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Certified Enters., Inc. v. United States

United States District Court, E.D. Missouri, Eastern Division

December 13, 2017

CERTIFIED ENTERS., INC., et al., Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.

          MEMORANDUM AND ORDER

          STEPHEN N. LIMBAUGH, JR. UNITED STATES DISTRICT JUDGE

         Plaintiffs filed this lawsuit against the United States stating that the United States Internal Revenue Service (“IRS”) wrongfully levied on their bank accounts for the tax debt owed by a delinquent taxpayer, Dalton West Coast, Inc. (“DWCI”). Plaintiffs contend that they are not the alter egos of or are otherwise related to DWCI and that they are thus not liable for the taxes owed by DWCI. Plaintiffs filed a motion for summary judgment against the United States (#19). The motion has been fully briefed and is ready for disposition.

         I. Factual background

         In 2000, DWCI was incorporated in California by John C. Dalton, IV. DWCI was in the document destruction business. In January 2006, DWCI entered into an asset sale and purchase agreement with Cintas Corporation. After adjustments, the net sale proceeds were $25.9 million. In March 2006, DWCI's shareholders sold their outstanding corporate stock to CDD Holdings, LLC[1] for $18.8 million. In September 2007, DWCI filed its 2006 Form 1120 corporate income tax return, reporting approximately $26 million in capital gains. The gain was completely offset by, primarily, purported losses relating to foreign currency options. In September 2010, the IRS issued a Notice of Deficiency to DWCI asserting a $9.4 million tax deficiency, plus penalties, primarily from disallowance of the claimed losses from foreign currency options. DWCI did not challenge the Notice of Deficiency in United States Tax Court.

         On January 27, 2011, a delegate of the Secretary of the Treasury assessed $9, 413, 246 in taxes against DWCI for tax year 2006. In an attempt to collect on DWCI's tax liability, on June 1, 2016, the IRS issued three Notices of Levy on First Bank in Hazlewood, Missouri related to each of the three plaintiffs --- Certified Enterprises, Inc., Certified Recycling, Inc., and Fibre Resources Unlimited, Inc. The levies attach to all property and rights to property of the plaintiffs as alter egos of DWCI.

         Plaintiffs contend that the levies were wrongful and filed this lawsuit.

         II. Legal Standard

         Pursuant to Federal Rule of Civil Procedure 56(c), a district court may grant a motion for summary judgment if all of the information before the court demonstrates that “there is no genuine issue as to material fact and the moving party is entitled to judgment as a matter of law.” Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 467 (1962). The burden is on the moving party. City of Mt. Pleasant, Iowa v. Assoc. Elec. Co-op., Inc., 838 F.2d 268, 273 (8th Cir. 1988). After the moving party discharges this burden, the nonmoving party must do more than show that there is some doubt as to the facts. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Instead, the nonmoving party bears the burden of setting forth specific facts showing that there is sufficient evidence in its favor to allow a jury to return a verdict for it. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).

         In ruling on a motion for summary judgment, the court must review the facts in a light most favorable to the party opposing the motion and give that party the benefit of any inferences that logically can be drawn from those facts. Buller v. Buechler, 706 F.2d 844, 846 (8th Cir. 1983). The court is required to resolve all conflicts of evidence in favor of the nonmoving party. Robert Johnson Grain Co. v. Chem. Interchange Co., 541 F.2d 207, 210 (8th Cir. 1976).

         III. Discussion

         Third parties may bring an action “against the United States when it is shown property was wrongfully seized pursuant to levy by the IRS.” Security Counselors, Inc. v. United States, 860 F.2d 867, 869 (8th Cir. 1988); 26 U.S.C. § 7426. In such a wrongful levy action, the plaintiff carries the initial burden of showing some interest in the levied property in order to have standing. Id.; see also Scoville v. United States, 250 F.3d 1198, 1201-02 (8th Cir. 2001). Once the plaintiff has made this initial showing, the burden then shifts to the government to prove a “nexus” between the property and the delinquent taxpayer. Scoville, 250 F.3d at 1201. The Eighth Circuit has not ruled on whether the burden of proof for the government is “preponderance of the evidence” or “substantial evidence.” Id. If the government proves a nexus, the plaintiff has “the ultimate burden to prove the levy was wrongful.” See id.

         The parties agree that the plaintiffs have satisfied their burden of showing some interest in the levied bank accounts --- the bank accounts belonged to the plaintiffs. The burden thus shifts to the United States to prove a “nexus” between the levied property (the bank accounts) and the delinquent taxpayer (DWCI) on or after the date the lien arose --- January 27, 2011. The IRS states that the 2016 levies on the plaintiffs' bank accounts were based upon the theory that the plaintiffs are the alter egos of the delinquent taxpayer DWCI.

         Plaintiffs contend that the IRS must have had probable cause at the time of the 2016 levies to believe that a nexus existed between DWCI and the levied bank accounts. The Eighth Circuit has not reached the question of whether the IRS must have probable cause at the time of the levies. See Scoville, 250 F.3d at 1201 n.3. However, courts in other Circuits have held that the IRS must make a showing of probable cause at the time a levy is imposed to comply with the Fourth Amendment. Valley Finance, Inc. v. United States, 629 F.2d 162, 171 n. 19 (D.C.Cir. 1980); Flores v. United States, 551 F.2d 1169, 1175-76 (9th Cir.1977); see also Oxford Capital Corp. v. United States, 211 F.3d 280, 287 (5th Cir. 2000) (Dennis, C.J., concurring). Plaintiffs thus insist that no discovery is required in this case because the case should be determined by the facts in the government's possession at the time of the levy.

         Probable cause exists if “the totality of facts based on reasonably trustworthy information would justify a prudent person in believing” that an offense had occurred. Smithson v. Aldrich, 235 ...


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