Annotations- Disability Benefits

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6334 Annotations: Disability Benefits- Levy

 

Property Exempt from Levy: Disability Benefits

 

[63-2 USTC ¶9596]Michael Kane, Appellant v. Burlington Savings Bank, Fulton D. Fields, District Director, Internal Revenue Service, Appellees

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 27941, 320 F2d 545, 7/9/63, Affirming an unreported District Court decision

[1954 Code Sec. 6334(a)(4)]

Property exempt from tax levy: Federal disability insurance benefits.--Monies received by a taxpayer as disability insurance benefits under the Social Security Act and seized by the District Director from the taxpayer's savings account in a bank are not analogous to "unemployment benefits" and, therefore, are not exempt from levy under 1954 Code Sec. 6334(a)(4).

Geoffrey M. Kalmus, 551 Fifth Ave. , New York City 17, N. Y., for appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Stephen B. Wolfberg, Department of Justice, Washington 25, D. C. (Joseph F. Radigan, United States Attorney, Rutland, Vt., of counsel), for appellees.

Before WATERMAN, FRIENDLY and SMITH, Circuit Judges.

[ Lower Court Decision]

WATERMAN, Circuit Judge:

Michael Kane appeals from a judgment of the United States District Court for the District of Vermont dismissing his complaint for lack of jurisdiction over the subject matter. Kane sought recovery of $275.91 seized by the District Director of Internal Revenue from plaintiff's savings account in the defendant Burlington Savings Bank. Kane alleged that the seized monies had been received by him as disability insurance benefits under Section 223 of the Social Security Act, 42 U. S. C. §423, and that, as such, the monies were exempted from levy for collection of taxes under Section 6334(a)(4) of the Internal Revenue Code.

Without waiting for responsive pleadings to be filed by the Bank, the district judge dismissed the action on July 10, 19 62, on the ground that the amount in controversy was not in excess of $10,000, as is required for a diversity action brought under 28 U. S. C. §1332. Plaintiff then made an application to join Fulton D. Fields, the District Director of Internal Revenue, as a party defendant. On July 31, 19 62 the district court, although granting plaintiff's application to join the District Director, reaffirmed its ruling of dismissal for want of jurisdiction. The district court erred, as the Government now concedes. Jurisdiction over plaintiff's action, when commenced, rested upon 28 U. S. C. §1340 which contains no jurisdictional amount requirement. ¹

[Statutory Construction Issue]

The Government contends, however, that the action was properly subject to dismissal for failure to state a claim upon which relief may be granted. Although the district judge did not rule upon this issue, the Government's contention raises a question of statutory construction which, in the interest of expedition, should be considered on this appeal. Accordingly, we affirm the action of the court below in dismissing plaintiff's complaint, but we do so on the ground that it failed to state a claim upon which relief may be granted.

[Statutory Provisions]

Section 6334 of the Internal Revenue Code of 1954, 26 U. S. C. §6334, provides:

"Property exempt from levy

(a) Enumeration.--There shall be exempt from levy--

* * *

(4) Unemployment benefits.--Any amount payable to an individual with respect to his unemployment (including any portion thereof payable with respect to dependents) under an unemployment compensation law of the United States, of any State or Territory, or of the District of Columbia or of the Commonwealth of Puerto Rico.

(b) * * *

(c) No other property exempt.--Notwithstanding any other law of the United States, no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."

[Taxpayer's Contentions]

Appellant maintains that subsection (a)(4) is sufficiently broad to encompass not only traditional unemployment compensation benefits, but also disability insurance payments under the Social Security Act. ² In support of this contention he advances three major arguments:

1. Section 223 of the Social Security Act, uncer which plaintiff received the monies in dispute, defines "disability," for purposes of Disability Insurance Benefit Payments, as

"inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration."

Unemployment, thus, is a necessary condition of eligibility for payments under §223. Moreover, Section 6334(a)(4) of the Internal Revenue Code of 1954 does not condition exemption from levy upon the causes of unemployment for which compensation is payable. Section 6334(a)(4) should be read, therefore, to cover benefits payable for unemployment due to disability as well as unemployment benefits payable by reason of adverse economic conditions.

2. Congress has expressly exempted from levy for collecton of taxes benefits paid under the Federal Railroad Unemployment Insurance Act, 45 U. S. C. §352(e). Under that Act benefits are payable to individuals within its coverage whether their unemployment is due to the unavailability of work or to "physical, mental, psychological, or nervous injury, illness, sickness or disease." 45 U. S. C. §351(k). Moreover, several states have provided for compensation payments in the event of unemployment due to disability as part of their state unemployment compensation laws. Such disability payments would, presumably, be exempt from tax levy under 26 U. S. C. §6334(a)(4). Exemption from levy of Social Security Disability Insurance benefits, therefore, would be consistent with the congressional policy of exempting disability payments paid under cognate compensation schemes.

3. In exempting unemployment benefits from tax levy, Congress evidently believed that persons drawing such benefits were likely to be suffering financial privation and to be unable to afford the further diminution of their income through government seizure. Therefore, no reason exists for so construing the statute as to exempt from levy benefits paid to one unemployed because of economic conditions but to subject to levy similar benefits when paid to a person unemployed because of disability.

[Language of Statute]

Although appellant's arguments might prove persuasive to Congress, they take insufficient account, we believe, of the narrow wording of the statute itself, of the congressional policies underlying §6334 exemptions generally, and of the legislative history of subsection (a)(4), enacted in 1958.

We turn first to the language of §6334(a)(4) which exempts from levy amounts "payable to an individual with respect to his unemployment * * * under an unemployment compensation law of the United States * * *." The fact that the monies here in issue were paid to appellant pursuant to certain provisions of the Social Security Act does not preclude the relief he seeks, for that Act includes provisions for the making of federal grants to the several states for the administration of state unemployment compensation systems, and state unemployment compensation payments are clearly exempt from tax levy. The fact that appellant's funds were received under the Act does not insure their exemption from levy, however, because the Act also includes within its provisions the well-known program of federal old age and survivors benefits, which benefits are concededly outside the scope of §6334(a)(4). Appellant urges that his disability benefits should be analogized to unemployment compensation because, for both, unemployment is a condition of eligibility. The argument is insufficient, however, for the federal old age insurance program, the disability insurance program, and the state unemployment compensation programs are all based upon the underlying fact that old age, disability, and temporary unemployment deprive an individual of the power to earn his own living. As the Supreme Court said in Helvering v. Davis, 301 U. S. 619, 641 (1937), "But the ill is all one, or at least not greatly different, whether men are thrown out of work because there is no longer work to do or because the disabilities of age make them incapable of doing it."

Rather than viewing federal disability insurance benefit under 42 U. S. C. §423 as a type of unemployment compensation, we are inclined to view them, in relation to Old Age and Survivors Insurance, as a program to give benefits to persons who have been retired from the labor pool and whose retirement has been brought about prematurely by reason of physical or mental disability. ³ Consistent with this approach is the requirement under §423 that its benefits be limited to persons whose inability to work is the result of "physical or mental impairment which can be expected to result in death or to be long-continued and indefinite duration."

[Congressional Policy]

We turn next to appellant's suggestion that the contressional policy implicit in the exemption provisions of §6334 requires that subsection (a)(4) be read with sufficient breadth to cover federal disability insurance benefits.

It is clear, as appellant contends, that humanitarian considerations underlie the §6334 exemptions from tax levy granted by Congress. It is equally clear that until the 1958 amendment, at least, Congress chose to effectuate these considerations by §6334 exemptions based not on the source of assets in the hands of the taxpayer, but on the nature of the property sought to be seized. Subsection (a)(1), thus, exempts from levy wearing apparel and school books, subsection (a)(2), fuel, provisions, furniture, and personal effects not exceeding $500 in value, and subsection (a)(3), books and tools of the trade not exceeding $250 in value. Appellant's argument proves too much, therefore. The gain to the Treasury of such small amounts as can be seized from the unemployed by reason of disability is, indeed, likely to be outweighed by the hardship imposed upon them as a consequence of levy upon their benefits. The same may be said, however, of old age and survivors benefits under the Social Security Act or of relief payments under state welfare laws, yet both of the latter are concededly subject to seizure unless they have been used by the taxpayer to purchase commodities exempt under §6334(a)(1) to (a)(3). No such exemption can be claimed by appellant in this case, for the District Director's levy was upon monies found in appellant's savings account in the Burlington Savings Bank.

Section 6334(a)(4) departs, of course, from this statutory pattern by exempting assets at, or by virtue of, their source in unemployment compensation agencies. The legislative history of the subsection, however, to which we now turn, lends no support to the suggestion that Congress, dissatisfied with the pattern of use or commodity exemptions, has sought to exempt from levy all governmental welfare or insurance benefits which are customarily received only by persons suffering economic privation.

[Legislative History]

Prior to enactment of the Internal Revenue Code of 1954, Congress had granted immunity from levy to old age and survivors insurance benefits paid under the Social Security Act, 42 U. S. C. §407 (1952). Although the Act made no express provision for exemption of unemployment compensation benefits, the Commissioner of Internal Revenue ruled, Rev. Rul. 54-171, 1954-1 Cum. Bull. 282, that state unemployment compensation commissions should be exempt from notices of levy on the ground that funds in approved state plans were, by federal statute, to be paid out by the states solely for unemployment compensation. Similar exemptions from levy were granted, inter alia, to benefits under the Railroad Unemployment Insurance Act, 45 U. S. C. §352(e) (1952), the Railroad Retirement Act, 45 U. S. C. §228(1) (1952), and the Civil Service Retirement Act, 5 U. S. C. §729 (1952).

This jigsaw pattern of particular exemptions from tax levy was eliminated by Congress in the Internal Revenue Code of 1954. While retaining the exemptions from levy upon specified types of property under §6334(a), Congress added the previously quoted pre-emptive subsection (c):

"No Other Property Exempt.--Notwithstanding any other law of the United States , no property or rights to property shall be exempt from levy other than property specifically made exempt from subsection (a)."

Although the legislative history of the 1954 Code sheds no light on the purposes underlying this provision, its effect was to eliminate all previously-enacted exemptions based upon source, leaving in their place only the property-type exemptions of §6334(a).

The consistency of the scheme of exemptions from levy under the 1954 Code did not long remain, however. In 1955 the Railroad Retirement Act and the Railroad Unemployment Act were amended to restore the prior exemption of their benefits from tax levy. 45 U. S. C. §228(1) (1958); 45 U. S. C. §352(e) (1958). Although no similar restoration of exemption for Social Security Old Age and Survivors benefits was made, in 1958 the Interstate Conference of Employment Security Agencies sought restoration of the exemption from benefits payable under state unemployment compensation plans. In House and Senate Committee hearings, Conference representatives stated that, since enactment of the Internal Revenue Code of 1954, levies had repeatedly been made upon their state unemployment compensation agencies for amount payable as unemployment compensation to named individuals. They urged that express provision be made to preclude levies by this "easiest method of collection" upon state agencies. ⁴

In direct response to these requests, Congress enacted subsection (a)(4) of 26 U. S. C. §6334 in 1958. The provision included the very language urged by the Interstate Conference of Employment Security Agencies, exempting from levy "Any amount payable [to an individual] with respect to his unemployment * * * under an unemployment compensation law * * *." ⁵ Federal, as well as state, unemployment compensation laws were included, but at the legislative hearings no reference was made of a possibility of exempting benefits awarded under the federal disability insurance plan, for it, of course, was a separate program of no concern to the Conference of State Unemployment Compensation Commissioners.

[No Exemption]

As neither the language of §6334(a)(4), the congressional policy underlying its enactment, nor the legislative history of the provision gives support to appellant's contention that federal disability insurance benefits are exempt from tax levy, the judgment of the district court dismissing appellant's complaint is affirmed for failure of the complaint to state a claim upon which relief may be granted.

We are indebted to Geoffrey M. Kalmus, Esq., of the New York Bar, who, at our request after the district court declined to issue a certificate of probable cause, represented appellant most ably in this in forma pauperis appeal.

¹ Appellant does not contend on this appeal that his complaint stated a sufficient cause of action against the Burlington Savings Bank, the sole defendant in the original complaint.

² As an alternative ground of reversal, appellant urges that the monies received by his as disability insurance benefits under 42 U. S. C. §423 were exempt from tax levy under 42 U. S. C. §407 which provides that "none of the monies paid * * * under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process." It is clear, however, that 42 U. S. C. §423 has been superseded by 26 U. S. C. §6334(c), supra, enacted in 1954. Contrary to appellant's suggestions, the fact that new substantive benefits, including certain disability insurance benefits of 43 U. S. C. §423, have been added since 1954 to the chapter covered by 43 U. S. C. §407 does not revive the operative force of the latter provision.

³ Disability benefits were first added to the Old Age and Survivors insurance program in 1956 by the Social Security Amendments of that year. 70 Stat. 807, §103(a). As the House Committee which initiated the legislation explained, H. Rep. No. 1189, 84th Cong., 1st Sess., p. 3:

"* * * retirement protecting for the 70 million workers under old-age and survivors insurance is incomplete because it does not now provide a lower retirement age for those who are demonstrably retired by reason of a permanent and total disability."

⁴ See Senate Hearings, Aug. 8, 11 , 12 and 13, 1958, on H. R. 13549, pp. 87, 170-179; House Hearings on All Titles of the Social Security Act, June 16, 20 , 23-27, 30, 1958, pp. 411-414; Hearnings before a Subcommittee of the House Committee on Government Operations, 85th Cong., 2d Sess., June 24, 26 , 27, 1958, pp. 1-50.

⁵ As an alternative ground for affirming the dismissal of appellant's complaint on the merits, appellee maintains that the exemption from tax levy granted by 26 U. S. C. §6334(a)(4) extends, by its terms, only to benefits payable, and not to those already paid, under federal or state unemployment compensation laws. Because of our favorable decision upon appellee's other ground of affirmance, we do not reach, and expressly reserve decision upon, this contention of the District Director.

 

[94-1 USTC ¶50,035] In re James R. Morris, Debtor. James R. Morris, Plaintiff v. United States of America , Internal Revenue Service, Defendant and George W. Stevenson, Chapter 7 Trustee, Intervening Defendant

U.S. Bankruptcy Court, West. Dist. Tenn. , West. Div., 92-33141-B, 12/17/93

[Code Secs. 6321 and 6334 ]

Tax liens: Property exempt from levy: Disability benefits.--

Social security disability payments received by a debtor in bankruptcy proceedings on behalf of his deceased spouse were subject to a prior recorded tax lien. Although the money was exempt from claims of other creditors under state ( Tennessee ) exemption laws and his tax liabilities for the tax years were dischargeable as personal obligations, this had no effect on the applicability of the federal tax lien. Further, the fact that the disability payments may have been considered part of his deceased spouse's probate estate was without consequence because the lien attached to any property actually owned by the taxpayer and to any property to which he had an ownership right.

Christian Goeldner, P.O. Box 1468 , Southaven , Miss. 38671-1468 , for plaintiff. George W. Stevenson, 200 Jefferson Ave. , Memphis , Tenn. 38103 , for trustee. William W. Siler, Assistant United States Attorney, 200 Jefferson Ave., Memphis, Tenn. 38103, Carol C. Priest, Department of Justice, Washington, D.C. 20530, for defendant. Madalyn C. Scott, 200 Jefferson Ave. , Memphis , Tenn. 38103 , for U.S. Trustee. James Morris, 4141 Mimosa Hill, Bartlett , Tenn. 38135 , for debtor.

MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT AND FOR DECLARATORY JUDGMENT

BROWN, Bankruptcy Judge:

This cause is before the Court on cross motions for summary judgment filed by the debtor and the Internal Revenue Service ("IRS"). At issue is whether the debtor may exempt Social Security disability benefits due his wife but not paid until after her death from the federal tax lien asserted by the defendant. The following constitutes findings of fact and conclusions of law pursuant to F.R.B.P. 7052 and 7056.

FACTUAL SUMMARY

The parties are in agreement that no genuine issues of material fact exist in this proceeding. The following is a brief summary of these undisputed facts.

The debtor filed his voluntary Chapter 7 petition for relief on December 19, 1992 . Prior to that time he and his wife jointly owed federal income tax, interest and penalties in the cumulative amount of $26,146.36 for the tax years 1987, 1988 and 1989. Assessment of the 1987 tax in the amount of $12,500.00 was made against the debtor and his wife on May 28, 1990 . Notice of the federal tax lien for this liability was filed in Shelby County, Tennessee on December 17, 1990 . The debtor filed joint tax returns for 1988 and 1989 in November, 1990. These returns established tax liabilities of $2,507.00 and $7,327.00 respectively. Assessments of these amounts were made on November 26, 1990 , and notice of a tax lien was filed on August 20, 1992 .

The debtor's wife died in August, 1990. Before her death, she had filed a claim for disability compensation with the Social Security Administration ("SSA"). The SSA originally denied her claim and she appealed that decision. After her death, the denial was reversed and five days after the debtor's Chapter 7 petition was filed, on December 24, 1992 , the SSA issued a check for accrued disability benefits in the amount of $27,741.00. The check was made payable to "James R. Morris on behalf of Katherine Morris, deceased." Response of the [U.S.A.] . . . On January 14, 1993 , the IRS served a levy upon the debtor for the collection of funds belonging to Mrs. Morris or her estate that were subject to the federal tax liens. On January 24, 1993 , the debtor delivered the SSA check to the Chapter 7 Trustee, Mr. Stevenson ("Trustee") who deposited it in the debtor's bankruptcy estate account.

The IRS subsequently filed a motion to require the Trustee to abandon any asserted interest in the funds. The motion was later withdrawn and this adversary proceeding filed. The Chapter 7 Trustee subsequently intervened in order to protect any interest that the bankruptcy estate might have in the funds.

The government acknowledges that the debtor's 1987 and 1988 tax liabilities are dischargeable pursuant to §§727 and 523(a)(1) of the Bankruptcy Code. However, the effect that this discharge might have on the asserted IRS lien is contested by the parties.

DISCUSSION

Examination of the Internal Revenue Code, 26 U.S.C. §101 , et. seq., reveals that a federal tax lien is triggered when "any person liable to pay any tax neglects or refuses to pay the same after demand." 26 U.S.C.§6321. Demand may be satisfied by mailing notice of the liability to the taxpayer. 26 U.S.C. §6303(a) . Such a lien is in the amount of the unpaid tax, penalty and interest, if any, and is "upon all property and rights to property, whether real or personal, belonging to [the taxpayer]." 26 U.S.C. §6321 . (Emphasis added). See also U.S. v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). State law defines the extent of the taxpayer's interest in property but the tax lien arises under federal law and will, to the extent of its value, attach to the debtor's property interest. Id., U.S. v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 80 S.Ct. 1008, 4 L.Ed.2d 1192 (1960).

The lien commences "at the time the assessment [of tax liability] is made" and continues until it is satisfied or "becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322 . Such a lien becomes effective against subsequent third party creditors upon registration of the notice of lien by the IRS in the appropriate governmental office located in the taxpayer's resident state. 26 U.S.C. §6323(f) . In Tennessee , this is the county register's office located in the taxpayer's county of residence. Tenn. Code Ann. §66 -21-201.

Once registered, the lien is effective against and, with limited exceptions not applicable here, has priority over subsequent judgment lien creditors, purchasers, and security interest holders. 26 U.S.C. §6323(a) and (b) . As such, even the status of a bankruptcy trustee, which encompasses such capacities pursuant to the strong arm powers of 11 U.S.C. §544 , is subject to the priority of a recorded tax lien.

Furthermore, as a creature of federal law, the federal tax lien is not affected by state law exemptions. 26 U.S.C. §6334(c) ; U.S. v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971); Knox v. Great West Life Assur. Co. , 212 F.2d 789 (6th Cir. 1954). Only those property interests or rights thereto enumerated by 26 U.S.C. §6334(a) are exempt from the operation of a federal tax lien. This is significant for purposes of this proceeding because at least in the bankruptcy context, Tennessee has opted out of the federal exemption scheme of 11 U.S.C. §522 and provides its own list of property interests that are exempt from the claims of creditors, which list includes disability benefits. Tenn. Code Ann. §26 -2-112 ("opt out" provision) and §26 -2-111(C). Neither disability benefits nor the right to receive them are counted among the property interests that are exempt from the operation of a federal tax lien. 26 U.S.C. §6334(a) ; Kane v. Burlington Savings Bank [63-2 USTC ¶9596 ], 320 F.2d 545 (2d Cir. 1963).

Satisfaction of a federal tax lien may be accomplished by payment of the amount due, by the surrender of property with a value equal to the amount of the lien, or by levy, which may include seizure and distraint, upon property subject to the lien. 26 U.S.C. §6331 and §6332 .

CONCLUSION

In the instant proceeding, the debtor argues that the IRS is not entitled to the Social Security disability funds at issue because they are exempt from the claims of creditors under state law made applicable by 11 U.S.C. §522(b). Were this a creditor other than the federal government, the debtor would be correct. However, as discussed above and unfortunately for the debtor, the power to tax granted to Congress by the United States Constitution and implemented through the above named statutes, preempts these otherwise applicable state ex- emption laws and renders these funds subject to the tax lien and levy. U.S. Const. art. I, §8 ; U.S. Const. amend. XVI; 26 U.S.C. §6334(c) .

This is true even though the 1987 and 1988 tax liabilities are unquestionably dischargeable as a personal obligation of the debtor. It is well settled that the discharge of personal liability has no effect on a lien against the debtor's property. See, In re Isom [90-1 USTC ¶50,216 ], 901 F.2d 744 (9th Cir. 1990); In re Victor, 1991 WL 268038 (Bankr. W.D. Tenn. 1991).

As further discussed above, the effectiveness of such a lien against a taxpayer's "right to property" operates to render these funds subject to the lien prior to issuance of the SSA check. 26 U.S.C. §6321 ; U.S. v. National Bank of Commerce, supra. Thus, whether the funds were to be property of the debtor or of Mrs. Morris' probate estate is of no importance because, at least to the extent of the amount of the federal tax lien, the funds are subject thereto and were so subject upon commencement of this bankruptcy case.

From the above findings and conclusions, the Court concludes that as a matter of law, the plaintiff is entitled to a discharge of his personal liability for 1987 and 1988 taxes and the defendant is entitled to receipt of the funds at issue to the extent necessary to satisfy its lien.

IT IS THEREFORE ORDERED THAT:

1. The debtor is granted a discharge of his personal tax liabilities for 1987 and 1988; and

2. The Internal Revenue Service is entitled to payment in an amount necessary to satisfy its federal tax lien from the social security disability funds presently held by the Chapter 7 Trustee.

SO ORDERED.

 

 

 

 

 

[99-1 USTC ¶50,526] Ramon and Nazzari Hughes, Plaintiffs v. Internal Revenue Service, Defendant Ramon and Nazzari Hughes, Plaintiffs v. The United States , Defendant

U.S. District Court, East. Dist. N.Y., 98-CV-4079 (JS) (MLO), 98-CV-4081 (JS) (MLO), 4/22/99, 62 FSupp 2 d 796, 62 FSupp2d 796

[Code Sec. 6334 ]

Levy and distraint: Seizure of property: Property exempt from claim: Disability benefits: Social security payments.--Married taxpayers' pro se suit seeking a refund of social security disability benefits that were collected by the IRS by means of a levy on their bank account was dismissed for failure to state a justiciable claim. The funds were not exempted from levy as amounts that were "payable" to the taxpayers; the act of the levy against the account signified that the funds had already been paid and, thus, were no longer "payable." The determination that the funds were not exempt from levy was a reasonable reading of the tax code.

[Code Sec. 7402 ]

Jurisdiction: Suits against the IRS: Sovereign immunity.--To the extent that married taxpayers' suit seeking a refund of social security benefits seized from their bank account was against the IRS, the government had not waived its immunity from suit. Further, with regard to their claims against the United States , the taxpayers failed to allege any basis for a waiver of sovereign immunity. They were granted leave to replead in order to assert a waiver of sovereign immunity, if appropriate.

[Code Secs. 7402 , 7432 and 7433 ]

Tax liens: Failure to release: IRS conduct: Civil damages: Unauthorized collection activities: Constitutionality: Due process violations: Failure to state justiciable claim.--Married taxpayers' claims for damages under Code Sec. 7432 , dealing with improper failure by IRS employees to release a lien, and under Code Sec. 7433 , regarding the improper collection of tax by IRS employees, were dismissed without prejudice because they failed to state a claim on which relief could be granted. They did not allege that IRS employees acted knowingly, recklessly, negligently, or in disregard of a statutory or regulatory provision. Finally, the taxpayers' bare allegation of a violation of their due process rights, without more, could not survive the government's motion to dismiss.

For Plaintiffs: Ramon Hughes, pro se, Nazzari Hughes, pro se, 930 Merrick Road, Unit #18, Baldwin, NY 11510-3338. For Defendants: Wendy J. Kisch, Esq., U.S. Department of Justice, Tax Division, Post Office Box 25, Ben Franklin Station, Washington, DC 20044.

MEMORANDUM & ORDER

SEYBERT, District Judge:

Plaintiffs Ramon and Nazzari Hughes ("plaintiffs"), proceeding pro se, initiated these actions alleging that the Internal Revenue Service ("IRS") and its agents, particularly Lawrence R. Engel, have wrongfully levied on their bank account. Pending before the Court are defendants United States of America and the IRS's motion to dismiss these actions under Fed. R. Civ. P. 12(b)(1) and (6) for lack of jurisdiction and for failure to state a claim upon which relief may be granted. For the reasons set forth below the motion is granted.

FACTS

In April 1998, plaintiffs commenced two actions in small claims court in the District Court of Nassau County , Second Department, Hempstead Part, seeking to recover $572.72, plus interest, from the IRS or IRS revenue officer Lawrence R. Engel. On June 5, 1998 , the United States removed these actions to this Court pursuant to 28 U.S.C. §1441(a). The United States requested consolidation of these actions on June 17, 1998 . ¹

Plaintiffs' complaints arise from revenue officer Engel's collection of unpaid federal income tax, by means of an IRS levy on plaintiffs' bank account at the European American Bank ("EAB"), from which $572.72 was collected. The plaintiffs claim the funds in the bank account were exempt from levy because the seized monies were Social Security Disability funds. Plaintiffs thus argue that the defendants' actions in levying on this account was improper, and that their money should be refunded with interest.

Defendants contend that the government's levy of the funds was proper because the funds were not exempt from levy, as provided for in the Internal Revenue Code ("Code"). Defendants also argue that there is no subject matter jurisdiction because the United States is entitled to sovereign immunity.

LEGAL STANDARD

A district court should grant a motion to dismiss under Rule 12(b) of the Federal Rules of Civil Procedure only if " 'it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.' " H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50 (1989) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73 (1984)). In applying this standard, a district court must "read the facts alleged in the complaint in the light most favorable" to the plaintiff, and accept these allegations as true. Id. at 249; see also Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 113 S. Ct. 1160, 1163 (1993) (citing Fed. R. Civ. P. 8(a)(2) to demonstrate liberal system of 'notice pleading' employed by the Federal Rules of Civil Procedure). The issue on a motion to dismiss "is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Chanayil v. Gulati, 169 F.3d 168, 1999 WL 104578, at *3 (2d Cir. March 2, 1999 ) (quoting Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996)).

DISCUSSION

The plaintiffs' complaints in both 98-CV-4079 and 98-CV-4081 are very sparse. Both complaints read as follows:

On the date of June 17, 1996 the defendant, Lawrence R. Engel, a revenue officer, representing the Internal Revenue Service, SEIZED and removed from the European American Bank account of the plaintiff's [sic]. The defendant, Agent Engel, was informed of the exempt status of the Social Security Disability funds, which amounted to $572.72.

Plaintiffs cite no authority in their complaints for the proposition that the IRS and Engel were not entitled to seize the funds in question.

However, the Court recognizes that it is required to construe this pro se complaint liberally, and must hold allegations found in pro se complaints to "less stringent standards" than those drafted by counsel. Haines v. Kerner, 404 U.S. 519, 520 (1972) (per curiam). Moreover, on a motion to dismiss, the Court must accept as true all the facts in the complaint. H.J. Inc., 492 U.S. at 249. With these standards in mind, the Court proceeds to an analysis of the claims.

Plaintiffs appear to have alleged in their complaint that the IRS, acting through Engel, unlawfully seized or levied upon certain of their assets which were located in an account at EAB. Plaintiffs claim that these funds, in the amount of $572.72, were exempt from levy as Social Security Disability payments, and that Engel was notified of this exemption. The defendants accept these claims as the thrust of the complaints, but argue that the complaints nevertheless fail to state a claim on which relief may be granted, and therefore the complaints should be dismissed.

In response to the defendants' motion, plaintiffs have submitted a three-page memorandum of law indicating that their opposition to the motion is based on due process and the unauthorized seizure of property. Plaintiffs' Memorandum in Opposition ("Opp. Memo."), at 1. Plaintiffs claim that they have filed timely tax returns every year; the returns have never been challenged or audited; they themselves declared the tax due amounts, not the IRS; they have diligently sought a resolution through the IRS's procedures; and they were denied "Small Case Hearings." Id. Plaintiffs also claim that due to an error in the Nassau County District Court Clerk's Office, their complaint named the IRS instead of naming Alan Pratesi, apparently an IRS agent. ² Id. at 2. Plaintiffs further indicate that they sought and were denied reconsideration through the IRS's Problem Resolution Office in Brooklyn . Id.

Finally, the last page of plaintiffs' memorandum appears to argue that Pratesi and Engel violated §§6334(a)(10) and (b)(3) of the Code. Id. at 3. By citing to Section 6334(a)(10), plaintiffs appear to be making a claim that the IRS unlawfully seized "service-connected" disability payments. Plaintiffs also cite, without discussion, Sections 7432 and 7433 of the Code. ³ These sections are entitled "Civil damages for failure to release lien" and "Civil damages for certain unauthorized collection actions," respectively.

Defendants respond that there has been no denial of due process, and in fact, it is well-settled law that the tax levy procedure outlined in the Code does not violate due process. United States ' Reply Brief (" U.S. Reply"), at 3. Defendants also deny that they ever were on notice that the funds seized were "service-connected" disability payments, and contend that even if they were, §6334(a)(10) exempts from levy only amounts "payable"--not amounts that already have been paid. Id. Defendants further assert that plaintiffs' citation of §6334(b), which refers to appraisals, has no relevance to this case. Id. Finally, defendants indicate that neither §7432 nor §7433 operate to provide plaintiffs with any relief, because the necessary elements of a cause of action under these sections are not pled. Id. at 4.

While the Court is aware that plaintiffs are proceeding pro se in this matter, and that these cases were originally brought in a state small claims forum, the Court agrees with the defendants' contention that the complaints must be dismissed. It is axiomatic that on a motion to dismiss, the Court must evaluate the sufficiency--not the merits--of a complaint. See Chanayil, 169 F.3d 168, 1999 WL 104578, at *3. However, even this minimum threshold has not been met here.

The Court has determined that the complaints are patently insufficient to state a claim of a violation of due process, or a violation of I.R.C. §§7432 and 7433. First, plaintiffs make no claim in their complaints that their due process rights were violated. This claim is made for the first time--in one conclusory sentence--in their memorandum of law in opposition to the defendants' motion. Even if the Court were to consider the due process claim as if it were pled in the complaint, it would still fail because there is no mention of how the defendants' tax-collecting procedure violated plaintiffs' constitutional rights. This bare allegation, without more, cannot survive the motion to dismiss. However, this dismissal will be without prejudice, to allow plaintiffs an opportunity to allege additional specific facts that may support the claim of a denial of due process.

The Court also holds that plaintiffs have failed to state a claim for a violation of §§7432 and 7433 of the Code. Section 7432 states, in relevant part, that "[i]f any officer or employee of the Internal Revenue Service knowingly, or by reason of negligence, fails to release a lien under section 6325 on property of the taxpayer, such taxpayer may bring a civil action for damages against the United States." I.R.C. §7432. In similar fashion, section 7433 provides, in relevant part, that

[i]f, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States .

I.R.C. §7433. It is clear from the statutory language that these two sections authorize suit only against the United States --not against the Internal Revenue Service or against individual IRS agents. See Kersting v. United States [93-1 USTC ¶50,159], 818 F. Supp. 297, 302 (D. Haw. 1992) (holding that §§7432 and 7433 allow suit only against the United States ).

An examination of the complaints indicate that plaintiffs have failed to allege a violation of either of these two sections. For example, there is no allegation that defendants acted knowingly, recklessly or negligently, nor that any agent or employee of the IRS disregarded a section of the Code or a regulation promulgated thereunder. In regard to §7432, there is no allegation that defendants failed to release a lien, only an allegation that defendants seized property from plaintiffs' bank account. Thus, any claims purportedly brought under either of these two sections must be dismissed for failure to state a claim on which relief may be granted. Again, however, such dismissal will be without prejudice, such that plaintiffs may have the opportunity to correct these deficiencies.

The Court also holds that plaintiffs have failed to state a cause of action pursuant to I.R.C. §6334(a)(10) and §6334(a)(11). Section 6334 of the Code provides that certain property is exempt from levy under the IRS's collection procedures. Among other things, the statute exempts from levy property such as clothing and school books; fuel, furniture and personal effects; books and tools of a trade or profession; undelivered mail; and unemployment benefits. I.R.C. §§6334(a)(1-5). Relevant to this motion are the exemptions found in §§6334(a)(10) and 6334(a)(11).

Section 6334(a)(10) provides an exemption for "[a]ny amount payable to an individual as a service-connected . . . disability benefit," subject to certain statutory limitations. Section 6334(a)(11) exempts from levy "[a]ny amount payable to an individual as a recipient of public assistance . . . relating to supplemental security income for the aged, blind, and disabled . . . or State or local government public assistance of public welfare programs for which eligibility is determined by a needs or income test." The key word in each of these exemptions is "payable."

"As in any case of statutory construction, [the] analysis begins with the language of the statute. And where the statutory language provides a clear answer, it ends there as well." Hughes Aircraft Co. v. Jacobson, 119 S. Ct. 755, 760 (1999) (citations omitted). Additionally, "courts must presume that a legislature says in a statute what it means and means in a statute what it says there." Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253-54 (1992). When the words of a statute are clear and unambigu ous on their face, no further inquiry is necessary. See, e.g., Tennessee Valley Auth. v. Hill, 437 U.S. 153, 185 (1978).

The defendants argue that §§6334(a)(10) and (11) exempt from levy only amounts "payable," that is, amounts "not yet paid" to eligible disabled persons. Memorandum in Support of United States ' Motion to Dismiss (" U.S. Memo."), at 3. In other words, defendants argue that Congress has distinguished between funds that are "payable" and funds that are "paid." Id. In support of this proposition, defendants cite to I.R.C. §6334(a)(9), where Congress provides an exemption for amounts "payable to or received by" an individual. Id. ; see also 26 I.R.C. §§6334(a)(4), 6334(a)(7), 6334(a)(10) (exempting amounts "payable" for unemployment benefits, workers compensation, and military disability, respectively).

The plain meaning of the word "payable" is an amount "[c]apable of being paid" or "suitable to be paid." Black's Law Dictionary 1128 (6th ed. 1990). The term may also "signify an obligation to pay at a future time." Id. The Court holds, after an examination of the plain language of the statute, that §§6334(a)(10) and (11) exempt from levy only amounts that are payable--that is, amounts that are not yet paid. In this case, the funds in plaintiffs' bank account, which were levied upon by the defendants' were no longer capable of being paid. The funds, by plaintiffs' own admission, were taken from their bank account--they were not garnished at the source. Thus, the very act of the levy--directly from the plaintiffs' account--signifies that the funds already had been paid, and therefore were no longer "payable." See Fredyma v. United States of America, Dep't of the Treasury [98-1 USTC ¶50,166], No. 96-477-SD, 1998 WL 77993, at *4 (D.N.H. Jan. 9, 1998 ) (holding that under §6334(a)(7), the plain meaning of the word "payable" does not include amounts already paid).

To that end, plaintiffs' claims that the levied funds were exempt from seizure must be dismissed. The seized funds were not exempt from levy under the plain language of the Code's exemption provisions in §§6334(a)(10) and (11). ⁴ Because these exemptions, as a matter of law, do not apply to the seizure of plaintiffs' funds, these claims will be dismissed with prejudice, the Court having determined that no relief is available under any set of facts that could be proved consistent with the allegations. See H.J., Inc., 492 U.S. at 249-50. ⁵

Finally, defendants raise a meritorious argument that certain of these claims cannot be maintained on sovereign immunity grounds. U.S. Memo., at 5. In regard to the suit again