Opinion ID: 71338
Heading Depth: 3
Heading Rank: 2

Heading: Ruff's obligation to surrender Artrip's commission to the IRS

Text: 22 Once it is determined that a state law property interest exists, federal law determines the tax consequences of that interest. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925. State law is not relevant to this inquiry. Id. Federal law, specifically the Treasury regulations governing the levy power, establishes the nature of this determination. 23 [A] levy extends only to property possessed and obligations which exist at the time of the levy. Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date. 24 26 C.F.R. § 301.6331-1(a)(1). The issue of whether Ruff was obligated to surrender Artrip's commission to the IRS is really a question of whether the liability of the bankruptcy estate to Artrip was fixed and determinable at the time that the Notice of Levy was served on Ruff. United States v. Hemmen, 51 F.3d 883, 888 (9th Cir.1995). 25 At the outset, it is important to note that the quoted regulations include among obligations which are fixed and determinable those obligations for which the right to receive payment has been deferred. Thus, an obligation can be fixed and determinable even if the right to receive payment does not arise until a later time. The court in Hemmen analogized a fixed and determinable obligation of this type to an ordinary contract with an executory duty to pay for a completed performance by the obligee. Id. at 890. 26 The situation confronted by the court in Hemmen is very similar to that in the case at bar. In Hemmen, the president of a Chapter 11 debtor, Al-Hadid (hereinafter referred to as taxpayer) performed certain services for the estate by working to preserve the assets of the estate. He filed a claim with the bankruptcy court for administrative expenses. The case was converted into a Chapter 7 liquidation, and Hemmen was appointed trustee. Id. at 886. The district court entered two separate orders allowing the taxpayer's claim for administrative expenses. The second of these orders, dated October 16, 1984, indicated that payment would not be made except upon further order of the court. Id. The underlying performance by the taxpayer was complete at all relevant times. Approximately one year before the issuance of these orders, the IRS assessed a civil tax penalty against the taxpayer. Pursuant to that assessment, on December 17, 1985, after allowance of the claim for administrative expenses but before the bankruptcy court had finally approved payment thereof, IRS agents served a notice of levy on Hemmen demanding the surrender of any of the taxpayer's property or rights to property in Hemmen's possession as a result of his status as trustee. Id. However, instead of surrendering the money owed by the estate to the taxpayer, Hemmen paid those funds to the taxpayer. The IRS sued Hemmen, arguing that he was personally liable for the funds paid to the taxpayer. 27 The court in Hemmen held that the allowed administrative expenses were fixed and determinable as of the date on which the Secretary's notice of levy was served. It reached this conclusion despite the fact that actual payment of those expenses by the trustee had to await authorization from the bankruptcy court, and the fact that the claims for expenses could be reduced to money only if there were sufficient assets left in the estate to satisfy them. Id. at 890. Additionally, the court noted that the trustee retained the power to move the bankruptcy court to disallow the claims. Id. These factors failed to sway the court. 28 None of these conditions to payment, however, undermines the proposition that the obligation of the estate to [the taxpayer] was fixed within the meaning of § 301.6331-1(a)(1) after the underlying performance was completed and the claim was allowed by the court.... At best, the factors Hemmen cites establish only that the estate's liability was fixed but that [the taxpayer's] interest was still subject to possible defeasance due to factors having no bearing on the underlying performance. 29 Id. Further, the court held that the sum due the taxpayer was determinable because, although there was some uncertainty as to whether there would be sufficient funds remaining in the estate to pay the taxpayer's claims, the sums were still capable of precise measurement in the future. Id. (citing Reiling v. United States, 77-1 U.S. Tax Cas. (CCH) P9269, 1977 WL 1094 (N.D.Ind.1977)). Thus, according to the Hemmen court, the administrative expenses due the taxpayer were fixed and determinable because they had been allowed by the bankruptcy court and the underlying performance had been completed. The fact that payment might not be made due to a shortfall in the estate or subsequent disallowance by the bankruptcy court had no impact on the Hemmen court's determination that they were fixed and determinable as of the date of the levy. 30 Similarly, Artrip's commission was fixed and determinable on July 27, 1989, the date that Ruff received the Secretary's Notice of Levy. 2 It was fixed because the bankruptcy court in its March 2, 1989, order approved Artrip's appointment as broker for the estate with a 10% commission (to be shared equally with two other brokers), and because the underlying performance required of Artrip was complete. The buyer identified by Artrip entered into an agreement with Ruff to purchase those assets in April of 1989, and the sale was authorized by the bankruptcy court on May 24, 1989. The closing occurred on June 16, 1989. The commission was determinable because it was capable of precise measurement, having been established by previous court order. See In re Central Micrographics Corp., No. 88-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989) (Order appointing Artrip business broker). The bankruptcy court set a date for Artrip's fee hearing by notice to the parties almost two weeks before Ruff received the Notice of Levy. The fact that Artrip was entitled to a commission of $20,000 was never in dispute, and this is unaffected by the potential unavailability within the bankruptcy estate of the resources needed to pay that amount. Common sense dictates that the Treasury regulations at issue here be read this way. 3 If the regulations were meant to require, as Ruff argues, that the commission must be paid to the broker before it can be fixed and determinable, then they would have been written to so require. 31 Our holding is consistent with the purpose of the levy. The levy is not designed, as noted above, to give the government's claims superiority over the claims of others. Instead, the levy is intended only to protect the government's statutory interest in property or rights to property, see 26 U.S.C. § 6332(a), and to assure the availability of the assets at issue once a final ordering of claims is made. National Bank of Commerce, 472 U.S. at 721, 728, 105 S.Ct. at 2924-25, 2928. The resolutions reached in Hemmen and in the case at bar merely insure that this interest is protected by putting the burden of monitoring the progress of the bankruptcy estate on the party who can most easily and efficiently carry it, the trustee. 32 The interpretation of the statute urged upon us by Ruff would read out of the statute the phrase rights to property, and thus would strictly limit an IRS levy to property actually in the possession of the party upon whom the levy is served. Ruff's interpretation is also inconsistent with the regulations, and would eliminate from the property subject to levy obligations which exist at the time of the levy. 26 C.F.R. § 301.6331-1(a)(1). It would render superfluous the regulation's elaboration to the effect that those obligations upon which levy may be made are those which are fixed and determinable although the right to receive payment thereof may be deferred. Ruff's interpretation would seriously undermine the Service's ability to protect the government's statutory interest. 33 Analysis of the relevant bankruptcy provisions governing the payment of professionals from the assets of the estate reinforces our conclusion that Artrip's commission was fixed and determinable as of the date of the levy. Section 328 of the Bankruptcy Code states: 34 (a) The trustee ..., with the court's approval, may employ ... a professional person ... on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, or on a contingent fee basis. Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions. 35