Annotations- Interest and
Penalties
6332 Annotations: Interest
and Penalties- Levy
Penalty
for Failure to Surrender Property: Interest and Penalties
[72-1 USTC ¶9193]
United States of America
, Plaintiff v.
City of Los Angeles
,
California
, Defendant Counterclaimant v. State of
California
, Franchise Tax Board, Defendant to Counterclaim
U.
S. District Court, Central Dist. Calif., Civil No. 70-2860-AAH, 1/18/72,
336 F. Supp. 1014)
[Code Secs. 6323 and 6332]
Lien for taxes: Priority of liens: Federal excise taxes: California
state income taxes: State as judgment creditor: Interest on fund.--A
lien for Federal excise taxes had priority over an unrecorded California
lien for state income taxes, since the State did not by reason of its
lien become a judgment creditor. The city which held the fund to which
the lien attached was not liable for interest from the date of its
refusal to pay the fund to the Government, since it was awaiting a
determination of the priority of the liens.
Robert L.
Meyer, United States Attorney, Charles H. Magnuson, Lawrence V. Brookes,
Assistant United States Attorneys, Los Angeles, Calif., for plaintiff.
Roger Arneberg, City Attorney, John A. Daly, Assistant City Attorney,
Ronald Tuller, Deputy City Attorney, Los Angeles, Calif., for defendant
and counterclaimant. Evelle J. Younger, Attorney General, Philip C.
Griffin, Mark W. Jordan, Deputy Attorneys General, for defendant to
counterclaim.
Decision,
Findings of Fact and Conclusions of Law, and Order For Judgment For
Plaintiff
HAUK, District
Judge:
Robert L.
Meyer, United States Attorney, Los Angeles, Charles H. Magnuson,
Assistant United States Attorney, Chief, Tax Division, Los Angeles, and
Lawrence V. Brookes, Assistant United States Attorney, Los Angeles,
attorneys for Plaintiff.
Roger
Arneberg, City Attorney, Los Angeles, John A. Daly, Assistant City
Attorney, Los Angeles, and Ronald Tuller, Deputy City Attorney, Los
Angeles, attorneys for Defendant and Counterclaimant.
Evelle J.
Younger, Attorney General of the State of California, Philip C. Griffin
and Mark W. Jordan, Deputy Attorneys General for the State of
California, attorneys for Defendant to Counterclaim.
This is an
action for enforcement of Internal Revenue levy and for collection of
Internal Revenue taxes for failure to honor levy. Jurisdiction is
conferred upon this Court by 28 U. S. C. Sections 1340 and 1345 and 26
U. S. C. Section 740. The specific question posed is whether a tax lien
of the United States, hereafter the Government, perfected prior to and
superior to a State tax lien is subordinated by the State lien under the
State's theory that their lien is that of a judgment creditor which
under Federal law, takes priority over a Government lien which has not
been filed.
[Facts]
The facts are
not in dispute. On March 4, 1970, the Los Angeles Police Department
arrested Ronald Holman and pursuant to a valid search warrant seized
from him $13,320.03 in
United States
currency. At the time of his arrest, Ronald Holman had in his possession
ten pounds of hashish and marihuana. On March 5, 1970, before 3:30 p.
m., the United States Internal Revenue Service made a jeopardy
assessment for excise tax (marihuana) in the amount of $16,000.00 and on
the same day left a notice and demand at his last known address. On
March 5, 1970, the California Franchise Tax Board issued a jeopardy
assessment for personal income taxes in the amount of $14,500.00 and on
the same day, sent a notice of assessment to the last known address of
Ronald Holman.
On March 5,
1970, at 3:30 p. m., the California Franchise Tax Board served the Los
Angeles Police Department with an Order to Withhold Tax in the amount of
$14,500.00 based on its jeopardy assessment, and at 5:18 p. m., the
United States Internal Revenue Service served them with a Notice of Levy
in the amount of $16,000.00 based on its jeopardy assessment.
On March 6,
1970, at 8:20 a. m., the Internal Revenue Service filed its Notice of
Federal Tax Lien with the Los Angeles County Recorder and on March 25,
1970, final demand for payment of levy was served upon the Los Angeles
Police Department. Subsequently, the Government filed this action
against the City of
Los Angeles
alleging that the City had refused to honor the levy and was continuing
to refuse to surrender to the Government the currency which they had
seized at the time of Holman's arrest. The City counterclaimed against
the State of
California
, Franchise Tax Board, and requested the Court to order the Government
and the State of
California
, Franchise Tax Board to interplead their respective claims.
On April 23,
1971, the Court entered an Order making the State of California,
Franchise Tax Board, a Defendant to the Counterclaim; requiring it and
the Plaintiff to interplead their respective claims; directing the City
to pay into Court the sum of money it had seized from Holman; and
discharging the City from all further liability with respect thereto.
[Priority
of Liens]
The parties
stipulated to all facts material to this action, filed briefs on the
relevant issues and thereupon submitted the case on the briefs. As is
readily apparent, the basic question to be decided here is whether the
fund deposited in the registry of the Court by the City of Los Angeles
should be paid to the Government pursuant to the lien created by the
Federal jeopardy assessment 1
or to the State of California, Franchise Tax Board, pursuant to the lien
created by the State Order to Withhold Tax. 2
When a Federal
tax lien is at issue, problems of priority of liens must be determined
under Federal law. United States v. Security Trust & Savings Bank
[50-2 USTC ¶9492], 340
U. S.
47 (1950); United States v. Division of Labor Law Enforcement
[53-1 USTC ¶9219], 201 F. 2d 857, 859 (9th Cir. 1953). Of course, in
determining the priority of the liens involved, we must apply the
"cardinal rule" which was originally laid down by Chief
Justice Marshall in Rankin & Schatzell v. Scott, 25 U. S. 177
(1827): "The principle is believed to be universal that a prior
lien gives a prior claim, which is entitled to prior satisfaction, out
of the subject it binds. . . ." 25
U. S.
at 179. Thus, the lien which is first in time is first in right. United
States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81 (1954); United States v. Vermont [64-2 USTC ¶9520], 377
U. S.
351 (1964). Since the parties have stipulated to the fact that the
assessment which created the Federal lien was made prior to the service
of the Order to Withhold Tax which created the State lien, it would seem
that the issue is easily resolved, since the lien of the Government is
unquestionably the "first in time."
[State
as a Judgment Lien Creditor]
However, while
admitting that Internal Revenue Code of 1954, §6322 gives the
Government a lien on all the property of a taxpayer upon assessment, the
State contends that under §6323(a) of the Internal Revenue Code of
1954, 3
the validity of the Government's lien is suspended as against a judgment
lien creditor until notice is duly filed by the Government. The State
argues that since the Order to Withhold Tax confers upon the State the
power to execute on the created lien without resort to any legal or
equitable action in a court of law or equity, 4
the State has become a judgment creditor and is thus qualified to come
within the preferential class of §6323(a) of the Internal Revenue Code
of 1954. Consequently, the State argues, in order for the
United States
to defeat the State as a judgment creditor, the State must have notice,
and notice can only be given by the Government filing its lien. Since
notice of the Government's lien was not filed until the day after the
California Franchise Tax Board levied upon the funds held by the City,
the State contends that the lien of the Government was subsequent to the
lien of the State and thus ineffectual.
In order to
resolve the issue in the manner postulated by the State, we must first
accept the premise that the State is a judgment lien creditor under §6323(a)
of the Internal Revenue Code of 1954. It is at this foundational point
that the State's case falls short, for under Federal law, which we must
follow, the mere Order to Withhold Tax does not raise the State to the
level of a judgment creditor. This is especially true in light of the
policy of the Federal Courts to "closely scrutinize State-created
claims to find any possible imperfection which would permit seniority of
the Federal lien." State of
New Jersey
v. Moriarity, 268 F. Supp. 546, 562 (D. N. J. 1967). In this case it
is not even necessary to "closely scrutinize" the State claim
for an imperfection since under many Federal court decisions the
contention that the State's Order to Withhold Tax created in the State
the rights of a judgment creditor is plainly without merit. 5
[Judgment
Creditor Defined]
In determining
who is a judgment creditor under Federal law we can look to the
definition contained in Treas. Reg. 301.6323-1(2)(b)(1967); 26 C. F. R.
§301. 6323-1(2)(b)(1971), which defines a judgment creditor as used in
Section 6323(a) of the Internal Revenue Code of 1954:
"(b)
The term 'judgment creditor' means a person who has obtained a valid
judgment in a court of record and of competent jurisdiction for the
recovery of specifically designated property or for a certain sum of
money and, in the case of a judgment for the recovery of a certain sum
of money, who has a perfected lien under such judgment on the property
involved.
The term
'judgment' does not include an inchoate lien, such as an attachment
lien, unless and until such lien has ripened into a judgment. United
States v. Security Trust and Savings Bank (1950) [50-2 USTC ¶9492]
340
U. S.
47. Nor does the term 'judgment' include the determination of a
quasi-judicial body or of an individual acting in a quasi-judicial
capacity, such as, for example, the action of State taxing authorities.
United States
v. Gilbert Associates (1953) [53-1 USTC ¶9291] 345
U. S.
361; and United States v. City of New Britain (1954) [54-1 USTC
¶9191] 347
U. S.
81."
Assuredly, or
even greater influence in our decision is the case of United States
v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361, 364 (1953)
in which the Supreme Court laid down the guidelines which Federal Courts
must follow in determining whether an entity is a judgment creditor
under the Internal Revenue Code. An essential principle of Congress in
its tax scheme being uniformity, Mr. Justice Minton finds accordingly
that the term "judgment creditor" must be used in the
"usual, conventional sense of a judgment of a court of record,
since all states have such courts." 345
U. S.
at 364. Thereupon the Justice specifically excludes from the ranks of
judgment creditors, entities whose rights are created by actions of
State taxing authorities where the end result is merely "something
in the nature of a judgment." Thus, since there has been no
judgment whatsoever by a court of record concerning the State's alleged
lien, and since the procedure effectuated by the State taxing authority
can only be classified as "something in the nature of a
judgment", it would be most imprudent for this Court to elevate the
State to the status of a judgment creditor. Fortifying the Court in its
decision that the lien arising from the State's Order to Withhold Tax is
not the lien of a "judgment creditor" is the decision of our
esteemed Brother of the Central District of California, Hon. Pierson M.
Hall, in the case of U. S. v. Zuetell [56-1 USTC ¶9411], 138 F.
Supp. 857 (S. D. Cal. 1956). In that case, Judge Hall, citing the
phraseology of Gilbert, supra, held that a California lien for
State income taxes which arose by recordation was not the lien of a
"judgment creditor" under the Internal Revenue Code, and was
therefore not prior to a Federal tax lien. Surely here, where the State
has not recorded its lien, much less gone through a court determination,
it cannot conceivably be considered a judgment creditor.
[Effect
of State's Claim]
To follow the
route proposed by the State would make a complete mullity of the Federal
priority in tax matters established by Congress. Each State could enact
a procedure that would destroy this priority by providing for an
immediate and nonjudicial seizure of property which would instantly
create in the State the rights of a judgment creditor, but which could
be effected by the State after learning of the Federal lien and before
the Federal authorities could file the necessary notice. If we were to
construe the use of this summary type of procedure as creating a true
judgment creditor, we would have to read into the law a self-stultifying
intent of Congress to set up a priority of Federal liens while at the
same time permitting the States the opportunity of devising a simple and
self-serving method of subordinating and subverting these liens. This we
cannot and will not do.
[Interest
on Fund]
The United
States is also seeking interest on the fund against the City of Los
Angeles from the original date of the levy until the date the levy is
satisfied, upon the theory that the City's failure to pay over the fund
upon notice of levy made it liable for interest pursuant to Internal
Revenue Code of 1954, §6332(c)(1) which provides that: "any person
who fails or refuses to surrender any property . . . subject to levy,
upon demand . . . shall be liable in his own person and estate to the
United States in a sum equal to the value of the property . . . together
with costs of interest on such sum . . . from the date of levy."
However, as simple and straightforward as this statute appears, we do
not feel that it was intended to cover the situation at bar. It would be
inequitable and unjust to exact interest in a situation such as this,
where the City was merely an innocent stakeholder which properly came to
the Court for assistance by way of interpleader. The City would not turn
over the funds to one taxing authority without becoming liable to the
other. It was in the unenviable position of being caught between the
rock and the whirlpool: if it had turned the money over to the State it
would have been liable to the Government under the Internal Revenue Code
of 1954, §6332(c) 6;
and if it had turned the money over to the Government, it would have
been liable to the State under Cal. Rev. and Tax Code, §18808 (West
1970). 7
It was for this reason that we originally directed the City to pay the
fund into the registry of the Court and discharged it from any and all
further liability while requiring the State and the
United States
to interplead their claims. And it is for this same reason that the
Court now denies the claim of the Government for interest from the City.
[Orders]
Pursuant to
the foregoing which shall constitute findings of fact and conclusions of
law as required by F. R. Civ. P. 52, it is hereby ordered that:
1. Judgment be
entered for the Plaintiff United States in the amount of $13,320.03,
which sum was heretofore deposited in the registry of the Court and
shall be paid forthwith to Plaintiff by the Clerk.
2. The
Defendant, City of
Los Angeles
, and the Defendant to the Counterclaim, California Franchise Tax Board,
shall take nothing herein but shall be discharged from any and all
further liability with respect to the claims and allegations set forth
in the complaint and counterclaim herein.
3. The
Plaintiff prepare and lodge with the Court a separate proposed judgment
in conformance with the foregoing decision.
1
§6321. Lien for taxes.
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person.
Int. Rev. Code
of 1954, §6321.
§6322.
Period of lien.
Unless another
date is specifically fixed by law, the lien imposed by section 6321
shall arise at the time the assessment is made and shall continue until
the liability for the amount so assessed (or a judgment against the
taxpayer arising out of such liability) is satisfied or becomes
unenforceable by reason of lapse of time.
Int. Rev. Code
of 1954 §6322.
2
§18807. Withhold notice; service; duty of recipient.
The Franchise
Tax Board may by notice, served personally or by registered mail,
require any person, officer or department of the State, political
subdivision or agency of the State, city organized under a freeholder's
charter, or political body not a subdivision or agency of the State,
having in their possession, or under their control, any credits or other
personal property or other things of value, belonging to a taxpayer or
to a person who has failed to withhold and transmit amounts due pursuant
to Sections 18806 and 18808, to withhold, from such credits or other
personal property or other things of value, the amount of any tax,
interest or penalties due from the taxpayer or the amount of any
liability incurred by such person for failure to withhold and transmit
amounts due from a taxpayer under this part and to transmit the amount
withheld to the Franchise Tax Board at such times as it may designate.
Cal. Rev. and
Tax Code §18807 (West 1970).
3
§6323. Validity and priority against certain persons.
(a) Purchases,
holders of security interests, mechanic's lienors, and judgment lien
creditors.--The lien imposed by section 9321 shall not be valid as
against any purchaser, holder of a security interest, mechanic's lienor,
or judgment lien creditor until notice thereof which meets the
requirements of subsection (f) has been filed by the Secretary or his
delegate.
Int. Rev. Code
of 1954 §6323(a).
4
§18809. Withhold notice; compliance without recourse to court;
nonliability to taxpayer.
Any person
required to withhold and transmit any amount pursuant to this article
shall comply with the requirement without resort to any legal or
equitable action in a court of law or equity. Any person paying to the
Franchise Tax Board any amount required by it to be withheld is not
liable therefor to the person from whom withheld unless the amount
withheld is refunded to the withholding agent.
Cal. Rev.
& Tax Code §18809 (West 1970).
5
United States v. Acri [53-1 USTC ¶9138], 348 U. S. 211 (1955); United
States v. Liverpool etc. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United
States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218 (1955); United
States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81
(1954); United States v. Gilbert Associates [53-1 USTC ¶9291],
345 U. S. 361 (1953); United States v. England [55-2 USTC ¶9693],
226 F. 2d 205 (9th Cir. 1955); California State Department of
Employment v. United States [54-1 USTC ¶9218], 210 F. 2d 242 (9th
Cir. 1954).
6
§6332. Surrender of property subject to levy.
(c)
Enforcement of levy.--
(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 or his delegate, shall be liable in his own person and estate
to the United States in a sum equal to the value of the property or
rights not so surrendered, 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 rate of 6 per cent per annum from the date
of such levy. 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.
(2) Penalty
for violation.--In addition to the personal liability imposed by
paragraph (1), if any person required to surrender property or rights to
property fails or refuses to surrender such property or rights to
property without reasonable cause, such person shall be liable for a
penalty equal to 50 percent of the amount recoverable under paragraph
(1). No part of such penalty shall be credited against the tax liability
for the collection of which such levy was made.
Int. Rev. Code
of 1954 §6332(c).
7
§18808. Withhold notice; liability on failure to comply.
Any person
failing to withhold the amount due from any taxpayer and to transmit the
same to the Franchise Tax Board after service of a notice pursuant to
Section 18807 is liable for such amounts.
(Added by
Stats. 1943, c. 659, p. 2403, §1. Amended by Stats. 1951, c. 70, p.
257, §1; Stats. 1951, c. 215, p. 465, §2.)
Cal. Rev. and
Tax Code §18808 (West 1970)
[96-2 USTC ¶50,360] United States of
America, Plaintiff v. Giffels Associates, Black & Veatch, and
Comerica Bank, N.A. as successor in interest of Manufacturers National
Bank, Defendants
U.S.
District Court, East. Dist.
Mich.
, So. Div., 95-CV-71316-DT, 5/20/96, Awarding prejudgment interest in a
District Court decision, 96-1
USTC ¶50,253
[Code Secs.
6332 and 6621
]
Levies: Failure to honor: Prejudgment interest: Computation:
Bankruptcy stay: Accounts receivable.--Two consulting firms that
failed to surrender to the IRS accounts receivable owed to a bankrupt
taxpayer and that, instead, remitted the funds to the taxpayer's bank
were liable for prejudgment interest in an amount determined by the
court. The government was not entitled to interest accruing between the
date on which the consulting firms were served with a notice of levy and
the date on which they transferred the funds to the bank. Since the
accounts receivable became part of the taxpayer's bankruptcy estate, the
automatic stay barred their release, and the consulting firms were not
liable for interest until they released the funds to the bank regardless
of the ongoing bankruptcy proceedings.
Russell F.
Walker,
P.O. Box 2062
,
St. Albans
,
W.Va.
25177
, for appellant. Gary R. Allen, David E. Carmack, Regina S. Moriarty,
Department of Justice, Washington, D.C. 20530, Bonnie R. Schlueter, 633
United States Post Office & Courthouse, Pittsburgh, Pa. 15219, Blane
A. Black, Marcus, Black & Spadafore, 204 W. Main ST., Monogahela,
Pa. 15063, Ronald G. Backer, Rothman, Gordon, Foreman & Groudine,
300 Grant Bldg., Pittsburgh, Pa. 15219, for appellee.
ORDER
GRANTING PLAINTIFF $133,914.07 IN PREJUDGMENT INTEREST AGAINST
DEFENDANTS GIFFELS ASSOCIATES AND BLACK & VEATCH
WOODS,
District Judge:
This matter
having come before the Court on plaintiff's April 12, 1996 memorandum
regarding interest on judgment;
The Court
having reviewed the pleadings submitted herein, and being otherwise
fully informed in the matter;
IT IS HEREBY
ORDERED that defendants Giffels Associates and Black & Veatch are
liable to plaintiff for $133,914.07 in prejudgment interest.
I.
INTRODUCTION AND FACTS
On July 7,
1982, plaintiff issued and served on defendants Giffels Associates and
Black & Veatch (collectively, "defendants") a notice of
levy, notifying them of taxes owed by a third-party taxpayer. Plaintiff
demanded that defendants surrender all of the property and property
rights of the taxpayer which they held in the form of $62,294.71 in
unpaid accounts receivable. The defendants did not honor plaintiff's
levy; this failure to honor the levy eventually formed the basis for the
instant tax collection suit.
The taxpayer
at issue filed a bankruptcy petition on July 22, 1982. On January 24,
1983, and upon the taxpayer's motion, the Bankruptcy Court restrained
defendants from tendering the $62,294.71 to plaintiff. On March 18,
1983, the Bankruptcy Court ordered defendants to pay the taxpayer and
Manufacturers National Bank ("Bank") jointly the $62,294.71
owed in accounts receivable. On April 12, 1983, however, the Bankruptcy
Court vacated that order upon a motion by plaintiff. On June 10, 1983,
the taxpayer began an adversary proceeding seeking a turnover of the
$62,294.71. The Bankruptcy Court dismissed this proceeding without
ordering defendants to turn over the funds. On June 11, 1984, defendants
turned over the $62,294.71 to the Bank, which agreed to indemnify
defendants for any liability incurred as a result of doing so.
On October 17,
1985, plaintiff began an adversary proceeding against the taxpayer and
the Bank, seeking payment of the $62,294.71. On January 8, 1986,
plaintiff stipulated to a dismissal; the stipulation stated that
"the parties hereto agree that the account receivable which is the
subject of this adversary proceeding is not property of the estate and
that this dispute is a priority dispute between the
United States
and the Bank."
On May 22,
1991, the taxpayer's bankruptcy proceeding closed. Plaintiff filed the
instant suit on April 3, 1995, seeking to enforce the July 9, 1982 levy
and collect from defendants the $62,294.71 which they paid to the Bank
rather than to plaintiff.
On April 3,
1996, the Court granted plaintiff's motion for summary judgment against
defendants after finding that defendants were liable to plaintiff for
$62,294.71 in unpaid taxes. Although plaintiff also requested
prejudgment interest at the rate provided by the Internal Revenue Code,
plaintiff did not explain how to calculate such interest. The Court
therefore requested plaintiff to submit by April 19, 1996 a brief
regarding the issue of prejudgment interest. The Court also stated that
defendants had ten work days in which to contest the amount of interest
requested.
II.
DISCUSSION
Plaintiff
requests $258,651.80 in prejudgment interest under 26 U.S.C. §§6621(a)(2)
and 6332(d)(1)
. Plaintiff reaches this figure by calculating interest as
having accrued from July 7, 1982, the date upon which plaintiff served
defendants with a notice of levy, to April 19, 1996, a week from the
date upon which plaintiff filed the instant supplemental memorandum
regarding interest.
Although they
accept the interest rates provided by plaintiff for the periods in
question, defendants contest the particular sum requested by plaintiff.
Defendants argue that when the taxpayer filed its bankruptcy petition on
July 23, 1982, the automatic stay arising under 11 U.S.C. §362
prohibited defendants from turning over the taxpayer's
accounts receivable because those assets had become part of the
bankruptcy estate. Defendants also assert that equitable considerations
militate against awarding plaintiff's full request because plaintiff
took advantage of the minimal time requirements placed upon it by
waiting until 1995 to file suit, thereby allowing the interest to
accumulate considerably.
Defendants
therefore request the Court to calculate the interest as having started
to accrue on January 8, 1986, the date upon which the Bankruptcy Court
entered a stipulation and order dismissing plaintiff's adversary
proceeding against the taxpayer and the Bank. Defendants note that this
stipulation and order stated that "the parties hereto agree that
the account receivable which is the subject of this adversary proceeding
is not property of the estate and that this dispute is a priority
dispute between the
United States
and the Bank." Alternatively, defendants request the Court to
calculate the interest as having started to accrue on June 11, 1984, the
date upon which defendants turned the accounts receivable over to the
Bank. Under the rates agreed to by the parties, defendants' suggested
dates would reduce the amount of applicable interest to $101,129.02 or
$133,914.07 respectively.
The Court
agrees with defendants that interest should not accrue for the period of
time in which defendants were complying with the law by not releasing
the taxpayer's assets during the bankruptcy proceedings. In the instant
case, the taxpayer filed its bankruptcy petition on July 22, 1982, only
two weeks after plaintiff served its notice of levy on defendants. Given
this Court's prior finding that the taxpayer retained property rights to
its accounts receivables and did not assign them to the Bank, defendants
are correct that the accounts receivable became part of the bankruptcy
estate, see 11 U.S.C. §541(a)(1)
; see also In Re Challenge Air Int'l, Inc. [92-1
USTC ¶50,090 ], 952 F.2d 384, 386-88 (11th Cir. 1992)
(debtor's rights to assets subject to pre-petition levy still constitute
part of bankruptcy estate), and therefore subject to an automatic stay
prohibiting their release. See 11 U.S.C. §362
; cf. also In re Weatherly, 169 B.R. 555, 561 (Bankr.
E.D.Pa. 1994) (stating that "[c]learly, 11 U.S.C. §362(a)
precludes any post-petition actions by the IRS to collect
even nondischargeable pre-petition debts"). Moreover, the
Bankruptcy Court restrained defendants from tendering the accounts
receivable to plaintiff on January 24, 1983. Defendants should not have
to pay interest on funds when the law obligated them to not release
those funds. Cf. Cordero v. De Jesus-Mendez, 922 F.2d 11, 18 (1st
Cir. 1990) (defendants did not have to pay interest on award when they
were not responsible for the loss of interest; clerk of the court had
failed to place assets into an interest-bearing account). The Court
therefore will not calculate interest as accruing immediately upon the
July 7, 1982 service of plaintiff's notice of levy.
After the Bank
agreed to indemnify them, however, defendants released the accounts
receivable to the Bank on June 11, 1984. Defendants obviously were
willing to transfer the assets at issue to another party as of June 11,
1984, regardless of the ongoing bankruptcy proceedings. The Court
therefore will calculate the interest as having begun to accrue on June
11, 1984, rather than January 8, 1986, the date upon which plaintiff
stipulated to the dismissal of its proceeding against the Bank and the
taxpayer.
III.
CONCLUSION
Accordingly,
defendants Giffels Associates and Black & Veatch are liable to
plaintiff for $133,914.07 in prejudgment interest.
So Ordered.
[97-2 USTC ¶50,985] Donna S. Evert,
Plaintiff v.
United States of America
and Waste Management of Missouri, Inc., Defendants
U.S.
District Court, East. Dist.
Mo.
, East. Div., 4:97CV408-DJS, 10/8/97
[Code
Sec. 7426 ]
Jurisdiction: Wrongful levy: Limitations period: Equitable tolling:
Failure to state a claim.--The IRS's motion to dismiss an
individual's wrongful levy action for lack of jurisdiction due to the
running of the limitations period was denied based on the factual
uncertainty over whether the individual filed a written request for the
release of the levy, thus extending the limitations period, and whether
equitable tolling applied. Also at issue was whether the wrongful levy
action was filed within the nine-month period after the date the notices
of levy filed by the IRS became effective. The wrongful levy action
against the company the IRS levied against was dismissed for failure to
state a claim because Code
Sec. 7426 only allows for wrongful levy actions against the
United States
. Finally, the company was not liable for interest under Code
Sec. 6332 for failure to surrender property subject to levy
because that provision is available solely to the
United States
, not third parties claiming wrongful levy.
ORDER
STOHR,
District Judge:
Plaintiff
filed her one-count complaint against the United States of America and
Waste Management of Missouri, Inc. ("WMM") pursuant to 26
U.S.C. §7426(a)(1) which provides for a civil cause of action for
wrongful levy. Plaintiff alleges as follows. On or about June 11, 1993,
plaintiff's former husband, E. Scott Evert ("taxpayer") and
two corporations of which he was the majority owner, entered into an
asset-purchase agreement with defendant WMM. The asset-purchase
agreement contained, in part, a non-compete agreement. Pursuant to the
non-compete agreement, WMM agreed to pay taxpayer $108,210 annually on
June 11 for a period of five years. On or about April 17, 1996,
plaintiff obtained a judgment against taxpayer in the amount of
$31,015.06 for back child support and $81,550.91 for back maintenance.
On May 8, 1996 and May 14, 1996, the Internal Revenue Service
("Service") issued notices of levy to WMM to attach any monies
WMM owed to taxpayer. Following service of the notices of levy, but
preceding the June 11, 1996 due date of the fourth installment of the
non-compete agreement, plaintiff served WMM with separate garnishments
for the back child support and maintenance. Subsequently, the Service
issued a release of levy in the amount of $31,712.90, to satisfy the
child support garnishment which is not at issue in this case. Plaintiff
argues that because WMM was not indebted to taxpayer until June 11,
1996, that the Service's May 8, 1996 and May 14, 1996 notices of levy
could not have attached and were thus ineffective, giving plaintiff's
garnishment priority.
This matter is
now before the Court on defendants' separate motions to dismiss. The
United States
alleges that the Court lacks subject matter over plaintiff's claims
because plaintiff failed to bring the action within the statutorily
required nine month period. WMM alleges that the Court lacks subject
matter jurisdiction and that plaintiff's complaint fails to state a
claim against it. WMM asserts that the
United States
is the sole proper defendant under 26 U.S.C. §7426 and, in the
alternative, that WMM was unconditionally discharged from any liability
when it surrendered the money in question to the Service.
A.
United States
' Motion to Dismiss
The United
States argues that the Court lacks subject matter jurisdiction over
plaintiff's claims because they were brought outside the nine month
limitation period contained in 26 U.S.C. §7426. Section 7426(h)
provides that the limitation period for a wrongful levy action is
determined by 26 U.S.C. 6532(c). Section 6532(c) provides:
(1) General
rule.--Except as provided by paragraph (2), no suit or proceeding
under section 7426 shall be begun after the expiration of 9 months from
the date of the levy or agreement giving rise to such action.
"The
nine month limitations period contained in §7426(h) is
jurisdictional." Dieckmann v. United States [77-1 USTC ¶9224],
550 F.2d 622, 623 (10th Cir. 1977). The
United States
asserts that because the notices of levy were served upon WMM on May 8,
1996 and May 14, 1996 that plaintiff's complaint, filed on March 7,
1997, falls outside the nine month limitation period and thus, the Court
lacks jurisdiction to adjudicate plaintiff's claims.
Plaintiff
advances two arguments in opposition to the
United States
' motion to dismiss. First, plaintiff argues that she "filed a
written request for the release of the levy as to the sums in
question" and that such request grants plaintiff additional time in
which to bring her suit pursuant to the exception to the nine-month
limitation period found in §6532(c)(2) [Pltf's Response to Deft United
States' Motion to Dismiss, p. 1]. Section 6532(c)(2) provides in
pertinent part:
(2) Period
when claim is filed.--If a request is made for the return of
property described in section 6343(b), the 9-month period prescribed in
paragraph (1) shall be extended for a period of 12 months from the date
of filing of such request or for a period of 6 months from the date of
mailing by registered or certified mail by the Secretary to the person
making such request of a notice of disallowance of the part of the
request to which the action relates, whichever is shorter.
From July 17,
1996 to January 16, 1997, plaintiff corresponded with Ms. Dana Freeman
of the Internal Revenue Service on numerous occasions regarding the levy
of the monies at issue and plaintiff's claim thereto. On January 16,
1997, plaintiff filed an "Administrative Claim Against Levied
Property," apparently at the suggestion of Ms. Freeman. This filing
detailed the basis of plaintiff's claim to the taxpayer's funds,
allegedly wrongfully levied by the Service. Plaintiff presents the
foregoing as evidence of her compliance with §6532(c)(2)'s
"request" requirement which grants plaintiff additional time
in which to bring her wrongful levy suit. For a request to qualify under
§6532(c)(2), it must comply with the requirements contained in 26
C.F.R. §301.6343-2(b). Section 301.6343-2(b) provides:
(b) Request
for return of property. A written request for the return of property
wrongfully levied upon must be addressed to the district director
(marked for the attention of the Chief, Special Procedures Staff) for
the Internal Revenue district in which the levy was made. The written
request must contain the following information--
(1) The name
and address of the person submitting the request;
(2) A detailed
description of the property levied upon;
(3) A
description of the claimant's basis for claiming an interest in the
property levied upon; and
(4) The name
and address of the taxpayer, the originating Internal Revenue district,
and the date of the levy as shown on the notice of levy form, or levy
form, or, in lieu thereof, a statement of the reasons why such
information cannot be furnished.
Moreover, the
regulations provide procedures which govern inadequate requests. Section
301.6343-2(c) provides:
(c) Inadequate
request. A request for the return of property wrongfully levied upon
will not be considered adequate unless it is a written request
containing the information required by paragraph (b) of this section.
However, unless a notification is mailed by the director to the claimant
within 30 days of receipt of the request to inform the claimant of the
inadequacies, any written request will be considered adequate. . . .
Plaintiff has
presented evidence of multiple contacts with the Service, culminating in
a formal filing. The
United States
has failed to show that plaintiff's "request" did not meet the
requirements contained in the aforementioned regulations. Based upon the
record before it, the Court cannot determine as a matter of law that
plaintiff's evidence fails to establish a "request" and thus
fails to qualify for the additional twelve months from the date of
filing in which to bring an action provided for under 26 U.S.C. §6532(c)(2).
In addition to
the factual uncertainty regarding plaintiff's compliance with the
"request," plaintiff's written correspondence and
administrative claim may "prove a set of facts that would establish
that equitable tolling applies and that the action was timely." Supermail
Cargo, Inc. v. United States [95-2 USTC ¶50,575], 68 F.3d 1204,
1206 (9th Cir. 1995). "Because the applicability of the equitable
tolling doctrine often depends on matters outside the pleadings, it is
not generally amenable to resolution on a Rule 12(b)(6) motion."
Id.
(internal quotations omitted). In considering the United States' motion
to dismiss, the Court cannot, as a matter of law, find that it
"appears beyond doubt that the plaintiff can prove no set of facts
in support of [her] claim which would entitle [her] to relief." Conley
v. Gibson, 355
U.S.
41, 45-46 (1957).
Plaintiff's
second argument in opposition to the United States' motion to dismiss is
that the notices of levy did not become effective until June 11,
1996--the date when the taxpayer had a present right to receive the
funds at issue--thus, her complaint was filed within nine months
"from the date of the levy." The
United States
argues that the Service's notices of levy became effective immediately
upon their receipt by WMM on May 8, 1996 and May 14, 1996. Plaintiff
argues that the levy was not effective until taxpayer became entitled to
the property on June 11, 1996 and thus, her March 7, 1997 complaint was
brought within nine months of the "date of the levy." See
26 U.S.C. §6532(c)(1). "Levy may be made by serving a notice of
levy on any person in possession of, or obligated with respect to,
property or rights to property subject to levy, including receivables,
bank accounts, evidences of debt, securities, and salaries, wages,
commissions or other compensation." 26 C.F.R. §301.6331-1(a).
Although notice of levy may be sufficient as to receivables, here, the
contract entitling taxpayer to money was still partially executory.
Taxpayer had to comply with the non-compete agreement with WMM in order
to be entitled to payment on June 11, 1996. "[A] levy shall extend
only to property possessed and obligations existing at the time
thereof." 26 U.S.C. §6331. Here, taxpayer did not possess the
funds in question nor was there an existing obligation when the May 8,
1996 and May 14, 1996 notices of levy were issued. Therefore, the Court
cannot find as a matter of law that plaintiff's complaint was not
timely, even under the nine month statutory period. For all the
foregoing reasons the Court will deny the motion to dismiss filed by the
United States.
B.
WMM's Motion to Dismiss
WMM moves to
dismiss for lack of subject matter jurisdiction alleging that the United
States is the only proper defendant under 26 U.S.C. §7426. Section
7426(a)(1) provides in pertinent part, "If a levy has been made on
property . . . any person . . . who claims an interest in or lien on
such property and that such property was wrongfully levied upon may
bring a civil action against the United States." 26 U.S.C. §7426(a)(1)
(emphasis added). Alternatively, WMM states that it honored the United
States' levy on the property in question and is thus released from
liability pursuant to 26 U.S.C. §6332(e). Section 6332(e) provides in
pertinent part, "[a]ny person in possession of . . . property or
rights to property subject to levy upon which a levy has been made who .
. . surrenders such property . . . to the Secretary . . . shall be
discharged from any obligation or liability to the delinquent taxpayer
and any other person with respect to such property or rights to property
arising from such surrender or payment." 26 U.S.C. §6332(e).
Although
plaintiff concedes that WMM is not a proper defendant under 26 U.S.C. §7426,
1
she contends that WMM should nevertheless be retained in the lawsuit.
Although not set forth in her complaint, in her memorandum in opposition
to WMM's motion to dismiss, plaintiff argues that for a period of
approximately nine months, WMM wrongfully retained sums owed to her and
that WMM should be held liable for the interest which accrued on those
funds pursuant to either 26 U.S.C. §6332(d) 2
or state law.
In ruling on
WMM's motion to dismiss for failure to state a claim, the Court must
view the facts alleged in the complaint in the light most favorable to
plaintiff. Scheuer v. Rhodes, 416
U.S.
232, 236 (1974). A motion to dismiss will not be granted merely because
the complaint does not state with precision every element necessary for
recovery. A complaint should not be dismissed unless it "appears
beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." Conley v. Gibson,
355
U.S.
41, 45-46 (1957); Hungate v.
United States
, 626 F.2d 60, 62 (8th Cir. 1981). For the purpose of defendant's
motion to dismiss, the Court takes all facts alleged in plaintiff's
complaint as true. Westcott v.
Omaha
, 901 F.2d 1486, 1488 (8th Cir. 1990). Even under this standard,
plaintiff fails to state a claim against WMM and thus WMM's motion to
dismiss will be granted.
Even if the
Court considers plaintiff's argument regarding WMM's liability for
interest under §6332(d), a claim not set forth in her complaint,
plaintiff's argument fails. Section 6332(d) imposes personal liability
on those who fail to surrender property subject to levy to the
United States
. However, this penalty provision is available solely to the
United States
and not to third parties claiming wrongful levy. Additionally,
"[a]ny amount (other than costs) recovered under this paragraph
shall be credited against the tax liability for the collection of which
levy was made." 26 U.S.C. §6332(d)(1). Because WMM complied with
the levy on the property in question, it is released from liability
pursuant to 26 U.S.C. §6332(e). Additionally, plaintiff lacks standing
to pursue any potential penalties available to the
United States
pursuant to 26 U.S.C. §6332(d).
Plaintiff also
argues that the Court has supplemental jurisdiction over an alleged
claim against WMM for interest for its delay in turning over the funds
at issue "under state law". [Pltf's Response to Deft WMM's
Motion to Dismiss, p.2]. In her complaint, plaintiff fails to identify
any basis for a state law claim against WMM. Even construing the
pleadings liberally as required by Fed.R.Civ.P. 8(a), plaintiff fails to
provide a "short and plain statement of the claim showing that the
pleader is entitled to relief" on any theory.
In light of
the foregoing, the Court lacks subject matter jurisdiction over
plaintiff's claim against WMM for wrongful levy. Moreover, plaintiff's
complaint fails to state a claim upon which relief can be granted as to
WMM's alleged wrongful withholding of the funds at issue. Therefore, the
Court will grant WMM's motion to dismiss.
Accordingly,
IT IS
HEREBY ORDERED that defendant
United States
' motion to dismiss [Doc. #7] is denied.
IT IS
FURTHER ORDERED that defendant Waste Management of Missouri, Inc.'s
motion to dismiss [Doc. #9] is granted.
1
"Plaintiff acknowledges that, because WMM did in fact release the
monies in question to the Internal Revenue Service after the
filing of this suit, Plaintiff's complaint as presently constituted does
not properly frame the issues against WMM." [Pltf's Response to
Deft WMM's Motion to Dismiss, p.2].
2
Section 6332(d) provides in pertinent part, "[a]ny person who fails
or refuses to surrender any property . . . 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 the property . . . 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 . . ." This provision is
designed to provide the United States with a remedy against those who
wrongfully withhold property subject to levy.
[99-2 USTC ¶50,827] Waste Management
of Missouri, Inc., Interpleader Plaintiff v. Donna S. Evert,
Defendant-Appellant
,
United States of America
, Defendant-Appellee, William D. Nichols, Intervenor-Appellant
(CA-8),
U.S. Court of Appeals, 8th Circuit, 98-3395, 8/27/99, 188 F3d 1002,
Affirming two District Court decisions, 97-2
USTC ¶50,985 and 98-2
USTC ¶50,569
[Code
Sec. 6323 ]
Tax liens: State law: Priority of liens: Perfection of liens:
Judgment creditors.--A notice of federal tax lien was properly filed
with the "official records" of the applicable county's
Commissioners, despite the fact that state (Florida) law specified that
the notice was to be filed with the circuit court clerk. Thus, the lien
had priority over subsequently perfected liens of judgment creditors
with respect to interpleaded funds owed to the taxpayer by a third
party. The judgment creditor's contentions that the government filed its
lien notice in the wrong office and that the lien was not valid against
them under
Florida
's Federal Lien Registration Act were rejected. The county in which the
notice was filed had exercised its right under the state constitution to
designate different offices for the filing of public documents, such as
lien notices.
Before: LOKEN
and ARNOLD, Circuit Judges, and WATERS, *
District Judge.
LOKEN, Circuit
Judge:
Waste
Management of Missouri, Inc. ("Waste Management"), was
contractually indebted to taxpayer E. Scott Evert
("Taxpayer"), a resident of
Broward County
,
Florida
. On April 20, 1995, the
United States
filed a notice of federal tax lien against all of Taxpayer's property in
the "official records book" of the Broward County
Commissioners. Taxpayer's judgment creditors Donna S. Evert and William
D. Nichols perfected their judgment liens against monies owed by Waste
Management on May 13, 1997. Generally, when a federal tax lien is in the
competition, the first lien in time has priority, and state law governs
what constitutes a perfected lien. See
United States
v. Dishman Indep. Oil, Inc., 46 F.3d 523, 526 (6th Cir. 1995). In
these two lawsuits, the judgment creditors seek to capture Waste
Management contract payments on the ground that the government's lien is
unperfected because it was filed in the wrong
Broward
County
office. The district courts 1
granted summary judgment in favor of the United States, and the judgment
creditors filed these consolidated appeals. We affirm.
The assessment
of unpaid federal income taxes creates a lien in favor of the
United States
on all property "belonging to" the taxpayer. See 26
U.S.C. §6321; Thomson v. United States [95-2 USTC ¶50,549], 66
F.3d 160 (8th Cir. 1995). To be valid against a taxpayer's subsequent
secured creditors, such as judgment creditors, the government must give
formal notice of its tax lien in accordance with 26 U.S.C. §§6323(a)
& (f). For personal property, like the right to Waste Management's
contract payments, notice of the tax lien must be filed--
in one office
within the State (or the county, or other governmental subdivision), as
designated by the laws of such State, in which the property subject to
the lien is situated. . . .
§6323(f)(1)(A)(ii).
If State law does not designate one such office, the lien notice must be
filed "[i]n the office of the clerk of the United States district
court for the judicial district in which the property subject to the
lien is situated." §6323(f)(1)(B). If the government files notice
of its tax lien in the wrong office--which is primarily an issue of
state law--then the judgment creditor has a superior claim to the
personal property in question. See Gordon White Constr. Co., Inc. v.
Southland Inv. Co. [75-2 USTC ¶9771], 521 F.2d 856, 857 (5th Cir.
1975).
The Florida
Constitution states, "When not otherwise provided by county charter
or special law approved by vote of the electors, the clerk of the
circuit court shall be ex officio clerk of the board of county
commissioners, auditor, recorder and custodian of all county
funds." FLA. CONST. art. VIII, §1(d).
Florida
counties may enact a county charter providing for "local
self-government not inconsistent with general law." FLA. CONST.
art. VIII, §1(g) and (c). The voters of
Broward
County
approved the Broward County Charter in November 1974. That Charter
transferred responsibility for recording public documents to an agency
of the Broward County Commissioners. Broward
County
Charter
, art. IV, §4.02(C). Consistent with the Broward County Charter, the
United States
filed its lien notice with the "official records" of the
Broward County Commissioners, rather than with the Broward County
Circuit Court or the United States District Court for the Southern
District of Florida.
The judgment
creditors rely on the Florida Legislature's 1992 enactment of the
Florida Uniform Federal Lien Registration Act ("the Act").
FLA. STAT. §713.901. The Act specifies that liens against an
individual's personal property are to be filed "in the office of
the clerk of the circuit court of the county where the person against
whose interest the lien applies resides at the time of filing of the
notice of lien." FLA. STAT. §713.901(3)(c)(4). The judgment
creditors argue that either §713.901(3)(c) implicitly repealed the
Broward County Charter provision and therefore lien notices must be
filed with the clerk of the circuit court, or §713.901(3)(c) created two
state offices in which tax lien notices may be filed, triggering the
requirement in 26 U.S.C. §6323(f)(1)(B) that federal tax lien notices
be filed with the clerk of the local federal court. Under either theory,
the
United States
filed its lien notice in the wrong office and the lien is not valid
against the judgment creditors. We disagree.
The judgment
creditors' argument rests on the mistaken assumption that, in passing
the Act, the Florida Legislature failed to consider the possibility that
some counties--like Broward--had exercised their authority under the
Florida Constitution to designate different offices for the filing of
public documents such as lien notices. However, subsection (3)(b) of the
Act explicitly states:
If by law the
county recorder and custodian of the official records of a county is
other than the clerk of the circuit court, a reference in this section
to the clerk of the circuit court shall be deemed to be the county
recorder so designated by law.
Although
this provision is in a different subsection than §713.901(3)(c), on
which the judgment creditors rely, its plain language states that it
applies to all references "in this section." (Emphasis
added.) Thus, the Act is consistent with the Broward County Charter, and
the two read together provide for only one state office in
Broward
County
for the filing of lien notices. By filing its lien notice in that
office, the
United States
complied with 26 U.S.C. §6323(f), and its lien is valid against the
judgment creditors under §6323(a).
The judgments
of the district courts are affirmed.
*
The HONORABLE H. FRANKLIN WATERS, United States District Judge for the
District of Arkansas, sitting by designation.
1
The HONORABLE CATHERINE D. PERRY and the HONORABLE DONALD J. STOHR,
United States District Judges for the Eastern District of Missouri.
[2002-1 USTC ¶50,446] In re Arthur J.
Cobb, Paula K. Cobb, Debtors. Arthur J. Cobb and Paula K. Cobb,
Plaintiffs v. Samera L. Abide, as Chapter 7 Trustee for the bankruptcy
estate of Arthur J. Cobb and Paula K. Cobb, Defendant United States of
America, Plaintiff v. Arthur J. Cobb, Paula K. Cobb, Samera L. Abide,
Citicorp Mortgage, Inc., and Sunburst Bank, Defendants
U.S.
Bankruptcy Court,
Mid. Dist. La.
, 93-11077, 5/1/2002
[Code
Secs. 6321 and 6323
]
Tax liens: Annuities: Property transferred to third parties: Validity
and priority against third parties: Super-priority safe harbor: Filing
of notice.--
The IRS was entitled to recover funds subject to tax liens that debtors
had transferred to third party creditors. The debtors had transferred
cash and assigned rights under annuity contracts to their mortgage
holder banks after the IRS perfected the tax liens. That the banks had a
perfected security interest in real property secured by a mortgage did
not give them priority as to the government with respect to the
encumbered funds. Moreover, the creditors' were not entitled to the
super-priority safe harbor relief under Code
Sec. 6323 . The banks were not includible in the classes of
interest holders addressed by the statute; moreover, even if they were,
the banks took the funds from the annuities after notice had been filed.
[Code
Sec. 6332 ]
Surrender of property subject to levy: Post-judgment interest:
Pre-judgment interest: Congressional intent.--
The IRS was entitled to post-judgment interest on debtors' funds that
were erroneously transferred to other creditors after the imposition of
a tax lien. Pre-judgment interest, however, was denied as unsupported by
statute or equity. Because pre-judgment interest is intended to
encourage payment of taxes, it was inapplicable in the present case
where third-party creditors held the funds.
REASONS FOR JUDGMENT
PHILLIPS,
Bankruptcy Judge:
BEFORE THE
COURT are the motions by the United States of America
("US") to reopen this matter, substitute party, and for the
addition of pre and post-judgment interest. For the reasons that follow,
the Court will grant the motion to reopen and will render judgment
therein; will grant the motion to substitute party to reflect the proper
party Defendant as Union Planters Bank, National Association
("Union Planters"); 1
will deny the US's motion for pre-judgment interest, but grant the US
post-judgment interest.
I.
BACKGROUND AND PROCEDURAL HISTORY
Prior to
filing bankruptcy, Arthur and Paula Cobb were practicing attorneys with
a substantial practice. As compensation for attorney's fees in a case in
which the Cobbs were counsel for the plaintiff, the Cobbs agreed to
accept annuity payments. As part of the structured settlement of that
case, the Cobbs became the beneficiaries of four annuity policies issued
by Manufacturers Life Insurance Co. The annuity policies entitle the
Cobbs to receive (without the right of acceleration) monthly payments,
semi-annual payments, and certain lump sum payments over the course of
the life of the annuity.
Beside being
relatively successful attorneys, the Cobb's were also serially
delinquent taxpayers who failed to either file returns and/or pay taxes,
both for personal income and for that of Mr. Cobb's business, for an
extended period of time beginning in 1978. The Internal Revenue Service
("IRS") finally began assessments against Mr. Cobb, and on
November 22, 1991, the IRS filed a notice of federal tax lien for the
tax periods, 1987, 1988, 1989, and 1990. On July 15, 1992, the IRS filed
an additional notice of federal tax lien for the 1991 tax period. 2
In addition to
being abundantly indebted to the IRS for unpaid taxes, Mr. Cobb and his
wife were obligors on two different loans secured by two mortgages
placed on their personal residence. Citicorp Mortgage, Inc.
("Citicorp") held a first priority mortgage on the residence,
while Union Planters occupied a second priority position with respect to
its mortgage.
Sometime prior
to bankruptcy, the Cobbs began experiencing financial difficulty and
defaulted on the mortgage obligations owed to Citicorp and Union
Planters. In an attempt to stave off foreclosure, the Cobbs made several
lump sum payments to Citicorp and Union Planters to try and bring their
loan obligations current. The payments made by the Cobbs totaled
$91,578.87 and were made in the following amounts: $55,614.21 to
Citicorp on November 25, 1992; $4,638.51 to Citicorp on January 26,
1993; $4,544.52 to Citicorp on March 11, 1993; $19,527.58 to Union
Planters in January, 1993; and $7,254.05 to Union Planters in April,
1993.
In addition,
the Cobbs assigned their rights as annuitants to the proceeds from the
annuity policies to Union Planters. The purported assignment was
confected on January 29, 1993. Under the assignment, payments due under
the policies were remitted directly to Union Planters by the policy
issuer. 3
After the
Cobbs filed bankruptcy, the
US
filed adversary proceeding no. 95-1022. This adversary proceeding was
consolidated with another pending adversary proceeding involving claims
made by the Cobbs against the trustee, no. 94-1103. The matter was tried
on August 29, 1995. Thereafter, a consent judgment was entered in the
consolidated adversary proceeding and the consolidated adversary
proceeding was closed by order of dismissal. On January 27, 1997, this
Court entered an order dismissing the Cobb's bankruptcy case. In its
order of dismissal, the Court reserved jurisdiction over Paragraphs 1(B)
and 1(C) of the
US
's complaint filed in the instant adversary proceeding, no. 95-1022. A
similar reservation of jurisdiction was included within the consent
judgment entered in the consolidated adversary proceeding. Despite this
reservation of jurisdiction, the Court issued an order administratively
closing the instant adversary proceeding on September 28, 2001. The
Court does not know exactly how, but it seems that this matter has
fallen through the proverbial cracks, so to speak, perhaps because of a
minute entry that incorrectly referred to this proceeding as being
settled and to be made the subject of a dismissal by consent order (the
administrative close was done as a ministerial act, upon the Court not
having received the consent dismissal erroneously referred to in the
minute entry). At any rate, the Court has been made aware of the pending
claims and will issue and order reopening the adversary proceeding and
will now rule on the merits. Apologies are extended for the delay.
II.
ANALYSIS
Paragraphs
1(B) and 1(C), including subparts, essentially allege that the
US
's lien claims were properly and validly perfected. More specifically,
the paragraphs allege that such liens attached to the annuity payments
received by the banks and to the lump sum payments to the banks made by
the Cobbs, and therefore such payments must be returned to the
US
.
The voluminous
compendium of laws on the subject of federal taxes, commonly referred to
as the Internal Revenue Code, 26 U.S.C., et seq., provides that
if any person required to pay taxes:
neglects or
refuses to pay the same after demand, the amount . . . shall be a lien
in favor of the
United States
upon all property and rights to property, whether real or
personal, belonging to such person. 4
The
Supreme Court, examining the lien created by 26 U.S.C. §6321, has
expounded that the scope, "is broad and reveals on its face that
Congress meant to reach every interest in property that a taxpayer might
have." 5
In addition to being extraordinarily broad, the lien imposed by 26
U.S.C. §6321 arises at the time the IRS assessment is made and
continues until the liability for the amount of such assessment is made.
6
In this case,
the IRS made assessments of the Cobbs federal tax liability at various
times between 1991 and 1992. The assessments totaled approximately 2.5
million dollars. Pursuant to the statutes cited above, a tax lien arose
at that time on all the Cobbs' property (and rights to property),
whether immediately in their possession or which was acquired by them
after the date of the assessment. According to the statutes, the lien
continued in effect until the Cobbs satisfied the debt. 7
The next
question, is to what did the tax liens attach? The foremost inquiry
required under the tax lien statute is whether there is
"property" or "right to property" to which the tax
lien could encumber. The federal tax lien statutes do not create
property rights, but rather attach consequences, federally defined, to
rights which are created under state law. 8
Resort must first be made to underlying state law to determine the
existence and nature of an interest to which the federal tax lien could
be asserted. 9
If the taxpayers interest under state law is considered
"property" or a "right to property," the tax lien
attaches to that interest, and "the tax consequences thenceforth
are dictated by federal law." 10
In this
instance, the Cobbs' interests at issue are several lump sum payments of
cash to the banks to cure a default in the mortgage notes, and the
rights to payments due under the various annuity policies. Clearly,
without the need for citation,
Louisiana
state law recognizes that money, i.e., the money used as payments
on the mortgage notes, is a form of property, moveable (or personal)
property, but property nonetheless. The money was the Cobbs to have,
hold, and use, and therefore, was property to which the
US
's tax lien attached.
In addition,
the rights held by the Cobbs to payments due under the annuity policies
was property. Though the Cobbs did not have a present interest in the
actual monies due for future payments, what the Cobbs possessed was the
right, under the annuity contract, to receive those payments when they
became due. 11
Contract rights are a form of property under
Louisiana
law, and those rights became impressed with the tax lien at the time it
arose. 12
Furthermore, any payments actually made to the Cobbs under the annuity
policies would immediately succumb to attachment by the tax lien as
well, being both "property" of the Cobbs in the parlance of 26
U.S.C. §6321, and as a consequential transformation of the right to
receive that payment, which right was encumbered by the tax lien. 13
Once it has
been determined that a particular interest a taxpayer holds constitutes
"property" or a "right to property," federal law
determines the relative priority of competing claims in and to that
particular interest. 14
Priority of competing claimants is generally determined by the
"rule of first in time, first in right," meaning that
whichever entity perfects a lien on the subject property first is
entitled to priority to the property or proceeds of the property. 15
In this case,
the IRS assessed the Cobbs for delinquencies in taxes in November 1991
and July 1992. The liens at issue arose on these dates. The liens
covered all property interests presently held by the Cobbs at that time
and all property interests thereafter acquired. At the time the liens
arose, the Cobbs possessed present interests in the rights to future
payments under the annuity contracts. The lien attached to those rights
to the extent of the Cobbs' tax liability exigent within the
assessments. Additionally, the liens attached to any property interests,
including sums of money, to which the Cobbs acquired after the tax lien
arose.
At the time
the Cobbs transferred lump sums of money to the banks, those sums of
money were impressed with the federal tax liens. Moreover, at the time
the Cobbs purportedly assigned their rights under the annuities, those
rights were encumbered by the tax liens as well. 16
Both sets of transfers occurred after the IRS had assessed tax
deficiencies and the liens arose under 26 U.S.C. §6322.
Furthermore,
in no instance did the banks have a prior perfected security interest in
the property transferred to them. The banks did have a perfected
security interest in the real property secured by a mortgage. However,
the "first in time, first in right" rule refers to competing
interests on the particular property at issue. The
US
does not contest that the banks prior perfected mortgages would prime
their tax liens regarding the subject matter of the mortgages, i.e.,
the Cobbs' residence. However, the tax lien is broader than the security
interest held by the banks. The tax liens attached to all property to
the extent not otherwise validly encumbered. That the Cobbs paid the
banks money that the banks used to satisfy an underlying obligation for
which they had distinct security for does not mean that the banks had a
security interest in those funds used to pay such obligations. The funds
themselves (and the rights allegedly transferred by the assignment of
the annuity payments) were previously encumbered by the governments tax
liens, and passed to the banks subject to that encumbrance. 17
The
"first in time, first in right" general rule is qualified,
however, by the "super-priority" provisions of 26 U.S.C. §6323.
18
According to this statute, a tax lien may be primed by other competing
interests under certain limited circumstances, which the banks claim are
present in this case.
The provisions
of 26 U.S.C. §6323 pertinent to this case provide:
(a) . . .--The
lien imposed by section 6321 shall not be valid as against any
purchaser, holder of a security interest, mechanic's lienor, or judgment
lien creditor until notice thereof which meets the requirements of
subsection (f) has been filed by the Secretary.
(b) . .
.--Even though notice of a lien imposed by section 6321 has been filed,
such lien shall not be valid--
(1) . .
.--With respect to a security (as defined in subsection (h)(4))--
(A) as against
a purchaser of such security who at the time of purchase did not have
actual notice or knowledge of the existence of such lien; and
(B) as against
a holder of a security interest in such security who, at the time such
interest came into existence, did not have actual notice or knowledge of
the existence of such lien. 19
Subsection
(a) of the statute does not apply in this instance. The provisions of
subsection (a) extend priority to certain classes of interest holders if
notice has not been properly filed at the time the interest holder
accepted or took such interest. In this case, the IRS properly filed its
notice as required by 26 U.S.C. §6323(f). 20
Additionally, the transfers from the Cobbs to the banks took place after
the IRS had properly filed its notice. Even if the banks fit within the
categories described within subsection (a) (which the Court is not
convinced they would), the banks took the money and payments from the
annuities after notice had been filed. Therefore, the provisions of
subsection (a) afford the banks no safe harbor from the government's tax
lien.
The provisions
of subsection (b) similarly do not apply to provide the banks with
"super-priority" above the government's tax liens. The
US
sets forth a litany of reasons why the banks fail to fall within the
purview of the provisions of subsection (b). While the Court believes
that the
US
's arguments are well founded, it is unnecessary to discuss in detail
most of them because the Court finds that the banks had notice of the
tax liens at the time the banks accepted the lump sum and annuity
payments.
Subsection (b)
affords "super-priority" to certain classes of persons
involved in specifically listed categories of transactions. For the
purposes of the instant case, only the provisions of 26 U.S.C. §6323(b)(1)
could conceivably apply. However, both classes of persons for whom
"super-priority" could be available requires that the entities
take a security, whether by purchase or by taking a security interest
therein, without notice of the existence of the tax lien.
In this case,
the record and evidence adduced at trial indicate that both banks were
aware of the tax liens at the time the lump sum and annuity payments
were made. The Court finds that Citicorp was aware of tax liens on
October 29, 1992--a month before their acceptance of the first lump sum
payment. 21
Additionally, the Court finds that Union Planters was aware of tax
liens, at the latest, by March 26, 1992--again, prior to acceptance of
lump sum and annuity payments. As both banks were aware of the
government's tax liens the relevant provisions of 26 U.S.C. §2623(b)(1)
do not confer "super-priority" status sufficient to avoid the
government's tax lien on the lump sum and annuity payments.
For these
reasons, the Court will grant the
US
a judgment against Citicorp in an amount equal to the total of the lump
sum payments received by it from the Cobbs. The Court will also enter a
judgment against Union Planters in an amount equal to the amount
received by it in lump sum payments from the Cobbs as well as for the
total amount of all payments made under the annuity policies until such
time as the annuity became the subject of the interpleader action
referenced in footnote 2, supra, without prejudice to any right
Union Planters has or may have against Citicorp for contribution, etc.,
due to the payment arrangement made between the two banks regarding the
disposition of annuity payments.
III.
INTEREST
The
US
urges this Court to grant pre-and post-judgment interest on the amounts
incorporated into this Court's judgment. 22
Regarding post-judgment interest, 28 U.S.C. §1961 provides,
"Interest shall be allowed on any money judgment in a civil case
recovered in a district court." according to the statute, such
interest shall be calculated from the date of the entry of the judgment.
Accordingly, the Court will grant the motion of the
US
to award post-judgment interest to be calculated in accordance with 28
U.S.C. 1961(a). 23
A right to
pre-judgment interest is not specifically conferred by statute. However,
the United States Supreme Court has stated that awards of pre-judgment
interest be governed by traditional judge-made principles. 24
Among the principles to be considered are: 1) the relative equities
between the beneficiaries of the obligation and those on whom it is
imposed; 2) fairness; 3) ensuring full compensation; 4) expeditious
settlement; 5) the need to conform to historical legislative and
judicial precedent. 25
The Fifth Circuit also requires that the Court inquire whether the
federal act that creates the cause of action precludes an award of
interest, and whether the award furthers the congressional policy behind
the act creating the cause of action.
In this case,
the Court does not know of any statutory prohibition on recovery of
pre-judgment interest in a case such as this. However, the Court does
not believe that an award of pre-judgment interest in this specific case
and based on the specific facts underlying it would further
congressional policy. Congressional policy creates a lien on the
taxpayer's property. The policy behind the act is to facilitate payment
of tax liability by the taxpayer. In this case, an award of pre-judgment
interest would be against a third party not liable for the underlying
tax obligation, but rather because the third party possesses former
property of the taxpayer (but not as a result of a fraudulent transfer
by the taxpayer). The Court sees no reason how congressional policy
would be furthered by shouldering a third party should bear an enormous
pre-judgment interest award.
The Court does
not believe that the traditional principles outlined above help the
US
either. Those principles form an equitable balancing test. While it may
be argued that pre-judgment interest would compensate the
US
for the time-value of the money, other factors militate against such an
award. First, as stated above, the
US
is requesting interest not from the taxpayer-obligor, but from a third
party who accepted property (albeit burdened with the tax lien) from the
taxpayer and gave value to the taxpayer in return (in the form of a
credit on the balance due under the notes it held).
Secondly, the
evidence in the record and introduced throughout the pendency of this
proceeding indicates the IRS knew of the annuities well prior to the
purported assignment. The IRS also knew that the Cobbs had not paid
proper taxes for years. The IRS had ample time to protect its interest
in property of the Cobbs to which the lien attached. 26
While the Court finds today that the banks must disgorge the proceeds
received from the Cobbs upon which the tax liens were impressed, the
banks nonetheless took such proceeds without malice towards the
government and with a good faith belief that they had a right to the
proceeds. The banks are not the ones who owed the underlying tax debt.
It would be
extremely unfair, considering the circumstances surrounding this case,
to award pre-judgment interest against the third-party banks in the face
of the governments knowledge of the Cobbs property and dilatory actions
involving protection of its rights thereto. 27
In sum, the Court finds that an award of pre-judgment interest is not
appropriate in this instance and will deny the
US
's motion for such.
IV.
CONCLUSION
For the
foregoing reasons, the Court will issue an order granting the
US
's motion to reopen the case, and will allow substitution of Union
Planters Bank, National Association as the proper party defendant.
Further the Court will enter a judgment against Citicorp equal to the
amount it received from the Cobbs in the lump sum payments discussed
above. In addition, the Court will enter a judgment against Union
Planters equal to the amount it received from the Cobbs in the lump sum
payments described above, as well as equal to the amount of all annuity
payments dispersed under the annuity that it received pursuant to the
purported assignment of the Cobbs rights thereto, without prejudice to
Union Planter's right to contribution or other legal and equitable
rights against Citicorp for recoupment of sums Union Planters paid to
Citicorp under its agreement with Citicorp. The Judgments will include
an award of post-petition interest to be calculated in accordance with
28 U.S.C. 1961(a). The Judgments will not include an award of
pre-judgment interest.
1
The original defendant, Sunburst Bank changed its name to Union Planters
Bank of
Louisiana
on June 15, 1995. On August 29, 1995 this Court allowed the substitution
of Union Planters Bank of
Louisiana
. Subsequently, Union Planters Bank of
Louisiana
merged with Union Planters Bank, National Association. Pursuant to 12
U.S.C. §215(e), the Court will allow the substitution of Union Planters
Bank, National Association as proper party defendant.
2
In a collateral proceeding entitled, "Manufacturers Life
Insurance Co. v. Arthur J. Cobb, et al.," U.S.D.C., E.D.La.,
No. 93-3325, the district court specifically determined that the
November 1991 and July 1992 notice of federal tax liens were properly
filed. This Court believes that the District Court's determination on
that issue is entitled to issue preclusive effect in this proceeding as
it involved the same parties, the issue is identical to one at issue in
this proceeding, the issue was litigated and decided by the district
court, and the district court's determination was integral to its
ultimate conclusion. See, Stripling v. Jordan Production Co., LLC,
234 F.3d 863, 868 (5th Cir. 2000). Therefore, the Court will consider
the notices of tax liens filed November 1991 and July 1992 to have been
properly filed.
3
Union Planters apparently acted as a receiving agent for Citicorp with
regard to the annuity payments, and upon receipt of such would remit a
portion of the annuity payment to Citicorp to satisfy a portion of its
first priority mortgage.
4
26 U.S.C. §6321 (emphasis added).
5
United States v. National Bank of Commerce [85-2 USTC ¶9482],
472 U.S. 713, 719-720 (1985).
6
26 U.S.C. §6322.
7
See, Texas Commerce Bank-Fort Worth, N. A. v. United States [90-1
USTC ¶50,155], 896 F.2d 152, 161 (5th Cir. 1990).
8
See, United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55,
78 S.Ct. 1054, 1057 (1958).
9
See, United States v. Craft [2002-1 USTC ¶50,361], 122 S.Ct.
1414, 1420 (2002); Aquilino v. United States [60-2 USTC ¶9538],
363 U.S. 509, 512-514, 80 S.Ct. 1277, 1280-1281 (1960).
10
See, Medaris v.
United States
[89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989), quoting National
Bank of Commerce [85-2 USTC ¶9482], 472
U.S.
at 722, 105 S.Ct. at 2925.
11
See, In re Wessel [93-2 USTC ¶50,549], 161 B.R. 155, 159 (Bankr.
D.S.C. 1993); c.f.,
United States
v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497 (11th
Cir. 1989).
12
Accord, Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770],
542 F.2d 270 (5th Cir. 1976) (contract rights are "right to
property").
13
See generally, Phelps v.
United States
[75-1 USTC ¶9467], 421 U.S. 330, 334-335, 95 S.Ct. 1728, 1731
(1975) (the lien attaches to the thing and to whatever is substituted
for it).
14
See, Aquilino [60-2 USTC ¶9538], 363
U.S.
at 814, 80 S.Ct. at 1280.
15
See, Texas Commerce Bank [90-1 USTC ¶50,155], 896 F.2d at 161.
16
Union Planters has previously argued that it took a security interest in
the annuities by virtue of the assignment. While the Court does address
the question of whether Union Planters received a security interest by
virtue of the assignment, the Court notes that even if it had, the
assignment occurred after the tax liens had already attached to the
Cobbs' rights under such annuities. Therefore, regardless of whether a
security interest was created, the governments' lien would have primed
Union Planters' rights to the payments under the assignments.
17
See, Bess [58-2 USTC ¶9595], 357 U.S. at 57, 78 S.Ct. at 1058
("The transfer of the property subsequent to the attachment of the
lien does not affect the lien, for 'it is of the very nature and essence
of a lien, that no matter into whose hands the property goes, it passes cum
onere.' ").
18
See, Western National Bank v. United States [94-1 USTC ¶50,017],
8 F.3d 253, 255 (5th Cir. 1993).
19
"Security" is defined by 26 U.S.C. §6323(h)(4) as "any
bond, debenture, note, or certificate or other evidence of indebtedness,
issued by a corporation or a government or political subdivision
thereof, with interest coupons or in registered form, share of stock,
voting trust certificate, or any certificate of interest or
participation in, certificate of deposit or receipt for, temporary or
interim certificate for, or warrant or right to subscribe or to purchase
any of the foregoing; negotiable instrument; or money.
20
See, n. 2, supra.
21
As part of a discovery sanction against Citicorp during the conduct of
this proceeding, the Court prevented Citicorp from producing any
evidence that it did not have knowledge of the government's tax liens. See,
Order dated August 11, 1995, Doc. No. 111.
22
The banks have objected to imposition of interest on the basis that they
were never put on notice of the
US
's claim for such prior to trial. While the
US
never explicitly stated in its complaint, "We want interest,"
the Fifth Circuit has upheld interest awards based on very relaxed
pleading standards. In this case, the
US
prayed for such other relief deemed equitable and just under the
circumstances, and the Fifth Circuit has previously upheld an award of
interest premised upon similar language. See, Federal Savings and
Loan Ins. Corp. v. Texas Real Estate Counselors, Inc., 955 F.2d 261,
270 (5th Cir. 1992).
23
The
US
urges the court to award post-judgment interest pursuant to 28 U.S.C. §1961(c)(1).
Although this matter originally stems from tax liability, the Court does
not believe that this action qualifies as a tax case, but rather is an
exercise upon a lien. This interpretation is bolstered by the fact that
the
US
is not proceeding against the taxpayer, but rather against third-parties
to enforce its lien. Therefore, interest is appropriate under subsection
(a) of the statute, not subsection (c)(1).
24
See, City of Milwaukee v. Cement Div. Nat'l Gypsum Co., 515 U.S.
189, 194, 115 S.Ct. 2091, 2095 (1995); see also, Gore, Inc. v.
Glickman, 137 F.3d 863, 868 (5th Cir. 1998).
25
Gore, 137 F.3d at 866.
26
In fact, the Court finds that the annuities could have been seized even
before this adversary proceeding, and even before the bankruptcy case,
was filed. Why the government failed to act has never been explained.
While such failure on the part of the government does not offer help to
the defendants regarding the main demand, if provides the Court guidance
to refuse to issue post-judgment interest.
27
The Court finds that factors 4) and 5) above are neutral and do not sway
the Court either way.
