United States v. Bigley

UNITED STATES OF AMERICA, Plaintiff, v. MICHAEL A. BIGLEY, et al., Defendants.

No. 2:14-cv-0729-HRH

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

August 20, 2019

ORDER

Motion to Strike Notice of Levy¹

The Bigley defendants move to strike the Notice of Levy. This motion is opposed.² Oral argument has not been requested and is not deemed necessary.

Background

Plaintiff commenced this action "to reduce the outstanding federal tax liabilities assessed against [the Bigley defendants] to judgment and to foreclose federal tax liens on real property."³ In its May 10, 2017 summary judgment order, the court determined that the Bigleydefendants' liability for federal income taxes, interest, and penalties for the tax years 2004, 2005, and 2006 was $261,781.34, plus interest.⁴ The court also determined that the Kelso defendants were nominees, alter egos, and fraudulent transferees of the Bigley defendants with respect to the real property located at 3115 East Park Avenue, Gilbert, Arizona 85234 ("the subject property").⁵ Judgment was entered in plaintiff's favor on May 10, 2017.⁶ The Bigley defendants filed a notice of appeal on September 28, 2017.⁷

On September 14, 2017, the court entered an Order of Foreclosure and Judicial Sale of the subject property.⁸ The subject property was thereafter sold for $385,000.00; and the proceeds of the sale were deposited in the registry of the court.⁹ The sale of the subject property was confirmed on March 6, 2018, and $277,670.92 was distributed to plaintiff in satisfaction of plaintiff's judgment.¹⁰ $107,329.08 remains in the court registry.

On May 6, 2019, the court received the mandate¹¹ of the Ninth Circuit Court of Appeals covering the appeal court's memorandum decision which affirmed this court's judgment. OnJune 10, 2019, the court entered an order in which it "invite[d] plaintiff to levy on the funds held in the registry of the court if the Bigley defendants owe additional, unpaid taxes[.]"¹² On July 2, 2019, pursuant to 26 U.S. § 6331, the Internal Revenue Service served a Notice of Levy¹³ on the clerk of court. The Notice of Levy names Carolyn Bigley as the taxpayer and claims that she owes $178,383.46 in 1040 taxes and statutory additions for the 2007, 2008, and 2009 tax years.¹⁴ The Notice of Levy was signed by Suzy Taylor, a revenue officer.¹⁵

The Bigleys defendants now move to strike the Notice of Levy, raising primarily constitutional and procedural objections to the Notice of Levy.

Discussion

"Section 6331(a) of the Internal Revenue Code of 1986 authorizes the Secretary of the Treasury (or a delegate) to collect taxes 'by levy upon all property and rights to property' belonging to a person who neglects or refuses to pay any tax liability within ten days after notice and demand." Maisano v. Welcher, 940 F.2d 499, 500-01 (9th Cir. 1991) (quoting 26 U.S.C. § 6331(a)). "Section 6331(b) defines 'levy' as including "the power of distraint and seizure by any means'." Id. at 501 (quoting 26 U.S. § 6331(b)). "Both real estate and personal property, tangible and intangible, are subject to levy under section 6331(a)). Id.

As an initial matter, plaintiff argues that the Bigley defendants lack standing to challenge the Notice of Levy. Plaintiff contends the Bigley defendants are arguing that the levy is "wrongful" and that 26 U.S.C. § 7426(a)(1) is the exclusive remedy for third-party wrongful levy claims. "Title 26 U.S.C. § 7426(a)(1) provides that 'any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States. . . .'" Arford v. United States, 934 F.2d 229, 231-32 (9th Cir. 1991) (quoting 26 U.S.C. § 7426(a)(1)). The elements of a wrongful levy claim are as follows:

First, the person must not be one "against whom is assessed the tax." Second, the person must claim a legally cognizable "interest" in the property. Third, the property must have been "wrongfully levied upon."

Id. at 232 (quoting 26 U.S.C. § 7426(a)(1)). To the extent that the Bigley defendants are attempting to assert a wrongful levy claim pursuant to Section 7426, such a claim would fail because Mrs. Bigley is the person against whom the tax is assessed and she does not claim an interest in the funds remaining in the court's registry.¹⁶ That said, the Bigley defendants'motion cannot be read as solely asserting a wrongful levy claim. That the Bigley defendants cannot assert a wrongful levy claim does not dispose of the instant motion.

Plaintiff next argues that the Anti-Injunction bars the instant motion. "The Anti-Injunction Act, 26 U.S.C. § 7421, limits actions to enjoin the assessment and collection of taxes." Sokolow v. United States, 169 F.3d 663, 664-65 (9th Cir. 1999). "The Act provides, in part, that 'no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person. . . .'" Id. at 665 (quoting I.R.C. § 7421(a)). "There are, however, several statutory exceptions to the Act, as well as one judicial exception." Id. "An action that does not fall within one of the exceptions must be dismissed for lack of subject matter jurisdiction." Id. "Thus, ordinarily, once a tax has been assessed, the taxpayer's only recourse is to pay the tax in full and then sue for a refund in district court."¹⁷ Id.

To the extent that the instant motion could be construed as an attempt to restrain tax collection, the only possible way the Bigley defendants could avoid the jurisdictional bar of the Anti-Injunction Act would be to show that the judicial exception applies. The judicial exception to the Anti-Injunction Act requires a plaintiff to show that the "the Government's claim is baseless" and that he "is entitled to equitable relief[,]" which requires a showing that "he has no adequate remedy at law and that the denial of injunctive relief would cause himimmediate, irreparable harm." Church of Scientology of Calif. v. United States, 920 F.2d 1481, 1486 (9th Cir. 1990) (citation omitted). The constitutional arguments raised by the Bigley defendants in the instant motion can be construed as arguments that the Notice of Levy is baseless.

First, the Bigley defendants argue that Mrs. Bigley's Fourth Amendment rights have been violated because no warrant based upon probable cause has been issued. "The Fourth Amendment protects, among other things, a person's right not to have their property unreasonably seized by the government." Recchia v. City of Los Angeles Dep't of Animal Services, 889 F.3d 553, 558 (9th Cir. 2018). However, "[t]he Supreme Court has noted that where the government seizes property to collect delinquent taxes, the seizure, if it involves no invasion of the taxpayer's premises, does not violate the Fourth Amendment." Hutchinson v. United States, 677 F.2d 1322, 1328 (9th Cir. 1982). "Here, the Internal Revenue Service has committed no invasion of [Mrs. Bigley's] personal effects or premises. Rather, it levied upon" the funds in the court's registry. Id. Thus, there has been no Fourth Amendment violation here.

The Bigley defendants also argue Mrs. Bigley's Seventh Amendment right to a jury trial has been violated. But, "the seventh amendment does not apply to actions against the United States." Hudson v. United States, 766 F.2d 1288, 1292 (9th Cir. 1985).

The Bigley defendants also argue that Mrs. Bigley's Fifth Amendment due process rights have been violated. But, "the IRS's lawful collection of taxes does not violate aperson's Fifth Amendment right to due process because the post-seizure remedies available to the taxpayer are adequate to protect the taxpayer's due process rights." Del Elmer v. Metzger, 967 F. Supp. 398, 404 (S.D. Cal. 1997). "Due process challenges to tax levies have been specifically rejected by the Supreme Court." Id. (citing Fuentes v. Shevin, 407 U.S. 67, 90-92 (1972); Phillips v. Commissioner, 283 U.S. 589, 595-97 (1931)).

But even if the Anti-Injunction Act bars the court's consideration of some of the arguments raised by the Bigley defendants in the instant motion, the court has jurisdiction to consider the Bigley defendants' procedural challenges to the Notice of Levy. Smith v. Rossotte, 250 F. Supp. 2d 1266, 1269 (D. Or. 2003). "When the IRS seeks to collect taxes by means of a levy, it must adhere to the provisions of the Internal Revenue Code." Tull v. United States, 69 F.3d 394, 397 (9th Cir. 1995). "Section 6331 of the Internal Revenue Code sets forth the procedure the IRS must follow to levy upon a taxpayer's property." Martinez v. United States, 669 F.2d 568, 569 (9th Cir. 1981). "Normally, the taxpayer is given notice of any deficiency and a demand for payment is made. If the tax is not paid within ten days, the IRS may levy on any property of the taxpayer." Id.

The Bigley defendants first argue that Mrs. Bigley is not a "taxpayer" and thus the IRS cannot seek to collect taxes from her by means of levy. Mrs. Bigley's argument appears to be based on the fact that she did not file tax returns for the 2007, 2008, and 2009 tax years and that she did not "self-assess" any amount of tax to return. As this court has previously observed, "[i]n a literal sense, the Bigleys are not taxpayers for they have not yet paid taxesfor the years in question."¹⁸ But Mrs. Bigley's failure to file a tax return does not mean that she is not a taxpayer for purposes of Section 6331. The record in this case contains Certificates of Assessment showing that Mrs. Bigley owes 1040 taxes for the 2007, 2008, and 2009 tax years.¹⁹

The Bigley defendants next argue Mrs. Bigley did not receive the statutorily required Notice and Demand. Mrs. Bigley "declares that I never received a 'notice and demand' as mandated by statute to pay a tax subscribed by the Secretary of the Treasury or his duly authorized delegate."²⁰ The Bigley defendants do not appear to be contending that Mrs....