Opinion
Case No. 02-C-1119.
May 6, 2004
DECISION AND ORDER
This case arises out of an effort by the United States Internal Revenue Service (IRS) to collect unpaid federal employment and unemployment taxes, along with statutory additions, owed by Debra and Kenneth Waldvogel. The taxes were incurred in connection with the operation of Waldvogel Material and Landscaping, a business jointly owned and operated by Debra and Kenneth Waldvogel. The assessments against the Waldvogels have already been reduced to judgment, and the only issue that remains in the case is the liability of their attorney, Gary Knudson, for his failure to honor an IRS Notice of Levy and turn over the proceeds from an auction of the Waldvogel's business inventory and other property. That issue is presently before me on the Government's Motion for Summary Judgment. For the reasons that follow, the Government's motion will be granted.
UNDISPUTED FACTS
In early 2001, the Waldvogel's decided to sell their home and to auction off their business inventory in Waldvogel Materials and Landscaping. Their home was subject to a mortgage held by Banner Bank of Antigo, Wisconsin. Banner Bank also claimed a security interest in Waldvogel Materials and Landscaping business inventory. Because of their outstanding debt and unpaid taxes, the IRS and Banner Bank requested that the auction proceeds be placed in escrow. The Waldvogels retained Attorney Gary Knudson to serve as escrow agent, and on May 10, 2001, Kenneth Waldvogel and Knudson entered into an excrow agreement "for purposes of assuring that the Banner Bank will be protected for allowing Kenneth Waldvogel to hold an auction sale of secured property." (Knudson Dep. Ex. 19.) On May 12, 2001, an auction was held of the business equipment and supplies of Waldvogel Materials and Landscaping, netting $15,122 in auction proceeds. Attorney Knudson received the proceeds and they were deposited in the escrow account. On July 26, 2001, Knudson was served with an IRS Notice of Levy. The notice listed the taxpayer as Debra Waldvogel and directed Knudson to turn over to the IRS any money, property or credit that you have or are already obligated to pay the taxpayer.
By this time, the Waldvogels had also moved out of their home and stopped making mortgage payments to Banner Bank. On August 3, 2001, the bank's attorney wrote Knudson advising him that unless the money held in escrow was turned over within two weeks, the bank would "commence legal proceedings to foreclose and obtain the funds which are presently held by you." (Knudson Dep. Ex. 26.) Shortly thereafter, Kenneth Waldvogel telephoned Knudson and directed him to turn the proceeds over to the bank. On August 9, 2001, Kenneth Waldvogel met Knudson at the bank. At Waldvogel's direction, Knudson obtained a money order payable to Banner Bank for the full amount of the proceeds and delivered it to Waldvogel, who immediately turned it over to the bank.
On September 7, 2001, the IRS sent Knudson a Final Demand on the original levy. Knudson responded by letter dated September 11, 2001, noting that the Notice of Levy directed him to turn over property belonging to Debra Waldvogel. At the time he received the notice, Knudson stated, he had no money or property in his possession belonging to Debra Waldvogel. Knudson then stated:
I had in my possession a bank account containing auction proceeds which was deposited by Kenneth Waldvogel from a sale of his landscaping business. The proceeds were deposited so that assurance to the Banner Bank of Antigo could be given that they would receive the proceeds of the sale of property subject to their prior security interest. In due course the money was paid over to them.
(Knudson Dep. Ex. 30.)
On the basis of these facts, the Government contends that it is entitled to judgment against Knudson as a matter of law.
ANALYSIS
Section 6321 of the Internal Revenue Code, 26 U.S.C. § 6321, provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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." The lien generally arises when an assessment is made and continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. § 6322.
The IRS is empowered to enforce such liens in either of two ways. The first is a lien foreclosure suit. Section 7403(a) authorizes the institution of a civil action in federal district court to enforce a lien "to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." 26 U.S.C. § 7403(a). The second means of enforcement, which the IRS sought to use here, is by administrative levy. The levy is a provisional remedy which typically "does not require any judicial intervention." United States v. Rodgers, 461 U.S. 677, 682 (1983). As used in the Code, the term "levy" includes "the power of distraint and seizure by any means." 26 U.S.C. § 6331(b).
In United States v. National Bank of Commerce, 472 U.S. 713 (1985), the Court described the operation of an administrative levy where the property of the taxpayer is held by a third person:
a notice of levy upon the custodian is customarily served pursuant to § 6332(a). This notice gives the IRS the right to all property levied upon, United States v. Eiland, 223 F.2d 118, 121 (CA4 1955), and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government. Phelps v. United States, 421 U.S. 330, 334, (1975). If the custodian honors the levy, he is "discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment." § 6332(d). If, on the other hand, the custodian refuses to honor a levy, he incurs liability to the Government for his refusal. § 6332(c)(1).472 U.S. at 720-21.
In this case, the government notes, it is undisputed that Knudson was served with the Notice of Levy while the proceeds from the auction of the Waldvogel's property were in his possession. Despite this fact, he failed to turn over the proceeds to the IRS, and instead paid them to the bank at Kenneth Waldvogel's request. Under these circumstances, the government argues, Knudson is liable for the full amount of the funds he had in his possession.
In opposing the government's motion, Knudson makes essentially two arguments. He first argues that Banner Bank had a prior interest in all or, at least a substantial portion, of the proceeds of the auction based on its chattel security agreement covering the property sold at the auction and the Waldvogel's assignment of the proceeds of the auction to the bank. Knudson argues that the Bank was entitled to all of the proceeds if the court concludes that there was a "completed assignment of funds" prior to the IRS levy. If, on the other hand, the court concludes that the assignment was not complete, he claims that there would still remain a factual issue with respect to what portion of the proceeds was subject to the levy. Knudson contends that the fact that the Waldvogels claim that a substantial portion of the property sold was acquired prior to the filing of the notice of federal tax liens raises a material issue of fact as to the amount of proceeds the IRS was entitled to receive.
As the government points out, this argument fails for the simple reason that it was not up to Knudson to decide how much, if any, of the proceeds the IRS was entitled to receive. "The courts have uniformly held that a bank served with an IRS notice of levy `has only two defenses for a failure to comply with the demand'" United States v. National Bank of Commerce, 472 U.S. at 721-22 (quoting United States v. Sterling National Bank Trust Co. of New York, 494 F.2d 919, 921 (2nd Cir. 1974.)). The same rule applies to escrow agents. United States v. Cuti, 395 F. Supp. 1064, 1065 (E.D.N.Y. 1975). A bank or other entity served with a notice of levy can claim that it is not in possession of the property of the taxpayer, or assert that the property is subject to a prior judicial attachment or execution. 472 U.S. at 727. But it cannot, as Knudson did here, take it upon itself to decide who is entitled to the taxpayer's property. "That another party or parties may have competing claims to the accounts is not a legitimate statutory defense." Id. If the bank was entitled to priority, it would have been free to request return of the property under 26 U.S.C. § 6343(b), or assert its own interest in the property in an action under 26 U.S.C. § 7426(a). But by making himself the arbiter of who was entitled to the proceeds, Knudson violated the clear provisions of the Code.
Knudson's second argument, if supported by the evidence, would constitute a legitimate defense. He claims that at the time he received the notice, he did not possess any property belonging to the Debra Waldvogel, the named taxpayer on the Notice of Levy. The difficulty with this argument, however, is that Knudson's own response to the government's motion belies his claim that he did not know Debra had an interest in the proceeds. He states in his response that "[t]he Waldvogels entered into an assignment of all proceeds of their auction sale, whereby the proceeds were paid to Gary D. Knudson, to hold for Banner Bank and was [sic] therefore funds belonging to the bank and not the Waldvogels." (Response at 1.) Thus, it is clear that Knudson knew that the property sold at the auction belonged to both of the Waldvogels. And as an attorney licensed in the State of Wisconsin, Knudson also knew that the property acquired in their business was marital property and could be used to satisfy any marital debt, including any debt incurred by a spouse during the marriage in the interest of the marriage and family, such as the operation of a family owned business. Wis. Stat. § 766.55 (2001-02). The fact that Knudson was the Waldvogel's attorney not only for this transaction, but also for their bankruptcy in 1997 (Pl.'s Statement of Undisputed Material Facts ¶ 7.), renders incredible any claim by him that he was unaware of Debra's interest in the proceeds entrusted to him.
I conclude from the undisputed facts of the case that Attorney Knudson's failure to comply with the Notice of Levy served upon him renders him liable for the value of the property wrongfully withheld.
IT IS THEREFORE ORDERED that the government's motion for summary judgment is GRANTED and judgment shall be entered in favor of the United States in that amount of $15,122, together with interest allowed by law and costs.
JUDGMENT IN A CIVIL CASE
Jury Verdict. This action came before the Court for a trial by jury. The issues have been tried and the jury has rendered its verdict.[x] Decision by Court. This action came before the Court for consideration.
IT IS HEREBY ORDERED AND ADJUDGED that Judgment is entered in favor of the United States and against defendant Debra Waldvogel for federal employment (941) and unemployment (940) taxes and statutory additions to tax in the amount of $47,894.32 plus all penalties accruing under law after the dates of assessments, plus interest accruing after the dates of assessment under 26 U.S.C. § 6601, 6621 and 6622 and 28 U.S.C. § 1961(c) until paid.
IT IS FURTHER ORDERED AND ADJUDGED that Judgment is entered in favor of the United States and against defendants Debra and Kenneth Waldvogel for federal income taxes and statutory additions to tax in the amount of $25,706.84 plus all penalties accruing under law after the date of assessment, plus interest accruing after the date of assessment under 26 U.S.C. § 6601, 6621 and 6622 and 28 U.S.C. § 1961(c) until paid.
IT IS FURTHER ORDERED AND ADJUDGED that the government's motion for summary judgment against defendant Gary Knudson is GRANTED and judgment is entered in favor of the United States and against Knudson in the amount of $15,122, together with interest allowed by law. IT IS FURTHER ORDERED AND ADJUDGED that costs are awarded to the United States against each of the defendants.