United States v. Moskowitz, Passman & Edelman, No. 08-3017 (2d Cir. 2010)

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08-3017-cv United States v. Moskowitz, Passman & Edelman 1 UNITED STATES COURT OF APPEALS 2 F OR THE S ECOND C IRCUIT 3 4 5 August Term, 2009 (Argued: March 9, 2010 Decided: April 29, 2010) 6 7 Docket No. 08-3017-cv 8 U NITED S TATES OF A MERICA, 9 Plaintiff-Appellee, 10 - v.- 11 M OSKOWITZ, P ASSMAN & E DELMAN, 12 Defendant-Appellant. 13 14 Before: 15 16 17 18 19 20 21 22 23 24 25 26 Appeal from an October 10, 2007 order of the United States District Court for the Southern District of New York (Owen, J.). The district court found that the appellant law firm unlawfully failed to honor two tax levies served on it by the IRS relating to unpaid taxes owed by the firm s managing partner. We hold that the firm was obligated by the IRS s continuing levy on the partner s salary, 26 U.S.C. § 6331(e), to surrender to the government the funds that it instead paid to the partner as draws. 27 28 29 30 L EVAL, S ACK, and W ESLEY, Circuit Judges. A FFIRMED. M ATTHEW L. S CHWARTZ, Assistant United States Attorney (David S. Jones, Assistant United States Attorney, on the brief), for Preet Bharara, United States Attorney for the Southern 1 2 3 4 5 6 7 8 9 District of New York, New York, New York, for Appellee. J AMES J. M AHON, Lally Mahon & Rooney, LLP, New York, New York, for Appellant. W ESLEY, Circuit Judge: In this appeal, the appellant law firm, Moskowitz, 10 Passman & Edelman ( MPE or the firm ), argues that its 11 managing partner s draws that is, advances on profit 12 distributions to which he was entitled pursuant to the 13 firm s partnership agreement were not salary or wages 14 under § 6331(e) of the Internal Revenue Code. 15 this contention in defense of its failure to comply with two 16 administrative levies served on it by the Internal Revenue 17 Service (the IRS or the government ), relating to the 18 personal income tax liability of the firm s managing 19 partner. 20 MPE proffers The district court rejected this contention and imposed 21 a statutory fine for the firm s non-compliance with the 22 levies. 23 to evade the levies. 24 § 6331(e) levy was sufficient to reach the partner s draws 25 from MPE s profits. We, too, are unpersuaded by the firm s bold attempt Therefore, we affirm and hold that the 2 I. 1 2 BACKGROUND The facts are undisputed and straightforward. The 3 levies at issue relate to the personal income tax liability 4 of A. Sheldon Edelman, the managing partner of MPE, which is 5 a law firm organized as a partnership under New York law. 6 Pursuant to MPE s oral partnership agreement, Edelman was 7 entitled to 60% of the firm s profits and Jeffrey Motelson, 8 the firm s other partner, was entitled to 40%. 9 Dep. 27:3-6.) (Edelman Edelman handled the checkbook for the firm, 10 and wrote MPE checks to himself and to Motelson on an 11 almost-weekly basis. 12 characterized these payments as draw[s] or advances 13 taken against whatever the [firm s] profits were going to 14 be . . . at the end of the year. 15 (Id. 52:4-9, 76:23-24.) He (Id. 52:12-14.) 1 Beginning in 1996, the IRS sought to collect Edelman s 16 unpaid taxes from 1990-1994 by serving administrative levies 17 on MPE. 2 First, on March 1, 1996, the IRS served MPE with a 1 Edelman also caused MPE to write checks to the IRS and the New York State Department of Taxation and Finance, which he used to resolve other aspects of his income tax liability not at issue in this case. Edelman viewed these payments as part of [his] draw from the firm. (Edelman Dep. 75:5.) 2 In January 2004, in a separate action in the United States District Court for the District of Connecticut, Edelman stipulated to the entry of a $1,224,157.74 judgment relating to unpaid taxes during the years 1990-1994, 1996, and 19983 1 Form 668-W(c) Notice of Levy on Wages, Salary, and Other 2 Income (the Salary Levy ). 3 as the relevant taxpayer and indicated that he owed 4 $429,071.02 in unpaid taxes, penalties, and interest for the 5 years 1990-1994. The Salary Levy listed Edelman It also stated: 6 7 8 9 10 11 This levy requires you [MPE] to turn over to us: (1) [Edelman s] wages and salary that have been earned but not paid yet, as well as wages and salary earned in the future until this levy is released, and (2) [Edelman s] other income that you have now or for which you are obligated. 12 MPE did not turn over any funds in response to the Salary 13 Levy. 14 On May 2, 1996, the IRS sent the firm a Form 668-C 15 Final Demand letter relating to the Salary Levy. The 16 letter stated that [d]emand is again made for the amount of 17 $429,071.02, shown in the [Salary Levy], or for any smaller 18 sum you may have owed the taxpayer at the time the [Salary 19 Levy] was served. 20 not comply with the demand within five days of its service, 21 then the IRS would consider it [MPE s] final refusal and 22 may then start proceedings under [Internal Revenue] Code The letter also warned that, if MPE did 2001. (Stipulation for Judgment, United States v. Edelman, No. 03 Civ. 240 (PCD) (D. Conn. Jan. 16, 2004).) The complaint in this action relates only to Edelman s tax liability between 1990 and 1994. 4 1 2 section 6332. When MPE did not respond to the demand letter, the IRS 3 sent the firm a second Notice of Levy on April 8, 1997, this 4 time on Form 668-A(c) (the Property Levy ). 5 Salary Levy, the Property Levy related to Edelman s tax 6 liability for the years 1990-1994. 7 time between the first and second levy, the Notice indicated 8 that Edelman owed $472,026.09 in back taxes, penalties, and 9 interest. Like the Based on the lapse of It directed MPE to turn over to the IRS 10 [Edelman s] property and rights to property (such as money, 11 credits, and bank deposits) that you [MPE] have or which you 12 are already obligated to pay [Edelman]. 13 respond to the Property Levy, and the IRS sent the firm a 14 second Final Demand letter on June 4, 1997. 15 contained language substantially similar to that in the May 16 2, 1996 demand letter but called for the more recently 17 calculated figure of $472,026.09. 18 the second demand letter. 19 MPE did not This letter MPE did not respond to On May 22, 2000, the government commenced this action 20 to enforce both levies pursuant to 26 U.S.C. § 6332(d). 21 Following discovery, the parties cross-moved for summary 22 judgment and the district court ruled in favor of the 5 1 government. See United States v. Moskowitz, Passman & 2 Edelman, No. 00 Civ. 3832, 2007 WL 2962556 (S.D.N.Y. Oct. 3 10, 2007). 4 advance instead of . . . salary is insufficient to except it 5 from the levies ambit. 6 Jefferson-Pilot Life Ins. Co., 49 F.3d 1020, 1022 (4th Cir. 7 1995) and United States v. Has, Inc., No. 87 Civ. 1644, 1990 8 WL 54826, at *2 (D.P.R. Feb. 21, 1990)). 9 that, [k]eeping in mind the spirit of the law, the fact It held that calling [the payment] a draw or an Id. at *2 (citing United States v. The court reasoned 10 that monies are paid out to the partners frequently weekly 11 as advances on future income cannot exempt the law firm from 12 the statute by virtue of Edelman s partner status. 13 The court also found that MPE had not demonstrated 14 reasonable cause for its failure to comply with the 15 levies, and assessed an additional statutory penalty 16 pursuant to 26 U.S.C. § 6332(d)(2). 17 *2. 18 19 II. Id. See 2007 WL 2962556, at DISCUSSION We review de novo the legal conclusions relied on by 20 the district court to grant summary judgment. E.g., N.Y. 21 Marine & Gen. Ins. Co. v. Lafarge N. Am., Inc., 559 F.3d 22 102, 114 (2d Cir. 2010). MPE s principal argument in this 6 1 appeal is that the district court erred by holding that 2 Edelman s partnership draws were salary or wages under § 3 6331(e). 4 on this basis, and reject its lone contention. 3 5 reasons set forth below, we hold that the Salary Levy, 6 served pursuant to § 6331(e), was sufficient to reach 7 Edelman s draws from MPE because the checks that he wrote to 8 himself were periodic payments that compensated him for his 9 services to the firm. 10 A. 11 We accept MPE s invitation to resolve the appeal For the Therefore, we affirm. Federal Tax Liens and Administrative Levies by the IRS When an individual such as Edelman fails to pay his 12 income taxes after a demand from the IRS, a statutory lien 13 in the amount of the deficiency arises on all property and 14 rights to property, whether real or personal, belonging to 15 such person. 16 until the deficiency is either satisfied or becomes 17 unenforceable by reason of lapse of time. 18 exemplified by Edelman s failure to pay his back taxes, 19 however, a federal tax lien is not self-executing. 20 States v. Nat l Bank of Commerce, 472 U.S. 713, 720 (1985). 26 U.S.C. § 6321. 3 The lien remains in effect Id. § 6322. As United Because we reject MPE s argument and affirm as to the Salary Levy based on 26 U.S.C. § 6331(e), we do not address the Property Levy that was served on MPE pursuant to 26 U.S.C. § 6331(a)-(b). 7 1 Nevertheless, the IRS is not without a sword to wield when a 2 taxpayer fails to honor his or her income tax obligations. 3 Congress has armed the agency with at least two statutory 4 mechanisms for collecting unpaid income taxes: 5 foreclosure suits, see 26 U.S.C. § 7403; 4 and (2) 6 administrative levies, see id. §§ 6331-6332. 7 latter option is relevant here. 8 9 (1) lien- Only the The administrative levy tool is a summary, non-judicial process, a method of self-help authorized by 10 statute which provides the [IRS] with a prompt and 11 convenient method for satisfying delinquent tax claims. 12 United States v. Sullivan, 333 F.2d 100, 116 (3d Cir. 1964). 13 The power to levy [was] designed to enable the government 14 promptly to secure its revenues while competing claims are 15 resolved. 16 (11th Cir. 2007) (quoting United States v. Ruff, 99 F.3d 17 1559, 1563 (11th Cir. 1996)). United States v. Ryals, 480 F.3d 1101, 1110 The procedure allows the 4 Pursuant to § 7403, [i]n any case where there has been a refusal or neglect to pay any tax, the government may commence a civil action in federal court to enforce the lien of the United States . . . with respect to such tax or liability or 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). 8 1 government to collect on a tax lien by levying upon all 2 property and rights to property of the deficient taxpayer, 3 even if in the hands of third parties, whether real or 4 personal, tangible or intangible. 5 (b). 6 reveal a purpose to assure the collection of taxes. 7 City Bank v. United States, 326 U.S. 265, 267 (1945); see 8 also Drye v. United States, 528 U.S. 49, 56 (1999). 9 26 U.S.C. § 6331(a), Stronger language could hardly have been selected to Glass An administrative levy typically extends only to 10 property possessed and obligations existing at the time 11 the levy is served. 12 fit within this category. 13 regulations, obligations exist with respect to such a levy 14 when the liability of the obligor is fixed and determinable 15 although the right to receive payment thereof may be 16 deferred until a later date. 17 Thus, subject to certain exceptions, e.g., 26 U.S.C. § 18 6331(e), (h), a one-time levy does not usually reach 19 property acquired after the date on which it is served. 20 United States v. Hemmen, 51 F.3d 883, 887 (9th Cir. 1995). 21 One of the exceptions to this rule, which the IRS 22 26 U.S.C. § 6331(b). The Property Levy According to Treasury 26 C.F.R. § 301.6331-1(a)(1). relied on when it served the Salary Levy, is a continuing 9 See 1 levy pursuant to § 6331(e). Section 6331(e) was added to 2 the tax code as part of the Tax Reform Act of 1976, Pub. L. 3 94-455, § 1209, 90 Stat. 1709, in order to alleviate the 4 administrative burdens on the IRS that arose out of 5 requiring the agency to make successive levies in cases 6 involving salaries and wages. 7 396, 401 n.13 (2004). 8 effect of a levy on salary or wages payable to or received 9 by a taxpayer shall be continuous from the date such levy is Meehan v. Comm r, 122 T.C. The statute provides that [t]he 10 first made until such levy is released. 11 § 6331(e). 12 13 B. 26 U.S.C. The § 6332(d) Action to Enforce the Administrative Levies 14 After MPE failed to respond to either of the IRS s 15 Final Demand letters, the government commenced this action 16 pursuant to § 6332(d). 17 be held personally liable in a sum equal to the value of 18 the property or rights that it failed to surrender, up to 19 the amount of the underlying tax deficiency. 20 6332(d)(1). 21 finds that the defendant ignored the levies without 22 reasonable cause. 23 In such an action, the defendant may 26 U.S.C. § The court may also impose a 50% penalty if it Id. § 6332(d)(2). The defenses available in a § 6332(d) action are 10 1 limited. [T]he validity of the levy and competing claims 2 to the ownership of the funds are not valid reasons for 3 refusing to honor a levy. 4 F.3d 37, 59 (2d Cir. 1993). 5 taxpayer s property, however, is a defense available in such 6 an action, see United States v. Sterling Nat l Bank & Trust 7 Co., 494 F.2d 919, 921 (2d Cir. 1974), and MPE appears to 8 rely on this defense to argue that Edelman s draws were not 9 the sort of property or rights to property subject to a § United States v. Daccarett, 6 Non-possession of the 10 6331(e) levy on salary or wages. 11 federal court of appeals to address the application of § 12 6331(e) in this context, we readily reject MPE s contention. 13 Although we are the first For practical purposes, the objects of our inquiry are 14 profits that were in the possession of MPE when it was 15 served with the Salary Levy and because we are examining 16 the effect of a continuing levy under § 6331(e) profits 17 that came into the firm s possession after it received the 18 levy. 19 Code creates no property rights but merely attaches 20 consequences, federally defined, to rights created under 21 state law. 22 (2002) (quoting United States v. Bess, 357 U.S. 51, 55 With respect to these funds, the Internal Revenue United States v. Craft, 535 U.S. 274, 278 11 1 (1958)); see also Rev. Rul. 75-554, 1975-2 C.B. 478 (citing 2 Aquilino v. United States, 363 U.S. 509, 512-13 (1960)). 3 must therefore look initially to state law to determine 4 what rights the taxpayer has in the property the 5 [g]overnment seeks to reach, then to federal law to 6 determine whether the taxpayer s state-delineated rights 7 qualify as property or rights to property within the 8 compass of the federal tax lien legislation. 9 U.S. at 58. 10 We Drye, 528 New York law guides our assessment of Edelman s rights 11 to MPE s profits. Absent a contrary provision in the 12 partnership agreement, a partner s interest in the 13 partnership includes his or her share of the profits and 14 surplus, which constitutes personal property of the 15 partner in question. 16 itself recognized that a partner s interest in a partnership 17 is generally . . . the right to a proportionate share of the 18 distribution of partnership profits or surplus after the 19 payment of partnership debts. 20 Oil, 277 F.3d 1251, 1256 (10th Cir. 2002) (internal 21 quotation marks omitted); see also IRS, Internal Revenue 22 Manual § 5.17.3.9.16 (Dec. 7, 2007). N.Y. P ship Law § 52. 12 The IRS has United States v. Triangle 1 Edelman testified at his deposition that MPE s verbal 2 partnership agreement vested in him the individual right to 3 60% of the firm s profits. 4 13.) 5 on a near-weekly basis, which he referred to as draws and 6 were, in his view, akin to advances or loans taken from 7 the firm s annual profits. 8 at the end of year, the firm s accountant calculated MPE s 9 profits and Edelman was charged with having taken advances (E.g., Edelman Dep. 27:3-6, 8- He also testified that he wrote MPE checks to himself (Id. 26:12-14.) Specifically, 10 or loans or draw of the equivalent of [60%] of the net 11 earnings [during] that period of time. 12 According to Edelman, he relied on the accountant s 13 calculation each year and reported as partnership income 60% 14 of the MPE s profits. 15 testimony, MPE s partnership agreement, and New York law, we 16 conclude that: 17 firm s profits; and (2) Edelman s draws were advances on 18 his annual share of the firm s profits. 19 (Id. 30:9-15.) (Id. 30:9-14.) In light of this (1) Edelman had an interest in 60% of the The district court concluded that Edelman s interest in 20 MPE s profits constituted property or rights to property, 21 26 U.S.C. §§ 6321, 6331, and MPE has not challenged that 22 conclusion on appeal. The final question before us, then, 13 1 is whether these profit distributions were salary or wages 2 under § 6331(e). 3 state law. 4 interpretation. 5 consequences of MPE s possession of Edelman s property or 6 rights to property. 7 This is not, as MPE contends, an issue of Instead, it is a matter of federal statutory The Internal Revenue Code governs the Craft, 535 U.S. at 278. The statute does not define salary or wages for 8 purposes of § 6331(e), and its legislative history provides 9 little illumination. Meehan, 122 T.C. at 401 n.13. 10 However, a Treasury regulation titled Continuing effect of 11 levy on salary and wages defines the statutory phrase 12 salary or wages to include[] compensation for services 13 paid in the form of fees, commissions, bonuses, and similar 14 items. 15 Moreover, the regulation interprets the statute which 16 makes the levy effective on all salary or wages that 17 become payable to the taxpayer continuous[ly] from the 18 date [the] levy is first made, 26 U.S.C. § 6331(e) 19 (emphases added) such that a continuing levy under 20 § 6331(e) may reach advances on salary or wages made 21 subsequent to the date of the levy. 22 1(b)(1). 26 C.F.R § 301.6331-1(b)(1) (emphases added). 26 C.F.R § 301.6331- The broad construction we now adopt by relying on 14 1 this regulation is consistent with common usage 5 and the 2 objective of § 6331(e): 3 upon remuneration payable to a taxpayer on a recurring basis 4 for personal services performed for the payor. 5 States v. Jefferson-Pilot Ins. Co., 49 F.3d 1020, 1022 (4th 6 Cir. 1995). 6 7 [T]o provide a means of levying United Applying the Treasury regulation, we conclude that the 8 Salary Levy pursuant to § 6331(e) was sufficient to reach 9 Edelman s draws because they were compensation for 10 services that he provided to MPE. 11 1(b)(1). 26 C.F.R. § 301.6331- Edelman acknowledged that he rendered services to 5 According to the 2002 edition of Webster s Third New International Dictionary of the English Language, the words wage and salary both mean the price paid someone for his [or her] labor or services, with the chief difference between the two terms being that salary typically connotes fixed compensation . . . paid at longer intervals than wages and usually for services that require training or special ability. Webster s Third New International Dictionary of the English Language 2568 (2002). 6 We join the other courts that have looked to this Treasury regulation when considering the reach of the continuing levy provision. E.g., Mission Primary Care Clinic, PLLC v. IRS, 606 F. Supp. 2d 638, 645 (S.D. Miss. 2009), aff d in part and rev d in part on other grounds, 2010 WL 1141592 (5th Cir. Mar. 25, 2010) (per curiam); Maloney v. Syvertsen, No. 85 Civ. 1309 (MJL), 1985 WL 2037, at *2 (S.D.N.Y. July 16, 1985); see also Jefferson-Pilot, 49 F.3d at 1022-23 (affording Chevron deference to the IRS s conclusion that salary or wages includes commissions ). 15 1 MPE for which he was entitled to compensation in the form of 2 a share of the firm s profits. 3 arrangement. 4 partners for their services to a partnership is through 5 profit-sharing. 6 Tribunal of the City of New York, 100 N.Y.2d 389, 393 (N.Y. 7 2003). 8 of compensation for services that were similar to fees, 9 commissions, [or] bonuses. 10 This was not a unique [T]he most common method of compensating Buchbinder Tunick & Co. v. Tax Appeals Therefore, we hold that Edelman s draws were a form 26 C.F.R. § 301.6331-1(b)(1). MPE contends in its brief that its payments of 11 partnership draw to Edelman did not constitute salary or 12 wages under § 6331(e) at the time of the Salary Levy 13 because a partner only realizes income on the last day of 14 the partnership s taxabale year. 15 cited by MPE concerns the timing of the [r]ecognition of 16 gain or loss to [a] partner [f]or the purposes of sections 17 731 and 705 of the Internal Revenue Code. 18 1(a)(1)(ii). 7 However, the regulation 26 C.F.R. 1.731- Contrary to MPE s assertion, the time at 7 The full text of the regulation provides that, [f]or purposes of sections 731 and 705 [of the Internal Revenue Code], advances or drawings of money or property against a partner s distributive share of income [are] treated as current distributions made on the last day of the partnership taxable year with respect to such partner. 26 C.F.R. § 1.731-1(a)(1)(ii). 16 1 which Edelman was required to recognize a gain or loss from 2 his draws is not dispositive of whether the checks that he 3 wrote himself constituted compensation for services, 26 4 C.F.R. § 301.6331-1(b)(1), or salary or wages, 26 U.S.C. § 5 6331(e). 6 position and equated these distinct concepts, MPE s 7 contention is contradicted by the Treasury regulation 8 relating to § 6331(e), which provides that a continuing levy 9 attaches to . . . advances on salary or wages made Moreover, even if we ignored that flaw in MPE s 10 subsequent to the date of the levy. 11 1(b)(1) (emphasis added). 12 Treasury regulation cited by MPE did not absolve the firm of 13 its obligation to honor the Salary Levy. 14 26 C.F.R. § 301.6331- Therefore, the additional Finally, it is of no moment that the MPE checks that 15 Edelman wrote to himself sometimes drew on funds that were 16 generated through client representations in which he did not 17 participate. 18 compensation for services that Edelman provided to the 19 firm itself, not to the firm s clients. 20 establishes that Edelman, the firm s managing partner, was 21 providing services to MPE on an ongoing basis. 22 Edelman practiced law on behalf of the firm. The issue is whether the payments were 17 The record For example, (See Edelman 1 Dep. 37:4-7.) 2 its partners, which was only a portion of the duty that 3 Edelman referred to as hand[ling] the firm s checkbook, 4 was a service to the firm for which Edelman was compensated 5 by the payments at issue. 6 Even distributing the firm s profits amongst (Id. 76:23-24.) The bottom line is this: Edelman wrote checks from MPE 7 to himself usually on a weekly basis 8 as compensation 8 for services that he provided to the firm. 9 these payments were characterized as draws means only that The fact that 10 they were, as Edelman admitted at his deposition, 11 advance[s] on compensation. 12 to § 6331(e) reaches advances on salary or wages. (Id. 26:12.) 8 A levy pursuant See 26 In a September 2008 Chief Counsel Advisory, the IRS took the view that profits distributed to an attorney from a firm organized as a limited liability company may be subject to the continuing wage levy provision of I.R.C. § 6331(e). See Chief Counsel Advisory 2008-36-2002 (Sept. 5, 2008) (emphasis in original), available at 2008 WL 4102684. The memorandum emphasizes that the district court s decision in this case and the decision in Jefferson-Pilot, 49 F.3d at 1022, were based . . . on the fact that the remuneration was paid out to the delinquent taxpayer on a recurring basis. Chief Counsel Advisory 2008-36-2002. The memorandum is correct as a factual matter Edelman testified at his deposition that he received draws on a near-weekly basis. (Edelman Dep. 52:8-9, 54:20-21.) We also agree with the IRS that the frequency and regularity of the firm s payments to Edelman militate in favor of the conclusion that the draws were salary or wages under § 6331(e). 18 1 C.F.R. § 301.6331-1(b)(1). 2 liable for its failure to comply with the Salary Levy. III. 3 4 5 Accordingly, we hold that MPE is CONCLUSION For the foregoing reasons, the district court s order is AFFIRMED. 6 19

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