US v. Cope, Civ. A. No. C86-0051P(J).

Decision Date23 October 1987
Docket NumberCiv. A. No. C86-0051P(J).
Citation680 F. Supp. 912
PartiesUNITED STATES, Plaintiff, v. Darrell W. COPE, et al., Defendants.
CourtU.S. District Court — Western District of Kentucky

Michael F. Spalding, Asst. U.S. Atty., Louisville, Ky., Michael J. Salem, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for plaintiff.

James A. Anderson, III, Lewis, Anderson & Gilmore, Benton, Ky., for Cope, Quality and intervenor Croley.

Joseph A. Hammer, Hammer & Weber, Louisville, Ky., for ITT Industrial Credit Corp.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JOHNSTONE, Chief Judge.

A trial was held in this matter on April 15, 1987 in Paducah, Kentucky. This is a six-count civil action in which the Internal Revenue Service (hereinafter the IRS) seeks to reduce certain tax assessments to judgments and to foreclose tax liens against defendants Darrell W. Cope, d/b/a Cope Mining Company and Quality Construction Corporation. In addition, the IRS seeks damages against defendant I.T.T. Industrial Credit Corporation for failing to honor two Internal Revenue Service levies or for tortious conversion. Intervenor Debbie Sexton Croley joins this suit claiming that taxes and penalties assessed against her as a responsible person in charge of paying Cope Mining Company's taxes, were improper. Jurisdiction is proper under 28 U.S.C. §§ 1340, 1345, 1346 and 26 U.S.C. § 7402.

FINDINGS OF FACT

Upon the record before the court, the stipulations of the parties and the evidence adduced at this trial, the court finds the following to be the facts of this case.

1. Defendant, Darrell W. Cope (hereinafter Cope), formerly doing business as Cope Mining Company (taxpayer identification number XX-XXXXXXX), resides at 2100 Pepper Lane, Benton, Kentucky.

2. Defendant, Quality Construction Corporation (hereinafter Quality), also known as Quality Corporation (taxpayer identification number XX-XXXXXXX), is a Kentucky corporation formerly having its principal place of business at 337 North Poplar, Benton, Kentucky.

3. Defendant, I.T.T. Industrial Credit Corporation (ITT) is a corporation doing business within the Commonwealth of Kentucky and having an office at Suite 228, 4429 Bardstown Road, Louisville, Kentucky.

4. Cope was assessed for the following:

a. On February 11, 1980, Cope was assessed Federal Insurance Contribution Act taxes and Federal Employee Income Withholding taxes (hereinafter cumulatively referred to as FICA taxes) for the quarter ending September 30, 1979. This sum was not paid to the IRS. The unpaid assessed balance due the IRS as of April 29, 1985 was $42,947.35. Interest and penalties accrued after April 29, 1985. Notice of a Federal Tax Lien was filed in Marshall County, Kentucky with respect to that tax on June 28, 1980.

b. On March 19, 1980 Cope was assessed FICA taxes for the quarter ending December 31, 1979. The assessment was not paid. The unpaid assessed balance due the IRS as of May 29, 1980 was $38,908.03. Interest and penalties accrued after May 26, 1980. A Notice of Federal Tax Lien was filed with respect to that tax in Marshall County, Kentucky on June 28, 1980.

c. On May 16, 1980 Cope was assessed FICA taxes for the quarter ending March 31, 1980. Those taxes were not paid. The unpaid assessed balance due the IRS as of May 16, 1980 was $28,105.38. Interest and penalties accrued after May 16, 1980. A Notice of Federal Tax Lien was filed with respect to that tax in Marshall County, Kentucky on June 28, 1980.

d. On February 23, 1981 Cope was assessed Federal excise taxes for the quarter ending March 31, 1980. This assessment was not paid. The unpaid assessed balance due the IRS as of May 4, 1981 was $3,406.43. Interest and penalties accrued after May 4, 1981. Notice of Federal Tax Lien was filed in Marshall County, Kentucky on April 1, 1981.

e. On March 23, 1981, Cope was assessed Federal Unemployment Act taxes for the year ending December 31, 1980. The unpaid assessed balance for those taxes is $879.08 as of May 25, 1981. Interest and penalties accrued after May 25, 1981. A Notice of Federal Tax Lien was filed in Marshall County, Kentucky on May 4, 1981.

5. Quality was assessed for the following:

a. On March 17, 1980, Quality was assessed FICA taxes. This assessment was not paid. The unpaid assessed balance due the IRS as of December 29, 1986 was $5,076.17. Interest and penalty accrued after December 29, 1986. A Notice of Federal Tax Lien was filed in Marshall County, Kentucky on June 28, 1980.

b. On May 16, 1980, Quality was assessed FICA taxes for the quarter ending March 31, 1980. This assessment was not paid. The unpaid assessed balance due the IRS as of December 29, 1986 was $41,758.77. Interest and penalties accrued after December 29, 1986. A Notice of Federal Tax Lien was filed in Marshall County, Kentucky June 28, 1980.

c. On October 27, 1980, Quality was assessed FICA taxes for the quarter ending June 30, 1980. This assessment was not paid. The unpaid assessed balance due the IRS was $21,461.65. Interest and penalties accrued after December 29, 1986. A Notice of Federal Tax Lien was filed in Marshall County, Kentucky on December 2, 1980.

6. Notices and demands for payment of the aforementioned assessments were made on Cope and Quality.

7. Quality bought the following property on the following dates:

a. A Grove RT 6205 rough terrain crane, serial number 40092, from Whayne Supply Company on November 1, 1978.

b. A Caterpillar 627 wheel tractor, serial number 1551266, from Whayne Supply Company on September 14, 1979.

c. A Caterpillar 627 push-pull cushion hitch tractor, serial number 68M711, from Whayne Supply Company.

8. Security agreements with respect to the property described in paragraph 7 were assigned to ITT on November 20, 1978 and September 13, 1979.

9. ITT repossessed the three pieces of property described in paragraph 7.

10. ITT gave proper notice to the IRS under Internal Revenue Code § 7425 by giving written notice to the IRS at least 25 days before the proposed sale.

11. ITT sold the property described in paragraph 7 on February 25, 1981 for $260,000.00.

12. ITT expended the sum of $10,000.00 for broker's services in selling the collateral.

13. After the sale on February 25, 1981, ITT immediately distributed all the proceeds

according to KY.REV.STAT. § 355.9-504 by applying $10,000.00 to the broker's fee, $42,220.27 to satisfy the debt on the property described in paragraph 7.a., and $200,981.00 to satisfy the debt on the property described in paragraphs 7.b. and 7.c. The remainder of the proceeds were also distributed and applied by ITT at that time.

14. IRS levies with respect to taxpayers Cope and Quality was served on ITT on May 4, 1981. These levies seized all property and rights belonging to Cope and Quality then in the possession of ITT, in the amounts of $134,161.94 and $132,444.57.

15. Debbie W. Croley resides in Marshall County, Kentucky.

CONCLUSIONS OF LAW

After consideration of the applicable statutes and caselaw before it, the court makes the following conclusions of law.

1. The assessments, judgments and liens against defendants Cope and Quality are valid.

Assessments duly made by the Secretary or his delegates are presumptively correct and proper. United States v. Besase, 623 F.2d 463, 465 (6th Cir.1980), cert. denied, 449 U.S. 1062, 101 S.Ct. 785, 66 L.Ed.2d 605 (1980). The burden is on the taxpayer to show that the Secretary's assessments are improper. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935). In the present case, the assessments against Cope and Quality were properly made by a delegate of the Secretary and certified to the Court. United States v. Haley, 38 A.F.T.R.2d 5897, 59901 (S.D. Ohio 1976), aff'd, 582 F.2d 1281 (6th Cir. 1978), cert. denied, 440 U.S. 959, 99 S.Ct. 1501, 59 L.Ed.2d 772 (1979); Adams v. United States, 175 Ct.Cl. 288, 358 F.2d 986, 994 (1966). At the trial of this action, neither Cope nor Quality presented evidence tending to defeat the assessments made against them. They therefore failed to meet their burden of proving that the assessments were incorrect. Sinder v. United States, 655 F.2d 729, 731 (6th Cir. 1981).

In accordance with the foregoing, the court concludes that the assessments against Cope and Quality are valid and that Cope and Quality are liable to the United States in the amounts of the assessments against them, plus statutory additions thereto, including statutory interest from the dates set forth above.

2. ITT properly refused to honor the Internal Revenue Service's levies.

The IRS made a demand upon both Quality and Cope for taxes due and owing to the federal government. Quality and Cope did not pay. Upon failure to pay the taxes after demand therefore, the amount of the taxes, plus interest, penalties, and accrued costs became a lien in favor of the United States. 26 U.S.C. § 6321. The lien so created arose at the time the taxes were assessed and attached to all property and rights to property belonging to Cope and Quality. 26 U.S.C. §§ 6321, 6322. Thereafter, the IRS could collect the taxes by levy, which is precisely what the IRS did. 26 U.S.C. § 6331(a).

Two months after ITT repossessed and sold its collateral, the IRS levied on Cope and Quality's property and rights to property in ITT's possession. Specifically, the IRS claimed, that $16,798.73 of Cope and Quality's property remained in ITT's possession. ITT refused to honor the levy claiming that it had already disbursed the proceeds from the sale of the collateral according to KY.REV.STAT. § 355.9-504(1)(a)-(c) and that it no longer had any property belonging to Cope in its possession at that time. The IRS claimed that its lien continued into the surplus proceeds of the collateral sale in ITT's possession and that ITT wrongfully disbursed those funds and wrongfully refused to honor the IRS's levy. For the reasons stated below, the court must hold for ITT.

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