Opinion
00-CV-3832 (RO).
October 9, 2007
Nicole L. Gueron, Assistant United States Attorney, (Michael J. Garcia, U.S. Attorney, SDNY).
James John Mahon, Esq., Helms Greene, LLC, New York, NY, for defendant.
OPINION ORDER
Before me are the government's and Moskowitz, Passman Edelman's cross Motions for Summary Judgment.
The facts of this case are not in dispute. A. Sheldon Edelman, Esq., is an attorney and the senior of the two partners of defendant law firm Moskowitz, Passman Edelman ("MPE"). Attorney Edelman owes $1,224,157.74 in unpaid income taxes, a debt memorialized in a January 2004 Stipulation for Judgment and a subsequent Judgment against him. The Judgment is based on his unpaid federal income tax liabilities for the years 1990-1994, 1996, 1998-2001.
Over 1996 and 1997, his law firm, MPE, was served with two levies (Form 668-W(c) and Form 668-A(c)) and two Final Demand Letters (Form 668(c)). The 1996 levy stated that it applied to: "(1) This taxpayer'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) this taxpayer's other income that you have now or for which you are obligated." MPE neither honored the levies, nor filed a wrongful levy action. On the contrary, Mr. Edelman, who handled the books for the firm, wrote himself and his junior partner Motelson checks from whatever was available in MPE's bank accounts, frequently on a weekly basis. Mr. Edelman stated at his deposition that these checks in varying amounts were rough advances to each of them against the total income and firm profits they were due to receive from the partnership in a given year, and principally motivated by Motelson's continuing needs, no issue being presented as to the bona fides of any of these advances.
Mr. Edelman has filed tax returns for those years but with shortfalls claiming total income of $202,761 in 1997, $287,857 in 1998, $317,368 in 1999, and $176,270 in 2000.
Mr. Edelman's deposition reads (p. 52, 54-5):
Q: You're here representing the firm. You signed checks on behalf of the firm to yourself?
A: Yes.
Q: Frequently every week?
A: Yes.
Q: So what did you think you were paying yourself for?
A: A draw against whatever the profits were going to be of the firm at the end of the year.
***
Q: You told me there's no set formula. I'm just trying to understand what are the variables. How much is in the bank account is one of the variables?
A: That's the main variable because you can't draw against something that's not in the bank account.
Q: What other considerations came to mind?
A: Well, if we need X dollars to pay rent and Y dollars to pay phone and this, it might leave Z dollars against which you could draw.
Q: I'm not talking about the operating expenses of the firm. I'm trying to understand once your expenses are paid in any given period, you were writing yourself checks. On behalf of the firm you were writing yourself a check?
A: Yes.
Q: At least once a week, it looks like?
A: Yes.
Q: How did you decide how what the amount of the check would be?
A: It would be based upon availability. That's why the checks are not consistent.
Q: Availability in the bank account of the firm?
A: Can't draw from anything else.
Q: Was it based on anything else, the amount that you wrote yourself? The amount that you paid yourself, was it based on anything else?
A: What generally would happen is Mr. Motelson needs X amount of dollars. So if we go along with the general split, he gets X of dollars. I will take either the same or less at that time because there's not enough money. And if we get in the money later on, I'll try to make up for the difference that I did not take by issuing myself a larger check at another time. I tried to keep the draw, as much as possible and it was difficult to do that, with a general theme of a 60/40 draw division. That's what I tried to do.
Summary judgment should be granted when "there is no genuine issue as to any material fact . . . and the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The Internal Revenue Code provides that, to satisfy a tax judgment, the IRS may impose a lien on any "property" or "rights to property" belonging to a taxpayer. See 26 U.S.C. § 6321; Drye v. United States, 528 U.S. 49, 55 (1999). The lien can attach "to an individual partner's interest in [a] partnership, that is, to the fair market value of his or her share in the partnership assets."United States v. Craft, 535 U.S. 274, 286 (2002). As the holder of the lien, the IRS is "entitled to `receive . . . the profits to which the assigning partner would otherwise be entitled.'" Id. If a taxpayer refuses to honor a lien, and pay its tax liabilities, the IRS may levy upon "all property and rights to property" of the delinquent taxpayer. 26 U.S.C. § 6331(a). The Supreme Court has repeatedly observed that the language in Sections 6321 and 6331 is broad and reveals on its face that Congress "meant to reach every interest in property that a taxpayer might have." Drye, 528 U.S. at 56. "When Congress so broadly uses the term `property,' we recognize . . . that the Legislature aims to reach `every species of right or interest protected by law and having an exchangeable value.'" Id.
Mr. Edelman contends that the above described checks were not subject to the levies against the firm because they were as he testified a "draw or an advance or a loan against what is ultimately converted to income at the end of the year." However, calling it a draw or an advance instead of income or salary is insufficient to except it from the levies' ambit. See United States v. Jefferson-Pilot Life Ins. Co., 49 F.2d 1020, 1022 (4th Cir. 1995) (holding that IRS levies apply to commissions earned by an independent contractor, although such earnings are not a traditional salary); see also United States v. Has, Inc., No 87-1644CC, 1990 WL 54826 at *2 (D. Puerto Rico, Feb. 21, 1990) (holding that an employer may not avoid a levy on its employee's wages by advancing the employee the salary it will later owe the employee).
While Mr. Edelman points out that the government cannot cite a case where it has applied this collection device to a partner's draw from a partnership, I note that neither does he cite a case where a court has refused to permit it. Keeping in mind the spirit of the law, the fact that monies are paid out to the partners frequently weekly as advances on future income cannot exempt the law firm from the statute by virtue of Edelman's partner status.
Section 6332(d)(2) of the Internal Revenue Code imposes an additional punishment of fifty percent on an entity failing to honor a levy if there was no "reasonable cause" for failing to surrender property to the United States that is subject to the levy. See 26 U.S.C. § 6332(d)(2); Celauro v. I.R.S., 411 F. Supp. 2d 257, 265-66 (E.D.N.Y. 2006). In this context, reasonable cause means a "bona fide dispute over the amount owing to the taxpayer (by the property holder) or over the legal effectiveness of the levy itself." Sterling National Bank, 494 F.2d 919, 923 (2d Cir. 1974). MPE has not created a "bona fide" dispute over either the amount the firm owes Mr. Edelman or the legal effectiveness of the levies. As set forth in his deposition as a witness on behalf of MPE, see supra n. 2, Mr. Edelman testified that based upon oral agreement with the firm's other partner, Motelson, his share of the annual profits is 60%. I find that there was no reasonable cause for MPE's failure to surrender any property subject to the levies, and I therefore also impose the fifty percent statutory penalty here yet to be established.
The government's Motion for Summary Judgment is granted as is its request for imposition of the fifty percent statutory penalty.
While MPE has moved for summary judgment, the Motion is at a minimum also procedurally deficient under Local Rule 56.1. The Motion fails to set forth any material facts as to which it contends there is no genuine issue to be tried, nor any citations to admissible evidence. See Local Rules 56.1(a), (d). Such deficiencies constitute "grounds for denial of the motion" pursuant to Local Rule 56.1(a), and accordingly, MPE's Motion is denied.
Submit order on notice.