Annotations- Retirement Accounts Page1

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6334 Annotations- Retirement Accounts- Levy

 

Property Exempt from Levy: Retirement Accounts

 

[91-2 USTC ¶50,354] In re Thomas J. Taylor, Hattie M. Taylor, Debtors

U.S. Bankruptcy Court, Dist. Md., Rockville, 90-4-3273-PM, 5/14/91

[Code Secs. 401 , 6321 and 6334 ]

Liens: Validity: Exemption: Qualified retirement account: Bankruptcy.--

The bar against assignment or alienation of a qualified retirement account does not preclude a tax levy or a judgment in favor of the government resulting from unpaid taxes. Because the IRS obtained neither a pre-bankruptcy petition levy nor a judgment as provided in Reg. §1.401(a)-13(b)(2) , its lien is inchoate regarding such asset. The federal tax lien on the remaining property became choate before the bankruptcy petition was filed and constitutes a valid prebankruptcy petition lien on such property. After deducting from the debtor's assets the value attributable to the retirement account and the value of a secured claim on an automobile, the remaining value of the debtor's property was determined and was considered the extent of the IRS's secured claim on the prepetition tax lien. The balance of the IRS claim was considered an unsecured priority claim.

Alfred Lawrence Toombs, Murray & Price, 1915 I St., N.W., Washington, D.C. 20006-2107, for debtors. Lawrence Blaskopf, Department of Justice, Washington , D.C. 20530 , for IRS.

MEMORANDUM OF DECISION

MANNES, Chief Judge:

Before the court is debtors' objection to the allowance of certain claims by the Internal Revenue Service ("IRS") and for valuation of security. The IRS on November 14, 1990 , filed a timely proof of claim in the amount of $64,154.52 claiming all but $7,462.65 as secured. Certain facts, as summarized below, are undisputed.

THE FACTS

Acting pursuant to 26 U.S.C §6323(f)(1)(A) , the IRS filed a tax lien against the debtors in the Circuit Court for Montgomery County , Maryland , on April 19, 1989 . The debtors filed this case under Chapter 13 of the Bankruptcy Code on October 2, 1990 . Debtors' Chapter 13 statement shows ownership of personal property valued at $30,740.16 and no real property. Prior to debtors' Chapter 13 filing, the IRS had done nothing further after filing the tax lien to obtain payment such as levy, obtain a judgment or do any other act, with respect to any property of the debtor.

The issue before this court is the validity and extent of IRS liens with respect to certain property, namely (1) multiple retirement accounts that debtors claim are qualified pursuant to the Internal Revenue Code, 26 U.S.C. §401 ; (2) A 1986 Toyota Cressida automobile, the $975.06 equity of which is claimed exempt by the debtor; (3) $200.00 in bank deposits which are similarly claimed by the debtor as exempt; and (4) various items of tangible personal property said to aggregate $4572.25 in value ¹.

THE LAW

The starting point for analysis is the Federal Tax Lien Act of 1966 (the "Tax Lien Act"). 26 U.S.C.S. §§6321 et seq. ² The statute sets forth the three requirements for the creation of a Federal tax lien: (1) an assessment by the IRS of the tax liability; (2) demand by the IRS for payment of the tax liability; and (3) failure on the part of the taxpayer to pay. A valid tax lien arises as to all property without the federal government filing notice thereof in a public recordation system. The procedure for filing and effect of such notice of the lien is set out in 26 U.S.C. §6323 .

Under 26 U.S.C. §6331 , if any person liable to pay any tax fails to pay the same within ten days after notice and demand, the Secretary of the Treasury or a delegate may proceed to collect such taxes by levy upon all property and rights to property belonging to the taxpayer.

The broad pervasive language of the nature of the lien contained in §6321 may be contrasted with the narrow limits of §6334 providing specific exemptions from levy, none of these being applicable to this case.

Given the filed tax lien by the IRS, the United States has a lien on all of the property of the debtors, including the property that is the subject of this action unless exceptions exist. We shall now deal with each item of property in turn.

DEBTORS' RETIREMENT AND SAVINGS ACCOUNTS ³

There is no dispute that the retirement and savings accounts (jointly the "accounts") are qualified accounts pursuant to 26 U.S.C.S. §401(a) . Under the plan, assignment or alienation of these accounts are prohibited.

However, Treas. Reg. §1.401(a)-13(b)(2) (as amended in 1990) provides as follows:

(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:

(i) The enforcement of Federal tax levy made pursuant to section 6331 .

(ii) The Collection by the United States on a judgment resulting from an unpaid tax assessment.

Treas. Reg. §1.401(a)-13(b)(2) (as amended in 1990).

Regulations such as these have the power of statutes and "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes". Bingler v. Johnson [69-1 USTC ¶9348 ], 394 U.S. 741, 704 (1969), citing Commissioner v. South Texas Lumber Co.[48-1 USTC ¶5922 ], 333 U.S. 496, 501 (1948).

No part of the list of property exempt from levy of 26 U.S.C. §6334 provides a safe harbor for qualified plans from tax levy however regulations circumscribe how the IRS may pursue qualified plans. Treas. Reg. §1.401(a)-13(b)(2) (as amended in 1990). Therefore, accounts such as these may properly be subject to either a tax levy or a judgment in favor of the United States resulting from unpaid taxes. Here the IRS neither obtained a pre-petition levy or judgment on these accounts. It has only obtained a filed tax lien. Under the above regulation, the mere filing of tax liens effected no transfer of interest in a qualified plan.

Inasmuch as the IRS obtained neither a pre-petition levy nor judgment with respect to these accounts, its lien is inchoate, vis a vis the accounts.

REMAINING PROPERTY

In that the validity and extent of the Federal tax liens on the remaining property presents common issues of law and fact, the court will dispose of these items collectively.

Debtors assert that in order for the IRS to have a valid interest in the remaining property, it must have complied with the applicable state law requirements. Specifically, the debtors assert that the IRS would be required;

1. with respect to the automobile, to perfect their interest by filing a form with the state department of transportation;

2. with respect to the bank accounts, to serve legal process upon the banks;

3. with respect to the remaining assets, to take possession of the assets or obtain a security interest in the property under applicable state law. ⁴

This assertion is clearly contradictory to the provisions of §6321 that provides, as we have stated above, that the tax lien, in this instance a filed tax lien, is a lien on all of the property of the debtor, whether real or personal, unless exceptions exist. The court has found, and debtors have cited, no exception in either the Internal Revenue Code or the Bankruptcy Code or IRS regulations that would provide for unique treatment of the remaining property.

Inasmuch as the federal tax lien on the remaining property became choate prior to the filing of the bankruptcy petition, the IRS was not required to take any other action and therefore the court finds there exists a valid pre-petition lien on the remaining property.

EXTENT OF LIENS

Having determined the validity of the federal tax liens, the court now turns to the extent of these liens given the debtors Chapter 13 bankruptcy. It is a fundamental principle of bankruptcy law that a creditor is only secured to the extent of the value of such creditor's interest in the estate's interest in such property. 11 U.S.C. §506(a). The IRS asserts that all but $7,462.65 of its $64,154.52 is secured. The debtors' schedules of assets show personal property in the amount of $30,740.16 and no real property. After deducting from the debtors' assets the value attributable to the retirement accounts and the sum of $5,749.94 attributable to the value of the secured claim on the automobile, the remaining value of the debtors' property is $4,572.25. Therefore, the IRS's prepetition tax lien results in a secured claim to the extent of the value of the debtors' remaining property or $4,572.25. The remaining claim of the IRS is an unsecured priority claim.

Counsel for the debtors shall submit an order on notice in accordance with the foregoing.

¹ This value excludes a $5,749.94 secured claim with respect to the automobile that has undisputed superior priority to the claims of the IRS.

² 26 U.S.C.S. §§6321 -6322 provide as follows:

§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.

§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.

³ College Retirement Equities Fund--Retirement Unit-Annuity Certificate Number Q-677375-1; Teachers Insurance And Annuity Association of America --Retirement Annuity Contract Number B-677375-4; Teachers Insurance And Annuity Association of America --Supplemental Retirement Annuity Contract Number K-302507-5; College Retirement Equities Fund--Supplemental Retirement Unit-Annuity Certificate Number J-302507-7; United States Government Thrift Savings Plan.

Only the last plan is the property of the debtor, Hattie M. Taylor.

⁴ Md. Com. Law Code Ann. §§9-101 through 9-507 (1975 & Supp. 1990).

 

 

 

[94-2 USTC ¶50,512] Theodore Shanbaum, Plaintiff-Appellant v. United States of America and the Pension Benefit Guaranty Corporation, Defendants-Appellees

(CA-5), U.S. Court of Appeals, 5th Circuit, 94-10199, 9/16/94, Affirming an unreported District Court decision

[Code Secs. 6321 , 6331 and 6334 ]

Tax liens: Property subject to lien: Pension benefits: Levy and distraint: Wrongful levy.--An IRS levy on qualified pension plan benefits in order to collect unpaid income taxes of a plan retiree was not a violation of the Employee Retirement Income Security Act of 1974 or was otherwise wrongful. The plan benefits were not specifically exempt from collection, and, therefore, the general provision creating a lien in favor of the government and permitting levy and collection applied.

[Code Secs. 7422 and 7426 ]

Civil actions: Jurisdiction: Sovereign immunity.--A retiree of a terminated qualified pension plan who had received benefits from the Pension Benefit Guaranty Corporation (PBGC) prior to an IRS levy was barred from bringing suit against the government for alleged violations by the IRS of the Employee Retirement Income Security Act (ERISA). He was also barred from bringing suit against the PBGC trustee for its failure to pay the full amount of his guaranteed pension benefit because the trustee honored the levy. The retiree failed to satisfy the jurisdictional prerequisites for filing suit because he did not pay the amount of tax due or file an administrative claim for refund so that sovereign immunity was not waived. Nor was sovereign immunity waived by the provision allowing an action for wrongful levy, because only a person other than the person against whom is assessed the tax out of which the levy arose may bring such an action. In addition, the suit was not considered to be brought on behalf of the plan since the levy was served on the PBGC's paying agent assigned to collect the participant's monthly benefits, and not on the plan assets.

Joe B. Abbey, 1717 Main St. , Dallas , Tex. 75201 , for plaintiff-appellant. Nancy S. Heermans, Ralph L. Landy, 1200 K St., Washington, D.C. 20005-4026, for defendant-appellee Pension Benefit Guaranty Corp. Gary R. Allen, Billie L. Crowe, Ann B. Durney, Department of Justice, Washington, D.C. 20530, Paul E. Coggins, 1100 Commerce St., Dallas, Tex. 75242, for defendant-appellee United States.

Before: GARWOOD, HIGGINBOTHAM and DAVIS, Circuit Judges.

PER CURIAM:

Theodore Shanbaum appeals the district court's dismissal of his suit against both the United States and the Pension Benefit Guaranty Corporation ("PBGC"). We affirm the decision of the lower court.

I.

Theodore Shanbaum is a beneficiary of the Lee Optical and Associated Companies Pension Plan (the "Plan"), a qualified pension plan under the Employment Retirement Income Security Act ("ERISA"). Shanbaum retired in 1978 and began receiving pension benefits. In 1991, the Plan was terminated and PBGC was appointed trustee of the Plan. ¹ On June 24, 1991 the Plan's prior trustee notified Shanbaum that his pension would be reduced to the Title IV guaranteed amount. Shanbaum began receiving an estimated monthly pension benefit of approximately $734.00 from the PBGC, pending an initial determination of his guaranteed benefit. Plaintiff has not yet received his initial benefit determination from PBGC.

On October 17, 1992 , the Internal Revenue Service ("IRS") levied upon Shanbaum's pension benefits in order to collect his unpaid income taxes for tax years 1974 through 1982, excluding 1979. The levy was served on State Street Bank of Massachusetts , the PBGC's paying agent. Since the levy, Shanbaum has not received any of his monthly pension benefits because they are being paid to the IRS.

Shanbaum filed suit against the United States seeking damages and declaratory relief on the grounds that the IRS levy violated ERISA. Shanbaum also filed a claim against PBGC alleging that PBGC paid him less than the full amount of his guaranteed pension benefit under the Plan and that PBGC improperly honored the IRS notice of levy.

PBGC moved to dismiss Shanbaum's complaint, and the district court granted the motion on the grounds that Shanbaum had not exhausted his administrative remedies regarding the amount of his guaranteed benefit. See 29 C.F.R. §2606.7 ("[A] person aggrieved by an initial determination of the PBGC . . . has not exhausted his or her administrative remedies until he or she has filed a request for reconsideration . . . or an appeal . . . and a decision granting or denying the relief requested has been issued."). Shanbaum has not appealed this issue. Issues not raised by the appellant are normally not considered on appeal, and, in any event, the district court's ruling on this issue was correct.

In its order dismissing Shanbaum's cause against PBGC, the lower court did not address the merits of Shanbaum's claim that PBGC breached its fiduciary duty to protect Plan assets from levy by the IRS. However, since this Court reviews de novo a dismissal of a complaint for lack of subject matter jurisdiction or for failure to state a claim upon which relief may be granted, Bradley v. Barnes, 989 F.2d 802, 804 (5th Cir.1993); Fernandez-Montes v. Allied Pilots Ass'n, 987 F.2d 278, 284 (5th Cir.1993), we may consider whether Shanbaum's substantive claim also supports the lower court's dismissal.

The Government moved to dismiss, or alternatively for summary judgment, contending that the court lacked subject matter jurisdiction because the Government had not waived sovereign immunity for the action. Additionally, the Government asserted that the facts alleged by the taxpayer did not state a claim upon which relief could be granted. Shanbaum also filed a motion for summary judgment claiming that the United States had waived sovereign immunity pursuant to 29 U.S.C. §1132, 28 U.S.C. §§1331, 1340 and 1346, and section 7426 of the Internal Revenue Code. The district court found no waiver of sovereign immunity and granted the Government's motion to dismiss.

II.

We initially turn to Shanbaum's claim against the United States . The district court was correct in holding that Shanbaum is barred from bringing suit because the Government has not waived sovereign immunity.

The United States may not be sued except to the extent it has consented to such by statute. United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953-54, 47 L.Ed.2d 114 (1976); Smith v. Booth, 823 F.2d 94, 96 (5th Cir.1987). A waiver of sovereign immunity cannot be implied, but must be unequivocally expressed. United States v. Mitchell, 445 U.S. 535, 538, 100 S.Ct. 1349, 1351-52, 63 L.Ed.2d 607 (1980).

Shanbaum's reliance on 29 U.S.C. §1132 is misplaced. Although this section gives plan participants the right to bring civil actions to redress violations of ERISA, this section does not provide a waiver of sovereign immunity which would permit the suit to be brought against the United States . ² Similarly, 28 U.S.C. §1331 is a general jurisdiction statute and does not provide a general waiver of sovereign immunity. Voluntary Purchasing Groups, Inc. v. Reilly, 889 F.2d 1380, 1385 (5th Cir.1989).

Shanbaum's assertion that 28 U.S.C. §1346 provides a waiver of sovereign immunity is also without merit. Section 1346 is a general jurisdiction statute that does not constitute a separate waiver of sovereign immunity. Standard Acceptance Co. v. United States , 342 F.Supp. 45, 47 (N.D.Ill.1972). Section 1346 operates in conjunction with 26 U.S.C. §7422 to provide a waiver of sovereign immunity in tax refund suits only when the taxpayer has fully paid the tax and filed an administrative claim for a refund. Neither of these jurisdictional prerequisites to a refund suit has been met in the instant case.

Finally, 26 U.S.C. §7426 does not support Shanbaum's contention that the government waived sovereign immunity. Section 7426 expressly provides that only a person other than the taxpayer (the person against whom is assessed the tax out of which the levy arose) who has an interest in or lien on the property at issue may bring a civil action for wrongful levy of the property. Shanbaum argues that he is only a nominal plaintiff bringing suit on behalf of the Plan, and he characterizes the property at issue as the Plan's assets rather than his pension benefits. His position is without merit. The IRS did not levy on Plan assets; the levy was served on PBGC's paying agent to collect taxpayer's monthly pension benefits as they become due. Shanbaum, the taxpayer, instituted this suit specifically requesting to recover the loss of the benefits.

Even if Shanbaum could overcome the jurisdictional issue, he would still not prevail against the Government on the merits because his underlying claim is based solely on the erroneous contention that the IRS levy violated ERISA. In order for a pension plan to be qualified under ERISA, it must state that "benefits provided under the plan may not be assigned or alienated." 29 U.S.C. §1056(d)(1) . Shanbaum's pension plan complied with this requirement. On the basis of this non-alienation provision, Shanbaum attempts to argue that his pension benefits are exempt from levy by the IRS.

Section 6321 of the Internal Revenue Code creates a lien for unpaid taxes in favor of the United States upon all property and rights to the property of the taxpayer. Under section 6331 , the IRS is authorized to levy upon all property and rights to property belonging to the taxpayer in order to collect his assessed income tax liabilities. See generally United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). Section 6334 , which specifically exempts certain property from levy, does not exempt pension plan benefits from collection. ³ Moreover, section 6334(c) provides the following:

Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).

ERISA also provides that it shall not be "construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States . . . or any rule or regulation issued under any such law." 29 U.S.C. §1144(d). Reading the unambiguous language of Internal Revenue Code section 6334(c) with the mandate contained in section 1144(d) of ERISA, Shanbaum's argument that the IRS levy authority yields to the later enacted non-alienation provision is without merit. ⁴

III.

The lower court's dismissal of Shanbaum's suit against PBGC may also be upheld on the basis that PBGC did not breach any fiduciary duty to Shanbaum or to the Plan. Shanbaum contends that PBGC breached its fiduciary duty by not contesting the "wrongful and illegal levy." This contention fails because, as shown above, the IRS levy on Shanbaum's pension benefits was not wrongful or illegal. See Quinn v. IRS, 84-1 USTC (CCH) ¶9337, 1984 WL 25 (E.D.La.1984) (holding trustees of employee welfare plan have no standing under §7426 to attack IRS levies against benefits to employee-participants under the plan and any person who complies with a levy is discharged from liability to the delinquent taxpayer).

IV.

Since Shanbaum's suit against the United States is barred under the doctrine of sovereign immunity and since the IRS levy was neither wrongful nor illegal, we affirm the district court's dismissal of Shanbaum's actions against the United States and PBGC.

AFFIRMED.

¹ PBGC is a wholly-owned United States government corporation established under ERISA to administer the mandatory pension plan termination insurance program in Title IV. Under the insurance program, PBGC guarantees the payment to participants of certain pension benefits described in and limited by 29 U.S.C. §1322 in the event a covered pension plan terminates with insufficient assets to pay for those benefits. If a covered pension plan terminates without sufficient funds to pay benefits, PBGC generally becomes trustee of the plan under 29 U.S.C. §1342(c).

² The only waiver of sovereign immunity found in 29 U.S.C. §1132 is found in §1132(k), allowing specific actions against the Secretary of Labor of which this action clearly is not one.

³ Section 6334(a)(6) exempts certain pension rights, but the pension benefits at issue in this case are not among them.

⁴ Indeed, the applicable Treasury Regulation provides that pension benefits are not protected from federal tax levies. 26 C.F.R. §1.402(a)-13(b)(2)(ii) (plan provisions satisfying the requirements of the general rule against assignment and alienation of benefits do not preclude enforcement of a federal tax levy made pursuant to section 6331 ). Other courts have come to the same conclusion. See In re Raihl [93-1 USTC ¶50,290 ], 152 B.R. 615, 618 (Bankr. 9th Cir.1993); Ameritrust Co. v. Derakhshan [94-1 USTC ¶50,007 ], 830 F.Supp. 406, 410 (N.D.Ohio 1993); Hyde v. United States, 93-2 USTC (CCH) ¶50,432, 1993 WL 328375 (D.Ariz 1993), aff'd on other grounds without published opinion, 26 F.3d 130 (9th Cir.1994); Jacobs v. IRS, 147 B.R. 106, 107-08 (Bankr.W.D.Pa.1992); In re Taylor, 91-2 USTC (CCH) ¶50,354, 1991 WL 185110 (Bankr.D.Md.1991); In re Perkins, 134 B.R. 408, 411 (Bankr.E.D.Cal.1991); In re Reed, 127 B.R. 244, 248 (Bankr.D.Haw.1991); Quinn v. IRS, 84-1 USTC (CCH) ¶9337, 1984 WL 25 (E.D.La.1984).

 

 

 

[93-1 USTC ¶50,117] Georgia Cort, Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Calif., C-91-4178-DLJ, 11/21/92 , 816 FSupp 574

[Code Secs. 6334 and 7430 ]

Attorneys' fees: Substantially justified government position: Levies: Retirement accounts: Community property: State exemptions.--A retired teacher whose state retirement fund was levied upon by the IRS because her estranged husband owed back taxes was denied attorneys' fees for her action to obtain a temporary restraining order against the government because she was not the prevailing party and she did not exhaust her administrative remedies. Her action became moot when the estranged husband entered into a settlement agreement with the government. However, her retirement fund was community property in which her estranged husband had an interest under state law. The state could not exempt the property from a levy for federal taxes, and, therefore, the IRS's levy was substantially justified.

Robert S. Albery, Gordon & Rees, 275 Battery St. , San Francisco , Calif. 94111 , for plaintiff. Thomas Moore, Assistant United States Attorney, San Francisco , Calif. , for defendant.

ORDER

JENSEN, Dis.J.: On November 18, 1992 the Court heard plaintiff's motion for attorneys' fees. Robert S. Albery of Gordon & Rees appeared on behalf of plaintiff. Assistant United States Attorney Thomas Moore appeared on behalf of defendant. Having considered the papers submitted, the arguments of counsel, the applicable law, and the entire record herein, the Court DENIES plaintiff's motion for attorneys' fees.

I. BACKGROUND

This action concerns a non-debtor spouse whose state retirement fund was levied by the IRS because her husband owed back taxes. In August 1991, the Internal Revenue Service gave notice to plaintiff Georgia Cort's husband, Arnold Cort, that he owed approximately $122,000 in back taxes and fines. These alleged back taxes were the result of Arnold Cort's failure to report certain income on his 1986 income tax returns.

Having worked as a teacher for twenty-seven years in the California public school system, plaintiff was a beneficiary of a California state public retirement fund. In attempting to collect back taxes allegedly owed by Arnold Cort, the Internal Revenue Service ("IRS"), through the United States Attorney, filed a lien against the California State Teacher's Retirement Fund of Georgia Cort. Plaintiff has been estranged from her husband for many years and has received no income from him for at least the last ten years. Instead she relies on the retirement fund as her source of income. See Declaration of Georgia Cort, at 2.

As a result of the attempted levy, plaintiff filed an action in this Court for a Temporary Restraining Order ("TRO"). On November 26, 1991 , this Court deferred the hearing on plaintiff's motion and the government agreed to forego pursuing its lien until such time as this Court determined whether the defendant was entitled to levy upon plaintiff's retirement benefits. The parties stipulated that plaintiff's scheduled hearing on the TRO be changed to a motion for summary judgment on the issue of whether the government was entitled to levy upon plaintiff's retirement benefits. This Court subsequently heard argument on plaintiff's summary judgment motion.

The Court did not rule on that motion as it became moot when Arnold Cort and the United States entered into a settlement agreement as to the IRS claim against Arnold Cort. Plaintiff now moves for the recovery of attorneys' fees and costs which were incurred in the prosecution of the underlying action as to the IRS levy.

II. DISCUSSION

A. Legal Standard for Recovery of Attorneys' Fees Against the United States in a Tax Case

U.S. Code Section 7430 of Title 26 ("Section 7430 "), which governs the awarding of attorneys' fees and costs against the United States in a tax case, provides that:

(a) In General--In any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, the prevailing party may be awarded a judgment or a settlement for--

(2) reasonable litigation costs incurred in connection with such court proceeding.

(b) Limitations.--

(1) A judgment for reasonable litigation costs shall not be awarded under subsection (a) in any court proceeding unless the court determines that the prevailing party has exhausted the administrative remedies available to such a party within the Internal Revenue Service.

(c)(4)(A) The term "prevailing party" means any party in any proceeding to which subsection (a) applies (other than the United States or any creditor of the taxpayer involved)--

(i) which establishes that the position of the United States in the proceeding was not substantially justified,

(ii) which--

(II) has substantially prevailed with respect to the most significant issue or set of issues presented, and

(iii) which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of title 28, United States Code (as in effect on October 22, 1986 ) except to the extent differing procedures are established by rule of court and meets the requirements of section 2412(d)(2)(B) of such title 28 (as so in effect).

26 U.S.C. §7430 .

The Equal Access to Justice Act, 28 U.S.C. §2412(d)(1)(B), provides that:

A party seeking an award of fees and other expenses shall within thirty days of final judgment in the action, submit to the court an application for fees and other expenses which shows the party is a prevailing party and is eligible to receive an award under this subsection . . . . The party shall also allege that the position of the United States was not substantially justified.

28 U.S.C. §2412(d)(1)(B).

B. Application

Plaintiff claims that she is entitled to attorneys' fees and costs because the defendant was not "substantially justified" in levying plaintiff's retirement account and that therefore, this Court should adjudge plaintiff the "prevailing party" even though the Court never entered judgment in the underlying action. Plaintiff claims that defendant was not "substantially justified" because defendant had relied on California Civil Code §5120.110(a) in levying on the community property of Arnold Cort which included an interest in plaintiff's retirement account. California Civil Code §5120.110(a) provides that:

Except as otherwise expressly prohibited by statute, the community property is liable for debts incurred by either spouse before or during marriage . . . regardless of whether one or both spouses are parties to the debt.

Cal. Civ. Code 5120.110(a).

Plaintiff argues that California Code of Civil Procedure §704.110(b) sets forth an exemption from levy against a community property asset which is a state retirement account, by providing that:

All amounts held, controlled, or in the process of distribution by a public entity derived from contributions by the public entity or by an officer or employee of the public entity for public retirement benefit purposes, and all rights and benefits accrued or accruing to any persons under public retirement system, are exempt without making a claim.

Cal. Civ. Proc. Code 704.110(b).

Plaintiff argues that the defendant's ability to levy against plaintiff's retirement fund is derived from California law, and that therefore, the statutory exemption applied prohibiting defendant from levying on the retirement account. Since defendant levied the retirement account when it was prohibited from doing so, defendant was not substantially justified in its actions.

Furthermore, plaintiff requests that the Court adjudge

her to be the prevailing party based on the fact that defendant was not substantially justified in levying on plaintiff's retirement account. Plaintiff requests that this Court not let the fact that there was a settlement of the underlying action deter it from pronouncing plaintiff as the prevailing party.

Defendant counters that plaintiff has not fulfilled the three requirements of section 7430 because she did not exhaust the administrative remedies and she was not the prevailing party since defendant was substantially justified in levying plaintiff's retirement fund. Section 7430 requires that the Court must decide whether or not a party has exhausted the administrative remedies before that party could be awarded fees. Defendant alleges that plaintiff failed to exhaust her administrative remedies before filing suit, in that plaintiff could have sought a review of its case before an IRS supervisor. Plaintiff argues that it initially sought a TRO because plaintiff had a very important financial interest in the retirement account. This issue does not need to be resolved, since the Court will find that plaintiff was not the prevailing party because defendant was substantially justified in levying the retirement account. Nonetheless, plaintiff does not appear to have satisfied the requirement that she exhaust her administrative remedies in order to be able to be awarded attorneys' fees under the statute.

As to the other requirements of section 7430 , defendant argues that its actions were substantially justified and therefore plaintiff could not be the prevailing party. Under section 7430 , a position is substantially justified if it has a reasonable basis in both law and fact. See Timms v. United States [84-2 USTC ¶9774 ], 742 F.2d 489, 492 (9th Cir. 1984) (EAJA case considering meaning of substantially justified). The government's position is not substantially justified where its position is not clearly reasonable, well founded in law and fact or solid, though not necessarily correct. Kenagy v. United States [91-2 USTC ¶50,386 ], 942 F.2d 459 (8th Cir. 1991); Oliver v. United States [91-1 USTC ¶50,010 ], 921 F.2d 916 (9th Cir. 1990). Further, the plaintiff and not the United States has the burden of proving that the government's litigation position was not substantially justified. 26 U.S.C. §7430(c)(4)(A)(i) ; General Inv. Corp. v. United States [87-2 USTC ¶9453 ], 823 F.2d 337, 342 (9th Cir. 1987).

Defendant claims that plaintiff argues that the government's position was not substantially justified because the government levied on a retirement fund which under state law was exempted from levy. However, defendant argues that plaintiff has incorrectly characterized the type of levy here in question, as the government under federal law moved to levy the retirement fund.

U.S. Code Section 6321 of Title 26 ("Section 6321 ") states that the amount of the delinquent taxpayer's liability "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." The statute incorporates state law for the limited purpose of ascertaining whether or not the taxpayer's interest is "property" or "rights to property." Aquilino v. United States [60-2 USTC ¶9538 ], 80 S.Ct. 1277 (1960). "If state law raises the taxpayer's interest