Stead v. United States ( 2005 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IAN MICHAEL STEAD; BELINDA A. 
STEAD, No. 04-35028
Plaintiffs-Appellants,
v.  D.C. No.
CV-03-05068-RBL
UNITED STATES OF AMERICA, OPINION
Defendant-Appellee.

Appeal from the United States District Court
for the Western District of Washington
Ronald B. Leighton, District Judge, Presiding
Argued June 10, 2005
Submitted June 29, 2005
Seattle, Washington
Filed August 12, 2005
Before: David R. Thompson, M. Margaret McKeown, and
Ronald M. Gould, Circuit Judges.
Opinion by Judge Gould
10561
10564 STEAD v. UNITED STATES
COUNSEL
Don M. Running, Seattle, Washington, for the plaintiffs-
appellants.
Eileen J. O’Connor, Assistant Attorney General, Thomas J.
Clark, Karen G. Gregory, Attorneys, Tax Division, Depart-
ment of Justice, Washington, DC, for the defendant-appellee.
OPINION
GOULD, Circuit Judge:
We must decide whether the taxpayer or the government
bears the risk of loss when funds on deposit at a bank for
practical purposes disappear after being levied upon by the
Internal Revenue Service (“IRS”) and removed from a tax-
payer’s bank account. We have jurisdiction pursuant to 28
U.S.C. §§ 1291 and 1346(a)(1), and we hold that, in light of
the burden of proof on the taxpayer in a tax refund case, the
risk of loss necessarily falls upon the taxpayer.
I
In tax year 1994, Plaintiff-Appellant Ian Michael Stead and
his former wife, Lynan K. Stead, filed a federal income tax
return but underpaid their tax liability by $7,574.31. The IRS
issued a notice of balance due on November 13, 1995, and,
when the Steads did not respond, issued a notice of intent to
levy the Steads’ assets on January 22, 1996. Despite these
measures, the tax liability remained unsatisfied.
STEAD v. UNITED STATES 10565
On August 29, 1996, the IRS issued a notice of levy to First
Interstate Bank in the amount of $9,023.26 for funds on
deposit in an account belonging to From Gifted Hands, Inc.,
a corporate entity controlled by Ian Michael Stead. On Sep-
tember 4, 1996, First Interstate Bank debited the From Gifted
Hands, Inc. account in the amount of $9,023.26. The with-
drawal appeared as a “Miscellaneous Debit” on the Steads’
monthly statement. Shortly thereafter, First Interstate Bank
became a part of Wells Fargo Bank.
Although the levied upon funds were removed from the
Steads’ account, the final destination of the funds, if in fact
they were ever transferred from the bank, is not disclosed by
the record. The funds were not returned to the Steads, and the
IRS does not have any record of receiving the funds from
First Interstate Bank or Wells Fargo Bank. Consequently, on
July 21, 1997, the IRS issued a second notice of intent to levy
the Steads’ property. Ian Michael Stead then inquired with the
IRS regarding the first levy and debit from the account at First
Interstate Bank. In response, the IRS notified Ian Stead on
May 20, 1998 that the government had contacted Wells Fargo
Bank and that the bank could not locate any record of the
$9,023.26 levy payment. For reasons that are unclear from the
record, neither the Steads nor the IRS appears to have
attempted to recover the missing funds from First Interstate
Bank or Wells Fargo Bank.
On February 1, 2002, Ian Stead and his subsequent wife,
Belinda A. Stead, refinanced their home and paid $11,641.01
to the IRS. Upon receipt of this payment, the Steads’ tax dis-
pute was resolved to the satisfaction of the IRS, and, on Feb-
ruary 8, 2002, the IRS released its tax lien.
On May 30, 2002, the Steads filed an amended 1994 tax
return seeking a refund in the amount of $11,679.00 for dou-
ble payment of their 1994 tax liability. The IRS did not act on
the Steads’ claim within six months, I.R.C. § 6532(a)(1), and
10566 STEAD v. UNITED STATES
the Steads then filed a claim for a refund in the United States
District Court.1
In 2003, the IRS subpoenaed Wells Fargo Bank, but the
bank informed the IRS that any records of the September 4,
1996 debit from the Steads’ account had been destroyed due
to “the retention schedule of the bank.” The district court
granted summary judgment in favor of the IRS on the ground
that the Steads could not bear the burden of proving that the
$9,023.26 debited from their account on September 4, 1996
was remitted to the IRS. The Steads appeal.
II
When a taxpayer fails to pay his or her federal individual
income tax, a lien in favor of the government arises by opera-
tion of law on the taxpayer’s property and rights to property,
whether held by the taxpayer or by a third party. I.R.C. § 6321.2
The government may perfect this lien through one of two pro-
cedures: an administrative tax levy pursuant to I.R.C. § 6331,
or a lien-foreclosure suit in federal district court pursuant to
I.R.C. § 7403. United States v. Nat’l Bank of Commerce, 472
U.S. 713, 720 (1985); Farr v. United States, 990 F.2d 451,
455-56 (9th Cir. 1993); Treas. Reg. § 301.6331-1(a)(1). When
the IRS elects to recover funds though an administrative levy
on property in the possession of a third party, the IRS serves
a notice of levy on the third party in possession and sends a
copy of the notice to the taxpayer. Although legal title to the
property remains with the taxpayer for the purposes of admin-
istering a bankruptcy estate, Nat’l Bank of Commerce, 472
U.S. at 721; United States v. Whiting Pools, Inc., 462 U.S.
1Although Belinda A. Stead did not file the initial deficient tax return,
she has standing to seek a refund as a taxpayer who allegedly overpaid a
tax liability to the IRS, even though the tax was assessed against a third
party. United States v. Williams, 514 U.S. 527, 529 (1995).
2
Certain types of property are statutorily exempted from a § 6321 tax
lien pursuant to I.R.C. § 6323.
STEAD v. UNITED STATES 10567
198, 210-11 (1983); MICHAEL D. ELLIOTT, FEDERAL TAX COL-
LECTIONS, LIENS, AND LEVIES ¶ 13.05 (2d ed. 1995), service of
the notice of levy “gives the IRS the right to all property lev-
ied upon, and creates a custodial relationship between the per-
son holding the property and the IRS so that the property
comes into the constructive possession of the Government.”
Nat’l Bank of Commerce, 472 U.S. at 720-21 (internal citation
omitted); see also Phelps v. United States, 421 U.S. 330, 334
(1975); Resolution Trust Corp. v. Gill, 960 F.2d 336, 340 (3d
Cir. 1992). In the case of funds on deposit in a bank, the tax-
payer loses any right to access or control the funds. Treas.
Reg. § 301.6332-3(c)(3).
Although a person or entity in possession of property sub-
ject to a levy must ordinarily remit the property to the govern-
ment immediately, I.R.C. § 6332(a); Treas. Reg. § 301.6332-
1(a)(1), banks are subject to special rules and must wait
twenty-one days before relinquishing levied upon funds,
I.R.C. § 6332(c); Treas. Reg. § 301.6332-3. Following the
service of notice, a bank has only two defenses: 1) the levied
upon property is not in its possession, and 2) the levied upon
property is subject to prior judicial attachment or execution.
Nat’l Bank of Commerce, 472 U.S. at 722; MICHAEL I. SALTZ-
MAN, IRS PRACTICE AND PROCEDURE ¶ 14.17 (2d rev. ed. 2002-
2004). If a bank fails to turn over levied upon funds to the
government without statutory justification, the IRS may bring
suit and hold the bank personally responsible for the lesser of
the value of the property or the amount of the levy, plus costs
and interest, as well as a penalty equal to fifty percent of the
amount thus recoverable. I.R.C. § 6332(d); Treas. Reg.
§ 301.6332-1(b); see also Melton v. Teachers Ins. & Annuity
Ass’n of Am., 114 F.3d 557, 560 (5th Cir. 1997).
III
[1] We turn to the question whether the levy and debit from
the From Gifted Hands, Inc. account satisfied the Steads’
10568 STEAD v. UNITED STATES
1994 tax liability.3 The Steads raise their claim in the context
of a tax refund suit, and, as a result, they bear the burden of
showing that they overpaid their 1994 taxes. United States v.
Janis, 428 U.S. 433, 440 (1976); Lewis v. Reynolds, 284 U.S.
281, 283 (1932). We hold that the Steads have not raised a
genuine issue of material fact on an essential element of their
claim for alleged overpayment of their 1994 tax liability. Spe-
cifically, the Steads failed to show that the August 29, 1996
notice of levy to First Interstate Bank and the September 4,
1996 debit from the Steads’ account resulted in the payment
of funds from the Steads to the IRS.
[2] The record is devoid of evidence that the government
took title to or dominion and control over any property owned
by the Steads. Contrary to the Steads’ assertions, the issuance
of a tax levy does not in itself transfer ownership of the levied
upon property from the taxpayer to the IRS. Whiting Pools,
Inc., 462 U.S. at 211. Rather, the IRS ordinarily does not take
title to a levied upon property until the government reaps the
proceeds of a tax sale or otherwise collects on the property of
the taxpayer. Id.; In re Challenge Air Int’l, Inc., 952 F.2d 384,
386-87 (11th Cir. 1992). This framework applies to cash and
cash equivalents. See id. at 387; see also Citizens Bank of Md.
v. Strumpf, 516 U.S. 16, 21 (1995).
[3] Under most circumstances, a tax is “paid” when the
government becomes the owner of the property.4 Cash v.
3
We review de novo a district court decision to grant summary judg-
ment. Abelein v. United States, 323 F.3d 1210, 1213 (9th Cir. 2003). In
conducting our review, we ask whether, taking all reasonable inferences
in favor of the nonmoving party, sufficient evidence exists to create a gen-
uine issue of material fact for trial. FED. R. CIV. P. 56(c); Celotex Corp.
v. Catrett, 477 U.S. 317, 322-23 (1986).
4
Although service of a notice of levy gives the IRS power over the lev-
ied property, it does not guarantee that the amount levied upon will flow
into the coffers of the United States Treasury. Because property levied
upon by the IRS remains subject to the claims of other creditors, Nat’l
Bank of Commerce, 472 U.S. at 721; Whiting Pools, Inc., 462 U.S. at 210,
if we were to hold for the taxpayers in this case, it would permit a taxpayer
to establish that he or she had paid a tax even though the government had
never collected the tax money owed to it.
STEAD v. UNITED STATES 10569
United States, 961 F.2d 562, 569 (5th Cir. 1992) (“In the ordi-
nary case, the IRS need only ensure that the taxpayer is cred-
ited with the amount actually collected on the accounts.”); Sly
v. United States, 836 F.2d 1310, 1312 (11th Cir. 1988); see
also Murphy v. United States, 45 F.3d 520, 523 (1st Cir.
1995); Zapara v. Comm’r, 124 T.C. No. 14 (May 17, 2005)
(“[A] taxpayer generally is not entitled to a credit for seized
property until it is sold.”). Although the Internal Revenue
Code does not speak specifically to the issue presented in this
case, the Code accords with the reasoning that the government
need not credit an amount levied upon against a taxpayer’s
liability until the government actually collects on the account.
I.R.C. § 6343(a)(1)(A) (directing the IRS to release a tax levy,
inter alia, if “the liability for which such levy was made is sat-
isfied or becomes unenforceable by reason of lapse of time”);
id. § 6342 (providing the manner in which the government
must apply funds “realized” through a tax levy).
[4] Moreover, the remedies available to the IRS under
§§ 6331 and 6332 are “analogous to the remedies available to
private secured creditors” under Article 9 of the Uniform
Commercial Code. Whiting Pools, Inc., 462 U.S. at 210-11;
see also Enos v. Comm’r, 123 T.C. 284, 297 n.8 (2004).
Under U.C.C. section 9-207(b)(2) the risk of loss of property
in the possession of a secured creditor remains with the
debtor. Although U.C.C. section 9-207(a) provides that a
secured creditor in possession shall use reasonable care in
serving as custodian of the property, the Steads have pointed
to no affirmative negligence on the part of the IRS that might
shift the risk of loss to the government.
[5] There are situations in which the government exerts
such extensive dominion and control over a levied property
that it should bear the risk of any loss. See, e.g., United States
v. Pittman, 449 F.2d 623, 628 (7th Cir. 1971) (holding that a
levy constituted payment of tax when the government also
took the deed to a property, managed it, and collected rents
from tenants); United States v. Barlow’s, Inc., 767 F.2d 1098,
10570 STEAD v. UNITED STATES
1100 (4th Cir. 1985) (per curiam) (holding that the risk of loss
transferred when the IRS assumed dominion over a fully
earned account receivable and entered into a payment agree-
ment with the debtor); see also Enos, 123 T.C. at 299-300.
However, the government here did not take any action with
respect to the bank account at First Interstate Bank aside from
levying upon $9,023.26 held within it. A levy, without more,
is not sufficient to transfer the risk of loss to the government.
Unless the government takes affirmative action to administer
the levied upon property as it did in Pittman and Barlow’s,
Inc., a tax levy does not in and of itself equate to payment of
tax liability. Compare Murphy, 45 F.3d at 523, and Cash, 961
F.2d at 568-69, with Barlow’s, Inc., 767 F.2d at 1100, and
Pittman, 449 F.2d at 628.
IV
[6] The Steads further argue that the levy upon and debit
of the funds in their First Interstate Bank account was a taking
without just compensation that violated the Fifth Amendment.
We reject this argument. The government did not appropriate
the funds on deposit at First Interstate Bank for its own use
and did not take actual possession of or exert dominion and
control over the funds. Cf. Pittman, 449 F.2d at 626. The debit
of the funds from the Steads’ bank account also was not an
unconstitutional taking by the government. It was the bank —
not the IRS — that debited the Steads’ account, and the
twenty-one-day holding provision of I.R.C. § 6332(c),
designed to protect the taxpayer from unwarranted tax levies,
is a reasonable regulation of private property that ensures the
continuing flow of revenues into the public fisc.
V
[7] Both parties are to a degree at fault in this unfortunate
situation. For their part, the Steads failed timely to pay their
full income tax liability for tax year 1994, did not respond to
the notice of balance due or to the notice of intent to levy, and
STEAD v. UNITED STATES 10571
further did not follow up with First Interstate Bank and Wells
Fargo Bank to ensure that the funds subject to the tax levy
were remitted to the IRS. See United States v. Triangle Oil,
277 F.3d 1251, 1256-60 (10th Cir. 2002) (holding that a tax-
payer has standing to bring state law claims related to prop-
erty levied upon by the IRS); see also I.R.C. § 6332(e)
(granting immunity from suit only to those persons who “sur-
render[ ] . . . property or rights to property” in actions “arising
from such surrender or payment”). On the other hand, for its
part, the IRS did not take action against First Interstate Bank
to force compliance with the levy or to hold the bank person-
ally liable for the amount of the levy plus penalties pursuant
to I.R.C. § 6332(d). Although one might sympathize with the
Steads for their loss and one might encourage the IRS to
improve its efficiencies in collecting on tax levies, the govern-
ing law requires that, to recover in this refund suit, the Steads
must demonstrate that they paid to the government more
money than they owed on their 1994 tax liability plus penal-
ties. They have not done so.
AFFIRMED.