In the first post I discussed the role that the notice and demand plays in the collection process. In this post, I will consider how the Tax Court and other courts have approached situations when the IRS has failed to comply with its statutory and regulatory requirements for issuing a notice and demand.
read more... All of this sets the scene for the 9th Circuit’s decision in the Nakano case in which the IRS failed to send the traditional notice and demand letter prior to seeking to take levy action. The issue arose in the context of a collection due process (CDP) case. CDP did not exist in the 1980s when the primary wave of challenges to the timely issuance of notice and demand occurred. It came into existence in the Revenue Reform Act of 1998. Because CDP did not exist at that time and the Tax Court was then almost exclusively a pre-assessment forum, the Tax Court did not face the issue of the impact of failing to send out the notice and demand letter timely when the cases cited above were decided. Perhaps for that reason, the Tax Court treated its opinion on this issue as a full Tax Court opinion indicating that it thought its decision was novel or precedent setting. The insight of the Tax Court will bring a new perspective to this issue. I think the Court reached the right result here although it did so on the basis of a factual argument rather than directly addressing the legal issue of the effect of the failure to timely issue the notice and demand letter on the underlying assessment. The IRS determined that Mr. Nakano failed to pay over taxes collected by the company, National Airlines, Inc., where he served as the Chief Financial Officer. It therefore assessed against him the trust fund recovery penalty in an amount equal to the unpaid trust fund taxes. A couple of items about his trust fund recovery liability deserve note. First, his liability does not stem, or at least not primarily, from unpaid employment taxes, the traditional route to this penalty, but rather for unpaid airline excise taxes. The trust fund recovery penalty applies in any situation in which a responsible officer does not pay over federal taxes collected on behalf of the IRS by an entity. Excise taxes can cause this liability as well as employment taxes but do so much less frequently. Second, the liabilities at issue were for quarters in 2000 and 2001 yet the trust fund recovery penalty assessment did not occur until March 28, 2006, over five years later. Interest did not run on Mr. Nakano’s trust fund recovery penalty until assessment. This is a consequence of placing the trust fund recovery penalty statute in the assessable penalties section of the Internal Revenue Code, which, I believe, is a mistake Congress should correct. I commented on this in an article for Hastings Business Law Journal. When the IRS assessed the trust fund recovery penalty against Mr. Nakano on March 28, 2006, it apparently failed to send him a notice and demand letter until June 6, 2006, 70 days after assessment. Because of the size of his liabilities, almost $9 million, his case did not take the normal route through the collection process. In most cases the IRS will follow the notice and demand letter with one or two other letters sent six to eight weeks after each other. These letters are not required by statute but are designed by the IRS to convince the taxpayer to pay without triggering the more serious steps of filing the notice of federal tax lien or issuing a levy. Here, the size of the liability caused the IRS to collapse its normal process and move very quickly to levy, or at least the threat of levy. Here, the IRS issued the Notice of Intent to Levy letter, required by IRC 6330 and 6331, on May 22, 2006, within the 60 day period after assessment. The Circuit, sustaining the Tax Court, determined that the notice of intent to levy served the purpose of the notice and demand letter. The Tax Court looked at IRC 6303 to determine what information should go into a notice and demand. It determined that the statute required that a notice and demand state the amount of the unpaid tax and demand payment. The Notice of Intent to Levy contained that information and was issued within 60 days of assessment. Since the Notice of Intent to Levy contained all of the information required by IRC 6303 and since it was sent within 60 days of the date of assessment, the statute was satisfied and the taxpayer’s challenge to the collection process, something contemplated by the CDP hearing process, failed. Mr. Nakano attacked the assessment against him on three bases: 1) it was untimely; 2) the Certificate of Assessment incorrectly characterized it as a jeopardy assessment and 3) the notice and demand was untimely. The Tax Court found that the assessment occurred within the statutory time frame and that the incorrect characterization of the type of assessment did not cause the assessment to fail. When it turned to his third argument, the Tax Court stated simply that “the Court has already rejected Nakano’s argument that he did not receive timely notice and demand for payment.” Does the Tax Court’s failure to reject Mr. Nakano’s argument on a legal basis and its reliance on its factual determination in this case suggest that it believes the legal argument that failure to timely send notice and demand has some validity as a basis for striking down an assessment? The 9th Circuit sustained the Tax Court determination in an unpublished opinion. It did not specifically address the issue of the validity of the assessment because taxpayer abandoned that argument, but it did determine that the notice of intent to levy satisfied the requirements of notice and demand. This leaves open the question of how the Tax Court would have ruled on the validity of the assessment had the notice and demand not occurred within 60 days. While the “quick” issuance of the notice of intent to levy seems to have saved the IRS here, the timing of the notice of intent to levy here is very unusual. In a normal case it would not occur until two or three months later – outside the 60 day period after assessment. In addition, some levies do not require the notice of intent to levy, e.g., jeopardy levy and state refund offsets. In those situations the IRS can take property without going through the notice of intent to levy process and any notice may occur on the back end. The decision here allows the levy to move forward, unlike the lien decision in Conroy because of the language of the notice of intent to levy which serves the dual purpose of meeting the notice and demand. If this case involved a taking without the requirement of first sending the notice of intent to levy, the IRS would be back in the same situation as Conroy. It would have taken collection action prior to a notice and demand. The Tax Court left open here the issue of the impact of the failure of the IRS to send notice and demand on the validity of the underlying assessment. The IRS will make this mistake again given the volume of assessments it makes. The next time it makes this mistake and must defend the validity of the assessment it is unlikely to have corrected the problem by making a notice of intent to levy within 60 days. It will be interesting to see if the Tax Court will then make the legal ruling it failed to make here or if it thinks that the failure to send notice and demand does impact the validity of the assessment. For the reasons I set forth here, I do not believe that a failure to send notice and demand should impact the validity of the assessment but the Nakano case certainly provides encouragement to the next person where the IRS fails to send a timely notice and demand to the taxpayer’s last know address.
Ken, your two posts on the Nakano case and its implications were fascinating. I somehow missed one point. You say in your second post, “The decision here allows the levy to move forward, unlike the lien decision in Conroy because of the language of the notice of intent to levy which serves the dual purpose of meeting the notice and demand. If this case involved a taking without the requirement of first sending the notice of intent to levy, the IRS would be back in the same situation as Conroy.” I’ve looked over your two posts, but can’t find any other reference to “Conroy”. What did I miss here?
Although Nankano and Conroy were business partners in the same business and shared large assessments from that business the tax issues presented in their Tax Court cases differed because the actions the Service took with respect to each differed. In each case the Service failed to send notice and demand at the time of assessment. I would really like to know what happened. These were huge liabilities. There was a major system break down.
Conroy came into Tax Court on a CDP case involving 6320 because the Service filed a notice of federal tax lien. Nankano came into Tax Court on 6330 because the Service sent him a notice of intent to levy. Why the two cases traveled different collection tracks, I cannot explain. In both cases the Service argued that the CDP notice served the function of notice and demand and, therefore, the procedural posture of the case, which Appeals must verify, was proper.
This is where the difference between lien and levy gets highlighted. CDP lien cases arise after the filing of the notice of federal tax lien whereas CDP levy cases arise before the levy. In Conroy, the Service argued that the 6320 notice sent to him “after” the filing of the notice of federal tax lien, was the notice and demand letter creating the lien necessary as a predicate before filing the notice of federal tax lien. The Tax Court correctly said that the 6320 notice could not save the notice of federal tax lien because it came after that filing. The 6320 notice might work as a notice and demand; however, here it came after the filing of the notice of lien. Sending notice and demand cannot post date the filing of the notice of federal tax lien.
Because 6330 involves a notice before the levy takes place, the 6330 notice in Nankano could serve as notice and demand necessary before the levy. I think the Court got both cases right. I cannot understand why the Service argued that the 6320 notice could save the lien notice. In addition to making the argument in the Tax Court it issued, during the litigation, a Program Manger’s Technical Advice to the same effect. The Service did not appeal its loss in Conroy. It should issue something acknowledging that its position was wrong. I do not think that it has done so yet. I hope this answers your question.
Keith, thank you! Sorry to continue being so dense, but I had previously noticed that the original Tax Court case, (http://www.ustaxcourt.gov/InOpHistoric/conway2.TC.WPD.pdf) involved two petitioners, Raymond T. Nakano and Michael J. Conway; and that Conway had won his case in the Tax Court. (I could not find any reference to “Conroy” in the Tax Court opinion.) Is there a connection between Michael J. Conway and “Conroy”, or am I just being particularly slow today?
Separately, I would like to add that you, Leslie Book and Stephen Olsen have a gift for making procedural issues and cases fascinating and significant. I regularly look forward to reading all of your posts.
I was just working too quickly and spelled his name wrong. I intended to say Conway.
The Tax Court and the Ninth Circuit placed the cart before the horse.
The IRS was not allowed to levy unless and until Nakano refused or neglected to pay the tax within 10 days of notice and demand. I.R.C. section 6303(a). Yet the IRS could not levy unless and until it provided Nakano with 30 days notice of its intent to levy. I.R.C. section 6331(d). If the I.R.C. section 6330(a) notice is the 6303(a) notice and demand, then it cannot also be the 6331(d) notice. Even the Treasury recognizes this as fact:
“The person described in section 6330(a)(1) is the same person described in section 6331(a)—i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer).” Treas. Reg. 301.6330-1(a)(3)Q&A1.
As I see it, the IRS is barred from initiating administrative levy action against Nakano.
Back in 1998 the Service decided that it could combine the 6330 and 6331 notices. I do not think that decision has been challenged or if challenged the challenge was unsuccessful. Mr. Nankano did get 30 days after the notice issued to him before the IRS levied. (Because he exercised his CDP rights here, he got much more than 30 days but had he not exercised those rights he would have gotten 30 days before the IRS levied and that is what both 6330 and 6331 require.)
What Nankano decided is that during the required 30 day waiting periods under 6330 and 6331, the 10 day period of 6303 could also run simultaneously. These statutes do not require that each period run independent of the other. Based on Nankano, the IRS could issue a combine notice and demand, CDP levy notice and 6331 notice of intent to levy all in one form at the time of assessment. I doubt it will adopt that approach but that is permitted under this decision. I think the statute allows it. He could have paid within the first 10 days after the notice he received and that would have stopped the possibility of levy. He did not do that (and given the amount of the liability here that is no surprise). Allowing that same 10 day period to also be a part of the 30 day periods required by 6330 and 6331 does not appear to be barred by any of the three statutes at play.
The issue is not free from doubt. Perhaps the next person in this situation will take it to another circuit which will agree with the position you state and that Mr. Nankano argued.
Technically, RRA 98 stands for Restructuring and Reform Act of 1998, but I suppose Revenue Reform Act is close enough for government-related commentary.
Thanks for the correction. It is clear I worked for the Government for too long. I should have the correct name of that statute burned in my memory.
An assessment was made under 6871..long after bankruptcy was dismissed. It took the form of a quick assessment and timely and correct procedures were not followed. No 3552/letter 1055/pub. 1/appeal instructions. And sent to wrong address. IRS had years
remaining on ASED to perform a regular assessment…but chose to wait until the approximate short period left in the ASED to justify the quick process. Nevertheless the post-assessment procedures for quick assessment were not followed…and no notice & demand. Do you think this could impact validity of assessment? ASED has long expired.
Richard Snyder
If the assessment was timely and properly made, my view is that the failure to send out proper post assessment correspondence does not invalidate the assessment but can prevent the IRS from taking an administrative collection action. The failure to send notice and demand also prevents the federal tax lien from coming into existence. Based on the facts you have stated, I cannot say the assessment is an invalid assessment. I also cannot say that it was valid since I may lack important information. The fact that the IRS waited until late in the statutory period will not invalidate the assessment. The use of the quick assessment process, even though it had the opportunity earler in the statutory period to use a normal process, will not invalidate the assessment. I hope that this is helpful to you.