In re Dunne Trucking Co.
| Decision Date | 03 August 1983 |
| Docket Number | Bankruptcy No. 82-01010,Adv. No. 82-0083. |
| Parties | In re DUNNE TRUCKING CO., An Iowa Corporation, Debtor. DUNNE TRUCKING CO., Plaintiff, v. INTERNAL REVENUE SERVICE OF the UNITED STATES OF AMERICA, and L.E. Ellison, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Northern District of Iowa |
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Victor V. Sprengelmeyer, Dubuque, Iowa, for plaintiff.
James H. Reynolds, Dubuque, Iowa, for defendants.
This matter is before the Court on Plaintiff-Debtor Dunne Trucking Co.'s complaint to determine whether the Internal Revenue Service's post-petition collection and retention of Debtor's checking account, pursuant to a pre-petition Notice of Levy was in violation of the turnover provisions of § 542 of the Bankruptcy Code. The matter came on before the Court for hearing.
The parties submitted a Statement of Agreed Facts prior to trial. At the close of trial, the Court took the matter under advisement. Attorney for Plaintiff submitted a Memorandum and Argument. Attorney for Defendants submitted a Brief and supporting cases. The Court, having been fully advised, now makes the following Findings of Fact, Conclusions of Law, and Orders:
FINDINGS OF FACT
The parties stipulated to the following facts:
1. That the Debtor is an Iowa Corporation which maintained a general checking account, Account No. 12-659-4, at The First National Bank of Dubuque, Dubuque, Iowa.
2. That on or about August 31, 1981, the Defendant, Internal Revenue Service, assessed certain taxes for withholding and employment taxes, pursuant to Chapter 64 of the Internal Revenue Code, claiming sums in excess of $4,000.00.
3. That on January 28, 1982, the Internal Revenue Service, by its Agent, Defendant L.E. Ellison, served a Notice of Levy upon L. Richard Winter, Senior Vice-President of The First National Bank of Dubuque, claiming all of the funds of Debtor on deposit in the above described account, at 1:55 P.M.
4. That on said date and time Agent Ellison demanded immediate delivery of the balance in said checking account, which demand was refused by Mr. L. Richard Winter, who advised Agent Ellison that the Bank could not determine the correct balance in said checking account until completion of posting of items presented for payment against said account on that banking day. Mr. Winter further informed Agent Ellison that the posting process would be completed by the following bank day, and that the Bank would issue a check for the balance of the account and mail it to Agent Ellison.
5. That on the 29th day of January, 1982, at 8:00 A.M., the Debtor's Voluntary Petition was filed in the Office of the Bankruptcy Clerk.
6. That The First National Bank of Dubuque, sometime after 8:00 A.M., and before Noon, issued its check # 6652 to the Internal Revenue Service for $3,704.79, being the entire balance in Debtor's checking account, and mailed it to Agent Ellison at the Internal Revenue Service Office in Davenport, Iowa.
1. That as of the date of the filing of the petition, the Service did not have actual possession of the Debtor's checking account.
2. That, absent Notice of Seizure prior to filing of the bankruptcy petition, the Notice of Levy did not complete the levy processes on the checking account.
3. That the Notice of Levy by itself did not extinguish the Debtor's rights in the checking account.
4. That despite the Service's actual possession of the account subsequent to the filing of the bankruptcy petition, the account was property of the estate within the meaning of section 541 of the Bankruptcy Code.
5. That the account is property that the trustee may use, sell, or lease within the meaning of section 363 of the Bankruptcy Code.
6. That the account is therefore subject to the turnover provisions of section 542 of the Bankruptcy Code.
7. That the Service is a lien creditor of the estate and therefore may request adequate protection of its interest in the debtor's checking account under section 363(e) of the Bankruptcy Code.
8. That the Debtor is not entitled to costs or other relief in its action for turnover of the account to the estate.
IT IS THEREFORE ORDERED that the Plaintiff's Complaint is sustained.
IT IS FURTHER ORDERED that a hearing will be scheduled on the issue of whether the Debtor, Dunne Trucking Co., can afford the Defendant, Internal Revenue Service, adequate protection of its interest in the $3,704.79 of the account.
IT IS FURTHER ORDERED that until such hearing on adequate protection, the Defendant, Internal Revenue Service, shall retain possession of the $3,704.79, subject to Order of this Court.
IT IS FURTHER ORDERED that no costs or further relief will be awarded in this action.
MEMORANDUMPlaintiff Dunne Trucking Co. (debtor) is an Iowa corporation with its principal place of business at Zwingle, Jackson County, Iowa. The Defendant Internal Revenue Service (the Service) is the revenue collecting agency of the United States employing the revenue officer (the Agent) whose acts resulted in this proceeding.
In August of 1981, the Service assessed certain back taxes against the debtor claiming a delinquency in excess of $4,000.1 On January 28, 1982, the Agent served a Notice of Levy on the Vice-President of the First National Bank of Dubuque, Dubuque, Iowa (the Bank) where the debtor maintained a general checking account (the account). The Bank did not immediately pay over the funds contained in the account. Rather, the Bank's Vice-President informed the Agent that the Bank would not deliver the funds to the Service until the posting process was completed on items that were presented that day.2 At 8:00 a.m. the next day, January 29th, the debtor filed its Chapter 11 petition with the clerk's office at the Bankruptcy Court. Sometime between 8:00 and Noon on January 29th, the Bank issued and mailed a non-negotiable check, for the entire balance of $3,704.79 in the account, to the Service's offices located in Davenport, Iowa.
The facts as stated present the issue of whether the Service's Notice of Levy served on the Bank was sufficient to transfer all of the debtor's ownership interest in the account of the Service, such that the Service was not subject to a turnover order under 11 U.S.C. § 542 (Supp.V 1981). The Service contends that service of Notice of Levy, as provided for in I.R.C. § 6331 (CCH 1981) amounted to a pre-petition transfer of ownership, and that no rights remained in the account to pass to the debtor's estate. The debtor asserts that the Notice of Levy was not equivalent to levy and seizure. Debtor further asserts that actual physical seizure prior to filing was required in order to effect a seizure of the property, and that the post-petition collection and retention of the account was a violation of the automatic stay provision of 11 U.S.C. § 362 (Supp.V 1981),3 since the property rights had passed to the estate. The resolution of this issue as presented depends on an understanding of the Service's tax lien procedures and any applicable provisions regarding "property of the estate" of the new Bankruptcy Code.
The Service in this case proceeded under the levy and distraint provisions of I.R.C. § 6331 (CCH 1981). Section 6331 states in part:
I.R.C. § 6331(a) and (b) (CCH 1981).
When a tax is assessed, a debt is created and the Service becomes a creditor of the delinquent taxpayer.4 By virtue of assessment, demand, and a refusal to pay, a general lien arises automatically on all of a taxpayer's property and rights to property. I.R.C. § 6321 (CCH 1981). The general lien does not by itself deprive the taxpayer of property, but once it exists, the Service may seize and sell the taxpayer's property.5 The lien on the taxpayer's property is perfected as against creditors, purchasers, holders of security interests, mechanic's lienors, and judgment creditors by filing a notice of tax lien.6 If a tax lien is not so perfected then those persons are protected from the effect of the tax lien by virtue of I.R.C. § 6323 (CCH 1981).7
The Service has certain specific procedures which it follows in the assessment and collection processes. Generally, once a deficiency is discovered, unless the taxpayer acknowledges liability, notice of the deficiency is sent to allow the taxpayer 90 days to challenge the tax. After that period, a formal assessment is made, and within 60 days additional notice and demand for payment are sent to the taxpayer. A defect in the above procedure will have the effect of voiding the lien and any collections made pursuant to the lien. See M. Saltzman, IRS PRACTICE AND PROCEDURE ¶ 14.06 at 14-18, 14-29 (1981). After notice and demand, the general lien attaches, I.R.C. § 6321 (CCH 1981), and the Service can proceed with a levy and sale under I.R.C. § 6331(a) (CCH 1981). ...
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