Challenging Levy Compliance

The IRS regularly issues levies to banks and to employers.  Taxpayers subject to the levy have almost no way to stop the levy by suing the party receiving the levy.  Similarly, the party receiving the levy has almost no way to avoid making payment on the levy without running into trouble.  We have discussed the issue of suing to stop the levy before here (raising possibility that such a suit could prevail against a bank levy if the account was filled with funds exempt from levy).  Most cases in which taxpayers sue to stop a levy are relatively straightforward and today I write about one of those cases.  The Fourth Circuit recently affirmed the district court decision in the case of Nicholson v. Unify Financial Credit Union, No. 21-2095 (4th Cir. 2022) holding, per curiam, that the suit by the taxpayer against the credit union to stop the credit union from paying the IRS should be tossed.


Mr. Nicholson, acting pro se, brought a suit against his credit union related to the surrender of the money in his account to the IRS pursuant to a levy.  No doubt Mr. Nicholson was dismayed to find his account essentially wiped out by the levy; however, his effort to recover the money by suing the credit union does not fare well.  It does show, however, that in complying with the levy provisions the credit union has a good defense to such suits but still must engage lawyers to help it defend itself.  Occasionally, the US Attorney’s office might assist with the defense.

Mr. Nicholson alleges the credit union breached its fiduciary duty to him, violated IRS code provisions and violated the constitution by paying money over to the IRS in response to a levy.

The credit union countered that it had a mandatory obligation to comply with the levy under IRC 6332(c).  It further argues that IRC 6332(e) provides a complete shield of liability to Mr. Nicholson:

(e) Effect of honoring levy.

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1)) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

Because of the mandatory requirement to comply and the shield provided by IRC 6332(e), the credit union moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6). 

Mr. Nicholson responded with some standard tax protestor arguments that the income tax laws do not apply to him, but he also cited Treasury Regulation § 301.6332-1(c)(2)(3). The regulations cited by Plaintiff provide, in relevant part, that:

(2) Exception for certain incorrectly surrendered property. Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property.

(3) Remedy. In situations described in paragraphs (c)(1) and (c)(2) of this section, taxpayers and third parties who have an interest in property surrendered in response to a levy may secure from the Internal Revenue Service the administrative relief provided for in section 6343(b) or may bring suit to recover the property under section 7426.

The court makes relatively quick work of his attempt to use the wrongful levy provisions in this case pointing out their inapplicability because he has an interest in the property.  He had previously sued the IRS seeking a return of his property.  He faces the additional problem that a wrongful levy action needs to be brought against the IRS and not the third party such as the credit union.  The statutory scheme essentially requires the third party to turn over the property to the IRS and then allows a party whose property was wrongfully taken to seek the return of that property from the IRS.

The court not only finds for the credit union but determines that Mr. Nicholson’s argument has so little merit that it does not afford him the opportunity to amend his complaint.  The court had some familiarity with Mr. Nicholson from prior tax protestor type litigation.  The failure of the district court or the Fourth Circuit to sanction Mr. Nicholson surprises me a little bit, but perhaps the courts knew that he had no ability to pay for any sanctions imposed.

While not remarkable, the case shows what should happen in a straightforward challenge of a levy.  The quick dismissal saves the credit union from the burden of additional expenses.  Mr. Nicholson can pursue his case against the IRS if he has one while allowing the party that received and paid the levy to stand on the sidelines of the dispute.

Naked Owners Lose Wrongful Levy Appeal

We welcome back guest blogger Matthew Hutchens of the University of Illinois Gies College of Business. With co-author Erin Stearns, Hutch recently updated the lien and levy chapters of Effectively Representing Your Client Before the IRS. In today’s post, he examines the Fifth Circuit opinion on a niche question of Louisiana law after an attempted visit to the Louisiana Supreme Court. Christine

In a post last summer, I wrote about the 5th Circuit case of Goodrich et al. v. United States, No. 20-30422 (5th Cir. 2021). In that decision, the court defined what constituted “an interest” in property that would allow a third party to bring a wrongful levy suit under IRC. § 7426(a)(1). However, the court felt Louisiana law was unsettled as to whether such an interest existed in the present case.

Accordingly, we were left with the court certifying a question to the Louisiana Supreme Court regarding the property rights of naked owners of a usufruct of consumables. In November, the Louisiana Supreme Court denied certification of the question. And, in late January, the 5th Circuit—somewhat anti-climactically—resolved the case in an unpublished opinion.


In their initial opinion, the 5th Circuit adopted a definition of “an interest” used by several other Circuits; holding that “an interest” in the context of a wrongful levy suit requires a third party to hold “a fee simple or equivalent interest, a possessory interest, or a security interest in the property levied upon.” But, while determining what level of ownership interest is enough for a third party to bring a wrongful levy suit is a federal law question, determining what a third party actually owns is a state law matter. And here, the court was unable to determine—under Louisiana state law—what kind of ownership interest the third parties had at the time of the levy.

To briefly summarize the facts, Mr. Goodrich passed away with significant federal tax debt. After his death, a succession bank account was set up. The account included cash and later the proceeds from several post-death asset sales. This account was then levied upon by the Service. 

At the time of his death, Mr. Goodrich had a lifetime usufruct over various properties. A usufruct being the legal right to enjoy the use of property during the term of the usufruct (similar to the common law life estate, but duration can be shorter than a lifetime). Mr. Goodrich’s three children were the naked owners of the property subject to his usufruct. A naked owner owns the property, but they do not have the full rights to use the property. At the end of the usufruct, all the rights to the property revert to the naked owner (similar to a remainder interest at common law).

At the district court, the children prevailed in showing they were—as naked owners—the rightful owners of cash proceeds from certain post-death asset sales of usufruct property. This resulted in a portion of the levied funds related to those assets being returned.

However, the issue facing the 5th Circuit on appeal revolved around what kind of state law property rights the children had in proceeds from a stock sale of usufruct property that had occurred years prior to Mr. Goodrich’s death. Or put another way, what rights the naked owners had in usufruct property that had already been consumed.

Under Louisiana law, when the usufruct ended, Mr. Goodrich was bound to “pay to the naked owner the value that the things had at the commencement of the usufruct or to deliver to him things of the same quantity and quality.” So, the children had some interest in the sales proceeds from the stock. But was it enough of an interest to sustain a wrongful levy claim?

The children argued that they were the actual owners of Mr. Goodrich’s cash funds up to the amount of the prior stock sale proceeds. However, the district court disagreed, finding under Louisiana law that the children were merely unsecured creditors. The 5th Circuit though found the answer to this question unclear, certifying the following tongue twister to the Louisiana Supreme Court: “[d]oes a usufructuary’s testamentary usufruct of consumables render naked owners unsecured creditors of the usufructuary’s succession?”

In November, the Louisiana Supreme Court denied certification of the question stating that “[t]he certified question may be resolved under existing law and jurisprudence.” The court pointed to the Louisiana Civil Code and two state court appellate court decisions—one of those appellate decisions being the same ruling the district court had relied on in making their initial determination.

When the case returned to the 5th Circuit, the court affirmed the district court’s decision that the children (as naked owners) had a claim against the father’s succession for the usufruct of consumables (the disposed stock). However, that claim under Louisiana law was only as unsecured creditors. Thus, the children were not the direct owners of the disputed funds in the bank account. And, as unsecured creditors, the children did not have an interest sufficient to sustain a wrongful levy claim related to those funds.


While this may seem like an ending that fizzled, the case shows the interplay of state and federal law upon lien and levy law under the Internal Revenue Code.  The Supreme Court in Aquilino v. United States, 363 U.S. 509 (1960) made clear that state law plays a large role.  Here, it’s hard to criticize the district or circuit court for the manner in which the case was handled.  The district court properly looked to state law to find the answer and based its decision on the state law it concluded applied to the case.  The Fifth Circuit, giving the children the full benefit of getting definitive state law precedent, sought guidance from the state Supreme Court and received a response that basically said the district court got it right. 

Not many clients hold usufructs, but many have some type of state law property interest.  Goodrich provides a great example of how the process should work while simultaneously making some of us glad we don’t practice in Louisiana having to tangle with this strange property creature called a usufruct.

Limitation on Offset When the Government Seeks to Collect Restitution

The case of United States v. Taylor, No. 2:06-cr-00658 (E.D. PA 2021) brings out a limitation on the right to offset when the Government is collecting on a court-ordered restitution amount.  Here, the Government, specifically the Department of Justice, gets its hand slapped for levying on the social security of a convicted criminal.  The levy here is the 15% on social security that regularly arises with respect to outstanding federal tax obligations.  There is no indication in the opinion that the IRS made a restitution based assessment in this case or any kind of assessment.  This appears to be a case involving the payment of the court ordered restitution payment and not a derivative liability stemming from the restitution order.  The court does not mention the IRS other than in relation to the crime committed by the petitioner.


Ms. Taylor and others were convicted of conspiracy to defraud the IRS.  The federal district court that sentenced her and then ordered her to pay a restitution judgment of $3.3 million.  The court, however, failed to take into account her financial resources and the Third Circuit vacated the restitution order and remanded the case so that the district court could make an appropriate determination of her ability to pay as well as her culpability.

On remand, the court determined her ability to pay was $100 per year and noted that the government could come back to the court for an increase if her circumstances changed.  This happened in 2012.  Between 2012 and 2019 when Ms. Taylor became eligible for aged-based social security benefits, the government did not return to the court to seek an increase, although it did make a preliminary determination that she could pay $25 a month.

The restitution payments were listed with the Bureau of Fiscal Services as available for offset pursuant to the Treasury Offset Program (TOP) because they were delinquent federal debts.  When the social security payments began, TOP began offsetting 15% of her social security (about $235 a month) and applied the funds taken from her monthly social security check to her outstanding restitution obligation.  She continued to comply with the court order to pay $100 a year.

When Ms. Taylor initially brought the action complaining of the TOP offset, she did so pro se.  The district court appointed Peter Hardy, one of the top white collar criminal defense attorneys in Philadelphia who also taught as an adjunct professor at Villanova when I was there and has guest posted for us in the past (for example, see this terrific post on the crime fraud exception to the attorney client privilege).  Undoubtedly, Ms. Taylor benefited from his appointment.

The court provides some background on the TOP program which we have discussed previously here and here

Ms. Taylor argued that she was in compliance with the restitution order, making the TOP offset inappropriate.  She also argued that her restitution debt was not delinquent, meaning it was not one the government should refer to TOP.  The Government argued that the referral to TOP was appropriate because she had a large outstanding debt.  The court finds that the debt is not delinquent:

“[U]nlike a civil judgment, the restitution order is the product of a ‘specific and detailed [statutory] scheme addressing the issuance . . . of restitution orders arising out of criminal prosecutions.’” Id. at 1204 (quoting United States v. Wyss, 744 F.3d 1214, 1217 (10th Cir. 2014)). Section 3572(d) states that “[a] person sentenced to pay a fine or other monetary penalty, including restitution, shall make such payment immediately, unless, in the interest of justice, the court provides for payment on a date certain or in installments.” 18 U.S.C. § 3572(d)(1). This subsection provides that the full payment of restitution is not due immediately if a court establishes a payment plan for restitution. See Martinez, 812 F.3d at 1205. Thus, “a defendant subject to an installment-based restitution order need only make payments at the intervals and in the amounts specified by the order.” Id. Section 3572 also explicitly defines when a payment of restitution is delinquent or in default. See 18 U.S.C. § 3572(h)-(i). A “payment of restitution is delinquent if a payment is more than 30 days late.” Id. § 3572(h). A “payment of restitution is in default if a payment is delinquent for more than 90 days. Notwithstanding any installment schedule, when a fine or payment of restitution is in default, the entire amount of the fine or restitution is due within 30 days after notification of the default.” Id. § 3572(i). These provisions “would be unnecessary, even meaningless, if the total restitution amount were already owed in full under an installment-based restitution order.” Martinez, 812 F.3d at 1205. It is evident from the structure and language of § 3572 that under an installment-based restitution order, the restitution debt only becomes delinquent when a defendant’s installment payment is more than 30 days late.

The court tells the government that if it wants more from Ms. Taylor it needs to come back to the court and request more.  It cannot simply offset at a time when she has continued to comply with the court’s order.  The court orders the government to stop the offset and to return to her all the money taken through TOP.  Perhaps the government will come looking for her and seek to raise the amount she must pay from $100 a year to a larger number.  Because she became unemployed as a result of the pandemic, this might prove difficult.

It’s unclear if the conspiracy to defraud the IRS could turn into a tax assessment.  If the IRS made a tax assessment of the liability or some part of the liability, it could collect on the tax liability independent of the restitution order and through a tax assessment could potentially levy on her social security.  Ms. Taylor, as part of her defense to the taking of the social security funds, argued that the taking of these funds put her into a difficult financial situation.  If the IRS made a tax assessment, it could not levy, even through TOP, if doing so would create financial hardship as defined by IRC 6343(a)(1)(D).  Convicted tax criminals generally make difficult taxpayers from whom to collect.  Ms. Taylor appears to fit into that category.

Jurisdiction to Hear Naked Owners’ Wrongful Levy Suit Hinges on State Property Law

We welcome back guest blogger Matthew Hutchens of the University of Illinois Gies College of Business. With co-author Erin Stearns, Hutch recently updated the lien and levy chapters of Effectively Representing Your Client Before the IRS. In today’s post, he examines a recent Fifth Circuit opinion in which niche questions of Louisiana law will determine whether plaintiffs can sue to recover their levied inheritance. Christine

I.R.C. § 7426(a)(1) provides that if the IRS levies upon property claimed by a third party who has “an interest” in such property to collect the taxes of someone else, that third party can bring a suit in federal district court to recover the property. In Goodrich et al. v. United States, No. 20-30422 (5th Cir. 2021), the United States Court of Appeals for the Fifth Circuit tackled the question of what qualifies as “an interest” that would allow a third party to bring a wrongful levy suit to recover property levied to satisfy the debt of another taxpayer.


Ultimately, the court adopted the definition used by several other Circuits, including the Seventh, Ninth, and Eleventh, that “an interest” in the context of a wrongful levy suit requires the third party to hold “a fee simple or equivalent interest, a possessory interest, or a security interest in the property levied upon.”

The court also explained that whether an interest exists is a jurisdictional question, because without an interest in the levied property, I.R.C. § 7426(a)(1)’s waiver of sovereign immunity does not apply—depriving the court of subject matter jurisdiction to hear the claim.

The case also reminds us that while the determination of what ownership interest qualifies a third party to bring a wrongful levy suit is a question of federal law, whether an ownership interest actually exists (i.e., what does the third party own) is determined by state property laws. And, thanks to Louisiana’s French history and civil law influences, the Goodrich case involves some state law property issues and terminology that will look quite foreign to most federal tax practitioners.

Facts of the Case

The taxpayer, Mr. Goodrich, passed away with significant federal tax debts. At the time of his death, Mr. Goodrich had a lifetime usufruct over various properties he had previously inherited from his deceased spouse. A usufruct is the right to enjoy the use of property during the term of the usufruct (similar to the common law life estate, but the duration can be shorter than a lifetime). Mr. Goodrich’s three children were the naked owners of the property subject to his usufruct. A naked owner owns the property, but they do not have the full rights to use the property. At the end of the usufruct, all the rights to the property revert to the naked owner, similar to a remainder interest at common law.

The properties at issue where Mr. Goodrich held a lifetime usufruct with the children as naked owners were: 1) mineral rights, proceeds of which were deposited in the estate bank accounts after Mr. Goodrich’s death; 2) furniture that was sold as part of an estate sale (including a master bathroom towel rack that somehow fetched $1,200); and 3) shares of stock that Mr. Goodrich had sold years earlier.

Sometime after Mr. Goodrich passed away, the IRS issued a levy to Mr. Goodrich’s estate bank accounts. At this point, an attorney for the estate argued to the IRS revenue officer via a phone conservation and a letter that the children owned all of the cash in the accounts, with Mr. Goodrich’s ownership rights having ceased at death and all rights reverting to the children as naked owners. However, the IRS did not release the levy and collected approximately $250,000 from the accounts, prompting the children to file the wrongful levy suit. 

With regard to the mineral rights income and furniture sold after Mr. Goodrich’s death, the district court agreed with the children that upon Mr. Goodrich’s death (and the termination of the usufruct), they became the full owners of the usufruct property. Thus, the proceeds of from the mineral rights and the proceeds from the sale of the furniture both occurring after Mr. Goodrich’s death belonged to the children—entitling the children to a return of those levied proceeds.  

However, the mineral rights and the furniture existed at the time of Mr. Goodrich’s death. More complicated were the shares of stock that Mr. Goodrich had held as usufruct that were sold prior to Mr. Goodrich’s death. The appeal to the Fifth Circuit focused on those stock shares.

As previously mentioned, Mr. Goodrich had inherited these shares as a usufruct from his deceased spouse. And, by the terms of his spouse’s will, Mr. Goodrich was allowed to sell or otherwise dispose of the shares during his lifetime. However, the will also stated that in the event of a disposition, the usufruct would not terminate but would attach to the proceeds of the disposition, including their reinvestment.

Further, under Louisiana law dealing with usufructs where the property is consumed or disposed of, when the usufruct ended Mr. Goodrich was bound “either to pay to the naked owner the value that the things had at the commencement of the usufruct or to deliver to him things of the same quantity and quality.” So, at Mr. Goodrich’s death, the children were entitled to something to compensate them for being deprived of the stock shares. But, what was the exact ownership interest that they had? And, would it rise to the level of “an interest” for purposes of bringing a 7426(a)(1) action?

Legal Dispute & Open State Law Questions

The children argued unsuccessfully at the district court that they were entitled to an amount of cash equal to the sales proceeds from when Mr. Goodrich sold the shares of stock (i.e., the children argued that they owned the cash in the estate bank accounts up to the share sales price). The district court instead determined that the children were unsecured creditors of the estate in an amount equal to the stock sales proceeds, making the levy on the bank accounts proper (since the IRS enjoys statutory priority over unsecured creditors when a tax lien arises as a matter of law). And, because the estate had insufficient funds to pay the entire tax debt, the children, as unsecured creditors, would receive nothing from the shares Mr. Goodrich previously sold (one might say they lost their shirt as naked owners).  

The children appealed, and the Fifth Circuit found that determining the relationship of the children as naked owners vis a vis the estate at the termination of the usufructuary to be unresolved by existing Louisiana law. The court also found it appropriate to certify to the Louisiana Supreme Court the question of what the children as naked owners owned upon the termination of the usufruct where the property was previously disposed. So, the Fifth Circuit certified the following questions to the Louisiana Supreme Court:

  1. Does a usufructuary’s testamentary usufruct of consumables render naked owners unsecured creditors of the usufructuary’s succession?
  2. If not, what is the naked owner’s relationship to those consumables?

The Louisiana Supreme Court’s resolution of these property law questions remains pending as of this writing. Ultimately, the resolution of these questions may not be very broadly applicable (only two states, Louisiana and Georgia, recognize usufructs). But, the case is an important reminder of what the Supreme Court said 36 years ago in United States v. National Bank of Commerce472 U.S. 713, 722 (1985) about federal tax levies: “[T]he federal statute ‘creates no property rights but merely attaches consequences, federally defined, to rights created under state law.”

Jurisdiction of Wrongful Levy Claims

The case of i3Assembly, LLC v. United States, No. 3:18-cv-00599 (N.D.N.Y 2020) presents a sad outcome for a company taking over a government contract from a delinquent taxpayers and raises issues of jurisdiction discussed here on many occasions.  Because of a snafu, the IRS took money that should have been paid to i3Assembly and used it to satisfy the outstanding tax liability of the company that had the government contract before i3Assembly took it over. 

Although the company raises issues of equitable tolling in litigating the case, it is not clear that either the company or the Department of Justice Tax Division attorney have been closely following the many threads of discussion on jurisdiction present in this blog.  That’s unfortunate for the company, which may have had some arguments that it did not yet present, and disappointing from the government’s perspective if it neglected to cite to on point case law in other circuits adverse to the position it took in this case.


 In 2015 i3Assembly acquired certain assets from VMR Electronics and it assumed certain liabilities; however, it expressly did not assume VMR’s outstanding liability to the IRS.  i3Assembly had a different EIN, used its own labor to fulfill the contracts and then sent invoices for the work it performed.  Instead of paying i3Assembly, the government sent the money to the IRS in response to a levy.  This levy was a Federal Payment Levy Program levy served on July 18, 2016.  The IRS sent a post-levy CDP notice to VMR, which probably was surprised and delighted to find out its obligation was being paid by i3Assembly.

After the first levy, a second levy occurred on July 22, 2016 and a third on November 16, 2016.  All of the notices were going to VMR.  i3Assembly was probably trying to figure out what was happening and attributed some of the delay in payment to dealing with the Defense Department and the government in general but it was trying to find out what was happening to its invoices.  The VP of i3Assembly had several telephone conversations with IRS officials regarding the wrongful levy of its funds starting in October 2016 and going through July 18, 2017, but i3Assembly never received a notice of levy.

On October 31, 2017, i3Assembly submitted an administrative wrongful levy claim to the IRS.  The IRS disallowed the wrongful levy claim for the first and second seizure stating that the claims were not filed within nine months of the levy.  It subsequently disallowed the claim for the third levy stating that i3Assembly failed to establish that the payment did not belong to VMR or that i3Assembly had an interest in the payment superior to the IRS.

On May 21, 2018 i3Assembly filed suit.  The IRS moved to dismiss and alternatively moved for summary judgment.  The court discussed the Federal Payment Levy (FPL) and the fact that it acts as a continuous levy.  The IRS argued that i3Assembly had to raise its concerns with nine months of the time the IRS put out the FPL, even though it had no idea the FPL existed or that it would take money intended for i3Assembly. 

i3Assembly admitted that it did not file its claim for wrongful levy within nine months of the first and second levies under the FPL but argued that equitable tolling should suspend the time frame for filing the wrongful levy claim.  It argues that its claim was timely for the third levy based on the date the funds were actually seized and i3Assembly put on notice of the seizure.  According to i3Assembly that occurred on July 22, 2017.  The IRS argued that the date of the notice is irrelevant because it had no duty to notify i3Assembly, and the time limit starts to run on the date the person possessing the property received the notice of levy back in July 2016.

i3Assembly pointed out the IRS argument creates an absurd result, because the period for filing a claim could pass before any property was seized or the party whose property was taken would have any idea of the taking.  The IRS responded that the statute and case law do not require notice to the person claiming their property was wrongfully taken and that the Second Circuit in Williams v. United States, 947 F.2d 37, 39 (2d Cir. 1991) had already determined that notice to the third party was unnecessary when calculating the time period.  The levy at issue in Williams, however, was not a continuous levy like the FPL.  When the FPL was served, there was no property to which it attached.  So, i3Assembly would not under any circumstances have received notice at that time.

The court states that:

On this record, the Court cannot determine what, if any, notice was provided to Plaintiff regarding the continuing levy under FPLP before the statute of limitations [on filing the wrongful levy claim] had run.  Absent any evidence regarding what information was provided to Plaintiff, and further briefing from the Defendant regarding due process, the Court at this time denies the motion to dismiss Count One with prejudice to renewal.

The court then discussed equitable tolling.  It found that i3Assembly had not alleged facts that would support equitable tolling for the first and second levies. With respect to the third levy, the court seems to find it possible that i3Assembly did have facts in the record that could support equitable tolling, but then it shifted to the need for i3Assembly to show that the statute at issue is one to which equitable tolling could apply.  In other words, the court needs to know if the time period for filing a wrongful levy claim is a jurisdictional time period.  In looking at this issue, it cites to cases from the 1990s and ignores all of the law on this issue that has occurred in the past 15 years.

I have not looked at the briefs but even if i3Assembly attorneys did not find the relevant case law, I would have expected the DOJ attorney to cite to the more recent case law.  In particular the 9th Circuit has ruled in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. Jan. 30, 2015) that the time period in the wrongful levy statute is not a jurisdictional time frame.  I would have expected this decision to receive some mention as I would have expected the more recent and relevant law on jurisdiction to receive some mention.  Perhaps, i3Assembly’s attorneys will find the newer case law and find the Volpicelli opinion and file an appeal.  Carl has written a post on the last Second Circuit case, Mottahedeh v. United States, to seek equitable tolling in the context of wrongful levy. In that case, the court declined to grant equitable tolling but did so without citing to the recent Supreme Court case law as well.

Sixth Circuit Remands Wrongful Levy SOL Dispute: Did IRS’s 2012 Levy Attach to 2016 Payments?

Today we welcome first-time guest blogger Matthew Hutchens. Hutch has several years’ experience as a low-income tax clinic attorney with Indiana Legal Services. He is now a lecturer of accountancy at the University of Illinois Gies College of Business. With co-author Erin Stearns, Hutch is currently updating the lien and levy chapters of Effectively Representing Your Client Before the IRS.  Today he discusses a recent Sixth Circuit opinion analyzing the timeframe for filing a wrongful levy action, in a dispute over whether a past levy attached to recent payments owed to the taxpayer by their alleged alter ego. Guest blogger Lavar Taylor has explained the procedural barriers that alleged nominees and alter egos face in contesting IRS levies. In this case the Sixth Circuit declined to increase those barriers. Christine

Plaintiffs often face difficulties in meeting the statute of limitation deadlines in civil suits against the United States for improper tax collection action. But recently, the Sixth Circuit, in Gold Forever Music, Inc. v. United States, landed a third party a victory on the statute of limitations for an IRC Section 7426(a)(1) claim, which is the Code provision that allows innocent third parties to seek a return of property wrongfully levied to satisfy the tax debts of another taxpayer. Here, the third party, Gold Forever Music (Gold Forever), persuaded the court to vacate a district court’s dismissal based on the limitations period having expired prior to filing of the lawsuit. 


Wrongful Levy Suits Background

In fiscal year 2017, the IRS served almost 600,000 levy requests according to the IRS Data Book. While this number has decreased substantially in recent years (there were over 1.4 million such levy requests in FY2015), the levy power does provide many opportunities for the IRS to seize property not owned by the liable taxpayer, but instead by an innocent third party.

In the event the innocent third party is aware of the potential issuance of a notice of levy, that party can attempt to convince a Revenue Officer that such property does not belong to the taxpayer. However, until the issuance of a notice of levy, the innocent third party likely has no advance knowledge of the IRS’s plans. 

Then, at the point the notice of levy is issued, it is likely fruitless for the innocent third party to attempt to convince the recipient of the levy to not turn over property to the government because Section 6332(d)(1) imposes personal liability on individuals who fail to remit property pursuant to a levy. As an additional incentive, Section 6332(e) provides the party surrendering the property with immunity against liability from any other party.

When a levy is issued, it attaches to a taxpayer’s entire interest in property unless the property is exempt. For payments that will arise after the issuance of the levy, the levy attaches to all amounts that are fixed and determinable at the time of levy. Examples of future payment streams that are potentially fixed and determinable include retirement benefits, pensions, interest payments, and—as in Gold Forever—royalty payments.

Once the levy is issued—regardless of whether property is actually surrendered—the third party has the option to file an administrative claim for wrongful levy with the IRS. Such a written request is required if damages beyond just a return of the levied property are sought. If the claim is unsuccessful or no claim is filed, the third party can bring a civil suit against the United States. For innocent third parties who have property levied by the IRS to satisfy another taxpayer’s liability, a suit against the United States under Section 7426(a) is the only judicial remedy available.

Prior to the 2017 tax act (a.k.a. TCJA), the limitations period (found in Section 6532(c)) for a return of wrongfully levied property action was a mere nine months from the date of the levy, which is the period applicable in Gold Forever. The TCJA extended this period to two years for new levies and for levies where the nine month period had not expired as of the date of the TCJA’s enactment. In cases where the third party makes a timely administrative claim for a return of levied property, the limitations period is extended until the earlier of twelve months from the date of filing the claim or six months from the IRS’s notice of disallowance.

Facts of the Case

Gold Forever is a music publisher owned by Edward Holland, Jr. Holland is famous for being a member of the Holland-Dozier-Holland songwriting and production team responsible for several hits from Motown’s top artists. Mr. Holland also owed the government over $19 million in unpaid taxes.

Gold Forever licensed its music catalog to Broadcast Music, Inc. (BMI) and Universal Music Publishing (Universal) and in exchange, received royalty payments. Due to this arrangement, the IRS issued notices of levy to BMI and Universal in August 2012 under the theory that Gold Forever was either the alter ego or nominee of Edward Holland. Soon after the notices of levy were issued, BMI and Universal began remitting payments to the IRS and this apparently continued for several years without any action by Gold Forever (although there was some dispute about the extent to which payments were made during this period).

In the present litigation, Gold Forever has denied ever being an alter ego or nominee of Mr. Holland and claimed that the majority of levied royalty payments were meant for other artists and not Mr. Holland. In addition, at oral argument before the Sixth Circuit, the attorney for Gold Forever speculated that the inaction on the levy from Gold Forever was due to a belief that the amounts due to it under the contracts with BMI and Universal were not worth litigating over.  

However, by 2016 and 2017, when BMI and Universal made additional royalty payments totaling almost $1 million to the IRS pursuant to the levy, Gold Forever decided to bring the Section 7426(a)(1) challenge in the Eastern District of Michigan seeking a return of those 2016 and 2017 payments.

District Court Proceedings

In district court, Gold Forever alleged that the 2016 and 2017 royalty payments were not amounts that were fixed and determinable as of August 2012 levies. Thus, the 2012 notices of levy could not have attached to these payments. Therefore, the IRS’s seizure of the 2016 and 2017 royalty payments could not have been pursuant to the 2012 notices of levy. Instead, the seizure of these payments should be viewed as a new, constructive levy, starting the limitations period for a wrongful levy claim anew and making Gold Forever’s action timely (although this argument was framed in the somewhat confusing context of what is “the meaning of the word levy”). Gold Forever also noted the due process issues that would arise if the government were able to seize after-acquired property with no post-deprivation opportunity to dispute the taking.

In response, the government’s argument was very straightforward. The notices of levy occurred in August 2012. Thus, because an administrative claim was not filed during the months after the notice of levy, the limitations expired nine months later in mid-2013. The code and regulations are quite clear that a notice of levy starts the limitations period. Section 6532(c) calculates the limitations period from “the date of the levy” and Treas. Reg. Section 301.6331-1(c) provides that the date of the levy is the date on which a mailed notice of levy is delivered. Section 7426(a)(1) itself notes that a wrongful levy action may be brought “whether such property has been surrendered.”

The government also contended that whether the 2012 levy notices actually attached to the 2016 or 2017 royalties was irrelevant. According to the government, because the royalty payments were surrendered pursuant to the 2012 notices of levy, those notices of levy started the limitations period.

The district court appears to have missed the underlying substance of Gold Forever’s argument that the 2012 notices of levy did not attach to the 2016 and 2017 payments and the later seizure of those funds should be viewed as a separate levy distinct from the 2012 notices of levy. Instead, the district court summarized Gold Forever’s position as one that revolved around word meanings, stating “Plaintiff argues that ‘the date of the levy’ may also refer to the date of a seizure, namely the funds paid in 2016 and 2017.” Based on this understanding, the court easily found for the government and determined that a notice of levy, not the actual seizure, starts the limitations period. The court did not discuss whether the 2012 levies attached to the 2016 and 2017 payments and whether the remittance of those funds—if not reached by the 2012 levies—could constitute a new constructive levy.    

Sixth Circuit

At the appellate level, it appears the government began to appreciate that whether the 2012 levy attached to the 2016 and 2017 payments could actually matter. At oral argument, counsel for the government acknowledged that there was insufficient information in the record below to determine whether the 2016 and 2017 royalty payments were fixed and determinable at the time of the 2012 levies.

Nonetheless, the government contended that Gold Forever could have filed a wrongful levy suit within nine months of the 2012 notices of levy to determine “whether the levy attached to its royalty rights.” Gold Forever, quite rightly in my opinion, pointed out the problems of the government’s argument that taxpayers should litigate the scope of a notice of levy to avoid the possibility of the IRS wrongfully using that levy to seize property in the future to which the government was not entitled.  

Alternatively, the government argued that if the levy did not reach the 2016 and 2017 payments to the government, then those amounts remitted to the IRS “were voluntary payments that cannot be recovered in a wrongful levy suit.” Instead of a wrongful levy suit, the government suggested Gold Forever’s only judicial remedy would be a third party civil action for release of an erroneous lien under Section 7426(a)(4), which would require a deposit by the taxpayer, contains much tighter deadlines, and – conveniently for the government in this case—would preclude the recovery of payments already made.

Again, this second argument from the government is quite troubling. Section 7426(h) authorizes additional damages in cases where an IRS employee negligently, recklessly, or intentionally takes a collection action in violation of the IRC. It would be an odd result if an IRS employee could knowingly demand after-acquired property be turned over pursuant to a notice of levy and then deprive the third party from being able to bring a suit for the return of the property because such payment was actually “voluntary.” It is further problematic in that the IRS would likely be using the carrot and stick provisions of immunity and personal liability under Section 6332 to convince parties to turn over property pursuant to a notice of levy and then later flip-flopping to argue it was not a levy at all.

In ruling for Gold Forever, the Sixth Circuit held that there was insufficient evidence in the record to determine whether the 2016 and 2017 royalties were fixed and determinable, and that whether they were would determine the outcome of the statute of limitations issue. The court explained:

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.

As for the government’s alternative argument that there could have been no levy if the 2012 notices did not attach to the 2016 and 2017 royalties, the court declined review since it was raised on appeal for the first time.

Final Thoughts

On remand, it will be interesting to see whether Gold Forever can convince the Court that the 2016 and 2017 royalty payments were not fixed and determinable at the time of the 2012 notices of levy. Nevertheless, it seems this is an issue a third party should have the opportunity to litigate. Otherwise, the possibility of improper IRS collection action pursuant to previously issued notices of levies would go potentially unchecked.

This case stands as good reminder for anyone who has a stream of payments currently being levied (and who might believe the applicable limitations period has passed) to take a closer look to confirm whether property levied today was a fixed and determinable amount at the date of the notice of levy. 

Additionally, when the IRS issues a notice of levy, parties should carefully evaluate what property is fixed and determinable at the time of the levy. And Gold Forever’s current litigation should cause third parties to at least consider proactive litigation under Section 7426(a)(1), even when the monetary amounts at stake appear small, if there is a possibility of increased payments at a future date. After all, if Gold Forever had prevailed in a suit in 2012 or 2013 under the theory that it was not an alter ego or nominee of Mr. Holland, the company would have avoided the after-acquired property issue of the 2016 and 2017 payments altogether.

Finally, if you happen to find yourself streaming Motown classics on your favorite streaming service, you can feel a little extra patriotic knowing that—at least for the time being—some of those royalties payments are going to help put a dent in those ever-increasing annual federal deficits.

Summary Opinions — For the last time.

This could be our last Summary Opinions.  Moving forward, similar posts and content will be found in the grab bags.  This SumOp covers items from March that weren’t otherwise written about.  There are a few bankruptcy holdings of note, an interesting mitigation case, an interesting carryback Flora issue, and a handful of other important items.


  • Near and dear to our heart, the IRS has issued regulations and additional guidance regarding litigation cost awards under Section 7430, including information regarding awards to pro bono representatives. The Journal of Accountancy has a summary found here.
  • The Bankruptcy Court for the Southern District of Florida in In Re Robles has dismissed a taxpayer/debtor’s request to have the Court determine his post-petition tax obligations, as authorized under 11 USC 505, finding it lacked jurisdiction because the IRS had already conceded the claim was untimely, and, even if not the case, the estate was insolvent, and no payment would pass to the IRS. Just a delay tactic?  Maybe not.  There is significant procedural history to this case, and this 505 motion was left undecided for considerable time as there was some question about whether post-petition years would generate losses that could be carried back against tax debts, which would generate more money for creditors.  This became moot, so the Court stated it lacked jurisdiction; however, the taxpayer still wanted the determination to show tax losses, which he could then carryforward to future years (“establishing those losses will further his ‘fresh start’”).  The Court held that since the tax losses did not impact the estate it no longer a “matter arising under title 11, or [was] a matter arising in or related to a case under title 11”, which are required under the statutes.
  • The Tax Court in Best v. Comm’r has imposed $20,000 in excess litigation costs on an attorney representing clients in a CDP case. The Court, highlighting the difference in various courts regarding the level of conduct needed, held the attorney was “unreasonable and vexations” and multiplied the proceedings.  Because the appeal in this case could have gone to the Ninth Circuit or the DC Circuit, it looked to the more stringent “bad faith” requirements of the Ninth Circuit.  The predominate issue with the attorney Donald MacPherson’s conduct appears to have been the raising of stated frivolous positions repeatedly, which the Court found to be in bad faith.
  • And, Donald MacPherson calls himself the “Courtroom Commando”, and he is apparently willing to go to battle with the IRS, even when his position may not be great…and the Service and courts have told him his position was frivolous. Great tenacity, but also expensive.  In May v. Commissioner, the Tax Court sanctioned him another seven grand.
  • The Northern District of Ohio granted the government’s motion for summary judgement in WRK Rarities, LLC v. United States, where a successor entity to the taxpayer attempted to argue a wrongful levy under Section 7426 for the predecessor’s tax obligation. The Court found the successor was completely the alter ego of the predecessor, and therefore levy was appropriate, and dismissal on summary judgement was proper.
  • I’m not sure there is too much of importance in Costello v. Comm’r, but it is a mitigation case. Those don’t come up all that frequently.  The mitigation provisions are found in Sections 1311 to 1314 and allow relief from the statute of limitations on assessment (for the Service) and on refunds (for taxpayers) in certain specific situations defined in the Code.  This is a confusing area, made more confusing by case law that isn’t exactly uniformly applied.  The new chapter 5 of SaltzBook will have some heavily revised content in this area, and I should have a longer post soon touching on mitigation and demutualization in the near future.  In Costello, the IRS sought to assess tax in a closed year where refunds had been issued to a trustee and a beneficiary on the same income, resulting in no income tax being paid.  Section 1312(5) allows mitigation in this situation dealing with a trust and beneficiary.  There were two interesting aspects of this case, including whether the parties were sufficiently still related parties where the trust was subsequently wound down, and whether amending a return in response to an IRS audit was the taxpayer taking a position.
  • The First Circuit has joined all other Circuits in holding “that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the [Bank Secrecy Act], where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution,” and not allowing the taxpayer for invoking the Fifth Amendment. See US v. Chen. I can’t recall how many Circuit Courts have reviewed this matter, but it is at least five or six now.
  • The District Court for the District of Minnesota in McBrady v. United States has determined it lacks jurisdiction to review a refund claim for taxpayers who failed to timely file a refund request, and also had an interesting Flora holding regarding a credit carryback. The IRS never received the refund claim for 2009, which the taxpayer’s accountant and employee both testified was timely sent, but there was not USPS postmark or other proof of timely mailing, so Section 7502 requirements were not met.  Following an audit, income was shifted from 2009 to other years, including 2008.  This resulted in an outstanding liability that was not paid at the time the suit was filed, but the ’09 refund also generated credits that the taxpayer elected to apply to 2008.  The taxpayers also sought a refund for 2008, arguing the full payment of the ’09 tax that created the ’08 credit should be viewed as “full payment”, which they compared to the extended deadline for refunds when credits are carried back.  The Court did not find this persuasive, and stated full payment of the assessed amount of the ’08 tax was needed for the Court to have jurisdiction over the refund suite under Flora.  Sorry, couldn’t find a free link.
  • The IRS lost a motion for summary judgement regarding prior opportunity to dispute employment taxes related to a worker reclassification that occurred in prior proceeding. The case is called Hampton Software Development, LLC v. Commissioner, which is an interesting name for the entity because the LLC operated an apartment complex.  The IRS argued that during a preassessment conference determining the worker classification the taxpayer had the opportunity to dispute the liability, and was not now entitled to CDP review of the same.  The Court stated the conference was not the opportunity, as the worker classification determination notice is what would have triggered the right under Section 6330(c)(2)(B), and such notice was not received by the taxpayer (there was a material question about whether the taxpayer was dodging the notice, but that was a fact question to be resolved later).  The Hochman, Salkin blog has a good write up of this case, which can be found here.
  • The IRS has issued additional regulations under Section 6103 allowing disclosure of return information to the Census Bureau. This was requested so the Census could attempt to create more cost-efficient methods of conducting the census.  I don’t trust the “Census”.  Too much information, and it sounds really ominous.  That is definitely the group in Big Brother that will start rounding up undesirables, and now they have my mortgage info.
  • The Service has issued Chief Counsel Notice 2016-007, which provides internal guidance on how the results of TEFRA unified partnership audit and litigation procedures should be applied in CDP Tax Court cases. The notice provides a fair amount of guidance, and worth a review if you work in this area.
  • More bankruptcy. The US Bankruptcy Court for the Eastern District of Virginia has held that exemption rights under section 522 of the BR Code supersede the IRS offset rights under section 533 of the BR Code and Section 6402.  In In Re Copley, the Court directed the IRS to issue a refund to the estate after the IRS offset the refund with prepetition tax liabilities.  The setoff was not found to violate the automatic stay, but the court found the IRS could not continue to hold funds that the taxpayer has already indicated it was applying an exemption to in the proceeding.   There is a split among courts regarding the preservation of this setoff right for the IRS.  Keith wrote about the offset program generally and the TIGTA’s recent critical report of the same last week, which can be found here.



Ninth Circuit Denies En Banc Rehearing In Volpicelli v. U.S.

On January 30, in Volpicelli v. United States, 777 F.3d 1042, the Ninth Circuit reaffirmed its previous precedents from 20 years ago that held that the 9-month period at section 6532(c) in which to file a wrongful levy suit was not jurisdictional and was subject to equitable tolling.  See our post of that date summarizing the holding.  On March 16, the DOJ requested en banc rehearing — alleging a Circuit split and an unmanageable parade of future wrongful levy cases alleging equitable tolling.  See our post of March 18 for an analysis of how the DOJ may have exaggerated both the Circuit split and the administrative problems.  On April 8, the Ninth Circuit denied the request for an en banc rehearing.  The ball is now in the Solicitor General’s court to ask for cert. or not.  We will keep you posted.