American Acceptance Corp. v. Glendora Better Builders, Inc.

• Decision Date: 30 March 1977
• Docket Number: No. 75-1515,75-1515
• Parties: 77-1 USTC P 9348 AMERICAN ACCEPTANCE CORPORATION, Plaintiff-Appellee, v. GLENDORA BETTER BUILDERS, INC., Lem L. Stroud, and Beatrice Stroud, Defendants, and Sovereign Industries, Inc., Defendant-Appellee, and United States of America, Intervenor-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1220

550 F.2d 1220

77-1 USTC P 9348

AMERICAN ACCEPTANCE CORPORATION, Plaintiff-Appellee, v. GLENDORA BETTER BUILDERS, INC., Lem L. Stroud, and Beatrice

Stroud, Defendants,

and

Sovereign Industries, Inc., Defendant-Appellee,

and

United States of America, Intervenor-Appellant.

No. 75-1515.

United States Court of Appeals, Ninth Circuit.

March 30, 1977.

W. Francis Wilson, Beverly J. McConnell, Wilson, McConnell & Moroney, Phoenix, Ariz., submitted brief for appellees.

Scott P. Crampton, Asst. Atty. Gen., Myron C. Baum, Gilbert E. Andrews, Chief, Appellate Section, Karl Schmeidler, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., for intervenor-appellant; William C. Smitherman, U. S. Atty., John F. Flynn, Asst. U. S. Atty., Phoenix, Ariz., submitted brief.

Appeal from the United States District Court for the District of Arizona.

Before CHAMBERS, CARTER and ANDERSON, Circuit Judges.

JAMES M. CARTER, Circuit Judge:

This case involves a conflict between a tax levy and a judgment creditor's lien. The United States (the "IRS") appeals from a judgment on the pleadings in which the district court refused to enforce the IRS tax levy against Sovereign Industries, Inc. ("Sovereign"), the debtor of taxpayers Lem and Beatrice Stroud. We reverse and remand.

Facts

In 1967 the IRS made an assessment against taxpayers Lem and Beatrice Stroud of more than $22,000 in income tax for the year 1959. Notice of the assessment and demand for payment were made at the same time. A tax lien was filed with the appropriate recording office in 1968. Most of the tax remains unpaid.

American Acceptance Corporation obtained a judgment for $78,000 against the taxpayers in late 1968. That judgment was renewed in 1972.

From 1968 to 1972 taxpayer Lem Stroud was employed by Sovereign. Sovereign admits it owes Stroud $27,000 for compensation accrued during this period. In 1970 the IRS served a notice of levy on Sovereign. This notice stated that all property and rights to property belonging to taxpayer in Sovereign's possession were "levied upon and seized" to satisfy the unpaid 1959 assessment and demanded that such property be surrendered to the IRS. Additional notices of levy were served on Sovereign in 1971, 1972, and 1973, but no response was ever made to them.

In April 1972 the IRS mistakenly released the tax lien arising from the 1959 assessment. In June 1972 American Acceptance commenced garnishment proceedings by serving a writ of garnishment on Sovereign. In February 1973 the IRS revoked its release of the lien and notified taxpayers of this revocation.

In May 1973 American Acceptance and Sovereign stipulated in the garnishment proceedings that Sovereign owed taxpayers $27,000. The parties acknowledged the competing claims to the money made by American Acceptance and the IRS and agreed to join the IRS as a party to resolve the dispute. Subsequently the IRS was granted leave to intervene. Shortly thereafter both the IRS and American Acceptance moved for judgment on the pleadings.

The district court entered judgment on the pleadings for American Acceptance. The court held that the notices of levy did not affect a transfer to the IRS of the money owed by Sovereign to taxpayers because the IRS had not actually enforced its levy. Moreover, because American Acceptance's writ of garnishment was served after the IRS had released its lien but before its lien was reinstated, the writ had priority over the lien. The IRS has timely appealed that decision.

Effect of the Levy

The sole issue on appeal is whether the notices of levy served on Sovereign deserve priority over the subsequent writ of garnishment even though the tax lien was released before the writ of garnishment issued. The district court held that they did not deserve priority because the IRS had not actually enforced its levies before its lien was released and the writ of garnishment was served. The IRS urges reversal because it claims its notices of levy effectively transferred to it by operation of law any money owed by Sovereign to the taxpayers. It also argues that its erroneous release of the tax lien had no effect upon the prior notices of levy.

The levy is a summary administrative tool for the collection of delinquent taxes. 26 U.S.C. § 6331(a) gives the IRS the following power to levy:

"If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax . . . by levy upon all property and rights to property . . . 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(b) defines a levy as:

"the power of distraint and seizure by any means. A levy shall extend only to property possessed and obligations existing at the time thereof."

The IRS's regulations provide that a levy is effective upon serving notice of the levy. 26 C.F.R. § 301.6331-1(a). Repeated notice was served upon Sovereign in this case.

The Supreme Court recently analyzed the effect of a notice of levy in Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975). When faced with the competing claims of the IRS and a receiver in bankruptcy, it held that the IRS's notices of levy served before bankruptcy gave the IRS "full legal right" to the money as against the receiver's claim. Id. at 337, 95 S.Ct. 1728. It further held that "actual possession" of the money was not necessary because "Historically, service of notice has been sufficient to seize a debt, and notice of levy and demand are equivalent to seizure." Id. at 336-37, 95 S.Ct. at 1732 (citations omitted). Accord, United States v. Pittman, 449 F.2d 623, 627 (7 Cir. 1971); United States v. Eiland, 223 F.2d 118, 123-24 (4 Cir. 1955).

Phelps, filed after the district court's judgment below, controls in this case. When the notices of levy were served on Sovereign, they had the effect of seizing taxpayer's property held by that company. A custodial relation was then established, with Sovereign holding the property of and for the IRS. No subsequent party could gain any rights in this property from Sovereign because the property no longer belonged to Sovereign. All rights were held by the IRS.

Release of the Lien

This result is not changed by the subsequent release of the lien. 26 U.S.C. § 6331(a) provides that a levy may be made on either property belonging to the taxpayer or subject to a tax lien. These provide two alternative bases for a tax levy, either of which will support the levy independent of the other. A tax lien is not required. See United States v. Mitchell, 349 F.2d 94, 98-99 (5 Cir. 1965).

The only prerequisites to a levy are an assessment, notice and demand to pay the tax, and a failure to pay the tax within 10 days after notice and demand. It is undisputed that those requirements were met here. The levy operated as a seizure; a lien is a security interest. Therefore, the subsequent release of the lien is irrelevant.

Conclusion

Not having the benefit of the Phelps decision, the district court erred in determining that the writ of garnishment has priority over the tax levy. The judgment is reversed and the case remanded for proceedings consistent herewith.

CHAMBERS, Circuit Judge, concurring:

...