American Trust v. American Community Mut. Ins. Co., 97-3385

• Decision Date: 27 April 1998
• Docket Number: No. 97-3385,97-3385
• Citation: 142 F.3d 920
• Parties: -1687, 98-1 USTC P 50,369 AMERICAN TRUST, Plaintiff, v. AMERICAN COMMUNITY MUTUAL INSURANCE COMPANY, Defendant, AMERICAN COMMUNITY MUTUAL INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, INTERNAL REVENUE SERVICE, Defendant-Appellee, Edgar F. Bradley, II, Defendant-Appellant, Richard A. Davidson, Defendant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 920

142 F.3d 920

81 A.F.T.R.2d 98-1687, 98-1 USTC P 50,369

AMERICAN TRUST, Plaintiff, v. AMERICAN COMMUNITY MUTUAL INSURANCE COMPANY, Defendant, AMERICAN COMMUNITY MUTUAL INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, INTERNAL REVENUE SERVICE, Defendant-Appellee, Edgar F. Bradley, II, Defendant-Appellant, Richard A. Davidson, Defendant.

No. 97-3385.

United States Court of Appeals Sixth Circuit.

Argued March 18, 1998.

Decided April 27, 1998.

Richard John Donovan (argued and briefed), Richard J. Donovan & Associates, Worthington, OH, for Defendant-Appellant.

Michael W. Davis, U.S. Department of Justice, Tax Division, Washington, DC, Jan M. Holtzman, Asst. U.S. Attorney, cincinnati, OH, William S. Estabrook (briefed), Pamela C. Berry (argued and briefed), U.S. Department of Justice, Appellate Section, Tax Division, Washington, DC, for Defendant-Appellee.

Before: KENNEDY and SILER, Circuit Judges; COHN, District Judge. ^*

OPINION

KENNEDY, Circuit Judge.

Defendant Edgar F. Bradley, II, appeals the District Court's order granting summary judgment in favor of the United States in these consolidated breach of contract and interpleader actions. In its complaint in the interpleader action, the United States sought enforcement of tax liens against insurance sales commissions attributable to defendant. The District Court held that the Government had valid tax liens under 26 U.S.C. § 6321 and that these liens gave the United States the first priority claim to the commissions. On appeal, defendant contends he is entitled to the exemptions allowed taxpayers during administrative levy proceedings under 26 U.S.C. § 6331. For the following reasons, we affirm the District Court.

I. Facts

The facts underlying this case are undisputed. Between 1988 and 1992 Bradley, an agent authorized to sell insurance policies for American Community Mutual Insurance Company (hereinafter, "American Community"), entered into agreements with three other American Community insurance agents. Under these agreements, the three other agents assigned to Bradley their rights to the commissions that resulted from their sales of American Community policies. On December 4, 1992, Bradley assigned the rights to all of the commissions, including his own, to a trust identified as "American AMB 06044 Irrevocable Trust" (the "Trust"). From this date, American Community paid all monthly commissions directly to the Trust. ¹

On August 9, 1993, the Internal Revenue Service ("IRS") issued assessments against Bradley for deficiencies in income tax for his 1987, 1988, and 1989 taxable years. In October of 1993, the IRS, claiming a lien for tax deficiencies, penalties, and statutory additions totaling $85,617.55, issued a Notice of Levy to American Community. Through this notice, the IRS asked American Community to pay over to the IRS all property or rights to property belonging to Bradley. American Community responded by stating that it had no funds in its possession payable to Bradley, and that all commissions had been assigned to the Trust. In April of 1994, the IRS issued a second Notice of Levy to American Community, claiming a lien for taxes and statutory additions owed by Bradley in the amount of $90,406.74. American Community continued to pay Bradley's commissions, as well as the commissions assigned to him by the other agents, to the Trust, until June of 1994, when the IRS issued a Final Demand to American Community for payment of all "property, rights to property, money, credits, and bank deposits ... to the credit of, belonging to, or owned by [Bradley]" and in American Community's possession or owed to Bradley as of the first Notice of Levy.

The final payment to the Trust represented commissions earned through March 31, 1994. Upon receiving this Final Demand, American Community withheld payment of additional commissions to the Trust. The insurance agents and representatives of the Trust told American Community that the liens asserted by the IRS were invalid. Rather than comply with the Final Demand to pay the commissions to the IRS, American Community withheld the commissions from both claimants, and eventually deposited them, along with interest earned thereon, in the registry of the Clerk of the Court of Common Pleas in Hamilton County, Ohio.

This case embodies two separate actions that were filed in the Court of Common Pleas in Hamilton County, Ohio. First, the Trust brought a breach of contract claim against American Community, asserting that American Community had a contractual obligation to pay the commissions to the Trust. Second, American Community filed an action in interpleader to determine ownership of accumulated commissions. The defendants named in the second action included the Trust, the IRS, Bradley, and the other agents. The Court of Common Pleas consolidated the cases, and the United States removed the consolidated case to the United States District Court for the Southern District of Ohio. The funds in question were transferred to the registry of the Clerk of the District Court.

In the District Court, American Community moved for summary judgment on the breach of contract claim, and the United States moved for summary judgment in the interpleader action, asserting that, by virtue of its tax lien, the United States had a superior claim to the funds in dispute. On March 11, 1997, the District Court granted summary judgment in favor of American Community on the contract claim and the United States on the interpleader action.

II. Discussion

We review de novo the District Court's grant of summary judgment in favor of the Government. E.g., Roush v. Weastec, Inc., 96 F.3d 840, 843 (6th Cir.1996). The facts underlying this case are undisputed and Bradley's appeal raises a single question of law: whether an exemption from levy that is listed in Internal Revenue Code ("I.R.C.") § 6334, 26 U.S.C. § 6334, applies when the IRS seeks enforcement of a tax lien in an interpleader action.

To answer this question we look to the relationship of several sections of the Internal Revenue Code. Section 6321 of the I.R.C. provides that the amount of unpaid taxes, interest, and penalties that any person neglects or refuses to pay "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." 26 U.S.C. § 6321. The Supreme Court has stated that "[t]he statutory language 'all property and rights to property,' appearing in § 6321 ... is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2923-24, 86 L.Ed.2d 565 (1985). This tax lien arises at the time the unpaid taxes are assessed and persists until the liability for the amount assessed is satisfied. 26 U.S.C. § 6322.

The Government has several separate procedures through which it can recover the tax deficiency. As the Supreme Court explained in United States v. Rodgers, 461 U.S. 677, 682, 103 S.Ct. 2132, 2136-37, 76 L.Ed.2d 236 (1983), the Government is authorized under 26 U.S.C. § 7403 to file a lien-foreclosure suit in a district court of the United States to enforce the tax lien. In other cases, the Government may decide simply to sue for the amount of unpaid taxes, "and, on getting a judgment, exercise the usual rights of a judgment creditor." 461 U.S. at 682, 103 S.Ct. at 2136-37 (citing 26 U.S.C. §§ 6502(a), 7401, 7402(a)). Section 6331 of the I.R.C., 26 U.S.C. § 6331, provides an additional, administrative avenue for recovery:

If any person liable to pay any tax neglects or refuses to pay same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

26 U.S.C. § 6331(a). As the Court explained, "[t]he common purpose of this formidable arsenal of collection tools is to ensure the prompt and certain enforcement of the tax laws in a system relying primarily on self-reporting." 461 U.S. at 683, 103 S.Ct. at 2137.

The "[a]dministrative levy, unlike an ordinary lawsuit, and unlike the procedure described in § 7403, does not require any judicial intervention, and it is up to the taxpayer, if he so chooses, to go to court if he claims that the assessed amount was not legally owing." Rodgers, 461 U.S. at 682-83, 103 S.Ct. at 2136-37. Third parties who may have been aggrieved by an administrative levy against a recalcitrant taxpayer also must wait until a post-seizure proceeding to assert their rights to disputed property. See National Bank of Commerce, 472 U.S. at 731, 105 S.Ct. at 2930. "In contrast to the lien-foreclosure suit, the levy does not determine whether the Government's rights to the seized property are superior to those of other claimants; it, however, does protect the government against diversion or loss while such claims are being resolved." Id. at 721, 105 S.Ct. at 2924-25. In sum, § 6331 provides the Government with a mechanism to secure expeditiously property that might satisfy tax deficiencies and postpones the resolution of property rights until after the seizure. See id.

Although the Code authorizes the IRS to execute an administrative levy without prior judicial approval, it also provides some protection to the taxpayer. Internal Revenue Code § 6334, 26 U.S.C. § 6334, exempts specific types of property from attachment by levy. Most relevant to the instant case, § 6334(a)(9) provides that the following income is exempt from levy:

Any amount payable to or received by an individual as wages or salary for personal services, or as income derived from other sources, during any period, to the extent that the total of...