Oxford Capital Corp. v. U.S.

• Decision Date: 02 May 2000
• Docket Number: No. 98-11170,98-11170
• Citation: 211 F.3d 280
• Parties: (5th Cir. 2000) OXFORD CAPITAL CORPORATION, Plaintiff-Appellant, v. UNITED STATES OF AMERICA; ET AL, Defendants, UNITED STATES OF AMERICA, Defendant-Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 280

211 F.3d 280 (5th Cir. 2000)

OXFORD CAPITAL CORPORATION, Plaintiff-Appellant, v. UNITED STATES OF AMERICA; ET AL, Defendants UNITED STATES OF AMERICA, Defendant-Appellee.

No. 98-11170

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

May 2, 2000

[Copyrighted Material Omitted]

Appeal from the United States District Court for the Northern District of Texas

Before JONES and DENNIS, Circuit Judges, and PRADO, ^* District Judge:

PER CURIAM:

This is an appeal from the decision of a magistrate judge that a levy imposed by the Internal Revenue Service ("IRS") on bank accounts of Oxford Capital Corporation ("Oxford") to satisfy tax liabilities of one of its subsidiaries was not a wrongful levy under 26 U.S.C. 7426. Oxford filed this appeal, contending that the magistrate judge erred both in its application of the applicable standard and in its factual findings. For the reasons discussed, we vacate the decision of the magistrate judge and remand for further proceedings consistent with this opinion.

I.

Oxford is a publicly-traded corporation incorporated in Nevada, which operates as a holding company for multiple subsidiaries. RX was incorporated in the state of Texas as an employee leasing company in 1995 by Jerry Stovall and Rick Tarrell. Due in part to substantial unauthorized withdrawals by an employee, RX suffered severe financial difficulties and fell into arrears in its payment of employee payroll taxes. Due to these financial difficulties, Stovall and Tarrell sold RX to Oxford in 1996, at which time RX became a wholly-owned subsidiary of Oxford. RX continued to fall into arrears with respect to its payment of payroll taxes, and by November 1997 RX owed over three million dollars in back payroll taxes to the government for the third and fourth quarter of 1996 and the first quarter of 1997.

In its attempt to collect the unpaid payroll taxes, the Internal Revenue Service ("IRS") issued notices of levy on RX and on clients of RX that owed accounts payable to RX in November 1997. Soon afterwards, Oxford directed clients of RX to remit payments owed to RX directly into a bank account in the name of Oxford rather than to RX. Fearing that assets of RX were being diverted, the IRS issued a notice of levy against three bank accounts of Oxford in satisfaction of RX's tax liability -- contending that Oxford was a nominee of RX.

Oxford brought this suit in the Northern District of Texas contending that the levies against its bank accounts constituted "wrongful levies" under 26 U.S.C. 7426. The parties consented to the case being heard before a magistrate judge pursuant to 28 U.S.C. 636(c). Before the magistrate judge, the government introduced evidence to support the contention that Oxford was in reality the "alter ego" of RX, rather than a mere nominee. The government introduced evidence collected subsequent to the levy that Oxford and RX shared officers and directors in common, filed consolidated financial statements, shared a common floor in an office building and failed to follow many corporate formalities. Based on this information, the magistrate judge held that Oxford was in fact an alter ego of RX and thus the levies were not wrongful. Oxford timely filed a notice of appeal to this court.

II.

A.

A lien in favor of the United States arises with respect to all property and rights to property of a taxpayer upon failure to pay a tax liability after demand. See 26 U.S.C. 6321. The IRS has broad authority to impose levies on property and rights to property of taxpayers upon which liens have attached. See 26 U.S.C. 6331(a). This power is not unlimited, however. For example, the IRS may not impose a levy on property until a thorough investigation of the status of such property has been completed. See 26 U.S.C. 6331(j)(1). Similarly, a levy is wrongful if imposed upon property in which the taxpayer had no interest at the time the lien arose or thereafter or if the levy or sale pursuant to levy effectively destroys or otherwise irreparably injures a person's proprietary interest that is senior to the Federal tax lien. See 26 C.F.R. 301.7426-1(b)(1). Congress has waived the sovereign immunity of the United States for suits claiming wrongful levy and has allowed persons other than the taxpayer to file suit against the United States for either damages or return of the property. See 26 U.S.C. 7426.

The elements of a wrongful levy action under section 7426 are well settled -- to establish a wrongful levy claim a plaintiff must show (1) that the IRS filed a levy with respect to a taxpayer's liability against property held by the non-taxpayer plaintiff, (2) the plaintiff had an interest in that property superior to that of the IRS and (3) the levy was wrongful. See Texas Commerce Bank-Fort Worth v. United States, 896 F.2d 152, 156 (5th Cir. 1990). To prove that a levy is wrongful, (1) a plaintiff must first show some interest in the property to establish standing, (2) the burden then shifts to the IRS to prove a nexus between the property and the taxpayer, and (3) the burden then shifts back to the plaintiff to prove the levy was wrongful, e.g., that the property in fact did not belong to the taxpayer. See Century Hotels v. United States, 952 F.2d 107, 109 (5th Cir. 1992).

The Fifth Circuit, joined by the majority of the other circuits addressing the issue, has held that the IRS must prove a nexus between the property levied upon and the taxpayer by substantial evidence while a minority of circuits have required only proof by a preponderance of the evidence. See, e.g., LiButti v. United States, 107 F.3d 110, 118 (2nd Cir. 1997) ("If the government satisfied that substantial evidence burden, meaning that the evidence was 'considerably more than a preponderance but less than clear and convincing proof' the plaintiff would have the 'ultimate burden' to prove that the levy was wrongful.") (citing Century Hotels, 952 F.2d at 109). The policy behind requiring such a heightened standard of proof is that the government has unique access to the information it used as a basis for its levy and, after an opportunity to fully develop the factual record, fairness mandates that the government come forward with substantial evidence of the connection between the property levied upon and the taxpayer. See Valley Finance, Inc. v. United States, 629 F.2d 162, 171 n. 19 (D.C. Cir. 1980) ("Considerations of fairness impel us to conclude that once the factual record has been fully developed over time . . . the government must establish its asserted nexus between taxpayer and a third party by substantial evidence."); Flores v. United States, 551 F.2d 1169, 1175-76 (9th Cir. 1977) ("Principles of fair play and common sense dictate the result which we reach.").

B.

In the present case, the IRS issued a levy against multiple bank accounts in the name of Oxford. The notice of levy indicated that the levy was being imposed on funds of Oxford as "nominee, transferee, alter ego, agent and/or holder of a beneficial interest of taxpayer RX Staffing Corporation." The levy applied to two bank accounts - the so-called "2020 account" and the so-called "2069 account." According to the field notes of Wayne Honeycutt, the revenue officer responsible for issuing the notice of levy, the levy was issued against Oxford's accounts because funds owed to RX were transferred to Oxford's 2020 account -- making this "a possible case for either a DBA [Doing Business As] levy or a NOMINEE levy." At the evidentiary hearing, Honeycutt testified that at the time of the levy the only information he had to support a levy on Oxford was the direct wiring of funds into the 2020 account. Honeycutt further testified that at the time of the levy, he had no information with respect to the officers, directors, accounting methods, tax returns or employees of either RX or Oxford. Before the magistrate judge, however, the government contended that the levy against Oxford's accounts was not wrongful because Oxford was the "alter ego" of RX.

While related, the concepts of "nominee", "transferee", and "alter ego" are independent bases for attaching the property of a third party in satisfaction of a delinquent taxpayer's liability. "A nominee theory involves the determination of the true beneficial ownership of property. An alter ego theory focuses more on those facts associated with a 'piercing the corporate veil' analysis. In contrast, a transferee theory requires (1) an intent to defraud the Internal Revenue Service as a creditor or (2) a transfer without consideration which rendered the taxpayer insolvent. These issues are fact-intensive and involve imprecise legal rules." WILLIAM D. ELLIOT, FEDERAL TAX COLLECTIONS, LIENS AND LEVIES 9.10[2] (2nd Ed. 2000). Specific property in which a third person has legal title may be levied upon as a nominee of the taxpayer if the taxpayer in fact has beneficial ownership of the property. See, e.g., Towe Antique Ford Foundation v. Internal Revenue Service, 791 F. Supp. 1450, 1454 (D.Mont.1992), aff'd w/o opinion, 999 F.2d 1387 (9th Cir. 1993). ¹ Under the alter ego doctrine, however, all the assets of an alter ego corporation may be levied upon to satisfy the tax liabilities of a delinquent taxpayer-shareholder if the separate corporate identity is merely a sham, i.e., it does not exist independent of its controlling shareholder and that it was established for no reasonable business purpose or for fraudulent purposes. See United States v. Jon-T Chemicals, 768 F.2d 686 (5th Cir. 1985). ² Cause to believe that a third party is holding particular property of the taxpayer as a nominee, without cause to believe alter ego status, justifies a levy upon the property of the third party only with respect to that specific property held as a nominee.

At the evidentiary hearing, the magistrate judge found that the government had introduced substantial evidence of alter ego status, e.g., that Oxford and RX shared officers and directors in...