United Stats of America v. Heli USA Airways, Inc.

Filing 26

ORDER Granting 19 United States' Motion for Summary Judgment. IT IS FURTHER ORDERED that the government submit a proposed final judgment by 12/2/2011. Signed by Judge Kent J. Dawson on 11/14/11. (Copies have been distributed pursuant to the NEF - EDS)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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UNITED STATES OF AMERICA,

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Plaintiff,

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v.

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Case No. 2:09-CV-01339-KJD-PAL

HELI USA AIRWAYS, INC.,

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ORDER

Defendant.

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Before the Court is the United States’ Motion for Summary Judgment (#19). Defendant Heli

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USA Airways (“Heli”) filed an opposition (#23) to which the government replied (#24).

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I. Background

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Lee F. Rhodes was employed by Heli as a pilot between 2008 and 2010. Rhodes owed

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federal income tax liabilities for the years 1999 through 2003 and civil penalties for the years 1999

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through 2001. Pursuant to 26 U.S.C. § 6321 the IRS [instituted] a Levy on Wages, Salary, and Other

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Income. This levy required Heli to turn over to the IRS Rhodes’ “wages and salary that have been

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earned but not paid, as well as wages and salary earned in the future until this levy is released...”

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On January 9, 2008, Revenue Officer Ginger Wray (hereinafter “RO Wray”) sent a Notice of

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Levy on Wages, Salary, and Other Income with regard Rhodes to defendant Heli (the “January

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Notice of Levy”). The January Notice of Levy was sent via U.S. Mail to the attention of Omar

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Palacios, the Chief Financial Officer of Heli. The IRS did not receive any response from Heli to the

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Notice of Levy.

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On February 19, 2008, RO Wray contacted Palacios by telephone to inquire as to why Heli

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had not complied with the January Levy on Rhodes’ wages. Palacios stated that he had not received

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the January Levy. RO Wray informed Palacios that she had mailed the levy to him by U.S. Mail and

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that she would send a second levy to him on that date by certified mail and by telefax. She did so

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(the “February Notice of Levy.”)

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In April 2008, Heli had still not complied with the January and February Notices of Levy

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(collectively “Notices of Levy”). RO Wray prepared a Final Demand for Payment which was served

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on Palacios on April 8, 2008 by Revenue Office Chris Footit. Later, Palacios left Heli due to severe

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anxiety and depression. After Palacios left Heli, the company discovered that Palacios had neglected

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his responsibility in relation to some business and legal matters during his term as CFO.
The United States filed the Complaint for Failure to Honor Internal Revenue Service Wage

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Levy in this matter on July 23, 2009. As of March 1, 2011, the outstanding balance of Lee F.

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Rhodes tax liabilities and penalties for the years 1999 through 2003, included on the levy served on

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Heli, is $49,175.92.

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II. Discussion

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A. Legal Standard for Summary Judgment

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Summary judgment may be granted if the pleadings, depositions, answers to interrogatories,

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and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any

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material fact and that the moving party is entitled to a judgment as a matter of law. See Fed. R. Civ.

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P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The moving party bears the

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initial burden of showing the absence of a genuine issue of material fact. See Celotex, 477 U.S. at

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323. The burden then shifts to the nonmoving party to set forth specific facts demonstrating a

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genuine factual issue for trial. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

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587 (1986); Fed. R. Civ. P. 56(e).

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All justifiable inferences must be viewed in the light must favorable to the non-moving party.
See Matsushita, 475 U.S. at 587. However, the non-moving party may not rest upon the mere
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allegations or denials of his or her pleadings, but he or she must produce specific facts, by affidavit

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or other evidentiary materials provided by Rule 56(e), showing there is a genuine issue for trial. See

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Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). The court need only resolve factual

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issues of controversy in favor of the non-moving party where the facts specifically averred by that

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party contradict facts specifically averred by the movant. See Lujan v. Nat’l Wildlife Fed’n, 497

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U.S. 871, 888 (1990); see also Anheuser-Busch, Inc. v. Natural Beverage Distribs., 69 F.3d 337, 345

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(9th Cir. 1995) (stating that conclusory or speculative testimony is insufficient to raise a genuine

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issue of fact to defeat summary judgment). “[U]ncorroborated and self-serving testimony,” without

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more, will not create a “genuine issue” of material fact precluding summary judgment. Villiarimo v.

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Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002).
Summary judgment shall be entered “against a party who fails to make a showing sufficient

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to establish the existence of an element essential to that party’s case, and on which that party will

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bear the burden of proof at trial.” Celotex, 477 U.S. at 322. Summary judgment shall not be granted

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if a reasonable jury could return a verdict for the nonmoving party. See Anderson, 477 U.S. at 248.

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B. Legal Authority for a Wage Levy

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Title 26 U.S.C. § 6321 provides the United States a lien against “all property and rights to

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property, whether real or personal” belonging to a taxpayer who fails to pay tax liabilities after

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assessment and demand. Section 6331 provides that the Secretary of the Treasury may collect unpaid

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taxes “by levy upon all property and rights to property belonging to such person or on which there is

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a lien provided in this chapter for the payment of the tax.” The Supreme Court has noted that

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“[s]tronger language could hardly have been selected to reveal a purpose to assure the collection of

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taxes.” Glass City Bank v. United States, 326 U.S. 265, 267 (1945).

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In situations where a delinquent taxpayer’s property is held by a third party such as an

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employer, the IRS serves a notice of levy upon that third party pursuant to 26 U.S.C. § 6332(a). “This

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notice gives the IRS the right to all property levied upon, and creates a custodial relationship between

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the person holding the property and the IRS so that the property comes into the constructive
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possession of the Government.” United States v. Nat’l Bank of Commerce, 472 U.S. 713, 719-20

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(1985); United States v. Whiting Pools, Inc., 462 U.S. 178 (1983); Phelps v. United States, 421 U.S.

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330, 334 (1975).

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26 U.S.C. § 6332(a) requires the person in possession of, or obligated with respect to,

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property levied upon to surrender it to the Secretary of the Treasury upon demand. Failure to

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surrender the property results in personal liability under section 6332(d)(1). Section 6332(d)(2)

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further provides, that the IRS may demand an additional penalty against “any person” who “fails or

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refuses to surrender such property or rights to such property without reasonable cause.”

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A person served with a notice of levy has only two defenses under 26 U.S.C. § 6332: (1) that

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he is not in possession of, or obligated with respect to, property or rights to property belonging to the

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taxpayer on which there is a lien; or (2) that the property is subject to prior judicial attachment or

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execution. Nat’l Bank, 472, U.S. at 721; United States v. Hemmen, 51 F.3d 883, 887-888 (9th Cir

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1995).

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During the relevant period, Mr. Rhodes was paid $110,076.23 by Heli. The IRS asserts that

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Heli is now liable for Mr. Rhoade’s unpaid taxes because it did not properly surrender the portion of

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these wages demanded by the IRS in the Notice of Levy served upon it.

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C. Service of the Notice of Levy

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26 U.S.C. § 6331(a) provides that a notice of levy may be served by mailing the notice of

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levy to the person holding property of the taxpayer. 26 C.F.R. § 301.6331-1(c) (“A notice of levy

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may be served by mailing the notice to the person upon whom the service of a notice of levy is

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authorized ... ”) There is a presumption of delivery when the return receipt is received by the sender.

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See Busquets-Ivars v. Ashcroft, 333 F.3d 1008, 1009 (9th Cir. 2003) (no presumption where sender

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did not receive return receipt and used improper zip code).

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The government has provided testimony that the Notices of Levy were sent to the correct

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address and provided the return receipt from the U.S. Postal Service for the February Notice. The

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government has also provided testimony and documentary evidence that the Final Demand for
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Payment was personally served on Heli. Heli has not offered any evidence to contradict the

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government’s evidence.

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Heli does not expressly claim that it did not receive either of the Notices of Levy sent by the

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IRS. Instead, Heli asserts that the questions exist about whether Heli “was ever properly served with

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the Levy” because the IRS cannot provide a fax confirmation and because the signature on the

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registered mail receipt cannot be positively identified. (Opp. at 6.) Further, Heli claims that the

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Final Demand for Payment does not bear the signature of any Heli employee and that Palacios told

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his supervisor that he had not ever received the Final Demand for Payment. This is insufficient to

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show a genuine issue of fact about delivery of the notice. See Anderson v. Liberty Lobby, Inc., 477

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U.S. 242, 256 (1986). Further, the claim regarding Palacios’ denial to his supervisor is hearsay. The

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government has adequately shown that no issue of fact exists about whether Heli was properly served

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with the Notices of Levy and the Final Demand for Payment.

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Heli does not assert any the recognized defenses for failure to honor a levy. Accordingly,
Heli is liable for the outstanding tax liabilities noticed in the levy pursuant to 26 U.S.C. § 6332(d)(1).

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D. Reasonable Cause for Failure to Honor the Levy

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A court must impose a 50% penalty on any person who fails or refuses to honor a tax levy

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without “reasonable cause.” 26 U.S.C. § 6332(c)(2). According to the Treasury Regulation applicable

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to 26 U.S.C. § 6332(c)(2), a penalty should not be imposed “in cases where [a] bona fide dispute

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exists concerning the amount of the property to be surrendered pursuant to a levy or concerning the

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legal effectiveness of the levy.” 26 C.F.R. § 301.6332–1(b)(2).

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Here, there is no dispute about the amount of property to be surrendered. Heli argues that

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Palacios’ breakdown in mental health was the cause of the failure to respond to the Notices of Levy.

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Heli argus that it could not have known that Palacios was ignoring the Notices of Levy and that

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management properly supervised Palacios because it was regularly in contact with Palacios and had

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an outside firm perform an audit of company financials. According to Heli, Palacios’ incompetence

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provides “reasonable cause” for failure to comply with the levy.
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The Court cannot agree that Palacios’ conduct provides a sufficient basis to forego the

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penalty. Heli cites no authority upholding a “reasonable cause” defense based on the conduct of a

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rouge employee – even a properly supervised one. Heli does not cite authority showing that

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Palacios’ conduct creates a “bona fide dispute ... concerning the ... legal effectiveness of the levy.” 26

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C.F.R. § 301.6332–1(b)(2). The only case Heli points to is Matter of American Biomaterials Corp.,

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954 F.2d 919 (3rd Cir. 1992), where failure to file taxes was excused for lack of willful neglect. But

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that case is inapposite because it interprets a section of the Internal Revenue Code that is not

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applicable here. Excepting Heli from the penalty provisions of the statute where it has not raised a

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cognizable defense to the enforcement action would undermine the effectiveness of the levy as a

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remedy. See United States v. MPM Financial Group, Inc., 215 Fed. Appx. 476, 478 (6th Cir. 2007)

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(holding that reasonable cause did not exist where notice was sent to business address of employer

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and notice was intercepted and concealed by indebted employee). Accordingly, Heli is liable for

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50% of the recoverable amount pursuant to 26 U.S.C. § 6332(c)(2).

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III. Conclusion

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IT IS HEREBY ORDERED that the United States’ Motion for Summary Judgment (#19) is
GRANTED.
IT IS FURTHER ORDERED that the government submit a proposed final judgment by
December 2, 2011.
DATED this 14th day of November 2011.

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_____________________________
Kent J. Dawson
United States District Judge

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