Gold Forever Music v. United States , 920 F.3d 1096 ( 2019 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 19a0068p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
GOLD FOREVER MUSIC, INC., ┐
Plaintiff-Appellant, │
│
> No. 18-1789
v. │
│
│
UNITED STATES OF AMERICA, │
Defendant-Appellee. │
┘
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 2:17-cv-13927—George Caram Steeh, District Judge.
Decided and Filed: April 10, 2019
Before: McKEAGUE, GRIFFIN, and NALBANDIAN, Circuit Judges.
_________________
COUNSEL
ON BRIEF: Neal Nusholtz, NEAL NUSHOLTZ, P.L.L.C., Troy, Michigan, for Appellant.
Joan I. Oppenheimer, Geoffrey J. Klimas, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee.
_________________
OPINION
_________________
McKEAGUE, Circuit Judge. The statute of limitations for a wrongful levy action cannot
begin until there has been a levy that attaches to the property at issue. In this case, notices of
levy in 2012 did not constitute levies on royalties generated after the notices were served. For
the reasons set forth below, the statute of limitations does not bar Gold Forever’s wrongful levy
action. Accordingly, we REVERSE the judgment of the district court and REMAND for
further proceedings.
No. 18-1789 Gold Forever Music, Inc. v. United States Page 2
I.
Gold Forever Music, Inc. (Gold Forever) is a music publishing company that has entered
into agreements with various artists entitling it to half of the royalties collected for the sale and
performance of those artists’ work. Instead of directly licensing third parties to use music from
its catalog, Gold Forever works with Broadcast Music, Inc. (BMI) and Universal Music
Publishing (Universal) to do so. These companies license others to use Gold Forever’s music,
collect the royalties pursuant to those licensing agreements, and remit those royalties to Gold
Forever.
Edward Holland, Jr. is the sole owner of Gold Forever. He was a Motown artist and has
co-written several famous songs such as “You Can’t Hurry Love” by the Supremes and Phil
Collins, “Where Did Our Love Go” and “Stop In the Name of Love” by the Supremes, “How
Sweet It Is (To Be Loved by You)” by Marvin Gaye and James Taylor, “You Keep Me Hangin’
On” by Vanilla Fudge and Kim Wilde, “Just a Little Bit of You” by Michael Jackson, and many
more. His music forms some, but not all, of Gold Forever’s catalog. Holland owes millions of
dollars to the IRS in taxes, interest, and penalties.
In 2012, to collect on Holland’s tax deficiency, the IRS served two notices of levy, one to
BMI and one to Universal. The notices identified Gold Forever as the “alter ego/nominee
transferee of Edward Holland, Jr.” The notices of levy required the companies to remit to the
IRS “property and rights to property . . . that you have or which you are already obligated to pay
[Gold Forever].” It is unclear from the complaint whether BMI and Universal remitted any
monies to the IRS between 2012 and 2016. Beginning on October 6, 2016, through the date of
the complaint, BMI and Universal remitted a combined $967,140.76 to the IRS. Gold Forever
made requests for refunds to the IRS within nine months of BMI and Universal remitting the
funds.
On December 6, 2017, Gold Forever filed a wrongful levy action for the funds remitted
beginning on October 6, 2016. Gold Forever’s complaint alleged that it has never been the alter
ego or nominee of Holland and that most, if not all, of the money remitted by BMI and Universal
belongs either to Gold Forever or to artists other than Holland. The government moved to
No. 18-1789 Gold Forever Music, Inc. v. United States Page 3
dismiss Gold Forever’s wrongful levy suit as untimely, having been filed after the statute of
limitations had run. The district court agreed with the government and granted the motion to
dismiss.
II.
We review de novo the grant of a motion to dismiss, construing the complaint in the light
most favorable to the non-movant, accepting their well-pleaded factual allegations as true, and
drawing all reasonable inferences in their favor. Jackson v. Sedgwick Claims Mgmt. Servs., Inc.,
731 F.3d 556, 562 (6th Cir. 2013).
The IRS has several methods to collect monies owed by delinquent taxpayers, one of
which is the power of levy. See 26 U.S.C. § 6331(a). Levy “includes the power of distraint and
seizure by any means.” Id. § 6331(b). A levy can reach “all property and rights to property . . .
belonging to [the taxpayer].” Id. § 6331(a). In addition to levying on property in the taxpayer’s
control, the IRS can levy on property belonging to the taxpayer under another’s control.
In the situation where a taxpayer’s property is held by another, a notice of levy
upon the custodian is customarily served pursuant to § 6332(a). This notice gives
the IRS the right to all property levied upon, and creates a custodial relationship
between the person holding the property and the IRS so that the property comes
into the constructive possession of the Government. If the custodian honors the
levy, he is “discharged from any obligation or liability to the delinquent taxpayer
with respect to such property or rights to property arising from such surrender or
payment.” § 6332(d). If, on the other hand, the custodian refuses to honor a levy,
he incurs liability to the Government for his refusal.
United States v. Nat’l Bank of Commerce, 472 U.S. 713, 720–21 (1985) (some citations omitted).
There are only two defenses for failing to comply with the levy demand. First, that the
third party is “neither ‘in possession of’ nor ‘obligated with respect to’ property or rights to
property belonging to the delinquent taxpayer” and second, that the property is “subject to a prior
judicial attachment.” Nat’l Bank of Commerce, 472 U.S. at 722 (citation omitted). The third
party must comply with the levy demand even if it or any other party claims an interest in the
levied property.
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Any person other than the taxpayer who claims an interest in the levied property may
pursue a wrongful levy action against the United States under 26 U.S.C. § 7426(a) for recovery
of the levied property. An action under § 7426(a) is “the exclusive remedy for an innocent third
party whose property is confiscated by the IRS to satisfy another person’s tax liability.”
EC Term of Years Tr. v. United States, 550 U.S. 429, 433 (2007) (citation omitted). The
wrongful levy action “may be brought without regard to whether such property has been
surrendered.” 26 U.S.C. § 7426.
At the time relevant to this appeal, a wrongful levy action could be brought only within
nine months “from the date of the levy or agreement giving rise to such action.” Id. § 6532(c)(1)
(2017).1 A request for the return of the levied property under 26 U.S.C. § 6342 extended the
nine-month period by twelve months from the date of filing the request so long as the request fell
within the nine-month limitations period. Id. § 6532(c)(2) (2017); see Carter v. United States,
110 F. App’x 591, 594 (6th Cir. 2004). When the property or obligation levied on is intangible,
we have held that the notice of levy qualifies as the “date of the levy” sufficient to start running
the statute of limitations for a wrongful levy action. See State Bank of Fraser v. United States,
861 F.2d 954, 967 (6th Cir. 1988) (“[S]ervice of the notices of levy on [taxpayer’s] accounts
receivable debtors commenced the running of the statute of limitations.”); see also Phelps v.
United States, 421 U.S. 330, 337 (1975) (“Historically, service of notice has been sufficient to
seize a debt, and notice of levy and demand are equivalent to seizure.” (citations omitted)).
As relevant here, a levy may “extend only to property possessed and obligations existing
at the time thereof.”2 26 U.S.C. § 6331(b). An applicable regulation in the CFR explains, by
way of example, that a bank account can be levied on, which attaches the entirety of the contents
to which the taxpayer has a property right. 26 C.F.R § 301.6331-1(a). But, the regulation notes,
if there is a deposit made into the same bank account subsequent to the levy, the levy does not
reach that new deposit, and the IRS must issue a subsequent levy to attach those funds. Id.
“Obligations exist when the liability of the obligor is fixed and determinable although the right to
1The current limitations period is two years. 26 U.S.C. § 6532(c)(1).
2The statute makes narrow exceptions to this rule, permitting continuing levies for salary, wages, and
certain specified payments. 26 U.S.C. §§ 6331(e), (h).
No. 18-1789 Gold Forever Music, Inc. v. United States Page 5
receive payment thereof may be deferred until a later date.” Id.; see also Tull v. United States,
69 F.3d 394, 397 (9th Cir. 1995). An obligation can come due after the date of the levy and still
be fixed and determinable. As the CFR points out, where a taxpayer has sold personal property
on the first day of the month and has agreed that the purchaser will remit payment on the last day
of the month, that obligation is fixed and determinable such that a levy made in the middle of
that month still reaches the payment when it comes due. 26 C.F.R § 301.6331-1(a).
Taking the facts in the complaint in the light most favorable to Gold Forever, the
royalties remitted beginning in 2016 were generated after the 2012 notices of levy. The only
property or obligation to which the levy could potentially attach in 2012 were Gold Forever’s
agreements with BMI and Universal to remit future royalties to Gold Forever. So, the question
on appeal is whether the 2012 notices of levy reach the royalties generated after 2012 by virtue
of the agreements in place when the notices of levy were served.
The answer to that question depends on whether the royalties remitted to the IRS
beginning in 2016 were fixed and determinable in 2012 when the notices of levy issued. If they
were not fixed and determinable, the notices of levy could not reach the royalties and the
limitations period could not begin to run. If they were fixed and determinable, the notices of
levy would have been sufficient to qualify as the “date of the levy” under § 6532(c)(1),
beginning the limitations period.
Determining whether the 2012 levies attached to royalties acquired after the notices of
levy is necessary to finding when the limitations period began to run for a wrongful levy action
on those royalties. The government insists, without explanation, that determining the scope of
the 2012 levies affects only the relief that could be awarded in the wrongful levy action and that
considering the scope of the levies conflates “the statute of limitations with the merits of the
claim.” The government’s concern is misplaced. Whether the levy attached to property is not
part of the merits of a wrongful levy action—i.e., that the levy was made on property or a right to
property in which the non-taxpayer has an interest. See Nat’l Bank of Commerce, 472 U.S. at
739 (quoting United States v. Rodgers, 461 U.S. 677, 695 (1983)). A levy attaching to property
or the right to property is necessarily antecedent for the statute of limitations to begin running on
a wrongful levy action concerning that property.
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We have not previously addressed when an existing contractual obligation to pay the
taxpayer in the future is sufficiently fixed and determinable such that a levy can attach to that
future payment. Decisions from our sister circuits provide useful guiderails.
Prior to the levy statute being amended to permit continuing levies on wages and salaries,
the Second Circuit noted that a levy could not reach future earnings from salary or wages
because “[t]hey are contingent upon performance of a contract of service and represent no
existing rights of property.” United States v. Long Island Drug Co., 115 F.2d 983, 986 (2d Cir.
1940); see also Wagner v. United States, 573 F.2d 447, 454 (7th Cir. 1978) (“[Taxpayer’s] future
wages and commissions were contingent on his continued employment and thus did not
represent an existing property right to which a lien[3] could attach. [Taxpayer] had no present
right to the wages and commissions.”).
Similarly, the Ninth Circuit found that a levy could not reach the proceeds of an auction
of the taxpayer’s property that had not been conducted when the levy was served. Tull, 69 F.3d
394. The taxpayer had negotiated with an auctioneer to auction some of the taxpayer’s assets.
Prior to the auction, the auctioneer received a notice of levy seeking the auction proceeds. Id. at
395. The question on appeal was whether the future auction proceeds were fixed and
determinable in light of the agreement between the taxpayer and the auctioneer and the
significant preparations that had been made by the auctioneer such as circulating advertising
brochures and cleaning some of the assets to be sold. Id. at 396. The Ninth Circuit observed that
“an obligation to attempt to sell some as yet undetermined amount of property for an as yet
undetermined price to as yet undetermined buyers” was not fixed and determinable. Id. at 397.
The court commented:
An actual sale of property would establish both the price of that property and the
duty of the buyer to pay the price, even if the date of payment were deferred. On
the other hand, if a prospective buyer had not yet agreed to pay anything and was
only thinking about whether he would buy at all, it could hardly be argued that the
possible ultimate payment was property of the prospective seller. If the buyer did
later agree to purchase at a certain price, a new levy would reach that amount, just
as it would reach a later deposit in a bank. But to call an obligation both fixed
3The definition of property and rights to property is the same for liens under § 6321 and levies under
§ 6331. See Dominion Tr. Co. of Tenn. v. United States, 7 F.3d 233 (6th Cir. 1993).
No. 18-1789 Gold Forever Music, Inc. v. United States Page 7
and determinable when there has been no sale at all, no prospective buyer, no
final determination of what will be sold, and no notion of the price is to strip the
words “fixed and determinable” of all meaning.
Id. at 398.
The Ninth Circuit distinguished Tull from its prior decision in United States v. Hemmen,
51 F.3d 883 (9th Cir. 1995). In Hemmen, the court held that an allowed administrative claim in
an unsettled bankruptcy was fixed and determinable. Id. at 885. The taxpayer had briefly
administered a Chapter 11 bankruptcy as the debtor-in-possession before the proceeding was
converted to a Chapter 7 liquidation and a trustee was appointed. Id. at 886. The bankruptcy
court awarded the taxpayer an allowed administrative expense for his work as administrator prior
to the conversion to Chapter 7. While bankruptcy proceedings were ongoing, the Chapter 7
trustee received a notice of levy to surrender property belonging to the taxpayer. The trustee did
not surrender any property at that time. The IRS sought to hold the trustee personally
responsible for failing to honor the levy. The trustee defended on the basis that he was not in
possession of, or obligated with respect to, the taxpayer’s property when the levy was served
because bankruptcy was ongoing and the amount available to pay administrative claims had not
been determined. Id. The Ninth Circuit held that the allowed administrative expense was fixed
and determinable because the underlying performance giving rise to the claim was complete and
the claim had been allowed. Id. at 890. The mere possibility of “defeasance due to factors
having no bearing on the underlying performance” did not affect the fact that the obligation was
determinable because “[u]nlike a requirement that the extent of an obligation be ‘determined,’
the term ‘determinable’ requires only that the sum be capable of precise measurement in the
future.” Id.
These cases stand for the principle that a contractual obligation to pay money (or remit
property) to the taxpayer after the date of the levy is “fixed” where performance is complete and
all that remains under the contract is payment (or provision of property) to the taxpayer, and
“determinable” if, at the time the levy is served, the amount that the taxpayer will be owed can
be ascertained with reasonable accuracy, regardless of whether that amount is subject to potential
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defeasance.4 This makes sense. “The underlying principle justifying the administrative levy is
the need of the government promptly to secure its revenues.” Nat’l Bank of Commerce, 472 U.S.
at 721 (quoting Phillips v. Commissioner, 283 U.S. 589, 596 (1931) (cleaned up)). Third parties
will be able to determine at the time they receive the notice of levy precisely what the levy
reaches, rather than guessing at whether it creates a persistent nebulous liability. This means the
IRS will know immediately whether its levy will satisfy the delinquent tax obligation or if it will
need to seek additional monies elsewhere.
Although the district court was correct that service of the notice of levy can start the
statute of limitations running for intangible property, it is necessary for the notice of levy to
attach to the property that is the subject of the wrongful levy action before the statute can run. In
supplemental briefing submitted at this court’s direction, the government concedes that “[t]he
record does not contain sufficient information to determine whether Gold Forever’s right to
receive future royalties was attached by the 2012 levies.” Appellee Suppl. Br. 5. Therefore,
under the motion to dismiss standard, the district court should have drawn factual inferences in
Gold Forever’s favor and concluded that nothing remitted in 2016 and beyond represented any
obligation owed in 2012—i.e., the royalties had not yet been generated and so there was more
remaining to be done under the contract, such as finding licensees and collecting royalties, than
to simply remit royalties to Gold Forever. Taking the facts in the light most favorable to Gold
Forever, the only thing that existed in 2012 was the obligation to remit royalties generated in the
future. These royalties are similar to, if not even more indefinite than, the property to be
auctioned in Tull. Gold Forever’s agreements with Universal and BMI, therefore should have
been construed as merely “an obligation to attempt to sell some as yet undetermined amount of
property for an as yet undetermined price to as yet undetermined buyers.” Tull, 69 F.3d at 397.
4We find additional support for this formulation in the body of tax law concerning whether an expense is
sufficiently incurred to entitle an accrual-basis taxpayer to deduct it under 26 U.S.C. §162(a). That determination
rests on whether “all events” have occurred to “fix the amount of the tax and determine the liability of the taxpayer
to pay it.” United States v. Anderson, 269 U.S. 422, 441 (1926). The “all events” test has two prongs: “First, all the
events must have occurred which establish the fact of the liability. Second, the amount must be capable of being
determined with reasonable accuracy.” Chrysler Corp. v. Comm’r, 436 F.3d 644, 648 (6th Cir. 2006) (quoting
Chrysler Corp. v. Comm’r, No. 22148–97, 2000 WL 1231528, 80 T.C.M. 334, T.C.M. (RIA) 2000–283
(Aug. 31, 2000) (cleaned up)). In explaining the first prong, the Supreme Court noted that a liability is fixed when
“the obligation to pay[] has become final and definite in amount.” Sec. Flour Mills Co. v. Comm’r, 321 U.S. 281,
287 (1944).
No. 18-1789 Gold Forever Music, Inc. v. United States Page 9
Further, the district court should have drawn an inference in Gold Forever’s favor that the
earliest the statute of limitations could have begun running on Gold Forever’s claim was when
the IRS seized Gold Forever’s funds held by BMI and Universal. See, e.g., 26 U.S.C. § 6331(b)
(“The term ‘levy’ as used in this title includes the power of distraint and seizure by any means.”);
Id. § 6532(c)(l) (2017) (providing that a wrongful levy action can only be brought within nine
months “from the date of the levy or agreement giving rise to such action”). Here, the complaint
alleges that Gold Forever filed requests for the return of the remitted funds within that nine-
month period, and the complaint was filed within the twelve-month extension period provided to
individuals who file such requests with the IRS. Id. § 6532(c)(2). Therefore, the district court
should have concluded that, on the face of the complaint, this case was properly filed within the
statute of limitations.
It may be, as the government suggests, that nothing the IRS did after 2012 constituted a
subsequent levy. Thus, the funds remitted beginning in 2016 were not sent pursuant to a levy
and therefore there could be no wrongful levy. See Hamilton Nat’l Bank of Johnson City v.
United States, 367 F. Supp. 1110, 1112 (E.D. Tenn. 1972), aff’d, 486 F.2d 1405 (6th Cir. 1973)
(“If there was no levy, certainly there could have been no ‘wrongful’ levy.”). This argument,
however, was not raised by the government in its motion to dismiss below, nor was it addressed
by the district court. “In general, we will not review arguments or issues that a party raises for
the first time on appeal.” Estate of Barney v. PNC Bank, Nat. Ass’n, 714 F.3d 920, 925 (6th Cir.
2013) (citing DaimlerChrysler Corp. Healthcare Benefits Plan v. Durden, 448 F.3d 918, 922
(6th Cir. 2006)). We decline to do so here.
III.
For the foregoing reasons, we REVERSE the judgment of the district court and
REMAND for further proceedings consistent with this opinion.