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KMG Properties v. Internal Revenue Service

June 30, 2009


The opinion of the court was delivered by: Nora Barry Fischer, United States District Judge


I. Introduction

This matter comes before the Court on Defendant Internal Revenue Service's ("Defendant") Motion to Dismiss for Lack of Jurisdiction Plaintiff KMG Properties' ("Plaintiff") Complaint pursuant to Federal Rule of Civil Procedure 12(b)(1). (Docket No. 5). Plaintiff filed its Complaint on November 5, 2008 alleging that Defendant violated 26 U.S.C. § 7426 by intentionally and wrongfully levying against Plaintiff's rental income to satisfy payroll taxes owed by an entirely different entity, Grandeur Estates, Inc. (Docket No. 1).

II. Factual and Procedural Background

Plaintiff, a Pennsylvania General Partnership with its principal place of business in Monogahela, Pennsylvania, filed the instant action on November 5, 2008 against Defendant, the United States Internal Revenue Service. (Docket No. 1 at 1). Plaintiff avers that this Court has subject matter jurisdiction over its claim pursuant to 26 U.S.C. § 7426, which provides a civil cause of action against the United States for persons other than the taxpayer for wrongful levy. 26 U.S.C. § 7426(a)(1) (1998).*fn1 The facts essential to Plaintiff's claim and the Court's disposition of the instant motion are gleaned from Plaintiff's Complaint and the attached exhibits. They are as follows.

Prior to the end of 2002, Plaintiff owned real estate referred to as the Grandeur Estates Property, located at 1961 North Main Street, Washington, PA (hereafter "Property"). (Docket No.1 at 2; Docket No. 1-4 at 1). An entity known as Grandeur Estates, Inc., a Pennsylvania corporation (hereafter "Estates"), which is "separate and distinct" from the Property, operated a personal care facility on the Property. (Docket No. 1 at 2, 4). Kenneth McGavitt was the president and the only shareholder of Estates. (Id.). McGavitt also co-owns Plaintiff with Marty Gefsky. (Id.). Specifically, McGavitt owns 65 percent of KMG while Gefksky owns 35 percent. (Id.). Plaintiff leased the Property to Estates. (Docket No. 1 at 2).

In 2003, for financial reasons, Estates ceased operations of the personal care facility on the Property and terminated its lease with Plaintiff. (Id.). The Estates has been inactive since 2003 as reflected in its filed tax returns. (See Docket No. 1-5). At the time it ceased operations, the IRS alleged that the Estates owed significant payroll taxes. (Docket No. 1 at 3). It then assessed civil penalties for these taxes against McGavitt. (Docket No. 1 at 3). At the hearing on Defendant's motion held on May 26, 2009, counsel for Defendant explained that the Estates owed payroll taxes comprised of income tax money it withheld from its employees' pay. (Docket No. 24 at 7:16-25). The penalty assessed against the Estates is called the "trust fund recovery penalty," which counsel for the Defendant argued can be assessed against a party who is not the employer. An officer of the employer who is believed to have had the duty to withhold payroll tax is required to keep them in trust for the United States and pay them over. (Docket No. 24 at 7: 23-25; 8:1-3); see 26 U.S.C. § 6672(a)(any person required to collect and pay over taxes who fails to do so shall be liable for a penalty equal to the total amount of the tax evaded). That individual may be targeted by the IRS and may be liable for a penalty. Id. The penalty is equal to the amount of withheld trust fund taxes plus non-trust fund taxes that remain owing. (Id. at 8: 1-9); 26 U.S.C. § 6672(a). Here, McGavitt, as president and shareholder of the Estates, would classify as the individual representative required to withhold and pay over to the IRS such taxes.*fn2 (See Docket No. 24 at 8: 1-4). Further, the Government contends that McGavitt reported on his 1099 income tax return the rental income he received on the Property. (Docket No. 24 at 9: 9-16).

Martin Bujaky ("Bujaky"), the accountant for the Estates and McGavitt,*fn3 worked with the then Revenue Officer assigned to the case, Bernard Grimm, in an attempt to resolve the tax problems for both the Estates and McGavitt. (Id.). A letter dated January 16, 2007 from Officer Grimm to Bujaky states that McGavitt had paid in full the civil penalties assessed against him for not paying the trust fund taxes of the Estates. (Docket No. 1-6). Plaintiff further claims that as of January of 2007, Bujaky had established to Officer Grimm's satisfaction that the Estates owned no assets. (Docket No. 1 at 3). Therefore, Plaintiff avers, no collection action was taken by the IRS and Officer Grimm had no further contact with Bujaky or McGavitt. (Id.).

After the Estates ceased operations, it assigned its lease with Plaintiff for use of the Property to a company called Visionquest, Inc.*fn4 (Id.). Significantly, the lease defines the lessor as KMG Properties, t/a Grandeur Estates, a Pennsylvania partnership." (Docket No. 25 at 2). Subsequently, on June 15, 2007, Visionquest received a notice of levy from Officer Grimm for rental payments it was obligated to pay Plaintiff for use of the Property under the lease. (Id.; Docket No. 1-7). The notice states that taxpayer, the Estates owes $43,204.61 to the IRS. (Id.). Plaintiff claims that Revenue Officer Mary Arndt initiated this levy. (Docket No. 1 at 3; Docket No. 1-7). However, the notice of levy states that any reply to the notice should be sent to Officer Grimm and it is Officer Grimm's signature that appears on the "Signature of Service Representative" line. (Id.).

The crux of Plaintiff's claims is that Officer Arndt took over the Estates' case file and "embarked on a course of wrongful, illegal, and excessive execution against Plaintiff, intending to completely destroy Plaintiff and McGavitt." (Docket No. 1 at 3-4). Plaintiff specifically claims that Officer Arndt "unilaterally decided that KMG Properties owed all the taxes, penalties and interest accrued that were owed by Grandeur Estates, Inc." (Docket No. 1 at 4). According to Plaintiff, she justified the levy on the grounds that Plaintiff was an "alter ego" of the Estates. (Id.). Plaintiff then contends that Ms. Arndt based this decision on an incorrect W9 tax form filed by the Estates. (Docket No. 1 at 4, Docket No. 1-8). On the W9, the Estates "dropped the formality... [and] used the same name as the property owned by KMG Properties." (Docket No. 1 at 4). Plaintiff also attests that Officer Arndt made her determination despite the fact that Plaintiff and the Estates are separate and distinct legal entities with their own tax identification numbers and completely different business operations. (Id.).

Plaintiff next avers that Officer Arndt did not give it an opportunity to appeal her decision regarding the "alter ego"*fn5 status of the Estates and McGavitt and that it has been deprived of Visionquest's rental income for over 17 months. (Docket No. 1 at 5; Docket No. 24 at 17: 8-17; 19: 2-7). Plaintiff claims to have paid between $28,000 and $34,000 to the IRS for penalties and interest allegedly owed the Estates. (Id.). Further, despite repeated appeals by both Plaintiff and Visionquest through their respective representatives, Plaintiff maintains that Officer Arndt will not review and substantiate her decision and continues to require Visionquest, Inc. to forward its rental payments to the IRS. (Docket No. 1 at 5). In a letter dated February 13, 2008 to Visionquest, Officer Arndt stated that Visionquest was required to continue forwarding to the IRS the rental payments due under the lease to Plaintiff "per the levy issued by Revenue Officer Bernard Grimm." (Docket No. 1-9). Additionally, Officer Ardnt wrote in the letter dated February 13, 2008, that if McGavitt had any questions concerning the levy, to contact her. (Id.). Plaintiff also points to a letter dated August 7, 2008 wherein Officer Arndt contended that as of that date, the Estates still owed $19,630,97. (Id.).

Against this backdrop, Plaintiff bases its section 7426 claim on the allegations that Officer Arndt "intends to continue her levy and financial strangulation" of Plaintiff's rental income in order to destroy its business and force it into bankruptcy. (Docket No. 1 at 5). Specifically, Plaintiff maintains that the levy was intentionally issued against the wrong entity. (Id.). That is, Officer Ardnt "maliciously and recklessly" classified Plaintiff as the Estates' "alter ego" and sought taxes owed by the Estates despite knowledge that the Estates had no assets. (Id.). Plaintiff seeks compensatory damages in the amount of the money that was wrongfully seized, plus costs. (Docket No. 1 at 7).

On January 12, 2009, Defendant filed a Motion to Dismiss for Lack of Jurisdiction and supporting brief, arguing that the Court lacks subject matter jurisdiction because Plaintiff did not file its suit within section 7426's nine month statute of limitations. (Docket Nos. 6 and 8). In turn, Plaintiff filed its Response and Brief in Opposition to Defendant's motion on January 30, 2009, (Docket Nos. 9 and 10), arguing that the statute of limitations has not begun to run, and if it has, Plaintiff has timely brought its claim. Thereafter, on February 13, 2009, Defendant filed a reply to Plaintiff's responsive brief. (Docket No. 11).*fn6 A hearing and argument*fn7 were held on Defendant's Motion to Dismiss on May 26, 2009.*fn8 (See Docket No 21; and Transcript of Hearing, Docket 24).

As the Government's motion has been fully briefed and argued, it is ripe for disposition. The Court now turns to the applicable standard of review.

III. Standard of Review

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) challenges the lack of subject matter jurisdiction over a plaintiff's claims. See Fed. R. Civ. Pro. 12(b)(1). "At issue in a Rule 12(b)(1) motion is the court's 'very power to hear the case.'" Petruska v. Gannon University, 462 F.3d 294, 302 (3d Cir. 2006)(quoting Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir.1977)). As the party asserting jurisdiction, Plaintiff "bears the burden of showing that its claims are properly before the district court." Development Fin. Corp. v. Alpha Housing & Health Care, 54 F.3d 156, 158 (3d Cir. 1995); see also Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir. 1991), cert. denied, 501 U.S. 1222 (1991)("[w]hen subject matter jurisdiction is challenged under Rule 12(b)(1), ...

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