Annotations- Taxpayer's Property in Possession of Thrid Party Page3

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Less Set-Offs:

   Sand Purchased for the 
McLeans
 ...................  $  872.00

   Purchase of Equipment (assuming title is

   transferred to the 

U.S.

) .........................   5,000.00

   Additional Expenses for Re-Painting and Labor ....   3,302.00

   Payments Already Made ............................   5,900.00

                                                       ---------

     Total of Off-Sets ............................. ($15,074.00)

                                                      -----------

Net Amount Due the McLeans/IRS .....................  $16,623.50

                                             ----------------------

 

27. Any finding of fact deemed a conclusion of law shall be so deemed.

III. CONCLUSIONS OF LAW

1. This court has jurisdiction of this case under 28 U.S.C. §§1340, 1345, and 26 U.S.C. §7402 .

2. Section 6331(a) , of the Internal Revenue Code of 1986 (26 U.S.C.), allows the United States to levy upon all property and rights to property belonging to the taxpayer. The levy that the United States serves in accordance with Section 6331(a) , 26 U.S.C., attaches to all of the taxpayer's property and rights to property, including a subcontractor's (a taxpayer's) right to receive payments. J.A. Wynne Co., Inc., et al. v. R.D. Phillips Constr. Co., et al. [81-1 USTC ¶9305 ], 641 F.2d 205 (5th Cir. 1981); Fostmeier Constr. Co. v. United States [71-1 USTC ¶9342 ], 327 F.Supp. 589 (D.Cal. 1971); and United States v. Davis [76-1 USTC ¶9151 ], 37 A.F.T.R. 2d 76-519 (E.D.Va. 1975). See Citizens State Bank of Barstow v. Vidal [40-2 USTC ¶9603 ], 114 F.2d 380, 383 (10th Cir. 1940); United States v. Wilson, 61-1 USTC ¶9243 (E.D.Mo. 1960); and United States v. Humboldt-- Chicago Pipeline Protect [58-1 USTC ¶9266 ], 1 A.F.T.R. 2d 301, 302 (N.D.Okla. 1957). See also, St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282 ], 617 F.2d 1293, 1300-1302 (8th Cir. 1980); United States v. Eiland [55-1 USTC ¶9487 ], 223 F.2d 118 (4th Cir. 1955); and United States v. Augspurger [78-1 USTC ¶9339 ], 452 F.Supp. 659 (W.D.N.Y. 1978). ²

3. In the case at bar, when the United States served the second Internal Revenue Service levy on or about March 29, 1984, the levy attached to any amounts that the defendant owed the McLeans (the taxpayers). At the time he was served with the levy, the defendant was indebted to the McLeans in the sum of $16,623.50. The defendant should have remitted this sum to the United States in honor of the levy. ³

4. Section 6332(d)(1) (formerly subsection (c)(1)), 26 U.S.C., provides that any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the United States, shall be liable in his own person and estate to the United States in the sum equal to the value of property and rights to property not so surrendered, but not exceeding the amount of taxes. See United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1983). See also Sims v. United States [59-1 USTC ¶9338 ], 359 U.S. 108 (1959) and United States v. Bell Credit Union [86-1 USTC ¶9337 ], 635 F.Supp. 501 (D.Kan. 1986).

5. There are two defenses to a failure to honor a levy suit: the first is that the defendant was not in possession of property or rights to property belonging to the taxpayer; the second defense is that the taxpayer's property or rights to property is subject to a prior judicial attachment or execution. United States v. National Bank of Commerce, supra at 721-722. See United States v. Bank of America National Trust and Savings Association [64-2 USTC ¶9533 ], 229 F.Supp. 906, 909 (S.D.Cal. 1964), aff'd per curiam, [65-1 USTC ¶9429 ], 345 F.2d 624 (9th Cir. 1965), cert. denied, 382 U.S. 927 (1965); Bank of Nevada v. United States [58-1 USTC ¶9228 ], 251 F.2d 820, 824 (9th Cir. 1957), cert. denied, 356 U.S. 938 (1958); and Schiff v. Simon & Schuster, Inc. [86-1 USTC ¶9204 ], 780 F.2d 210, 212 (2nd Cir. 1985). The second defense is inapposite to the instant case. ⁴

6. In the case at bar, when the United States served the second levy on the defendant on or about March 29, 1984, the defendant was in possession of property or rights to property of the taxpayers. Specifically, the defendant was indebted to the McLeans in the sum of $16,623.50. Because he did not honor the levy by remitting this sum to the United States, he is personally liable to the United States in the sum of $16,623.50 pursuant to 26 U.S.C., Section 6332(d)(1) (formerly Section 6332(c)(1) ).

7. During trial, defendant made an oral motion to dismiss this case. Defendant argued that he is not liable under 26 U.S.C., Section 6332(d)(1) (formerly Section 6332(c)(1) ) since the statute of limitations for the government to collect the tax against the McLeans under 26 U.S.C., Section 6502(a) has expired. Defendant argued that he could not be liable where the underlying tax lien against the McLeans had expired subsequent to the levy and subsequent to the filing of this lawsuit but prior to entry of judgment. Assuming arguendo, the court accepts this assertion, then the United States could only pursue a failure to honor levy action against a defendant only so long as the statute of limitations for collecting the tax against the taxpayers remains open under Section 6502(a) . ⁵

8. Courts have uniformly rejected assertions by similarly-situated defendants that the United States's right to pursue a failure to honor levy action under Section 26 U.S.C., Section 6332(d)(1) (formerly Section 6332(c)(1) ) is limited by 26 U.S.C., Section 6502(a) , which sets forth the statute of limitations for the United States to collect the assessed tax from the taxpayer. United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 619-621 (6th Cir. 1979); United States v. Marine Midland Bank, N.A. [88-1 USTC ¶9159 ], 675 F.Supp. 775, 778-779 (W.D.N.Y. 1987); United States v. Stephens [83-2 USTC ¶9704 ], 568 F.Supp. 1198, 1199-1200 (N.D.Cal. 1983). See United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1328-1330 (9th Cir. 1990) (court of appeals for the Ninth Circuit affirmed the District Court's holding rejecting the defendant's claim that the Section 6502(a) statute of limitations applies to a failure to honor levy suit). Section 6502(a) expressly sets forth time limitations for collecting the assessed tax against the taxpayer. Nowhere does Section 6502(a) limit the time for the United States to pursue a failure to honor levy suit arising under Section 6332(d) (formerly Section 6332(c) ), 26 U.S.C. In addition, the courts have held that there is no statute of limitation within which the United States must bring a failure to honor levy suit. Weintraub, supra; Marine Midland Bank, supra; Stephens, supra; and Donahue Industries, supra.

9. Section 6332(d)(1) , 26 U.S.C., expressly limits a defendant's personal liability by the phrase "but not exceeding the amount of taxes for the collection of which such levy has been made." (Emphasis added). This limits a defendant's personal liability to the lesser of "property or rights to property not surrendered" or "the amount of the taxes" that remain unpaid. Section 6332(d)(1) , 26 U.S.C., does not limit personal liability solely to the extent that the taxpayers are still liable for the tax. If Congress had intended the latter, it would have provided such by stating that a defendant's liability under Section 6332(d)(1) (formerly 6332(c)(1)), 26 U.S.C., is limited "to the extent to which the taxpayer is liable for the tax." ⁶ Therefore, the government's right to pursue a failure to honor levy action is not limited to the extent the taxpayer remains liable for the tax. In addition, there is no statute of limitations that applies to the government's right to prosecute a failure to honor levy action since the levy was served timely.

10. Alternatively, the court finds that the levy perfected the underlying lien notwithstanding the lapse of time. In U.S. v. Eiland [55-1 USTC ¶9487 ], 223 F.2d 118, 120, 121 (4th Cir. 1955), and In re Brewster-Raymond Co., 344 F.2d 903, 910 (6th Cir. 1965), the courts held that when the IRS levies against property it "perfects" the underlying lien. Black's Law Dictionary defines "perfect" as follows:

Complete; finish; executed; enforceable; without defect; merchantable; marketable. Brought to a state of perfection.

Thus, the court holds that the IRS perfected, or did everything it had to do to execute and make the lien enforceable upon the date the levy was served.

11. The defendant further asserts that he is not liable under 26 U.S.C., Section 6332(d)(1) since the McLeans (the taxpayers) never formally assigned the defendant's debt to the United States . As stated supra, the United States may levy upon a subcontractor's (taxpayer's) right to receive payments from the general contractor.

Moreover, there is a distinction between levying on tangible assets versus intangible assets. When the United States levies upon intangible assets, and the amount of the tax liability is greater than the value of the asset, the intangible is transferred or assigned to the United States by operation of law. See e.g., G.M. Leasing Corp. v. United States [77-1 USTC ¶9410 ], 429 U.S. 338, 350 (1977); and United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343 ], 905 F.2d 1325, 1329-1330 (9th Cir. 1990). On the other hand, when the United States levies upon tangible assets, there are provisions governing how and when the United States must sell the tangible asset. See e.g., 26 U.S.C., Sections 6335 through 6339 .

In United States v. Eiland [55-1 USTC ¶9487 ], 223 F.2d 118, 121-122 (4th Cir. 1955), the court held that the levy and seizure (of the actual note receivable) with service of notice on the debtor amounted to a "virtual" transfer, or was tantamount to a transfer of ownership to the Internal Revenue Service. In addition,

the service of such notice [of levy] results in what is virtually a transfer to the government of the indebtedness [or note], 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.

Id. ; and 26 U.S.C., Section 6332(e) (formerly Section 6332(d) ).

Further, the statutory levy is substantially broader in scope than anything known to the common law, and it is applicable to intangible as well as tangible property. United States v. Sullivan [64-1 USTC ¶9392 ], 333 F.2d 100, 116 (3rd Cir. 1964). See also, Glass City Bank of Jeanette, Pa. v. United States [45-2 USTC ¶9449 ], 326 U.S. 265 (1945). When validly invoked, it effects a seizure of the delinquent's property tantamount to a transfer of ownership. United States v. Sullivan [64-1 USTC ¶9392 ], supra at l16; and United States v. Eiland [55-1 USTC ¶9487 ], 223 F.2d 118, 121-122 (4th Cir. 1955). In In re Cherry Valley Homes, Inc. [58-2 USTC ¶9581 ], 255 F.2d 706, (3d Cir.), cert. denied, 358 U.S. 864, 79 S.Ct. 96 (1958), the court held that "it seems correct to say that the tax levy . . . accomplished an assignment of [the taxpayer's] claim against [the person owing the taxpayer money] to the United States by operation of law." [58-2 USTC ¶9581 ], 255 F.2d at 707; see also, Phelps v. United States [75-1 USTC ¶9467 ], 421 U.S. 330, 336-337 (1975); and United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 621 (6th Cir. 1979). In re Quakertown Shopping Center, Inc. [66-2 USTC ¶9655 ], 366 F.2d 95 (3d Cir. 1966) held:

In making a levy such as this the United States becomes in effect the involuntary assignee of the [taxpayer]. . . . We deem the levy to be similar in effect to an assignment, albeit involuntary on the part of the [taxpayer].

366 F.2d at 98 (footnote omitted).

Finally, Section 6332(e) (formerly 6332(d)) of the Internal Revenue Code (26 U.S.C.), provides:

(e) Effect of honoring levy.--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 who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment. (Emphasis added).

The transfer or "assignment" concept is consistent with 26 U.S.C., Section 6332(e) , which discharges the person, who has been served with the levy and who complies, from any further obligation to either the taxpayer or anyone else. The purpose of this provision is to indemnify the person served with the levy from the exposure of double liability when he (she) complies with the levy and surrenders to the United States the property or rights to property that he (she) possesses. In other words, since the levy transfers or "assigns" the taxpayer's property or rights to property to the United States by operation of law, the person who has been served with the levy and complies with such levy, no longer will remain liable to the taxpayer or any other person since he (she) has discharged such obligation by honoring the levy.

12. In the instant case, on or about March 29, 1984, when the United States served the second levy on the defendant, the effect of the levy was to transfer or "assign" to the United States by operation of law the taxpayers' (the McLeans) right to be compensated for the sandblasting services the taxpayers performed on the Barbers Point and Pearl Harbor contracts. Therefore, since the levy transferred or "assigned" by operation the McLeans' (the taxpayers') right to receive payments from the defendant, there is no formal assignment required and the United States has the right to collect the debt from the defendant.

13. Finally, the court holds, on an additional alternative ground, that the levy is the equivalent of a new lien. "[S]ince the [levy] constitutes a claim to intangible property which is not immediately reducible to possession it also has the characteristic of a lien." In re Quakertown Shopping Center, Inc. [66-2 USTC ¶9655 ], 366 F.2d at 98 (footnote omitted). The court in In re Brewster-Raymond Company, 344 F.2d 903 (5th Cir. 1965) held the it "was of the opinion that if the effect of the levy amounts to anything short of passing title, it would constitute but a lien in favor of the government." 344 F.2d at 909.

The above-cited cases indicate that a levy is a new lien independent of the lien giving rise to the levy. Under this analysis there is no bar to this suit. This is so because 26 U.S.C. §6502(a) sets a six-year statute of limitations on the filing of suit after the lien is served. This lawsuit was filed within six years of service of the levy upon defendant.

14. Based on the foregoing, the court denies defendant's oral motion to dismiss. Accordingly, the court rejects the defendant's argument that the United States is precluded from prosecuting this failure to honor levy action since the statute of limitations for collecting the tax from the taxpayers (the McLeans) has expired.

15. Finally, the defendant urges the court to deny the government an award of interest even if it finds the defendant liable in any amount.

Section 6332(d)(1) (former Section 6332(c)(1) , 26 U.S.C., provides that any person who fails or refuses to surrender any of the taxpayer's property or rights to property to the United States, is liable to the extent of the property or rights to property not surrendered (but not exceeding the amount of taxes) "together with costs and interest on such sum at the underpayment rate established under Section 6621 from the date of such levy." ⁷ This statutory language clearly provides that if the court finds the defendant liable in any sum, it must award costs and interest on such sum. The court lacks the discretion to withhold an award to interest. If Congress intended to confer discretion with the court over an award of interest, it would have expressly provided so by stating that the court may award interest as is appropriate or reasonable. Such statutory language is absent, and therefore, the court lacks the discretion to withhold an award of interest.

Moreover, in the context of failure to honor levy suits, the courts, with the exception of one court, have uniformly awarded interest on the amounts that they held that the defendants were liable for. United States v. Wilson [64-1 USTC ¶9395 ], 333 F.2d 137, 144-145 (3rd Cir. 1964); United States v. Augspurger [81-1 USTC ¶9404 ], 508 F.Supp. 327 (W.D.N.Y. 1981); and United States v. Collier [79-1 USTC ¶9305 ], 471 F.Supp. 1185, 1186 (E.D. Tenn. 1979) ("Section 6332 indicates that the Court has no discretion in the matter since the wording of the statute mandates the allowance of interest."). See United States v. Village of Alsip [65-1 USTC ¶9390 ], 345 F.2d 365 (7th Cir. 1965), cert. denied, 382 U.S. 906 (court held that interest should be calculated on an apportioned basis since the defendant acquired property or rights to property over a period of time; nevertheless, defendant was liable for interest to the extent he possessed property or rights to property of the taxpayer); and United States v. Manufacturers Trust Co. [52-2 USTC ¶9417 ], 198 F.2d 366 (2nd Cir. 1952). But see, United States v. City of Los Angeles [72-1 USTC ¶9199 ], 336 F.Supp. 1014, 1019 (C.D. Cal. 1972). ⁸

16. Therefore, defendant is liable for "interest on such sum at the underpayment rate established under Section 6621 " on the sum of $16,623.50 from March 29, 1984, the date of such levy. The defendant is also liable for the costs described in Section 6332(d)(1) (former Section 6332(c)(1) ), 26 U.S.C.

17. Any conclusion of law deemed a finding of fact shall be so deemed.

IV. CONCLUSION

Based on the foregoing, the court orders that judgment be rendered in favor of the United States against defendant in the amount of $16,623.50, plus interest and costs as calculated in accordance with Title 26 of the United States Code.

¹ Defendant is entitled to set-off the $5,000.00 for equipment if and only if he transfers title of such equipment to the United States .

² Treasury Regulation (C.F.R.) Section 301.6331-1(a)(1) states that an obligation exists only if the liability of the obligor is fixed and determinable. It is the liability which must be fixed and determinable, not the amount of the liability. As long as the events which gave rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future, the obligation is fixed and determinable. It is not necessary that the amount of the obligation be beyond dispute. Reiling v. United States, 77-1 USTC ¶9269 (N.D. Ind. 1977).

³ If the defendant had remitted the amount he owed the McLeans , the defendant would have discharged his obligation to the McLeans (the taxpayers) under 26 U.S.C., Section 6332(e) (formerly Section 6332(d) ) and been relieved of any further liability. See Com. of Ky. for Benefit of United Pacific Ins. Co. v. Laurel County [87-1 USTC ¶9119 ], 805 F.2d 628, 635-636 (6th Cir. 1986), cert. denied, 484 U.S. 817-818 (1987); and Burroughs v. Wallingford [86-1 USTC ¶9173 ], 780 F.2d 502, 503 (5th Cir. 1986).

⁴ There was no evidence that the other defense is applicable. In other words, the defendant introduced no evidence that his indebtedness to McLeans was subject to a prior judicial attachment or execution. Neither did the defendant raise this as a defense.

⁵ In general, Section 6502(a) , 26 U.S.C., provides that the United States may collect an assessed tax from the taxpayer for six years from the date that the tax is assessed. (Since the commencement of this action, Congress amended Section 6502(a) and extended the statute of limitations for collecting an assessed tax from a taxpayer for ten (10) years; this amendment, however, is inapposite to this action). The United States may collect the tax either through serving a levy or by instituting a proceeding in Court. In addition, Section 6502(a)(2) provides that the taxpayer and the United States may mutually agree to extend the general six (6) year statute of limitations for collecting the assessed tax.

In the instant case, the taxpayers, the McLeans, and the United States mutually agreed to extend the statute of limitations for collecting the assessed tax until December 31, 1988. The levy in dispute was served on or about March 29, 1984, while the period for collecting the assessed tax was still open. Finally, this proceeding in Court (i.e. the instant failure to honor levy suit) was instituted on November 14, 1986, prior to the expiration of the collection statute on December 31, 1988.

⁶ Congress appears to have done so with respect to levies served after July 1, 1989. 26 U.S.C. §6343(a)(1)(A) .§6343(a)(1)(A) provides that levies are to be released if the "liability for which such levy was made is satisfied or becomes unenforceable by reason of lapse of time. . . ." However, the levies in this case were filed before July 1, 1989.

⁷ Section 6332(d)(1) (formerly Section 6332(c)(1) ), of the Internal Revenue Code (26 U.S.C.), provides:

(1) Extent of personal liability.--Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary, shall be liable in his own person and estate to the United States in a sum equal to the value of property or rights to property not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made, together with costs and interest on such sum at the underpayment rate established under section 6621 from the date of such levy (or, in the case of a levy described in section 6331(d)(3) , from the date such person would otherwise have been obligated to pay over such amounts to the taxpayer). Any amount (other than costs) recovered under this paragraph shall be credited against the tax liability for the collection of which such levy was made. (Emphasis added).

⁸ In City of Los Angeles , supra at 1019, the United States brought a failure to honor levy action against the defendant, City of Los Angeles . The defendant counterclaimed against the State of California ("state") and obtained an order compelling the United States and the state to interplead their respective claims. In addition, the defendant promptly interplead the funds it possessed into the registry of the court. The United States prevailed on its priority over the funds. The United States also sought interest under Section 6332(c)(1) (present section 6332(d)(1) ), 26 U.S.C., against the defendant. The court denied the United States ' claim for interest since it found that the defendant was presented with an exceptional situation where it faced exposure for double liability whether it honored the United States ' levy or whether it obeyed, the state's order. Therefore, the court in the City of Los Angeles essentially created a judicial exception to an award on interest under Section 6332(c)(1) (present section 6332(d)(1) ), 26 U.S.C.

The case at bar is clearly distinguishable from the City of Los Angeles , supra. First, the instant defendant, Ralph Antonio, d/b/a Precision Welding, was never presented with the possibility of exposure for double liability as the defendant was in the City of Los Angeles . Section 6332(e) (formerly Section 6332(d) ), 26 U.S.C., would have discharged the instant defendant from any further liability to the taxpayers (the McLeans) or anyone else if he had honored the levy. Thus, the instant defendant was never presented with a possibility of exposure to double liability as the defendant was in the City of Los Angeles .

In addition, the City of Los Angeles decision is no longer persuasive since Section 6332(d) (present Section 6332(e) ) of the Internal Revenue Code of 1986 (26 U.S.C.), as effective at the time that the facts arose in City of Los Angeles, was subsequently amended. Specifically, Congress broadened the scope of Section 6332(d) by indemnifying the person served with the levy and who honors the levy not only against the taxpayer but against anyone else. Thus, a person served with a levy could no longer be faced with the possibility of double liability like the stakeholder was in the City of Los Angeles .

Further, the defendant in the City of Los Angeles , acted diligently by immediately interpleading the funds into the registry of the court. The defendant in the instant case did not act diligently.

Finally, the City of Los Angeles decision is distinguishable since it did not involve the defendant's personal liability pursuant to Section 6332(d)(1) (former section 6332(c)(1) ), 26 U.S.C., since by interpleading all the funds it possessed, the defendant was able to satisfy the failure to honor levy action out of the funds that it had interpled before the court. There is no interpleader of funds in this case.

Based on the foregoing, the court holds that the City of Los Angeles , supra, is inapposite to the case at bar.

 

[96-1 USTC ¶50,111] United States of America , Plaintiff v. David Kamin, Arthur Solomon, and Ann Solomon, Defendants

U.S. District Court, East. Dist. Mich. , So. Div., CIV 95-CV-70558-DT, 12/27/95

[Code Secs. 6331 and 6332 ]

Levies: Surrender of property: Third parties: Penalty, civil: Levies.--A married couple who owed money to a delinquent taxpayer on a contract to purchase real property from the taxpayer was obligated to honor a government levy on the property and surrender the amount owed to the government. After receiving proper notice, their failure to honor the levy, without a showing of reasonable cause, subjected the couple to a penalty equal to half of the amount recoverable.

John A. Lindquist III, Department of Justice, Washington , D.C. 20530 , for plaintiff. Kent S. Siegel, Siegel & Siegel, 31800 Northwestern Hwy., Southfield, Mich. 48334-1664, for defendant.

OPINION AND ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BORMAN, District Judge:

The Court has before it Plaintiff's Motion for Summary Judgment. Having scheduled oral argument, reviewed the pleadings filed, and being otherwise fully advised, the Court grants Plaintiff's Motion for Summary Judgment for the following reasons.

The matter before the Court involves the enforcement of a tax levy upon an obligation owed by Defendants Solomon to Defendant Kamin. Defendants Ann and Arthur Solomon contracted to purchase certain real property from Brenda and David Kamin. The agreement required monthly payments to be made by Defendants Solomon over a five year period, with the last payment being a balloon payment. The agreement was evidenced by a promissory note in David and Brenda Kamin's favor. After the execution of the promissory note, Brenda and David Kamin divorced. David Kamin was awarded the property in question free and clear of all encumbrances and claims of Brenda Kamin.

The government assessed the Kamins for unpaid joint income tax liabilities for 1980 and 1981, and filed a federal tax lien upon the property with the Oakland County Register of Deeds in the amount of $304,266.70 on November 29, 1984. Thereafter, in 1985, David Kamin executed a quit claim deed to the property in favor of Sheila Kamin. The government served Defendants Solomon with a notice of levy on the property on April 30, 1986 for the unpaid joint tax return for the Kamins for 1980 and 1981. Defendants Solomon remain indebted on the promissory note executed in favor of David Kamin, and have refused to honor the levy. Plaintiff's Motion for Summary Judgment, to enforce the tax levy and to penalize the Solomons for their failure to honor the levy, was filed with the Clerk's Office on October 3, 1995. The Court scheduled oral argument on the motion for Wednesday, December 20, 1995 at 2:00 p.m. Defendants Solomon did not appear, nor had they responded to Plaintiff's motion. The Court characterizes Defendants failure to respond or appear as a concurrence in Plaintiff's motion.

The case law surrounding this matter supports the assertions made by Plaintiff in its Brief in Support of its Motion for Summary Judgment. The Solomons had a duty to honor the notice of levy, and their failure to do so has now subjected them, jointly and severally, to a penalty for refusing to comply.

The Internal Revenue Code provides for two procedures to enforce the collection of unpaid taxes. One method is the lien foreclosure suit, while the other is collection by administrative levy. State Bank of Fraser v. U.S.A. [88-2 USTC ¶9592 ], 861 F.2d 954, 958 (6th Cir. 1988). The Sixth Circuit has held that the levy is a temporary remedy that generally does not require judicial intervention. Id. The governing statute authorizing the administrative levy is 26 U.S.C. §6331(a) , however where the property is in possession of one other than the taxpayer, 26 U.S.C. §6332(a) is implicated. Pursuant to that section,

any person in possession of ... property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights ... to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

26 U.S.C.A. §6332(a) (West 1989). The Sixth Circuit has interpreted that section to mean that the notice of levy "gives the IRS the right to all property levied upon, and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." State Bank of Fraser [88-2 USTC ¶9592 ], 861 F.2d at 958. The levy effectively converts the taxpayer's property or rights to the property to the government. Id. at 961-62. Failure to honor the remedy subjects the custodian to liability pursuant to subsection (c) of the statute.

Subsection (c) provides that the failure of the custodian to honor the levy subjects the custodian to personal liability in an amount equal to the value of the property, or rights thereto, not surrendered. 26 U.S.C.A. §6332(c)(1) (West 1989). Moreover, the recalcitrant custodian who fails or refuses to surrender the property without reasonable cause "shall [also] be liable for a penalty equal to 50 percent of the amount recoverable under paragraph (1)." 26 U.S.C.A. §6332(c)(2) (West 1989). Reasonable cause has been interpreted to involve a bona fide dispute regarding the legal effectiveness of the federal tax levy. U.S.A. v. Bell Credit Union [86-1 USTC ¶9337 ] 635 F. Supp. 501 (D. Kan. 1986).

In the instant matter, the government filed its federal tax lien for the amount of David Kamin's unpaid federal income taxes in November, 1984. Defendants received notice of the government's levy upon the promissory obligation they owed to David Kamin in April, 1986. The quit claim deed from David Kamin to Sheila Kamin was filed in August, 1985, nine months after the government's lien had been filed. Therefore, Sheila Kamin's subsequent interest in the property to which the promissory note was attached is irrelevant. At the time that the government provided notice of its levy to Defendants, Defendants became custodians of the promissory obligation in favor of the government. Defendants had an obligation to surrender the $58,092.42 owing under the promissory note to the government in partial satisfaction of the unpaid income taxes owed by David Kamin. However, Defendants failed to honor the levy, thereby subjecting them to the provisions of section 6332(c)(1) and (2) because they have not provided reasonable cause for their failure to comply with the levy. Accordingly, the Court GRANTS Plaintiff's Motion for Summary Judgment, and further enters judgment against Arthur Solomon and Ann Solomon in the amount of $87,138.63, which is comprised of the $58,092.42 levy and $29,046.21 penalty for failing to honor the levy.

SO ORDERED.

 

[97-1 USTC ¶50,425] United States of America , Plaintiff v. Marlon Williams, Defendant

U.S. District Court, So. Dist. N.Y., 96 Civ. 0124 (WCC), 4/9/97, 959 FSupp 210, 959 FSupp 210

[Code Sec. 6332 ]

Notice of levy: Evidence of debt: Taxpayer's property in possession of third party: Sworn declarations: Signature under penalty of perjury: Reliance on accountant.--A corporation's sole shareholder and president, who had outstanding loan obligations to the corporation and its subsidiary, was required to comply with notices of levy and to pay the government the outstanding amounts owed on the loans. The president's sworn affidavit stating that he was not indebted to either corporation was contradicted by the fact that the outstanding loans were listed as assets on forms that he signed under penalty of perjury in an earlier collection proceeding. Since the forms were not long or complex, he was precluded from claiming that he did not understand them at the time they were signed.

Mary Jo White, United States Attorney, Daniel S. Alter, Assistant United States Attorney, New York, N.Y. 10007, for plaintiff. Marlon Williams, 48 Lawrence Place , Chestnut Ridge , N.Y. 10977 , pro se.

OPINION AND ORDER

CONNER, Senior District Judge:

This action was brought by plaintiff, the United States of America ("the Government") to enforce two tax levies against pro se Defendant Marlon Williams ("Williams"). We have jurisdiction pursuant to 28 U.S.C. §§1340 and 1345 and 26 U.S.C. §§7402 and 7403.

BACKGROUND

This action has its genesis in a consolidated tax return for the year 1991 filed in October 1992 by Yelram Productions, Inc. ("Yelram") and three of its subsidiary corporations, Marley Marl Productions, Inc. ("MMP"), Marley Marl Music, Inc., and Marley Marl Management, Inc. The consolidated return reported Yelram's 1991 consolidated federal income tax liability, without penalties, to be $43,659. Williams signed the consolidated return as Yelram's President; the return identifies Williams as Yelram's sole shareholder. The return was not accompanied by any payment of the taxes reported as due. On November 23, 1992 the IRS assessed Yelram for the unpaid taxes, together with interest and penalties. Yelram did not satisfy this liability and on November 15, 1993, the IRS filed a Notice of Federal Tax Lien against Yelram.

In connection with administrative collection proceedings regarding Yelram's 1991 tax liability, two IRS Form 433-B Collection Information Statements, one for Yelram and one for MMP were submitted on October 25, 1994. Both listed Williams as the "person being interviewed" and were signed by him "under penalties of perjury." (See July 30, 1996 Declaration of Daniel S. Alter; Exhs. E and F.) Yelram's form lists as its sole asset a note payable by Williams to Yelram in the amount of $15,568; MMP's form lists under Accounts/Notes Receivable a note payable by Williams in the amount of $280,408. Id. at Exh. E. However, the $280,408 is not reflected on the next page of the form, "Asset and Liability Analysis," which represents, in line 18, that the amount of "Equity in Asset" for Accounts/Notes receivable is zero. Id. ¹

On February 3, 1995, the IRS served Williams with two Notices of Levy, one for Yelram and one for MMP, each in the amount of $60,094.59 (the "Levies"). The Levies advised Williams that the IRS had made demand upon Yelram to satisfy its outstanding federal tax obligations, and that Yelram had failed to comply. The Levies directed Williams to turn over to the IRS all "property and rights to property (such as money, credits, and bank deposits) that Williams has or "is obligated to pay" either Yelram or MMP. Id. at Exh. G. When Williams failed to comply with the Levies, the IRS issued two Final Demand Notices on March 30, 1995. Williams still did not reply and on January 10, 1996, the Government instituted this action to enforce the Levies. On July 31, 1996 the Government moved for summary judgment.

DISCUSSION

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(d). A fact is material only if, based on that fact, a reasonable jury could find in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). On a motion for summary judgment, all evidence must be viewed and all inferences must be drawn in the light most favorable to the nonmoving party. City of Yonkers v. Otis Elevator Co., 844 F.2d 42, 45 (2d Cir. 1988).

The party seeking summary judgment bears the initial burden of "informing the district court of the basis for its motion" and identifying the matter "it believes demonstrate[s] the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Upon the movant's satisfying that burden, the onus then shifts to the non-moving party to "set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 250. The non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts," Matsushita Elec. Indus. Co. Ltd v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), "but must set forth specific facts showing that there is a genuine issue for trial." First Nat'l Bank of Az. v. Cities Serv. Co., 391 U.S. 253, 288 (1988). "When a party is proceeding pro se, as in the instant action, this Court has an obligation to 'read his supporting papers liberally, and . . . interpret then to raise the strongest arguments that they suggest.' " Hernandez v. Strack, No. 96 Civ. 417, 1997 WL 137439 (S.D.N.Y. March 25, 1997) (unpublished disposition) (citations omitted). A "pro se party's 'bald assertion,' however, completely unsupported by evidence, is not sufficient to overcome a motion for summary judgment." Id. , (citing Carey v. Crescenzi, 923 F.2d 18, 21 (2d Cir. 1991)); Lee v. Coughlin, 902 F.Supp. 424, 429 (S.D.N.Y. 1995).

Although Williams has not contested this point, it is clear that the IRS was authorized to levy upon any debts that Williams owed to Yelram and MMP. The Second Circuit has held that the "indebtedness of a third party to a taxpayer" is property that is subject to an IRS levy. United States v. Long Island Drug Co. [41-1 USTC ¶9140], 115 F.2d 983, 985-86 (2d Cir. 1940) (predecessor statute providing for levies against, inter alia, "evidences of debt"); Frasier v. Hegeman [85-1 USTC ¶9322], 607 F.Supp. 318, 323 (N.D.N.Y. 1985); Treas. Reg. §301.6331-1 (as amended in 1994) ("Levy may be made by serving a notice of levy on any person in possession of or obligated with respect to, property or rights to property subject to levy, including receivables, bank accounts, evidences of debt. . . .") (emphasis added). Moreover, treasury regulations provide that "the common parent corporation and each subsidiary which was a member of the group during any part of the consolidated return year shall be severally liable for the tax for such year." 26 C.F.R. §1.1502-6(a). Thus, it was proper for the IRS to levy against any money Williams owed Yelram or any of its subsidiaries in order to satisfy Yelram's consolidated tax obligations.

Once a person is served with a notice of levy, there are only two defenses available to a "failure to comply with the demand." United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721-22 (1985) (citations omitted). First, that the person is "neither 'in possession of' nor 'obligated with respect to' property or rights to property belonging to the delinquent taxpayer." Id. Second, that the taxpayer's property is "subject to a prior judicial attachment or execution." Id. Where neither defense is available, a party must honor an IRS Notice of Levy or be liable for "the amount not surrendered, plus costs and interest." Schiff v. Simon & Schuster, Inc. [86-1 USTC ¶9204], 780 F.2d 210, 212 (2d Cir. 1985) (citing 26 U.S.C. §6332(c)(1)). Williams has attempted to raise the first defense, by denying that he currently has outstanding loan obligations to Yelram in the amount of $15,568 and to MMP in the amount of $280,408. (Def. Memorandum in Opposition to Pl. Motion for Summary Jdgmt, p. 1.)

The only support Williams offers for this position is his sworn affidavit stating that he is not currently indebted to Yelram or MMP, that "no tax returns subsequent to the 1991 returns of Yelram Productions,Inc. . . . make any reference to any outstanding loan obligations to either Yelram Productions Inc. or Marly Marl Productions . . ." and that both of the 1994 433-B forms relied upon by the Government "were prepared and presented to me by an accountant without any explanation as to their contents, and I signed the same without any understanding of their contents. These documents were not signed before any notary or other public official, nor was I ever sworn under oath to the veracity of the contents of these forms." (Williams Aff. ¶3.)

We agree with the Government that this evidence is insufficient as a matter of law. As regards the $15,568 loan to Yelram, it is difficult to determine from Yelram's 1991 consolidated tax forms precisely what monies Williams owed Yelram and its subsidiaries as of the end of 1991. We note that the consolidated balance sheet shows a net loan "to stockholders" (and Williams was the sole stockholder of Yelram and all of its subsidiaries) of $99,661. (See Exh A., Form 1120, Schedule L.) Relying upon Williams' statements to the IRS in 1994, these loan amounts apparently subsequently changed. Regardless, Williams in 1994 declared under the penalty of perjury that Yelram's sole asset was a $15,568 loan to himself. ² (See July 30, 1996 Declaration of Daniel S. Alter, Exh. E.) Similarly, he declared under the penalty that one of MMP's seven assets was a $280,408 loan to himself. Id. at Exh. P. Although he failed, apparently inadvertently, to include this amount on the next page under "Accounts/Notes Receivable," he cannot escape the compelling effect of his explicit declaration that he owed the precise amount of $280,408.

These declarations are binding upon Williams. We are entitled to give an unsworn statement signed under the penalty of perjury the same weight as an affidavit. Goldman, Antonetti, Ferraiuoli, Axtmayer & Hertell v. Medfit Intern., 982 F.2d 686, 690 (1st Cir. 1993), (citing 28 U.S.C. §1746 ³); Bleavins v. U.S. [92-2 USTC ¶50,549], 807 F.Supp. 487, 489 (C.D. Ill.), aff'd, 998 F.2d 1016 (7th Cir. 1983). Williams cannot now contradict this statement with a later affidavit. "The rule is well settled in this circuit that a party may not, in order to defeat a summary judgment motion, create a material issue of fact by submitting an affidavit disputing his own prior sworn testimony." Trans-Orient Marine Corp. v. Star Trading Marine Inc., 925 F.2d 566, 572 (2d Cir. 1991): see also Reisner v., General Motors Corp., 671 F.2d 91, 93 (2d Cir.), (disregarding plaintiff's factual claims after defendant moved for summary judgment, "where those claims contradict(ed) statements made previously by plaintiff at his deposition, in his affidavits, and in response to defendant's interrogatories"), cert. denied, 459 U.S. 858 (1982); cf. United States v. Winshaw [83-1 USTC ¶9147], 697 F.2d 85, 87 (2d Cir.) (taxpayer estopped from claiming signature on return was not hers when she represented at a later date that it was, thus causing the IRS to rely to their detriment on her representation), cert. denied, 464 U.S. 822 (1983).

Nor can he avoid his sworn 1994 statement merely by claiming in his affidavit that an accountant prepared the forms and he did not understand them. "An account is merely the agent of the taxpayer," Springfield Prod. Inc., v., C.I.R. [CCH Dec. 35,831(M)], T.C. Memo 1979-023, 1979 WL 3121, 38 T.C.M. (CCH) 79, T.C.M. (P-H) 79,023 (U.S. Tax Ct., Jan 16, 1979) (No. 6412-69, 7252-72) (citations omitted), and it is "a common agency principle that the principal . . . is responsible for the action of his agent (accountant)." Id. In addition, the law assumes that a taxpayer will read his return before signing it. Cf. In re Meier, 1993 WL 406055, 72 A.F.T.R. 2d 93-5598, 93-2 USTC ¶50,482 (E.D.Va., July 26, 1993) (No. 2:93 Civ. 583), (citing Erdahl v. C.I.R. [91-1 USTC ¶50,184], 930 F.2d 585, 589 (8th Cir. 1991) (discussing the "innocent spouse" exception)). The 433-B Form Williams signed in 1994 regarding Yelram was neither long nor complex--it consisted of a mere four pages in which the sole asset, the $15,568 loan, was listed twice. One of these instances listed the $15,568 as a "Account/Note Receivable" and denominated it "Marlon Williams". (See July 30, 1996 Declaration of Daniel S. Alter, Exh. E.) The Yelram Form 433-B only contained one other number. Id. Similarly, the MMP Form 433-B consisted of four pages and a mere seven listed assets, one a $280,408 denominated "Marlon Williams." Id. at Exh. F. Williams cannot now claim that he did not understand this form.

Lastly, although he states that subsequent tax records do not reflect any outstanding loan obligations to him, he has not provided those records. Moreover, absent evidence regarding the satisfaction of the loan that he stated under the penalty of perjury existed in 1994, such a mere offering of later self-serving tax forms would be insufficient evidence to defeat the Government's motion for summary judgment.

CONCLUSION

For the foregoing reasons, we grant the Government's motion for summary judgment. We find that Williams is subject to the Notices Levy dated February 3, 1993 and order him to pay the United States the amount he owed Yelram ($15,568) and MMP ($280,408), together with costs and interest as set forth in 26 U.S.C. §6332, not to exceed the amount Yelram and MMP currently owe the IRS.

SO ORDERED.

¹ This is in contrast to the Form 433-B Williams filled out regarding Yelram, which lists the $15,568 as an "Account Receivable" in both locations.

² Although not identical in amount, statement 18 from the 1991 Tax Form 1120, (entitled "--ng Productions, Inc. & Subsidiaries Consolidated Balance Sheet"), reflects a $15,084 loan by Yelram "to stockholders." (See Alter Aff. Exh A, 1991 Consolidated Tax Form 1120.)

³ Section 1746 provides in relevant part:

Wherever, under any law of the United States, or under any rule, regulation, order or requirement made pursuant to law, any matter is required or permitted to be supported, evidenced, established, or proved by the sworn declaration, verification, certificate, statement, oath, or affidavit, in writing of the person making the same (other than a deposition, or an oath of office, or an oath required to be taken before a specified official other than a notary public), such matter may, with like force and effect, be supported, evidenced, established or proved by the unsworn declaration, certificate, verification, or statement, in writing of such person which is subscribed by him, as true under penalty of perjury, and dated, in substantially the following form:

(1) . . .

(2) If executed within the United States , its territories, possessions or commonwealths: "I declare (or certify, verify, or state), under penalty of perjury that the foregoing is true and correct. Executed on (date).

(Signature).

28 U.S.C. §1746 (1997).

 

[98-2 USTC ¶50,703] United States of America , Plaintiff v. Woodrow Smyers, Defendant

U.S. District Court, Cent. Dist. Calif., CV 98-2603 MMM (Mcx), 8/21/98

[Code Sec. 6332 ]

Liens and levies: Surrender of property: Taxpayer's property in possession of third-party: Landlord and tenant: Abandoned property: Sale of: State law: Priorities: Remedies: Tortious conversion.--A landlord was obligated to surrender to the IRS the proceeds of an auction sale of a delinquent taxpayer's abandoned personal property, which was subject to a federal tax lien, that were in the landlord's possession on the date the notice of levy was served. Although state ( California ) law established distribution priorities following the sale of a tenant's abandoned property, the state could not create property rights in third parties that acted to limit or defeat a federal tax lien. Thus, the tenant retained a property interest in the sale proceeds, and the tax lien that had attached to the tenant's property transferred to the proceeds of its sale. However, the landlord did not wrongfully exercise dominion over the government's property since he invoked statutory procedures for the disposition of unclaimed property and notified the IRS of the sale prior to its occurrence. Accordingly, the mere sale of the encumbered property did not constitute conversion even though its sale made the attachment of such property more difficult for the IRS.

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

MORROW, District Judge:

The cross-motions for summary judgment of plaintiff United States of America and defendant Woodrow Smyers came on regularly for hearing on June 5, 1998. Following oral argument, the court took the matter under submission. Having carefully considered the papers submitted and the oral argument of counsel, the court now grant in part and denies in part both the United States' and Smyers' motions.

I.

INTRODUCTION

The United States filed this action against Smyers on April 15, 1997, asserting a claim for failure to honor an Internal Revenue Service ("IRS") levy. On July 7, 1997, it filed a first amended complaint adding a claim for tortious conversion of a federal tax lien. The parties have now filed cross-motions for summary judgment on both causes of action. The United States argues that Smyers is personally liable both for failure to honor the IRS levy and for conversion. Smyers argues that he did not possess any property of the taxpayer on the date of levy, and thus that judgment on the first claim should be entered in his favor. He argues further that he did not wrongfully exercise dominion over property in which the IRS had an interest, and thus that the conversion claim cannot stand. For the reasons stated below, both the United States ' and Smyers' motions are granted in part and denied in part.

II.

FACTUAL BACKGROUND

Except as otherwise noted, the following facts are undisputed.

Smyers is the owner of certain real property located at 9845 Alburtis Avenue , Santa Fe Springs , California . (Pl.'s Statement of Uncontroverted Facts ("Pl.'s Fact") 1; Defendant's Statement of Uncontroverted Facts ("Def.'s Fact") 1.) Prior to 1994, Smyers leased the Alburtis property to the taxpayer, Special Cutting Tools, Inc. ("SCT"). ( Id. ) SCT was indebted to the United States for payroll taxes that accrued during tax periods ending December 31, 1991 through June 30, 1993. This liability was assessed against SCT from March 16, 1992, through June 30, 1993. (Pl.'s Fact 3; Def.'s Fact 3.) SCT vacated Smyers' premises in August 1993, leaving machinery and equipment behind. The abandoned property was encumbered by IRS tax liens that were recorded sometime prior to 1994. (Pl.'s Facts 2, 4; Def.'s Facts 1, 3, 5.)

At Smyers' direction, the machinery and equipment were sold at auction on February 15, 1994. (Pl.'s Fact 5; Def.'s Fact 2; Smyers Decl., ¶¶3 and 7.) The auctioneer gave the IRS notice of the sale prior to February 15, 1994, in a letter that set forth a detailed description of the property to be sold, and the date and time of sale. (Pl.'s Fact 5; Def.'s Fact 4.) The IRS took no action at the sale to assert its rights in the property. (Pl.'s Fact 6; Def.'s Fact 6.)

The sale of SCT's property grossed $28,375. (Pl.'s Fact 7; Def.'s Fact 7.) After deducting the auctioneer's costs of $6,505.40, Smyers was left with $21,869.60, which he deposited in a per sonal bank account. ( Id. ) Smyers claims he incurred the following expenses in connection with the disposition of SCT's property: legal fees related to the sale in the amount of $2,424.50; costs of inventorying the property in preparation for the auction in the amount of $200; costs for environmental clean-up of the property leased by SCT in the amount of $6,500; and storage fees in the amount of $13,800. (Def.'s Facts 8, 9; Pl.'s Fact 9.) The United States has proffered evidence suggesting that Smyers' storage costs were only $11,700. (Pl.'s Fact 9.)

The IRS served notice of levy on the $21,869.60 net sale proceeds on Smyers' counsel on April 20, 1994; on the auctioneer on June 16, 1994; and on Smyers on August 3, 1994. (Pl.'s Fact 8; Def.'s Fact 10.) Smyers refused to honor the levy. ( Id. ) This action followed.

III.

DISCUSSION

A. Legal Standard for Summary Judgment

Summary judgment shall be granted if the evidence supporting the motion for summary judgment shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A party moving for summary judgment may carry its initial burden by pointing out to the district court that there is an absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, supra, 477 U.S. at 322.

To avoid summary judgment, the non-movant must set forth specific facts showing that there remains a genuine issue of material fact for trial. Id. at 324. The non-movant "may not rest upon the mere allegations or denials of the adverse party's pleading." A factual dispute is "genuine" if a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in the non-movant's favor. Id. at 255. If the non-moving party's evidence is merely colorable or is not significantly probative, then summary judgment may be granted. Id. at 249-50.

B. Triable Issues Of Fact Preclude Summary Judgment On Plaintiff's Claim For Failure To Honor The IRS Levy.

1. Defendant Is Personally Liable For Failure To Honor The IRS Levy.

Section 6321 of the Internal Revenue Code provides that if any person liable to pay a tax fails or refuses to do so after demand, the amount of the tax is a lien in favor of the United States on "all property and rights to property" belonging to that person. 26 U.S.C. §6321. The lien attaches to the taxpayer's property when the unpaid taxes are assessed, and continue to attach until either the tax is paid or the lien becomes unenforceable because of the passage of time. 26 U.S.C. §6322. Moreover, it attaches to property in the possession of the taxpayer on the date of the assessment, and to after-acquired property as well. See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267, 268 (1945); Miller v. Alamo [92-2 USTC ¶50,524], 975 F.2d 547, 552 (8th Cir. 1992); Caldwell v. Loeb, 742 F.Supp. 650, 652 (N.D.Ga. 1990) ("It has long been held that a federal tax lien attaches to after-acquired property. . . . In particular, the proceeds of a foreclosure sale have been recognized as a property interest against which a federal tax lien will attach.")

One of the means by which the IRS can enforce a lien is an administrative levy. 26 U.S.C. §6331(a). Under §6331(a), the IRS can levy on "all property and rights to property . . . belonging to [the taxpayer] or on which there is a lien . . . for the payment of such tax." Id. In situations where a taxpayer's property is held by a third party, the notice of levy may be served on the custodian of the property pursuant to 26 U.S.C. §6332(a). Such a notice gives the IRS the right to all property levied upon, and renders the person in possession of such property a constructive trustee for the benefit of the government. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). If the individual having custody of the property fails to honor the levy, he incurs personal liability to the government for his refusal. 26 U.S.C. §6332(d)(1).

Smyers contends he is not personally liable for failing to honor the IRS levy because, at the time it was served in 1994, he neither possessed nor was obligated with respect to property or rights in property belonging to SCT. If true, this is a complete defense that exonerates him from any personal liability to the government. See National Bank of Commerce, supra [85-2 USTC ¶9482], 372 U.S. at 722. The threshold question, therefore, is whether, on the date of levy, Smyers possessed or was obligated with respect to property or property rights belonging to SCT.

The nature of a taxpayer's legal interest in property subject to levy is determined by state law. See National Bank of Commerce, supra [85-2 USTC ¶9482], 372 U.S. at 722; Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509 (1960). Cf. In re Kimura [92-2 USTC ¶50,397], 969 F.2d 806, 810 (9th Cir. 1992) (the court must look to state law to determine the bundle of rights and privileges it creates, and then determine whether the interest created is property or a right to property under federal law); Rodriguez v. Esambron Dev. Corp. [84-2 USTC ¶9698], 740 F.2d 92, 96-97 (1st Cir. 1984) ("The Internal Revenue Code 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' " (quoting United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55 (1958)). Once the nature of the state law interest has been determined, federal law determines whether that interest is "property or a right to property" for tax purposes. National Bank of Commerce, supra [85-2 USTC ¶9482], 472 U.S. at 722; Bess, supra [58-2 USTC ¶9595], 357 U.S. at 56-57; Kimura, supra [92-2 USTC ¶50,397], 969 F.2d at 810.

Applying these principles, there is no dispute that SCT owned the machinery and equipment left on Smyers' property when SCT abandoned the property in 1993. There is also no dispute that a federal tax lien attached to that property prior to the time SCT abandoned Smyers' premises. ¹ Smyers concedes that, had the IRS levied upon the machinery and equipment before it was sold, it would have been entitled to seize the assets and retain any and all proceeds of their sale. (Defendant's Memorandum of Points and Authorities in Support of Motion for Summary Judgment ("Def.'s Mem.") at 5.) He contends, however, that once the property was sold, SCT had rights only in the excess remaining after the expenses of storage and sale had been paid. ( Id. at 7.) The IRS maintains, to the contrary, that it is entitled to the entire proceeds of sale, just as it would have been entitled to all of the property had it been seized prior to sale. (Plaintiff's Opposition to Defendant's Motion for Summary Judgment and Cross-Motion for Summary Judgment ("Pl.'s Mem.") at 9.) It advances two arguments in support of this position: (1) SCT had property rights in the proceeds following sale; and (2) the lien that had attached to SCT's equipment and machinery transferred to the proceeds of its sale.

California Civil Code §§1980 et seq. governs the disposition of personal property left by a tenant upon the termination of a tenancy or his or her vacation of the premises. See Civil Code §1983. The property owner is required to give written notice to the departed tenant and any other person he reasonably believes to be the owner of the property, advising such persons that the property may be claimed at a designated time and location, subject to reasonable charges for storage. Id. The landlord must release the property to the tenant or owner if it is claimed by the date designated in the notice, and if the tenant or owner pays reasonable storage costs. Civil Code §1987. In the event the property is not claimed, the landlord may sell it at auction, after giving adequate notice of such sale to the public. Civil Code §1988. Section 1988 provides that "[a]fter deduction of the costs of storage, advertising, and sale, any balance of the proceeds of the sale which is not claimed by the former tenant or an owner other than such tenant shall be paid into the treasury of the county . . . not later than 30 days after the date of sale." Id. Anyone claiming an interest in the proceeds may apply to the county for payment within one year of the sale. Id.

Smyers argues that §1988 divested SCT of any property right in the sale proceeds generated by the abandoned machinery and equipment. This is so, he contends, because SCT was entitled to nothing more than the surplus that remained after payment of storage costs and sale expenses, and there was no surplus left. In support, Smyers cites Miller v. Alamo [92-2 USTC ¶50,524], 975 F.2d 547 (8th Cir. 1992). Miller involved competing claims to the proceeds from the sale of a debtor's goods. Among the claimants were the IRS and individuals who had obtained a judgment against the debtor and caused the property to be sold pursuant to a writ of execution. [92-2 USTC ¶50,524], 975 F.2d at 548-49. The district court awarded the sale proceeds to the individual creditors, holding that, to the extent the IRS or other claimants had liens on the property sold, those liens followed the property and did not attach to the sale proceeds. Id.

On appeal, the Eighth Circuit assumed that the IRS lien on the debtor's goods was superior to that of the individual creditors. Id. at 551-52. After noting that a tax lien attaches to the taxpayer's after-acquired property, the court stated that to decide "whether proceeds from these sales can be characterized as [the debtor's] property (thereby allowing the tax lien to attach) we must refer to Arkansas law." Id. at 552.

The Arkansas statutes governing writs of execution required that the sheriff deliver the sale proceeds to the creditor, and provided that the debtor would receive only the surplus that remained following payment of the judgment and the costs of sale. Id. Based on these statutes, the court concluded that the debtor had rights only in the surplus, and that the IRS lien attached only to that amount. Since there was no excess after the individual creditors and costs had been paid, the court held there was no property to which the IRS lien could attach. Id. It noted, however, that because the IRS lien was senior to the liens of the individual creditors, it survived the sale and remained attached to the goods that were sold. Id. at 553.

The government argued that it would be difficult to locate and execute on the goods in the hands of their new owners. The court responded:

"We cannot say whether or not it is practical or wise for the government to enforce its lien position. . . . Federal statutes do not grant the government any rights to the proceeds realized from the sales of the [property], and we cannot manufacture rights simply because the nature of the personal property in this case makes it difficult or impractical for the government to pursue the rights it does possess, or even because it would make the government's task easier." Id.

Smyers argues that the similarities between the Arkansas writ of execution statutes and the California statutes governing disposition of a tenant's abandoned property control the result here. The Arkansas statutes allowed the sheriff to deduct the amount of the creditor's judgment and his own costs of sale before paying any proceeds to the debtor, just as here the statutes allow the landlord to deduct the costs of storage and sale before paying the balance to the tenant or the county.

There are differences, however. The Arkansas statute authorized a sale of the property in Miller because it was already subject to the creditors' judgment lien. Under Civil Code §1988, the landlord has no judgment or other pre-existing lien on the tenant's property. Rather, he is given the statutory right to convert the property into cash, and to be reimbursed for the costs he incurs in doing so. Under the California statutes, therefore, it is the act of sale itself that, in effect, creates a lien in the landlord's favor to the extent of his storage and sale costs. See United States v. 110-118 Riverside Tenants Corp. [90-2 USTC ¶50,493], 886 F.2d 514, 517-19 (2d Cir. 1989).

In Riverside , the IRS placed a lien on a taxpayer's property, including his shares in a cooperative apartment building corporation. The proprietary lease the taxpayer had signed provided that if he failed to pay his proportionate share of maintenance costs within ten days' notice of default, the lease would terminate and the shares would revert to the corporation. The corporation then had the right to sell the shares, and apply the proceeds generated to payment of the lessee's indebtedness and expenses of sale. Any surplus was to be paid to the lessee. The IRS subsequently foreclosed on its lien and judgment on the shares was entered. One month later, the taxpayer defaulted on his maintenance payments to the corporation. Id. at 516. The apartment was ultimately sold, and the corporation claimed it was entitled to the sale proceeds to cover the taxpayer's delinquent maintenance payments and its costs of sale. The IRS, on the other hand, claimed that its lien attached to the gross proceeds prior to any payment of the corporation's claim. Id. at 517.

The court noted that the taxpayer was entitled to transfer the shares at any time subject to the corporation's approval, and, upon transfer, to receive the full value of the shares subject only to his default on maintenance payments. More importantly, it observed, at the time the government imposed its lien, the taxpayer had not defaulted on his maintenance payments, and the corporation had no right to sell the shares or deduct the arrearage from the proceeds. At the time the tax lien arose, therefore, the taxpayer's property interest was in "all the proceeds of the shares." For this reason, the court held that, as a matter of law, the IRS was entitled to the sale proceeds. Id. at 519.

Here, the situation is much the same. The IRS lien was "first in time" vis-a-vis any right of Smyers to deduct monies from the sale proceeds. See id. at 518. Moreover, at the time the lien attached, SCT had not yet abandoned the property, and Smyers had no right to sell the property under §1988. Accordingly, the lien attached to SCT's interest in all the property and its proceeds. Id. at 519.

Smyers argues that SCT's rights were limited to the surplus that remained after his expenses were paid, and cites the statutory notice that must be given to the tenant as evidence that, by the date of sale, the tenant's property rights are substantially curtailed:

"If you fail to reclaim the property, it will be sold at a public sale after notice of the sale has been given by publication. You have the right to bid on the property at this sale. After the property is sold and the cost of storage, advertising, and sale is deducted, the remaining money will be paid over to the county. You may claim the remaining money at any time within one year after the county receives the money." Code Civ.Proc. §1984 (emphasis supplied.)

This statute reveals that, after a tenant fails to respond to a notice that he or she may reclaim the property, the property can be sold, and the tenant can claim any surplus from the landlord or the county. ² This statute, however, cannot defeat the government's prior lien on the property. Because the tax lien attached to SCT's equipment and machinery prior to sale, it attached to the proceeds as well. See United States v. Blackett [55-1 USTC ¶9278], 220 F.2d 21, 23 (9th Cir. 1955) (upon the sale at execution of a liquor license to which an IRS lien had attached, the proceeds of the sale "became the property of the vendor-owner, subject, as any other property belonging to him, to valid liens in the order of their priority, in this case, first the tax lien, second the judgment lien").

In Blackett, the Ninth Circuit held that the government was entitled to enforce its tax lien against the proceeds of an execution sale of a stock of liquor and a liquor license. The IRS lien had attached to these items of property before the creditor obtained the judgment that gave rise to the sale (see [55-1 USTC ¶9278], 220 F.2d at 22), and it took the position that the sale proceeds were "property or rights to property" of the taxpayer (id. at 23). The court rejected the creditors' argument that the debtor had never had any property rights in the liquor license because the state had the right to refuse consent to its transfer. Id. at 23. Rather, it held, once the license was transferred, its proceeds "became the property of the vendor/owner, subject, as any other property belonging to him, to valid liens thereon in the order of their priority." Id.

Blackett must be read in conjunction with Kimura, supra, and In re Stone [93-2 USTC ¶50,635], 6 F.3d 581 (9th Cir. 1993), both of which also concerned the IRS' right to assert a lien against proceeds generated by the sale of the taxpayer's liquor license. In both cases, the Ninth Circuit held that the state was entitled to condition the transfer of the license on payment of state and local tax obligations owing to it, and thus that the tax lien attached only to the residual value of the proceeds after these obligations had been paid. See Stone, supra [93-2 USTC ¶50,635], 6 F.3d at 583; Kimura, supra [92-2 USTC ¶50,397], 969 F.2d at 813. This is because the state has a "property interest" in approving or disapproving the transfer and conditioning such approval on the payment of outstanding obligations to it. See Kimura, supra. The state may not, however, create rights in creditors other than itself by imposing conditions on transferability. Kimura, supra [92-2 USTC ¶50,397], 969 F.2d at 812-13; Business Title Corp. v. Division of Labor Law Enforcement, 17 Cal.3d 878, 886 (1976).

In Business Title, the California Supreme Court considered a statute which set forth the priority in which proceeds from the sale of a liquor license were to be distributed. See 17 Cal.3d at 887; Business & Professions Code §24074. The court held that such a statute was different than one giving the state power to condition sale of the license on the payment of certain obligations owing to it, and further held that such a statute could not, by establishing distribution priorities, defeat the paramount interest of the federal government in ensuring the payment of tax obligations. 17 Cal.3d at 884, 887. Code of Civil Procedure §1988 is like Business & Professional Code §24074 in that it establishes distribution priorities following the sale of a tenant's abandoned property. Consequently, it cannot trump the priority of a federal tax lien. And, even if it did, it would run afoul of the prohibition stated in Kimura, namely, that the state cannot create property rights in third persons that act to limit or defeat a federal tax lien. See [92-2 USTC ¶50,397], 969 F.2d at 812. Accordingly, under the law of this Circuit, SCT retained a property interest in the proceeds of the §1988 sale. ³ The question is whether Smyers had such property in his possession on the date of levy.

2. Triable Issues Of Fact Remain Concerning The Amount Of Property Subject To Levy Smyers Had In His Possession.

The IRS served notice of levy on Smyers' counsel on April 20, 1994; on the auctioneer on June 16, 1994; and on Smyers on August 3, 1994. (Pl.'s Fact 8; Def.'s Fact 10.) IRS regulations state that "[a] notice of levy may be served by mailing the notice to the person upon whom service of a notice of levy is authorized under paragraph (a)(1) of this section. In such a case the date and time the notice is delivered to the person to be served is the date and time the levy is made." 26 C.F.R. §301.6331-1(c). Cf. Resolution Trust Corp. v. Gill [92-1 USTC ¶50,199], 960 F.2d 336, 340 (9th Cir. 1992) (". . . [A] levy is effective upon the IRS's service of the notice of levy"). Under the regulations, sending the notice to the auctioneer or even to Smyers' attorney was not adequate service. Rather, service on Smyers himself was required. Thus, the date of levy was August 3, 1994.

A levy encompasses only "property possessed and obligations owed" by the third party at the time the government serves the notice of levy. 26 U.S.C. §6331(b); 26 C.F.R. §301-6331-1(a); Resolution Trust Corp. [92-1 USTC ¶50,199], 960 F.2d at 341. In his declaration, Smyers states that the auctioneer initially paid the net proceeds of sale, $21,869.50 to his attorney, Brian Burgess. (Declaration of Woodrow Smyers, ¶7.) The date of this payment is not reflected. Thereafter, Burgess sent Smyers a check that Smyers deposited in his bank account. ( Id. ) Smyers' declaration is silent as to whether or not Burgess deducted his legal fees of $2,424.50 before transmitting the funds. (See id.) It similarly does not reflect whether Smyers paid his inventory costs of $200 prior to receipt of the notice of levy on August 3, 1994. Finally, the record contains no evidence from which the court can determine whether the storage costs Smyers allegedly incurred were amounts payable to a third party, or simply amounts he calculated he was owed to compensate him for storing the property on his premises prior to sale. These uncertainties create triable issues of fact regarding the amount of sale proceeds in Smyers' possession on the date of levy. To whatever extent proceeds were in his possession on August 3, however, Smyers was obligated to surrender such property to the government pursuant to §6332(a). ⁴

The question arises, however, whether any equitable doctrine would allow plaintiff to recoup either costs of sale that had not already been paid on the date of levy and/or the costs of storage incurred by Smyers at least in part because the IRS delayed in enforcing its lien. In Riverside , for example, although the court determined that the government's lien was superior to that of the cooperative apartment corporation, it nonetheless held, as a matter of equity, that the corporation was entitled to recoup its costs of eviction and sale. See [90-2 USTC ¶50,493], 886 F.2d at 520-21. It offered two rationales for this result. First, had the government sought to sell the property, it would have been liable for the costs of sale. See 26 U.S.C. §6342 (providing that, where the United States sells property in satisfaction of a tax lien, the proceeds of the sale shall be used first to pay the "expenses of levy and sale"). [90-2 USTC ¶50,493], 886 F.2d at 520. Second, the court invoked the doctrine that permits the creator of a common fund to recoup the expenses incurred in creating the fund. [90-2 USTC ¶50,493], 886 F.2d at 521. Under either theory, the court held, it would be unjust not to require the government to pay the corporation's expenses in connection with the eviction and sale. Id. at 521. The court considered, but did not award, the additional unpaid maintenance fees that had accrued after the IRS obtained a foreclosure judgment but before the eviction and sale, because it could not determine whether one party was more responsible than the other for the delay. See id. at 520. The court expresses no view as to whether such an equitable assessment would be appropriate in this case. The parties, however, may wish at some future point to brief whether any equitable theory permits Smyers to recoup any unpaid storage and sale costs from proceeds that were subject to the IRS levy and are thus payable to the government in this action.

B. Smyers is Not Liable for Tortious Conversion

The United States asserts that Smyers committed tortious conversion by selling SCT's property with knowledge that it was subject to an existing IRS lien. By seizing and selling the property, the IRS argues, Smyers intentionally impaired its security interest in the property.

Conversion is the "wrongful exercise of dominion over the property of another." 4 B. Witkin, Summary of California Law, Torts, §610; see United States v. Paladin [82-1 USTC ¶9360], 539 F.Supp. 100, 103 (W.D.N.Y. 1982). Conversion is "a long-standing remedy, available to the government as well as to private litigants, which permits a conversion action against defendants who intentionally impair a lienor's security." Nomellini Construction Co. v. United States [71-2 USTC ¶9510], 328 F.Supp. 1281, 1285 (E.D.Cal. 1971); see id. at 1285-86 ("The statutory and common law remedies redress different evils. The manifest purpose of Section 6332 is to force the physical surrender of levied property to permit administrative sale, while the common law remedy casts a wider net to provide relief for any tortious act which impairs the lienor's interest in the converted property. With one exception, therefore, one remedy does not necessarily include the other.") But see Fritschler, Pellino, Schrank, & Rosen, S.C. v. United States [89-1 USTC ¶9111], 716 F.Supp. 1157, 1160-61 (E.D.Wis. 1989) (rejecting the government's cause of action for conversion, the court stated: "Section 6332 of Title 26 of the United States Code provides the government's sole remedy for recovery. . . . Conversion is outside the scope of section 6332, and would require the court to create or imply a remedy that Congress could have created had it been of a mind to do so.")

To sustain a claim for tortious conversion of property encumbered by a tax lien, the government must prove that the defendant engaged in conduct that rendered the government's lien valueless. See Nomellini, supra [71-2 USTC ¶9510], 328 F.Supp. at 1285. Paladin involved a fraudulent conveyance designed to escape the effect of the encumbrance, while Nomellini involved a junior creditor who took possession of encumbered property, intermingled a portion of the property with his own, and permitted the remainder to rust away to "junk." In neither case did the defendant make any attempt to preserve the security interest of senior lien holders such as the government.

In the present case, Smyers did not wrongfully exercise dominion over the government's property in the same manner the defendants did in Nomellini and Paladin. Rather, he invoked the procedures prescribed by statute for the removal and disposition of property left unclaimed on leased premises, and notified the United States of the sale prior to its occurrence. The mere sale of encumbered property, the effect of which makes it more difficult for the government to attach such property, does not by itself constitute conversion. For this reason, the government's conversion claim cannot stand, and Smyers' motion for summary judgment on this count is granted.

V.

CONCLUSION

Because triable issues of fact exist with respect to the amount of sale proceeds Smyers had in his possession on the date of levy, the parties' cross-motions for summary judgment on the first claim for failure to honor an IRS levy are denied. Smyers' motion for summary judgment is granted with respect to the claim for tortious conversion of a federal tax lien.

¹ Under 26 U.S.C. §6322, the lien attached at various points during 1992 and 1993 when liability for payroll taxes was assessed. It was recorded sometime prior to 1994. SCT abandoned the property in August 1993, and the property was sold at auction in February 1994.

² Even were this the case, the right to payment of the surplus funds, which the tenant retains for a year, is not valueless, and the tenant's state law interest would have to be deemed a property right. See, e.g., United States v. Rockland Trust Co. [94-2 USTC ¶50,339], 860 F.Supp. 895, 901 (DMUS 1994) (despite the fact that the taxpayer did not have unfettered access under state law to surplus funds from foreclosure sale because of competing creditor claims, and despite the fact that his entitlement was "merely speculative," he "evidently had] some property interest" sufficient for purposes of §6332). At that point, of course, the state law inquiry would then end, and the court would look to federal law to determine whether the right was a "right to property" subject to levy under §§6331 and 6332. See National Bank of Commerce, supra [85-2 USTC ¶9482], 472 U.S. at 724 and n. 8. Because even a limited interest to reclaim surplus funds has pecuniary value and would be transferable, it constitutes "rights to property" subject to lien or levy under the Internal Revenue Code. See Kimura, supra [92-2 USTC ¶50,397], 969 F.2d at 811 (because a liquor license"has beneficial value for its holder and . . . is sufficiently transferable," it constitutes property within the meaning of the tax statutes); Little v. United States [83-1 USTC ¶9343], 704 F.2d 1100, 1105-06 (9th Cir. 1983) (whether an interest is property within the meaning of §6321 requires a determination as to whether it "is an economic asset . . . that has pecuniary worth and is transferable). Little, in fact, involved the right to redeem property tax-deeded to the state, a right that is somewhat similar to the right to reclaim property from the County established by §1988. See id. at 1106. Thus, as of the date of sale, Smyers had possession of "property or rights to property" belonging to SCT.

³ In a subsequent opinion involving the Miller creditors' request for an attorneys' fees award, the Eighth Circuit held that the government's position had not been substantially justified. It based this holding, in part, on the fact that "it was unreasonable for the IRS to rely on Blackett" as support for its position that it was entitled to the surplus sales proceeds. Miller v. Alamo , 983 F.2d 856, 860 (8th Cir. 1993). The court noted that Blackett had not analyzed whether, under state law, the taxpayer had any rights in the property at issue. Id. Blackett, however, is consistent with the later Ninth Circuit cases of Kimura and Stone in allowing an IRS lien to attach to the proceeds generated by the sale of property to which the lien had previously attached. In any event, where, as here, the competing "lien" arises after the tax lien has attached, and only upon sale of the property, the rule of Blackett, Kimura, and Stone dictates that the tax lien be given priority.

⁴ Smyers' declaration indicates that he made payments of $6,500 for environmental clean-up expenses after the date the notice of levy was served. Thus, these amounts were in his possession on the relevant date, August 3.

 

[99-1 USTC ¶50,386] United States of America , Plaintiff v. Woodrow Smyers, Defendant

U.S. District Court, Cent. Dist. Calif., CV 98-2603 MMM (Mcx), 2/26/99, Prior decision by the District Court in this matter, 98-2 USTC ¶50,703

[Code Secs. 6323 and 6332 ]

Liens and levies: Property subject to: Third-party possession: Failure to honor: Notice of lien: Setoff.--An individual who auctioned property of a delinquent taxpayer that had been his lessee failed to comply with an IRS levy against the taxpayer and was liable to the IRS for the sale proceeds. The individual had notice and knowledge of the liens, which were superior to his interest in the property and attached to the sale proceeds. His claim that he was entitled to an offset for expenses incurred in liquidating the property was rejected.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

MORROW, District Judge:

This matter came on for trial on December 22, 1998, the Honorable Margaret M. Morrow, United States District Judge, presiding. Based on all matters properly part of the record, the court makes the following Findings of Fact And Conclusions of Law:

FINDINGS OF FACT

1. This is an action to hold Woodrow Smyers personally liable for failure to honor an Internal Revenue Service Levy or, in the alternative, for conversion.

2. Defendant Woodrow Smyers is the owner of certain real property located at 9845 Alburtis Avenue , Santa Fe Springs , California . Prior to 1994, defendant leased the Alburtis property to the taxpayer, Special Cutting Tools, Inc. ("SCT").

3. On and before August 3, 1994, SCT was indebted to the United States ("IRS") for payroll taxes for the tax periods ending December 31, 1991 through June 30, 1993. This liability was assessed against SCT from March 16, 1992 through September 27, 1993. Prior to 1994, the IRS recorded five (5) Notices of Federal Tax Liens against SCT in the Office of the Secretary of State for the State of California .

4. SCT vacated Smyers' premises in August 1993, leaving machinery and equipment behind. On or about January 11, 1994, Smyers entered into an "Auction Agreement" with T. A. Auction for the sale of the machinery and equipment belonging to SCT.

5. By certified mail dated January 21, 1994, T. A. Auctioneers, by and through its counsel, sent the IRS a "Notice of Sale of Abandoned Personal Property," notifying it of the auction sale. The notice included copies of the five Notices of Federal Tax Lien, a description of the property to be sold, and the time, date and location of the sale. On February 15, 1994, Smyers sold the machinery and equipment pursuant to California Civil Code §1988.

6. The IRS did not appear at the auction sale. At the time of the sale, Smyers knew SCT owed federal taxes. Prior to the auction, Smyers' attorney was aware that federal tax liens had been recorded against SCT prior to 1994.

7. The sale of SCT's property grossed $28,375. After the auctioneer deducted its commission in the amount of $6,505.40, Smyers received $21,869.60. He deposited $21,506 of this amount in his bank account on March 31, 1994.

8. On April 29, June 16 and August 3, 1994, the IRS served three (3) notices of levy on Smyers' counsel, Brian Burgess, the auctioneer, and Smyers respectively.

9. Smyers did not honor the levy by paying over funds to the IRS. By letters dated August 29, 1994 and March 1, 1995, from Smyers' counsel, Smyers advised the IRS "that, pursuant to Civil Code, Section 1988(c), the only items he ha[d] deducted [were] the costs of storage, advertising and sale." He further advised that, "[a]s there were no proceeds left after those costs, there [was] nothing" to pay to the IRS.

10. Smyers' counsel did not deduct his legal fees of $2,424.50 before transmitting the auction proceeds to Smyers.

11. At the time of the levy on Smyers on August 3, 1994, he had $24,154.33 on deposit.

12. Any conclusion of law deemed to be a finding of fact is incorporated herein as a finding.

CONCLUSIONS OF LAW

1. Section 6321 of the Internal Revenue Code (26 U.S.C. §6321) provides that when a taxpayer fails or neglects to pay any tax after demand, a federal tax lien arises in favor of the United States upon "upon all property and rights to property, whether real or personal, belonging to [the taxpayer]." Babb v. Schmidt [74-1 USTC ¶9476], 496 F.2d 957, 958 (9th Cir. 1974). The tax lien arises on the date of assessment of the unpaid tax. 26 U.S.C. §6321.

2. Because the flow of money into the Treasury of the United States must be uninterrupted, Congress has provided for an expeditious administrative levy process pursuant to which the IRS may collect unpaid taxes. Farr v. United States [93-1 USTC ¶50,229], 990 F.2d 451, 455 (9th Cir. 1993). Thus, "all property and rights to property . . . belonging to [a taxpayer] or on which there is a lien . . . for the payment of such tax" are subject to levy. 26 U.S.C. §6331(a). This is true even if a taxpayer's interest is in the hands of a third party. The tax laws are "designed to reach those interests and to encourage third parties to turn over the interests when the government issues a demand for them." Id. at 456.

3. Upon receipt of a federal tax levy, the custodian of property subject to the levy must surrender it to the United States . 26 U.S.C. §§6331, 6332. If the custodian fails to surrender property or rights to property of the taxpayer in his possession, he incurs personal liability to the government for his refusal. 26 U.S.C. §6332(d)(1).

4. Stated otherwise, a third party's refusal to honor a levy is at the party's own risk. Farr, supra [93-1 USTC ¶50,229], 990 F.2d at 456. "As the Supreme Court has indicated, the party in possession has limited defenses to a levy on a taxpayer's property interests and will proceed at his own peril if he refuses to honor the levy." Id.

5. In fact, there are only two defenses to failure to comply with a federal tax levy, namely (1) that the person is not in possession of property or rights to property belonging to the taxpayer; and (2) that the property is subject to prior judicial attachment or execution. 26 U.S.C. §6332(a); United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722, 105 S.Ct. 2919, 2925 (1985). "The statute admits of no other defenses." Bank of Nevada v. United States [58-1 USTC ¶9228], 251 F.2d 820, 824 (9th Cir. 1958). In this case, Smyers relies on the first defense, i.e., that he was not in possession of property or rights to property belonging to SCT.

6. A person who wishes to challenge a levy must bring a wrongful levy action against the United States . 26 U.S.C. §7624; Winebrenner v. United States [91-1 USTC ¶50,057], 924 F.2d 851, 854 (9th Cir. 1991) ("the exclusive remedy by a third party whose property has been levied upon or sold by the Internal Revenue Service is an action pursuant to Section 7426"); United States v. Badger [91-1 USTC ¶50,198], 930 F.2d 754, 757 (9th Cir. 1991) ("If any person wishes to contest the levy, that person must bring a wrongful levy action under I.R.C. §7426"). Smyers did not do this, but simply refused to pay the levy.

7. The federal tax liens that attached to SCT's property before it was sold enjoyed priority over Smyers' interest in the property. When Smyers sold SCT's property, the federal tax liens attached to the proceeds from the sale of such property, and he took the sale proceeds subject to the government's tax lien. See United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343], 905 F.2d 1325, 1331 (9th Cir. 1990) ("A federal tax lien attaches to a taxpayer's property when unpaid taxes are assessed, . . . and continues to attach . . . regardless of any subsequent transfer of the property"); United States v. Blackett [55-1 USTC ¶9278], 220 F.2d 21, 23 (9th Cir. 1955) (upon the sale at execution of a liquor license to which an IRS lien had attached, the proceeds of the sale "became the property of the vendor-owner, subject, as any other property belonging to him, to valid liens in the order of their priority, in this case, first the tax lien. . ."). Accordingly, following the auction sale, Smyers was in possession of property or rights to property belonging to the taxpayer in the amount of $21,869.60, that is, the amount of the sale proceeds that were transmitted to him and to which a lien attached. See Donahue Industries, supra [90-2 USTC ¶50,343], 950 F.2d at 1331.

8. Because Smyers was in possession of property or rights to property subject to a federal tax lien, he was required to honor the levy. See Donahue Industries, supra. Smyers' failure to honor the levy thus subjects him to personal liability pursuant to 26 U.S.C. §6332(d)(1).

9. Smyers' claim that he is entitled to an offset for the expenses he incurred in liquidating SCT's property must be rejected. The priority accorded such expenses is determined by federal law. Section 6323(e) provides that, if a competing lien (such as Smyers') is entitled to priority over a federal tax lien, interest and expenses related to the lien enjoy the same priority to the extent that local law allows them the same priority as the lien. 26 U.S.C. §6332(e).

10. In this case, the federal tax liens had priority over Smyers' interest in SCT's property. Congress has made no provision for an award of expenses to a junior claimant or for reimbursement of the expenses incurred by a junior claimant in foreclosing on a taxpayer's personal property.

11. Since Smyers' interest in SCT's property was not entitled to priority over the federal tax liens, the tax liens had to be satisfied before the sale proceeds could be applied to Smyers' liquidation and storage costs.

12. Prior to the auction, Smyers knew the IRS had priority liens on SCT's property, as evidenced by the fact that he forwarded copies of the liens to the IRS together with notice of the auction sale in January 1994. After the auction sale, Smyers knew that the IRS claimed it had a priority interest in the sale proceeds. When Smyers received the notice of levy on August 3, 1994, therefore, he was required to honor the levy. His contention that at the time of the levy he did not have any property belonging to the taxpayer is without merit. See Donahue Industries, supra [90-2 USTC ¶50,343], 905 F.2d at 1331 (bank that received payments on taxpayer's accounts receivable after federal tax liens had attached, and that credited them against outstanding loan balance, was required to surrender the payments when a notice of levy was served). Smyers received $21,869.60 in proceeds from the sale, and, like the bank in Donahue, was in possession of that sum on the date of levy. To the extent Smyers argues that he had expended all or a portion of this amount prior to the levy on August 3, 1994, his knowledge that the proceeds were encumbered by federal tax liens defeats his claim. If such an argument were countenanced, the court would have to find that Smyers interfered with the government's right to possession of the proceeds by exercising unauthorized control over the property. Smyers would then be liable for conversion. See United States v. Paladin [82-1 USTC ¶9360], 539 F.Supp. 100, 103 (W.D.N.Y. 1982) (conversion is the wrongful exercise of dominion over the property of another); Nomellini Construction Co. v. United States [71-2 USTC ¶9510], 328 F.Supp. 1281, 1285 (E.D.Cal. 1971) (conversion is a remedy available against defendants "who intentionally impair a lienor's security").

13. The IRS's claim to the sale proceeds is based on 26 U.S.C. §6331, which allows for levy upon "all property and rights to property belonging to [the delinquent taxpayer] or on which there is a lien." "There is no requirement that the IRS prove what portion of property being levied upon belongs to the delinquent taxpayer before it can levy on the property." Badger, supra, 930 F.2d at 757. Accordingly, when Smyers received the levy in August 1994, he was obliged to honor it.

15. Judgment shall be entered in favor of plaintiff in the amount of $21,869.60, plus interest, in accordance with law, from August 3, 1994.

16. Any findings of fact deemed to be conclusions of law are incorporated herein. 

 

[2002-1 USTC ¶50,286] Charles Raymond Dietz, Sr. v. Connecticut General Life Insurance Company

U.S. District Court, Dist. Md., Civ. JFM-01-3292, 1/17/2001, 179 F. Supp. 2d 532, 179 FSupp2d 532, 2001 U.S. Dist. LEXIS 22283

[Code Sec. 6332 ]

Levy and distraint: Taxpayer's property in possession of third party: Pension payments: Effect of honoring levy.--A pro se individual's wrongful levy claim against a life insurance company was dismissed. The company was required to surrender the taxpayer's pension payments to the IRS pursuant to Code Sec. 6332 . Moreover, wrongful levy actions have to be asserted against the IRS, rather than against the party upon which the notice of levy is served.

Charles Raymond Dietz, Sr., Baltimore, Md., pro se. Bryan D. Bolton, Funk and Bolton PA, Baltimore, Md., for defendant.

MEMORANDUM

MOTZ, District Judge:

Plaintiff, who is representing himself, and Connecticut General Life Insurance Company ("Connecticut General") have filed motions for summary judgment. ¹ Plaintiff's motion will be denied, and Connecticut General's will be granted. ²

The gravamen of plaintiff's claims is that Connecticut General has wrongfully honored a notice of levy from the Internal Revenue Service directing Connecticut General to forward all pension payments payable to plaintiff to the IRS as those payments become due. To the extent that plaintiff has asserted state law claims, they are preempted by ERISA. More fundamentally, federal law imposes upon a person receiving a levy from the IRS to surrender the property of the taxpayer subject to the levy to the IRS, see 26 U.S.C. §6332 (2001); United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720-21, 86 L.Ed.2d 565, 105 S.Ct. 2919 (1985); Congress Talcott Corp. v. Gruber [93-1 USTC ¶50,283], 993 F.2d 315, 318 (3d Cir. 1993). Any claim that the levy is wrongful must be asserted against the IRS itself, not against the person upon whom the notice of levy is served. ³

A separate order effecting the rulings made in this memorandum is being entered herewith.

ORDER

As stated in the accompanying memorandum, it is, this 17th day of January 2002 [sic]

ORDERED

1. The motion to dismiss or for summary judgment filed by CIGNA Retirement Investment Services is treated as one to dismiss and, as such, is granted;

2. Connecticut General Life Insurance Company is substituted as the party defendant for CIGNA Retirement Investment Services;

3. Plaintiff's motion for summary judgment is denied;

4. The motion for summary judgment filed by Connecticut General Life Insurance Company is granted; and

5. Judgment is entered in favor of Connecticut General against plaintiff.

¹ The defendant originally named in the complaint was CIGNA Retirement Investment Services, a marketing name used by Connecticut General and other CIGNA companies. CIGNA Retirement Services has filed a motion to dismiss that I will grant. However, the order of dismissal will substitute Connecticut General as a defendant (which has, as I have already indicated, filed a motion for summary judgment of its own).

² The case was originally filed in the Maryland District Court, a small claims court. When it was initially removed, in accordance with my routine practice in pro se cases arising under ERISA removed from the Maryland District Court, I indicated that I would appoint counsel to represent plaintiff. However, after reviewing Connecticut General's motion for summary judgment, I realized that this is not a usual ERISA case (in which removals from the Maryland District Court can be perceived as an abusive defense tactic warranting the appointment of counsel for plaintiff) but one involving the alleged improper collection of federal taxes (in which Connecticut General's removal is entirely appropriate). Accordingly, I changed my mind about appointing counsel for plaintiff and so advised the parties.

³ Plaintiff suggests that he is entitled to have his case heard by a three-judge district court. Such courts are authorized only in actions challenging the constitutionality of the apportionment of congressional districts or the apportionment of any statewide legislative body. 28 U.S.C. §2284. This case is obviously not such an action. 

 

[CCH Dec. 55,757]

Joseph F. and Caroline Enos v. Commissioner.

Dkt. No. 11630-01L , 123 TC 284, No. 17, September 27, 2004.

[Appealable, barring stipulation to the contrary, to CA-1. --CCH.]

[Code Sec. 6331]
Levy: Third-party: Dominion and control: Account receivable. --

The tax liability of married owners of a scrap metal business was not satisfied when the IRS issued a notice of levy to a third party that owed the taxpayers money because the levy only provided the IRS with legal custody of the taxpayers' property. Although the taxpayers contended that the notice of levy issued to the taxpayers' debtor before its involuntary bankruptcy had the effect of an immediate seizure by the IRS of their account receivable, under Code Sec. 6331 the liability created by a levy was not discharged until the third party honored the levy or the property levied upon was sold by the IRS. Distinguishing Barlow's Inc., 84-1 USTC ¶9233, aff'd CA-4 (unpublished opinion). --CCH.

[Code Sec. 6332]
Levy: Third-party: Dominion and control: Account receivable. --

The tax liability of married owners of a scrap metal business was not satisfied when the IRS issued a notice of levy to a third party that owed the taxpayers money because the IRS did not exercise dominion and control over the taxpayers' property as a result of the levy. The taxpayers actively participated in the negotiations between the IRS and the third party regarding payment of the levy. Additionally, after the IRS and the third party entered into a payment plan for the taxpayers' tax liability, the third party continued to make payments to the taxpayers, although it did not make payments to the IRS sufficient to pay off the taxpayers' liability. Distinguishing Barlow's Inc., 84-1 USTC ¶9233, aff'd CA-4 (unpublished opinion). --CCH.

[Code Sec. 6404]
Levy: Third-party: Dominion and control: Abatement. --

Married owners of a scrap metal business were not entitled to an abatement of interest under Code Sec. 6404. The taxpayers failed to pay the tax liability reported on their tax return for the year at issue, and the liability was outstanding for several years, until the third party's bankruptcy trustee paid the IRS on the taxpayers' behalf. Moreover, the taxpayers failed to show that any interest that accrued after the bankruptcy trustee's payment was due to the IRS's error or delay. Distinguishing Barlow's Inc., 84-1 USTC ¶9233, aff'd CA-4 (unpublished opinion). --CCH.

Hans A. Stoeckler, for petitioners; D. Sean McMahon, for respondent.

 

R assessed income tax, interest, and civil fraud liabilities for Ps' 1971 tax year. Ps were involved in the scrap metal business and had a substantial account receivable from Ps' customer M. R issued to M a notice of levy on the account receivable. R and M entered into a payment agreement, whereby M would make 200 weekly payments of $1,500 to R. Ps were aware of and participated in the negotiation of the payment agreement between M and R. Ps continued to do business with M and received large payments from M before M was placed in bankruptcy. R filed an original and several amended proofs of claim in M's bankruptcy case, relating to the notice of levy. The bankruptcy court held that R did not have to marshal Ps' assets before seeking M's assets in bankruptcy court. R issued Ps a notice of determination to proceed with collection of Ps' 1971 liabilities for accrued interest on Ps' 1971 tax liabilities pursuant to sec. 6330, I.R.C. R determined that collection should proceed because R never had "dominion and control" over the account receivable because M continued to make payments to Ps after R issued M the notice of levy and Ps participated in the negotiation of the payment agreement with M. Held: Ps' liability to R was not satisfied when R issued M the notice of levy because it only provided R with legal custody of Ps' account receivable from M. Held, further, R did not have "dominion and control" over the account receivable from M to Ps. Held, further, the notice of determination relates only to Ps' 1971 tax year, and the Court does not have jurisdiction over Ps' 1970 and 1972 tax years. Held, further, res judicata does not apply to the instant case. Held, further, collateral estoppel does not apply to the instant case. Held, further, the Court does not have jurisdiction to determine whether M's bankruptcy trustee is liable for penalties under 31 U.S.C. secs. 191 and 192 (2000) and secs. 6331 and 6332, I.R.C. Held, further, petitioners are not entitled to an abatement of interest because a significant aspect of any error or delay is attributable to petitioners.

OPINION

 

WELLS, Judge: The petition in the instant case was filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination).¹ In the notice of determination, respondent determined that collection should proceed against petitioners to collect a liability for accrued interest on petitioners' tax liabilities for 1971.

 

The issues to be decided are as follows:

 

1. Whether respondent's issuance of a notice of levy on an account receivable due petitioners from a customer satisfied petitioners' original tax liability for 1971 that was assessed in 1977 because respondent exercised "dominion and control" over the account receivable;

 

2. whether we have jurisdiction over petitioners' 1970 and 1972 tax years;

 

3. whether res judicata applies to the instant case;

 

4. whether collateral estoppel applies to the instant case;

 

5. whether the bankruptcy trustee of petitioners' customer is personally liable to respondent under 31 U.S.C. secs. 191 and 192 (2000) and sections 6331 and 6332 for wrongfully refusing to surrender the customer's property to respondent; and

 

6. whether petitioners are entitled to an abatement of interest accruing for their 1971 tax year pursuant to section 6404.

Background

 

The parties submitted the instant case fully stipulated, without trial, pursuant to Rule 122. The parties' stipulations of fact are hereby incorporated by this reference and are found as facts in the instant case. At the time petitioners filed their petition, they resided in Taunton , Massachusetts .

 

During the 1970s, petitioners operated Joseph Enos & Sons (Enos & Sons) and were engaged in the scrap metal business in Massachusetts . Petitioners routinely sold scrap metals to Metropolitan Metals, Inc. (MMI), of Harrisburg, Pennsylvania, from whom petitioners had a significant account receivable for scrap metal purchased by MMI (account receivable).

 

Petitioners made estimated tax payments of $1,753.51 for their 1971 tax year. Respondent conducted an audit of petitioners' 1971 tax year. On November 14, 1977, respondent assessed $164,886.76 in liabilities for 1971, comprising an income tax liability of $88,156.02, an addition to tax for fraud of $44,078.01 relating to certain cash transactions, and interest of $32,652.73. Petitioners did not dispute the liabilities assessed against them for 1971.

 

On August 15, 1978, in an attempt to collect payments on petitioners' 1970, 1971, and 1972 tax liabilities, respondent issued MMI a notice of levy (August 15, 1978, notice of levy), seizing the account receivable. When respondent issued MMI the August 15, 1978, notice of levy, MMI was experiencing financial problems. The August 15, 1978, notice of levy informed MMI that it owed respondent $310,333.58, of which $159,476.08 was for petitioners' 1971 tax year. The August 15, 1978, notice of levy also indicated that the amounts due for petitioners' 1970 and 1972 tax years were $64,167.11 and $86,690.39, respectively.

 

On December 15, 1978, MMI's counsel sent respondent a letter which stated that MMI would make 200 weekly installment payments of $1,500 to respondent in satisfaction of the levy served on MMI (December 15, 1978, payment agreement). The December 15, 1978, payment agreement was sent from MMI's counsel, Bruce D. Forman, Esq., to respondent's Revenue Officer Charles J. Hillsdale and stated the following:

 

I am writing to confirm my understanding of our conversation of December 13 and to put it in writing for purposes of specific explanation to my client.

 

Commencing Friday, December 19, 1978, and every Friday thereafter, Metropolitan Metals will forward to the Internal Revenue Service in self-addressed stamped envelopes to be provided by the Internal Revenue Service to me, payment in the amount of $1,500.00 for your levy on an account due and payable from Metropolitan Metals, Inc. to Joseph F. and Carol P. Enos, the same having been served on Metropolitan Metals August 15, 1978.

 

It has been agreed that the outstanding account payable is in the amount of $300,000.00 and, accordingly, at this rate of payment it would take 200 weeks to make all of the payments required. Mr. Roberts, President of Metropolitan Metals, Inc., has agreed to inform me if business profits permit increase payments and, at that time I would contact you so that we could increase the rate of payment to decrease the time during which payment would be made.

 

I appreciate the fact that you are cooperating with us so that this account can be paid in a manner consistent with continuing business and at the same time, allowing the government to collect the amount due.

 

MMI sent respondent seven checks for payment pursuant to the December 15, 1978, payment agreement. Only six of those checks were honored.

 

On March 29, 1979, MMI's creditors filed an involuntary bankruptcy petition against MMI in the U.S. Bankruptcy Court for the Middle District of Pennsylvania. MMI's bankruptcy petition was filed under chapter 11 of the Bankruptcy Act of 1898 (Bankruptcy Act), as amended. MMI's case was later converted to a chapter 7 case.

 

On April 25, 1979, Charles J. DeHart III, Esq., was appointed receiver of MMI.

 

On May 21, 1980, respondent issued Mr. DeHart a notice of levy (1980 notice of levy). The 1980 notice of levy indicated a total liability of $246,789.26, composed of a liability for 1971 of $153,002.11, and a liability for 1972 of $93,787.15.

 

On June 10, 1981, respondent filed an amended proof of claim, claim 134 (amended proof of claim), pursuant to a priority claim under section 64a(5),² based on the August 15, 1978, notice of levy and the December 15, 1978, payment agreement, in the amount of $232,427.35. The amended proof of claim stated that interest would accrue at a rate of $45.55 per day.

 

On June 24, 1981, the U.S. Bankruptcy Court for the Middle District of Pennsylvania issued an order of adjudication, ordering MMI's case to proceed under the provisions of the Bankruptcy Act, appointing Mr. DeHart to the position of trustee for MMI (bankruptcy trustee), and setting the amount of the bond of the bankruptcy trustee at $100,000.

 

On May 12, 1982, respondent filed a second amended proof of claim for internal revenue taxes, claim 173 (1982 proof of claim) in the U.S. Bankruptcy Court for the Middle District of Pennsylvania. Respondent's 1982 proof of claim stated that respondent had a priority claim under section 64a(5) based on the August 15, 1978, notice of levy and the December 15, 1978, payment agreement. The 1982 proof of claim also stated that interest would accrue on the $248,710.95 due under the 1982 proof of claim from MMI at a rate of $72.77 per day.

 

On April 5, 1989, respondent filed another amended proof of claim with the U.S. Bankruptcy Court for the Middle District of Pennsylvania, claim 175, claiming an amount due from MMI in the amount of $149,321.40.

 

On January 24, 1990, petitioners filed a complaint against respondent in the U.S. District Court for the District of Massachusetts, Civil Action No. 90-10178-WAG. Petitioners sought to have respondent remove certain tax liens on their property, relating to the tax liabilities from their 1971 and 1972 tax years. Petitioners also sought $10 million in damages from respondent.

 

On November 22 and 27, 1991, a deposition (deposition) was given by petitioner Joseph F. Enos (Mr. Enos), relating to the lawsuit petitioners filed in the U.S. District Court for the District of Massachusetts, Civil Action No. 90-10178-WAG. During the deposition, George Eliopoulos, Esq., of the U.S. Department of Justice, Tax Division, represented the United States , and David Shaughnessy, Esq., represented Mr. Enos.

 

During the deposition, Mr. Enos discussed certain events surrounding the August 15, 1978, notice of levy that was issued to MMI. Mr. Enos also discussed the nature of petitioners' business relationship with MMI.

 

Mr. Enos indicated that petitioners' business had sales in the millions of dollars during the 1970s. Mr. Enos also stated that MMI was petitioners' largest purchaser of scrap metal, accounting for over 50 percent of their business during the period in issue. Mr. Enos stated that petitioners kept an "Accounts Receivable Ledger" for their business (petitioners' business ledger), which reflected, in part, certain transactions with MMI, from August 1977 until February 1979.

 

A letter from James S. Newell, C.P.A., Mr. Enos's accountant, dated February 15, 1978, to Mr. Hillsdale states: "Enclosed herewith please find the personal and business financial statements for Joseph and Caroline Enos, 18 Marvel Street , Taunton . In addition I have enclosed a power of attorney signed by both individuals."

 

The February 15, 1978, letter from Mr. Newell to Mr. Hillsdale referred to a financial statement accompanying the February 15, 1978, letter. Petitioners' balance sheet for their business shows that petitioners had accounts receivable of $496,410, and that petitioners subtracted an uncollectible amount of $393,466, for a total value of $102,944. A note to the balance sheet states:

 

NOTE --THE ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS REPRESENTS THE AMOUNT DUE FROM METROPOLITAN METALS, INC. OF HARRISBURG , PENNSYLVANIA . THE OWNER OF THE BUSINESS SUPPOSEDLY HAS BEEN THROUGH SEVERAL BANKRUPTCIES. THE BALANCE REPRESENTS AMOUNTS DUE FOR A PERIOD LONGER THAN 6 MONTHS, AND THE COMPANY HAS SHOWN A CONTINUED POLICY OF ISSUING CHECKS WHICH SUBSEQUENTLY ARE RETURNED BY HIS BANK AS "INSUFFICIENT FUNDS". PROSPECTS OF COLLECTING THIS [sic] APPEAR SLIM.

 

Petitioners' Statement of Financial Condition and Other Information, dated June 20, 1978, under the heading "Accounts Receivable", states:

 

      Account Receivable        Book Value        Liquidation Value    

      Trade, at 12/31/77         $496,410            $102,944*         

* One Customer owes $393,466, Collection Appears Slim.                 

 

Mr. Enos signed the financial statements for the purpose of settling petitioners' tax liability with respondent. Mr. Enos knew MMI had agreed to make payments to respondent for the satisfaction of petitioners' tax liability to respondent. Mr. Enos believed that the account receivable had a value different from the $300,000 that was agreed to in the December 15, 1978, payment agreement.

 

Petitioners received money from MMI after the August 15, 1978, notice of levy was issued to MMI for the part of the account receivable that exceeded the amount of the August 15, 1978, notice of levy.

 

In respondent's record of petitioners' account, a Form 2-27, TDA³ (Taxpayer Delinquent Account) History Record form for the period from January 1, 1978, to July 2, 1981, the October 23, 1978, entry states that petitioners' counsel advised respondent that petitioners were meeting with representatives of MMI in Harrisburg, Pennsylvania, to resolve the amount owed by MMI to petitioners. Respondent's October 31, 1978, TDA entry states that petitioners informed respondent that petitioners and MMI did not agree as to the amount of MMI's liability to petitioners. That entry also states that MMI provided petitioners with their records so that MMI and petitioners could agree on a figure for the account receivable. Respondent's November 3, 1978, TDA entry states that MMI's attorney, Mr. Forman, was contacted by respondent on November 3, 1978, and indicated that MMI and petitioners were still discussing the amount of the account receivable.

 

Respondent's December 12, 1978, TDA entry states that MMI's counsel indicated that MMI could pay respondent $1,500 weekly on the August 15, 1978, notice of levy. Respondent's December 12, 1978, TDA entry also states that MMI and petitioners agreed that the amount MMI owed petitioners was $300,000. Additionally, respondent's December 12, 1978, TDA entry states that petitioners informed respondent that they were going to try to have MMI pay $3,000 weekly to satisfy the August 15, 1978, notice of levy. A letter dated September 26, 1991, from Mr. Enos's attorney, Mr. Shaughnessy, to Edward Rothman, Esq., who represented MMI, states: "Enclosed please find the documents discussed in our last telephone conversation." Attached to the September 26, 1991, letter is MMI's incomplete ledger of petitioners' account with MMI (MMI business ledger). Entries on MMI's business ledger state: "2 accounts for Joe Enos 1500 ea week" and "Joseph Enos 2A P.O. Box 949 Taunton , Mass. 02780 ". One page of MMI's business ledger indicates that MMI debited petitioners' account by $10,500, and all the debits were in the amount of $1,500. One of the $1,500 payments was entered as a credit on MMI's business ledger. Four of the entries state "J. Enos & Sons (IRS)". Mr. Enos also stated that "He put my name on his and vice versa", which describes both petitioners' business ledger reflecting an account receivable with MMI and MMI's business ledger reflecting an account with petitioners.

 

In addition to the first account in MMI's business ledger that recorded MMI's payments to respondent, MMI's business ledger describes certain business transactions with petitioners. MMI's business ledger covers a period from November 1978 to February 1979, and during that period, MMI debited petitioners' account by approximately $340,000 and credited their account by approximately $420,000.

 

Petitioners' business ledger reflects MMI's account with petitioners. Mr. Enos identified credit entries on petitioners' business ledger that corresponded to the MMI payment invoices presented to him by the United States during the deposition. The following table describes when MMI picked up the materials from petitioners, the MMI invoice number for each shipment referred to on MMI's payment invoices, the check number for the check MMI used to pay for the shipment, the amount paid to petitioners, and the payment date.

 

    Delivery                                                Payment  

      Date                                                    Date    

     1977        Invoice No.   Check No.1      Payment        1978    

      2/23          306           517          $2,500         8/18   

      2/23          306           519          2,500          8/18   

      2/23          306           565          2,500          8/22   

      2/23          306           607          2,500          8/23   

      4/14          419           752          2,500          9/1    

      4/14          419           750          2,500          9/1    

      4/14          419           728          5,000          8/31   

      4/14          419           714          2,500          8/30   

      4/14          419           672          2,500          8/28   

      4/14          419           648          2,500          8/25   

      7/19           47           940          3,000          9/15   

      7/19           47           942          3,000          9/15   

      7/19           47           988          2,500          9/19   

      9/19           47           1022         2,500          9/21   

      6/29           37           780          2,000          9/5    

      6/24           37           824          2,500          9/7    

      6/29           37           842          2,500          9/8    

      6/29           37           844          2,500          9/8    

      6/29           37           902          2,500          9/13   

1 The check number on each check corresponds to an inscription in    

petitioners' business ledger, under the ``detail'' section of that   

record.                                                              

 

Moreover, petitioners' business ledger indicates that there were a number of payments from MMI to petitioners that were made on or after August 15, 1978. Petitioners' business ledger indicates that petitioners credited MMI's account with over $800,000 after the August 15, 1978, notice of levy was served on MMI, of which approximately $210,000 was purportedly paid to petitioners on or after December 15, 1978. Along with the numerous credits on MMI's account, there appear to be numerous debits on MMI's account in petitioners' business ledger indicating that petitioners debited over $870,000 from MMI's account.

 

Respondent's April 30, 1979, TDA entry states that petitioners knew that as of April 30, 1979, MMI was no longer making payments to respondent on the August 15, 1978, notice of levy. Moreover, respondent's April 30, 1979, TDA entry indicates that respondent was also seeking to satisfy petitioners' tax liability with assets other than the MMI account receivable. Respondent's May 10, 1979, TDA entry indicates that petitioners were going to sell several parcels of real estate to pay part of their tax liability. Respondent's July 10, 1979, TDA entry indicates that petitioners' account at Bay Bank was levied upon.

 

On June 13, 1994, respondent issued notices of levy to a number of institutions in an effort to collect $730,729.67 in total liabilities from petitioners, $327,772.29 for 1971 and $402,957.38 for 1972. Of the $327,772.29 liability for 1971, $35,705.42 was for unpaid tax liability and $292,066.87 was for accrued interest and penalties. The levies were placed on petitioners' accounts at Bridgewater Credit Union, in Bridgewater , Massachusetts ; Prudential Ins. Co. of America in Newark , New Jersey ; Shawmut Bank. N.A. in Boston, Massachusetts; Baybank South in Westwood, Massachusetts; John Hancock Mutual in Boston, Massachusetts; Bristol County Savings Bank in Taunton, Massachusetts; Kidder Peabody Premium Acct. Fund in New York, New York; and Kidder Peabody & Co., Inc., in New York, New York. Respondent collected $87 from Shawmut Bank.

 

On September 15, 1994, respondent issued petitioners a notice of seizure of real estate located at 19 Dana Street in Taunton , Massachusetts , for a liability of $703,918.30. Also on September 15, 1994, respondent issued petitioners a notice of seizure for five additional parcels of real estate located on Dana Street in Taunton , Massachusetts . On September 29, 1994, respondent issued petitioners a notice of seizure for real estate located on Beach Street in Wareham , Massachusetts .

 

On September 26, 1994, the U.S. District Court for the District of Massachusetts dismissed petitioners' claims in Civil Action No. 90-10178-WAG by granting the Government's motion to dismiss for failure to state a claim on which relief can be granted and, alternatively, motion for summary judgment for petitioners' failure to present sufficient evidence for actual direct economic damages.

 

On October 4, 1994, respondent sent petitioners a notice of release of levy relating to six parcels of land on Dana Street in Taunton , Massachusetts , and one parcel of land on Beach Street in Wareham , Massachusetts .

 

On December 1, 1999, the U.S. Bankruptcy Court for the Middle District of Pennsylvania issued an order for final distribution for MMI's bankruptcy estate.

 

On February 7, 2000, respondent issued petitioners a Final Notice --Notice of Intent to Levy and Notice of Your Right to A Hearing for petitioners' 1971 tax year, which indicated that petitioners owed $34,382.77 of the original liability and $447,022.46 in interest for a total liability of $481,405.23.

 

On March 2, 2000, petitioners sent respondent a request for a section 6330 hearing. In their section 6330 hearing request, petitioners asserted: "All tax liability was paid on August 15, 1978 by means of levy against Metropolitan Metals, Inc. and an Agreement to pay levy. Claim for total tax liability was made in Bankruptcy Case 79-318, Middle District of Pennsylvania in 1981."

 

On March 8, 2000, the bankruptcy trustee sent respondent a check for $149,312.40 for claims 134 and 175. The check was endorsed "For deposit only" by the U.S. Department of Justice and paid on March 21, 2000.

 

On March 17, 2000, respondent received payment of $149,312.40 for petitioners' 1971 tax liability; $34,382.77 of the payment was used to satisfy the remaining 1971 tax liability, and the additional $114,929.63 was used to pay part of the accrued interest.

 

On August 14, 2001, respondent issued petitioners the notice of determination for their 1971 tax year. The Appeals Officer determined:

 

It is determined that the liability was the result of an examination of your personal income tax returns for the period. You executed an agreement at the Examination level agreeing to the liability. Under Section 6330 of the Internal Revenue Code the underlying liability may be challenged only if you did not receive a Statutory Notice of Deficiency or had no other opportunity to Appeal the liability. As part of the examination process, you were explained your appeal rights. You chose to execute an agreement with the Examination Division. Accordingly, the underlying liability may not be argued at the Collection Due Process Hearing.

 

* * * The facts indicate that after the Service levied the receivable with MMI you continued to negotiate with MMI regarding its payment to the Internal Revenue Service. It is noted that there are documents in the file indicating that you received payment on the account receivable of MMI subsequent to the levy. Accordingly, it is my determination that you have not proven that the service exercised "dominion and control" over the MMI receivable.

Discussion

 

Petitioners, relying on United States v. Eiland [55-1 USTC ¶9487], 223 F.2d 118 (4th Cir. 1955), contend that the August 15, 1978, notice of levy issued to MMI before MMI's involuntary bankruptcy had the effect of an immediate seizure by the United States of the account receivable. Petitioners contend that, under Eiland, respondent's notice of levy on the account receivable, an intangible asset, had the effect of transferring to respondent the amount necessary to pay petitioners' tax liability. Moreover, petitioners contend that the August 15, 1978, notice of levy provided respondent with possession of the account receivable, which satisfied petitioners' tax liability in whole. Petitioners rely on Phelps v. United States [75-1 USTC ¶9467], 421 U.S. 330 (1975); In re Pittsburgh Penguins Partners [79-1 USTC ¶9312], 598 F.2d 1299 (3d Cir. 1979); In re Cherry Valley Homes, Inc. [58-2 USTC ¶9581], 255 F.2d 706 (3d Cir. 1958); and United States v. Eiland, supra, arguing that, because these cases arose under the Bankruptcy Act of 1898, they should be controlling. Additionally, petitioners contend that the August 15, 1978, notice of levy transferred ownership under section 6331 and that petitioners had no recourse against MMI because section 6332(d) precluded petitioners from seeking recourse against MMI.

 

Respondent contends that the seizure of intangible property by levy does not constitute a transfer of ownership, relying on United States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198 (1983), and Murphy v. United States, 45 F.3d 520 (1st Cir. 1995).⁴ Respondent contends that the tax liability is not paid until the account receivable is either collected or sold, relying on Whiting Pools, Inc. and Cash v. United States [92-1 USTC ¶50,298], 961 F.2d 562 (5th Cir. 1992). Respondent contends that the levy on MMI had the effect of making respondent an involuntary assignee of petitioners, relying on In re Quakertown Shopping Ctr., Inc., 366 F.2d 95 (3d Cir. 1966).

 

Accounts receivable are subject to levy. See sec. 301.6331-1(a)(1), Proced. & Admin. Regs. A levy is effective when the notice of levy is served on a third party. See id. Section 301.6331-1(a)(1), Proced. & Admin. Regs., provides that "a levy extends only to property possessed and obligations which exist at the time of the levy."

 

In Phelps v. United States, supra at 336-337, the Supreme Court decided that the bankruptcy court below lacked summary jurisdiction under the Bankruptcy Act over an account receivable of a third party, upon which the Commissioner had levied to satisfy a tax liability of the taxpayer before the taxpayer sought bankruptcy protection. In Phelps v. United States, supra at 377, the Supreme Court stated in dictum⁵ that "The levy, therefore, gave the United States full legal right to the $38,000 levied upon as against the claim of the petitioner receiver." In In re Pittsburgh Penguins Partners, supra at 1302, the Court of Appeals for the Third Circuit, applying Phelps, held that a levy deprived the bankruptcy court of summary jurisdiction over a bank account and observed that the Court of Appeals did not need to decide whether the levy transferred full title to the bank account to the Commissioner.

 

We disagree with petitioners' contention that Phelps v. United States, supra, controls the outcome of the instant case. In Phelps, the Supreme Court decided whether the bankruptcy court had summary jurisdiction over an intangible, not whether the levy satisfied the liability to the Commissioner.

 

In United States v. Whiting Pools, Inc., supra,⁶ a bankruptcy case brought under the Bankruptcy Code of 1978 (Bankruptcy Code), the Supreme Court addressed the question of whether the issuance of a notice of levy to a third party satisfies a taxpayer's liability. The Supreme Court stated:

 

Under the old Bankruptcy Act, a bankruptcy court's summary jurisdiction over a debtor's property was limited to property in the debtor's possession when the liquidation was filed. Phelps v. United States [75-1 USTC ¶9467], 421 U.S. 330, 335-336 (1975); Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 432-434 (1924). Phelps, which involved a liquidation petition under the prior Bankruptcy Act, held that a bankruptcy court lacked jurisdiction to direct the Service to turn over property which had been levied on and which, at time of the commencement of bankruptcy proceedings, was in the possession of an assignee of the debtor's creditors.

 

Phelps does not control this case. First, the new Bankruptcy Code abolished the distinction between summary and plenary jurisdiction, thus expanding the jurisdiction of bankruptcy courts beyond the possession limitation. H.R. Rep. No. 95-595, pp. 48-40 (1977); see Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 54 (1982)(plurality opinion). Moreover, Phelps was a liquidation situation, and is inapplicable to reorganization proceedings such as we consider here. [ Id. at 206 n.13.]

 

In United States v. Natl. Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713 (1985), a nonbankruptcy case, the Supreme Court observed that an "administrative levy, unlike a judicial lien-foreclosure action, does not determine the ownership rights to the property." Id. at 731 (citing United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 696 (1983)). Moreover, in Natl. Bank of Commerce, the Supreme Court held that "The Court, in other words, recognized what we now make explicit: that §6331⁷ is a provisional remedy, which does not determine the rights of third parties until after the levy is made, in postseizure administrative or judicial hearings." Id. (examining United States v. Rodgers, supra at 696); see also United States v. Whiting Pools, Inc., supra at 211.⁸ Thus, the effect of the levy in the instant case is to bring the account receivable into respondent's legal custody. See United States v. Natl. Bank of Commerce, supra at 721 ("property comes into the constructive possession of the Government"); United States v. Whiting Pools, Inc., supra at 211. In United States v. Natl. Bank of Commerce, supra at 731 n.15, the Supreme Court stated that a "levy does not purport to determine any rights to the property. It merely protects the Government's interests so that rights to the property may be determined in a postseizure proceeding."

 

The liability created by a levy on a third party is discharged when the third party honors the levy. See id. at 721. Cash v. United States [92-1 USTC ¶50,298], 961 F.2d at 567, states that "when the levied upon property is a debt owed to the taxpayer, such as an account receivable, the levy may be satisfied by paying over to the Government the money owed to the taxpayer." See also sec. 6332(a), (d);⁹ sec. 301.6332-1(a)(1), Proced. & Admin. Regs.¹⁰ United States v. Natl. Bank of Commerce, supra, held that "If the custodian honors the levy, he is `discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment.' " Id. at 721 (quoting section 6332(d)). The liability can also be satisfied by the sale of the property levied upon by the Commissioner. See United States v. Whiting Pools, Inc. [82-1 USTC ¶9269], 421 U.S. at 211. In the instant case, MMI's bankruptcy trustee paid the remaining portion of the originally assessed liability in 2000.

 

Petitioners contend that when respondent entered into the December 15, 1978, payment agreement with MMI, which required MMI to make 200 weekly payments of $1,500 to respondent to satisfy petitioners' tax liability, respondent exercised "dominion and control" over petitioners' account receivable, satisfying petitioners' tax liability. In support of their contention, petitioners cite United States v. Barlow's, Inc., 767 F.2d 1098 (4th Cir. 1985), affg. 53 Bankr. 986 (E.D. Va. 1984), affg. [84-1 USTC ¶9233] 36 Bankr. 826 (Bankr. E.D. Va. 1984).

 

In United States v. Barlow's, Inc., supra at 1099-1100, the Commissioner and a third-party debtor of the taxpayer entered into an installment payment agreement for an account receivable, which was due the taxpayer, without the taxpayer's participation. The Commissioner failed to sell the taxpayer's account receivable pursuant to section 6335, and the Commissioner failed to take any action against the third-party debtor after the third-party debtor defaulted on the installment payment agreement. Id. ¹¹ The District Court, 53 Bankr. at 988, decided that the Commissioner had taken dominion and control over the account receivable, and by so doing "precluded Barlows [sic] from proceeding against the account itself in an effort to defray its tax liabilities. Section 6332(d) of the Internal Revenue Code divests the delinquent taxpayer of any right against the possessor of property levied upon by the IRS."

 

The facts in the instant case are distinguishable from those in Barlow's, Inc. and do not warrant a similar conclusion here. In the instant case, MMI and respondent entered into the December 15, 1978, payment agreement for 200 weekly payments of $1,500 to satisfy the August 15, 1978, notice of levy. MMI made only six payments under this agreement. Shortly after entering into the payment agreement with respondent, however, MMI went into bankruptcy, in contrast to Barlow's, Inc., where the third-party debtor defaulted on the payment obligation and the Commissioner failed to enforce the payment agreement, instead seeking payment from the taxpayer.

 

Unlike the taxpayers in Barlow's, Inc., who did not know that the Commissioner and the third-party debtor had negotiated an installment payment agreement for the satisfaction of the taxpayer's liability, petitioners were actively engaged in the negotiations between MMI and respondent regarding the December 15, 1978, payment agreement.

 

After the August 15, 1978, notice of levy was issued to MMI, petitioners participated in the negotiations between MMI and respondent as to both the amount of the account receivable and the payment agreement. Respondent's records reflect that Mr. Enos informed respondent that he was going to travel from Massachusetts to Pennsylvania to negotiate with MMI over the amount of the account receivable, and that petitioners and MMI did not agree about the amount. Petitioners and MMI later agreed that the account receivable had a purported value of $300,000. Petitioners indicated that they believed that MMI could pay the $300,000 liability off in 100 weekly payments of $3,000 to respondent. Petitioners were aware of the December 15, 1978, payment agreement between MMI and respondent and that respondent would receive 200 weekly payments of $1,500 to satisfy petitioners' tax liability. Petitioners were aware that MMI sent respondent several $1,500 checks during 1978 and 1979, and, as of April 30, 1979, Mr. Enos knew that MMI was no longer sending respondent money to satisfy the levy.

 

The most significant factual distinction between the instant case and Barlow's, Inc. is that petitioners continued to receive large amounts of money from MMI after the August 15, 1978, notice of levy and also after the December 15, 1978, payment agreement between MMI and respondent, while at the same time knowing that MMI and respondent were negotiating and did negotiate a payment agreement for the satisfaction of petitioners' tax liability.

 

Petitioners' business records reflect that after the August 15, 1978, notice of levy, petitioners were purportedly doing business with MMI, despite petitioners' prior alleged inability to collect on MMI's large debt to them, and despite the fact that petitioners alleged that a number of MMI's checks to them were not honored by MMI's banks. Petitioners' records reflect that petitioners received over $800,000 from MMI after respondent issued MMI the August 15, 1978, notice of levy, of which approximately $210,000 was received on or after December 15, 1978. Petitioners contend that these payments were "partial advance payments to petitioners for assurance of future shipments of scrap metal."

 

Several payment invoices from MMI to petitioners for invoice Nos. 37, 47, 306, and 419 refer to payments for deliveries that occurred between February and July 1977. According to petitioners' business ledger, which begins in August 1977, the first payments on invoice Nos. 37, 47, 306, and 419 began only after the August 15, 1978, notice of levy was issued to MMI. The payment invoices also provide check numbers for the payments made to petitioners, and those numbers are reported in the "detail" column of petitioners' business ledger. We note that, after August 15, 1978, many payments to petitioners reflected in the accounts receivable ledger bear no check numbers.

 

Petitioners have not provided us with any other business records or invoices, such as payment slips showing that the payments from MMI were from post-levy dealings with MMI, which might have substantiated their claim that the payments were for "partial advance payments", and that those "partial advance payments" do not relate to payments on pre-levy liabilities MMI owed petitioners. Petitioners' business ledger shows when certain payments were made and when certain amounts were debited from the balance owed by MMI, but the business ledger does not indicate when the underlying transaction occurred.

 

Moreover, the notice of determination raised the issue that petitioners received a large amount of money from MMI after the August 15, 1978, notice of levy, and petitioners have failed to rebut that claim or substantiate with credible evidence their claim that the payments petitioners received from MMI after August 15, 1978, were for "partial advance payments". Accordingly, petitioners have failed to carry the burden of proof on the issue. See Rule 142(a).

 

Petitioners' contention that payments made after August 15, 1978, were "partial advance payments" is contrary to the record in the instant case, and contrary to Mr. Enos's explanation during his 1991 deposition that the payments from MMI to petitioners represented amounts that were "over and above the levy".¹² We are especially doubtful of petitioners' claims in light of the large number of payments made by MMI to petitioners after the December 15, 1978, payment agreement between MMI and respondent, and, significantly, where many of those payments by MMI to petitioners, reflected on petitioners' business ledger, do not appear to have been made by check or other negotiable instrument. We find petitioners' contentions on brief that these payments represent "partial advance payments" to be incredible, especially in light of the following facts: After the December 15, 1978, payment agreement, respondent received less than $10,000 from MMI, while, at the same time, petitioners' business ledger reflects that they received over $210,000; petitioners knew that MMI was having significant financial troubles; and petitioners participated in the negotiations between respondent and MMI.

 

MMI's business ledger corroborates the fact that petitioners continued to receive funds from MMI after respondent issued MMI the August 15, 1978, notice of levy. MMI kept two accounts, and MMI's incomplete ledger, attached to the September 22, 1991, letter between petitioners' attorney David Shaughnessy and MMI's attorney Edward Rothman, indicates that one account is for the $1,500 payments to respondent and the other account is for payments to petitioners. MMI's business ledger covers a period from November 1978 to February 1979. MMI debited approximately $340,000 on petitioners' account after the August 15, 1978, notice of levy. MMI also credited petitioners' account with approximately $420,000 for the same period.

 

In United States v. Barlow's, Inc., 767 F.2d 1098 (4th Cir. 1985), the court found that the Commissioner's failure to take action against the third-party debtor after it defaulted on its liability to the Commissioner weighed against the Commissioner. In Cash v. United States [92-1 USTC ¶50,298], 961 F.2d at 567, the court held that the Commissioner was not required to sell an account receivable and could seek to collect the account receivable on his own, which is what respondent sought to do in the instant case. See also secs. 6332(a), 6335(f). Petitioners concede that respondent did not abandon the collection of the account receivable. Respondent was not able to reach MMI's funds from the start of MMI's bankruptcy in March 1979 until the bankruptcy court ordered a final distribution of funds in December 1999. Respondent filed several proofs of claim with the bankruptcy court to protect respondent's rights in that bankruptcy action and also pursued petitioners' other assets to satisfy their tax liability.

 

Accordingly, we hold that the instant case is distinguishable on its facts from Barlow's, Inc., and that respondent did not exercise dominion and control over the account receivable.

 

Petitioners contend that we have jurisdiction over their 1970 and 1971 Federal income tax years. The notice of determination was issued for petitioners' 1971 tax year. Since petitioners' notice of determination relates only to 1971, we may consider only that year and not 1970 and 1972. See Moorhous v. Commissioner [Dec. 54,316], 116 T.C. 263, 270-271 (2001).

 

Petitioners contend that the central issue in the instant case, whether the August 15, 1978, notice of levy issued to MMI satisfied petitioners' liability, was decided by the bankruptcy court in DeHart v. United States, 50 Bankr. 685 (Bankr. M.D. Pa. 1985), and that the principles of res judicata bind us to the decision in that case.

 

Res judicata applies to prevent the "repetitious suits involving the same cause of action." Commissioner v. Sunnen [48-1 USTC ¶9230], 333 U.S. 591, 597 (1948). The elements of res judicata are: Identity of the parties, prior judgment by a court of competent jurisdiction, final judgment on the merits, and the same cause of action. See Hambrick v. Commissioner [Dec. 54,722], 118 T.C. 348, 351 (2002);¹³ see also Commissioner v. Sunnen, supra at 597 (quoting Cromwell v. County of Sac, 94 U.S. 351, 352 (1877)).

 

In DeHart v. United States, supra, the issue was whether the United States was required to pursue petitioners' assets to satisfy the tax liability underlying the Commissioner's claim, which arose from the August 15, 1978, notice of levy, before pursuing the bankruptcy estate's assets to satisfy petitioners' tax liability. The bankruptcy court decided that the Commissioner did not have to pursue petitioners' assets before seeking the assets of the bankruptcy estate to satisfy petitioners' tax liability.¹⁴ The causes of action in DeHart and in the instant case are different and, accordingly, the principles of res judicata do not apply in the instant case. See Hambrick v. Commissioner, supra at 351.

 

Respondent contends that two cases have already addressed the central issue in the instant case; i.e., whether the August 15, 1978, notice of deficiency satisfied petitioners' 1971 tax liability: Enos v. DeHart, 217 Bankr. 457 (Bankr. M.D. Pa. 1997),¹⁵ and Enos v. United States, Civil Action No. 90-10178-WAG (D. Mass. Sept. 26, 1994). Respondent contends that the principles of collateral estoppel require us to follow the decisions in those cases. Respondent first raised the issue of collateral estoppel in respondent's opening brief. Rule 39 requires respondent to affirmatively plead collateral estoppel in respondent's answer to the petition.¹⁶ Respondent's failure to specifically plead the collateral estoppel issue in his answer or in an amended or amendment to his answer constitutes a waiver of the issue, and accordingly, we will not address the issue. See Rules 39, 41; see also Bonaire Dev. Co. v. Commissioner [Dec. 37,906], 76 T.C. 789, 802-803 (1981), affd. [82-2 USTC ¶9428] 679 159 (9th Cir. 1982); Jefferson v. Commissioner [Dec. 29,153], 50 T.C. 963, 966-967 (1968).

 

Petitioners contend that they are entitled to an abatement of interest that has accrued since 1977 on their 1971 tax liability. Petitioners failed to pay the taxes reported on their 1971 income tax return, and those taxes were only satisfied when the bankruptcy trustee paid respondent in March 2000. Accordingly, petitioners are not permitted to have the interest on their unpaid income tax liability abated under section 6404. See H. Conf. Rept. 99-841 (Vol. II), at II-811 (1986), 1986-3 C.B. (Vol. 4) 1, 811; see also sec. 6404(e); Downing v. Commissioner [Dec. 54,604], 118 T.C. 22, 30-31 (2002); Parikh v. Commissioner [Dec. 55,377(M)], T.C. Memo. 2003-341. Moreover, for the interest that accrued after the payment from the bankruptcy trustee, there is no evidence that the accrual of that interest was attributable to respondent's error or delay in performing a ministerial duty. See sec. 6404(e); Katz v. Commissioner [Dec. 54,081], 115 T.C. 329, 341 (2000); Parikh v. Commissioner, supra.

 

Petitioners contend that we have jurisdiction to hold MMI's bankruptcy trustee personally liable for wrongfully refusing to surrender petitioners' property during the pendency of the MMI bankruptcy, pursuant to 31 U.S.C. secs. 191 and 192 and sections 6331 and 6332. Respondent did not send MMI's bankruptcy trustee a notice of deficiency or any other type of determination over which this Court has jurisdiction, and MMI's bankruptcy trustee is not a party to this case. Accordingly, we lack jurisdiction to decide this issue. See generally Estate of Siegel v. Commissioner [Dec. 34,329], 67 T.C. 1033, 1040 (1977); Cincinnati Transit, Inc. v. Commissioner [Dec. 30,668], 55 T.C. 879, 882-883 (1971), affd. [72-1 USTC ¶9251] 455 F.2d 220 (6th Cir. 1972).

 

We have considered all of the parties' arguments and contentions that are not discussed herein, and we conclude they are without merit and/or irrelevant.¹⁷

 

To reflect the foregoing,

 

Decision will be entered for respondent.

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

² MMI's bankruptcy case was filed under the Bankruptcy Act of 1898. However, the amended proof of claim does not indicate whether sec. 64a(5) relates to the Bankruptcy Act of 1898.

³ Coggin v. Commissioner [Dec. 49,037(M)], T.C. Memo. 1993-209, affd. [96-1 USTC ¶50,033] 71 F.3d 855 (11th Cir. 1996), describes the function of TDAs.

⁴ In the instant case, respondent is not seeking to collect petitioners' 1971 tax liability that was assessed in 1977 and finally satisfied by the distribution from MMI's bankruptcy trustee in March 2000. Rather, respondent is seeking to collect the interest that accrued on that tax liability after it was assessed in 1977.

⁵ See United States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198, 210 n.18 (1983).

⁶ The property in issue in United States v. Whiting Pools, Inc., supra, was tangible property. The property in issue in Phelps v. United States [75-1 USTC ¶9467], 421 U.S. 330 (1975), was intangible property. The Supreme Court granted certiorari in United States v. Whiting Pools, Inc., supra at 202, to resolve a split in the circuits, between United States v. Whiting Pools, Inc. [82-1 USTC ¶9269], 674 F.2d 144 (2d Cir. 1982) (tangible property), and Cross Elec. Co. v. United States [81-2 USTC ¶9786], 664 F.2d 1218 (4th Cir. 1981) (intangible property). Accordingly, we reject petitioners' contention that, with respect to the issue under consideration, a distinction should be drawn between tangible property and intangible property. See also Meehan v. Wallace, 102 F.3d 1209 (11th Cir. 1997); In re Challenge Air Intl., Inc. [ 92-1 USTC ¶50,090], 952 F.2d 384 (11th Cir. 1992).

⁷ Sec. 6331 provides:

SEC. 6331. LEVY AND DISTRAINT.

(a) Authority of Secretary. --If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. Levy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia, by serving a notice of levy on the employer (as defined in section 3401(d)) of such officer, employee, or elected official. If the Secretary makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section.

(b) Seizure and Sale of Property. --The term "levy" as used in this title includes the power of distraint and seizure by any means. Except as otherwise provided in subsection (e), a levy shall extend only to property possessed and obligations existing at the time thereof. In any case in which the Secretary may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible). [Emphasis added.]

⁸ In Whiting Pools, Inc. v. United States, supra at 210-211, the Supreme Court stated:

The Service's interest in seized property is its lien on that property. The Internal Revenue Code's levy and seizure provisions, §6331 and 6332, are special procedural devices available to the IRS to protect and satisfy its liens, United States v. Sullivan [64-1 USTC ¶9392], 333 F.2d 100, 116 (CA 3 1964), and are analogous to the remedies available to private secured creditors. See Uniform Commercial Code §9-503, 3A U.L.A. 211-212 (1981); n.14, supra. They are provisional remedies that do not determine the Service's rights to the seized property, but merely bring the property into the Service's legal custody. See 4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.5, p. 111-108 (1981). See generally Plumb, Federal Tax Collection and Lien Problems (First Installment), 13 Tax L. Rev. 247, 272 (1958). * * * The IRS is obligated to return to the debtor any surplus from a sale. §6342(b). Ownership of the property is transferred only when the property is sold to a bona fide purchaser at a tax sale. See Bennett v. Hunter, 9 Wall. 326, 336 (1870); §6339(a)(2); Plumb, 13 Tax L. Rev., at 274-275. In fact, the tax sale provision itself refers to the debtor as the owner of the property after the seizure but prior to the sale. Until such a sale takes place, the property remains the debtor's and thus is subject to the turnover requirement of sec. 542(a). [Fn. ref. omitted.]

⁹ Sec. 6332(a) provides:

SEC. 6332. SURRENDER OF PROPERTY SUBJECT TO LEVY

(a) Requirement. --Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

¹⁰ Sec. 301.6332-1(a)(1), Proced. & Admin. Regs., provides:

Surrender of Property Subject to Levy. --(a) Requirement. --

(1) In general. --Except as otherwise provided in §301.6332-2, relating to levy in the case of life insurance and endowment contracts, and in §301.6332- 3, relating to property held by banks, any person in possession of (or obligated with respect to) property or rights to property subject to levy and upon which a levy has been made shall, upon demand of the district director, surrender the property or rights (or discharge the obligation) to the district director, except that part of the property or rights (or obligation) which, at the time of the demand, is actually or constructively under the jurisdiction of a court because of an attachment or execution under any judicial process.

¹¹ The District Court below placed weight on two factors in deciding that the Commissioner had "dominion and control" over the levied-upon property in issue: The Commissioner's failure to sell the property under sec. 6335, and the payment agreement between the Commissioner and the third-party debtor that was made without the taxpayer's participation. See United States v. Barlow's, Inc. [84-1 USTC ¶9233], 36 Bankr. 826 (E.D. Va. 1984). On appeal, the Court of Appeals for the Fourth Circuit decided that the District Court should be affirmed because the Commissioner exercised "dominion and control" over the property and the Commissioner failed to sell the property pursuant to sec. 6335. United States v. Barlow's, Inc., 767 F.2d 1098, 1100 (4th Cir. 1985). Thus, the Court of Appeals did not include the sec. 6335 analysis in determining whether the Commissioner had exercised "dominion and control" over the property. Petitioners failed to address sec. 6335 in their moving papers.

¹² During the deposition, Mr. Enos stated:

A. To make it in its simplest form, if we're owed, say, $400,000, and you levied $300,000, that account was over there to pay you off $300,000 and the other hundred thousand was over here. The account was levied on for whatever the amount was there.

Q. So what you are saying; that when the IRS levied on your tax liability back then was around $310,000 as indicated in the levy?

A. Right.

Q. And they served a levy on Metals to collect that, all properties in their possession up to $310,000?

A. Right.

Q. Are you saying they paid you money after the levy was served which was attributable to money owed by Metals to you before the levy was served?

A. Before the levy was served for amounts over and above the levy. Once the levy was served, that locked in the 310.

¹³ In Hambrick v. Commissioner [Dec. 54,722], 118 T.C. 348, 351 (2002), we observed:

The general principle of res judicata is that once a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are bound to each matter that sustained or defeated the claim, and as to any other matter that could have been offered for that purpose. * * *

¹⁴ In DeHart v. United States, 50 Bankr. 685, 688 (Bankr. M.D. Pa. 1985), the bankruptcy court held:

For these reasons we find that the doctrine of the marshalling of assets simply cannot be applied to the facts of this case. While we do not agree that there is a lack of equity in affording the Government a priority status in this case, we nonetheless realize that the estate, and more particularly the general creditors, do suffer a detriment by the IRS levy. We have determined that the plaintiff's alternative argument that the debtor should be subrogated to the position the IRS has, vis a vis, Enos should be afforded the debtor. We, therefore, determine that the facts of this case present a situation in which the debtor should be subrogated to the position held by the IRS pursuant to the levy. * * *

¹⁵ Enos v. DeHart, 217 Bankr. 457, 465 (Bankr. M.D. Pa. 1997), states:

As was observed earlier, the Enoses are ultimately liable for the tax and the entire amount of unpaid interest on tax. Notwithstanding that conclusion, I recognize the Enoses may argue that by agreeing to payment terms with Metropolitan, the Internal Revenue Service exercised such control and dominion over the account receivable owing the Enoses by Metropolitan that the Internal Revenue Service may be required to credit the taxpayer for the full amount of the value of the receivable levied upon. Barlow's, Inc. v. United States [84-1 USTC ¶9233], 36 Bankr. 826, 829 (Bank. E.D. Va.), affd. 53 Bankr. 986 (E.D. Va. 1984), affd. 767 F.2d 1098 (4th Cir. 1985). The impact of such a conclusion on the Enoses' future liability would be pivotal. Nevertheless, in recognizing the Enoses' overall liability to pay their taxes, including interest, I will take no position as to whether they would have any defenses to such claim. A finding as to the ultimate availability of various defenses by the Enoses to the Internal Revenue Service does not appear to be necessary for the enforcement of the provisions of the Act, §21a(15).

11 U.S.C. §11(a)(15).

¹⁶ Rule 39 provides:

Rule 39. Pleading Special Matters

A party shall set forth in the party's pleading any matter constituting an avoidance or affirmative defense, including res judicata, collateral estoppel, estoppel, waiver, duress, fraud, and the statute of limitations. A mere denial in a responsive pleading will not be sufficient to raise any such issue.

¹⁷ The parties raise the issue of the applicable standard of review. We need not decide the issue. See Washington v. Commissioner [Dec. 55,072], 120 T.C. 114 (2003). Moreover, we reject the contention that we may rely only on evidence contained in respondent's administrative record in deciding the instant case. See Robinette v. Commissioner [Dec. 55,698], 123 T.C. 85 (2004).