of authority that controlled whether the company's agreements with its bank were assignments of its rights to the funds. The court did not issue a judgment containing a final sum owed since the IRS did not explain how to calculate the interest that it requested.

John V. Cardone, Department of Justice, Washington , D.C. 20530 , for plaintiff. Michael D. Boutell, Michael R. Main, Christian C. Nilson, Allan M. Darish, Elias Muawad, Kurt M. Carlson, Comerica, Inc., Legal Department, P.O. Box 75000, Detroit, Mich. 48275-18936, for defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANTS GIFFELS ASSOCIATES AND BLACK & VEATCH

WOODS, District Judge:

This matter having come before the Court on plaintiff's motion for summary judgment against defendants Giffels Associates and Black & Veatch;

The Court having reviewed the pleadings submitted herein, and being otherwise fully informed in the matter;

IT IS HEREBY ORDERED that plaintiff's motion for summary judgment shall be, and hereby is, GRANTED.

I. INTRODUCTION AND FACTS

Defendants Giffels Associates and Black & Veatch (collectively, "defendants") are corporate entities located in Michigan . Defendant Comerica Bank, N.A. is the successor in interest to Manufacturers National Bank ("the Bank"). Defendants contracted with the City of Detroit to perform consulting services. Chemical Industrial Services, Inc. ("the taxpayer") performed services for defendants as a subcontractor for one or more of defendants' contracts with the City of Detroit .

On March 28, 1979 and February 11, 1982, the taxpayer and the Bank executed security agreements in which the taxpayer granted the Bank a security interest in its accounts receivable in consideration for future loans from the Bank. The Bank filed the appropriate financing statements with the Michigan Secretary of State. On March 28, 1979, January 9, 1980 and July 9, 1982, the Bank sent to defendants a document labelled as a "Notice of Assignment of Accounts Receivable and Direction to Pay to [the Bank]." This document instructed defendants to pay all of their current and future debts to the taxpayer directly to the Bank.

From March 23, 1979 through March 26, 1982, plaintiff filed notices of federal tax liens with the Michigan Secretary of State for outstanding tax liabilities owed by the taxpayer. By July 7, 1982, the taxpayer owed plaintiff $65,770.12, including unpaid assessed taxes and statutory interest. At that time, defendants owed the taxpayer $62,294.71 in accounts receivable. On July 7, 1982, plaintiff issued and served on defendants a notice of levy, notifying them of the taxes owed by the taxpayer and demanding that they surrender all of the property and property rights of the taxpayer which they held in the form of unpaid accounts receivable. To date, defendants have not honored plaintiff's levy.

The taxpayer filed a bankruptcy petition on July 22, 1982. On January 24, 1983, and upon the taxpayer's motion, the Bankruptcy Court restrained defendants from tendering the $62,294.71 to plaintiff. On March 18, 1983, the Bankruptcy Court ordered defendants to pay the taxpayer and the Bank jointly the $62,294.71 owed in accounts receivable. On April 12, 1983, however, the Bankruptcy Court vacated that order upon a motion by plaintiff.

On June 10, 1983, the taxpayer commenced an adversary proceeding seeking a turnover of the $62,294.71. The Bankruptcy Court dismissed this proceeding without ordering defendants to turnover the funds. On June 11, 1984, defendants turned over the $62,294.71 to the Bank, and the Bank agreed to indemnify defendants for any liability incurred as a result of doing so.

On October 17, 1985, plaintiff began an adversary proceeding against the taxpayer and the Bank, seeking payment of the $62,294.71. On January 8, 1986, plaintiff stipulated to a dismissal; the stipulation stated that "the parties hereto agree that the account receivable which is the subject of this adversary proceeding is not property of the estate and that this dispute is a priority dispute between the United States and the Bank."

On May 22, 1991, the taxpayer's bankruptcy proceeding closed. Plaintiff filed the instant suit on April 3, 1995, seeking to enforce the July 9, 1982 levy and collect from defendants the $62,294.71 which they paid to the Bank rather than to plaintiff.

II. STANDARD

Under Rule 56(c), a court should grant a motion for summary judgment only if the evidence indicates that no genuine issue of material fact exists. In order to avoid summary judgment, the opposing party must set out sufficient evidence in the record to allow a reasonable jury to find for him at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). A court tests the sufficiency of the evidence against the substantive standard of proof that would control at trial. Anderson , supra. The moving party must show that there is an absence of evidence to support the non-moving party's case. Celotex v. Catrett, 477 U.S. 317, 325 (1986). "[A] party opposing a properly supported motion for summary judgment may not rest on mere allegations or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256. A court disposing of a summary judgment motion must consider the evidence in the light most favorable to the non-moving party, but may weigh competing inferences for their persuasiveness. Matsushita, supra.

III. ANALYSIS

Plaintiff is attempting to collect unpaid taxes through an administrative levy served upon defendants under 26 U.S.C. §6331 , which provides that plaintiff may collect unpaid taxes "by levy upon all property and rights to property ... belonging to such person or on which there is a lien provided in this chapter for the payment of tax." Because defendants allegedly possessed property of the delinquent taxpayer in the form of the taxpayer's accounts receivable, plaintiff proceeds under 26 U.S.C. §6332(d)(1) , which imposes personal liability for a tax liability on any person who fails to surrender property which is subject to levy.

The parties first contest whether defendants ever possessed rights to property which belonged to the taxpayer. Specifically, the parties contest whether the taxpayer owned the rights to its accounts receivable when plaintiff served defendants with a notice of levy. If the taxpayer had assigned its rights to its accounts receivable to the Bank, then all of the funds owed by defendants to the taxpayer were actually the property of the bank and not of the taxpayer. Under such facts, defendants would have no obligation to honor plaintiff's levy because they never possessed rights to any property of the taxpayer. Conversely, if the taxpayer retained any property rights to its accounts receivable when defendants received the notice of levy, then defendants are potentially liable to plaintiff because they possessed rights to the taxpayer's property.

In United States v. Gen. Motors Corp. [91-1 USTC ¶50,158 ], 929 F.2d 249 (6th Cir. 1991), the IRS sought to collect under §6332 a tax by enforcing a levy served upon third-party General Motors Corporation ("GM"). As in this case, the IRS asserted that it had served GM with a notice of levy when GM had possessed property in the form of a debt owed to the taxpayer. Id. at 251. GM argued that it was not subject to the levy because it never possessed any property of the taxpayer because the taxpayer previously had transferred its entire interest in its accounts receivable to a bank as security for a loan. Id.

The General Motors Court first explained that "state law determines 'the nature of the legal interest which the taxpayer had in the property.' " Id. (quoting United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722 (1985)). The parties did not dispute that the taxpayer had assigned its accounts receivable to the bank. Id. at 252. The General Motors Court therefore explained that Michigan law defined an assignment as the following:

[a] transfer or setting over of property, or of some right or interest therein, from one person to another, and unless in some way qualified, it is properly the transfer of one's whole interest in the estate, or chattel or other thing. It is the act by which one person transfers to another or causes to vest in another, his right to property or interest therein.

Id. (quoting Allardvce v. Dart, 291 Mich. 642, 644 (1939)). Accordingly, the fact that the taxpayer had assigned its rights to its accounts receivable to the bank indicated that GM did not have to honor the levy because GM had not possessed any property of the taxpayer when the government served the levy. Id. at 252-53.

In the instant case, defendants argue that the holding in General Motors mandates a finding that they have no obligation to honor the levy. In General Motors, however, "[i]t [was] not disputed that [the taxpayer] assigned its accounts receivable and contract rights to the Bank." Id. at 252. Here, the government asserts that the taxpayer never assigned its accounts receivable. Likewise, the General Motors Court found that the government had no valid lien on future monies owed to the taxpayer because the taxpayer had assigned its after-acquired accounts receivable, and because the taxpayer's ability to collect money in the usual course of business on behalf of the Bank did not defeat the assignment. Id. at 253. General Motors therefore merely outlines the general rule that the IRS cannot collect from a third-party property which the taxpayer previously assigned; the case does not explain how to decide the issue in this case: whether the taxpayer in fact has assigned the rights to its accounts receivable to a bank.

The taxpayer and the Bank signed two security agreements, dated March 28, 1979 and February 11, 1982 respectively. See Defendant's Response, Exhibit A. A review of those documents reveals that the taxpayer merely granted the Bank a security interest in its accounts receivable in consideration for a loan; the taxpayer did not assign its entire rights to its accounts receivable to the Bank. Specifically, ¶4 of the security agreements indicate that the Bank made the loans to the taxpayer on a non-remittance basis. Id. The taxpayer therefore could collect its accounts receivable and then pay the Bank any monies owing. In contrast, if the Bank had made the loans on a remittance basis, then the taxpayer would have had to, among other things, (1) keep accounts receivable in a separate fund in trust for the Bank, and (2) at the Bank's option, deposit its accounts receivable into an "assignee deposit account," which the Bank then could use towards payment of monies owed. Id. at ¶5. Ultimately, the security agreements do not reflect an intent by the taxpayer to divest itself of all of its rights to all of its accounts receivable.

Defendants note that the Bank sent to them a document labelled as a "Notice of Assignment of Accounts Receivable and Direction to Pay to [the Bank]" on March 28, 1979, January 9, 1980 and July 9, 1982. These documents instructed defendants to begin paying all of their current and future debts to the taxpayer directly to the Bank. See id., Exhibits B-E. The security agreements, however, control the parties' rights; the taxpayer either assigned its accounts receivable to the Bank in those agreements or it did not. Because it did not, the Bank's notices of assignment to defendants are meaningless because they refer to a nonexisting assignment. ¹

Defendants have suggested that plaintiff's stipulated dismissal of its suit against the taxpayer during the bankruptcy proceedings is evidence that the taxpayer assigned its accounts receivable to the Bank. The stipulation, however, cannot affect whether the agreements at issue in fact created an assignment.

B. Defendants' Alleged Failure to Comply with Discovery

Plaintiff points out that many of the documents submitted by defendants in response to the instant motion, including the notices of assignment, did not surface until defendants filed their January 5, 1995 response. Although plaintiff's July, 1995 discovery requests encompassed the documents, defendants did not provide them. Defendants vaguely explain their failure to have provided the documents by attaching to their response an affidavit of an otherwise unidentifiable person named Beth A. Mier. In her affidavit, Ms. Mier states that "[o]n January 3, 1996, I was notified by the attorney for Giffels Associates, Stephen McGraw of Kerr, Russell & Weber, that files regarding the Detroit Water Department matter involved herein, which were thought to have been destroyed, were located in its warehouse." Plaintiff states that Fed. R. Civ. P. 37(c)(1) forbids the Court from considering the previously undisclosed documents when deciding the instant motion.

Regardless of whether plaintiff is correct that Rule 37(c)(1) necessarily prevents the Court from considering the previously undisclosed documents, the relief requested by plaintiff is moot. The Court has found that the security agreements defined the taxpayer's legal relationship with the Bank, and that the taxpayer did not assign its accounts receivable to the Bank through those documents. Subsequent communications by the Bank to defendants could not alter the legal effect of the security agreements. Even if the Court considered the previously undisclosed documents, therefore, plaintiff still would receive summary judgment.

C. Statute of Limitations and Laches Defenses

The parties dispute whether the statute of limitations bars this suit. As explained infra, the Court finds that it does not.

Before 1990, 26 U.S.C. §6502 provided for a six-year period of limitations for the collection of a tax after an assessment. See 26 U.S.C. §6502(a)(1) (West 1989). In the Sixth Circuit, timely service of a levy upon a third party complies with the requirements of §6502 . United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 620-21; 624-25 (6th Cir. 1979). In other words, the government constructively takes possession of property when it serves a levy concerning the property; if the government serves the levy within the applicable limitations period, it then may seek to enforce the levy at its leisure. Id.; see also State Bank of Fraser v. United States [88-2 USTC ¶9592 ], 861 F.2d 954, 961 n.6 (6th Cir. 1988) (holding the same)

Plaintiff served its levy in 1982 in order to collect taxes assessed from 1979 to 1982. Under Weintraub, plaintiff complied with the applicable six-year statute of limitations period.

Defendants argue that the rule in Weintraub ignores the holding in United States v. Updike [2 USTC ¶533 ], 281 U.S. 489 (1930), which ruled that the government could not seek to collect a dissolved corporation's tax liability from the corporation's stockholders more than six year after having assessed the tax at issue. The holding in Updike, however, did not control the issue in Weintraub of whether the government could comply with the six-year statute of limitations period by serving a levy, as opposed to filing suit.

Moreover, §6502 still does not bar this action, even if plaintiff had to file suit rather than merely serve a levy within the applicable statute of limitations period. 26 U.S.C. §6503 suspends the limitations period for collecting an assessed tax for as long as the taxpayer is in bankruptcy proceedings and for six months thereafter. See 26 U.S.C. §6503(h) . Plaintiff issued the earliest tax assessment on May 23, 1979. The taxpayer filed its bankruptcy petition on July 22, 1982. The bankruptcy proceedings extended until May 22, 1991, thereby suspending the limitations period for over nine years. Further, Congress extended the six year period of limitations to ten years for all tax liabilities which had not expired on or before November 5, 1990, see Pub. L. No. 101-508, 104 Stat. 1388-458 (codified as amended at 26 U.S.C. §6502(a) (1995)), such as the liability in the instant case. Given the four year extension on the limitations period and the taxpayer's bankruptcy proceeding, plaintiff had until September 22, 1998 in which to file this suit. See Plaintiff's Motion, p. 15, n. 7 (performing the applicable computation of time periods).

Defendants nonetheless argue that §6503(h) fails to suspend the statute of limitations sufficiently because defendants paid the property at issue to the Bank on June 4, 1984. Although defendants do not explain fully the significance of that date, they presumably are arguing that their payment to the Bank halted any tolling under §6503(h) because that section refers only to suspensions "for the period during which the Secretary is prohibited by reason of such case from ... collecting." In other words, defendants presumably argue that the taxpayer's bankruptcy in fact did not prohibit the government from collecting the tax after June 4, 1984 because the Bank possessed the property after that date, and the government thereafter could have sued either the Bank or defendants.

This argument fails. If a tax collection suit would be timely against a taxpayer because the taxpayer's bankruptcy tolled the limitations period under §6503(h) , then a suit against a party derivatively liable for the tax debt also would be timely. United States v. Wright [95-2 USTC ¶50,334 ], 57 F.3d 561, 564 (7th Cir. 1995); see also United States v. Assoc. Commercial Group [83-2 USTC ¶9689 ], 721 F.2d 1094, 1097 (7th Cir. 1983). Because the government still could file a timely collection suit against the taxpayer in the instant case, this suit is timely.

Defendants finally argue that laches bar plaintiff's suit. Defendants stress that plaintiff waited until 1995 to file suit, that the Bank has been unable to find its credit and legal files pertaining to the transactions at issue, and that plaintiff stipulated to a dismissal of its suit against the taxpayer during the bankruptcy proceedings. Defendants cite the Weintraub case, supra, in support of the proposition that laches is a possible defense against a collection suit by plaintiff. Defendants, however, have misconstrued the holding in Weintraub, which specifically ruled that laches is not a defense in the instant suit. See Weintraub [80-1 USTC ¶9172 ], 613 F.2d at 618-19; see also Fraser [88-2 USTC ¶9542 ], 861 F.2d at 961 n. 6 ("There is no time limit on the Government's right to pursue claims against those who fail to honor levies").

D. 50% Penalty

Under 26 U.S.C. §6332(d)(1) , plaintiff may collect a 50% penalty on the tax liability unless defendant had "reasonable cause" for not honoring the levy. Congress intended that "a bona fide dispute over the amount owing to the taxpayer (by the property holder) or over the legal effectiveness of the levy itself is to constitute reasonable cause under [section 6332(c) ]." Fraser [88-2 USTC ¶9592 ], 861 F.2d at 962 n. 8 (quoting S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U.S. Code Cong. & Admin. News 3722, 3740). In Fraser, the penalty applied because "the great weight of authority from other jurisdictions" refuted the defendant's argument that it could defeat a levy by exercising its right to setoff. Id. at 962.

In the instant case, defendants have contested the legal effectiveness of the levy by arguing that it did not have to honor a levy on property which the taxpayer had assigned to the Bank. The Court finds that the 50% penalty is inapplicable. This case is distinguishable from Fraser because no "great weight" of authority controlled whether the agreements at issue were assignments. More importantly, the General Motors opinion initially appears to be very helpful to defendants' case. Accordingly, defendants had a bona fide, albeit ultimately unsuccessful, dispute with plaintiff.

E. Statutory Interest

The Court has found for plaintiff in the amount of $62,294.71. Plaintiff also has requested "interest at the rate provided by the Internal Revenue Code." Plaintiff, however, has not explained how to calculate such interest. Before the Court issues a judgment containing a final sum, therefore, plaintiff should submit by April 19, 1996 a brief regarding the amount of interest that it is requesting. If they contest the amount, defendants shall have ten work days after having received the brief in which to respond.

IV. CONCLUSION

Accordingly, plaintiff's motion for summary judgment shall be, and hereby is, GRANTED.

So Ordered.

¹ Plaintiff has argued that the July 9, 1982 notice of assignment could not defeat the July 7, 1982 notice of levy. Plaintiff further points out that defendant has no evidence to support its sudden assertion that it did not receive the July 7, 1982 notice of levy until July 10, 1982. Regardless of whether plaintiff is correct, the notices of assignment could not transform agreements that did not constitute assignments into assignments. 

 

 

 

[2004-2 USTC ¶50,286] United States of America v. Philadelphia Yearly Meeting of the Religious Society of Friends.

U.S. District Court, East. Dist. Pa. ; Civ. 03-4254, June 21, 2004.

[ Code Sec. 6332]

Levy: Property of another: Freedom of Religion. --

Despite the Religious Freedom and Restoration Act (RFRA), the IRS could levy under Code Sec. 6332(d)(1) against the wages a religious organization paid to one of its employees, even though the levy ran counter to the organization's pacifist religious views. The IRS had a compelling interest in the levy process in that a speedy, cheap and certain means of collecting delinquent taxes was necessary. Levying against the employee's wages was the least restrictive means of collecting the delinquent taxes. However, the organization was not subject to the 50-percent penalty under Code Sec. 6332(d)(2) for failure to comply with the levy without reasonable cause since there was a bona fide dispute over whether the RFRA precluded the levy.

MEMORANDUM

DALZELL, District Judge: In this action brought under 26 U.S.C. §6332(d) ¹ , the Internal Revenue Service seeks to hold the Philadelphia Yearly Meeting of the Religious Society of Friends ("Yearly Meeting") directly liable for the unpaid taxes of one of its employees, Priscilla Lippincott Adams, as the sanction for its refusal to honor a levy on Ms. Adams's wages. The Yearly Meeting contends that it is not liable because the Religious Freedom Restoration Act ("RFRA"), 42 U.S.C. §2000bb-1 et seq., barred the Service from compelling its assistance in the collection of Ms. Adams's back taxes. For its part, the Service argues that the Yearly Meeting's RFRA claim is indistinguishable from Ms. Adams's own invocation of the statute, which our Court of Appeals decisively rejected in Adams v. C.I.R. [ 99-1 USTC ¶50,307], 170 F.3d 173 (3d Cir. 1999).

The parties have entered into an extensive stipulation of facts and filed cross-motions for summary judgment. ² We conclude that under the rather unique circumstances of this case, RFRA did not exempt the Yearly Meeting from honoring the Service's levy on Ms. Adams's salary, and it must therefore suffer the consequences of its non-compliance. However, because this action raises issues of first impression under RFRA, a "bona fide dispute exists concerning ... the legal effectiveness of the levy," 26 C.F.R. §301.6332-1(b)(2), and the Yearly Meeting is not liable for a fifty percent penalty that the Service would otherwise be entitled to collect pursuant to §6332(d)(2).



Factual and Procedural History

A. The Yearly Meeting

The Yearly Meeting is the coordinating body for over one hundred Quaker Monthly Meetings in the mid-Atlantic region and their 12,000 members. Since its founding in 1681, the Yearly Meeting has endorsed the "Peace Testimony" that is one of the core shared beliefs of Quakers. As Professor Emma Lapsansky-Werner of Haverford College explains in her declaration in support of the Yearly Meeting's motion, the Peace Testimony "comprises a dual obligation to oppose war and develop techniques to learn about and promote peace." Lapsansky-Werner Decl. ¶5.

The best known expression of the Peace Testimony is Quakers' historic refusal to serve in the military, but they have also objected to the payment of taxes that support war. During the Civil War, when the Government allowed conscientious objectors to pay a commutation fee or undertake duty "in the hospitals, or to the care of freedmen," Congress accommodated Quakers' opposition to war taxes by directing that their commutation fees "be applied to the benefit of the sick and wounded soldiers." Act of Feb. 24, 1864, ch. 13, §17, 13 Stat. 6, 9.

The Government now funds the military with its general revenues rather than special war taxes. Some Quakers have concluded that because the Internal Revenue Code does not allow them to earmark their taxes for civilian purposes, conscience forbids them from paying federal income taxes altogether. Since the Vietnam War era, a small but steady minority of the Yearly Meeting's own employees have taken this position. Although the Yearly Meeting has no general religious objection to the federal income tax and acknowledges its duty as an employer to participate in the withholding system, Quaker beliefs require it to support the tax protesters' endeavors. As Yearly Meeting General Secretary Thomas Jeavons explains,

[t]he Yearly Meeting considers it a sacred duty to support the conscientious actions of its individual members, especially in such historic witnesses as the peace testimony. The Yearly Meeting believes that to withdraw such support, for any reason, would directly violate one of its most fundamental religious principles: the sanctity of obedience to the guidance of the Inner Light (or Divine Spirit) as revealed in the individual conscience and confirmed by the discernment of the faith community.

First Jeavons Decl. ¶17 (Deft.'s Ex. 11).

Over the years, the Yearly Meeting has devised a number of policies that attempt to reconcile its acknowledged duty to render unto Caesar with its religious obligation not to impede the promptings of its employees' consciences. From 1968 to 1975, the Yearly Meeting withheld, but did not forward to the Service, the "military portion" of two employees' taxes, and the Service eventually seized these sums from a Yearly Meeting bank account. In 1975, it adopted a policy of refusing to honor levies on tax protesters' wages, and in 1983 it reaffirmed this policy and specified that "taxes not paid should be re-directed to an alternative or escrow fund, or to a recognized charitable cause." Stip. Facts ¶18-20.

The Government brought an action in 1988 to enforce levies on the salaries of two employees, and the Yearly Meeting argued that compelling its cooperation in the enforcement of the levy would impermissibly burden its free exercise of religion. Shortly after the Supreme Court's watershed decision in Employment Div. v. Smith, 494 U.S. 872 (1990), but before the enactment of RFRA, Judge Norma Shapiro of this Court concluded that the third-party levy provision of the Internal Revenue Code is a neutral, generally applicable law that passed constitutional muster under Smith. United States v. Philadelphia Yearly Meeting of the Religious Soc'y of Friends [ 91-1 USTC ¶50,042], 753 F.Supp. 1300, 1303-04 (E.D. Pa. 1990).

While the case before Judge Shapiro was pending, the Yearly Meeting adopted a detailed policy of limited compliance with the Internal Revenue Code. Under the policy, the Yearly Meeting withholds from every employee's salary the amount required under 26 U.S.C. §3402. However, if an employee has a conscientious objection to the payment of taxes that is based on historic Quaker principles, the Yearly Meeting declines to pay over the withheld amount to the Service, deposits it in a bank account where it is available for levy, and so notifies the Service. See Stip. Facts ¶21; see also Philadelphia Yearly Meeting of the Religious Society of Friends, Policy on Military Tax Refusal by PYM Employees and IRS Levies and Other Collection Efforts, 1988-1989 Yearbook, App. A, at 175-76 (1989) (Stip. Ex. 7).

This policy enables the Yearly Meeting to make monies available to the Service without directly subverting its employees' tax protest, and the Service gave it de facto recognition by levying the bank account on many occasions in the 1990s. See, e.g., Stip. Facts ¶22 (detailing levies on behalf of Ms. Adams from 1991 to 1998). The Yearly Meeting never contested these levies. Although the Service discontinued the levies in 1998, the Yearly Meeting apparently continues to comply with the policy.

B. Priscilla Adams

Priscilla Adams is a member in good standing of her Monthly Meeting whose Quaker ancestors settled in the Delaware Valley in the mid-seventeenth century. Ms. Adams has refused to pay federal income taxes since 1974. In keeping with Quaker practice, Ms. Adams has sought --and received --confirmation from her Monthly Meeting that her tax resistance is a "leading from God." First Adams Decl. ¶2, 5-9, 11 (Deft.'s Ex. 12).

Ms. Adams has worked for the Yearly Meeting in various capacities since 1984, and she is now a Regional Secretary for Quaker Concerns. Id. ¶1. There is no doubting the sincerity of Ms. Adams's protest ³ , but it is nevertheless fair to say that she has engaged in a cat-and-mouse game with the Service that has greatly exacerbated the Yearly Meeting's current conflict with the Government. Between 1984 and 1989, Ms. Adams claimed on her W-4 form that she was entitled to an eyebrow-raising nine allowances, and as a result, the Yearly Meeting did not withhold any taxes at all from her pay. On April 20, 1989, the Service instructed the Yearly Meeting to disregard Ms. Adams's W-4 and instead withhold taxes from her wages "as if [she] is married and claiming 1 withholding allowances [ sic ]...." Letter of Somerset to Yearly Meeting of 4/20/89 (Stip. Ex. 9).

The Yearly Meeting has complied with the Service's instructions since 1989 by withholding taxes from Ms. Adams's wages at the rate appropriate for a married person filing jointly and claiming one allowance. Stip. Facts. ¶27. However, her current tax liability exceeds the amount that would be available for levy from the Yearly Meeting's bank account even if the Service were inclined to acquiesce in the organization's withholding policy. There are no funds in the account for the period from 1986 to 1988. Moreover, for every year at issue in this action, Ms. Adams eventually filed as a married person filing separately and thereby lost the benefit of the lower tax rates she would have enjoyed had she filed a joint return. ⁴

The Service assessed deficiencies and penalties against Ms. Adams for the years 1988, 1989, and 1992-1994. Ms. Adams filed a petition in the Tax Court asserting, inter alia, that RFRA mandated a finding that her religious beliefs constitute "reasonable cause" under 26 U.S.C. §6651 for her refusal to pay tax and an "unusual circumstance" exempting her from penalties pursuant to 26 U.S.C. §6654. Adams v. C.I.R. [ CCH Dec. 52,602], 110 T.C. 137, 139-40 (1998). After the Tax Court ruled in the Service's favor on both the tax and penalty issues, Ms. Adams took an appeal to our Court of Appeals. For reasons we examine below, the Court rejected her position concerning RFRA and affirmed the Service's assessment. See Adams [ 99-1 USTC ¶50,307], 170 F.3d at 178-80, 182.

C. The Origins of this Action

On February 21, 2001, the Service acted upon its victory in the Court of Appeals by sending Ms. Adams notice of its intent to levy her wages for unpaid taxes and penalties for the period from 1986 to 1996. She apparently refused to respond, and on April 11, 2001, the Service sent the Yearly Meeting a Notice of Levy on Ms. Adams's wages in the amount of $42,397.69. ⁵

The Yearly Meeting's governing body replied that Ms. Adams's tax protest was consonant with Quaker beliefs and that it believed her "to be Divinely led in taking the stance she has." The letter reported that "for us as a Quaker organization to act to collect those taxes which she has refused to pay as a result of these deeply held religious convictions ... would be unconscionable ... [and] a complete betrayal of our own principles as a people of faith." It requested that the Service "not require us to act as your collection agent in this matter...." Letter from Yearly Meeting to Fuquay-Steele of 6/6/01 (Stip. Ex. 4).

On October 15, 2001, the Service responded that it considered the Yearly Meeting's position to be meritless in view of Adams . It further warned that if the Yearly Meeting persisted in defying the levy, the Government would institute a suit under 26 U.S.C. §6332(d), pursuant to which the organization would incur direct liability for Ms. Adams's unpaid taxes along with a fifty percent penalty. Letter of Lyons to Yearly Meeting of 10/15/01 (Stip. Ex. 5). When the Yearly Meeting failed to comply, the Government commenced this action.



Discussion

RFRA is the Yearly Meeting's only defense in this action. We therefore begin by examining whether RFRA exempts the Yearly Meeting from honoring the levy, and because we conclude that it does not, we turn to consider whether the Yearly Meeting is liable for the fifty percent penalty under §6332(d)(2).

A. Enforcement of the Levy

Congress enacted RFRA in response to Smith and "to restore the tests that were routinely employed before the Supreme Court's ruling that neutral, generally applicable laws may impinge on religious practices, even in the absence of a compelling state interest." Adams [ 99-1 USTC ¶50,307], 170 F.3d at 176. As our Court of Appeals explained in Adams , a RFRA claimant must first demonstrate a "substantial burden" on the exercise of religious belief. The Government must then demonstrate that its regulation or practice furthers a "compelling interest" by the "least restrictive means." Id. , quoting 42 U.S.C. §2000bb-1(a) & (b).

1. Substantial Burden

RFRA does not explain what constitutes a "substantial burden" on the exercise of religion. However, a useful definition derived from the Supreme Court's pre- Smith decisions is that it arises when the Government "put[s] substantial pressure on an adherent to modify [her] behavior and to violate [her] beliefs" or "forces an individual to choose between following the precepts of her religion and forfeiting benefits, on the one hand, and abandoning one of the precepts of her religion." Branch Ministries v. Rossotti [ 99-1 USTC ¶50,410], 40 F.Supp.2d 15, 25 (D. D.C. 1999), quoting Sherbert v. Verner, 374 U.S. 398, 404 (1963), and Thomas v. Review Bd. of Indiana Employment Sec. Div., 450 U.S. 707, 718 (1981).

The record demonstrates that the levy on Ms. Adams's wages substantially burdened the Yearly Meeting's exercise of religion within the meaning of RFRA. First, Secretary Jeavons's declaration explains that the Yearly Meeting's refusal to comply with the levy grows out of Quakers' shared beliefs. The Yearly Meeting recognizes Ms. Adams's tax protest as divinely-led expression of the Peace Testimony, and Quakers deem it a "sacred duty" to support the conscientious actions of an individual member, regardless of whether the majority endorses that member's conduct. First Jeavons Decl. ¶17.

Second, the levy placed substantial pressure on the Yearly Meeting to betray its religiously based support for Ms. Adams. As we have already noted, §6332(d) saddles a third party who refuses to honor a levy with both direct liability for the unpaid taxes and, where appropriate, a fifty percent penalty. The Service heavy-handedly wielded these enforcement sabres in its effort to pressure the Yearly Meeting to serve up Ms. Adams, at one point even offering to waive the penalty in exchange for immediate compliance. See Letter of Hubbert to Yearly Meeting of 6/2/03 (Stip. Ex. 6).

2. The Government's Burden

Because the Yearly Meeting has established that the Service's conduct substantially pressured it to abandon core Quaker beliefs, the burden shifts to the Government to show that enforcement of the levy furthers a compelling interest by the least restrictive means.

The Government argues that it need not go through this exercise because Adams demands the conclusion that the levy does not violate RFRA. However, this assertion is based on an overly expansive reading of Adams . The issue in Adams was whether uniform and mandatory participation in the federal income tax system is the least restrictive means of advancing the Government's compelling interest in collecting taxes. Ms. Adams contended that the Government had failed to show that it could not achieve its purpose by some means that accommodates conscientious objectors' beliefs, perhaps by setting aside their tax monies for non-military purposes. Our Court of Appeals rejected her argument, concluding instead that

[t]he least restrictive means of furthering a compelling interest in the collection of taxes ... is in fact, to implement that system in a uniform, mandatory way, with Congress determining in the first instance if exemptions are to built [ sic ] into the legislative scheme. The question of whether government could implement a less restrictive means of income tax collection surfaced in pre- Smith case law and was answered in the negative based on the practical need of the government for uniform administration of taxation, given particularly difficult problems with administration should exceptions on religious grounds be carved out by the courts.

Adams [ 99-1 USTC ¶50,307], 170 F.3d at 179.

While this language is broad, the Court expressly noted that its decision was not "tantamount to exempting the IRS from RFRA altogether." Id. at 180. Given that RFRA apparently still has some play in the tax area, we think that this action is distinguishable from Adams . There is an important difference between the routine assessment and collection of taxes, which was the governmental practice at issue in Adams , and the Service's efforts to secure the payment of delinquent taxes, which became necessary in Ms. Adams's case after she defied our Court of Appeals's 1999 decision.

As the Court made clear in Adams , the routine administration of the federal income tax system requires uniform assessments and mandatory participation. By contrast, the levying process focuses on non-complying taxpayers' individual circumstances, and it often involves the exercise of discretion as to what assets and sources of income the Government pursues or foregoes. There may well be a case in which the Service can choose between two means of satisfying a taxpayer's delinquency, one of which substantially burdens the free exercise of religion (perhaps that of a third party, as here) and one of which does not. Although we need not reach the issue here, we think it plausible that such a case would implicate RFRA.

The governmental interest in uniform and compulsory participation in the tax system that informed the Court's analysis in Adams thus has little relevance once the Service must resort to a levy to collect back taxes from a person such as Ms. Adams. Because we conclude that Adams does not govern this case in the manner the Government has suggested, we turn to examine the nature of the Government's interest in levying and whether its use here is the least restrictive means of advancing that interest.

Perhaps because the Supreme Court has not extensively addressed the constitutionality of the levy and distraint provisions of the Interal [ sic] Revenue Code since the Hoover Administration, see Phillips v. C.I.R. [ 2 USTC ¶743], 283 U.S. 589, 592-601 (1931), the precise nature of the Government's "compelling interest" in these powers is an issue of first impression. However, the Court has indirectly answered this question in its modern cases construing §6332 and related statutes. As the Court has emphasized, the reason the levy requires broad construction --and has been a cornerstone of federal revenue laws since 1791 --is that the Government needs a speedy, cheap, and certain means of collecting delinquent taxes. See id. at 595 n.5 (gathering late eighteenth- and early nineteenth-century statutes). As the Court noted in a 1985 decision that distilled over a half century's cases on the levy,

[t]he underlying principle justifying the administrative levy is the need of the government promptly to secure its revenues. Indeed, one may readily acknowledge that the existence of the levy power is an essential part of our self-assessment tax system, for it enhances voluntary compliance in the collection of taxes. Among the advantages of administrative levy is that it is quick and relatively inexpensive.

United States v. Nat'l Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 721, (1985) (internal quotations and citations omitted).

The remaining question under RFRA is whether the levy on Ms. Adams's wages was the least restrictive means of achieving the Government's interest in quickly and inexpensively discharging her deficiency. The Yearly Meeting argues that the Government has failed to satisfy its burden because there were at least two other means of achieving its goals, neither of which would have required a wage levy.

First, the Yearly Meeting argues that the Government could have acquiesced in its policy of withholding protesters' taxes and placing them in a bank account that the Service can then levy. Moreover, it contends that if the bank account does not contain enough funds to satisfy Ms. Adams's liability, the blame lies with the Service itself for having instructed the Yearly Meeting to withhold at the rate for a married person filing jointly.

There are two major difficulties with this argument, and as a result we cannot reach --at least in this round of the Yearly Meeting's dispute with the Government --the very interesting question of whether RFRA compels the Service to respect the Yearly Meeting's withholding policy. ⁶

In the first place, it does not account for the fact that part of Ms. Adams's tax liability derives from the period before 1989, when she was claiming nine exemptions on her W-4 and the Yearly Meeting had not yet implemented its current withholding policy.

Moreover, the Yearly Meeting's claim that Ms. Adams's tax liability is the Service's own fault presupposes that it had an obligation to monitor her filing status and adjust its 1989 withholding instructions accordingly. The Yearly Meeting offers no support for this proposition, and indeed there is no justification for it. Like any other taxpayer, Ms. Adams was responsible for ensuring that her withholding accorded with her tax obligations. Nothing in the Service's 1989 instructions precluded Ms. Adams from directing her employer to withhold more from her wages to reflect the fact that she wished to file as a married person filing separately. Indeed, the Service assumed that Ms. Adams would complete a new W-4 that would supersede its interim instructions. See Letter of Somerset to Yearly Meeting of 4/20/89 (Stip. Ex. 9) (directing Yearly Meeting to "disregard this employee's Form W-4 ... until you receive a new Form W-4 from your employee"). This argument also fails because, lest we forget, it was not until 1997 that Ms. Adams filed her tax returns for 1986-1989 and 1992-1995. As the Government notes, the Service cannot be expected to have clairvoyantly anticipated in 1989 that Ms. Adams would decide eight years later to file as a married person filing separately. ⁷

The Yearly Meeting also faintly argues that the Service could have located and then levied Ms. Adams's personal bank accounts or other property. It is true, as the Yearly Meeting notes, that the Service has the power to trace and set aside fraudulent transfers and that "[j]ointly owned assets of husband and wife may be vulnerable to collection." Pl.'s Mem. at 21 n.9. However, the parties have stipulated that Ms. Adams's salary from the Yearly Meeting is her only income, see Stip. Facts ¶29, and there is nothing in the record to suggest that Ms. Adams has other property that could satisfy her tax liability.

The Yearly Meeting's argument, therefore, boils down to the proposition that RFRA required the Service to investigate Ms. Adams's bank accounts and other property once it knew that the wage levy would burden her employer's exercise of religion. However, the imposition of the duty to engage in a time-consuming, and possibly fruitless, scavenger hunt for other assets would be inconsistent with the Government's compelling interest in the speedy exercise of its levying power.

In sum, we agree with the Yearly Meeting that the levy substantially burdens its exercise of religion. We also acknowledge that RFRA might have required a different result if (1) Ms. Adams had ensured that the Yearly Meeting's account contained sufficient funds to satisfy her tax liability ⁸ , (2) she or the Yearly Meeting had promptly identified other property that the Service could have levied as readily as her wages, or (3) the Yearly Meeting had honored the levy but placed the monies in its bank account and so notified the Service. However, neither the Yearly Meeting nor Ms. Adams pursued these possibilities. We must therefore conclude on the record actually before us that the levy on Ms. Adams's wages was the least restrictive means of achieving the Government's compelling interest in satisfying her tax deficiency. Because the Yearly Meeting refused to cooperate with the Service and RFRA offers no defense for its conduct, it is directly liable for her back taxes under §6332(d)(1).

B. The Fifty Percent Penalty

Having concluded that the Yearly Meeting cannot rely on RFRA to avoid direct liability for Ms. Adams's tax deficiency, we must determine whether it is subject to a penalty for refusing to honor the levy on her wages. Pursuant to §6332(d)(2), a third party who fails without reasonable cause to comply with a levy on the property of a taxpayer is liable for a penalty equal to fifty percent of the amount directly recoverable from the third party in satisfaction of the taxpayer's underlying liability. The regulations implementing §6332(d)(2) further provide that

[t]he penalty ... is not applicable in cases where [a] bona fide dispute exists concerning ... the legal effectiveness of the levy. However, if a court in a later enforcement suit sustains the levy, then reasonable cause would usually not exist to refuse to honor a later levy made under similar circumstances.

26 C.F.R. §301.6332-1(b)(2).

The Government offers two arguments in favor of the penalty's applicability. First, it contends that there was no bona fide dispute here because this action is governed by Adams . ⁹ We have already concluded that the holding of Adams does not control the dispute here. As we explain above, this case raises an issue the Court of Appeals did not have occasion to consider in Adams : whether, and under what circumstances, RFRA governs the collection of taxes after a taxpayer has defied the Service and compelled it to choose among its various enforcement tools to satisfy a deficiency. Thus, this case both factually and doctrinally begins where Adams left off, and for the reasons provided above, we do not think that the answers to the issues it raises are so self-evident or fully settled that a penalty is warranted here. Accord Philadelphia Yearly Meeting [ 91-1 USTC ¶50,042], 753 F.Supp. at 1306, citing United States v. Sterling Nat'l Bank & Trust Co. [ 74-1 USTC ¶9336], 494 F.2d 919, 923 (2d Cir. 1974) (penalty inappropriate under §6332 when enforcement of levy depends on "an unsettled question of law").

Finally, the Government seizes upon the final provision of §[301.]6332-1(b)(2) and argues that the Yearly Meeting is liable for the penalty because its defeat in the case before Judge Shapiro almost fifteen years ago put the organization on notice that its position here is untenable. The fatal flaw in this argument, of course, is that Judge Shapiro decided the case under Smith. If we were to penalize the Yearly Meeting because it lost the 1990 case, we would effectively be holding it hostage to the jurisprudence Congress sought to reverse when it enacted RFRA.



Conclusion

For better or for worse, the peculiar facts of this case have precluded a more comprehensive analysis of RFRA's effect on the Yearly Meeting's ongoing efforts to accommodate its employees' religious beliefs. What we have decided is that, although honoring the levy on Ms. Adams's wages would substantially burden the Yearly Meeting's exercise of religious belief, the Service has a compelling interest in the expeditious and inexpensive satisfaction of her tax liability. The Service had no duty to investigate Ms. Adams's assets, and because neither she nor the Yearly Meeting identified other property that the Service could have attached, the least restrictive means of achieving its interest was the levy at issue here. Finally, we have concluded that the fifty percent penalty is not warranted because the Yearly Meeting has raised novel and important questions about the reach of RFRA in the aftermath of Adams .

An appropriate Order and Judgment follow.

ORDER

AND NOW, this 21st day of June, 2004, upon consideration of the parties' cross-motions for summary judgment (docket entry ##10 and 12) and the parties' responses thereto, and in accordance with the accompanying Memorandum, it is hereby ORDERED that:

1. Plaintiff's motion for summary judgment is GRANTED IN PART AND DENIED IN PART; and

2. Defendant's motion for summary judgment is GRANTED IN PART AND DENIED IN PART.

JUDGMENT

AND NOW, this 21st day of June, 2004, in accordance with the accompanying Memorandum and Order, it is hereby ORDERED that:

1. Judgment is ENTERED in favor of the United States of America and against the Philadelphia Yearly Meeting of the Religious Society of Friends in the amount of $49,188, plus interest as allowed by law from December 22, 2003 until paid; and

2. The Clerk of Court shall CLOSE this action statistically.

¹ Section 6332(d)(1) provides that any person who refuses to surrender any property or right to property subject to levy "shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered," along with costs and interest. Section 6332(d)(2) imposes a fifty percent penalty upon any person whose failure to comply with a levy is "without reasonable cause."

² The Service has declined to challenge the constitutionality of RFRA as applied to the federal government. See United States v. Indianapolis Baptist Temple [ 2000-2 USTC ¶50,663], 224 F.3d 627, 629 (7th Cir. 2003) (noting that constitutionality of RFRA as applied to the federal government is "not without doubt").

³ As our Court of Appeals noted in 1999, " Adams has taken pains to ensure that she does not profit from her tax protests...." Adams [ 99-1 USTC ¶50,307], 170 F.3d at 174.

⁴ Between 1986 and 1995, excluding 1990 and 1991, Ms. Adams did not file a timely income tax return, and the Service prepared substitute returns in accordance with 26 U.S.C. §6020. In 1997, Ms. Adams filed amended returns for 1986-1989 and 1992-1995. She filed a timely return in 1996. Stip. Facts ¶30.

⁵ The Government calculates that, as of December 22, 2003, the deficiency had grown to $49,188.37.

⁶ We would have had the opportunity to examine this question if the Yearly Meeting had honored the levy but placed the funds in its bank account along with the monies it has withheld to satisfy Adams's current tax obligations. Instead, the Yearly Meeting flatly refused to serve in any manner as the Service's "collection agent." Letter from Yearly Meeting to Fuquay-Steele of 6/6/01 (Stip. Ex. 4).

⁷ The Yearly Meeting also argues that the Service's 1989 withholding instructions somehow violated 26 U.S.C. §6013, which governs joint tax returns, because Ms. Adams has never elected to use this filing status. However, the Service never compelled Ms. Adams to file a joint return. Instead, it merely extended her the courtesy of directing her employer to withhold at the lower rate for joint filers.

⁸ If Ms. Adams had made up the shortfall in the Yearly Meeting's bank account, the Service would then have had the option of levying either her wages, thereby burdening the Yearly Meeting's exercise of religion, or the bank account, which might have been onerous to her but would not have required her employer's complicity.

⁹ The Government also argues that this case is controlled by United States v. Packard [ 98-2 USTC ¶50,589], 7 F.Supp.2d 143 (D. Conn. 1998). In Packard, a Quaker refused to pay taxes voluntarily but acquiesced in levies on her bank account. She then sued under RFRA for the return of the penalties included in the levies, arguing that the assessment of penalties was not the least restrictive means of ensuring her payment of taxes because the Government could readily levy her account. The district court rejected this argument because "levying taxpayers' assets is at odds with the Government's compelling interest in the collection of taxes under the present system." Id. at 147.

Although Packard would be a useful precedent for the Government in a case involving the Yearly Meeting's policy of placing employees' tax monies in a bank account and then acquiescing in levies, it is not particularly informative here. As we have already noted, the issue in this case is not whether RFRA requires the Government to choose between the current system of taxation and some alternative means of assessment and revenue allocation ( Adams ) or routine collection ( Packard). Instead, the issue is whether RFRA constrains the Government's discretion in collecting back taxes once a tax protester has already disrupted what Packard terms "the collection of taxes under the present system." [ 98-2 USTC ¶50,589], 7 F.Supp.2d at 147.